Anyone who shares the goal, emblazoned on the wall in the lobby of the World Bank—OUR DREAM IS A WORLD FREE OF POVERTY—needs to read this sobering book by former World Bank Senior Research Economist, William Easterly. Named after Rudyard Kipling’s 1899 poem, Easterly provides an assessment of foreign aid’s successes—and more frequently—its disasters.
Despite spending $2.3 trillion (yes, trillion), nearly three billion people live on less than two dollars day; eight hundred and forty million people in the world don’t have enough to eat; and ten million children die every year from easily preventable diseases; the West still can’t get twelve-cent medicines to children to prevent one-half of all malaria deaths.
Contrast this situation to millions of children receiving Harry Potter novels the day they are released. What’s the difference? The former is based on top-down planning, while the latter is not.
The right plan is to have no plan. The central conclusion of the book is eloquently summarized by Friedrich Hayek, in The Fatal Conceit: The Errors of Socialism:
The curious task of economics is to demonstrate to men
How little they really know
About what they imagine they can design
There’s not one person in the world who knows how to make a pencil, yet any of us can get a pencil relatively easily, without a White House pencil czar, despite the fact that it takes, literally, thousands of people millions of interactions to make one (as Milton Friedman brilliantly explains in this short video).
Easterly draws a very useful distinction between Planners and Searchers:
Have good intentions
Decide what to supply
Develop global blueprints
Know the answers
Believe outsiders impose solutions
Receive no feedback
Are not held accountable
Set priorities, deny trade-offs
Look for what works
Ask, What’s in demand?
Deal with local conditions
Don’t have answers in advance
Believe only insiders have knowledge
Receive instantaneous feedback
Held accountable for results
Understand there are only trade-offs
NGOs and social entrepreneurs
Folks like Jeffrey Sachs, Bono, Bob Geldof and George W. Bush are Planners. Geldof told the New York Times, “Something must be one; anything must be done, whether it works or not.”
The World Bank (where Easterly worked for more than 16 years) and the IMF—the Sisters of Nineteenth Street—are also clearly in the Planners camp.
The Planner’s Paradox
No matter how much you may want it, it doesn’t make sense to have as your goal that your cow will win the Kentucky Derby. It’s much more useful to ask, “What useful things can a cow do?” Aid agencies are cows, not racehorses, according to Easterly.
He tells the story of his nine-year old daughter asking him, “Why do ambulances make so many accidents?” The presence of the IMF and World Bank is a consequence of poverty, not the cause.
Yet the problem is their very presence does cause further pile-ups due to rubbernecking bureaucratic planners, a phenomenon Easterly fails to explain fully, though he does equate aid to the “natural resource curse” (think oil-producing countries) with all of its concomitant negative effects on economic growth.
Another paradox is free markets—they work, but free market reforms do not (think Russia). Same with democracy; it works, but it cannot be imposed, since the majority may vote to abolish it.
It’s amusing that in Eastern Europe, after the fall of the USSR, the Big Six accounting firms were the chief recipients of foreign aid dollars, paid to draft new laws and create free markets, which had little effect on local customs. In fact, in 2003, KPMG’s Bearing Point received a contract from USAID to create a free market in Iraq.
Hiring accountants and consultants to create a free market is like appointing a eunuch to edit Playboy.
A free market is not created from a top-down plan; it doesn’t have goals, which is why we don’t need a White House book czar to ensure children get Harry Potter books. It’s also why we have no Jell-O shops in New York, but plenty of bagel shops.
Easterly does a masterful job of debunking the three legends of poverty with an overwhelming amount of empirical evidence:
Legend Part One: The poorest countries are stuck in a poverty trap from which they cannot emerge without an aid-financed big push.
Legend Part Two: Whenever poor countries have lousy growth, it is because of a poverty trap rather than bad government.
Legend Part Three: Foreign aid gives a big push to countries to achieve a takeoff into self-sustained growth.
Too Many Politicians
Easterly applies the principal-agent problem to that of foreign aid, explaining that it’s really the politicians who are the principals—not the poor—and the aid agencies are their agents. Thus, agencies are not held accountable by the very people they are trying to help.
There are far too many agencies who are each responsible for a plethora of objectives. When the objectives are not met, each agency can blame the others. If everyone is responsible, no one is.
It’s much easier to fart in a crowded elevator, since no one knows who’s to blame, than one where there are only two people.
He asks you to compare the cleanliness of your dining room with your attic. The poor are invisible, located in the rich world’s attic (especially the United Nations). Agencies only have to have visible plans and good intentions to delight the politicians, not produce actual results for the poor.
Easterly claims aid agencies have been bogged down the aid agencies in the equivalent of its Vietnam: AIDS. Despite a number of health triumphs—one area where the agencies have actually produced some good results—they have utterly failed on AIDS.
What’s the Answer?
Easterly concludes that aid will never be able to end poverty, only homegrown free markets can do that with any efficacy.
The solution: First, do no harm. In my mind, this means abolishing the World Bank, the IMF, and most other government-to-government aid agencies, as they have done demonstrably more harm than good.
But Easterly does believe that aid agencies can do some good, if they are held accountable for narrow results. Good luck with that. I don’t think it’s possible, otherwise it would have already happened.
No doubt some NGOs and social entrepreneurs are achieving positive results in some limited areas. He cites Global Giving as aid’s version of online dating, with some positive results accomplished.
The problem with these types of efforts is they detract from the real issue: we shouldn’t study poverty, for even if we knew the root causes, what would we do with that knowledge—create more of it?
We need to study how wealth is created. And it’s not created through aid agencies and NGOs giving away malaria nets and free medicines.
Rather, it’s created through a culture of exalting free minds in free markets, where entrepreneurship flourishes and continuously lifts people out of the perils of poverty. It is our only hope.
One optimistic note that Easterly cites is that the children coming of age today have only known markets, and will make them better due to digital technology. Time will tell, though I’m much less sanguine about this view.
But I remain a paranoid optimist, as long as we realize that the goal is to create wealth, the one and only antidote to creating a world free of poverty.