Benjamin Powell (Editor).
Reviewed By Joseph Keckeissen.
A recently published work is a must fit in any economist’s library, as well as that of any layman interested in the ongoing problem of poverty. It address the question: Why have so many of the earth’s nations escaped from the depths of poverty while so many other aspiring nations have been entrapped, being poorer today than they were at the moment of their decolonization forty years ago?
Benjamin Powell’s compendium is a composite of thirteen highly convincing articles that demonstrate, from a free market point of view, that the unique royal path to development consists in freedom. Mancur Olson lays the theoretical base for the argument, showing how the older, accepted theory that growth depends merely on inputs of resources and technology and is impeded by overpopulation or lack of resources, fails to convince. On the contrary, the real test of progress lies in institutions and policies. Holcombe, Baumol, and Lawson place their collective finger on the right kind of entrepreneurial incentives and the factors that accompany unfettered entrepreneurship: private property rights, low marginal taxes, and less regulation, all of which promote the exploitation of ever-expanding growth opportunities.
This conclusion is remarkably illustrated by the history of Ireland, where the entrepreneurial environment was greatly improved after the 1987 reforms. All of the miracle- producing innovations came about by reducing the size of the government: a cut in inflation coupled with lowered expenditures in education, health, agriculture, infrastructure, military, public employment, government debt—all between 6 and 18 percent. With the governmental budget thus hemorrhaged, traditional Irish free trade polices, coupled with reduced taxation rates and the commitment not to backtrack, produced “tiger-style” growth in GDP, raising per capita increments from a measly 3 to as much as 9 percent and causing Ireland to rise in rank to among the top ten freest economies in the world.
Powell follows with four tragic cases of entrepreneurial failure and then with five cases of reform and success based on better institutions and better policies. The basic reference is Gwartney and Lawson’s Economic Freedom of the World Index, as a thermometer of progress from poverty to riches, paralleling the route from servitude to freedom.
Two of Powell’s dozen, however, see possibilities for free markets in Africa. George Ayittey proposes that Africa’s indigenous economic system, wherein private property had once reigned, without state controls under the auspices of an extended family sys- tem and had been crushed out of existence by the independent governments, should be restored to its former preeminence. He labels the period 1880 to 1950, “the Golden Age of Peasant Property,” laid waste by the repression and destruction of the statists. Scott Beaulier then shows how free market policies made little Botswana into “Africa’s best- kept secret” until its more recent period of overarching government reduced the pace of the country’s modernization.
The book rejects nation-to-nation aid. As Vargas Llosa sums it up: “In the past fifty years, rich nations have given poor nations as much as $2.3 trillion in aid (in today’s dollars), and so far not one of the countries that has overcome underdevelopment has been a primary recipient of that money.” Collier, on the contrary, while recognizing the historic futility of so many of the aid payments, sees as the only hope for the bottom billion a new kind of aid—not the historical inadequacies of what he labels as the “headless heart.” “Aid,” he argues rather convincingly, “does tend to speed up the growth process.” He asserts this on the basis of his sympathetic, convincing studies. “A reasonable estimate” he concludes, “is that over the last thirty years [aid] has added around one percentage point to the annual growth rate of the bottom billion. This does not sound like a whole lot, but then the growth rate of the bottom billion over this period has been much less than 1 percent per year—in fact, it has been zero.”
On the basis of such studies as he and his associates have made, he concludes that aid has significantly reduced capital flight. Aid revenues have actually raised growth, whereas oil and other resource revenues have lowered growth, though both are financial transfers to bottom billion governments. Even though forty percent of Africa’s military spending is inadvertently financed by aid, aid still has an important, though minimal, role to play in breaking the conflict trap. Collier concludes that the way we have given “headless” aid must be changed. Donors are now learning when to pay, how to pay, and how to stop paying when the marginal benefits disappear. Payoffs for technical assistance, rather than outright grants, have returned as much as fifteen times their costs.
Aid agencies must reform their practices: even USAID has been distorted by congressional commercial lobbies. Yet, more and more aid is in the political works. In 2005, the Gleneagles G8 summit, promoted by Britain’s Tony Blair, committed to doubling aid to Africa. Bush’s Millennium Project is noted and criticized for its unique dedication to governmental contributions. The roaring question is: “Is there another viable alternative?” This author suggests that the a priori rejection of aid on the part of Powell and company demands reconsideration.
Every economist worth his salt must consider as required reading the successes and dismal failures of development presented by Powell. It is an indispensable task for the modern economics profession to call a halt to the conventional nondescript claptrap that has served as development theory over so many decades and to provide the profession with tangible remedies, especially for the backsliding economies—one sixth of humanity. Yet, economists do not seem to read each other’s works. For example, the free market hero on development has always been the late Lord Peter Bauer, “a lone voice in the wilderness,” as Lawson states. He dedicated a lifetime of study to Asia and Africa to show how it is attitudes and policies that matter—and not foreign meddling. Collier has no reference to Bauer; of Powell’s associates only four mention him (Lawson, Vargas Llosa, Dorn Shah, and Sane).
Going outside the profession, one has no excuse not to refer to the pride of place in the development of Western civilization on the part of the Catholic Church, as Deepak Lal notes in his introduction, referring to the accomplishments of two Pope Gregorys in the sixth and eleventh centuries. More recently and to the point, the social encyclicals of the Catholic Church, as updated by the recent publication of the Compendium of Catholic Social Doctrine, are probably the most common-sensical, nontechnical versions of what reforms could well be made in the modern economic world. The Church has occasion- ally miscued in the past, as in the case of an oblique adherence to fascism in 1931 and in suggesting foreign aid as a panacea in 1970. Yet, the Church’s basic contribution is the doctrine of subsidiarity, promulgated by Pope Pius XI in 1931. This author contends that all the free market proposals made by Powell’s economists are neatly summarized in subsidiarity, and most of Collier’s insights are implied in the negative provisions of the subsidiarity principle: what the governments should not do, lest they destroy the entrepreneurial spirit. It seems that no economist has yet discovered this.
Subsidarity suggests, à la Powell, that maximum bottom-up freedom be given to the activities of the entrepreneur, his rights to private property, and independent decision- making. It instructs, too, that the ingressions of the state, à la Collier, be substantively limited to create the basic environment in which free entrepreneurs can successfully do their thing under a rule of law.
