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P.T. Bauer, Development Prophet

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.

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  1. Jim wrote:

    Bauer talked a good game but didn’t seem that bothered about the facts. When he said “Foreign aid is …. much more likely to inhibit economic advancement than it is to promote it”, he seemed blithely unconcerned with what the evidence showed at the time, and his supporters seem to care just as little about what decades of evidence since have done for this claim.

    No doubt Bauer made some useful contributions, but he seems to be mostly invoked these days as having ‘proved’ that aid doesn’t work, when all this proves is that some people will latch onto any justification they can for not having to give their money to the government or to poor people. Ironically, Bauer’s work itself seems to function as a salve for guilty consciences, this time on the part of those opposed to aid.

    Posted November 3, 2009 at 3:45 am | Permalink
  2. Marc wrote:

    Claudia writes “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.”

    Claudia, I think it’s beyond that. I think the West wants to give away money and actively does not want to see results. Look at the US reaction to China’s growth from poverty to wealth–it is seen as a threat. When your average third world country opens a factory paying local standards to the workers, it is demonized as a sweatshop in part because the output threatens Western manufacturing jobs. Maybe this is a peculiar pattern to the United States (I am not exposed to European public opinions on these matters), but here in the US the reaction to third world growth is a presidential-level topic of discussion and most of it is about how to protect US jobs from the threat of outsourcing to nasty third worlders who don’t pay US union wages.

    Posted November 3, 2009 at 5:14 am | Permalink
  3. Manuel wrote:

    “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.”?

    No more no less than the mere existence of starving individuals and societies flies in the face of the “primacy of property rights and the importance of informal norms and culture for economic change”.

    P.T. Bauer was really a brilliant development economist, and a courageous one. But we will make a disservice to his legacy by suspending our critical abilities when presenting his work.

    Posted November 3, 2009 at 10:21 am | Permalink
  4. Claudia Williamson wrote:

    To Jim:
    I believe Bauer’s work is valuable because he consistently relies on basic economic principles to logically argue his position. It is true that he didn’t cite empirical evidence to support his claims, but he did engage in case study work to support his arguments. Even if some individuals overstate Bauer’s conclusions, I don’t believe it takes away from the value of his work.

    To Manuel:
    The argument is that the poverty trap is not a binding constraint because history reveals countless individuals and groups that emerged from poverty without outside assistance. It is because individuals lack property rights that they are poor. History also reveals this phenomenon.

    Posted November 3, 2009 at 5:57 pm | Permalink
  5. Brian wrote:

    Claudia: you don’t consider case studies to be empirical?

    I also don’t think reducing the cause of poverty to lack of property rights captures the whole spectrum of reasons why people are poor. Certainly they are a part of it, as are informal norms and culture, but you seem to be assuming that if an incentive exists it will automatically motivate (the desired) behavior. History would also reveal this to be an incomplete and unsatisfying explanation.

    Posted November 3, 2009 at 8:46 pm | Permalink
  6. Claudia Williamson wrote:

    To Brian:

    I do think case studies are empirical, so thank you for pointing this out. I simply meant that Bauer didn’t rely on pure statistical analysis.

    I also did not mean to imply that my response was providing a complete explanation to the cause of poverty. I focus on property rights as a fundamental cause but other institutions and policies matter as well.

    Posted November 3, 2009 at 9:27 pm | Permalink
  7. Mozza wrote:

    I guess it was just a matter of time before Bauer would get his praise on that blog. Not that there’s anything wrong with that.

    It’s a bit early though to measure the World Bank against the results of its interventions in the midst of the financial crisis, as the results will take a few months to show. It’s only normal that their action is measured in volume for the moment. If a year or two from now, it’s still all they have to show, this critique will be relevant. Still, it’s funny that a blog so critical of the Millennium Development Goals should complain that development agencies are not measured on results enough!

    Once again, thanks for offering a platform for healthy debates.

    Posted November 3, 2009 at 10:46 pm | Permalink
  8. Manuel wrote:

    Claudia, my argument is that cases where individuals and groups emerge from poverty without outside assistance just show that poverty traps are not universal binding constraints, they do not rule out the possibility that there can be binding poverty traps. If there are a few or many of them is something to discuss over the empirical evidence, that it is everything but conclusive.

    I agree that empirical evidence is sharper in the case for property rights. But nevertheless there are/were cases of poor societies with well-defined property rights, and there were/are? cases of rich societies without them. I do not think these cases invalidate the argument for property rights.

    By the way, do you really think h(H)istory can “reveal” anything?

    Posted November 4, 2009 at 5:56 am | Permalink
  9. Kris wrote:

    I’m sorry to say this, but I’m literally stunned that a post-doctoral fellow at NYU studying development can write that “P.T. Bauer was a brilliant development economist who began writing in the early 1970s’.” Bauer visited many ‘less developed’ countries in Africa as well as India as early as the 40s and had already written MANY important books on development in Africa and India in the 50s. And, this is a personal impression, I do tend to believe that these books were much more important and interesting than his later work. Unfortunately with a Whiggish conception of progress in science, people tend to consider later work as better.

    And, I’m sorry to say this again, what follows your opening sentence is hardly better.

    On the first point, the view that people will all people will become entrepreneurs, will earn profits, invest, watch their business grow is romantic, to say the least. Just see the barrage of criticisms addressed to micro-credit schemes after an initial ‘romance’. How many people really developed genuine firms after having started as poor people. After all, it all depends on why you mean by poor people. Maybe you should read the brilliant paper by Banerjee and Duflo “The Economic Lives of the Poor” to grasp the extent to which the view of the penniless entrepreneur who will turn into a genuine business-owner is romantic or flawed, or both. May I also add that both Bauer and you at least implicitly acknowledge that these people must be helped in order to improve their lives. They do need “external funding”, even if this takes the form of credit from banks, microcredit or foreign aid. I don’t see why, granted that we acknowledge that these people need ‘external funding’, we should make a distinction about the source of this funding.

    On the second point: please, have you heard about the Millennium Development Goals? Have you heard about the Human Development Index? The Index of African Governance? The Doing Business Report published by the World Bank Group? Do you REALLY believe that “what matters is to give away money, not actually see results”?

    On the third point: you quote a paragraph from Peter Bauer “Foreign aid is demonstrably… promote it.” This is the opening paragraph of his paper “Foreign Aid: Abiding Issues”, delivered by the way at NYU in 1996. Now, Bauer is not calling for the end of aid altogether as your comment might suggest. Indeed, the last section of this paper is entitled “The Reform of Aid” and Bauer says that “The most important single reform would be a radical change in the criteria of allocation. These subsidies should go to those governments whose policies are most likely to promote economic progress and general welfare of the peoples through humane leadership, effective administration, and the extension of personal freedom. Such a reform would remove the most conspicuous anomalies of official aid and enable it to make whatever contribution it can to improve the condition and prospects of the poorest.” Bauer is not suggesting that we abandon aid altogether, rather he is arguing in favor of a reform of aid. He is concerned with aid effectiveness like so many other scholars working in this area, including the recent Nobel Prize winner Elinor Ostrom. BTW, I had hoped that the award of the Nobel Prize to her would have dispensed us at least for some time with the cliche “It is because individuals lack property rights that they are poor. ” Do you know how many poor people there are in the US? DO they lack property rights?

    Posted November 4, 2009 at 9:37 am | Permalink

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    The Aid Watch blog is a project of New York University's Development Research Institute (DRI). This blog is principally written by William Easterly, author of "The Elusive Quest for Growth: Economists' Adventures and Misadventures in the Tropics" and "The White Man's Burden: Why the West's Efforts to Aid the Rest Have Done So Much Ill and So Little Good," and Professor of Economics at NYU. It is co-written by Laura Freschi and by occasional guest bloggers. Our work is based on the idea that more aid will reach the poor the more people are watching aid.

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