Paper Money Can’t Save Billions From Poverty

Today, there are 6.5 billion people on our planet. Over the next 45 years, that number will explode to 9.1 billion, according to the United Nations’ latest estimate. Disturbingly, this sudden 40% population increase will be disproportionately concentrated in the world’s poorest nations. While the number of poor living in the 50 least developed countries is projected to more than double, more prosperous countries will experience virtually no population growth at all.

The implications are deeply unsettling. One wonders what the future will hold if such a massive increase indeed comes to pass. How will the world – the relatively wealthy developed world – deal with such a dramatic change? We are prompted to ask, “Is there anything that can be done now to prevent billions of babies from being born into a life of abject poverty?”

In a classic understatement, UN Population Division Director Hania Zlotnik dryly noted in the report, “It is going to be a strain.”

The traditional response to global poverty has been foreign aid – which in reality is no more than limited transfers of money from wealthier countries to those in power in poorer countries. Many institutions, such as the World Bank and the International Monetary Fund, exist to channel those funds into waiting bureaucratic hands in countries where photographs of starving children cry out for help.

Since 1980, the United States has provided over $167 billion in official development assistance to 156 countries and regions. And that’s just the United States. Foreign aid globally, is far higher. As if that were not enough, the United Nations has announced – in its “Investing in Development” report – that the number of those living on $1 a day or less would be halved if richer nations would contribute another $195 billion over the next decade.

The way to rid the globe of abject poverty, so we are told, is “more money.”

But, wait a minute. Haven’t we been pushing more money at the problem for quite a while? One is tempted to ask, “Is all that money doing any good?”

Sadly, the answer is “No.”

In too many cases, foreign aid only serves to make poor countries more corrupt and dysfunctional.

For instance, the United States continues to support countries like Nigeria, Indonesia, Azerbaijan and Egypt, even though they are controlled by some of the most repressive and corrupt governments in the world. These governments could not survive without outside aid, while their populations have been pushed further and further into poverty. From 1980 to 2000, the median GDP per capita in at least 97 of the countries supported by the United States decreased from $1,076 to $994.

In fact, more money may well be the last thing, in a long list of things, that poor countries will need in order to navigate successfully through the predicted poverty boom. While money can help – at least help a privileged few in the short term -it is always limited, often misused and, if experience is any guide, not particularly helpful in eradicating long-term, deeply-rooted poverty.

No, more money is not the answer. The way out of poverty is a vibrant local economy made up of indigenous economic activity – not handouts from outsiders.

The answer (and the best hope for the poor) lies in creating conditions where a free and open economy can flourish – making changes that will spur home grown economic activity. It’s very hard to imagine anyone nurturing an entrepreneurial dream in the midst of civil unrest, in the absence of property rights, or up against a mind-numbing (and often corrupt) bureaucracy. As long as those sorts of conditions exist, poverty is going to get recycled from generation to generation.

If the wealthy countries want to help the poor, they could best do it by helping create institutions that favor a commercial society because only when a society begins to experience economic activity can its members begin to live more comfortable lives and enjoy the benefits of progress.

Indeed, aid without reform can be worse than no aid at all. According to U.S. Government Accountability Office senior economist Harold Brumm, “foreign aid has a negative growth effect even where economic policy is sound.”

Think about it: If the United States sends a boatload of free grain to a hungry nation, what does that do to the local farmers who are trying to make their living growing grain? The transaction may be great for the mid-American farmer when the government buys his grain to send abroad – but it is a disaster for the farmer abroad who has to compete against free grain. We make the problem worse by driving the local farmer out of business. It would be far wiser to establish the institutional infrastructure to foster a healthy agricultural sector. That might mean enforceable property rights or wider access to a fair judicial system.

In 130 countries, changes in economic, legal and political institutions accounted for more than 80 percent of the change in income per capita between 1995 and 1999, according to economists Richard Roll and John Talbott, both professors at UCLA.

Understanding that letting the free market do its work is the best way to help a poor country isn’t rocket science. The Foundation for Teaching Economics, where I work, has been spreading this message to American high school teachers for years. In fact, policy makers at the World Bank or International Monetary Fund might benefit from taking a look at a new high school unit – “Is Capitalism Good for the Poor?” – which we just released. The lessons in it show how free market institutions, not aid, attack poverty. A clear example where this policy is succeeding is India.

India is particularly relevant because it’s predicted to have the world’s largest population by 2030. On the bright side, the country is aggressively pursuing policies of free-market economic development – rather than simply seeking international aid – to deal with its coming population explosion.

For example, 6.7 million farmers in the state of Karnataka are participating in a project to computerize 20 million land ownership records. The new electronic system will allow farmers to record their ownership and acquire land titles. Once they have clear title to the land, they can obtain loans to develop it, using the land itself as collateral.

Even India’s success, however, has been mixed. Urban populations have thrived, but it remains extremely difficult to raise rural communities above bare subsistence levels. In part, this is because 90 percent of India’s poorest inhabitants are “Dalits,” or “Untouchables,” who are at the bottom of the Hindu caste system and still have very limited freedoms or property rights.

For many Dalits, Indian democracy exists only on paper. This is India’s biggest challenge, and it cannot be overcome by money. The United States can go a long way in laying foundations for a broad move forward out of poverty by encouraging the government of India – and other developing nations – to make structural changes to allow market innovations and interactions.

If the United States and other wealthy nations were to commit to developing democratic institutions in poor countries from now until 2050, perhaps we won’t enjoy the simple, satisfying publicity that billion-dollar pledges bring. But support for the most basic institutions of democracy will likely be the only kind of aid remembered by the grandchildren of those who suffer so much today.

Jim Klauder is vice president of the Foundation for Teaching Economics, a nonprofit organization that promotes economics education at the high school level.

Jim Klauder

Foundation for Teaching Economics

260 Russell Blvd.

Davis, CA 95616

Phone: 530-757-4630

By Jim Klauder

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