"Let Them Work Out Their Own Problems."

Economist Peter Bauer's work on                          developing areas

By Peter Brimelow.

First published in Forbes,                          Feb 22, 1988

HAVE THE ACADEMICS and liberals                          laid a burden of guilt on you about the plight of the                          Third World? Have they convinced you that debt repayment                          by the poorer countries is causing hunger and disease                          and that U.S. affluence is a cause of poverty in the                          less-developed economies? Throw off the burden. Most                          problems besetting the poorer countries are of their own                          making.

This, in simple terms, is the                          message derived from reading or listening to Peter                          Bauer, London School of Economics professor and student                          of developing countries. Lord Bauer—he was raised to the                          British peerage at the request of Prime Minister                          Thatcher in 1983—is no fringy, right-wing character: He                          is widely viewed as the outstanding figure in                          development economics since the death last year of                          Sweden's Gunnar Myrdal.

But unlike Myrdal, Bauer considers                          foreign aid to be a disaster for the recipients, and he                          has consistently emphasized the importance of market                          forces in the developing world. This is diametrically                          opposed to the consensus among development economists,                          expressed, for example, in Myrdal's seminal Asian Drama, that Third World conditions make central planning and                          economic controls essential.

The clash between the two views has                          been bitter. Much of Bauer's professional life has been                          spent in what he describes matter-of-factly as "partial                          ostracism." For all the talk of academic tolerance,                          dissent is not viewed kindly.

Bauer's views on the Third World                          debt problem are typically trouble-making. He says that,                          as a percentage of gross national product, neither the                          total outstanding sovereign debt of the major Third                          World borrowers nor their interest and principal                          payments have been particularly high by historical                          standards. He says the borrowers, while pleading                          poverty, have substantial real assets. More to the                          point, they have sound policy options, which they will                          not take, such as liberalizing their economies and                          opening them up to foreign participation.

However, Bauer argues, the                          borrowers perceive that they can avoid repaying—and they                          appear to be right. Western governments and powerful                          commercial interests would rather cover up the problem                          with rescheduling, Baker Plan-type additional loans and,                          in the last analysis, increased foreign aid.

If the Western banking system is so                          undermined by Third World loans that it needs support                          from the taxpayer, Bauer says, this support should not                          be filtered through Third World governments. It should                          be given directly to the affected banks—and their                          managements and shareholders made to pay a price in cut                          dividends, mergers and recapitalization. Bauer adds that                          in any case bank collapses cannot trigger another                          Depression unless accompanied by a monetary contraction,                          which the authorities can prevent.

But isn't debt forgiveness, and                          increased foreign aid, necessary to prevent the spread                          of communism in the Third World? Bauer says communism                          has historically spread independently of prosperity—and                          much Western aid is channeled through multilateral                          agencies to anti-Western governments anyway. Aid to                          Ethiopia, for example, entrenches the Marxist-Leninist                          dictatorship and helps perpetuate the very policies that                          accentuated the hunger in the first place.

Lord Bauer is a small, courtly man                          given to flashes of ferocity. Born in Budapest in 1915,                          his manner is a curious cross of deliberate Central                          European professor and waspish Cambridge don. His father                          was a bookmaker, one of whose betting clients suggested                          Bauer should study in Britain.

He began studying economics at                          Cambridge University in 1934, while still working on a                          law degree in Budapest. Today one of the numerous things                          that trigger Bauer's ire is the claim, as in the movie                         Chariots of Fire, that Cambridge in the 1920s was                          exclusive, xenophobic, anti-Semitic. As a foreign                          Catholic of Jewish background, he says, he met with                          nothing but hospitality. He adds that, with his minimal                          English and worse finances, he could never gain                          admission in similar circumstances now.

Then, economics at Cambridge was                          dominated by John Maynard Keynes. Bauer's supervisors                          included the celebrated Joan Robinson, associated with                          an overtly left-wing Cambridge faction. Bauer, whose                          early work was on abstruse topics like rent, quasi-rent                          and monopoly, says his sympathies were "mildly" on the                          left.

What made him change from left to                          right? "My eyes were opened by West Africa," he says—the                          more than ten years he spent in exhaustive empirical                          study (once described as "Benedictine scholarship") of                          the economies of Nigeria and Ghana, then under British                          rule; and also that of Malaysia, then also a colony of                          Britain.

An economic revolution had just                          occurred in these regions, quite spontaneously and                          without any particular planning or direction by the                          colonial authorities, who basically restricted their                          role to the maintenance of public order. "In 1885 there                          was not a single rubber tree in Malaya nor a single                          cocoa tree in British West Africa," Bauer has written.                          "By the 1930s there were millions of acres under these                          and other export crops, the bulk of them owned and                          operated by non-Europeans." Indeed, many of these                          African and Asian peasants were illiterate, but they had                          responded with alacrity and foresight to incentives                          transmitted to them quite unconsciously by the                          activities of traders.

What's this? Economic development                          in a poor country without benefit of economists, foreign                          aid and technical experts? It actually happened. The                          phenomenon led Bauer to question essentially all the                          axioms of contemporary development theory. Colonialism                          was supposed to be bad, but here it had brought cash                          crops to regions previously dependent on subsistence                          farming. Poor countries were supposed to lack the                          capital and skills to escape the so-called vicious                          circle of poverty, but all these peasants had seized the                          opportunity, either borrowing the minimal capital                          required from traders or, more commonly, substituting                          their labor for it. (Some ethnic groups were more                          successful than others, however.) British West Africa's                          population was supposed to be wholly agricultural,                          according to official statistics, but Bauer could see                          that many of the people were really involved, often part                          time, in trade and transportation.

Bauer's observations contravened                          the widely accepted "Clark-Fisher" hypothesis that                          economic growth must entail a progressive shift of labor                          from agriculture to trade and industry. It also caused                          Bauer to doubt the orthodoxy that major capital                          investment in infrastructure had to precede                          sophisticated economic activity: Here the activity came                          first. Human energy and ingenuity were the seed capital,                          not foreign aid or foreign bank loans.

This healthy process was                          interrupted by, of all people, the British colonial                          authorities. By the 1940s they were abandoning their                          traditional policies of limited government in favor of                          state intervention—influenced, partly, by the sort of                          economics Bauer was taught at Cambridge. How could an                          ignorant African peasant possibly know as much as a                          Cambridge don or a trained British civil servant?

In West Africa, in particular,                          marketing boards were set up to which the peasants were                          compelled to sell their produce. Originally justified as                          a price-stabilizing measure, the boards were used to                          confiscate the peasants' profits by paying them less                          than the world price. When colonies became independent,                          the new governments happily stepped up the practice. The                          money siphoned off from the peasants was often spent on                          unviable state-sponsored industrial projects. The                          economic progress recorded by Bauer stalled, and, as the                          peasants have reverted to subsistence farming, even                          regressed—thanks not to colonialism or neocolonialism                          but to socialism.

The 1979                         Brandt Report on the Third World and similar studies                          helped entrench many of the wrong-headed attitudes. It                          endorsed domestic socialism and, in the name of economic                          growth, urged more and more foreign aid—or, as Bauer                          prefers to call it, "government to government subsidy."                          Bauer argued that these injections of aid could not                          produce sustained growth. In fact, they were positively                          harmful, because they enhanced the power of government                          elites to persist in destructive policies, such as                          Tanzania's forcible collectivization of its agriculture,                          and to further politicize economic life.

Growth, Bauer argued, was really                          dependent on complex changes in attitudes, and these                          could occur only through incentives. Bauer cites                          econometrician Simon Kuznets' conclusion that less than                          10% of the developed Western World's growth in per                          capita output could be attributed to increases in the                          supply of capital or labor; the rest was because of                          subtle improvements in their efficient use.

Bauer's insight causes him to be                          equally critical of a more conservative prescription for                          the Third World: population control. He observes that                          modernization, which is really westernization, is                          usually followed by a drop in population size, but there                          is no reason to suppose that the process will work the                          other way around. Contraception is already widely                          available in the Third World, and the fact that it is                          not fully used suggests that children are important to                          the local incentive structure. Draconian control                          programs—like the Chinese enforcement of a                          one-child-per-family rule—might temporarily free some                          resources by reducing the dependent population relative                          to the work force. But resources are not the key factor                          in development anyway. Historically, population                          increases have been quite compatible with economic                          growth.

Bauer's prescription for the Third                          World: Leave them alone.

But no one is inclined to leave                          them alone. The Third World elites benefit so much from                          economic controls and from Western guilt feelings, Bauer                          says, that they will not abandon controls and statism                          despite all promises—unless the West stops subsidizing                          them, which it is not yet inclined to do. And, he says,                          just as foreign aid created the "Third World" by                          encouraging a totally diverse group of countries to                          unite in quest of handouts, so also it has created the                          development economics industry in the First World, by                          indirectly paying for the network of institutes and                          university departments.

Bauer's views are receiving more                          attention as the economic problems of the Third World                          become less deniable. His last two books, Equality, the Third World, and Economic Delusion and Reality and Rhetoric, were widely and                          respectfully reviewed. An academic conference was                          recently held in his honor by Washington, D.C.'s Cato                          Institute and the proceedings published in the Cato                          Journal.

But Bauer remains cheerfully                          pessimistic: "The vested interests are so enormous that                          they must influence the rising generation."

Bad enough that this causes the                          expensive miseducation of our talented young. Worse, it                          condemns millions in the Third World to more suffering                          than they would otherwise have to endure.

Reprinted in VDARE.COM on May 03, 2002