Opinion Editorial | |
| Wednesday, March 11, 1998 | |
The Right Path for Third-World Development |
Peter Bauer is one of this century's great economists. Born in Budapest
in 1915, he was one of the early pioneers in the field of development economics.
A longtime professor of economics at the London School of Economics, Bauer
was a made a life peer in 1983, and now, as Lord Bauer, sits in Britain's
House of Lords. Last week, he paid a visit to the Cato Institute on the
occasion of the publication of a new book in his honor, "The Revolution
in Development Economics." In the World Bank's 1984 book, "Pioneers in Development," Bauer
recounted his involvement in development economics. It came about because
of his investigations during the 1940s and 1950s into the rubber industry
in Southeast Asia and trade in the former British West Africa. At the same
time, the study of development economics, the economics of underdeveloped
countries, was just becoming a separate field of economics. Although he
did not initially consider himself a development economist, Bauer was drawn
into it by the stark contrast between the analyses of the development economists
and his own observations in developing countries. From his own experience, Bauer knew that the same economic principles
that applied in Europe and North America applied equally in Africa and Asia.
Yet development economists in the early postwar period were basing their
work on the idea that somehow a different set of economic principles applied
in underdeveloped countries. In those countries foreign trade was said
to be harmful, saving and capital formation were impossible because of low
incomes, and the lack of investment opportunities prevented access to foreign
capital. From these principles, it followed that the key to development was the
unrequited transfer of capital from the Western industrialized countries
to the developing nations; that is, foreign aid. Such aid would then be
used to development indigenous manufacturing industries that would obviate
the need to import manufactured goods from abroad. To implement this agenda,
developing countries instituted comprehensive economic planning, while the
industrialized nations poured billions upon billions of dollars of aid into
the nations of Africa, Asia and Latin America. Bauer was one of the very few economists who said right from the beginning
that the strategy of foreign aid and inward development would never work.
Cutting off the developing countries from international markets destroyed
the class of traders and entrepreneurs who were the catalysts for development.
And foreign aid made government bureaucrats, rather than businessmen, the
main economic agents in the recipient countries. This reinforced the power
of the economic planners and further cut off the developing countries from
market forces. We all know what happened. Thriving indigenous businesses and industries
died or went underground, while government bureaucrats built uneconomic
steel mills and other trophy projects that became sinkholes for capital
and hothouses for corruption. Virtually all of the foreign aid money of
the last 50 years, taxed from the workers and producers of Europe and North
America, was completely wasted on worthless projects. Meanwhile the restrictions
on trade and private businesses stifled economic activity, leading to declining
growth, rising poverty and unemployment. As a result, most of the former
colonies of Africa are poorer today than they were at independence. Although derided as a reactionary during most of his career, Bauer lived
to see his ideas finally triumph. Eventually, the nations of Asia and Latin
America rejected the teachings of the development experts and moved to dismantle
their planning agencies and base their economies on exports. The results
were too spectacular to ignore, leading to wholesale repudiation of the
development model Bauer long fought against. It is good that he lived to
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