Nobel winner: Conservatives may have been right all along on foreign aid

Power corrupts, and absolute power corrupts absolutely. That axiom reflects the need for checks and balances in government, and one key check is popular accountability on revenue. But what happens when governments get much of their revenue not from the governed, but from outsiders with few effective controls on how the money gets used? A newly minted Nobel Prize winner in economics argues what conservatives have claimed for years — that foreign aid corrupts accountability and creates even worse poverty than ever:

It sounds kind of crazy to say that foreign aid often hurts, rather than helps, poor people in poor countries. Yet that is what Angus Deaton, the newest winner of the Nobel Prize in economics, has argued.

Deaton, an economist at Princeton University who studied poverty in India and South Africa and spent decades working at the World Bank, won his prize for studying how the poor decide to save or spend money. But his ideas about foreign aid are particularly provocative. Deaton argues that, by trying to help poor people in developing countries, the rich world may actually be corrupting those nations’ governments and slowing their growth. According to Deaton, and the economists who agree with him, much of the $135 billion that the world’s most developed countries spent on official aid in 2014 may not have ended up helping the poor. …

Think of it this way: In order to have the funding to run a country, a government needs to collect taxes from its people. Since the people ultimately hold the purse strings, they have a certain amount of control over their government. If leaders don’t deliver the basic services they promise, the people have the power to cut them off.

Deaton argued that foreign aid can weaken this relationship, leaving a government less accountable to its people, the congress or parliament, and the courts.

The Washington Post’s Ana Swanson writes that “it might seem odd that having more money would not help a poor country,” then launches into a discussion of mineral resources. That’s a non-sequitur response to Deaton’s argument, however. Deaton isn’t arguing about the “natural resource curse” theory, which curiously didn’t seem to hamper the United States in its economic development. He’s talking about the corrupting nature of well-meaning outsiders eliminating fiscal accountability, with a largesse that attracts people who thrive in environments lacking checks and balances into positions of power.

It only seems odd that Swanson considers this odd. F. A. Hayek wrote about this mechanism in a more general sense in The Road to Serfdom, right down to the kind of people who succeed in an organization lacking any popular accountability. Even those who have of late tried to tackle the enduring poverty of African nations have awoken to the “corrosive” nature of foreign aid; music stars Bono publicly embraced capitalism almost three years ago, calling aid a “stop gap”:

“Aid is just a stop-gap. Commerce [and] entrepreneurial capitalism takes more people out of poverty than aid.

“In dealing with poverty here and around the world, welfare and foreign aid are a Band-Aid. Free enterprise is a cure.

“Entrepreneurship is the most sure way of development.”

That formula is true in every context in which it applies. Government handouts do not solve poverty; they only provide a very temporary stop-gap solution to immediate crises. In the context of foreign aid, they create incentives that undermine and destroy entrepreneurship in favor of cronyist corruption at best, and usually much worse.

The oddity of this isn’t that a Nobel Prize winner stated the obvious. It’s that the world has ignored the fruits of this system for decades, and keeps insisting that the hair of the dog will cure the hangover.