“Let them work out their own problems.”

Economist Peter Bauer's work on developing areas

By Peter Brimelow.

First published in Forbes, Feb 22, 1988

HAVE THE ACADEMICS and liberals laid a burden of guilt on you about the plight of the Third World? Have they convinced you that debt repayment by the poorer countries is causing hunger and disease and that U.S. affluence is a cause of poverty in the less-developed economies? Throw off the burden. Most problems besetting the poorer countries are of their own making.

This, in simple terms, is the message derived from reading or listening to Peter Bauer, London School of Economics professor and student of developing countries. Lord Bauer—he was raised to the British peerage at the request of Prime Minister Thatcher in 1983—is no fringy, right-wing character: He is widely viewed as the outstanding figure in development economics since the death last year of Sweden's Gunnar Myrdal.

But unlike Myrdal, Bauer considers foreign aid to be a disaster for the recipients, and he has consistently emphasized the importance of market forces in the developing world. This is diametrically opposed to the consensus among development economists, expressed, for example, in Myrdal's seminal Asian Drama, that Third World conditions make central planning and economic controls essential.

The clash between the two views has been bitter. Much of Bauer's professional life has been spent in what he describes matter-of-factly as "partial ostracism." For all the talk of academic tolerance, dissent is not viewed kindly.

Bauer's views on the Third World debt problem are typically trouble-making. He says that, as a percentage of gross national product, neither the total outstanding sovereign debt of the major Third World borrowers nor their interest and principal payments have been particularly high by historical standards. He says the borrowers, while pleading poverty, have substantial real assets. More to the point, they have sound policy options, which they will not take, such as liberalizing their economies and opening them up to foreign participation.

However, Bauer argues, the borrowers perceive that they can avoid repaying—and they appear to be right. Western governments and powerful commercial interests would rather cover up the problem with rescheduling, Baker Plan-type additional loans and, in the last analysis, increased foreign aid.

If the Western banking system is so undermined by Third World loans that it needs support from the taxpayer, Bauer says, this support should not be filtered through Third World governments. It should be given directly to the affected banks—and their managements and shareholders made to pay a price in cut dividends, mergers and recapitalization. Bauer adds that in any case bank collapses cannot trigger another Depression unless accompanied by a monetary contraction, which the authorities can prevent.

But isn't debt forgiveness, and increased foreign aid, necessary to prevent the spread of communism in the Third World? Bauer says communism has historically spread independently of prosperity—and much Western aid is channeled through multilateral agencies to anti-Western governments anyway. Aid to Ethiopia, for example, entrenches the Marxist-Leninist dictatorship and helps perpetuate the very policies that accentuated the hunger in the first place.

Lord Bauer is a small, courtly man given to flashes of ferocity. Born in Budapest in 1915, his manner is a curious cross of deliberate Central European professor and waspish Cambridge don. His father was a bookmaker, one of whose betting clients suggested Bauer should study in Britain.

He began studying economics at Cambridge University in 1934, while still working on a law degree in Budapest. Today one of the numerous things that trigger Bauer's ire is the claim, as in the movie Chariots of Fire, that Cambridge in the 1920s was exclusive, xenophobic, anti-Semitic. As a foreign Catholic of Jewish background, he says, he met with nothing but hospitality. He adds that, with his minimal English and worse finances, he could never gain admission in similar circumstances now.

Then, economics at Cambridge was dominated by John Maynard Keynes. Bauer's supervisors included the celebrated Joan Robinson, associated with an overtly left-wing Cambridge faction. Bauer, whose early work was on abstruse topics like rent, quasi-rent and monopoly, says his sympathies were "mildly" on the left.

What made him change from left to right? "My eyes were opened by West Africa," he says—the more than ten years he spent in exhaustive empirical study (once described as "Benedictine scholarship") of the economies of Nigeria and Ghana, then under British rule; and also that of Malaysia, then also a colony of Britain.

An economic revolution had just occurred in these regions, quite spontaneously and without any particular planning or direction by the colonial authorities, who basically restricted their role to the maintenance of public order. "In 1885 there was not a single rubber tree in Malaya nor a single cocoa tree in British West Africa," Bauer has written. "By the 1930s there were millions of acres under these and other export crops, the bulk of them owned and operated by non-Europeans." Indeed, many of these African and Asian peasants were illiterate, but they had responded with alacrity and foresight to incentives transmitted to them quite unconsciously by the activities of traders.

What's this? Economic development in a poor country without benefit of economists, foreign aid and technical experts? It actually happened. The phenomenon led Bauer to question essentially all the axioms of contemporary development theory. Colonialism was supposed to be bad, but here it had brought cash crops to regions previously dependent on subsistence farming. Poor countries were supposed to lack the capital and skills to escape the so-called vicious circle of poverty, but all these peasants had seized the opportunity, either borrowing the minimal capital required from traders or, more commonly, substituting their labor for it. (Some ethnic groups were more successful than others, however.) British West Africa's population was supposed to be wholly agricultural, according to official statistics, but Bauer could see that many of the people were really involved, often part time, in trade and transportation.

Bauer's observations contravened the widely accepted "Clark-Fisher" hypothesis that economic growth must entail a progressive shift of labor from agriculture to trade and industry. It also caused Bauer to doubt the orthodoxy that major capital investment in infrastructure had to precede sophisticated economic activity: Here the activity came first. Human energy and ingenuity were the seed capital, not foreign aid or foreign bank loans.

This healthy process was interrupted by, of all people, the British colonial authorities. By the 1940s they were abandoning their traditional policies of limited government in favor of state intervention—influenced, partly, by the sort of economics Bauer was taught at Cambridge. How could an ignorant African peasant possibly know as much as a Cambridge don or a trained British civil servant?

In West Africa, in particular, marketing boards were set up to which the peasants were compelled to sell their produce. Originally justified as a price-stabilizing measure, the boards were used to confiscate the peasants' profits by paying them less than the world price. When colonies became independent, the new governments happily stepped up the practice. The money siphoned off from the peasants was often spent on unviable state-sponsored industrial projects. The economic progress recorded by Bauer stalled, and, as the peasants have reverted to subsistence farming, even regressed—thanks not to colonialism or neocolonialism but to socialism.

The 1979 Brandt Report on the Third World and similar studies helped entrench many of the wrong-headed attitudes. It endorsed domestic socialism and, in the name of economic growth, urged more and more foreign aid—or, as Bauer prefers to call it, "government to government subsidy." Bauer argued that these injections of aid could not produce sustained growth. In fact, they were positively harmful, because they enhanced the power of government elites to persist in destructive policies, such as Tanzania's forcible collectivization of its agriculture, and to further politicize economic life.

Growth, Bauer argued, was really dependent on complex changes in attitudes, and these could occur only through incentives. Bauer cites econometrician Simon Kuznets' conclusion that less than 10% of the developed Western World's growth in per capita output could be attributed to increases in the supply of capital or labor; the rest was because of subtle improvements in their efficient use.

Bauer's insight causes him to be equally critical of a more conservative prescription for the Third World: population control. He observes that modernization, which is really westernization, is usually followed by a drop in population size, but there is no reason to suppose that the process will work the other way around. Contraception is already widely available in the Third World, and the fact that it is not fully used suggests that children are important to the local incentive structure. Draconian control programs—like the Chinese enforcement of a one-child-per-family rule—might temporarily free some resources by reducing the dependent population relative to the work force. But resources are not the key factor in development anyway. Historically, population increases have been quite compatible with economic growth.

Bauer's prescription for the Third World: Leave them alone.

But no one is inclined to leave them alone. The Third World elites benefit so much from economic controls and from Western guilt feelings, Bauer says, that they will not abandon controls and statism despite all promises—unless the West stops subsidizing them, which it is not yet inclined to do. And, he says, just as foreign aid created the "Third World" by encouraging a totally diverse group of countries to unite in quest of handouts, so also it has created the development economics industry in the First World, by indirectly paying for the network of institutes and university departments.

Bauer's views are receiving more attention as the economic problems of the Third World become less deniable. His last two books, Equality, the Third World, and Economic Delusion and Reality and Rhetoric, were widely and respectfully reviewed. An academic conference was recently held in his honor by Washington, D.C.'s Cato Institute and the proceedings published in the Cato Journal.

But Bauer remains cheerfully pessimistic: "The vested interests are so enormous that they must influence the rising generation."

Bad enough that this causes the expensive miseducation of our talented young. Worse, it condemns millions in the Third World to more suffering than they would otherwise have to endure.