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As Friedrich Hayek was to socialism, Peter Bauer is to
foreign aid
As socialism and central planning gave way to resurgent
market forces in the second half of the 20th century, three great economists
were brought in from the ideological wilderness. Friedrich Hayek, who in 1944
predicted the demise of command economies in "The Road to Serfdom",
was later to inspire the free market policies of Ronald Reagan and Margaret
Thatcher. He also inspired Milton Friedman, a fierce advocate of free markets
and monetarism at a time when Keynesian demand management was the order of the
day. And now Mr. Friedman has given his name to a new biennial prize "for
the advancement of liberty", which will be awarded on May 9th to the least
famous of the three, Peter Bauer. Born in Budapest in 1915, the young Mr. Bauer came to
Britain in 1934, taught at Cambridge and the London School of Economics, and was
made a peer in 1982. Lord Bauer's work applies classical economics to questions
of poverty and development, where conventional wisdom, for 30 years after
1945, was remorselessly hostile to market solutions. After the Second World War, a new "development
economics" came to dominate policymaking in poorer countries, often at
the urging of international institutions such as the World Bank. It argued that
poor countries were victims of a vicious circle of poverty, doomed to remain
poor because they lacked the income that provided savings which, when invested,
generated economic growth. The answer? Rich countries should provide the
capital, in the form of foreign aid. To use the capital efficiently,
poor-country governments should plan their economies and create new industries
to substitute for foreign imports. And to give these nascent industries a
chance, competition should be restricted through monopoly rights and barriers
to foreign trade. Both the theory and its practice appalled Lord Bauer. His
studies of small holdings in the Malaysian rubber industry and of the
importance of small scale traders in West Africa had convinced him that
there could be wealth creation, even in subsistence economies, if only market
forces were allowed to work. Trade barriers and monopolies merely destroyed
entrepreneurialism. In his blunt way, Lord Bauer set out alternative
theories that, from the 1950S to the 1970S, were heresy. All countries had
started poor, he argued. If the vicious-circle theory were true, mankind would
still be living in the stone age. Opportunities for private profit, not
government plans, held the key to development. Governments had the limited
though crucial role of protecting property rights, enforcing contracts, treating
everybody equally before the law, minimising inflation and keeping taxes low. It
was a tragedy that countries neglected this role. Above all, Lord Bauer argued, there would be no concept
of the third world at all were it not for the invention of foreign aid. Aid
politicised economies, directing money into the hands of governments rather than
towards profitable business. Interest groups then fought to control this money
rather than engage in productive activity. Aid increased the patronage and power
of the recipient governments, which often pursued policies that stifled
entrepreneurship and market forces. Indeed, aid had proved "an excellent
method for transferring money from poor people in rich countries to rich people
in poor countries." Why so much aid, then? Western post-colonial guilt, Lord
Bauer claimed, before debunking the notion that countries are poor because they
were exploited by former colonialists. They are generally better off now than
they were before colonialism. The most developed of the poorer countries are
those that have the most interaction with rich countries, through trade and the
exchange of ideas. Today, many of Lord Bauer's views on aid and development
are part of a new conventional wisdom. Even the World Bank admits that creating
the right conditions for markets to flourish is the key to economic development,
and that until recently much of the money that it has supplied has been badly
used. Lord Bauer is not convinced that he has won, though, for
government-to-government aid has increased, not decreased. Even though there is
now more public questioning of aid, he is not optimistic about further change.
There are so many vested interests behind foreign aid, "regardless of its
effects". Some of his other views remain out of the mainstream, at
least for now. Lord Bauer opposes policies aimed at reducing income inequality.
This is not because he favours inequality-although he thinks it often reflects
fair pay for output produced-but because policies designed to promote equality
usually infringe personal liberties to such an extent as to slow economic
development. If, as often happens, development happens to reduce inequality,
then so much the better. Nor does Lord Bauer favour population control. Worries
about population growth, he says, reflect a patronising view that the poor are
incapable of making sensible choices about having children. The much deplored
population explosion "should be seen as a blessing rather than a disaster,
because it stems from a fall in mortality, a prima
facie improvement in people's welfare." At the same time, he argues,
there is no correlation between population growth (or even density) and poverty.
The population of the western world has more than quadrupled since the mid-18th
century, yet real income per head has increased at least fivefold. In short, economic development rests on people having the
right desires and aptitudes, and on a political and legal system that allows
people to act on them. In this, the poor are no different from anybody else.
Formerly heretical insights such as these put Lord Bauer in a class of his own
as an economist, says Amartya Sen, a darling of the aid and development world
and both a former student and a sparring partner of Lord Bauer's. His blunt lack
of political correctness may have prevented Lord Bauer from sharing the Nobel
prize awarded to Mr. Sen in 1998. The Milton Friedman prize should provide some
consolation - not to mention $500,000. Reprinted from The Economist. May 4th 2002. |
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