Hi Platt, all,
Came across this, which you might be interested in. I would have put it in
as a link, but it's a premium access page (which I get because I already
subscribe).
A voice for the poor
May 2nd 2002
>From The Economist print edition
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
smallholdings 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.
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