Poor countries need trade, not aid

‘Give a man a fish and you will feed him for a day. Teach him how to fish and you will feed him for a lifetime’. This supposedly Chinese proverb expresses the idea that self-reliance, not handouts, is the key to prosperity. However, the reverse seems to be the failed thinking behind decades of development aid that has produced few tangible results. Developing nations who have for decades been relying on foreign aid in the form of handouts have not managed to extricate themselves from poverty.

Problems abound in many poor countries, but most of them share a common trait: bad governance. Corruption, unaccountable governments, a rent-seeking privileged elite, bureaucracy, poorly defined property rights and legal structure, trade barriers… the list goes on. A glance at Freedom House’s ‘Freedom in the World 2017’ map is all that’s needed to illustrate how developing nations do poorly.

The Heritage Foundation’s Economic Freedom rankings is another enlightening source to look at. Particularly instructive is the heath map of sanctity of property rights.

Government Integrity, Judicial Effectiveness and Investment Freedom are other parameters in the survey serving as a severe indictment of governance in the developing world.

Promoters of the current aid policy seem to completely miss that what has made the Western nations rich is not aid. Free markets, capitalism and entrepreneurship is the only way for any nation to achieve wealth. What developing economies need is free trade, unimpeded access to global markets and a system of governance that encourages private entrepreneurship and the accumulation of capital. This way productivity and hence living standards will be allowed to rise. Western policy towards the developing world should consist of encouragement to reform institutions to achieve these aims coupled with unimpeded access to Western markets. Special interests would lose out but increased trade would benefit Western consumers and revolutionize economic development in the developing world.

Unfortunately, the current patronising approach to aid is not under serious review, though after half a century it should be clear that it is not working. Western nations buy a clear conscience with cash transfers while maintaining trade barriers and subsidies which if removed would be a much more meaningful step in the right direction. Putting real pressure on developing nations to open up trade, cut red tape and protect private property rights is the only sustainable way forward.

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