Profit, Not Philanthropy, Creates Jobs and Income for the Poor

In the Wall Street Journal, William Easterly explains why Bill Gates’ proposal for “creative capitalism” — a rejection of the profit motive in favor of philanthropic motives for who corporations should do business with — would likely fail to create as many jobs, and ladders out of poverty, for the teeming millions of poor people in the Third World as plain-old fashioned money-making capitalism. He describes how the leading export industry in Third World countries is typically an industry that Western donors never even contemplated, much less assisted, in their billions of dollars in economic aid to the Third World.

Easterly has written a book about how foreign aid backfires. We earlier discussed a similar book by former World Bank official Robert Calderisi, and why so much foreign aid backfires, here.

Even relatively transparent forms of Western aid, such as anti-AIDS assistance, have sometimes backfired, resulting in increased child death rates and harm to countries’ health-care systems through brain-drain from critical primary care areas.

Foreign aid also has distorting macroeconomic effects even on the few countries that make good use of it, like Uganda, where it resulted in increased inflation and interest rates, harm to its export industry from changes in exchange rates, and other economic problems. In many African countries, aid agencies siphon off so much of the country’s scarce skilled manpower that industrial development cannot take off. Here is an African perspective on how restrictions on free markets keep poor people in poverty.