Why Foreign Aid Backfires and Condemns Countries to Poverty
EspañolStudying economics at the university level usually means taking at least one course in development economics and three in macroeconomics.
However, in my case, as in many other students across the world, none of these ever covered the importance of free enterprise and property rights.
How to get countries out of poverty is a standard theme of Macro 301 and development economics. But these courses’ answer to such a complex dilemma is, almost without exception, state intervention— all very much in line with the notion that the poor are trapped in a vicious circle and only a third party can help them.
This idea, which the great late economist Lord Bauer dubbed the “spurious consensus” and combated throughout his life, states that poor countries cannot progress because they have such low incomes that they have no money left to save and are therefore condemned to misery.
Where that kind of reasoning leads to should be obvious: rich countries should step in to the provide the poor ones with alms. This has been the predominant development theory in academia, and the policy for combating poverty of any kind.
But how can the theorists of development economics, faithful believers in aid, then explain that countries that are now rich escaped poverty without subsidies from third parties?
Their solution is based on a false premise; it is not true that receiving foreign aid is a necessary condition for overcoming poverty. How unnecessary “development aid” is becomes evident when you look at historical evidence.
The incredible economic success of the “Asian Tigers” is just one example that shows underdeveloped countries can lift themselves out of poverty.
It’s not just that foreign aid is not necessary; it is dangerous and condemns those who it intends to save.
When development aid was first championed as a solution to poverty, it claimed that a few years of subsidies would get poor countries out of this “vicious circle”.
However, countries remain poor while the amount diverted to aid only keeps growing. If only they had listened to what Lord Bauer countless times explained: “development is not a consequence of capital; capital is created during the development process.”
In my course of development economics, the professor regularly talked of helping the Chocó, a Colombian region mired in poverty. His solution: money transfers.
Which investment projects to spend the money on, whom to give aid, how to encourage business creation, and much more would all be decided by a group of enlightened scholars and technocrats.
Such rationale is the same that permeates the United Nations: rich countries must not only raise money and give it to the poor; they must also tell them where and how to invest, because only with the guidance of Western intellectuals can they abandon misery.
Let me return to my starting point. Development economics relies on state intervention, rather than the only tried and true solution: fostering the spontaneous emergence of small businesses. However, “spontaneous” is a feared word at governments and organizations like the UN.
So that investment flourishes, it should go to productive projects that are maintained over time and are the result of actual needs that arise organically in society. In other words, it’s the market, not a group of development “experts,” that should guide the allocation of scarce resources.
But again and again, aid and intervention committees made up of” wise” economists derails efficient decision-making.
So firstly, no economic aid is needed for countries to get out of poverty. They pull through on their own if we let them. Second, aid with strings attached by politicians and experts impairs the emergence of entrepreneurs who discover investment opportunities in the market and create truly profitable and sustainable projects.
Now, this can only work under a system of capitalism and respect for private property. I needs an institutional framework that rewards individual efforts and allow businesses to operate. Without it, countries won’t be able to escape poverty.
Governments should focus not on handouts and micromanaging the lives of those whom it treats as disabled. They should allow entrepreneurship, especially lifting barriers for the poorest. All that is needed is an institutional environment of respect for private property, low taxes, and basically getting out of the way of businesses.
The current system subsidizes poverty, so it’s no wonder the billions of dollars in aid to poor don’t solve their misery.
It’s really that simple: if you want to end poverty, you must abstain from interfering with people’s innate ability to improve their lives through entrepreneurship.