Edward Carr, who if you aren't reading then - well - shame on you, wonders why there aren't more markets on development initiatives:
It seems to me that you could – after all, a big initiative from either a multilateral or large bilateral donor will often come with quite a bit of money attached (at least initially), a lot of publicity, and some clearly stated goals that are almost always tied to economic growth or diversification.  So, do investors look at these initiatives and bet for or against them?  I’m not saying they bet directly on an initiative, but on its outcome: for example, do funds look at large food security initiatives in a particular country and bet on the prices of the crops involved in that initiative?This is an intriguing suggestion that pops up every few months or so. I think we can work backwards from the fact that there aren't any betting markets to deduce why they don't exist and why they may not be terribly useful in this context.Here is why I care: if nobody is betting on them, it pretty much signals that these initiatives are largely irrelevant.  Either they are not large enough to move any market in the short or long term, or they are not aimed at anything likely to induce a transformation of economy and society through some set of cascading impacts in the long term.  If this is the case, it seems to me we ought to back out of those initiatives right away.  This is not to say that we should not be addressing the needs of the most vulnerable people in the world, but to suggest that an absence of interest in these initiatives might mean that our efforts to address these needs are not likely to come to much.
Betting markets tend to crowd around easily-verifiable outcomes - election results, government decisions, changes in market fundamentals, etc. If it can't be easily measured, then it really can't be bet on. The reason 99% of development initiatives aren't really eligible for this kind of treatment is because their objectives are usually too imprecise, or there is little-to-no-effort to measure their outcomes. This doesn't, by default, make these projects worthless - I'm sure all of us support policies at home which the betting markets would never touch - but we should be a bit more cautious when talking about their efficacy.
Even when the metrics are clear, credibility can be an issue There can be betting on future US job growth because the figures, while not perfect, come from a reliable source. I don't see people flocking to wager bets on outcomes like child mortality or GDP growth in developing countries where the capacity to gather both frequent and high-quality data is more limited.
However, if there was a credible third party who could verify some of this stuff, then maybe people would be willing to put some money down. Cash-on-delivery aid* could be thought of as a bet by a donor that a recipient won't be able to meet some target, with the wager being the amount of aid stipulated in the contract. Since the target would be verified by a third party, others may be willing to bet on the outcome, giving us an idea if the target was overly-optimistic or not.
Still, while the sort of outcomes that COD aid or, for example, rigorous impact analyses look at are interesting and worthwhile, they aren't the `transformative' impacts that Carr is concerned with. I think the problem is more with the massive amount of uncertainty surrounding future development rather than the efficacy of development initiatives - how many of you are willing to bet on what Zambia's growth rate will be in ten years? Five?
In retrospect, we can see why some people might have wanted to bet on some of China's policies which led to transformational changes, but would anyone have been willing to at the time? I suspect that when investors see real opportunity, they're more likely to, y'know, invest, rather than resort to the marginal gains of betting markets. These are just musings, so more thoughts on this are - as always- welcome.
*Somewhere at CGD, a fairy gets its wings every time you mention this.
3 Comments
Yes, we absolutely need a new breed of speculators! The financial/banking and food commodity ones are such stellar examples of how well 'betting' works, how markets thrive on 'information' and how precise forecasts are. And please no 'credible third party' fairytales. You mean as credible as rating agencies? Or as credible as carbon markets? Aid is certainly not perfect, but more marketization will unlikely improve it for the benefit of 'the poor'
Hi Matt,
You may have misread Edward Carr here. I assumed he was not talking about explicit bets on development programmes delivering on their proposed outcomes, but implicit ones in existing markets. I guess you could draw the parallel with major new economic initiatives as announced by rich country leaders; if credible these tend to move the markets. E.g. if a WB programme is expected to permanently raised economic growth in a developing country by 1% (I've vaguely seen such numbers bandied about), then you'd expect a reaction there too. The question is where. Carr mentions food prices, but how easy is it to speculate on local commodity prices in developing countries - not very, is probably the correct answer in most cases. For wider economic changes you could look at bond markets (shallow or non-existent for many developing countries) or currency markets (often subject to controls, can be hard to trade in minor currencies). Carr implies the lack of reaction maybe due to lack of credibility around implementation. I might also be sceptical over implementation, but I suspect the lack of a decent market in which to place the necessary bets is maybe a bigger obstacle to such betting.
MJ
Dean has talked about betting markets for RCTs before - they are pretty clearly measured. Just need to make sure there is no insider trading from IPA staff and academics :)