Foreign Policy Explained, Ep. 12: Can Humanitarians Help Economic Development?

Release Date
September 15, 2016


Charity Economics Politics & Policy Poverty & Inequality

How can we actually stimulate economic development in poverty stricken nations?
Just about everyone would agree that humanitarians have a worthy goal and that their hearts are in the right place, but can humanitarian aid actually help stimulate economic development? Professor Chris Coyne discusses the key elements needed for an economy to work and how this is best left to the people of that economy to decide.

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Promoting economic development in poverty stricken countries, is a worthy goal. But few people stop to consider whether governments and NGOs can actually achieve this goal through foreign aid programs. Instead, a common view is that well-meaning people can do whatever they want as long as their hearts, minds and money are in the right place.
There are three reasons why we should be skeptical of this view. First, humanitarians suffer from a knowledge problem. They don’t actually know how to allocate resources in a way that will make citizens in the recipient country better off. The knowledge required to make people better of can only be acquired by the people themselves and not by a central authority.
It can only be discovered through a market process, grounded in property, prices and profit loss. This doesn’t mean that humanitarians can’t produce stuff to give to a recipient nation, for example, when donating food for famine relief. It just means that they cannot plan general prosperity. To illustrate this, consider that in the Soviet Union, economic planners were able to produce lots of certain items like infrastructure and military equipment.
But these investments did not improve the well-being of average citizens, evidenced by the long waiting lines for basic items like bread and shoes. Humanitarians can also produce lots of certain items, but this is not the same as broad based development and prosperity, which can only take place when local entrepreneurs discover the needs and wants of their fellow citizens.
Second, economists don’t have some universal blueprint for growth that can be neatly followed across societies. Economists know in broad terms what conditions are required for economic prosperity, such as private property rights, sound monetary policy, and the rule of law. But they know much less about how to develop these conditions.
For example, property rights will vary from society to society depending on historical experiences and customs. What this means is that economical prosperity can not be planned or designed even by the best and brightest economists. And where participants in an economy do have information that can be used to improve economic outcomes, such knowledge is context-specific and dynamic, changing as human wants and needs themselves change.
Third, efforts to promote a societies growth and development through top-down planning tend to create perverse incentives, which lead to failure. In many cases, efforts to foster development reinforce the very conditions responsible for underdevelopment in the first place. For example, foreign assistance often empowers corrupt political elites while discouraging reforms of dysfunctional political and economic institutions.
This happens because recipient nations become dependent on the donor country, disincentivizing any effort to improve their own institutions. Instead of viewing economic development as something that is created or planned through aid, it is more accurate to view development as an ongoing process of discovering new and improved ways of creating value for people.
This can take place only in an environment of economic freedom, grounded in private property, private ownership over the means of production, and free trade in labor and goods. This process is messy and full of mistakes, but it’s the only way to achieve development. This matters for the way we think about humanitarian action.
Those wishing to improve the human condition must recognize the constraints on their ability to engage in development.