Handouts won’t cure poverty

The Australian government has joined the turn-of-millennium drive to eliminate extreme Third World poverty a laudable objective. However, John Howard cautioned the recent United Nations summit against relying excessively on specific targets and highlighted the merits of self-help. He was promptly criticised by celebrity economist and UN adviser Jeffrey Sachs for not being generous enough and insufficiently supportive of the UN’s plan targets. Sachs (who incidentally is visiting Australia this week) had proposed numerical targets for eliminating some consequences of Third World poverty, such as illiteracy and child mortality.

The approach by Sachs and the UN to backward countries, mainly in Africa , amounts to top-down central planning, now on a global scale, coupled with campaigns to bump up international aid by taxing the affluent and transferring the proceeds to foreign governments and organisations.

Australian reluctance to uncritically endorse such redistribution is understandable. Like social welfare at home, aid transfers have generated a claims mentality and taught helplessness. Let’s not forget that the Asian growth economies have reduced poverty by self-reliance and export orientation. Foreign aid played a minor role, and loans have been duly repaid (except by Vietnam and Burma ).

Poverty is reduced first and foremost by economic growth, not redistribution. We now also know that growth depends on the quality of economic institutions property rights, free markets, the rule of law and rule-bound, limited government. These institutions of economic freedom have been greatly improved across most of Asia , while Africa ‘s problem economies are still unfree. Economic freedom standards are atrocious in the heavily indebted, poor countries, whose official debts are now to be forgiven and who are to receive billions more aid.

Little of this new generosity will reach the poor. However, the World Bank will continue making bad loans; and the oppressive elites will carry on as usual. Since Magna Carta, economic (and political) life has become freer only when economic necessity forced rulers to yield influence to citizens and merchants. Transfers erode that pressure. Institutional reforms are also promoted by free trade not “fair trade”, as the millennium aid campaigners are demanding. Knowledgeable observers have therefore castigated official aid, easy credit and debt forgiveness as pernicious gifts to oppressors and obstacles to genuine development.

Seen in this light, the UN’s redistributive millennium strategy amounts to a mere symptom cure. It could even perpetuate poverty.

As the theory of institution-based development is increasingly accepted, Western politicians insist on conditions to improve institutions, as the US did in its millennium challenge program. It was promptly criticised as neo-colonialist by the anti-globalisation NGOs and African potentates, who keep rejecting all lessons about development and demand unconditional hand-outs on a needs basis.

Conditionality is indeed problematic. Donors cannot force sovereign governments to fulfil conditions. How can aid officials even know whether the property rights of farmers or shantytown dwellers in Kenya or PNG are violated? How to assess the rule of law in faraway places? And can aid officials, whose careers depend on handing out aid, be trusted to be objective and steadfast? Sachs’s Millennium Report acknowledged these problems, but he then identified only a few abominable regimes, such as Burma and Zimbabwe , as not deserving more hand-outs.

The Australian government is justified in insisting on higher standards of probity in places where our money is dispensed. We should concentrate on enhancing the institutions in faltering regimes, such as PNG. If necessary, donors will need the moral fortitude to enforce freedom standards by withholding aid, as the Hawke government did in Fiji after repeated coups, and the Howard government did when our police were refused proper legal protection in PNG.

The conspicuous compassion displayed at rock concerts and lofty summits this northern summer may have been gratifying. Now the time has come for sober analysis. Boundless compassion will only hurt the cause of making extreme poverty a thing of the past.

Wolfgang Kasper is Senior Fellow at The Centre for Independent Studies and is professor emeritus, University of NSW .