This post is by Claudia Williamson, a post-doctoral fellow at DRI.
P.T. Bauer was a brilliant development economist who began writing in the 1940s, and published many influential works throughout the 50s, 60s and 70s, when most of his profession favored central planning and government solutions.* Bauer preferred bottom-up solutions and focused on the importance of institutions to align incentives and provide information to promote social cooperation and economic growth.
Relying on basic economic principles and logic, Bauer made bold arguments that are surprisingly relevant today.
Bauer said: The vicious circle of poverty “is in obvious conflict with simple reality.”
Proponents of the “poverty trap” explanation argue that underdeveloped countries are so poor that individuals can’t save enough to support the investment necessary to generate economic growth. The only way to break out of the cycle is through external funding.
Bauer argued that the poverty trap cannot be a binding constraint. The mere existence of prosperous individuals and societies—most of which have emerged from poverty without the assistance of foreign aid—flies in the face of the poverty trap. While it is true that poor people can’t save as much relative to rich people, if the right incentives are in place, small scale savings will lead to small scale investment, which in turn will generate marginally higher incomes leading to medium scale savings and investment, thus creating a “friendly circle of wealth.”
Bauer said: “Guilt-ridden people hope to assuage their feelings simply by giving away money…without questioning the results: what matters is to give away money, not what results from this process.”
At the recent World Bank annual meeting, the Development Committee praised the World Bank’s “vigorous response” to the global financial crisis, which they quantified as “a tripling of IBRD commitments to $33 billion this year and IDA reaching a historic level of $14 billion.”
While most development agencies profess a commitment to measurable results and outcomes, “results” in development are puzzlingly often equated with volume of loans given or number of grants handed out. According to Bauer, the reason for this apparent contradiction is that collective guilt has replaced individual responsibility. Because the West feels responsible for the lack of development in the rest of the world, what matters is to give away money, not actually see results.
Bauer said: “Foreign aid is demonstrably neither necessary nor sufficient to promote economic progress in the so-called Third World and is indeed much more likely to inhibit economic advancement than it is to promote it.”
Foreign aid inflows alter the incentives of recipient governments, argued Bauer, increasing the power of the (often dictatorial) government, promoting dependency and encouraging rent seeking. Aid ignores the fundamentals that are necessary for economic development: the primacy of property rights and the importance of informal norms and culture for economic change.
Bauer said: There is a “need to restate the obvious.”
If Bauer said it all, why is it still so vital that new research follow in his footsteps?
Bauer’s answer comes from George Orwell, who lamented in 1939: “we have sunk to such a depth that the restatement of the obvious has become the first duty of intelligent men.” What may be obvious to some is counterintuitive for many.
There is a need to restate the obvious.
*Update: Thanks to astute readers for prompting us to be more precise on the time when Bauer began writing. As a few of you pointed out, Bauer’s influence spanned many decades: he published his first major work, “The Working of Rubber Regulation,” in 1946, and continued publishing through the 1990s. A collection of Bauer’s essays, entitled “From Subsistence to Exchange,” with an introduction by Amartya Sen, was published in 2000, two years before his death. The opening sentence of the blog has been changed to more accurately reflect this. – Eds.