Reducing Poverty through Economic Freedom

by Kimani S. Njoroge

Simon Njoroge, who was born in Kenya, is a research fellow at FEE.

The worldwide obsession with poverty eradication is a major threat to economic freedom in developing nations. Through central planning, governments and aid agencies are busy blocking poor people’s road to prosperity. The United Nations' Millennium Development Goals (MDGs)–which seeks to magically reduce worldwide poverty by half before 2015–is the most popular, and disastrous, plan. The MDG Secretariat is urging developed countries to double their foreign aid, which will be used to promote UN programs on extreme hunger; primary education; gender equality; child mortality; maternal health; HIV/AIDS, malaria, and other diseases; environmental sustainability; and global partnership for development. The UN claims that poverty would be history if those issues were addressed. But it ain’t so! Things would be worse, considering that poor nations are being encouraged to spend more on the aforementioned programs. This would widen avenues of corruption and increase budget imbalances, both of which have crippled Third World economies for decades.

Then enter the Bretton Woods Poverty Reduction Strategy Papers (PRSP) that developing nations must submit as requisites for foreign aid and debt relief. In these papers governments are required to describe their countries' macroeconomic and structural policies to be used in the promotion of broad-based growth and poverty reduction, as well as indicating the amount of foreign aid needed. Failure to submit convincing PRSPs is suicidal to countries like Uganda, where foreign aid (pdf) accounts for over 50 percent of government spending. This means empowering seasoned bureaucrats with the task of developing these nations' master plans against poverty. William Easterly, author of The White Man’s Burden, wonders why such powers are given to bureaucrats, instead of to individuals who actually reduce poverty through enterprise.

The resulting economic policies end up appeasing donor agencies at the cost of robbing poor folks of opportunities to help themselves. Their strong emphasis on ending poverty through welfare programs and intergovernmental transfers is creating a mentality that governments exist not to preserve liberty but rather to improve lives through tax money and donor funds. Thus instead of pushing for institutional reforms that would confine governments to protecting life, liberty, and property, and providing market-friendly environments, Third World civil societies are pushing for more transparency and accountability in their nations' wealth-transfer systems. Their goal is to make governments behave like flawless conduits of distribution. But that will never happen; government planning will only prevent the establishment of long-run market solutions to poverty.

Economic Freedom

Two independent projects (one by the Cato and Fraser institutes and the other by the Heritage Foundation and Wall Street Journal) have consistently found that economic prosperity is greater in countries whose governments stick to the role of protecting life, liberty, and property. These findings confirm Frederic Bastiat’s claim in The Law that economically prosperous people are to be found in:

countries where the law least interferes with private affairs; where government is least felt; where the individual has the greatest scope, and free opinion the greatest influence; where administrative powers are fewest and simplest; where taxes are lightest and most nearly equal, and popular discontent the least excited and the least justifiable; where individuals and groups most actively assume their responsibilities, and, consequently, where the morals of admittedly imperfect human beings are constantly improving; where trade, assemblies, and associations are the least restricted; where labor, capital, and populations suffer the fewest forced displacements; where mankind most nearly follows its own natural inclinations; where the inventions of men are most nearly in harmony with the laws of God.

True for All Nations

The success of economic freedom in bringing forth prosperity holds true for all nations. Comparing three neighboring East African countries (Kenya, Uganda, and Tanzania) tells it all. Two decades of different levels of economic freedom (see graph) have produced different economic fortunes in these countries. According to the 2007 Human Development Report, Uganda, reported to be East Africa's freest economy by the Heritage rankings, has managed to reduce abject poverty from 56 percent of the population in 1990 to 37.7 percent in 2006. The country has continued to sustain the region’s highest annual per capita productivity ($1,478), highest life expectancy (48.4 yrs), and highest education enrollment ratio (66.1 percent). Kenya, second after Uganda in economic freedom, comes second in all measures; her abject-poverty rate rose from a little more than four points (from 48 percent in 1990 to 52.2 percent in 2006). Annual per capita productivity currently stands at $1,140, life expectancy at 47.5 years, and the education enrollment ratio at 60.1 percent. Tanzania, with the least economic freedom of the trio, lags in all measures: its abject-poverty rate rose by 7 points (from 28 percent in 1990 to 35.7 percent in 2006), per capita productivity stands at $674, and life expectancy at 45.9 years. The country has a sorry education enrollment ratio of 47.1 percent.

The Ugandan example is testament that free people can indeed pull themselves up from poverty. The scale of their economic activities does not matter, as long as they want to improve their lives through the best means they know–whether as subsistence farmers or micro-entrepreneurs. Nobel laureate Milton Friedman referred to them as a collection of Robin Crusoes who cooperate in the production of goods and services.

Poverty is escaped when the small economic interactions expand into more efficient enterprises. This is aided by the existence of strong market-friendly environments that Cato and Fraser describe as better protection of private property, proper enhancement of contract laws, stable monetary environment, low taxes, elimination of trade barriers, and the allocation of goods and resources through the market process. But instead of providing that, governments, especially in developing nations, regard rising enterprises as sources of revenue to be milked through business licenses, fees, and taxes. Farmers are seen as time-wasters who cannot succeed without government help and who thus are coerced into selling their commodities through government marketing boards. Such boards helped wreck coffee farming in Kenya, cocoa in Ghana, and tobacco in Malawi. Small traders are seen as economic nuisances who need to be eliminated altogether. Such interventions end up destabilizing small-scale enterprises that already account for huge portions of these nations’ economic output.

To reverse that trend, economic freedom needs to be seen as a development partner. Governments must understand that providing market-friendly environments will enable their societies to develop long-lasting solutions to economic problems and, as Friedman wrote in Capitalism and Freedom, “reduce the range of issue that must be resolved through [ineffective] political means.”