Big Think

Well economics is a very under appreciated way of looking at the problems that face poor people, and face human beings in general operating in society. It’s really just a set of common sense principals that have gotten refined over time through a lot of trial and error, a lot of thinking by a lot of people over the last two centuries since Adam Smith wrote “The Wealth of Nations”. About very simple concepts like how we can both mutually benefit if we trade with each other. You know, if I give you something that you want more in return for something that I want more, we both benefit. And there are positive gains from that trade. That’s a very simple insight, but that has been an enormous engine for human progress, a simple insight like that coming out of economics. Or the whole idea of the invisible hand. A complex economy that creates riches is not designed by anyone. There’s nobody who designed it. It just arises spontaneously through the free market, and the invisible hand through the decentralized actions of lots of just self-seeking, selfish individuals who are each just pursuing their own interests. That’s how people achieve wealth. And those kinds of simple insights which have been so neglected throughout the history of fighting world poverty . . . because we’re always . . . The approach in fighting world poverty is, “Oh, we have to come up with some government expert plan. We have to get someone to devise the expert plan that will lift poor people out of poverty.” Well that’s not what economics says. Economics says there’s this genius of the invisible hand that makes wealth happen without anyone intending it through individuals operating in the free market, trading with each other specializing in what their good at. And they create wealth, and the wealth spreads, and people are lifted out of poverty. Well these days I’m best known for the critique of foreign aid to lift poor areas of the world like Africa out of poverty. And the critique is . . . it comes from kind of a bitter experience. I spent 16 years at the World Bank working to fight world poverty. I’m very much an idealist wanting to help the world’s poor, and really seeing a lot of those efforts fail. A lot of the official foreign aid efforts fail to help the world’s poor. I saw 2.3 trillion dollars spend on foreign aid over the last 50 years, and I saw the results of that on the World Bank trips that I went on that were just nightmares of bureaucracy, and ineffective experts flying in, and thinking that they were experts in the problems of Africans after spending a week in a luxury hotel room in Africa. Frankly there was a moment of disillusionment, and then there was a desire to change things. A desire to change the foreign aid system so that it would work better so that more of that 2.3 trillion dollars that’s been spent over the last 50 years would reach poor people, and not be dissipated in luxury missions from World Bank headquarters, or in ineffective government bureaucracies on the other end. The critical thing that makes foreign aid fail so often – and this is really heartbreaking – is simply that the poor who are the intended customers of foreign aid, just like you are the intended customer of the Pepsi Corporation when they sale you Pepsis . . . But unlike your relationship with Pepsi, the poor have no right to complain and no right to turn down the product if they don’t like it. The poor just get foreign aid foisted on them by these ill-informed “experts”, and there’s no feedback from the poor – whether they’re satisfied or not, whether their money even reached them or not. There’s no accountability on the part of these official aid agencies for whether they got the money to the poor, whether they made the poor better off by getting them a drink of clean water when they previously didn’t have access to clean water. Or by getting them an essential immunization to prevent their child from getting measles. Or to get them a bed net to prevent them from getting bit by a malarial mosquito. There’s no accountability for these basic things, and so these basic things don’t happen. Where there are no incentives and no accountability, then that’s another insight of economics. And then that doesn’t happen, and that’s indeed what has happened in foreign aid tragically. You know the money sort of leaks out all along the chain that starts in Washington and New York with the United Nations, or the World Bank, or other official aid agencies, and it gets sort of lost all along the way. Because on the part of the rich country public, they’re mainly concerned with how much aid money is spent and then they’re satisfied. “Well we spent 2.3 trillion to help the world’s poor, so our job is done.” And they’re pretty much not paying attention after the money is spent. So with a long chain of officials in charge of the money with no one looking over their shoulder to see how they’re spending it, there’s plenty of ways that it leaks. It leaks into expensive salaries for the people working at headquarters like me. I have to admit I was one of those who benefited from this gravy train. There’s all the administrative costs in which huge amounts of money are wasted of the official aid agencies. The World Bank has a budget of one billion dollars to help the world’s poor, even though it only disperses about seven billion dollars in aid to help the world’s poor. It has an administrative budget of one billion dollars. Then the money is given to the government in the poor country, and then the money there either gets dissipated in an ineffective bureaucracy where it’s just paying the salaries of unmotivated civil servants who have no incentive to help the poor. Or it’s outright stolen through corrupt officials. There’s an estimate that something like 40 to 60 percent of drugs meant for health clinics in West Africa get stolen before they ever reach the clinics, and get sold on the free market . . . on the black market. So that’s where the money disappears. And then at the end of the day, unfortunately nobody seems to care. That’s the tragedy that breaks my heart over and over again – that no one cares that this money is not actually reaching the most desperate people in the world for whom it is intended, people who live on less than a dollar a day. It’s just an unbelievable measure of deprivation. People living on less than a dollar a day, and that’s who the money was intended for but it never reaches them. Well people just assume if the money is budgeted for helping the poor that it goes to help the poor. Unfortunately there’s not a very strong incentive to . . . If you’re just the average taxpayer in the U.S. or in Europe, there’s not much incentive to investigate whether some poor village off in Ghana, West Africa received the money or not. You can’t mount your own investigation to find out. The press, unfortunately, doesn’t seem to have enough motivation to really dig deep into whether the money reaches the poor, because they are mainly providing stories for U.S. consumption that are mainly mostly about disasters striking Africa, wars and earthquake, and famines and droughts, and not about the more kind of pedestrian matter of, you know, did a dollar of aid money get to a baby in time to give them a re-hydration treatment so they wouldn’t die from dehydration due to a disease that kills 2 million babies a year due to dehydration? Well I think that Jeff Sachs makes two fundamental errors, I think. People might feel some qualms about us having such a vigorous debate about this, but my feeling is the poor deserve vigorous debate just as much as the rich country tax payers vigorously debate domestic programs on whether they’re working or not. And just like we vigorously debated whether hurricane Katrina victims were being helped or not, I think we should vigorously debate whether foreign aid victims . . . victims of poverty are being helped by foreign aid or not. And so Professor Sacks makes two fundamental errors, I think. First is with Professor Sacks, it’s all about the money. It’s always about the money. It’s just, you know, spend more money and that will solve the problem. But we’ve already seen $2.3 trillion spent, and that has not solved the problem. You know two million babies are still dying from dehydration. Another million are still dying from measles for lack of a simple vaccination. Economic growth and living standards of the average African was basically zero in the four decades since independence despite Africa getting $568 billion dollars of that 2.3 trillion in foreign aid. So we’ve seen this movie already Professor Sacks, and it didn’t have a happy ending. We’ve seen the movie in which money was spent and yet it didn’t reach the poor. And yet he seems to want to reinvent the wheel and say, “Oh yes. Let’s just spend more money,” and not paying attention to the history where we’ve already spent money and it didn’t reach the poor. And then the second mistake that I think he makes is to assume that expert plans can solve poor people’s problems. His approach to ending world poverty was to assemble 300 of the world’s leading experts on all fields that affect poverty: agriculture to talk about green manure; and infant care to talk about breast feeding and infant formula; and agriculture to talk about nitrogen and fixing leguminous trees to restore soil fertility . . . and get all these experts together and draw up an expert plan that was designed by 12 task forces of 300 experts that produced a 3,000 page report. “And this is our expert plan that we’ve devised in New York at UN Headquarters to end world poverty.” Well that’s just ridiculous. That’s not how you solve the problems of poor people. They’re not solved by expert plans. That’s not how the problems of poor people have ever been solved anywhere else. The poor in Asia who have escaped poverty were not rescued by an expert plan. They were rescued by market driven, free trade driven, economic growth. We just have to look at ourselves even. The people of West Virginia, my home state, were not rescued by an expert plan. They were rescued by American economic growth over the last two centuries. And even though West Virginians are still only 80 percent of U.S. per capita income, it’s a much, much higher per capita income – 20 times higher than it was at the time of our independence. And that’s what rescued West Virginians out of poverty. And that’s how poverty has always ended. It’s through private sector, free market, economic growth, Not through expert plans devised by experts who think that they know poor people’s problems better than the poor people do themselves. I confess I’m really kind of tired of hearing this argument that Africa is different. Africa needs special help. Africa is this unusually sort of war torn place. A lot of this is exaggerated by the media. Of course there are wars in Africa, and the victims of those wars, my heart goes out to. I would love to see the people of Darfur be rescued from the genocide and experience peace. But this is not an unusually war torn continent by historic standards, or even by contemporary standards. And the problem is nowhere as near widespread has people would have you think from the media. Actually over last 40 years, on average about one in every 10,000 Africans every year dies in a war. So we’re not talking about something that is killing off the great bulk of the population every year. We’re talking about a 1 in 10,000 event that is affecting a small part of the population every year. And Europe had its wars when it was starting to develop. It had murderous wars in the 20th century, and the 16th century, and the 17th century, every century. America has had its share of wars during its development. Africa is not different. It can benefit just as much from free trade, and markets, and globalization as any other continent. It’s not stuck in some kind of trap. That’s one of the favorite words of the people who analyze Africa. There’s some kind of special trap that Africa is stuck in. Well there’s no evidence for that. Countries at Africa’s level of income, yes they’ve had war, and they’ve had bad institutions, and they’ve had corruption; but they’ve managed to escape that level of poverty, and I fully expect Africa will escape that level of poverty also. Well there’s a lot of complicated limiting factors that Africans have had to struggle with since independence. Now the colonial . . . The legacy of the slave trade and the colonial error was very bad for Africa. There’s a lot of violence involved in that by Europeans not by Africans. At independence these artificial states were created out of no where that did not have any previous sort of national identification, national identity. And so Africa has done not so bad for a continent that was created under such inauspicious circumstances. Some economic historians have compared them recently to Latin America which was created under similar conditions early in the 19th century, early in the 1800s. Also rather artificial nations at first, and Latin America. And Latin America also had a half century of war, and poverty, and not much growth. And then eventually it got it’s act together, and now has had much more growth and much more escape from poverty where now only 10 percent of the population of Latin America is in poverty, whereas 50 percent of the population in Africa is in poverty. So homegrown economic development does happen. It does happen everywhere sooner or later. Some countries are unlucky; but the answers have to be homegrown. They cannot be parachuted in by experts. Success in escaping poverty everywhere always has been homegrown, not driven by expert advice by outsiders.Well you know there’s certainly tremendous humanitarianism needs in Africa, and there are rich people in the west who want to help. So there should be a market there that there are people in need, and there are rich people who want to help. There should be a sort of philanthropy market that does close, that does clear eventually, and rich people’s money does make it through to alleviate some of these humanitarian needs. I think the only reason that hasn’t happened is because we’ve been stuck in this sort of Jeff Sacks, big plan, just spend more government World Bank money and the problem is solved. If instead we had much more accountable agencies that were much more accountable for whether they got the infant’s that were getting dehydrated . . . whether they got them re-hydration kits; whether they got the children who are about to get measles get vaccinated from measles; whether they got the children who are malnourished nutritional supplements . . . if they were held accountable for results like this, then I think actually rich people’s money could do some good to alleviate some of these humanitarian tragedies in Africa until homegrown developments come along. But I don’t think the west is going to achieve the end of poverty in Africa like Jeff Sacks does. I think Africans are going achieve the end of poverty in a homegrown way. Africans are going to save themselves. It’s not going to be Jeff Sacks that saves Africa. It’s not going to be Bono that saves Africa. It’s not going to be Bob Geldof that’s going to save Africa. It’s going to be Africans that save Africa. Recorded On: 7/6/07