How foreign aid makes the world poorer

Peter Bauer and John O'Sullivan

In 1975, to mark Somalia's commitment to the ideals of International Women's Year, the President announced that in future women would enjoy equal rights of inheritance with men. Twelve Muslim religious leaders protested that this violated Koranic law. Whereupon they were rounded up and shot.

This instructive tale should warn us that the liberal ideas and phraseology of the West, once transplanted to the Third World, often assume fantastic and distorted forms. We might bear this in mind when assessing the discussions on the establishment of a 'new international economic order' (NIE0) at the North-South dialogue' in Paris, the Commonwealth Conference in London and the numerous UNCTAD and UN gatherings in Geneva, New York, Nairobi, Delhi and elsewhere.

For, on the face of it, the NIE0 boasts an impeccably Western, indeed English, genealogy. It is the most far-reaching application of Fabian socialist theories of wealth re-distribution, state control and economic planning to international economic relations yet attempted by Third World governments and their Western supporters. In no sense, of course, is it new. Its Fabian inspirations apart, the various UN and other declarations, in which the NIE0 is embodied, contain familiar demands for still greater foreign aid; comprehensive schemes for 'stabilising' (i.e. raising) commodity prices, transferring technology and cancelling debt repayments by developing countries; and even notions of restricting Western production of synthetic substitutes for Third World products.

But some little novelty is introduced in the arguments justifying these claims. No longer is foreign aid solicited as an act of charity. Indeed, charity is indignantly rejected as demeaning. Nor is it still justified principally as the means of ensuring economic development in less developed countries— though that remains a secondary argument.

Today, in international forums, the large-scale transfer of resources from the West to the Third World is demanded as a right. It is presented as some small recompense for the West's unjust economic exploitation, past and present, which is alleged to have caused the poverty of the developing world. But the NIE0 goes beyond even this. Its demands clearly imply that everyone everywhere should be entitled to a substantial income by virtue of being alive, regardless of economic performance. Dr Julius Nyerere, the austeritarian Tanzanian dictator, put these arguments succinctly during his 1975 state

visit to Britain: 'In one world, as in one state, when I am rich because you are poor, and I am poor because you are rich, the transfer of wealth from rich to poor is a matter of right; it is not an appropriate matter for charity.'

Endlessly repeated, but almost never rebutted, such arguments have not been without effect. Mr Callaghan told Com monwealth statesmen that the 'gulf' between rich and poor was 'the most serious challenge to our age and to our leadership'.

At the Paris Conference, the West, alias the 'North', agreed to setting up a commodity stabilisation fund and to granting more aid, beginning with another $1,000 million, to the hardest-hit poor countries. And, expre ssing general journalistic agreement, Mr

Keith Richardson of the Sunday Times admits that the West enjoys a 'dis

proportionate share of the world's wealth' (does it not also have a disproportionate share in creating that wealth?) and doubts if we can keep our present illgotten living standards.

But are the arguments in support of the NIE0 valid? And would the consequences of implementing it be those desired by the Third World's Western sympathisers? Or those experienced by the Somali Muslims?

Is it, first, really true that Western pros perity is founded on the economic exploitation of Asia and Africa? It seems to be contradicted by common observation. Swe den and Switzerland, two of the world's richest nations, had no colonies at all and

few direct economic contacts with the Third World. Portugal, on the other hand, which relinquished large colonies only recently, is the poorest nation in Western Europe-.

Nor can the extreme poverty and backwardness of aborigines, pygmies, nomads and African tribesmen be a result of exploi tation in international transactions since these groups have almost no links with the rest of mankind. Indeed the usual rela

tionship is between material backwardness and lack of external contacts. If we examine

the 'Fourth World' countries listed in UN Agency documents as least developed, namely Burundi, Chad, Lesotho, Ethiopia, Rwanda, Afghanistan, Bhutan, Nepal and Sikkim, we find that they are scarcely involved in trade with the West. Certainly their trading links are fewer and less exten sive than those between the West and Malaysia, Hong Kong, Venezuela, South Korea, Singapore, Mexico and Taiwan — all relatively prosperous and developing rapidly in flat contradiction to NIE0 reasoning.

Such examples clearly support the traditional pre-Leninist view of international trade, hamely that it benefits both parties. In more modern jargon, it is not a 'zero-sum game' in which one man's gain is necessarily another's loss. Western nations undoubtedly benefited from the access to raw materials brought by trade. Yet the developing nations also obtained access to markets, to a variety of goods, to new ideas and information and to such complementary resources as capital, enterprise and specific skills. Without these, the Third World would be much poorer today.

Moreover, even amongst developing countries with equal access to trade opportunities, some have prospered more than others. Why? The principal reason is that nations, peoples, tribes, communities and ethnic groups are not equally endowed with those qualities which mainly determine economic achievement. These are not, as is commonly supposed, plentiful raw materials and the supply of capital on easY terms, but aptitudes, social customs, motivations, modes of thought, social institutions and political arrangements. It is these qualities which influence people's willingness to save, work hard, take risks, and to seek and develop the economic opportunities, however limited, that are available.

How else can we explain the many startling group differenees in economic performance where economic opportunities have been identical, or broadly similar, or even relatively unfavourable to the successful group — the Chinese, Indians and Malays in Malaya, the Asians and Africans in East Africa and the Greeks and Turks in Cyprus? Some groups 'failed' in the narrowly economic sense because of such factors as a preference for the contemplative life over the active; a reluctance to undertake profitable tasks traditionally regarded as demeaning; and a social hierarchy in which mere economic success is not particularly esteemed. Why should such preferences necessarily be condemned? In recent years, a less justifiable influence favouring poverty and economic backwardness has made its appearance — namely, the economic and other policies pursued by Third' World governments, Everyone is well-informed about the expIll' sion of Asians from East Africa which, incidentally, at a stroke reduced per caPita income in those countries and widened the gap between them and the West. But, in general, Western liberal opinion has been strangely and culpably blind to the extent of the persecution of economically productive, perhaps relatively well-off, but politicallY unpopular minorities.

It ranges in kind from discrimination in employment to expulsion and even Inas' sacre, and geographically from Algeria to Burma, Egypt, Ghana, Indonesia, Iraq, Kenya, Malawi, Malaysia, Morocco, Nigeria, Sri Lanka, Tanzania, Uganda, Zaire and Zambia. So much for the theory that wealth is synonomous with power.

And when such groups as the enterprising Indian community in Burma are driven out, they take with them scarce skills, the ability to generate capital locally and often an indispensable service to the local community. President Mobutu's expulsion of Greek and Portuguese traders from Zaire, for instance, caused a breakdown in the bush trading and distribution system. Farmers were thus unable to market their produce effectively: in some cases, planting stopped altogether.

Some regimes do not stop at persecuting minorities. Dr Nyerere's government in Tanzania has in the last decade forcibly moved millions of people into collectivised Villages, and sometimes simply into the bush. Among the methods of encouragement employed are the destruction of existing homes, physical force and barring recalcitrant elements from such social facilities as communal transport, bee' shoPs, ceremonial dances and cattle auctions. The numbers of people subjected to this new life certainly runs into millions. Some estimates are as high as six to eight million (Washington Post, 6 May, 1975) and even thirteen million (The Times, 20 April, 1977) out of a total population of fifteen million.

That is only one, admittedly glaring, example. Other government policies, which have served to impoverish further the people in developing countries, include restrictions on the inflow of foreign capital and O n the activities of expatriates; the establishment of costly and inefficient state monopolies in trading, transport, banking and industry; widespread restrictive licensing on economic activity; penal taxation of small-scale farmers; the political diversion of resources to state-sponsored enterprises that cannot survive unassisted; and the suppression of private firms that inconveniently compete with them.

But the Third World is by no means a homogeneous, uniform group of countries, all sunk in an identical poverty that is irremediable without foreign aid. Numerous regions and groups there are actually more prosperous than some in the West — compare Chinese communities in SouthEast Asia with much of rural Ireland and Southern Europe. And among Third World countries which have enjoyed rapid economic growth are South Korea, Taiwan, 1-long Kong, Malaysia, the Ivory Coast, Kenya, Brazil, Colombia, Mexico, Venezuela and, of course, the oil states of the Middle East which were treated as less developed until 1973 despite high percapita incomes.

Properly considered, the Third World is little more than an arbitrary classification covering half the world's population and including societies ranging from millions of aborigines to populous cities — the composition of which is occasionally altered with an arbitrariness bordering on caprice.

The developed world is only slightly more homogeneous. It would make little sense to talk of an income 'gap', especially a 'widening gap', between too such shifting classifications, even if the statistical bases for comparison were otherwise valid. Of course, they are nothing of the sort.

Professor Oscar Morgenseern, in his book On the Accuracy of Economic Observations, quotes an unnamed civil servant as admitting: 'We shall produce any statistics that we think will help us to get as much money out of the United States as we can. Statistics which we do not have, but which we need to justify our demands, we shall simply fabricate.' His light-hearted approach is certainly not contradicted by the comedy of the Nigerian population estimates. When Professor Peter Kilby, a leading independent American scholar, put the population at 37.1 million, the official 1963 census produced an estimate of 55.6 million — a figure not unconnected with the then government's need for inflated parliamentary representation. Even today, when parliamentary representation is of little moment in Nigeria, the UN's estimate of its population is ten million less than the Nigerian government's.

Honest statistics, however, would be only marginally less inaccurate. National income comparisons, for instance, are rarely adjusted for differences in age composition. Yet the proportion of children is much larger in developing countries than in the West. And both the incomes and requirements of children are lower than those of adults. Not to allow for age composition in such statistics is to transform age differences into income differences.

Another major flaw arises from how changes in life expectation are interpreted statistically. In the last twenty-five years, mortality has declined substantially in the Third World. Since most people like to live longer and to see their children survive, this is surely an improvement. Without much doubt the standard of living of those who would otherwise have died has improved. But there are, as a result, more children and old people in the population. So this improvement is registered in national income statistics as a decline in per capita income and a widening of the gap.

The aggregate effect of these and other flaws is to exaggerate, often wildly, the poverty of developing countries and hence the gap between them and the West. So much for the arguments justifying the N1EO. What of its likely effects?

There are two general points. Were the NIE0 to be implemented seriously, it would clearly mean a transfer of resources from groups in the West to groups in the Third World. If people's aptitudes, motivations and economic capacities were everywhere the same, and official policies broadly favourable, this could be achieved without a reduction in the wealth and income of mankind as a whole. NIE0 documents often assume tacitly that this is so.

Yet people's abilities to take advantage of economic opportunities differ very radically. And, paradoxically, this is confirmed by one of the NIEO's principal demands — namely, debt cancellation. For the argument that debtors face great, even insur mountable, difficulties in repaying loans means that the borrowed capital has been wastefully employed. Otherwise, the incomes in recipient countries would have increased by more than the cost of the capital. This is further confirmed by the fact that the great proportion of Third World government debts arises from foreign aid loans on concessionary terms. Often the grant element in these loans has been over half the nominal value, sometimes over 90 per cent. Moreover, the burden of debt has already been much reduced by inflation and by various disguised forms of substantial default.

The NIEO, therefore, especially in the form of debt cancellation, represents a transfer of resources from those who can use them productively to those who cannot. World income as a whole must therefore either fall, or fail to rise as it otherwise would. If this effect were concentrated in the West, some NIE0 advocates would presumably count it as a gain — a step towards a more egalitarian, if poorer, world. But, insofar as the West's income is reduced, so is its capacity to trade with developing countries, some of which in consequence share in this virtuous impoverishment.

Secondly, official wealth transfers go to Third World governments, not to the population at large. Inevitably, this increases the power of the ruling groups over their peoples — an effect often reinforced by the preferential treatment accorded to governments establishing state-controlled economies. To Western supporters of aid programmes, there is nothing objectionable in this. They enthusiastically urge vigorous state action to promote development and social and economic equality. But this is where the Somali distorting-mirror effect intrudes. For, between the intentions of Third World governments and those of their Western sympathisers, there is a wide and widening gap.

It is the overriding aim of almost all Third World governments to consolidate and extend their own power over their subjects, and this is made clear in the policies they consistently pursue. Monopolies, valuable licences and other privileges are granted to those who support the government, often very prosperous people. Quite small properties and businesses, on the other hand, are often confiscated' wholesale. Small-scale producers of export crops have often been singled out for penal taxation at the hands of state export monopolies. And there have been countless instances of massive discrimination against poor members of ethnic minorities distinct from, the ruling group, even though they may sometimes be indigenous to the country — such as Tamil plantation workers in Sri Lanka, and Ibo clerks in Nigeria.

Such policies have very little to do with promoting either equality or development. In fact, they hold development back. But they have a great deal to do with placating government supporters, winning over entrenched groups, making more and more people dependent upon government decisions for their economic success or failure and depriving potential opponents, or merely disfavoured groups, of power, advantages and even of their livelihood. Indeed, a Burmese Cabinet Minister was candid enough to admit privately that, although the expulsion of foreigners damaged the economic interests of the Burmese, he favoured the policy simply in order to rid his country of aliens.

During Mrs Gandhi's rule in India, well over ten million people were sterilised, very many forcibly, sometimes with great brutality and fatal results. According to an academic Indian report, which forms the basis of an article in New Scientist (5 May, 1977), the compulsory sterilisation campaign included such methods as: organised manhunts; dawn police raids to catch people; physical force to hold down the victims; entire villages fleeing from sterilisation squads; refusal to admit unsterilised people to hospitals; the withholding of licences from taxi-drivers, rickshaw-drivers and others unless they could produce sterilisation certificates; and the use of economic policy and civil service pay and promotion to foster the programme 'voluntarily'. And the report noted significantly that compulsion was exercised on a partial basis. Administrators, the urban elite and local politicians were able to avoid it, even when they had more than their usual quota of children; whereas an almost random brutality was employed against poor people, village-dwellers and minorities like the Muslims, who rioted in consequence and were shot down.

It is, of course, commonplace in societies that are both multi-racial and highlypoliticised for minorities to find themselves economically ruined and even physically threatened. Who controls the government becomes a life-and-death matter, sometimes literally so. Asians have been expelled from East Africa, Ibos massacred in Northern Nigeria and the Chinese subjected to various degrees of discrimination all over South-East Asia. Naturally they suffer most. But such struggles, expulsions and civil wars also inflict extreme hardship on the rest of the population as, for instance, a result of food shortages when the .trading system breaks down.

We have so far assumed that the NIE0 will actually transfer resources from rich to poor. But will it do so? Take, for instance, one specific and widely-canvassed proposal to which Western countries have now reluctantly agreed — commodity agreements to maintain stable prices. If these are intended to transfer wealth from rich to poor, then they are inefficient to the point of perversity.

To begin with, primary producers of raw materials are by no means necessarily poor. The OPEC countries are an extreme example of the opposite — and were so long before 1973. Rich countries, in fact, are net exporters of major primary products and their close substitutes. Moreover, within the less developed world, those countries which export such products are generally to be found among the most prosperous. And, within the exporting countries themselves, the main beneficiaries of commodity. agreements and higher prices are likely to be existing producers, the scheme's administrators and politicians — all relatively prosperous people already.

And how will such schemes work in practice? Commodity agreements can normally be maintained only if they exclude potential producers from entering the market. Only thus can supply be restricted and prices raised. Yet the excluded producers are usually poorer than those inside the cartel— and than those who otherwise gain, both internationally and within exporting countries. Their poverty is thus perpetuated.

It is also noteworthy that most of the suggested agreements cover commodities (e.g. tea, rubber, copper) that are subsequently used in mass consumption products. Poor Third World countries are net importers of many of these. So the contrived increase in prices will tax consumers, often regressively, in rich and poor countries alike, at a time of world-wide inflation. And the experience of the OPEC cartel suggests that poor people will not be protected against these price rises by anything more substantial than rhetoric.

But commodity agreements also tend to be unstable. If the incomes of those inside the cartel are to be kept up, then not only must the supply of the commodity reaching the market be controlled effectively; so must the supply of its close substitutes. Yet the resulting high price itself stimulates the search for new sources and the development of new substitutes. So, save in very exceptional circumstances where control of a scarce and indispensable resource is confined to a few countries, any commodity scheme will succeed in raising prices for a prolonged period only at the cost of large sums of the money being tied up in unsold stocks.

It is clear therefore, that commodity agreements would harm many poor people, benefit few poor people and enrich quite a number who are already prosperous. Some relatively rich people in the West might also be discommoded, but that is surely an insufficient benefit for so much waste, conflict and distress. So much for this cornerstone of the NIEO. Debt cancellation, as we have already shown, specifically benefits the improvident and affects the poorest least of all. And the transfer of technology, as expounded in N1E0 documents, is a notion too vague for systematic assessment.

But all this does not justify dismissing the NIE0 as unimportant. If the 'eradication of poverty' and the confining of income differences, both within and between countries, to within a narrow band were to be seriously pursued, then a far-reaching, intensive and persistent coercion would be required. Nothing less would remove or overcome the wide and deeply-rooted variety of attributes, motivations, values, customs, social institutions, living conditions and political arrangements of different countries, societies, groups and individuals which lie behind income differences.

NIE0 advocates admit, for instance, that the use of substitutes and the application of new inventions in Western industries would need to be limited in order to protect commodity agreements and to maintain Third World export earnings. What else is this but the internationalisation of industrial restrictive practices, maintaining high-cost production and thus harming the poorest everywhere? Yet if Western governments fail to enforce such luddite interventions, will they not be pressed to step up direct tax-financed wealth transfers by way of compensation?

But who will enforce these policies and transfers? It is hardly likely that Western governments will act voluntarily. Perhaps national governments might act under pressure from a combination of other governments, or from international organisations, in accordance with agreements they had thoughtlessly endorsed. But if they did so, it would not be for long. And would policies that substantially depressed or retarded the living standards of Western voters survive more than a few elections? Only a world government with extensive, or indeed almost totalitarian, powers could stand a reasonable chance of enforcing such an economic order indefinitely.

And, finally, the commitment to the NIE0 is by its very nature open-ended. Third World incomes,, as we have already seen, depend principally upon domestic factors, not on external donations. So anY obligation to establish minimum living standards in the Third World, or to reduce international income differences substantially or to any specified extent, implies a completely open-ended Western corn: mitment, determined by the Third World,s performance. Attempts to enforce this permanent, world-wide standardisation, then, would lead to increasing international tension, a Hobbesian war of all against all, the spread of totalitarian powers and to further erosion of the West's power and influence.

Is it unreasonable, in the light of these considerations, to regard Dr Nyerere's

for a world 'ceiling of wealth' as 'first and foremost a matter of political will and determination' as something more, an" more sinister than harmless cant? Or in hope that, when Western leaders warnlY endorse the NIEO's objectives, they are simply indulging in the political equivaleir: of singing 'Auld Lang Syne' on New Year s Eve?