In my June 18th, 2005, column for the Pittsburgh Tribune-Review, I simply share the deep wisdom of the late Peter Bauer, as well as that of William Easterly, regarding economic development and foreign “aid.” You can read the column beneath the fold.
Hosannas are being sung to the rocker Bono and G-8 leaders in praise of the recently announced agreement to relieve developing countries — mostly African — of more than $40 billion in debt.
The Christian Science Monitor calls it “a victory for the world’s poorest continent.” World Bank President Paul Wolfowitz declares it to be “a very important, successful outcome.” U.S. Treasury Secretary John Snow boasts that it’s “an achievement of historic proportions.” And according to Larry Elliott of The Guardian, it’s “a once-in-a-generation opportunity.”
But it won’t work.
PREDICTION OF FAILURE
I’d like nothing better than to be proven wrong, but I’m gloomily confident that my prediction of failure will be verified. History and sound economics both warn that foreign aid is far more likely to harm than to help economies.
During the past four decades, Western governments have lavished on Africa nearly a half-trillion dollars in aid. But to no good effect. Everyone agrees that Africans remain desperately poor.
Academic studies confirm aid’s ineffectiveness. In his celebrated 2001 book, “The Elusive Quest for Growth,” former World Bank economist William Easterly carefully reviews aid’s history and concludes that it is one of abject failure.
Indeed, many studies find that aid harms economies. For example, University of Regina economist Tomi Ovaska, writing in the Cato Journal, finds that “a 1 percent increase in aid as a percent of GDP (gross domestic product) decreased annual real GDP per capita growth by 3.65 percent.”
The reasons for this dismal record should be plain to anyone with a rudimentary understanding of economics. Failure of economies to develop is not because of lack of resources. Instead, it’s because of overbearing and corrupt governments, as well as to the dysfunctional social and cultural institutions that keep such governments in power and that are themselves fostered by such governments.
As long as a country is cursed by a malignant government and dysfunctional institutions, no amount of foreign aid will help it.
But any country whose government commits to protecting private property rights, containing corruption and keeping regulations limited and taxes low will discover on its shores all the capital it needs to fund wealth-creating enterprise. As the late Peter Bauer learned from his long lifetime studying economic development, “It is more meaningful to say that capital is created in the process of development, rather than that development is a function of capital.”
Taiwan is a good example. Despite receiving no foreign “aid” since 1964 (and being a densely populated former colony), Taiwan has grown spectacularly over the past half-century into one of the world’s wealthiest countries. Since its independence in 1949, it has been — and remains — a magnet for private capital. Its secret is no secret: a government that protects property rights and commerce.
Unlike private capital, foreign “aid” enters a country not because conditions there favor economic growth but because that country is poor — because that country lacks institutions and policies necessary for growth. And the more miserable its citizens’ lives, the more foreign “aid” its government receives.
Can you imagine a more perverse incentive? The poorer and more wretched are a nation’s people, the more likely celebrities such as Bono will convince Westerners and their governments to take pity on that country and to send large sums of money to its government. And because that country’s citizens are poor largely because their government is corrupt and tyrannical, the money paid in “aid” to that government will do nothing to help that country develop economically.
The cycle truly is vicious. Aid money naively paid by Westerners to alleviate Third-World poverty is stolen or misspent by the thugs who control the governments there. Nothing is done to foster the rule of law and private property rights that alone are the foundation for widespread prosperity. The people remain mired in ghastly poverty, their awful plight further attracting the attention and sympathy of Western celebrities, who use their star attraction and media savvy to shame politicians in the developed world into doling out yet more money to the thugs wielding power in the (pathetically misnamed) “developing world.”
If I could figure out a way to measure the long-term consequences of this new round of debt relief — a way that is so clear and objective that even the most biased party could not quibble with it — I would offer to bet a substantial sum of money that years from now this debt relief will be found to have done absolutely no good for the average citizens of the developing world.
It’s a bet I would surely — and sadly — win.