To the Editor:

We do not wish to reply in detail to the comments of P.T. Bauer and John O’Sullivan on our comments on the role of international aid to poor countries [Letters from Readers, July, referring to “Foreign Aid for What?” by Messrs. Bauer and O'Sullivan, December 1978]. Again we find much to agree with; more to disagree with. Again we find that their non sequiturs and distortions overwhelm their insights and truths. (One example: Messrs. Bauer and O’Sullivan rather go to town over our remarks on the Stevenson scheme, giving not so much a curriculum vitae of one of us, as a request for an apologia pro vita sua. Yet those who are interested in the facts will find in Charles R. Whittlesey’s authoritative Government Control of Crude Rubber [1931], pp. 105-109, a confirmation of what we said.) But we feel it would be tedious for your readers to enter into a blow-by-blow debate. We should, however, like to highlight our major disagreement.

Messrs. Bauer and O’Sullivan agree with us that there are many very poor people in the world—people who are starving and unhealthy, illiterate and homeless. We believe that this fact imposes a strong obligation on rich societies to transfer resources on concessional terms to poor countries. If past transfers of this kind have sometimes gone astray—as is undoubtedly the case—we believe this is an argument for reforming aid, not for rejecting it.

Messrs. Bauer and O’Sullivan appear to believe that aid is unreformable, as shown by their statements that “any presumption about the effects of aid must be that they are adverse” and “any positive contribution of aid to development must be negligible.” These claims are serious ones which, if established, would undermine the basis of aid. Are these claims justified in the general case, as against particular instances? Consider the cases of Taiwan, of South Korea, and of India. The authors cite Taiwan and South Korea approvingly on a number of occasions (referring to Taiwan, they rightly speak of the “massive economic advance”). India is regarded as the epitome of what happens to a country following aid: not only has economic progress been markedly less impressive, but “Indira Gandhi’s manipulation of economic controls for political purposes” is cited as one of the indirect consequences of aid. They say nothing of South Korea’s repressive regime and the only reference they make to Taiwan’s tough and interventionist government is to describe the Taiwanese as “lightly governed” (in comparison with China). Yet the facts on aid, development, and politics in these three countries are in stark contrast to the conclusions the authors draw: both Taiwan and South Korea have been major recipients of aid. Between 1961 and 1972, South Korea received nearly five times as much aid per head of the population as India; Taiwan nearly twice as much. It is probably incorrect to attribute any large element in the spectacular progress of either South Korea or Taiwan to the flow of aid: their success is mainly due to a combination of land reform, trade and pricing policies, and strong government which supported economic development and suppressed vested interests which might have thwarted such progress. But the aid facilitated the transformation of policies and of the economy which led to the rapid economic growth. There is certainly no evidence here that aid acted as any sort of drag on, or obstacle to, economic progress.

In contrast, India, with a substantially lower income level, has received an unduly low proportion of the total flow of aid. India’s room for maneuver—in particular the possibility of moving toward more outward-looking, trade-oriented policies—would have been much greater had it received levels of aid comparable to Taiwan and South Korea.

The argument that aid retards growth was put forward as much as twenty years ago—by Mr. Bauer, among others. Since then, not only have the outstanding success stories of countries like South Korea and Taiwan provided a conclusive counter to this conclusion, but it has been subject to much systematic statistical investigation. The most authoritative study of the relationship between aid flows and economic growth among developing countries during the past three decades—by Professor Papenek in the Economic Journal, 1972—demonstrates that aid has contributed positively and strongly to economic growth, among developing countries as a group.

While we would not base the case for aid on its effects on economic growth—we believe the fundamental case is the moral imperative arising from extremes of poverty in the midst of plenty—your readers will be subject to self-deception if they believe that they can avoid this moral obligation, which falls on those whose incomes are average or above average in rich societies, by false claims that aid impedes economic progress in poor countries.

Frances Stewart
Paul P. Streeten
The World Bank
Washington, D.C.

_____________

P.T. Bauer writes:

I should have thought it obvious that John O’Sullivan (who has now left England) and I listed some of Paul P. Streeten’s posts solely in order to convey to readers his outstanding prominence as a development economist and aid administrator and for no darker purpose. As to the other points:

1. Poverty: Official aid goes to Third World governments not to the poor. Many spend lavishly on purposes which have nothing to do with the poor—witness the construction at vast cost of brand new capitals such as Brasilia, Islamabad, and Dodoma in Tanzania. Many prestige projects or programs have to be supported by local taxes, including those on the very poor. In particular, official aid does not go to the skeletal figures, or to the families of those children with distended bellies so prominent in aid propaganda. Indeed, their horrifying situation is often aggravated or even caused by the aid recipients. Aid has gone to many Asian and African governments who have for political and racial reasons persecuted, expelled, or even killed very many people, often their most productive subjects. Such policies have been commonplace in Asia and Africa, alphabetically all the way from Afghanistan to Zambia, and geographically from North Africa to the Far East. The new Vietnam is only a recent and conspicuous example of a list which includes at least Afghanistan, Algeria, Angola, Burma, Burundi, Egypt, Ghana, Indonesia, Iraq, Iran, Kenya, Malaysia, Mozambique, Nigeria, Sri Lanka, Tanzania, Uganda, Zaire, and Zambia. When productive groups such as Asians in Africa or Indians in Burma are persecuted, or even if private trading is suppressed, the local people are deprived of skills and consumer goods and also of markets for their produce, which causes shortages and even famines. The poorest groups, especially in the rural areas, are among the worst hit. Aid facilitates these policies by enabling governments to conceal from their population, at least temporarily, some of their worst effects. Aid to rulers on the basis of the poverty of their subjects tends to encourage policies of impoverishment.

2. Development: We made it quite clear in our reply to Mrs. Stewart and Mr. Streeten why aid cannot contribute significantly to development. The maximum possible contribution, we showed, “cannot exceed the difference between the cost of commercially available capital and that of aid, applied to the percentage of national income represented by aid.” The pertinent magnitudes, namely, aid as a percentage of the national income of the recipients; the avoided cost of borrowing by governments who can use capital productively; and the maximum return on investible funds, insure that the contribution of aid to development must be insignificant, in all but the most exceptional cases. Moreover, investible funds are not the main determinants of development. Any marginal contribution to development by the avoided cost through receiving subsidized funds is easily offset by such adverse repercussions of official aid as support for overvalued exchange rates and the further politicization of life. The inefficacy of aid is suggested, among other evidence, by the problems many aid recipients have in servicing even very soft loans.

Once it is recognized that the contribution of aid to development normally must be at best minimal, the whole basis of official aid is undermined, as indeed Mrs. Stewart and Mr. Streeten would seem to accept.

The progreess of some aid recipients listed by Mrs. Stewart and Mr. Streeten does not affect the issue. It shows at most that government or business in these countries can use capital productively. (At most, because material progress reflects the operation of numerous past and current influences operating with different time lags, and investible funds are not the main determinant of progress, much less the only one.) These countries can therefore borrow abroad, as noted above. The progress of South Korea and Taiwan reflects the attitudes and motivations of the population and of firm but relatively limited governments, which are also behind the spectacular progress of Hong Kong and Singapore, not mentioned by Mrs. Stewart and Mr. Streeten. On the other hand, land reform, foreign aid, and strong government (emphasized by our critics) as prime agents of progress reflect the principal political thrusts of global egalitarianism.

For reasons already indicated, even a very high correlation between aid and economic development (and the statistics are in fact conflicting) would tell absolutely nothing about the contribution of aid to development. In New York City, there are many rich people living on Fifth Avenue, but this does not mean that living on Fifth Avenue makes you rich.

3. Commodity schemes: Charles R. Whittlesey’s book is on several grounds irrelevant to Mrs. Stewart’s and Mr. Streeten’s views on commodity agreements. For instance, that book, published in 1931, has no bearing at all on the International Rubber Regulation Scheme which started in 1934. In 1948, the British Colonial Office published my officially commissioned report on the rubber growing small holdings of Malaysia, which argued that quotas under that scheme discriminated against the small holders and, more important, that its operation jeopardized the entire economic future of the small holders. According to the official Colonial Office foreword to that report: “. . . Mr. Bauer’s main conclusion that under the pre-war restriction agreements a disproportionate burden was carried by small holders was accepted by the Colonial Office and the Government of the Federation of Malaya. . . .” All this is quite apart from the exclusion of potential producers necessitated by the operation of that scheme, for many of whom rubber would have been much the most suitable cash crop or even the only one available. As Mr. O’Sullivan and I repeatedly noted, this is a usual feature of effective commodity agreements.

4. Morality: The donors of aid are the taxpayers who have to contribute whether they like it or not and often do not even know that they contribute. What is the morality in forcing them to contribute resources for the maintenance of aid agencies and to governments which have often pursued inhuman and barbarous policies, not to speak of merely wasteful ones, policies often facilitated or even made possible by aid? Virtue is not obviously reflected or enhanced by enforced removal of money from Western taxpayers, or from Western and Third World buyers of necessities controlled by commodity schemes.

5. Reform of aid: I do not think that the major defects and limitations of official aid are remediable. But aid could be much improved, especially in its methods of allocation. I have already argued this in easily accessible publications, and hope to do so again in a forthcoming book. But I would not be surprised if my ideas for reform should differ substantially from those which Mrs. Stewart and Mr. Streeten would favor.