The road to prosperity (Vincent De Roeck)

Rewarding good behaviour is all the rage these when it comes to dealing with developing countries. But good behaviour can be in the eye of the beholder. The Bush administration has backed the creation of the Millennium Challenge Account, which conditions U.S. bilateral aid on good governance in some of the poorest countries in the world. Key to success overall is less government interference in the economy, except in areas like education and healthcare. The last years brought the news that the European Union has produced its own conditionality to lower trade barriers on developing nations. The offer as articulated by then EU Trade Commissioner Pascal Lamy, however, had nothing to with making their economies more self-sustaining and competitive. Instead, it had everything to do with making them accept a European agenda that emphasizes government intervention in labour markets and environmental regulation, and a political agenda that includes obedience to international treaties. Ironically, the very same policies that have promoted growth in the U.S. and hampered it in Europe are now playing themselves out again in the field of development policy. These policies encapsulate the principles of the free market vs. government intervention -- or translated into American terms, of Republicans and Democrats respectively.

What is sauce for the goose is sauce for the gander, could have been the subtitle of a new important work on economic development, “The Road to Prosperity: The 21st Approach to Economic Development,” edited by Marc A. Miles, director of the Center for International Trade and Economics at the Washington-based think tank Heritage Foundation. In it, the authors argue precisely that there are no separate sets of economic laws that govern rich and poor countries. Now, this flies in the face of much traditional thinking on how to improve the lot of developing countries. Foreign aid, just like domestic welfare, has for half a century been considered simply a transfer of funds from richer to poorer, either bilaterally or through the International Monetary Fund and the World Bank. “Need based transfers such as welfare and unemployment require people to remain in the needy state to receive benefits (…) The resulting disincentives discourage people from following their natural desires to improve the lot of their families and themselves,” writes Mr. Miles.

Not much consideration was traditionally given to whether the recipient was positioned to spend aid money constructively. Foreign aid, government-to-government transfers often resulted in giant infrastructure programs, many of which fell into disrepair the moment the funding stream ended. And that could be the best-case scenario. At worst, they simply fed corruption of government officials. The 21st century approach to economic development is fundamentally different. It eliminates the distinction between “developing” and “developed” countries. Rather than poverty itself being the criterion for assistance, the right policies to escape from poverty become the test. In “The Road to Serfdom,” Frederick von Hayek argued against placing too much power and too many resourced in the hands of government, as it would stifle economic progress and individual freedom. In “The Road to Prosperity,” a distinguished group of authors, that includes Arthur Laffer, Hernando de Soto, and Adam Lerrick, argue that returning economic power and rights to individuals is the way to economic development. Some of the stations on the roadmap to prosperity include open markets and free trade; property rights; price stability; lower and equitable taxes; and liberalization of capital flows. And consider what foreign aid can do.

The 10 largest recipients of World Bank aid have experienced a rise in standard of living of 0.2 percent in the past 40 years. More than 40 recipient nations mostly in sub-Saharan Africa show a per capita income of less than $1, and are growing poorer by the day. Now consider by contrast what economic growth will do for a country: In 1960, the Central African Republic had a per capita GDP of $2,180 (constant 1996 dollars). The comparable figure for Taiwan was $1,430 that year. Today, the figures are an amazing $1,120 and $18,700 respectively. The Central African Republic is still a recipient of development aid. Taiwan is a major international donor. Today, one could only call Taiwan as a “developing country” if we redefine what that means. As Arthur Laffer writes, “In effect all economies are developing economies. No country should ever stop developing. There is not one set of rules for rich countries and another set for others.” Regulatory burdens and confiscatory taxation will drag any economy down. Therein lies a lesson for us all. Especially today.