Global Institutions–Help or Hindrance?

CEI Vice President Iain Murray‘s presentation to International Youth Democrat Union seminar “Can Free Trade Free Oppressed Peoples?” panel on “Global Institutions–Help or Hindrance?”

Iain Murray: It’s a pleasure to be here today. I was for my sins a youth political activist. Unfortunately, while I was an activist in the Oxford University Conservative Association, the University stripped the Association of its official university position. When I was an activist in the Federation of Conservative Students, Conservative Central Office abolished it. The National Association of Conservative Graduates no longer exists, either. I trust that my presence here today will not cause the IYDU similar problems.

Today, I work as a Senior Fellow in International Policy at the Competitive Enterprise Institute here in Washington DC. CEI is on the libertarian wing of the conservative movement in America, so you will not be surprised to hear that I tend towards the position that global institutions are a hindrance to helping free oppressed societies rather than a boon, so I’d like to explain the reasoning behind that thought.

We have to begin by asking what the problem is in oppressed societies. Oppression, obviously, but how is that manifest? In some ways, and especially in Africa, oppression is not so much the presence of an oppressive government as the lack of an institutional framework of liberty. When the economist Jeffrey Sachs says that the age of Idi Amin and Mobutu Sese Seko has passed as he told the New York Times last November, that is missing the point. Oppressed countries are mired in a swamp where there is no rule of law, poor enforcement of contracts and no property rights to speak of. These are the basis of prosperity the world over. Without them, as Hernando de Soto has shown, societies cannot hope to be free.

Take, for example, home ownership. In his new book “The Shackled Continent,” Robert Guest estimates that 90 percent of housing in most African countries is owned informally. In Malawi, for example, not a country that is suffering oppression from a dictator, houses are built on “customary land,” where “the plot’s previous owners had no formal title to it. The land was simply part of a field their family had cultivated for generations. About two-thirds of the land in Malawi is owned this way…If there is a dispute about boundaries, the village chief adjudicates.”

Guest goes on to spell out why this is a problem: “No bank will accept a contract signed by a local chief as collateral because it is not enforceable in a court of law. Rather, it is an expression of traditional law, which is usually unwritten, unpredictable and dependent on the chief’s whim.” Even if the chief is “a wise, just and consistent fellow,” as Guest puts it, “the bank does not know this.”

A similar issue arises with natural resource development. Most of Africa’s natural resource wealth remains unexploited, because even when people have secure ownership of land, they do not have rights to sub-surface resources beneath this land. The economist Jude Wanniski believes that if these rights were secured, much of Africa would quickly become as prosperous as Texas, with “wildcatters” searching for oil, gold and other natural resources to the benefit of the local people.

These rights are the basis of free trade. An unfree people cannot trade freely. Without meaningful reform, the developing world is doomed to remain in poverty. It is, sadly, a state of its own making.

This is why I am skeptical of the role of international institutions in engendering reform. International institutions are quasi-governmental organizations. As such, they rely for the most part on government-to-government programs. This is a failed model. The Oxford Policy institute looked back in 2000 at 50 years of foreign aid and discovered that:

• The effects of aid on poverty are complex and, on average, neutral.

• Aid has had no effect on public spending allocations. Governments simply transfer tax money away from sectors favored by donors.

• The benefits of public income transfers are prone to capture by the rich. Income inequality has not lessened.

• Even if governments are benign towards the poor, officials are constrained by politics towards helping better organized urban groups.

• Aid managers tend to be judged for the performance on implementation rates rather than program outcomes, and

• Much of institutional investment fails to take into account the recurrent costs of maintenance and service delivery, leaving a legacy in many poorer countries of unaffordable social services and of decaying and under-utilized economic infrastructure.

This is not a happy picture. It has been confirmed recently by another economist, William Easterly, who has tracked Overseas Development Assistance against GDP in African countries over the last 30 years. Since the late 1970s, as ODA has increase, economic performance in African countries has deteriorated. The World Bank, IMF, European Union and the rest are complicit in this reliance on a failed model. The G8’s recent pledges on increased aid are just another example. We need to look elsewhere for sources of real help to the developing world. In what I am about to suggest, I am indebted to Carol Adelman of the Hudson Institute for her work on the subject. She has looked at how America helps the developing world and found that while the US government provides the most ODA of any country, 16.3 billion dollars annually, that is dwarfed by private assistance to the developing world in the form of foundation money, corporate investment, charitable donations and an amazing 40 billion dollars of private remittances, being sent by immigrants to the US being sent back to relatives in the home country. In all, Americans send over 115 billion dollars to the developing world above and beyond the official government donations.

The interesting thing about this massive flow of capital is that it is for the most part on a person-to-person basis rather than government-to-government. As the Pew Hispanic Trust found, remittances “are keeping large numbers of working-class families from slipping into poverty.”

The privatization of development assistance that this represents helps create the market for prosperity that is needed. As Carol says, “Foundations, churches, universities, hospitals, corporations, business associations, volunteer groups and hard-working immigrants are delivering more than just aid money to developing countries. They are delivering the values of freedom, democracy, entrepreneurship, and volunteerism.” These values will be a powerful force for change in the developing world. I am glad that there are so many IYDU members in developing countries also helping foster that process.

To those of you from prosperous countries, I can add only this, you can have a role in helping create the private capital flows from your country to the developing world as well. You can think about how your country’s charitable donation laws can help increase private giving. You can think about how your immigration rules can help private remittances. And you can think about how levels of subsidy harm free trade in Africa. I promised Othmar last night that I would not bang on about the EU’s Common Agricultural Policy, for instance, but suffice it to say that that is a severe hindrance to the development of economic liberty in the developing world.

In short, therefore, I believe global institutions are becoming not so much a help or a hindrance as increasingly irrelevant. The future of aid to developing countries is private. The global institution’s time has passed.