THE END OF THE Cold War deprived our foreign aid system of its strategic underpinnings. No longer could official development assistance be justified as part of a global struggle between two great superpowers and their competing economic systems. Foreign aid became a more amorphous exercise, motivated by a marbled mixture of altruism, vanity, pragmatism, guilt, and nobles oblige. Development assistance has become a global welfare system, with many of the same syndromes that afflicted America’s war on poverty.
In 1996 the United States scrapped the war on poverty and launched a remarkably successful reorganization of its Federal welfare system. Now, with the rise of venomous new threats to the American and the global economic system, it’s time to apply the same kind of analysis that empowered Federal welfare reform to a re-thinking of our foreign aid system.
THE WELFARE REFORM movement was launched in 1984 with the publication of Charles Murray’s classic Losing Ground. Opposition to welfare up to that time had focused on “waste, fraud and abuse” to little effect. Murray transformed the debate by amassing official Government data to demonstrate in irrefutable detail that the Johnson administration’s war on poverty had created a series of perverse incentives that made it completely rational for aid recipients to choose dependency, illegitimacy, illiteracy, unemployment, and crime over self-sufficiency. Murray said, “The issue is not how much good we can afford to do (as the choice is usually put), but how to do good at all. In the debate over social policy, the angels are not arrayed against the accountants.”
The unparalleled success of Federal welfare reform demonstrates that opportunity and accountability can trump despair and dependence. Malignant incentives can be reversed. And failing policy paradigms can be replaced.
THE INDISPENSABLE WELFARE critique that Charles Murray produced in the 1980s, former World Bank Senior Economist William Easterly has now provided for foreign aid. Easterly’s energetic scholarship and impeccable development credentials make his analyses authoritative and persuasive.
Easterly’s indictment of the foreign aid system echoes Charles Murray’s analysis of the war on poverty on many levels. Murray noticed that welfare advocates nearly always used the amount of money spent as their main measure of society’s “commitment” or “compassion,” rather than talking about the results actually piling up in the real world. “The more we pay, the more certain we can be that we have done our part, and it is essential that we feel that way regardless of what we accomplish.” The same has been true of development assistance. How much easier it is for legislators to respond to appeals from rock stars to “double our commitment” than it is to slog through the nitty-gritty of program evaluation and holding aid agencies accountable for achieving their goals.
Easterly’s books and articles allow us to look in detail at both the dollars spent and results achieved by the current foreign aid system. He calculates that over the past five decades the West has poured a mind-boggling $2.3 trillion into foreign aid. And yet disease and poverty continue to stalk billions of people around the world, with no turnaround in sight. He explains the fallacy of focusing on spending over results by pointing out that money spent on aid is an input to development, not an output.
In a recent essay Easterly writes, “The West’s efforts to aid the Rest have been even less successful at goals such as promoting rapid economic growth, changes in government economic policy to facilitate markets, or promotion of honest and democratic government. The evidence is stark: $568 billion spent on aid to Africa, and yet the typical African country is no richer today than 40 years ago. The evidence suggests that foreign aid results in less democratic and less honest government, not more.”
Like Charles Murray, Easterly puts his finger on misplaced incentives as the chief culprit for explaining why development hasn’t happened. “People respond to incentives–all the rest is commentary.”
Easterly recommends that the aid agencies be relieved of their Sisyphean task of fostering broad societal development in favor of more focused goals. “Remember aid cannot achieve the end of poverty. Only homegrown development based on the dynamism of individuals and firms in free markets can do that. Shorn of the impossible task of general economic development, aid can achieve much more than it is achieving now to relive the suffering of the poor.”
WILLIAM EASTERLY’S KNOWLEDGE and willingness to be a whistle-blower have made him extremely controversial in the development community–but nearly impossible to refute. His critics try to dismiss him by pointing out that he offers no real alternative to the existing foreign aid paradigm. Easterly pleads guilty to that charge in his most recent book, The White Man’s Burden, Why the West’s Efforts to Aid the Rest Have Done so Much Ill and so Little Good.
But almost in passing, during his insightful explanation of third world corruption, Easterly points out that “good institutions” are the key to resisting the corruption and racial strife that hobble so many third world economies. The institutions he lists are: the rule of law, democracy, merit-based civil service, limits on government’s ability to repudiate contracts or expropriate property, and an independent central banking system. He has hit the nail squarely on the head.
For Western development assistance to finally deliver on its promises, we urgently need a strategy that can propagate these missing institutions in the third world. We need a way to harness market forces to jump-start non-corrupt, globalized private sectors inside impoverished countries. Free Cities is that plan. FREE CITIES IS A NEW development paradigm that would allow the United States to offer millions of people in the third world the same kind of hope, freedom, and prosperity that the people of Hong Kong enjoy today–without the baggage of colonialism.
Hong Kong began in 1842 as a minor trading post, surrounded by empty territory. Like the United States, most of Hong Kong’s citizens moved there for freedom and opportunity. After World War II Britain allowed Hong Kong to pursue a classical liberal, laissez-faire economic program. Taxes were kept very low. There were no exchange or trade restrictions, and minimal labor legislation. The results were spectacular. Despite absorbing millions of impoverished refugees, Hong Kong’s per capita income rose from about a quarter of Britain’s to more than a third larger in just four decades.
In 1984 Hong Kong became a free city under a 50-year agreement between Britain and China. The PRC Government agreed to allow Hong Kong to retain all its existing laws, its democratic legislature and judiciary, and its free market economic and trade systems. China calls this arrangement “One country, two systems.” Post-colonial Hong Kong offers a model the U.S. can adapt to seed outposts of freedom and opportunity around the world.
The United States should enter into a series of bilateral treaties with receptive host governments, carving out undeveloped plots, the size of Hong Kong, where a joint venture between the host government, the United States, and an international financial institution such as the World Bank, would construct brand new cities, where a complete set of western-style freedoms and responsibilities would be guaranteed by treaty for 50 years.
Treaty-based Free Cities would offer their citizens democracy, rule of law, limited government, low taxes, reliable prosecution of corruption, public registration of real property, freedom of faith, speech and press, a merit-based civil service, multiethnic meritocracy, free trade, and an American university.
If the United States established a treaty-based Free City with these precepts, inside a committed developing nation, a flood of global corporations, NGOs, and faith-based groups would go there. Skilled and unskilled workers would flock to the City. Offshore expatriate citizens of the host country would pour back to their homeland to share their skills and invest their capital. Factories would spring up, and other factories would soon appear nearby in the host country–as they did in Shenzhen, outside Hong Kong. The joint venture would only have to build the public infrastructure of a Free City. The private sector would gladly build the rest because they’d be able to reap the rewards of their own enterprise.
These nascent free societies would exemplify open market globalization, rather than the economic exploitation of protectionist colonialism. They would become safe havens for both local and global entrepreneurs, with globalized private sector economies attracting capital and skills from around the world.
BECAUSE THE VALUE of land selected for a Free City would multiply many times as the new City is constructed, that increase could be harnessed to pay for building the public infrastructure of the City. Guarantees of Free City bonds would provide access to global capital markets at first world sovereign rates. The IFI would float bonds and purchase the City land, survey it, and institute a comprehensive real property title registration system. The IFI would then resell the land for development, capturing the appreciation generated by fee simple titles and freedom. The host country’s leaders and people would naturally have the opportunity to invest early in the myriad of businesses and services the new City would require.
In return for these benefits, the host country would only have to agree to sell the land to its own joint venture, and not tax or interfere with the new City after it’s launched.
Free cities would be dramatic demonstration projects inside the third world. They would provide virtually scientific proof to the world of how capital is formed and how free market policies generate wealth.
Free Cities would not be colonies. They would be joint ventures between the United States, a multinational IFI, and the host countries. They would be outposts of free market globalization, rather than colonial mercantilism. Their treaties would be voluntary and offer freedom and opportunity for all, rather than unequal treaties imposed by force, accompanied by racial condescension.
Free Cities would strengthen and enrich their host countries, rather than diluting their sovereignty. Any foreign aid program with accountability can be said to damage the recipient country’s “sovereignty.” Easterly says “The [aid] Planners tie themselves in knots as they try to resolve the unresolvable contradiction between conditions and sovereignty.” Any dilution of sovereignty in Free Cities would be completely voluntary and generate enormous flows of tangible benefits in return.
The United States would not have to intervene to enforce Free City Treaties. The people who move to Free Cities would become stakeholders who would resist aggressively any interference with their freedoms, as the citizens of Hong Kong have. The foreign exchange generated by the Cities, their tariff-free status, and their other benefits would be woven into a web of treaty incentives for non-interference. And the host country’s ruling elite would learn quickly, as China’s did, that they can earn much more in their Free City than they’d ever be able to pocket from foreign aid or “squeeze.”
THE FREE CITIES STRATEGY IS simple, inexpensive, and revolutionary. By providing hope and opportunity at the expense of corruption and despair, Free Cities would be asymmetric weapons to combat terrorism and undermine statism and autocracy around the world. This approach would be so attractive to enterprising people that it could actually subvert the repressive status quo in the third world. A Free Cities program would appeal to the innate idealism and generosity of the American people. It would shift the focus of foreign aid from bureaucracy-to-bureaucracy to people-to-people and the private sector. And it would put America on the offensive in the global war of ideas.
Ultimately this is not even a government development program. It’s a strategy for American leadership in helping the global private sector energize and globalize the economies of third world countries.
Charles Murray ended Losing Ground with a prophetic benediction that is even truer for foreign aid than it was for the war on poverty. “When reforms finally do occur,” he said, “they will happen, not because stingy people have won, but because generous people have stopped kidding themselves.”
Ken Hagerty is founder and president of the Global Venture Investors Foundation, in McLean, Virginia.
