All Commentary
Saturday, April 1, 1995

Perpetuating Poverty: The World Bank, the IMF, and the Developing World

The Third World Needs Moral and Political Reform, Not Dollars

There is a biblical proverb that says: “the tender mercies of the wicked are cruel.” I have often thought of this verse in relation to the misery that political policies such as rent control or minimum wages have caused people–especially the poorest of people. The “tender mercies” of governments’ attempts to use the law as an instrument of compassion often turn out to be cruel to the intended beneficiaries, the poor. With friends like most modern governments, the poor do not need any enemies.

Perpetuating Poverty demonstrates this to be true on an international scale. Fifty years and hundreds of billions of dollars of aid from Western governments—tunneled through the IMF, the World Bank, and a number of other multilateral aid agencies—have had an impact on world poverty: it has helped keep the Third World poor just that—poor.

Development economists have long held that the Third World is poor primarily because of its lack of capital. According to the conventional wisdom poor nations cannot, on their own, afford to save enough to break out of a subsistence-type economy. Their only hope is massive infusions of capital from the taxpayers of the West. They need Western wealth in order to “develop.” Furthermore, according to the popular Marxist notion of Western guilt for the exploitation of the poor nations, the Third World has a right to Western wealth.

It now seems beyond question that the massive wealth transfers to Third World governments have not, in general, helped the poor. As the editors note in the introduction, “the multilaterals can point to few, if any, cases in which their efforts have led to improved living standards and sustained economic prosperity.” Forty years of international aid transfers have left Latin America with a foreign debt of $430 billion, sub-Sahara Africa with per capita incomes lower today than they were in the 1970s, and India with an annual per capita income of around $300.

Why has aid failed? Primarily because most developmental institutions lend to governments, and not to individuals. The recipient governments are often-through their destructive economic policies-the very cause of the economic problems that the aid seeks to rectify. International aid is, in effect, a subsidy to bad economic policies and a bloated public sector. It succeeds, not in alleviating poverty, but in extending and prolonging bureaucratic control over the poor of the Third World. Governments who would have been forced to change or collapse have instead been kept afloat by loans from the World Bank or the IMF and allowed to continue their destructive policies. This is something like an international welfare program, not for the poor of the Third World, but for their governments. Much aid has been wasted in poorly planned, ill-administered projects of little benefit-such as crop-storage depots built where peasants never go, or funds allotted to buy a profitable private bus line in India and turn it into a money-losing public enterprise. Billions of dollars, collected from middle-class taxpayers of the West, have “aided” Third World elites to possess grand estates, private zoos, classic car collections, and Swiss bank accounts.

But this book does not merely look at the “bad cases”—it is a devastating critique of foreign aid in principle. Shyam Kamath, in his chapter on foreign aid and India’s Leviathan State, shows how foreign aid has allowed India to create and sustain one of the “world’s largest and most inefficient public sectors.” Robert Salinas Leon demonstrates how World Bank loans allowed Mexico to expand its state-owned industries from 300 in 1970 to some 1,200 by 1982, and how IMF loans during the early 1980s helped postpone the privatization of major state corporations. James Bovard details how the World Bank helped finance the cruel “relocation” policies of Julius Nyerere’s government in Tanzania, and the Mengistu government in Ethiopia. He also brings to light the Bank’s complicity in the brutal collectivization policies of Vietnam in the late 1970s. Doug Bandow demonstrates how the IMF relieves the political pressure on Third World governments for a much needed reform of their economic policies. Surely the “teder mercies” of this type of aid have been bitterly cruel to the poor of the Third World. Surely Western taxpayers would be outraged if they knew that their money was going not to help the poor but to finance international socialism.

If the Third World is poor because it lacks capital, it lacks capital because it lacks economic freedom. It is no coincidence that the aid-recipient countries are characterized by state-sponsored monopolies, high taxation, onerous regulation, high inflation, extensive price controls, ambitious social programs, persistent budget deficits, and a general lack of private property rights. These things are not caused by poverty, they are the cause of poverty.

What the Third World so desperately needs is economic freedom and limited civil government. With these preconditions in place, the capital necessary for economic progress will be attracted. Prompted by Mexico’s extensive free market reforms of the past few years, over $40 billion of foreign capital has Rowed in since 1988. Likewise, the small country of Chile (population 13.5 million) has attracted $8.5 billion in foreign investment since its free market reforms in the mid-1970s. Countries that respect private property and economic freedom attract investment capital; countries that do not suffer “capital flight.”

Foreign aid is inherently statist. Even when institutions such as the World Bank or the IMF do lecture countries on the need for freer markets—as they have sometimes done in recent years-they simultaneously give the foreign governments the very means to resist that which they advise. It is analogous to lecturing a drug addict on the need for reform while giving him money to buy more drugs. As Paul Craig Roberts notes in his chapter, the leftists are partially correct: the West does bear some responsibility for the conditions of the Third World–not because of its capitalistic exploitation—but because of the statist consequences of its aid.

Perpetuating Poverty shows that what the Third World needs is not more dollars but the moral and political reform that underlie a free economy. The poor nations also need increased trade with the West. As the last section of the book details, it is a striking hypocrisy that while Western governments continue to give billions of dollars in multilateral aid, they refuse to open their markets to Third World and former East-Bloc producers. In his chapter, J. Michael Finger calculates that developed countries’ import restrictions “reduce developing countries’ national income by about twice as much as developing countries receive in aid.” This is a shame, for, as James Bovard writes, “charity is no substitute for opportunity.”

The authors of this book, as Peter Bauer notes in his comment, are the best in their field. Their case against multilateral aid is well-documented, well-reasoned, and powerful. Their charges deserve an answer from those who continue to justify multilateral institutions.

Mr. Ewert is a businessman and the editor of a Christian public policy publication called U-Turn.

  • Doug Bandow is a senior fellow at the Cato Institute and the author of a number of books on economics and politics. He writes regularly on military non-interventionism.
  • Mr. Ewert is the editor of U-Turn, a quarterly publication addressing theological, political, economic, and social issues from a biblical perspective.