Jay Richards’ previous post on Richard Rahn’s article “Not Rocket Science” illustrates Huxley’s famous statement about a fact destroying a theory.
Jay quotes Rahn’s lists of the politicians and development experts who support increased foreign aid.
It’s no longer just politicians and economists. Bono’s One Campaign is designed to get the developed nations to contribute 1 percent of their GDP to foreign aid for the poorest countries. No doubt Bono and many other supporters have good intentions. But good intentions don’t fight poverty. Economic opportunity, entrepreneurship, and free trade do.
Using the Heritage Foundation/WSJ “Index of Economic Freedom” Rahn lists example after example of the success of countries who liberalized their economies, and failures of those that haven’t.
The economically freest societies are the most prosperous, and the most economically repressive societies are the poorest.
Ireland 30 years ago was among the poorest countries in Europe. It then made a major shift toward freeing up its economy — e.g., its maximum corporate tax rate is only 12 1/2 percent (it ranks No. 3 out of 157 countries in the index). As a result, it now has the second-highest per capita income in Europe and is far ahead of the old leaders like Germany (No. 19) and France (No. 44). (Note, when I refer to per capita income, I do so using the Purchasing Power Parity measure which accounts for local price differences.)
In Eastern Europe, Estonia is economically the freest (No. 7), and Romania the least free (No. 92), though the latter is now making progress. Both countries started out at roughly the same level 16 years ago, but now Estonia has almost twice the per capita income of Romania. Much of the credit for Estonia being the most successful transition country goes to its brilliant and able free-market former prime minister, Mart Laar.
On the other hand, the biggest recipients of development aid over the last quarter-century, for the most part, have gone nowhere economically. Egypt (No. 129), the biggest recipient of development aid in the last quarter-century, is a prime example, with a per capita income about 5 percent of Ireland’s.
Despite the evidence you will continue to hear Kofi Annan and the others clamoring for more aid and more generosity. Instead of aid, they should start asking to reduce tariffs and subsidies and encourage and assist developing countries to set up market economies guided by the rule of law.
Hernando de Soto’s book The Mystery of Capital illustrates that what is needed is not more aid, but the ability to turn assets into capital and less government regulation and interference in the economy.
The One Campaign is right to care about the poor in Africa and elswhere. Perhaps if we could get Bono’s good intentions and passion behind sound economics we might see some real change.