Freedom breeds generosity

Posted: Jul 04, 2005 12:00 AM
  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.

The data show clearly that the less economically free a nation is, the more likely it will be poor. The more likely a nation is economically free, the more likely it will be prosperous.

In particular, last year's Economic Freedom of the World study showed that the highest quintile of nations that are economically free have an average per capita GDP of $26,106. The nations in the lowest quintile of economic freedom have an average per capita GDP of $2,828.

The Heritage Foundation publishes a similar Index of Economic Freedom each year that reports similar results. The Heritage report displays a graph showing geographic distribution of various regions according to economic freedom and income. Africa is by far disproportionately represented on the side of the graph that is economically not free and poor.

As President Bush prepares to discuss global poverty in general, and in Africa in particular, with other world leaders, he is under great political pressure to agree to address poverty with aid money rather than pressure for policy reforms. As I noted earlier, the aid issue lends itself readily to politicization.

The Europeans are forever looking for angles to blame America for the world's ills. Recently, pastors from some of the largest black churches in the United States wrote to the president urging large increases in US aid to Africa.

As we celebrate the 229th birthday of the United States, we should remember two things. First, we are the most generous nation in the world. Americans delivered $80 billion to the developing world in aid and assistance last year. Of this $80 billion, over $60 billion came from private rather than government sources. Second, Americans have the capability to provide this largesse because we are free and freedom is what produces prosperity everywhere.