Tim Worstall

The Real Causes of Poverty.

At least one person seems to share my views on how to cure the gross poverty and destitution of Africa:

Subsidies to local producers also mean fewer choices for consumers. The
average Ghanaian has suffered because of shoddy goods made locally by
protected industries that do not face any competition. Who can blame
consumers for buying higher quality and less-expensive foreign goods?

Import tariffs and the infant industry protection idea might seem like good things but there is the actual effect.

Protection for local producers also means that African countries trade
very little with each other, as illustrated by the World Trade
Organisation’s 2001 statistics. Africa’s share of intra- and
inter-regional trade flows to western Europe alone was 51.8pc, while it
was a paltry 7.8pc within Africa.

Quite, the division of labour and comparative advantage would work just as well between Angola and Ghana as it would between France and either. This is why multilateral tariff reductions are so important, rather than just between rich world and poor.

The solution to all that ails us is not aid, debt
relief or "fair trade". It is to adopt institutions to harness the
entrepreneurial spirit that exists in every African country, to enable
Africans to trade with each other and anyone else in the world.

Establishing
property rights would be an important first step; an effective,
transparent and accountable legal system is another. Combined with
respect for private property and the rule of law, these broad reforms
would encourage entrepreneurship, trade, innovation and even
environmental protection because they empower people – rather than the
politicians.

Right on! We need to put the basic structures in place for growth first. Then, perhaps, we might pump prime the process via aid. But if we don’t get the basic institutions right first we’ll just be pissing away the money.

In

6 responses

  1. Rob Read Avatar
    Rob Read

    “we’ll just be pissing away the money”
    No it’s worse than that we will be rewarding corruption in these countries and making them even worse.
    P.S. We should unilaterally remove import tarrifs, they “protect” businesses, but only by transfering costs onto consumers!

    Reply
  2. Phil Hunt Avatar
    Phil Hunt

    How to solve poverty in Africa:
    (1) the rich world to end agriculture subsidies, and restrictions on imports from Africa
    (2) the rich world to stop attempting to enforce so-called “intellectual property” rules on African countries
    (3) African countries to progressively reduce tariff barriers to inter-African trade, aiming to remove them entirely by 2012.
    Tim adds: One and three certainly, but then I believe in free trade anyway. Two? Certainly provide a boost now but there will come a time when the Africa countries (they already do in a small way) are creating their own IP and thus will want a protection system.

    Reply
  3. Owen Barder Avatar
    Owen Barder

    Planet earth calling Tim….
    I’m all for working to put in place better institutions for markets to work well including property right, dismantling tariffs (both rich country tariffs and tariffs in developing countries) and – too often ignored – dismantling non-tariff barriers such as rules of origin, phytosanitary standards etc.
    But Tim: you appear to be developing a new thesis:
    Then, perhaps, we might pump prime the process via aid. But if we don’t get the basic institutions right first we’ll just be pissing away the money.
    This is an interesting point of view, which does not happen to be supported by any evidence. Some aid is wasted. Much aid could be spent more efficiently. But despite the inefficiencies, the evidence is remarkably consistent that even without the other changes that we would both like to see, aid is effective. It saves millions of lives, lifts millions of people out of poverty, and yields a very handsome rate of return in economic growth.
    Empirical studies do generally show that aid is a bit more effective in “good” policy environments, and a bit less so in “poor” policy environments (though some studies do not find a stastically significant effct), but all the studies show that, even in poor policy environments, aid works.
    And, of course, a great deal of aid is used to support exactly the kind of changes that you are advocating: liberalisation of state enterprises, reductions in tariffs, land reform and asset rights, establishment of financial markets, improved accountability and governance, and so on. In general, donors agree with you that improvements in political and economic institutions are an important step towards economic self-sufficiency.
    I am at a loss to understand why you are so keen to convince yourself that aid does not work – at any rate until the other desirable reforms have occurred – when that flies in the face of such an accumulation of evidence from a range of different sources?

    Reply
  4. Tim Worstall Avatar
    Tim Worstall

    Owen,
    I was slightly more nuanced in my comment at your site:
    “When you put it like that it’s difficult to disagree. However, I do have two points.
    1) I think we have found certain immutable truths about how a society needs to be organised in order for it to become and stay wealthy. De Soto and Sen along with those you would more readily associate with my ideology, like Hayek and Friedman. If we do not insist that legal structures, etc etc accord with those discovered truths, then we are failing in our moral duty to aid the poor in development (and yes, for all my rhetoric, I do think we have such a moral duty). Thus it is important that we do lecture others on what we think they should do.
    2)I want this to come before the aid. Yes, Zimbabwe is an extreme case but aid (other than immediate food and medical aid, and even then Mugabe is using that to consolidate power) would not help there at all, the other problems being so great. But that’s the thing. I regard Zimbabwe as being extreme but many if not most of those countries likely to receive aid as having the same internal problems that make the aid either ineffective or less so than it should be.
    What really worries me is that without the structural reforms necessary (and yes, this does include telling people to privatise telephone systems, issue multiple licences for mobiles, make power generation a free market (although perhaps not the grid), charge rational prices for water, blah blah blah) we’ll send in aid and not much will happen, leading people to conclude in a decade that the problem is unsolveable.
    I think we’ll only get one chance at motivating people to take this seriously, so I want it to be done right. Fix the systems first, with aid if need be, then pump prime them.
    Otherwise I’m all in agreement. Liberalising trade rules, for example, will simply make us richer, and who could argue against that? ”
    Note the last sentence of the penultimate paragraph.
    As I’m sure you are aware by now my anger is not directed at decent aid projects. It’s against those who wilfully ignore the fact that there are economic truths, that there are changes that have to be made to the structures and economic environments before aid can work, before wealth can be created. People like the Make Poverty History crowd, who specifically in their manifesto state that there should be no requirements for economic reform nor privatisation nor liberalisation. Like Christian Aid. Like some of Jim’s output. Like the Trade Justice movement. Like, at times, your support of the Fair Trade movement, specifically for coffee. The Oxfam site you point to states that the long term need is for a commodity board, which in turn means, a couple of decades after its establishment, its collapse just as the last one did, the low prices resulting from that being what we’ve only just, in the past couple of years, overcome.
    It isn’t the aid so much that bugs me, it’s the economic vacuity of so many who propose it (yourself mostly excepted).

    Reply
  5. Owen Barder Avatar
    Owen Barder

    Tim
    Thanks – I sense some convergence here. It would be good to hear you acknowledge explicitly that, on average, aid is effective at reducing poverty, reducing hardship and promoting economic growth (or at any rate that this is what the evidence appears to show). We can then agree that we need free trade AND economic reform AND better governance AND enforceable property rights AND aid – and perhaps you can drop the idea that more aid should wait until everything else has been done. This is no idle intellectual curiosity: people are dying every day and we can, and should, do more to help them.
    The only place you suspect me of being an unreconstructed market interventionist is on Fair Trade. I can’t see how you can be against people seeking to secure higher value added from their products by branding them in a way that earns a higher return. That is good old fashioned free market capitalism at work: willing buyer, willing seller and all that. If it is OK for Starbucks to pump up its revenues by building a brand that appeals to some consumers and enables them to charge a higher mark-up over costs, why is not OK for an impoverished tea grower or chocolate farmer to try to do the same?
    Owen

    Reply
  6. Teko Avatar
    Teko

    I wonder how many first worlders ever stop and think for a moment that maybe africans prefer their current lifestyle. That maybe they dont want to adopt european culture and values. Africans dont come to your country and condemn your lifestyle and preach to you on how to run it. Maybe their “poverty” is of their own choosing. If africans had a voice they would likely say “Butt out”. Youve helped us enough thanks.” But who would listen because theyre just uneducated savages right?

    Reply

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