Ending poverty

Isabel Patterson said in her 1943 book, The God of the Machine, ‘Most of the harm in the world is done by good people, and not by accident, lapse, or omission. It is the result of their deliberate actions, long persevered in, which they hold to be motivated by high ideals towards virtuous ends.’ Things have not changed much in the intervening 60 years. World leaders, economists, celebrities, rock stars, and millions of good people around the world now believe that increased aid, and debt cancellation, will bring about ‘virtuous ends’ for poor countries. ‘Make poverty history’ they say. However, the most likely result will be more harm.

After four decades and an estimated $1 trillion in poverty relief, poor countries are no better and perhaps worse off than before the aid programmes began. The real beneficiaries of development aid are those who get paid first. It is not the poor – they are last in the queue. Government and aid organisation officials earn high incomes out of aid funds. Corrupt rulers of poor countries enrich themselves and their cronies by stealing aid intended for the poor. Government poverty relief programmes are inefficient. Taxpayers of donor ‘countries’ meantime – the real donors – may be appalled at the misuse of their hard-earned money but have very little say over the process.

Relief typically focuses on providing the poor with the things like housing, food, electricity, water, health care, telephones and transport. Government departments, a plethora of national and international aid agencies, development banks and small business development corporations carry out the delivery. There is economic and infrastructural development, agricultural assistance, business development and a host of other kinds of ‘development’. Economist Murray Rothbard pointed out what all the governments and development agencies seem to miss: the things the poor don’t have stem from a single cause – they don’t have money. So Rothbard suggested that instead of doing all these other things, their intending benefactors should give them money.

Handing money to the poor, however, creates its own problems. Would the wealthy continue to work and pay taxes in order to supply cash to the poor? Would the poor not stop trying to earn a living? Would politicians, government officials, economists, rock stars and taxpayers not then also clearly understand the causal relationship between incentives, disincentives and poverty? They may wonder whether supplying money to those who do not feel like working would not further weaken their willingness to work. Whether supplying the poor with money and creating an ever-greater number of people looking for handouts is not a recipe for perpetuating poverty.

Overcoming poverty requires the creation of wealth, which in turn requires production and exchange. At the most basic level of existence, simply to survive, individuals have to work by growing or finding or hunting for food. In order to advance from subsistence to a better existence, people have to produce more food than they require for their immediate needs. They need to have a surplus that they can trade for whatever else they need. Specialising makes increased production possible, allowing the producer to purchase an ever-widening range of assets and goods from other suppliers. That is how an individual increases his or her wealth. If everyone does the same they all end up with more assets and a better quality of life.

As trade and commerce expanded the most tradable products, usually gold and silver, became money. These commodities have now been replaced with paper money but the basic relationship between production and exchange remains the same. If people don’t produce goods and services for their own account they have to sell their labour to someone who does.
Most people on earth have lived in poverty for the 6000 years of known history. It is only from the 18th century onwards that people in some parts of the world have succeeded in rapidly increasing production and trade. Scientific and technological discoveries helped the people of those countries to overcome poverty. However, the greatest change was in the laws of the countries that are now the wealthiest. People became free to produce whatever goods and services they wished to produce and to trade with anyone willing to trade with them. Their property was secure and they could depend on the law to protect their freedom. They enjoyed economic freedom, which, together with productive work, is the key to overcoming poverty.

The tragedy is that while the benefits of economic freedom are irrefutable, many governments continue to ignore the evidence. Independent studies confirm that people who live in countries with high levels of economic freedom are wealthier, healthier and live longer than those in countries that are economically less free. The poor in economically free countries are substantially better off than those in less free countries. Wherever and whenever the shackles that hold back individual effort and trade are removed, rapid economic growth and wealth creation follows. China is one of the world’s newest examples. By contrast, poverty is the norm wherever economic freedom and the rule of law are absent, as in the world’s remaining communist states, and wherever dictators rule, with Africa providing many examples.
Achieving economic freedom requires that political intervention in, and direction and control of the economy must be terminated. This is the real hurdle to overcoming poverty in all countries, whether they are democracies or dictatorships.

The essence of economic freedom is secure property rights, freedom to contract and the rule of law. A programme for achieving a free economy requires low income taxes, no taxes on trade, no subsidies, no licensing or minimum wage laws, and protection of the contractual rights of employees and employers. Government monopolies have to be reduced by either privatising state-owned enterprises or repealing all laws preventing competition with them, including in electricity supply, telephones, postal services, education, health care and broadcasting.

Development economist Peter Bauer observed that having money and being wealthy are the result of economic achievement, not its precondition. The tragedies that are now taking place in Niger and other African countries will continue unless their people are provided with environments in which they and their property are respected and protected. While their production is looted they will not produce, and if the international community makes it unnecessary for them to produce or their governments to change their ways, they will also not produce. Unless the quality of governance changes drastically, increased aid to the governments of these poor countries will serve to subsidise and perpetuate their people’s poverty. Making poverty history requires world leaders, economists and celebrities to call for an unreserved commitment, by all, to economic freedom and the rule of law.

Author: Johan Biermann is a planner and policy researcher. This article may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the author’s and are not necessarily shared by the members of the Free Market Foundation.

FMF Feature Article/ 26 July 2005