Foreign Aid is Wasteful: Recent World Bank Move Could Easily Make it Moreso

Robert B. Zoellick, World Bank President, has attracted sovereign wealth funds to expand his organization’s ability to “assist” developing world economies  (World Bank gets help from sovereign wealth funds to invest in developing nations).   Since foreign aid, as the late Peter Bauer noted long ago, in practice is normally a process of taxing the poor in richer countries to help the rich in poorer countries, this is not encouraging.  Sovereign wealth funds are the sums accumulated by nation states (often via capital controls) for investment.  In freer economies, these funds are dispersed via profits throughout the economy and invested by private parties in pursuit of their risk/return preferences.  Sovereign funds are political versions of the same thing but politics often is less adroit at allocating capital – sometimes investing too much in high-failure sectors, other times satisfying with low risk and low return options (China, after all, is a major purchaser of US Treasuries).

These funds often do employ sophisticated advisors to help maximize their returns – much like mutual fund investors.  Since the World Bank employees – undoubtedly nice people – are unlikely to have the same skills as such financial entrepreneurs, why would they seek out the World Bank to play this middleman role?

Could it be that these funds recognize that the World Bank is the exemplar of the Too Big Too Fail global institution, that their investments will be now guaranteed by the richer nations?  Do they believe that – if a crisis occurs – the World Bank (and, thus, they too) will be bailed out?  Certainly, political institutions are loathe to see institutions fail (Fannie and Freddie, California, General Motors in the United States; Greece in Europe).  Thus, they may well expect that the World Bank will provide them risk-free profitability.  Not a bad bet given that past World Bank crises have been “resolved” by “special” assessments on member nation states and/or by working closely with their sister organization, the International Monetary Fund.  There may be, of course, other motivations, but this further entanglement of capital allocation into global politics certainly raises the moral hazard risk in a world in which it is already rife.  Capitalism’s task is to allocate capital.  It is disciplined by market profit and loss.  When politics suffers with this most important task (allocating humanity’s always scarce seed corn), we should expect slower growth in the global economy, faster growth in global bureaucracy.