Throwing money into the fire


Why foreign aid often makes things worse
Roger Sandall has a great piece on Third World economics. It's much too long for me to quote much here, but there were some bits that stood out.

“There is plenty of money coming from the World Bank and from France and Britain and America, but President Biya and his friends put it in their pockets. They do not spend it on the roads.”

This is the standard “top-down” explanation for African dereliction, and in the case of public highways it is surely true. In Cameroon and elsewhere the link between high-level political theft and poor public facilities is direct and obvious. Harford deploys a theory of government that distinguishes the benefits of long-term from short-term despotism. Short-term despots take the money and run; long-term despots buy fleets of Mercedes, find they need decent roads to drive on, and are forced with extreme reluctance to fill in a few of the holes. Ergo, long-term despots are best.

But what our author says about lawlessness and endemic violence is more revealing. It stifles economic initiative at every turn, and the effect on public morale is devastating. Though the rot starts with government, he writes, it afflicts the entire society, and in the extract below he explains why the absence of law, of enough honest men and women, and of incorruptible institutions, paralyses modern life and economic progress:

There’s no point investing in a business because the government will not protect you against thieves. (So you might as well become a thief yourself.) There’s no point in paying your phone bill because no court can make you pay. (So there’s no point being a phone company.) There’s no point setting up an import business because the customs officers will be the ones to benefit. (So the customs office is under-funded and looks even harder for bribes.) There’s no point getting an education because jobs are not awarded on merit. (And you can’t borrow money for school fees because the bank can’t collect on the loan.)

Hernando de Soto at the Institute for Democracy in Peru has emphasized the importance of legal title to land for there to be any hope of residential progress. The situation described by Tim Harford supports this general argument. But above and beyond freehold title, a man in Cameroon will not invest in business, not establish a company, not even bother with education because all ventures and investments are permanently at risk.

All the little unspoken assumptions of personal property and the voluntary exchange of goods and services are what make economic progress possible. I do mean progress, as in growing the economy and producing more. It's the division of labor. It's specialization. It is basic human interaction.

Hat tip to Arts & Letters Daily.

— NeoWayland

Posted: Fri - September 8, 2006 at 10:35 AM  Tag


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