Senator Barack Obama, the
eminently likable possible Democratic nominee for president, has
sponsored a “Global Poverty Act” that would require the United States
to increase foreign aid by approximately $65 billion per year. If the
Senate passes this bill, it will be Mr. Obama’s first significant
legislative accomplishment in Washington (he has only been a senator
since January 2005). As such, it merits our scrutiny for clues about
should be careful how they critique the Global Poverty Act. If we say,
“we can’t afford another $65 billion per year,” Obama will score a lot
of points with the rebuttal, “You mean, we can afford hundreds of
billions to wage war in poor countries and tens of billions for
pork-barrel spending like the bridge to nowhere, but we can’t afford to
rescue the wretchedly poor from misery?” Granted, Obama’s proposal has
important fiscal, constitutional, and even sovereignty issues
(sovereignty because his legislation would commit us to the U.N.’s
global “master plan” for dispensing aid) but those points—however
valid—will strike many Americans as cheap and small-minded
technicalities when weighed against humanitarian considerations.
Having seen heart-rending poverty in developing
countries, I heartily endorse Senator Obama’s desire to greatly reduce,
if not eradicate, Third World poverty. At the same time, I oppose the
Global Poverty Act. If passed, it would be a hugely expensive mistake.
The act fails on pragmatic grounds—it simply would not accomplish its
stated goal of greatly reducing poverty.
For the zillionth time, we see that leftist
politicians are so obsessed with redistributing wealth that they never
bother to learn the prior and most fundamentally important economic
lesson—namely: How to create wealth. How, in fact, do countries develop
economically? WHAT WORKS?
Very simply, countries have progressed from
developing to prosperous by liberating the productive energies of their
citizens. How? By protecting private property, respecting and
permitting profits, allowing markets to determine prices, reducing tax
rates, cutting back on stifling bureaucratic red tape, stabilizing the
currency, etc. In short, the primary need is for good governance and
vibrant markets. This is of crucial importance. It means that countries
hold the key to their own fate.
Is there nothing, then, that foreigners can do
to assist this process? Indeed there is. It is called “foreign
investment,” not “foreign aid.” The distinction is crucial.
Nowhere in the world can we point to a country
that has escaped poverty through foreign aid—in spite of more than $2
trillion of foreign aid spending so far. Tragically, in some African
countries that have received billions of dollars in aid, standards of
living have deteriorated rather than improved in recent decades. As
celebrity economist Jeffrey Sachs has written, the majority of foreign
aid gets siphoned off to service old debts, pay for expensive
consultants, fund emergency humanitarian relief, or to Swiss bank
accounts. Of the remaining “aid,” much often goes to U.S. multinational
corporations (corporate welfare?) who are contracted to construct dams,
airports, highways, buildings, etc. Many of those projects are no more
than “white elephants”—extravagant monuments to vain leaders that do
little to foster economic development.
By contrast, many of the world’s developed
economies were boosted by foreign investment. Foreign capital has
always contributed greatly to economic progress in the United States,
and foreign capital is instrumental in the rapid development of China
Why does foreign investment so often succeed
where foreign aid fails? Primarily because investors are more careful
and prudent with investments because they bear the losses when
investments go south. Consequently, they are more diligent and
successful at seeking out investments that will be profitable—that is,
that will actually create value in the targeted economy. Public
“servants,” by contrast, don’t run the same risk. If a government
“investment” fares poorly, the politicians or bureaucrats who made the
investment suffer no personal loss. They simply go back to the public
treasury for more funds for more boondoggles. Private markets are far
more efficient, productive allocators of scarce capital than any
government or multilateral taxpayer-funded institution.
Besides foreign investment, another way to help
the world’s poor is through increased trade. According to Benjamin
Mkapa, past president of Tanzania, if wealthy countries would simply
open their markets to developing countries, those poorer countries
could earn their way out of poverty and wouldn’t need any foreign aid.
Foreign investment and open markets are not only more effective than
foreign aid at overcoming poverty, they also confer a dignity that is
denied to those who receive handouts.
I am convinced that Sen. Obama’s heart is in
the right place, but his Global Poverty Act proposal shows his economic
knowledge to be 50 years behind the times. He has good intentions. What
he needs now is a crash course in economics.