| President Bush is getting ready to head for Scotland to meet with heads of the other major industrialized nations where one of the big questions on the table will be poverty. There is a consensus of opinion that there is too much of it, that rich nations are not doing enough to help poor nations, and that the way to remedy the situation is aid.
Certainly, no one would challenge the premise that there is too much poverty. Yet, why poverty exists and how to fix it is a much more difficult question than British rock star Bono would have us believe.
A front page headline the other day in the prestigious Financial Times announced "Aid will not lift growth in Africa, warns the IMF."
The International Monetary Fund and the study it published, authored by its chief economist, cast dubious light on the effectiveness of aid in reducing poverty and producing economic growth. The study warns that aid can cause just the opposite.
The study is not the first to question the effectiveness of aid in reducing poverty. Although conclusions of previous studies vary in nuances, it is fair to say that it is clear that there is no simple direct correlation in spending aid money and eliminating poverty.
The question of foreign aid has two factors which complicate the discussion.
First, it is important to make the distinction between humanitarian aid and development aid. Few question the importance of charity and assistance under extenuating circumstances like disaster relief. It is the issue of aid as an effective tool to eliminate poverty that is being questioned.
Second, of course, is the pure emotional appeal of aid. It seems cold and heartless to not spend when poverty and suffering exist. Because aid has a considerably strong emotional component, it lends itself readily to political demagoguery. It is very easy to juxtapose a picture of a fat American eating a cheeseburger with that of a starving African and sell the idea that Americans are selfish.
A study just published by the International Policy Network in London reports that, despite $400 billion in aid expenditures in Africa from 1970 to 2000, the correlation between the aid and economic growth was negative. Increases in aid resulted in worse economic performance.
The general explanations for this negative correlation between aid and economic performance are that aid discourages the very activities that produce economic growth and vitality _ savings, investment, and incentives for government policies that encourage and sustain positive economic activity.
If we change the question we ask regarding poverty, the picture of the problem becomes clearer. We should examine the conditions that allow prosperity to occur rather than asking how to spend money to eliminate poverty.
The correlation between prosperity in nations and the conditions of economic freedom in those same nations is absolutely clear. The Fraser Institute in Vancouver, Canada, in partnership with a network of think tanks around the world, publishes an Economic Freedom of the World study annually. The study uses measures of economic freedom, developed by a distinguished team of economists that includes the state of law, courts, and economic and regulatory management, to rank nations by their level of economic freedom. Continued... |