Easterly on World Poverty

“The way to channel aid is from individuals to individuals (or small organizations to small organizations), not from government to government.”

I’m suspicious of blanket statements like this. Of course, no one is against individual-to-individual type aid. But what is the economic or philosophical principle that justifies rigid lines between the finances of different governments. Why shouldn’t wealthy Denmark’s government help poor Malawi’s government out? Given that governments need to be financed somehow, and some regions of the world are much richer than others, there’s a prima facie equity advantage if some of the burden of financing poor-country governments is paid by rich-country taxpayers. This question is independent of the size of government. Whether governments are big or little, they still need money, and foreign-aid financing is more globally equitable than local financing. Aid might also give smarter and more civilized rich countries’ governments the leverage to improve the behavior and/or policies of poorer countries.

In this post, Arnold makes no argument for his claim. It strikes me not so much as counter-intuitive as arbitrary (and populist). I sense that he thinks he has strong public choice arguments for the claim, but I suspect they’re not as strong as he thinks.

And don’t give me the empirical claim that aid doesn’t work. In recent decades in the former “Third World,” famine has receded, life expectancies have risen dramatically, literacy has receded and years of education have risen, there is more respect for democracy and human rights, some countries have made spectacular take-offs into economic growth, and lately almost all developing countries are growing at a nice clip. I’m not saying this is because aid is working; something’s working, and whether and to what extent foreign aid has made a contribution is a complex question to the point of being unanswerable. Still, with the trends positive, a blanket claim that aid doesn’t work is not so much counter-intuitive as counter-factual.

More often than not, the money one government sends to another ends up in the pockets of those in charge of the government receiving the money. If personal enrichment is your goal, then government-to-government transfers are ideal.

Given that governments need to be financed somehow, and some regions of the world are much richer than others, there’s a prima facie equity advantage if some of the burden of financing poor-country governments is paid by rich-country taxpayers. This question is independent of the size of government. Whether governments are big or little, they still need money, and foreign-aid financing is more globally equitable than local financing.

Actually, there’s an argument that local financing tends to encourage democracy and local wealth more than foreign-aid financing.

One of the puzzles of development economics is why so many countries with ample natural resources are so poor. In fact, this is so common that the suggested question has been “Why is Australia so rich, despite having so many natural resources?”. Sadly, it’s impossible to do proper controlled tests, but one plausible answer is that in a country where the elite gets its money from elsewhere, it does not need to pay as much attention to the general population as if it is dependent on taxation. Meanwhile, a government that is dependent on taxes has an incentive to ensure that its population can afford lots of taxes. The necessity of raising taxes was the cause of the development of the English Parliament and its eventual winning over the Crown. The Crown had to call Parliament to get its tax laws passed because the monarch couldn’t get money from elsewhere.

Or, in other words, the American Revolutionaries got their cry wrong. It should have been “No representation without taxation!”

A government that is fianced by foreign aid loses that incentive. In the long-run, the lack of democracy and of government concern for the wealth of its citizens is probably is worse for global equity than the unfairness of having to live off local taxes. Obviously we are talking about the very long-run, in England the process took centuries. But the argument does cause me to question the assumption that financing is good regardless of whether it comes from local taxes or foreign taxes.