Commentary

Throwing Money at the Poor

An enduring feature of the Soft Left that it is always willing to throwing other people’s money at the world’s woes. In India many of the foolish actions the current coalition government has undertaken, or is proposing, form part of this pattern. In the United Kingdom, New Labor has opened the public purse to throw money at unreformed nationalized health and education services which has predictably been largely wasted.

Often times, although aimed at helping some perceived disadvantaged group, the remedies proposed will only make things worse. Right now the world’s bleeding hearts are proposing a massive increase in foreign aid to “solve” Africa’s enduring poverty. But the basic flaw in these proposal is that they fail to take account of the nature of the instruments that are to be used to promote their would-be utopias.

The basic outcome of such measures is to extend the reach of the state. But the state and its agents — no matter how much actions are cloaked in the rhetoric of the public good — is predatory in most countries. This is certainly true in India, despite the “dream team” of reformers purportedly at its helm.

Take, for example, the proposed act going through the Indian parliament to provide labor in the unorganized sector “rights” similar to those enjoyed by workers in the organized sector. The greatest damage to the interests of India’s laboring millions has been done by the colonial labor laws which provide “rights” for labor in the organized sector. They have been the equivalent of a tax on the use of labor in the large-scale industrial sector. That has led to growing capital intensity of Indian industry in a country awash with labor.

The jobless growth in the industrial sector since liberalization is the result of the failure by successive governments to rescind those colonial labor laws. The reasons are well known. Each major political party has its own client trade unions that prevent such necessary reform in order to protect the incomes and perquisites of their members. That labor aristocracy of course receives its “rents” at the expense of those millions unable to enter the aristocracy because the “tax” on labor they impose reduces its demand.

But now the Congress Party’s coalition government is proposing to artificially raise the price of labor in the unorganized sector. As any shopper knows, if you raise the price of anything, the amount demanded falls. That is the predictable outcome of the proposed bill to “protect” labor in the unorganized sector. The hope of labor intensive industrialization in India, which as China has shown can lead to spectacular gains in the employment and incomes of the laboring poor, will thereafter be permanently dashed.

Those intellectuals of the Soft Left in India who have pushed such measures in the name of the poor should hang their heads in shame. They are the surest means of damaging the interests of the poor by both reducing the overall demand for their labor whilst at the same time feathering the nests of the myriad intermediaries (both private and public) who will be inducted to administer, or to capture the rents, from these new laws.

Or take the increased social expenditures which the coalition government has committed itself to and which the Finance Minister has in his budget partly delivered at the cost of a standstill in meeting the targets of the bill imposing fiscal responsibility. Lip service is paid to looking at the outcomes of these increased social expenditures on health, education and employment guarantees. But, as innumerable studies have shown, public provision of health and education has failed massively, so much so that even the poorest of the poor are relying on private providers for these basic services. The leakage from public employment and poverty programs is known to be massive. The late Prime Minister Rajiv Gandhi declared that only 25 per cent of those transfers reach their intended beneficiaries.

Moreover, as a large number of studies in many developing countries has shown, public transfers to alleviate poverty most often crowd out private transfers — which are large in the developing world. There are well known alternatives. For health and education it is to publicly finance them for the poor but to allow the poor to choose private providers through some form of voucher scheme, which would probably be best administered through the panchayats, or village councils. For poverty alleviation, India’s own recent experience and that of China show that rapid labor intensive growth is the only sustainable route. Increased social expenditure will only crowd out the investment needed to finance the infrastructure India desperately needs to accelerate growth and alleviate poverty.

Or take the showering of largesse on the unreformed National Health Service by New Labor in the United Kingdom. The predictable outcome of failing to privatize one of the largest remaining nationalized industries in the world is that much of the extra money is spent on administrators rather than on doctors and nurses, so that the NHS provides one of the worst standards of health care for one of the most advanced countries in the world.

Finally, take the recent outburst of calls for action from the world’s great and the good to save Africa: the UN’s new millennium agenda fathered by economist-turned-saint-cum-pop-star Jeffrey Sachs, and the recent Africa Commission report fathered by British Prime Minister Tony Blair. Their purpose is to argue for massive increases in foreign aid to Africa.

But if foreign aid were the answer to Africa’s problems, the continent should now be rich. Measured in today’s dollars Africa has received $2.3 trillion over the last 50 years. Yet it has stagnated. The reasons for the failure are evident and increasingly acknowledged even by many bleeding hearts. It is politely called the problem of governance, which in ordinary language means much of Africa has been ruled by predatory elites who have been more interested in feathering their own nests than advancing the public weal.

Compared with most Asian countries, Africa is immensely rich in natural resources. But Africa has been systematically looted by its predatory elites who have ruined hitherto thriving economies. Robert Mugabe in Zimbabwe is only the most recent in a long line of tropical gangsters. Why does anyone believe that throwing foreign aid money at him and his ilk will help the African poor?

The Soft Left has always claimed the moral high ground and tugged at our heartstrings by claiming to speak in the name of the poor and the oppressed. But that is mere rhetoric. The policies advocated by many on the Left make them the enemies of the poor. Alleviating poverty has become a world-wide business from which those Lords of Poverty derive a profitable living. In the interests of the world’s poor it is time we said “Boo” to them and pensioned them off.

Deepak Lal is the James Coleman professor of international development studies at the University of California, Los Angeles, and an adjunct scholar at the Cato Institute.