Princeton University economist Angus Deaton was awarded the Nobel prize in economics today. His work on carefully measuring consumption and other measures of well-being led him to understand development as a complex process not susceptible to improvement by technical or top-down interventions. For Deaton, knowledge is a key to development—even more so than income—and helps explain the tremendous progress humanity has experienced in the last 250 years when parts of the world we now call rich began their “great escape” from poverty and destitution.
In his book, The Great Escape: Health, Wealth, And the Origins of Inequality, Deaton documents how that progress is now spreading around the globe and is the reason we are living longer, wealthier and healthier lives than at any time in history. (You can see him presenting the book at this Cato forum, and see a summary of that talk here.) Even countries with relatively low incomes have seen tremendous advances, largely as a result of the spread of scientific, medical and other kinds of knowledge. Though he is not deterministic, Deaton paints a largely hopeful picture of humanity reminiscent of the views of Julian Simon, whom he cites. He is also concerned with inequality, but recognizes that “Inequality is often a consequence of progress,” and distinguishes between inequality that helps humanity and the kinds that harm it (e.g., inequality that can lead to political inequality).
As his career progressed, Deaton joined the growing number of development experts who have become skeptical of foreign aid and consider that numerous other factors play a critical role in development. Citing pioneer development economist Peter Bauer, Deaton notes a foreign aid dilemma: “When the ‘conditions for development’ are present, aid is not required. When local conditions are hostile to development, aid is not useful, and it will do harm if it perpetuates those conditions.” In The Great Escape, Deaton goes on to document the myriad practical problems with foreign aid including corruption, the failure of loans conditioned on policy changes, the institutional incentives to lend, the divergence of donor country interests from recipient country needs, etc. Even when aid projects do good, he concludes:
The negative forces are always present; even in good environments, aid compromises institutions, it contaminates local politics, and it undermines democracy. If poverty and underdevelopment are primarily consequences of poor institutions, then by weakening those institutions or stunting their development, large aid flows do exactly the opposite of what they are intended to do. It is hardly surprising then that, in spite of the direct effects of aid that are often positive, the record of aid shows no evidence of any overall beneficial effect.
When thinking about aid, the developed world would do well by heeding Deaton’s advice and by not asking what we should do. “Who put us in charge?” Deaton rightly asks. “We often have such a poor understanding of what they need or want, or of how their societies work, that our clumsy attempts to help on our terms do more harm than good…And when we fail, we continue on because our interests are now at stake…”
Deaton provides a far better way of thinking about development:
What surely ought to happen is what happened in the now-rich world, where countries developed in their own way, in their own time, under their own political and economic structures. No one gave them aid or tried to bribe them to adopt policies for their own good. What we need to do now is to make sure that we are not standing in the way of the now-poor countries doing what we have already done. We need to let poor people help themselves and get out of the way—or, more positively, stop doing things that are obstructing them.
