Freedom for Less Developed Countries; D. Bechara

Dennis Bechara ~fF(Ifr~ I for Less • Developed ~ ~JIJ' THE PLIGHT of the less developed countries has become one of the most hotly debated issues in interna tional affairs. Worldwide organiza tions have been established with the common purpose of uniting the less developed countries to obtain re sources from the developed coun tries. Opinion leaders are almost unanimous in their belief that the developed countries have a duty to aid the poor countries. The debate, in fact, is not whether this aid is le gitimate, but what ought to be the extent of it. Conventional wisdom holds that the situation in the less developed countries is attributable to the industrialized countries. Is this assessment correct? Many reasons have been ad vanced to explain the poverty of the Mr. Bechara is an attorney in Mayaguez, Puerto Rico. 104 underdeveloped countries, and con versely to interpret the cause of the wealth of the industrialized nations.

A popular notion is that the rich na tions owe· their wealth to their ex ploitation of the poor countries. The argument is really an extension of the fallacy that in every transaction there is a winner and loser. The ide ology that has been erected to ex plain the alleged causes of poverty in the. underdeveloped world holds that the most direct cause of exploi tation is colonialism. Therefore, the argument goes, the colonial powers owe their lifeblood to the colonies. There is no correlation, however, between a country's standard of liv ing and its history of colonial power. Some of the countries in the world that presently enjoy a relatively high standard of living either never pos sessed colonies or, if they did, the FREEDOM FOR LESS DEVELOPED COUNTRIES 105 history of their colonialism is incon sequential. Switzerland, Denmark, Sweden, Norway and the United States are examples of this. Some of the great colonial powers, on the other hand, are presently facing eco nomic difficulties. Portugal, for ex ample, possessed colonies which en compassed a territorial area larger than itself. Yet, Portugal's economic position does not substantiate the charge that colonialism has en riched the colonial powers.

The Myth of Colonial Exploitation The historical evidence is simply nonexistent to demonstrate that the poor countries subsidized the devel·· oped countries' wealth. The argu·· ment, however, continues to flour-· ish, with a new twist. It is asserted. that the old colonial powers, aI-though having granted political independence to their former colonies, continue to exert an invidious con trol over the economies of the under developed countries. The relative prosperity of the old colonial powers is therefore attributed to the exer cise of this degree of power, which has been termed "neo-colonialism." According to this line of thinking, the industrialized countries have reached their present position of op ulence as a consequence of their in vestments in the less developed na tions. The belief is harbored that since developed countries have in vested tremendous amounts of money in the underdeveloped countries, the resources withdrawn from the latter have therefore yielded the investors fabulous profits. This argument is popular because it nourishes envy.

It is easier to blame foreigners for a country's misfortune than to recog nize that the country's governmen tal policies coIjltributed to the situa tion. However, when the available evi dence is analyzed, it becomes clear that the developed countries do not owe their prosperity to their trade relationship with the less developed countries. There is no correlation between a nation's present economic standing and its holding colonies in the past. The solutions espoused for the im provement of the underdeveloped countries' conditions reflect the re distributionist mentality on an in ternational scale. It is politically fashionable to. combat poverty with the compulsory transfer of income from the taxpayers to those deemed needy. Similarly, on an interna tional scale, the predominant ideol ogy is the same: to have the rich countries subs~dize the poor coun tries. Therefore, the concept of re distribution of income is essentially the intellectual underpinning for foreign aid. In light of this, one must question whether or not massive in come redistribution is the solution to the problem.

Aside from· the libertarian posi106 THE FREEMAN February tion that it is immoral to force peo ple to support others, the ideology of redistribution cannot be defended on grounds that it achieves what it sets out to do. Rather, the opposite is the case. Foreign Aid Often Fails to Reach Needy Individuals When a country receives foreign aid, it is a fallacy to presume that its citizens are necessarily any bet ter off. This is so because the aid is recei ved and handled by the host country's government, to use for its politically predetermined goals. For example, a country may wish to build an industry which is not economi cally feasible, but which grants prestige in the international com munity-such as an automobile in dustry or a steel mill. Foreign aid makes it easier for the governments of the less developed countries to embark upon these projects, since part of the funds util ized to finance them have come from abroad. Therefore, the local taxpay er's opposition, which could other wise have materialized, is lessened.

In addition, foreign aid ag grandizes the power of the less de veloped countries' governments. The state becomes the beneficiary of this process because it has the power to apportion jobs and subsidies to its political favorites. Foreign aid, therefore, becomes an unwitting in strument of intervention in the internal political affairs of the host country. Foreign aid is usually justified precisely on grounds that the recip ient countries will ultimately be come loyal to the country providing it; it is often proclaimed as an anti dote to Communism. However, his torical evidence fails to establish this. There is no causal connection be tween a nation's economic well-being and its vulnerability to fall under a Communist dictatorship. How var ious countries have fallen under Communist domination involves many historical explanations. Surely it cannot be argued that poverty au tomatically instills a pro-Commu nist attitude on the part of the pop ulation. If this were the case, most of the poor countries would have be come Communist.

The idea that one country can purchase the allegiance of another through foreign aid is pernicious. In fact, it is commonplace to see the re cipient countries become hostile to the donor countries. Foreign aid is viewed by the nationals of the recip ient countries as a more subtle ver sion of colonialism. Other factors, such as nationalism and cultural differences, account for a country's governmental attitude. It is, there fore, truly simplistic to assume that foreign aid can buy allegiance. Yet, those people who claim that one of the virtues of foreign aid is that it politically influences the recipient 1982 FREEDOM FOR LESS DEVELOPED COUNTRIES 107 country are really conceding the fact that aid is not granted to improve the economic conditions of the recip ient countries. Rather, the aid given is designed to obtain foreign policy goals, and consequently, no eco nomic considerations are necessar ily relevant in its granting.

The Need for Savings A country, and for that matter, any individual, may increase its wealth in the long run only if part of its consumption is deferred for a later time. In other words, it is essential to save in order to increase one's wealth. Why is this the case? Be cause savings finance projects which, if economically necessary, increase productivity. For example, let us say that a railroad connecting farm lands to a market needs to be built. The railroad will increase the mar ketability of agricultural goods, and therefore the costs to consumers will be lowered as a result of this more efficient mode of transportation. However, savings are needed in or der to finance the project. The individuals who construct the railroad need funds to defray the costs of the project. Clearly, the money utilized by them constitutes their abstention from consuming those funds. The investors have placed their savings in the form of a railroad. If the investors do not have the funds to carryon their project, they may entice others to lend such funds. Whether the funds originate domestically or from foreign sources, these funds r~present savings. A common way to finance many proj ects, however,. contains the element of governmenta~ coercion, or what is commonly called forced savings. This is the method of simply levying taxes or issuing paper currency to finance the projects. In 'either case, the citi zens are forced to consume less of their income, because the taxes im posed 'reduce •their disposable in come, or the pnice increases which result from the increase in the money supply reduce, their purchasing power.

The issue that is crucial to a na tion's development, therefore, is where the savings should originate. Foreign aid is another form of com pulsory saving,...---.byreducing the consumption of the donor country's taxpayers. But as we have seen, for eign aid is not economically moti vated when it becomes intergovern mental aid. Foreign investment, on the other hand" does utilize sound business justifications for its use. Foreign investors seek to place their capital in the most profitable lines of business. This benefits the recipi ent countries because jobs are cre ated, and the marginal productivity of labor is increased. This tends to raise wages in thJe recipient country. The guidepost o(profits, in addition, insures that scarce resources are not misallocated. When an activity is 108 THE FREEMAN February profitable, it means that consumers view its rendition in a positive man ner. The high profits attract more investors, and this in turn serves to lower the prices charged to con sumers. Foreign investment speeds up this process.

Increasing the amount of foreign investment available does benefit the recipient country, but is is not the only available solution to relieve the underdeveloped countries' position. For these countries to truly improve their condition, it is necessary for them to establish an institutional framework which will attract not only foreign investment, but en courage domestic savings and in vestment as well. The people best suited to know local conditions and local investment opportunities are the residents of these countries themselves. If the underdeveloped countries attempt to encourage sav ings and institutionalize the essen tial preconditions of a free market economy, there will be a sounder ba sis for growth. However, when one examines their record, the policies which have been followed are pre cisely contrary to the attainment of these goals. The Protection of Property Governments are instituted to safeguard pre-existing rights pos sessed by individuals. Among these rights is the right to own and pos sess property. This is essential because if a person is not entitled to his property, his right to survive is endangered. Since a person has the right to life, it follows that a person needs to keep the fruits of his labor in order to survive. Therefore, gov ernments must respect property rights. What is the record of the underdeveloped countries concern ing this?

The history of the less developed countries is scattered with instances of wide-scale nationalization of for eign-owned business enterprises. At the turn of the century, for example, Mexico nationalized its fledgling oil industry, which was prospering at the time precisely because the gov ernment had allowed private inves tors to place their capital there. In dia, after obtaining its independence from England, proceeded to estab lish onerous controls over foreign investments. Virtually every coun try in the "Third World" has exper imented with some form of state ownership of enterprises. Brazil, which many point out as a beacon of hope in South America, has a large segment of its economy under the direct control of the government. With these facts merely as an illus tration of the state of affairs of these countries, it becomes easy to under stand why foreign investment rep resents such a small percentage of the United States economy.

The less developed countries have also pursued a very dangerous pol1982 FREEDOM FOR LESS DEVELOPED COUNTRIES 109 icy which has, in effect, discouraged savings and eliminated the long term capital markets. The policy is uni versally known as inflation. This policy of increasing the money sup ply with its consequence of a rise in prices, helped diminish the role of savings in those countries. Constant increases in the money supply, cou pled with periodic devaluations of the national currencies and foreign ex change controls served to stultify growth. Other Interventions Aside from failure to protect pri vate property and aside from inflat ing the money supply, many of the less developed countries adopted other policies detrimental to a free market. The newly independent na tions created massive licensing re quirements, implemented regula tions and enforced policies that discouraged competition.

One of the most notable of the pol icies that were adopted by these countries was the progressive in come tax. TAis rather recent devel opment, however, is due to the influ ence the industrialized countries exert on the less developed coun tries. Under the aegis of the prevail ing academic wisdom, it was the pol icy of the United States government to advise these countries of their duty to eliminate the broad inequalities of income in existence and to adopt a progressive income tax. The effect of these taxes, of course, has been to discourage capital formation. It is not uncommon to I. discover many for eigners holding substantial wealth outside the borders of their own countries beca4se they are in search of a place whicp offers security and stability. Polit~cally, many of these countries have! experienced revolu tions, suddenichanges in govern mental policy, .. and this instability has added an element of risk, mak ing it less attrflctive for anyone to accumulate sav~ngs.

Another common feature in the less developed countries has been the prohibition of free foreign trade. This has occurred because it is feared that free entry of foreign goods could de stroy local industries and therefore produce unemployment. The fallacy here, however, ~ests in not recogniz ing that if foreign countries do make better and cheaper goods, this bene fits the country importing those goods. This is sol because the citizens of the importing country will have resources left over as a result of their acquisition of th~ goods that cost less, while other goods may be acquired as well. The principle, of comparative ad vantage is applicable to trade. This means that a country has, if permit ted to trade in a free environment, the incentive to specialize in the production of goods for which it is better suited. M<\lrewine is produced in France than in England, for ex110 THE FREEMAN ample, because of this principle. If England, however, were to enact a law prohibiting the importation of foreign wines, in order to encourage its domestic wine production, its consequent inefficient production cannot be said to improve England's economic posture. The less devel oped countries, unfortunately, as a result of misdirected policies, have become quite protectionist.

In conclusion, it must be said that, outside of the ravages of natural di sasters, or those brought about as a result of war, a substantial portion Hope for the Oppressed of the cause of the poverty of the less developed countries is directly at tributable to their own governmen tal policies. This is not to argue that voluntary aid to the needy in the less developed countries should not be granted. Rather, the discussion here has centered around what policy the governments of the less developed countries should adopt. In light of this, the best advice the developed countries may grant to the less de veloped ones is to encourage capital formation. This can best be accom plished by trying freedom. i IDEAS ON LIBERTY ONLY when the state is restricted to the administration of justice, and economic creativity thus freed from arbitrary restraints, will conditions exist for making possible a lasting improvement in the welfare of the more miserable peoples of the world. It is often this very lack of justice in the poorer countries that keeps the people in their low economic state.

An English economic advisor to an African state was shocked at the prevalent low wages and succeeded in securing a minimum wage law for the land. The result was that the thousands of workers who had earned forty to fifty cents a day were put out of work. Only the more efficient and essential workers remained and the whole economy suf fered. It had been interventions in the market by the government, a lack of justice, that had kept the wages down in the first place by pre venting capital accumulation and investment. Further intervention, in the form of the minimum wage law, only aggravated the situation, removing the one chance many had for some economic improvement. Were justice present in these lands, there would be no shortage of in vestment capital, for there would then be no fear of unjust confiscation or nationalization. Justice is the one condition that will lead to economic improvement.

FRANCIS E. MAHAFFY, "Social Justice"