whyroots

 
 

We are better at identifying problems than solutions. Many—perhaps most—of the people I know share the Bono-Jeff-Sachs consensus that the best, most humanitarian way to spend a dollar is in foreign aid; they would privately admit to feeling guilt for all the other causes we fund—health care for Americans, the arts, NASA—when they contrast them with the importance of foreign aid. There is an excellent reason: The biggest human problem is obviously the enormous share of humanity (~2 billion people) that struggles to maintain its very existence. It's compelling. But we need to consider the price of solving the problem before we decide not to fund other worthy causes.

I'm not optimistic about foreign aid. Countries that benefit from it don't need it and countries that need it don't benefit from it. Theoretically, foreign aid donations are small even relative to the savings of those we aim to help (the economist Hernando de Soto estimates that all foreign aid given by all nations since WWII—including the Marshall Plan—amounts to 1/40th of the savings of the poorest billion people on earth). Even the very poor save—the problem is they don’t have an infrastructure to make use of their savings. In rural China, I had tea in the home of villagers in Jianxi Province. The home was full everywhere with bags of rice, which is how they saved their income. In Bogotá it was bricks, in India gold, and in East Africa they save in cattle (note: the word "capital" comes "cattle"). These are not productive investments—they reflect the bad access to capital markets, which is a reflection of developing societies’ weak institutions.

Two-hundred and forty years ago Adam Smith proposed a startlingly simple recipe for economic development. As he put it, "Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes, and a tolerable administration of justice; all the rest being brought about by the natural course of things." He was right. We in the developed world are not so different from the individuals in the developing world. Most of them would do just fine among first-world institutions, especially after a generation. The difference is in our institutions—we have secure property rights, peace, and low taxes, which translate into opportunities for trade and investment and access to capital, which is everything any developing society needs. Last week I said I was grateful for our institutions--this is why.

I'm not saying there isn't work to do—this is the biggest problem in the world—but it needs a more radical solution than giving bags of beans to bureaucrats. Those radical solutions may be risky and intolerable to many.

So this is a plea for all the causes that my friends privately resent: health care and education for comparatively wealthy people, the arts, and science. One can argue that these also are attempts to solve problems that won't be solved by throwing money at them. This is wrong: The Democratic Republic of Congo is a problem that won't be solved by throwing money at it. The Oakland Unified School District? Let’s throw the money that way and not look back.

-- Walter Lamberson

 


Comments

Nathan Huttner

Wed, 03 Dec 2008 15:01:37

Agree that capital markets need to improve. But why wouldn't we use foreign aid as a tool for development until those capital markets exist? Not a fast or easy process, setting up capital markets, and until they're up and running, foreign aid can be important for infrastructure and the like.

The other point I'd make, RE: Adam Smith, is that there's a bit of a chicken and egg problem here. Poverty is often a destabilizing force in states, making it difficult for them to be peaceful enough to protect wealth. Seems like helping countries out of the direst poverty might help citizens build good institutions.

 

Brian Karfunkel

Thu, 04 Dec 2008 17:24:14

I agree that institutions are a prerequisite for sustained and stable economic growth and prosperity, but I think Nathan points out correctly that waiting for the institutions to develop before making investments in the developing world is not a successful policy.

The metaphor I prefer is not chicken-and-egg, but rather deforestation. Remove the trees and you increase the rate that water evaporates from the soil and at the same time remove the roots that hold the soil in place. Thus, you have dry and dusty soil that has nothing to keep it from blowing away, and soon enough you can't restore the forest no matter how many seedlings you plant, and you can't restore the soil until you bring back the trees to stop the erosion. (In case you missed it, the metaphorical deforestation in the case of the developing world is often, though by no means always, a period of egregiously extractive policies by tyrants and/or colonialists).

I have no answer to this problem, though, other than truly massive levels of investment that I think no one is willing to commit. However, I would note that the money given to the Oakland schools does not (at least I hope it doesn't) get burned in the process; it goes to pay teachers who buy houses and maybe Fords, and to pension funds that invest their money in banks to pay for others to take out loans to buy houses and cars. It also goes to buy cell phones and computers that use coltan mined in DR Congo, for which a Congolese miner may have been paid (and managed to keep, despite general lawlessness) a few pennies. To take an extreme scenario, the money might allow a young Oakland child to grow up with the skills and opportunities needed to become incredibly wealthy and found a foundation dedicated to, say, ridding Zimbabwe of cholera.

I'm not saying giving a dollar to Oakland is also giving a dollar to DR Congo or Zimbabwe, just that we should be more farsighted in looking not only at what our investment might immediately produce, but also at all the effects that might come about as our investment ripples out into the broader world economy. Giving money to spur green tech might create research and manufacturing jobs for Americans (or might not), but the products those Americans make could slow climate change and reduce droughts in East Africa and (in the scale of decades, to be sure) help stabilize Sudan. All of which should be considered in the equation.

 



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