Posted: December 5, 2006
tragedy of our world is that hundreds of millions of people perform backbreaking labor but still live in dire poverty. Through no fault of their own, young lives are regularly cut down by malnutrition, disease, and predators called presidents. Our ancestors lived no better, to be sure, and sometimes worse. But the survival of such poverty into our times is a heartbreaking reality, one that tugs at the conscience. The problem is that we don't know what to do about it, though that has not stopped us from trying.
In his important new book, The White Man's Burden, William Easterly estimates that advanced industrialized countries gave one trillion dollars in official development assistance (measured in constant 1985 dollars) to poor countries between 1950 and 1995. And that doesn't include billions more in subsidized loans, forgiven debt, and private charity (the latter an especially significant source of American giving). This has been one of the most ambitious collective aid projects in human history, and also, sadly, one of the most ineffectual.
Having cut his teeth as a World Bank economist, Easterly is able to provide a true insider's guide to what went wrong. In his first book, The Elusive Quest for Growth (2001), Easterly described the long series of economic-development theories that informed successive anti-poverty policies from the 1940s on. At first the economists thought the problem was mere lack of technical expertise, and so they urged rich countries to share their technology. When this did not produce the desired result, economists suggested that the real problem was lack of investment in machinery and other "means of production." When this also failed to do the trick, they shifted their focus to reforms in government, e.g., reducing corruption. They introduced the idea of "structural adjustment" programs that offered loans in return for political improvements. But when many countries failed to implement genuine reform and couldn't pay back the loans, donors often forgave the debt anyway, which only served to reward the recipients' bad faith and bad policies.
The record suggests that the development economists never got it right, but this hardly slowed them down. As each theory succumbed to bitter experience, they replaced it with another. By contrast, Easterly seems to have taken away exactly the right lesson, that we should be skeptical of all such theories in this area. As he points out in The White Man's Burden, the foreign aid community's "utopian agendas" are as intellectually arrogant as they are operationally doomed.
The urgency of this message cannot be exaggerated, since massive international aid schemes frequently have downright deleterious effects. We now know (as some wise minds had reason to anticipate) that in many cases our large-scale aid plans assisted corrupt and abusive despots to outfit militaries and co-opt leading reformers. Their unjust rule was deepened and perpetuated by our aid programs, while their already weak economies were made even more dysfunctional.
Easterly doesn't flinch from citing studies suggesting that foreign aid, above certain levels, is associated with negative effects on growth. He tackles the issue of whether failure pre-dated aid—whether aid got sent to places because they were already disasters, instead of aid causing the disasters—and concludes that, in any event, large-scale aid seldom helps. Some major aid recipients never improve (some even get worse). Most of the recent success stories are countries "that did not get a lot of foreign aid and did not spend a lot of time in IMF [International Monetary Fund] programs."
Now, if a lot of this sounds familiar, it should. Over four decades ago, the political scientist Edward C. Banfield warned that the reigning "doctrines" of foreign aid would prove counterproductive, underestimating the many prerequisites of development and overestimating our own ability to address these problems. Not long afterward, the economist Peter Bauer warned that government-to-government development assistance tended to politicize economies, fuel growth-choking bureaucracies, and retard development, protracting the poverty of millions. Since then, dozens of market-oriented scholars and commentators have expanded on Banfield's and Bauer's warnings and applied them to specific countries and development projects.
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Beyond adding to that line of argument, Easterly has a positive case to make. We should not necessarily throw up our hands just because hugely transformational projects are fruitless and even dangerous. Our mistake has been to pursue grandiose goals with the tools at hand, however unsuitable. Instead, we should ask first what tools are available and then how best to use them.
So what are our tools? We have an abundance of money and technology, certainly. But we lack knowledge of poor economies, communities, and families, as well as of the effects of different kinds of assistance. Our knowledge is limited in part because distant bureaucracies have few mechanisms for getting feedback from the people they're trying to help—and lack incentives to improve that information, much less to get outcomes right.
Our knowledge is limited, too, because of the complexity of the processes of economic growth. Even industrialization in the West remains mysterious; we don't know exactly which conditions favored its emergence. As Easterly puts it, "The fallacy is to assume that because I have studied and lived in a society that somehow wound up with prosperity and peace, I know enough to plan for other societies to have prosperity and peace." Now, we can guess that things like the rule of law mattered in Western economic history. But that's a satisfactory answer only until we remember that the emergence of the rule of law required still other conditions, and we don't really know what those were.
So what is to be done? We should be cautious, set modest goals, experiment, and avoid schemes that rely on many moving parts. In Easterly's words: "The right plan is to have no plan." So in telling the story of foreign aid, if the black hats are worn by those whom Easterly calls "Planners," the white hats are the "Searchers," people who have "knowledge of local conditions, experimental results from interventions, and some way to get feedback from the poor." Searchers assume (unlike Planners) that the world's complexity outpaces our insights, and are content to look for incremental improvements. The way forward is to accept that "there is no automatic formula for success," and that only "piecemeal improvements" are likely. By setting their sights right, by aiming "to make individuals better off, not to transform governments or societies," Searchers can tangibly improve the quality of people's lives. For example, Easterly likes programs that pay poor parents to keep their children in school, especially schoolgirls in some traditional societies. This isn't a master plan for a national economy. But it could very gradually expand the number of citizens with better economic prospects.
Our limited knowledge, the problem of unintended consequences, the need for caution—this, too, should sound familiar. Beginning in the 1960s, neoconservatives argued on precisely these terms against large-scale social engineering, advising policymakers to adopt a more humble approach. And the Austrian school of economists, too, has long argued that ignorance is a pervasive problem in social planning. You'd never uncover any of this intellectual debt from Easterly's pages, but his critique of foreign aid is so needed that he can be forgiven the curious conceit of having invented humility.
The book's most innovative moments come when he discusses politics, not economics. First, he argues that functioning free markets emerge as the result of many accumulated actions, and can't be created by administrative fiat. "Shock" transitions to capitalism strike him as just as implausible as abrupt industrialization. Second, he rejects the notion that since sustained economic growth presupposes good government and the rule of law, we should go into the good-government business. That, too, is beyond our capacities. "Western intervention in the government of the Rest, whether during colonization or decolonization, has been on the far side of unhelpful."
This sort of language, imparting these sorts of lessons, has made Easterly an inviting target for professional economic developmentalists. Jeffrey Sachs, for example, in a recent issue of The Lancet, rejects Easterly's call for lowering our sights, and lists nine major achievements of large-scale international intervention. Eight of the nine achievements concern health care (such as the eradication of smallpox) and the other is "the spread of high-yield variety seeds." Sachs's list is revealing. These are largely feats of technology, accomplished in labs by small numbers of professionals, then paired with field operations that were in many cases either one-time events or involved very precise objectives. None of the nine consumed the huge budgets and bureaucracies that characterize the economic-development industry. None is meant to achieve the sustained economic progress hoped for by development economists, and none involves the grandiose imagery of Sachs's recent book, The End of Poverty (2005). If anything, the nine items on Sachs's list are more consistent with Easterly's message: each involved the use of feasible means to tackle what amounted to small parts of the poverty puzzle.
But the real validation for Easterly—as well as for Edward Banfield, Peter Bauer, the neocons, and the Austrian economists—is in front of our nose. Well, it's in front of my nose: it's the computer screen on which I'm writing these words. The screen is sleek and new, and it was made in a country that just 30 years ago was in economic ruins. I'm talking about China. But after decades of stagnation and disaster, China's economy experienced a striking shift toward rapid growth in the 1980s. This shift coincided with a change in government policies, a change in the direction of economic freedom. It's true that such freedom required a state strong enough to enforce de facto property rights. But the combination of an effective state and economic liberty unleashed tens of millions of "Searchers" in China whose names, until then, were unknown even to themselves. These Chinese citizens have improved their lives—and only coincidentally their country's economy—through one incremental decision after another, decisions concerning employment, risk-taking, education, and much else. In the process, more people in China have been lifted out of dire poverty, and in less time, than in any comparable episode in history. And foreign aid had absolutely nothing to do with it.