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April 10, 2008

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Nato

Neal Peart writes in his journal about a bike trip through Cameroon, in which he encounters a number of locals who attributed the relative wealth of a neighboring country to their having received greater foreign aid. This is a fairly enervating mindset, likely to discourage enterprise. That said, I tend to suspect that attributing this unfortunate conclusion to foreign aid is a transposition of cause and effect. In economies organized disproportionately through nepotism and other forms of organizational proximity, of course the population could be expected to explain international economic differences amongst neighbors in terms of largesse from the powerful.

Nevertheless, the form of international aid probably makes a difference in how strongly it reinforces that style of thought in recipient countries.

Nathan Smith

That's an argument about the *harm* that foreign aid does. It's certainly plausible. But do the harms of an "enervating mindset" (or rather, the probably small shift towards an "enervating mindset" that a bit more foreign aid might induce) offset the utility gains from having a bit more income? Does foreign aid have psychological effects that actually make people *poorer*?

I'm skeptical, because whereas there's a very simple story about how foreign aid would help-- give someone $1, he's $1 better off-- any story of how foreign aid could *hurt* must be somewhat more complicated, indirect, roundabout, and paradoxical. I'd have to see it told in a very clear logical fashion, preferably with testable implications, before I'd consider substituting it for the more commonsensical pro-foreign-aid story.

My guess is that the gain to Africans or Asians or Latin Americans from a $1 increase in foreign aid is less than $1, but more than zero.

Nato

A fairly safe guess. As I said, I think that, as an argument for the harm of foreign aid, it operates by getting cause and effect reversed. In fact, I would say that $1 in particularly smart financial aid could just as plausibly provide considerably more than $1 in utility (i.e. >0.00499).

Nato

That said, I don't think it's *that* hard to come up with a scenario in which foreign aid provided negative utility.

Tom

That utility argument could be used in support of domestic monetary redistribution as well. Why does Bill Gates need all of that money? If he dropped a dollar every second, it wouldn't be worth his time to pick it up, and yet, that same dollar picked up every second would provide tremendously more utility to 99% of people in America. Luckily, Gates is a philanthropist, and donates vast riches. And that really is the superior system*: voluntary redistribution. People for the most part know if they absolutely need that extra dollar, and people also know if they don't need it and can give it away to someone else who does. I would say it's good to encourage charity, and maybe even subsidize it through tax breaks, but mandatory redistribution, while better than no redistribution, is sub-optimal.

*Actually, the truly best system would be to actually gain something in return for giving aid. If you had poor countries competing for aid by offering us better and better returns on that aid (not necessarily monetary), then everyone would benefit. So really, aid should be more like an investment, with America acting like a venture capitalist.

Nathan Smith

Yes, the utility argument could also be used to support domestic redistribution, and I think something like it actually is a big part of the reason we engage in domestic redistribution. The differences are that (a) we engage in a lot more domestic redistribution than foreign aid, (b) the foreign poor are much poorer than the domestic poor so the argument is much stronger internationally than domestically, and (c) since the US has attained something at least in the ballpark of equality of opportunity domestically, poverty is to some extent a lifestyle choice that we don't want to subsidize, but on the world scale nothing remotely close to equality of opportunity has been achieved, and in fact the US is engaged in one of the largest social engineering projects in the history of the world, known as immigration controls, in a successful effort to maintain extreme inequality of opportunity. In short, the arguments for redistribution are much stronger internationally than domestically, and the arguments against it, much weaker.

I think we can leave the venture capital business to the private sector. It's inappropriate to expect much return on aid. And of course I'm all for voluntary redistribution. But I'm also conservative enough not to want to throw out an institution as entrenched as the tax-and-transfer system, and as long as we're not going to completely avoid redistribution on principle, it seems sensible to steer the redistribution towards the truly needy. Like, *not* affluent American seniors!

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