It was a great opportunity to be part of the LSE conference on Freedom and Development in Honor of P.T. Bauer. The conversation reflected high quality academic discourse and presentations were made by some of the leading contemporary scholars in the field --- e.g., Ester Duflo who spoke on gender and development, Robert Bates who spoke on putting the politics back into economic development, Barry Weingast on market preserving federalism and development, John Roemer on Equal Opportunity and development, and James Robinson on colonial origins, institutional development and economic performance. The conference organizers were Tim Besley, Robin Burgess, and Ravi Kanbur.
The conference was bookended by presentations by Anne Krueger and Andrei Shleifer. Krueger spoke on the importance of openness for economic development. In the context of her critique of government efforts to orchestrate development she highlighted the importance of small-scale trade as did P.T. Bauer. Her guideline for further regulation was simple --- pursue only those economic regulations which are (a) reasonable, and (b) uncapturable by interest groups. Once stated so clearly the debate then becomes what regulations could meet that standard. Andrei Shleifer concluded the conference with a discussion of the failures of foreign aid. He started with the great Bauer quote that foreign aid is the process of taking money from the poor in rich countries and giving it to the rich in poor countries. Shleifer explained foreign aid is ineffective due to the corrupt diverting of funds, and that the incentives for efficient use of funds that do get to the projects are low-level. He argued that there are three possible responses: (1) the Bauer response of abolition, (2) the World Bank redirection on 'doing business' and the push to streamline regulation and bureaucracies in the less developed world and (3) the cynical view that we shouldn't worry --- foreign aid is a small part of our budget, it is mainly for show in the West, and while it doesn't fix the problem there is some marginal effectiveness. Shleifer rejected the Bauer response (as I believe everyone at the conference other than Pete Leeson and myself would) and instead opted from some mix between (2) and (3). But in making this move, I believe that Shleifer (who as usual was amazingly impressive throughout the conference) failed to consider two points that were raised during his talk --- one by him and one by Tim Besley. First, Shleifer reported on a paper forthcoming in the Journal of Economic Perspectives on the effectiveness of HIV/AIDS initiatives. This paper argues that in terms of saving lives, that preventative measures (condoms, penicillin for other STDs, etc.) are at least 10 times more effective than treatment measures for HIV/AIDS (retro viral drugs, etc.). This highlights that intending to do good is not the same as doing good in public policy, yet much of the debate in public policy is about intending to do good. Politicians as part of the show beat their chest over who is intending to do more good and little feedback comes back to signal whether intentions are being met. Tim Besley raised the second point when he asked Andrei whether or not Bauer was right that foreign aid prevents the institutional developments that would be necessary to generate lasting economic development. Another important point was made by Besley and Ravi Kanbur that the incentives for donor countries to put binding conditions on recipient countries are not that strong because the real incentive is to disburse the funds regardless because that is how one will be judged.
Anyway, the evidence weighs toward Bauer even if the conclusion violates are 'ethical sensibilities'. Foreign Aid as a 'moral show' is extremely costly --- the unintended undesirable consequences are not trivial in terms of human suffering. As Andrei asked: "Do we have an answer on how we could spend large sums of money from the West to provide poverty alleviation in LDCs?" And as he answered: "No." Once it is stated that way, we are back to Bauer.
Bauer's main criticism of modern economics is that styles of thought have enabled economists to get caught in an intellectual trap of the cycle of poverty --- poor countries are poor because they are poor. In response Bauer argued we should go back to basic economics --- supply and demand analysis and an examination of incentives. Once we do that, Bauer thought we will see the perversity's of foreign aid programs, the wealth creating opportunities that follow from small-scale trading behavior and the capital accumulation it affords, and the silliness that some intellectual developments in modern economics lead brilliant and well meaning individuals to adopt.