Economists often neglect major determinants of the economic performance of developing nations, according to a new Cato Institute book written by a pioneer in development economics.
Peter Bauer, Professor Emeritus of Economics at the London School of Economics, challenges standard explanations of Third World poverty, including colonialism, lack of capital, and population growth, in From Subsistence to Exchange and Other Essays, published by Princeton University Press.
Bauer argues that the study of developing countries suffers from a disregard of the crucial role of domestic trade in poor countries even though economists recognize the importance of such trade in the rise of Western nations. Economists also regularly disregard the impact of history, culture, and institutions on material progress, Bauer writes.
The reasons for that, Bauer says, include feelings of guilt and an overreliance on quantitative methods, which "has brought with it a regrettable atrophy of close observation and simple reflection."
Foreign aid is often counterproductive and fails to reach destitute people, Bauer writes. He notes that foreign aid, which expanded from a few hundred million U.S. dollars a year in the 1940s to well over $50 billion a year by the 1990s, often ends up in the hands of "governments hostile to the donors, whom they embarrass and thwart whenever they can." He cites Nkrumah's Ghana in the 1950s and Nyerere's Tanzania and Mengistu's Ethiopia in the 1980s as examples.
Bauer warns that foreign aid has been a cure worse than the disease. "Foreign aid is demonstrably neither necessary nor sufficient to promote economic progress in the so-called Third World and is indeed much more likely to inhibit economic advance than it is to promote it," he writes.
He argues that the population explosion is a crisis that has been "invented" by intellectuals, politicians, and international aid workers. He says there is no correlation between population density and poverty, citing examples of affluent countries with high population densities and poor countries with low population densities.
"Economic achievement and progress depend on people's conduct, not on their numbers. The central issue of policy is whether the number of children should be determined by the parents or by agents of the state," writes Bauer.
He concludes that "official government-to-government subsidies ought to be terminated or at least drastically altered." Until that occurs, he writes, aid should be bilateral, not multilateral; it ought to take the form of straightforward grants rather than subsidized loans; and it should go only to governments most likely to promote the economic progress and general welfare of citizens.
Bauer calls for more freedom for people in developing countries and for an end to the "alarming retrogression" in development economics. Because of Bauer's continued influence in fields as diverse as political science and anthropology, Nobel laureate Amartya Sen writes in the book's introduction, "Many of Bauer's claims, while resisted at the time, have become a part of the new 'establishment' of ideas."
From Subsistence to Exchange and Other Essays can be purchased by calling Cato Institute Books at 1-800-767-1241 or through the Cato Institute's online bookstore.
This article originally appeared in the May/June 2000 edition of Cato Policy Report.