Peter Bauer, Part II

“The suggestion that foreign aid should be granted specifically to underwrite Indian economic planning should be rejected – not so much because of the cash cost to the United States and the West, but because of the cost to India.”

So wrote Peter Bauer, Development Economist, in 1965

Bauer lived most of his life as a contrarian. In an economic world dominated by significant government involvement in markets, Bauer advocated freedom. His academic work took him to study the rubber industry in modern-day Malaysia, and local trading practices in West Africa. Direct observation, more than economic theory, drove his conclusions.

One prevailing thought of Bauer’s time was that the poor were caught in a “vicious circle of poverty” from which they could not escape without outside help. This view has resurfaced in Jeffrey Sachs‘ “The End of Poverty.”

Bauer disagreed with this theory saying, “…it is in obvious conflict with simple reality. Throughout history, innumerable individuals, families, groups, societies, and countries – both in the West and the Third World – have moved from poverty to prosperity without external donations. All developed countries began as underdeveloped. If the notion of the vicious circle were valid, mankind would still be in the Stone Age at best.”

James Dorn, in his opening chapter of “Peter Bauer and the Economics of Prosperity,” notes that at long last the following principles are finally becoming understood:

• Having capital is the result of successful economic performance, not a precondition for it.
• Economic performance depends on personal, cultural, and political factors; on people’s aptitudes, attitudes, motivations, and social and political institutions.
• The ability to borrow abroad does not depend of the level of income, but on responsible conduct and the capacity to use funds productively.
• Therefore, development aid is thus clearly not necessary to rescue poor societies from a vicious circle of poverty. Indeed, it is far more likely to keep them in that state.

Since “aid” infers that the strategy is helping, Bauer preferred the term government-to-government transfer.

MIT’s Esther Duflo has teamed up with Jeff Sachs’ in advocating much more aid. Here you can see a recent Ted Talk delivered by Duflo about the topic.

What do you think? Does the “Poverty Trap” argument ring true to you? Or, do you lean toward Bauer’s perspective?