TCS Daily


Let the Capitalists In

By Tim Worstall - January 7, 2005 12:00 AM

Yesterday I suggested that perhaps giving $175 billion a year to corrupt thieves was not quite the most advantageous or efficient method of solving global poverty. I also promised to come back with some ideas about how I thought we could do it better.

Before I go into those details perhaps I'd better address the question of whether we should be doing anything at all. I understand all of the libertarian arguments against any form of aid at all and have some sympathy for them, but I don't think that in the current climate that argument has any chance of political success. I would also point out that if we do mange to make those two billion people currently destitute rich it will be to our great material benefit, both what they can make and create for us and also what they will buy from us. The moral argument of what we owe to our fellow humans, simply because they are our fellow humans, also has great resonance for me....of course, I accept that your mileage may vary on this.

Concentrating thus on purely the mechanism by which the rich countries could more effectively promote wealth in the currently poor world, what exactly is it that we could do?

The first is that we should have free trade. No, not fair trade, not managed trade, not free trade except for farmers and others that our politicians like, but simple and pure free trade. We all know the benefits of the division of labor, the more efficient uses of resources, the joys of comparative advantage playing out; these things will make the poor richer just as they will make us so. We have mere days ago got rid of the Multi-Fiber Agreements which have done so much to stop the poor countries exploiting their advantages in textile production. We need to move on, to dismantle the absurd systems of farm protection in the EU, US and Japan. We don't have to do this for the benefit of the poor either. Professor Patrick Minford has run his slide rule over the effects of the UK moving to true free trade and finds that it is a substantial 3.8% of GDP. Given the tax take on marginal activity in the economy this will more than cover the 0.7% of GDP that, according to the United Nations, we are supposed to be spending on the poor.

That's probably caused a little head scratching. First this guy says that giving the money to the varied dictators and fools that run these poor countries is a bad idea then he sticks with the 0.7%. What's up? I'm actually going to suggest a method that accepts the numbers that we have already signed up to under the UN Millennium Development Goals, but proffer a more efficient method, one that actually has a chance of working.

The first part is to do the above, that which we know will benefit us all, simply remove barriers to trade. The second is that while we agree to spend 0.7% of GDP we are not going to give it to the rulers who we have already shown are incompetent to handle it, nor are we going to pass it through some wonderful international bureaucracy. We're going to invest it in private companies in poor countries.

We already know that profit motivated companies are the most efficient users of assets and the capital that the poor countries lack is of course one of those that they are especially careful with. There has always been one major argument against this sort of idea, that the profits from such investments will flow out of the poor country, thus condemning them to yet more decades at the bottom of the pile. As an idea or belief this was almost impossible to refute for we didn't have any actual numbers, no hard facts with which to reject it. Until, of course, a paper by William Nordhaus that I wrote about here. The heart of the paper was as follows:

        "The present study develops a technique for estimating the size of 
        Schumpeterian profits in a market economy. It shows that innovational 
        profits depend upon the appropriability of innovations as well as the rate 
        of depreciation of profits from the innovations. Using data from the U.S. 
        non farm business section, I estimate that innovators are able to capture 
        about 2.2 percent of the total social surplus from innovation."

(Just a small thought but now that I'm recycling a quote and half an argument do I get a Greenpeace award for environmental leadership or something?)

We can quibble about whether that number is correct in different economies, shout and scream that Burundi or Benin are different (which is a fair point, for that is exactly what concerns us, that they are different. They're poor.) but let's assume that it is somewhere near right. What this is telling us is that who gets the profits doesn't actually matter. Seriously, we should simply stop worrying about whether a company is domestically owned, foreign, what the rules on repatriation of profits are, which industries allow overseas investment and which don't (or, to be more precise, the poor countries and those who advise them should). For all but the merest scraps of benefit flow to the society at large rather than to those evil capitalists and benefit to that society at large is, in fact, what we are looking for.

Let me go through this in a little more detail. By innovation in the countries we aim to help we are talking about revolutionary products, like tap water that doesn't kill you when you drink it, sewage treatment plants that are more than a pipe into the bay, primary schooling that is more than how to herd the cattle, health care systems which actually have drugs and bandages to treat patients. We are also talking about things like factories, places where people can work and earn a living rather than scraping in the dirt for scraps, telephone systems that connect to the dialed number more than 10% of the time, roads free of water buffalo, roads with surfaces even. We know, we can see, that the current rulers of these countries can't provide them, that's what we are complaining about. So let the capitalists in, let them provide them.

The argument against letting them in was always that the profits would flow out again, that the people, the citizenry, would in some way be ripped off. Yet as above we can see that 97% or so of the benefits go to those very citizens, that us evil capitalist oppressors only get 3% or less. No doubt it is unfair, possibly even evil, that anyone should get as much as 3% off the backs of the poor, yet I would want to see someone offering a better system before I rejected this idea. Only my innate sense of propriety prevents me from mentioning how much the UN charged to run the Oil for Food scheme (psst. 10% before the various extras for sons etc...Ed) but we all know that it is more than the 3% that a free market solution would charge.

So, I'm suggesting that we live up to that promise we've already made and provide 0.7% of GDP for development aid, but that we provide it to the private sector. I've also suggested that we should open up our markets just as we are also urged to by almost every organization and NGO in the field. Just how we do this is the rub and I would suggest that we do it by agreeing to the third usual demand of those who demand more aid now. It is quite usual when aid is offered that it must be spent on products from the country offering the aid. Fine, we'll do away with those as well. We are therefore doing everything demanded of us by the international community, living up to all our promises and also helping the poor in the third world in the most efficient manner we can devise.

Oh, you want actual details of how we manage this investment in the private sector of these poor countries? What? I have to do everything round here? In the case of the US there is an experienced agency which does exactly this, called the Export-Import Bank. The majority of their work is in financing exports from the US. They also run a number of schemes to help US companies invest in poor countries (It's a general rule of such organizations, and most rich countries have one, that exports to rich countries cannot be insured or financed in this manner) and are actually quite good at it. A number of colleagues have used the facilities over the years and a fairly normal program would be for someone to suggest an investment in a project, come up with 10% of the money and then borrow the rest from Uncle Sam at advantageous rates. The kicker is that the majority of the equipment for the project must be of US manufacture. All I'm suggesting is that the aid money is routed through the bank and the restrictions on rules of origin be dropped. We don't need a wholesale change of the rules, don't need a huge new bureaucracy, just current experts freed from one restriction on the projects they can fund.

OK, OK, I know it won't happen, I realize this just isn't the way that the world actually works. I can dream though can't I? In fact I would pay good money to be there when George Bush announces it to the General Session of the United Nations. Yessir, we're going to meet the Millennium Development Goals and contribute 0.7% of the US GDP to the poor countries, we're going to scrap the restrictive rules on what can be bought with aid, open our markets to their exports, and do it all in the most efficient and effective manner we can devise. We're going to do it ourselves and invest only in private companies.

I wonder if Professor Reynolds of this parish would be willing to provide advice on the correct camera to capture the look on Kofi Annan's face as he realizes there's no place for him in this scheme?

The author is an entrepreneur and frequent TCS contributor. Read more of his writing here.

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