by Manuel F. Ayau
Manuel Ayau is the founder of the Universidad Francisco Marroquin in Guatemala and a former FEE trustee.
Beginning with Bill and Melinda Gates and Warren Buffet, everyone wants to do something to end poverty in the world. That's supposedly why the World Bank and myriad other expensive international institutions, plus the foreign-aid programs of developed nations, were created. But they've been at this effort for more than 50 years, and judging by the state of the underdeveloped world, there is little evidence of success. Even some of their own experts admit this. Why the poor results? A consideration of the reason for this colossal failure is necessary if we want to help the poor create prosperity.
There is no reason why poverty should exist in the world today amid all the modern wonders in technology, agriculture, medicine, and more. Poverty persists because governments in poor countries do stupid things, many of them advised by their well-intentioned charitable donors. Lets point out a few of these obvious but persistent tragic mistakes.
The resource that is most scarce in poor countries is the capital necessary to employ and increase the productivity of their abundant people. Capital demands labor; indeed, it competes in the labor market, thereby pushing all wages up. Everybody also knows that capital is invested for one reason and one reason only: to provide a competitive return. So isn’t it absurd to put a high tax on the return to capital? Customarily, high taxes are put on activities that governments want to discourage Just think: if to attract capital to a poor, usually unstable country the yield needs to be especially attractive, say, 20 percent, and profits are taxed at 33 percent (not unusual), the pretax yield would have to be 30 percent. Opportunities that offer this return are rare indeed. So why tax the return on capital? Unfortunately the aid dispensers invariably recommend taxing the rich — that is, investors — in order to reduce inequality. They prefer equality in poverty over prosperity with inequality.
Next, take the labor law inspired by the UN's International Labor Organization: contingent severance pay to encourage job security. When a worker is dismissed for a cause not attributable to him (any market condition that makes his employment redundant), the employer must pay him a month's wage for each year he was employed. But if he quits to take a better-paying job, he gets nothing. Thus workers lose bargaining power because employers know they are reluctant to forgo the severance. As a result, workers are discouraged from moving to better-paying jobs where their contribution would be of higher value but their severance would fall back to zero, and they don’t get raises they might otherwise deserve because their employers know this. Everybody is worse off by this misplaced quest for job security.
Trade Restrictions
Trade restrictions are another way that governments perpetuate poverty. Most poor countries have import duties to cripple competition and keep inefficient malinvestments profitable for cronies of the powerful. Governments are oblivious to the waste of capital and effort that uneconomic investments produce (known as dead weight loss). Opening markets would remove barriers to productive investment and hence prosperity.
These are just a few examples of harmful practices common to poor countries. Donor countries and institutions have not been much help; indeed many of these practices have been promoted by them at one time or another.
The reasons for the donors' failure is that they allow ideology to prevail over common sense. They invest time, effort, and money trying to alleviate the effects of poverty rather than the obvious causes and thus perpetuate it. If we want to help the poor, let us use our heads more than our hearts.