The haves and have nots

Published on 7th June 2005

 The Centre for Independent studies hosted three liberals; Manuel Ayau,(President emeritus Universidad Francisco Marroquin, Guatemala), Barun Mitra (Director, Liberty Institute, New Delhi)and James Shikwati(Director, Inter Region Economic Network, Kenya). Below are excerpts from an interview with Wofgang Kasper. (Professor Emeritus of Economics, University of New South Wales) which appeared in Policy Vol.18.no 4 Summer 2002-3

 WOLFGANG KASPER: Welcome to Australia. We are most fortunate to have three prominent liberal thinkers here from those major regions of the world that are outside the increasingly integrated and affluent core of the world economy, namely Europe, North America and the ascending Far East. In a way, you represent those poorer two thirds of humanity who are sometimes called the ‘have nots’: Latin America, south Asia and Africa. This is a great opportunity to discuss the roots of mass poverty in the third world and to explore whether the ‘haves’ can do something to help.

Maybe, we could begin by asking you, Don Manuel, why Latin America, once the most affluent part of what we now call the third world, aborted several promising start into economic reform and growth. Why did Latin American countries (except Chile) never manage to sustain liberalization and economic growth?

MANUEL AYAU: First of all, this is entirely our own fault. We cannot blame anyone.

Of course, our world politics had some effect and this convinces many of our politicians that the outside world is to blame for our failures. US foreign aid has been tremendously impoverishing because it has maintained many bad politicians in power. In effect, transfers from poor taxpayers in the rich countries to the rich elites in poor countries has enabled Latin American leaders to implement social welfare policies which poor countries cannot afford. Money –dispensing aid organizations have also been responsible for inspiring much harmful intervention in industry and commerce.

KASPER: Judging from an African and south Asian angle, would you James and Barun agree?

JAMES SHIKWATI: In Africa capitalism and economic freedom have been widely perceived as part of the colonial conspiracy. African independence was supported by socialists. Therefore, African elites have long felt and acted anti-capitalist and anti-free market. During the Cold War, East and West channeled much aid to Africa, trying to buy friends. Our leaders focused on the interests of the donors to obtain even more aid. Because of the easy option of aid, government officials did not have to get involved in the difficult business of improving productivity. Many got addicted to aid and became mere aid administrators, who did not take the interests of the people into account.

BARUN MITRA: In India, aid has not helped either, given the huge size of India. As elsewhere, it has not only led to ideological corruption but institutionalized and subsidized corrupt political practices also.

KASPER: Do you refer to Soviet central planning and Nehru’s build-up of state-owned industries?

MITRA: That is part of it. However, western aid has helped to sustain that costly, hurtful socialism. Aid locks in vested interests and establishes s cycle of growing aid dependency. The so-called ‘good Samaritans’ create a caste of professional aid seekers, offer spoils to corrupt politicians and promote the paternalistic, top-down collectivism that destroys economic freedom and stifles individual initiative. We get a class of official mendicants who specialize in writing grants proposals. These have no relevance to the recipients. Nor do they address the realities on the ground. After all, the grant proposals have to satisfy only the donors.

SHIKWATI: Because of past abuses, much foreign aid for Africa was frozen in the 1990s. Fortunately for the ordinary people; politicians now depend more on raising taxes and therefore have to listen to taxpayers. This makes them think more about cultivating genuine development. More people in Africa now query whether aid is the path out of poverty, and private citizens demand more freedom and better control of corruption. Businesses, which pay 80% of the taxes in East Africa, now have more influence with governments thanks to the drop in aid. Business leaders call for legal and judiciary reforms, free trade and free movement among neighbouring countries. They see freedom as something positive. Of course officials and politicians resist and still seek more aid to bankroll their old ways. But matters are changing, because they have to.

AYU: Another part of the ‘good Samaritan problem’ is that aid-giving Western governments delegate the task to inexperienced officials who are economically illiterate and don’t know the countries they work in. frequently, the aid bureaucrats are career officials who dislike Western values and the enterprise culture, which has enriched their own countries. Harvard or Georgetown University Graduates then try to create a world of their dreams in third world countries. Yet, ministers and taxpayers in donor countries rely on these so-called experts. They would be scandalized if they saw how their funds are spent.

MITRA: You just mentioned ‘western values’. Individualism, material aspirations and the spirit of enterprise are not exclusively western characteristics. They are universal. Likewise, the collectivist enemies of the free, open society come from the east and the west.

I agree with Manuel that western taxpayers have no idea how their funds are spent. The World Bank and others have begun to acknowledge that much has gone wrong with aid giving. They now involve non-government organiosations in implementing aid programs. So the aid is also corrupting the civil society!

KASPER: President Bush, in Monterrey, promised a big increase in foreign aid, but coupled with ‘new conditionality’, namely that aid will be given to those poor countries that liberalize their economies and make progress towards genuine democracy. The US proposes to stop aid countries that fail to enforce private property rights, free markets and the rule of law. This is based on ‘institutional growth theory’, that is the empirically well-founded insight that economic freedom, more than anything else, promotes economic growth. Can conditionally work?

MITRA: Conditionality would be resented in recipient countries. Besides, it is the interest of our countries to enhance our own standards of economic freedom. The impression should not be created that we liberalize to please the US state Department.

SHIKWATI: I agree. Conditionality smacks of neo-colonialism. Free institutions have to be home-grown! After a long history of bad governance and repression, Africans are finding out about the consequences of bad governance. They have begun to realize that assured freedom is important for getting out of poverty. It would be tragic if the external imposition of conditionality gave bad politicians an excuse to garner sympathy votes and again play the nationalist card.

AYAU: I am also skeptical. The US president gets his information through the aid agencies. Would they ever tell him to discontinue a project which gives them work? Would they not conspire with the local aid beneficiaries to make Washington believe that conditions are fulfilled, or will soon be? The powers of the foreign aid business don’t understand the powers of spontaneous development. Free people help themselves intelligently and resourcefully if the results of law apply. If it is not prevented, development will happen. But governments, in their ignorance, try to impose development schemes from the top down, typically hampering this process. They design plans that inevitably stifle private experiments, innovation and the initiatives of industry and commerce.

KASPER: The problem normally is the planners and aid officials pretend to have the solutions and then impose them, whereas liberals say: ‘Trust the people to discover what is good for them. Only foster simple rules that protect private property, free contracts and equality before the law.’ However, the planners act on false pretences; they are ignorant of the side effects. Thus, the planners promoted conspicuous projects such as the Aswan High Dam in Egypt, China’s farm collectivization and the great leap forward, amongst others, to overtake Britain in iron production.

The side effects were discovered later: Lake Nasser upstream from Aswan silted up; downstream valuable farm assets were lost, as people built houses on fertile riverside land, the Nile silt no longer fertilized the land and salinity rose dangerously. In china, the farmers melted down farm implements and iron bedsteads with local wood to meet plan targets, in order to produce iron that was reworked…into farm implements and bedsteads. The ‘great leap backwards’ produced deforestation and land erosion.

AYAU: One could add to these examples endlessly. Only self-reliance and turning your back on these grand plans will produce development of what the people want. Development is far too important to be left to government!

Let me ask: why don’t governments unilaterally cut high tariffs, which hurt us in Latin America? Instead, we are waiting for longwinded WTO negotiations which are premised on the principle that we keep hurting ourselves as long as you hurt yourselves! This mutual masochism of trade negotiations can only be explained by the wrong-headed collectivist approach to development- and perhaps the enjoyment of conference facilities and career opportunities for trade negotiators.

MITRA: The delays in liberalizing trade and capital flows in big countries like India have been bad enough. In addition, this has gone along with much foot-dragging in reforming domestic markets. The poorest are disadvantaged most by government controls. They may be illiterate and hungry, but they are surprisingly enterprising and resourceful in producing a little wealth and trading to mutual advantage. The poor of India have to be; otherwise, their families starve. The poor people are least capable of dealing with bureaucratic controls or obtaining licenses. Of course, they manage to circumvent regulatory obstacles, though this is not cost-free. Where but amongst the poor of India can you see mechanics assembling computers or motor cars under a tree, simply because the costs of running formal factories are artificially inflated by regulation? People assemble secondhand engines and new components to build farm machinery and cars.

Fortunately, India has always had such bazaar-level enterprise. This was lacking in the Soviet Union, and this explains the USSR’s demise. By contrast, India- despite emulating the soviet model after independence-survived the ordeal since we could fall back on the longstanding culture of small entrepreneurs in the informal private sector.

Good Samaritans from the outside, who have never lived among poor people, simply cannot understand this. How can people who look so helpless begin to help themselves? I tell you: You give them their freedom and they will create wealth! No aid agency can imagine this or indeed imagine spontaneous growth can happen without their intervention and assistance.

SHIKWATI: I can see numerous examples of poor Africans helping themselves, as long as they are free to exchange goods. We have a lot of spontaneous enterprise and trade in Africa, for example in reselling secondhand clothes. When people learn to rely on governments, they become lazy, unimaginative and poor. When you open up, they solve problems. Let me give you just one example: during the recent drought in Kenya, many predicted a national disaster and anticipated calls for international food aid. Fortunately for the poor, the borders with neighbouring countries had been opened to trade, so that traders were able to bring in maize and other food stuffs from Uganda and Tanzania. The business solution quickly solved the worst crisis. Governments and international organizations tend to move slowly and only after a famine has begun.

KASPER: Why do your governments not throw out the false foreign prophets that advocate aid dependency?    

AYAU: Because of the universal nature of government. Politicians everywhere are easily bribed by handouts and access to instruments of control. Rent-seeking is part of human nature. If the rich countries gave no aid, there would be more pressure on our politicians to get things right. Aid offers an easily bail-out. Wrong headed, economically illiterate policies are continued. Without aid there would be more freedom, cleaner government and therefore more wealth creation.

SHIKWATI: Foreigners offering aid pretend that there is an easy option. Politicians will always go for that! But foreign aid is not a free lunch. Much of what came into Africa before 1990 was not a gift, but a loan. As a result, every Kenyan born today is saddled with a stifling liability of US $216, and that in a country where per capita income is US$377. The ‘do-gooders’ may come with good intentions, but their advice and their actions have led to bad consequences. As a result, many Africans are now alienated and suffer a drop in living standards.

Nonetheless, I also want to add a word of caution here. Grandstanding, nationalist leaders in Africa have called for the World Bank and others to go home, but they stopped with the rhetoric. What African countries need most is an improvement in the basic institutions- good and enforced laws, genuine democracy, and clean governance. Over the past decade, Kenyans have experienced economic decline. This will not change without improvements in the rule of law and law enforcement. Crime rates are high and there is a lot of corruption. A recent report on corruption in Kenya showed that the worst are the judiciary and the police. It will therefore be very difficult to weed out corruption with the help of judges and policemen.

Unless these fundamental conditions are improved, economic growth will remain elusive. Foreign prophets who offer a bit of aid or simply dramatise our shortcomings only divert us from this key task. It is now increasingly clear that weak institutions are the fundamental cause of poverty. There is an initiative in Kenya for a constitutional review to address the root causes: governance is not balanced by a division of powers; the executive often arbitrarily over-rules the judiciary and parliament. Executive interventions plaque private business. Who invests when arbitrary decrees come from the presidential palace? To give but one example: our coffee growers have been subjected to the rulings of a government board, and the coffee trade is licensed. The farmers have been pushed around by the authorities to such an extent that they have uprooted their own coffee trees in protest. There is no parliament and no free press to look into the causes of this type of interventionism.

AYAU: No country in the history of humankind has ever developed though foreign aid! A key component in successful development is capital. If you tax it heavily, or discourage saving by inflationary policies, you get less of it and you attract less capital. High taxation of capital is based on these false egalitarian, redistributive philosophies which foreign aid has promoted and entrenched.

MITRA: Ironically, high taxes also prevent the employment of bountiful labor in the third world. In many countries with abundant labor, taxes and regulations of labor markets make job creation virtually impossible. Labor regulations in the organized sector in India raise the costs of employing people by a factor of two or three, if not more. So industrialists reduce employment and use excessive amounts of capital. Most Indians therefore have only a chance of finding a job in the unorganized and underground parts of the economy.

AYAU: Inflated labor costs are to a great extent due to the UN\'s International Labor Organization (ILO). They have always represented union and anti-capitalist interests, beginning with the Soviet influence in the 1950s. The ILO has been responsible for much third world unemployment.

MITRA: You can see this in India, where 85% of the workforce is now outside the organized sector; 50% of all jobs are in the underground economy. Most big employers cannot meet the internationally imposed regulations. Many regulations are unethical and most are unfair to the vast majority or mankind. Poor people lose out on jobs that put them in a position to learn better skills, compete in world markets, raise the their productivity, and earn more.

One also has to realize that employment in the unorganized sector, to which ILO regulations relegate so many, is insecure and often outside the protection of the law. The underground economy is racked with violence and strong-arm tactics.

KASPER: India belatedly implemented a number of good economic reforms. These have paid worthwhile growth dividend in the 1990s. Will these reforms be upheld and reinforced?

MITRA: While we can argue with the timing and pace of reforms, liberalization has now created an important constituency for a free economy. In our democracy, no party and no provincial government could return to collectivism. The provinces now compete in out federal system, which is a great advantage for big countries like India.

As we said, markets, to be efficient and to produce development, require basic ground rules. Internal, customary institutions are important here, but they often go along with much aggression and strong-arm tactics. Therefore, there is a need for external protection -that is by governments- of lawful conduct and the fulfillment of contracts. Government agents, are given the monopoly of exercising violence, have to be strictly controlled. Only then will they enforce the rules in just ways. Without the rule of law, the poor cannot help themselves all that effectively. External government law must respect the customary norms that have evolved in society. Otherwise, it cannot be effective. If the government law bypasses the people, the people will bypass the law.

AYAU: Good law is essential. Unfortunately, we now have a lot of legislation and regulation which is based on fairness and redistribution. This undermines the law. The philosophy of fairness and equality leads to an excess of prescriptive legislation and interventions. In addition, legislation and regulations are imposed after having been drafted by amateurs in the US, who are ignorant of our realities and cultural traditions.

This undermines the respect for the simple, expedient laws that help people to help themselves. Excessive legislation often makes law-abiding behavior impossible. In Latin America, law enforcement has been neglected. Besides, law and order have often been imposed by the Right and the dictatorial military. This discourages good people from joining the police, the military and the judiciary.

KASPER: Can we talk about trade and investment flows between the \'have nots\' in the South and the \'haves\' in the North? The closed economy hurts the poor in the third world. What should be done?

MITRA: As India is still largely rural, we would benefit from free market access, for all our agricultural products. This would help promote openness and technical innovation. If the EU, Japan and the US really care about the poor, they should abandon their selfish protectionism and the subsidies that featherbed their own farmers. Maintaining two EU farmers at their present living standards on the land costs, maybe 400 Indian farmers their life opportunities.

SHIKWATI: Australia is helping third world countries by showing us how to negotiate in international forums. We do not have the negotiating skills and get easily pushed around by rich country trading interests. We want trade, not aid! I would only plead that the rich countries give Africans a chance to export all their products freely. We also want to attract foreign investment, but blatant corruption, outright expropriation and bad institutions are obstacles. Why invest when officials demand kick-backs from foreign investors?

AYAU: Whatever happens in agriculture, our countries have to industrialize to wipe out poverty.

MITRA: Indeed-This is why I am deeply troubled by, many of the NGOs who now advocate idyllic rural ways that are bound to perpetuate poverty. In the last ten years, we have had a 15% drop in the rural population because the economy has been opened up and new opportunities arose outside agriculture. This has been crucial to reducing the poverty problem in India.

KASPER: The shift from the land into industry happened in East Asia from the 1950s.Many East Asians are now coming close to rich country living standards. Why has there not been more such mobility in Africa or Latin America?

SHIKWATI: In Africa, many people are tied to the land. A small plot that they own is their only material security. Life in city slums is miserable and most insecure, in the past, governments have also coerced people to return to the land. Yet, inherited plots of land are getting divided among more and more sons, so that they get locked into poverty.

AYAU: The main reason for rigid employment structures is the tariff that prevents efficient, innovative industrialization. Customs houses are very expensive; they force producers to hold large inventories, cost huge bribes and induce industrialists to turn from producing to lobbying and corrupting po1icicians. Tariffs invariably smother the enterprise culture and destroy competition. Yet, the biggest obstacles to opening the economy are local business lobbies, who like protected profit and comfortable markets.

MITRA: Ironically, this also applies to foreign owned companies. Ford has now joined domestic car producers to lobby hard against car imports into India. In the 1980s, Pepsi spent millions of dollars to keep Coca Cola out of the lndian market, and they succeeded for a few more years.

AYAU: Most businessmen are short sighted; they do not understand that a freer, open economy increases the size of their own market. Prospering exporters create income growth that benefits local producers, too. Few businessmen understand comparative advantage. 

KASPER: ….which is based on the notion that one can obtain many things either by the direct method of producing these oneself, or the indirect method of specializing on what one is particularly good at and trading these products for all the other things one wants. The latter method is invariably much more conducive to high living standards. For example, a surgeon may also be very good at cutting hair. However, if he specializes in cutting open patients and sends the family to the hairdresser, they enjoy a higher living standard. Australians would be better off if they concentrated on mass producing aluminum engine blocks which they can make comparatively well, that is comparative to other products, and then traded the engine blocks for assembled cars from other countries. Australia’s trade liberation has demonstrated how much cheaper and better cars and garments become when tariffs and quotas are cut. Specialization lifts overall growth. It is a win-win game.

AYAU: The Universities have failed to explain comparative advantage. Most business people, officials and academic economists, let alone journalist, do not understand the merits of specialization and exchange.

MITRA: This sort of economic illiteracy makes it easy for the demonstrators against free trade to win allies. Foreign do-gooders now try to push up wage levels in the third world artificially, enforcing a kind of extended EU social charter. They destroy the very basis on which poor, low wage earners in India gain from trade. This is why the advocacy groups do not attract much support in the third world where people want development and prosperity.

KASPER: I am very interested in the underlying cultural and institutional causes of development. I ask myself why people in East Asia did not fall for the blandishment of foreign aid, or listen to the prophets of import substitution and ILO-labor policies. Sociologists say that the ideal of dharma-accepting your fate, not fighting to better yourself by innovating and competing-is  a great modernization in India.

MITRA: Yes, but there is also karma-the individual responsibility for bettering your destiny.

SHIKWATI: Africans have long practiced customary laws which facilitate trade and markets. Different tribes have mixed and bartered with each other through  history. Only recently have legislation and axes disrupted the exchange. A lot of trade has gone underground to avoid value added taxes.

AYAU: The universities also fail to convey the dire reality of third world poverty which James and Barun have spoken so passionately. Neither do universities properly teach the essential theories such as the theory of comparative advantage. Most academics are part of collectivist rationalist networks. This was the motivation why I, an engineer by profession, studied economics and founded a small private university in Guatemala, where we teach the principles of free economy.

KASPER: Thank you for inspiring us and sharing your insights.

 

 

 


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