Trade, Not Aid—and Some Military Power

David Tucker

July 1, 2001

George Bush and the other leaders of the eight major industrialized countries, the Group of Eight or the G 8, recently concluded their annual meeting in Genoa, Italy. Like all recent meetings of those who wield most of the economic and political power in the world, this one attracted tens of thousands of protesters. Since one of these was killed in battles with the police, and a hundred or more of his colleagues were injured, the violent tactics of the protesters received more attention than the substance of their complaints. What was at issue between the G 8 leaders and the protesters was scarcely mentioned. In a phrase, it was trade or aid.

The protesters believe that the increasingly open and expanding regime of free trade that is one of the major accomplishments of the post-World War II international system is unfair. They believe that it harms the poorer countries of the world and even the poorer regions of the industrialized countries. They believe that free trade only makes the rich richer, while ruining traditional ways of life. The remedies the protesters offer differ, but in general they want the G 8 to offer more aid to the poorer countries by forgiving their debt and giving them direct financial assistance.

The protesters were not alone in making such arguments. The week before the G 8 meeting convened, Jeffrey Sachs, an economist at Harvard and an influential advisor to governments, while not arguing against free trade, did contend that the United States should increase its aid to the least developed countries. Among his suggestions was more debt forgiveness.

Some thought that the combined pressure of such street and elite protests might make the G 8 give way and move more than it has in the past from trade toward aid. As it turned out, the G 8 did not. As they put it in their final communiqué, “the most effective poverty reduction strategy is to maintain a strong, dynamic, open and growing global economy.”

The G 8 was right to stand its ground. Poor countries are not poor because they suffer unfavorable terms of trade. They are poor because they squander the resources they have, through corruption, bad management and ineffective government. Individuals in poor countries can work hard and display extraordinary ingenuity, but this hard work and inventiveness is inhibited by the obstacles officials erect out of their own self-interest. Aid and debt relief will not change that. Debt relief, in fact, may simply be a reward for bad behavior and thus encourage more of it. Vast sums have been transferred to poor countries over the past 50 years and a great deal of debt already forgiven without improving their condition.

What can be done then for the poorest countries? Perhaps nothing. If what inhibits their economic growth is bad governance in the most comprehensive sense, there is probably little that the G 8 can do to change that. They should continue to insist on free trade (and practice what they preach by lowering barriers to foreign goods, especially those from the poorest countries). Beyond that, Sachs and others suggest supporting targeted programs, such as those that seek to fight disease and improve education. These are more likely to work and have greater economic effect than other forms of aid, especially if they can be delivered directly to people and not administered through their governments.

Assuming that such targeted programs work, should the United States, as Sachs argues, increase its contribution to them? The United States spends vastly more on its military power than do other countries and this power, as Sachs acknowledges, is essential for the order that exists in the world, without which the economic growth of all countries would be adversely affected. Since we do this better than any other country—it is our comparative advantage, as economists say—continuing to do it is probably the best contribution we can make. Trade, not aid, and some military power, is the best formula we have for global economic prosperity.

David Tucker is a Member of the Board of Advisors at the Ashbrook Center for Public Affairs at Ashland University and an Associate Professor at the United States Naval Postgraduate School.