Trade, not aid, is the best way out of poverty
IPN Opinion article
South China Morning Post
Donors are already behind on their previous commitments: Last month it emerged that the G8 nations were $20 billion short (in real terms) of their 2005 Gleneagles aid pledges. The financial crisis has forced countries into rigorous austerity measures and aid budgets are feeling the pinch. And a good thing too.
Paradoxically, the prospect of declining aid revenues could be a boon for people trying to escape poverty in developing nations. Rather than pandering to foreign politicians, the leaders of poor nations would be forced to focus on growing their own economies. Currently, many developing economies are shackled by an array of internally imposed trade barriers, tariffs and regulations that hamper business. Aid gives no incentive to change these, but removing them would do more to alleviate poverty than any amount of foreign assistance.
Trade is the surest known route out of poverty. Given the freedom to trade goods and services, people can use their comparative advantage of production and exchange their goods for things that other people make better.
This is why Hong Kong no longer needs to produce staple foods: these are bought with the income from selling other things it produces more efficiently, such as financial services. The remarkable growth in Hong Kong, Singapore, China and the “Asian Tigers” is testament to the power of trade to allow hundreds of millions of people to lift themselves out of poverty in just a few decades.
This success has not been limited to Asia. Forty years ago, Mauritius was one of the poorest countries in the world, dependent almost exclusively on sugar cane. Today, Mauritians enjoy some of the best standards of living in Africa and their economy boasts extensive finance, retail and tourism sectors. Average incomes (adjusted for purchasing power) are now on a par with Turkey at around US$12,500.
Crucial to this success has been the creation of a business-friendly environment. The success of local business creates stability and investment opportunities, attracting foreign capital and creating new businesses. The World Bank considers Mauritius to be the best place to do business in Africa and the 17th best in the world--higher than Sweden and Switzerland. By comparison, African countries currently constitute 17 of the 20 worst business environments in the world.
In most poor countries, red tape is compounded by egregiously high import and export tariffs. As Rwandan President Paul Kagame recently noted, “...competition in an economy is good for poor people... competition is good everywhere... Asking our citizens to compete is the same as asking them to go out there into the world on behalf of Rwanda, and play their part. On the other hand, shielding them is something that travels deep in the mind. If you allow a process where some people are shielded from the forces of competition, then it’s like saying they are disabled.”
Despite Kagame showing that progress is possible--Rwanda recently became the most business-friendly economy in East Africa--many developing nations remain trapped in protectionism. Governments continue to prevent their businesses from enjoying duty-free access to foreign goods which would significantly lower their costs of production and enable them to compete globally. The poor pay the bill. These barriers to trade should be demolished, unilaterally and immediately.
Public opinion towards aid and development is shifting both among donors and recipients. The decision of the UK’s new coalition government to ring-fence aid spending has provoked widespread criticism--a recent poll found only 6% of Britons think aid should be protected from austerity cuts. Instead of continuing to walk the financing tightrope, dependent on the changing moods and fortunes of donors, developing countries should follow Hong Kong and Mauritius and break free.
True aid will only come with internal reforms that allow the poor to make things and to trade with each other and everyone else. These reforms can be implemented without foreign assistance. Nothing else will aid the poorest to make poverty history.