Topic: International Economics and Development

Nobel Laureate Angus Deaton on Human Progress, Poverty, and Aid

Princeton University economist Angus Deaton was awarded the Nobel prize in economics today. His work on carefully measuring consumption and other measures of well-being led him to understand development as a complex process not susceptible to improvement by technical or top-down interventions. For Deaton, knowledge is a key to development—even more so than income—and helps explain the tremendous progress humanity has experienced in the last 250 years when parts of the world we now call rich began their “great escape” from poverty and destitution.

In his book, The Great Escape: Health, Wealth, And the Origins of Inequality, Deaton documents how that progress is now spreading around the globe and is the reason we are living longer, wealthier and healthier lives than at any time in history. (You can see him presenting the book at this Cato forum, and see a summary of that talk here.) Even countries with relatively low incomes have seen tremendous advances, largely as a result of the spread of scientific, medical and other kinds of knowledge. Though he is not deterministic, Deaton paints a largely hopeful picture of humanity reminiscent of the views of Julian Simon, whom he cites. He is also concerned with inequality, but recognizes that “Inequality is often a consequence of progress,” and distinguishes between inequality that helps humanity and the kinds that harm it (e.g., inequality that can lead to political inequality).

As his career progressed, Deaton joined the growing number of development experts who have become skeptical of foreign aid and consider that numerous other factors play a critical role in development. Citing pioneer development economist Peter Bauer, Deaton notes a foreign aid dilemma: “When the ‘conditions for development’ are present, aid is not required. When local conditions are hostile to development, aid is not useful, and it will do harm if it perpetuates those conditions.” In The Great Escape, Deaton goes on to document the myriad practical problems with foreign aid including corruption, the failure of loans conditioned on policy changes, the institutional incentives to lend, the divergence of donor country interests from recipient country needs, etc. Even when aid projects do good, he concludes:

The negative forces are always present; even in good environments, aid compromises institutions, it contaminates local politics, and it undermines democracy. If poverty and underdevelopment are primarily consequences of poor institutions, then by weakening those institutions or stunting their development, large aid flows do exactly the opposite of what they are intended to do. It is hardly surprising then that, in spite of the direct effects of aid that are often positive, the record of aid shows no evidence of any overall beneficial effect.

When thinking about aid, the developed world would do well by heeding Deaton’s advice and by not asking what we should do. “Who put us in charge?” Deaton rightly asks. “We often have such a poor understanding of what they need or want, or of how their societies work, that our clumsy attempts to help on our terms do more harm than good…And when we fail, we continue on because our interests are now at stake…”

Deaton provides a far better way of thinking about development:

What surely ought to happen is what happened in the now-rich world, where countries developed in their own way, in their own time, under their own political and economic structures. No one gave them aid or tried to bribe them to adopt policies for their own good. What we need to do now is to make sure that we are not standing in the way of the now-poor countries doing what we have already done. We need to let poor people help themselves and get out of the way—or, more positively, stop doing things that are obstructing them.

Urbanization Is Good for the Environment

Urbanization is on the rise around the world. By 2050, some 70 percent of humanity will live in the cities and that is good news for the environment.

Many of the environmental advantages are derived from living spaces being condensed. For example, electricity use per person in cities is lower than electricity use per person in the suburbs and rural areas. Condensed living space that creates reduction in energy use also allows for more of the natural environment to be preserved. In a suburban or rural environment, private properties are spread out, because land values are relatively low. So, more of the natural environment is destroyed. In cities, property values are higher and space is used more efficiently. That means that more people live in the same square mile of land than in the rural areas.

Another environmental advantage of cities compared to rural areas is a decrease in carbon emissions per person. In a rural or suburban area people normally use their own vehicles to drive to work or anywhere else. Due to congestion, the use of personal cars in the city is much less attractive. More people use public transportation instead and that means that less carbon dioxide gets released into the atmosphere.

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Will TTIP Wilt in the Shadow of the Aging German Voter?

In today’s Cato Online Forum essay, Iana Dreyer of the EU trade news service Borderlex marshals public opinion data to support a rather gloomy prediction about the chances for a robust and comprehensive TTIP outcome. Despite having “strong ‘Atlanticist’ instincts and the vision for Europe as a dynamic, globalized, economic powerhouse,” the EU’s business community and its cosmopolitan policy makers are likely to be thwarted by demographics: especially, by the aging German voter.

Iana concludes that the likely outcome will be a TTIP agreement that reflects the sensibilities of older, risk-averse Europeans who are unwilling to gamble with their social safety nets, even though those safety nets are not really on the negotiating table, which means a rather shallow and limited agreement at best.

The essay is offered in conjunction with a Cato Institute TTIP conference being held on Monday.  Read it. Provide feedback.  And register to attend the conference here.

Be Careful to Not Misuse the Economic Estimates of the Costs and Benefits of Trade Agreements

Cato Senior Fellow Dan Pearson is the author of today’s Cato Online Forum essay, which explains the value and limitations of the International Trade Commission’s economic assessments of trade agreements.  Too often, parties opposed to trade liberalization misappropriate the estimates in ways that raise doubts about the integrity of the models. Dan’s conclusion: 

Supporters of trade liberalization should be prepared to counter those who would misinterpret the economic analysis of trade agreements in order to advance anti-trade arguments.  Yes, trade liberalization will produce both winners and losers.  But credible analysis clearly indicates that making markets more open and competitive will lead to improved resource allocation, expanded international trade, greater economic growth, and higher consumer welfare.  Those objectives are genuinely worth pursuing. 

The essay is offered in conjunction with a TTIP conference being held at the Cato Institute on Monday, October 12. Read it. Provide comments. And please sign up to attend the conference.

Kirchner Locks in Her Model in Argentina

One of the most controversial and radical moves implemented during the populist rule of Cristina Fernández de Kirchner in Argentina was the nationalization of private pension funds in 2008.

Not only did the government seize $29.3 billion in pension savings but, since the private pension funds owned stock in a multitude of companies, the government also seized that stock and used it to appoint cronies to their boards. This significantly increased the government’s control over the private sector.

Even though none of the opposition candidates has proposed peddling back the nationalization of the pension funds, the Kirchner administration is taking no chances. This week the government enacted a law that makes it extremely difficult for future administrations to sell the stock: from now on it will require a two-thirds majority vote in both chambers of Congress. Since kirchnerismo will likely remain a significant political force in Congress in the foreseeable future, it will enjoy a veto power over any future sale of the stock regardless of who wins the presidential election in late October.

Tellingly, the Argentine government has also drafted legislation that would limit the extraordinary executive powers that the presidency has accumulated since the Kirchner couple came to power in 2003 (Cristina was preceded by her husband Nestor). But don’t count on Cristina discovering her inner Montesquieu. The Kirchner administration has signaled that the bill would be approved only if an opposition candidate wins the election.

Thus, even though Cristina might have only few more months in power, much of her economic model will live on.

The Dramatic Decline in World Poverty

This week the World Bank released new data on world poverty, and projects it to fall to a record low of 9.6 percent in 2015. The graph below shows the dramatic decline of global poverty over the past few decades.



Using updated methodology, the World Bank recalculated poverty figures back to 1990. The new data track closely with previous Bank figures, which I use in the graph to show the fall in poverty since the early 1980s when 43 percent of the world’s population was extremely poor. The record on poverty reduction is consistent with the unprecedented progress that humanity has made around the world in the whole range of indicators of well-being, and which researchers and others can explore at

The drop in poverty also coincides with a significant increase in global economic freedom, beginning with China’s reforms some 35 years ago and the globalization that followed the collapse of central planning in the late 1980s and early 1990s. As we celebrate this achievement and strive for further progress, we should not lose sight of the central role that voluntary exchange, freedom of choice, competition and protection of property play in ending privation.


A Case for Making TTIP Better for Workers

In today’s Cato Online Forum essay, George Washington University Professor of Foreign Affairs Susan Ariel Aaronson argues that the “TTIP provides an opportunity to think differently about how policymakers in advanced industrialized economies can protect labor rights, encourage job creation, and empower workers.”  After describing some of the concerns workers have about the TTIP and explaining why certain parts of the agreement could serve to undermine labor rights, Susan provides some fresh recommendations for making the TTIP more appealing to workers.

Read it. Provide feedback.  And register for Cato’s October 12 TTIP conference.