All Commentary
Monday, February 1, 1982

Freedom for Less Developed Countries

Mr. Bechara is an attorney in Mayaguez, Puerto Rico.

The plight of the less developed countries has become one of the most hotly debated issues in international affairs. World-wide organizations have been established with the common purpose of uniting the less developed countries to obtain resources from the developed countries. Opinion leaders are almost unanimous in their belief that the developed countries have a duty to aid the poor countries. The debate, in fact, is not whether this aid is legitimate, but what ought to be the extent of it. Conventional wisdom holds that the situation in the less developed countries is attributable to the industrialized countries. Is this assessment correct?

Many reasons have been advanced to explain the poverty of the underdeveloped countries, and conversely to interpret the cause of the wealth of the industrialized nations. A popular notion is that the rich nations owe their wealth to their exploitation of the poor countries. The argument is really an extension of the fallacy that in every transaction there is a winner and loser. The ideology that has been erected to explain the alleged causes of poverty in the underdeveloped world holds that the most direct cause of exploitation is colonialism. Therefore, the argument goes, the colonial powers owe their life-blood to the colonies.

There is no correlation, however, between a country’s standard of living and its history of colonial power. Some of the countries in the world that presently enjoy a relatively high standard of living either never possessed colonies or, if they did, the history of their colonialism is inconsequential. Switzerland, Denmark, Sweden, Norway and the United States are examples of this. Some of the great colonial powers, on the other hand, are presently facing economic difficulties. Portugal, for example, possessed colonies which en compassed a territorial area larger than itself. Yet, Portugal’s economic position does not substantiate the charge that colonialism has enriched the colonial powers.

The Myth of Colonial Exploitation

The historical evidence is simply nonexistent to demonstrate that the poor countries subsidized the developed countries’ wealth. The argument, however, continues to flourish, with a new twist. It is asserted that the old colonial powers, although having granted political independence to their former colonies, continue to exert an invidious control over the economies of the underdeveloped countries. The relative prosperity of the old colonial powers is therefore attributed to the exercise of this degree of power, which has been termed “neo-colonialism.”

According to this line of thinking, the industrialized countries have reached their present position of opulence as a consequence of their investments in the less developed nations. The belief is harbored that since developed countries have invested tremendous amounts of money in the underdeveloped countries, the resources withdrawn from the latter have therefore yielded the investors fabulous profits. This argument is popular because it nourishes envy. It is easier to blame foreigners for a country’s misfortune than to recognize that the country’s governmental policies contributed to the situation.

However, when the available evidence is analyzed, it becomes clear that the developed countries do not owe their prosperity to their trade relationship with the less developed countries. There is no correlation between a nation’s present economic standing and its holding colonies in the past.

The solutions espoused for the improvement of the underdeveloped countries’ conditions reflect the redistributionist mentality on an international scale. It is politically fashionable to combat poverty with the compulsory transfer of income from the taxpayers to those deemed needy. Similarly, on an international scale, the predominant ideology is the same: to have the rich countries subsidize the poor countries. Therefore, the concept of redistribution of income is essentially the intellectual underpinning for foreign aid. In light of this, one must question whether or not massive income redistribution is the solution to the problem.

Aside from the libertarian position that it is immoral to force people to support others, the ideology of redistribution cannot be defended on grounds that it achieves what it sets out to do. Rather, the opposite is the case.

Foreign Aid Often Fails to Reach Needy Individuals

When a country receives foreign aid, it is a fallacy to presume that its citizens are necessarily any better off. This is so because the aid is received and handled by the host country’s government, to use for its politically predetermined goals. For example, a country may wish to build an industry which is not economically feasible, but which grants prestige in the international community-such as an automobile industry or a steel mill.

Foreign aid makes it easier for the governments of the less developed countries to embark upon these projects, since part of the funds utilized to finance them have come from abroad. Therefore, the local taxpayer’s opposition, which could otherwise have materialized, is lessened. In addition, foreign aid aggrandizes the power of the less developed countries’ governments. The state becomes the beneficiary of this process because it has the power to apportion jobs and subsidies to its political favorites. Foreign aid, therefore, becomes an unwitting instrument of intervention in the internal political affairs of the host country.

Foreign aid is usually justified precisely on grounds that the recipient countries will ultimately become loyal to the country providing it; it is often proclaimed as an antidote to Communism. However, historical evidence fails to establish this. There is no causal connection between a nation’s economic well-being and its vulnerability to fall under a Communist dictatorship. How various countries have fallen under Communist domination involves many historical explanations. Surely it cannot be argued that poverty automatically instills a pro-Communist attitude on the part of the population. If this were the case, most of the poor countries would have become Communist.

The idea that one country can purchase the allegiance of another through foreign aid is pernicious. In fact, it is commonplace to see the recipient countries become hostile to the donor countries. Foreign aid is viewed by the nationals of the recipient countries as a more subtle version of colonialism. Other factors, such as nationalism and cultural differences, account for a country’s governmental attitude. It is, therefore, truly simplistic to assume that foreign aid can buy allegiance. Yet, those people who claim that one of the virtues of foreign aid is that it politically influences the recipient country are really conceding the fact that aid is not granted to improve the economic conditions of the recipient countries. Rather, the aid given is designed to obtain foreign policy goals, and consequently, no economic considerations are necessarily relevant in its granting.

The Need for Savings

A country, and for that matter, any individual, may increase its wealth in the long run only if part of its consumption is deferred for a later time. In other words, it is essential to save in order to increase one’s wealth. Why is this the case? Because savings finance projects which, if economically necessary, increase productivity. For example, let us say that a railroad connecting farmlands to a market needs to be built. The railroad will increase the marketability of agricultural goods, and therefore the costs to consumers will be lowered as a result of this more efficient mode of transportation. However, savings are needed in order to finance the project.

The individuals who construct the railroad need funds to defray the costs of the project. Clearly, the money utilized by them constitutes their abstention from consuming those funds. The investors have placed their savings in the form of a railroad. If the investors do not have the funds to carry on their project, they may entice others to lend such funds. Whether the funds originate domestically or from foreign sources, these funds represent savings. A common way to finance many projects, however, contains the element of governmental coercion, or what is commonly called forced savings. This is the method of simply levying taxes or issuing paper currency to finance the projects. In either case, the citizens are forced to consume less of their income, because the taxes imposed reduce their disposable income, or the price increases which result from the increase in the money supply reduce their purchasing power.

The issue that is crucial to a nation’s development, therefore, is where the savings should originate. Foreign aid is another form of compulsory saving—by reducing the consumption of the donor country’s taxpayers. But as we have seen, foreign aid is not economically motivated when it becomes intergovernmental aid. Foreign investment, on the other hand, does utilize sound business justifications for its use. Foreign investors seek to place their capital in the most profitable lines of business. This benefits the recipient countries because jobs are created, and the marginal productivity of labor is increased. This tends to raise wages in the recipient country. The guidepost of profits, in addition, insures that scarce resources are not misallocated. When an activity is profitable, it means that consumers view its rendition in a positive manner. The high profits attract more investors, and this in turn serves to lower the prices charged to consumers. Foreign investment speeds up this process.

Increasing the amount of foreign investment available does benefit the recipient country, but is is not the only available solution to relieve the underdeveloped countries’ position. For these countries to truly improve their condition, it is necessary for them to establish an institutional framework which will attract not only foreign investment, but encourage domestic savings and investment as well. The people best suited to know local conditions and local investment opportunities are the residents of these countries themselves. If the underdeveloped countries attempt to encourage savings and institutionalize the essential preconditions of a free market economy, there will be a sounder basis for growth. However, when one examines their record, the policies which have been followed are precisely contrary to the attainment of these goals.

The Protection of Property

Governments are instituted to safeguard pre-existing rights possessed by individuals. Among these rights is the right to own and possess property. This is essential because if a person is not entitled to his property, his right to survive is endangered. Since a person has the right to life, it follows that a person needs to keep the fruits of his labor in order to survive. Therefore, gov ernments must respect property rights. What is the record of the underdeveloped countries concerning this?

The history of the less developed countries is scattered with instances of wide-scale nationalization of foreign-owned business enterprises. At the turn of the century, for example, Mexico nationalized its fledgling oil industry, which was prospering at the time precisely because the government had allowed private investors to place their capital there. India, after obtaining its independence from England, proceeded to establish onerous controls over foreign investments. Virtually every country in the “Third World” has experimented with some form of state ownership of enterprises. Brazil, which many point out as a beacon of hope in South America, has a large segment of its economy under the direct control of the government. With these facts merely as an illustration of the state of affairs of these countries, it becomes easy to understand why foreign investment represents such a small percentage of the United States economy.

The less developed countries have also pursued a very dangerous policy which has, in effect, discouraged savings and eliminated the long term capital markets. The policy is universally known as inflation. This policy of increasing the money supply with its consequence of a rise in prices, helped diminish the role of savings in those countries. Constant increases in the money supply, coupled with periodic devaluations of the national currencies and foreign exchange controls served to stultify growth.

Other Interventions

Aside from failure to protect private property and aside from inflating the money supply, many of the less developed countries adopted other policies detrimental to a free market. The newly independent nations created massive licensing requirements, implemented regulations and enforced policies that discouraged competition.

One of the most notable of the policies that were adopted by these countries was the progressive income tax. This rather recent development, however, is due to the influence the industrialized countries exert on the less developed countries. Under the aegis of the prevailing academic wisdom, it was the policy of the United States government to advise these countries of their duty to eliminate the broad inequalities of income in existence and to adopt a progressive income tax. The effect of these taxes, of course, has been to discourage capital formation. It is not uncommon to discover many foreigners holding substantial wealth outside the borders of their own countries because they are in search of a place which offers security and stability. Politically, many of these countries have experienced revolutions, sudden changes in govern mental policy, and this instability has added an element of risk, making it less attractive for anyone to accumulate savings.

Another common feature in the less developed countries has been the prohibition of free foreign trade. This has occurred because it is feared that free entry of foreign goods could destroy local industries and therefore produce unemployment. The fallacy here, however, rests in not recognizing that if foreign countries do make better and cheaper goods, this benefits the country importing those goods. This is so because the citizens of the importing country will have resources left over as a result of their acquisition of the goods that cost less, while other goods may be acquired as well.

The principle of comparative advantage is applicable to trade. This means that a country has, if permitted to trade in a free environment, the incentive to specialize in the production of goods for which it is better suited. More wine is produced in France than in England, for example, because of this principle. If England, however, were to enact a law prohibiting the importation of foreign wines, in order to encourage its domestic wine production, its consequent inefficient production cannot be said to improve England’s economic posture. The less devel oped countries, unfortunately, as a result of misdirected policies, have become quite protectionist.

In conclusion, it must be said that, outside of the ravages of natural disasters, or those brought about as a result of war, a substantial portion of the cause of the poverty of the less developed countries is directly attributable to their own governmental policies. This is not to argue that voluntary aid to the needy in the less developed countries should not be granted. Rather, the discussion here has centered around what policy the governments of the less developed countries should adopt. In light of this, the best advice the developed countries may grant to the less de veloped ones is to encourage capital formation. This can best be accomplished by trying freedom.