Peter Gregory, Institute of Public Affairs, Melbourne
It is erroneous for the UN to claim that the Millennium Development Goals (MDGs) has been “the most successful anti-poverty movement in history”. The extraordinary reduction in the number of people living in extreme poverty over the last 25 years has been caused by market-led economic growth. We must re-cast foreign aid and charity to reflect this reality.
Between 1990 and 2015 the number of people living in poverty fell from 1.9 billion to 836 million. This drastic improvement is something we should all be ecstatic about. But the UN is incorrect in judging the MDGs as contributing significantly to this extraordinary achievement in its final report into the 15-year goals released a fortnight ago.
According to The Economist, in the first decade of this century, developing countries increased their GDP by 6% per year on average – 1.5 points more than between 1960 and 1990. Since 2000 annual growth in household consumption in developing countries grew by 4.3% per year on average – it grew by only 0.9% annually in the preceding decade.
These gains largely occurred because of market liberalisation which boosted trade between and within countries. In their Economic Freedom of the World report for 2014 the Cato Institute in the US found that global economic freedom has increased significantly since 1980 based on security of property rights, freedom to trade internationally, the rule of law, regulation and other factors. They also found almost without exception, that countries that were more economically free were more prosperous.
An obvious example is China. Throughout the late 70s and early 80s China instituted free market reforms such as opening itself up to trade with the outside world, removing the barriers to private enterprise and allowing agricultural markets to emerge.
These reforms meant that 680 million people have been lifted out of poverty since 1980. Indeed, China accounts for three quarters of the people moving out of poverty over the last three decades. It’s worth noting China has never shown any interest in the MDGs.
But China is not the only one. Growth in other developing countries has lifted 280 million people out of poverty since 2000 according to former World Bank economist Martin Ravallion.
There is a lesson in this for foreign aid and charity. If free markets are lifting so many hundreds of millions of people out of poverty, foreign aid must re-cast its role as enabling poor people to participate in markets.
One way to do this is by enhancing individuals’ economic rights. A prime example are property rights. Hernando de Soto estimates that $US 10 trillion of assets owned by poor people aren’t protected by formal property rights therefore restricting grassroots entrepreneurship. Ensuring that women have the same property and inheritance rights as men would drive economic empowerment and equality for women.
Another crucial economic right is the right to engage in free trade. Bjorn Lomborg estimates that removing the despicable trade barriers that prevent developing nation producers from selling their wares in developed and developing markets would make each person in the developing world on average $US 1000 richer per year by 2030 and lift 160 million people out of extreme poverty.
Furthermore, enhancing economic rights by fighting endemic corruption that cripples entrepreneurship is extremely impactful. As is ending the obtrusive industry policies that are rife in the developing world and crowd out entrepreneurship such as the Pakistani government’s price-setting practices in the country’s wheat sector.
The other way foreign aid can help poor people take part in transformative free markets in a sustainable way is to identify and facilitate the development of markets that are beneficial for the most deprived. For example, the Human Capital Project in Cambodia utilises a unique financing mechanism called personal equity finance which enables impoverished students to pay for university without the risk of a standard bank loan.
Proponents of this type of free market poverty alleviation scheme is what development economist William Easterly calls ‘searchers’ – people who develop market-based local solutions for local problems.
That’s not to say there is no room in global foreign aid for targeted government social programs. Brazil’s Bolsa Familia and Mexico’s Oportunidades are successful conditional cash-transfer schemes that have put a dent in poverty. Furthermore, foreign aid is also helpful during natural disasters.
But the UN must realise that the most successful anti-poverty movement in history is called ‘the free market’ and it’s something that thankfully, most people in the world now participate in every day.
People, not governments, will end poverty Peter Gregory
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