We need Aid and Trade, not Either/Or

July 6, 2017

This article appeared on CapX.

If you read CapX, you probably already know the good news. The world is getting better. The combination of open markets and evolving technology – capitalism, in other words – continues to drive down global poverty, increase quality of life and provide a cornucopia of new innovations. Over the last thirty years, the proportion of people living on less than the equivalent of $1 a day has halved, taking one billion out of extreme poverty, while global life expectancy has increased a decade from 60 to 71.

The majority of this was the result of bottom-up organic spontaneous order: the result of millions of individual decisions aggregated and shaped by the power of the market.

Last week was the tenth anniversary of the iPhone, indisputably the iconic invention of our age – and as Brian Merchant’s new book The One Device argues, probably the most profitable product ever made. While some have argued that the US Government invented the iPhone, or alternatively that it appeared fully fleshed in Steve Job’s imagination, the reality was and is far more complex. The iPhone was the aggregation of hundreds of individual innovations, both public and private, commercialised through a fiercely competitive, profit seeking company and visionary leader.

Markets continue to make the world better, even in many of the poorest parts of the world. Sub-Saharan Africa already has a 77% penetration rate for cell phones – and by 2020, over half of these are expected to be iPhone-style smartphones.  In countries where basic infrastructure is often lacking, this offers opportunities far beyond a bigger market for Facebook or Pokemon Go. It is not inconceivable that Africa could leapfrog many more advanced economics – with direct to the individual mobile banking, health advice or digital education. It is not a coincidence that China’s digital infrastructure, centred on the smartphone, is often more advanced than in the West.

While there is sometimes a tendency in the development community to blame poverty on markets-caused inequality, in reality markets and globalisation remain the power driver of poverty reduction. It is not a coincidence that China and India’s growth really took off as they liberalised their markets. While it is hard to make accurate adjustment for different price levels across very different types of economy, as far as we can tell, global inequality is falling.  Markets reduce global inequality – the kind we should care most about – not increase it.

That is all true. However, it is not the complete story. While it is understandable why classical liberals often feel the need to defend markets against unsophisticated attacks, we also need to recognise that while markets are necessary to long term prosperity, they may not be sufficient. Neither are they the only way to increase welfare, especially in areas like health. This week, Policy Exchange released a new report, with a foreword by Ruth Davidson, arguing that to really tackle the world’s challenges we will need both markets and public goods, trade and aid.

For one thing, unleashing growth likely requires an underlying set of open institutions and culture, including the rule of law, a free press and elite accountability. Poor countries are not just the result of a lack of financial investment. We only have a very limited idea of how to transplant these kinds of institutions from the outside, but that doesn’t mean there’s nothing we can do to improve quality of life for the poor in the meanwhile.

In the past, overseas aid has sometimes not been careful enough to ensure that it doesn’t make the problems of bad institutions worse, effectively subsiding extractive elites – but there are many types of aid intervention, from direct cash transfers to vertical health programs which effectively sidestep this kind of problem.

While standards of health are closely connected to a society’s wealth, there are other factors that can make a difference too. In nineteenth century Britain, it was both higher wages and major reforms of public sanitation that really increased life expectancy. Today, we have still cheaper interventions, requiring less state capacity, such as oral rehydration therapy or insecticide-treated mosquito nets. Since 2000, the global malaria mortality rate has fallen by 58%, averting 6.2 million deaths. We have high-quality randomised evidence that bed nets are effective in reducing malaria, and since the early 2000s the proportion of children sleeping under bed nets in many African countries sleeping under bed nets has increased from 1% to 50% or higher. Since 2011, UK aid has helped distribute 50 million nets.

Overall, every $1 billion increase in health aid is associated with 360,000 fewer under-5 deaths, the equivalent of around $3000 each. By one calculation, if all the entirety of the historic $4.7 trillion global aid budget had achieved was the elimination of smallpox, this would still be equivalent to spending $80,000 per life saved – or twice as cost effective as the NICE threshold in the NHS.

As well as direct interventions, we should be doing more to help with basic R&D too – and that will have to be a partnership between private pharmaceutical firms and government subsidy. Without public support, the current low levels of wealth in developing countries make it very hard for a private company to earn a commercial return on products targeted solely at the developing world.  Only around $3 billion a year or 1-2% of medical R&D is targeted at infectious diseases in low and middle income countries. Just 10% of medical research is dedicated to tackling conditions accounting for 90% of the global disease burden. In 2013, the Lancet Commission identified more than 500 specific research gaps that still need to be filled, while the WHO has recommended that the current $3 bn in global R&D spending be doubled.

And yes, we need more trade too. The Copenhagen Consensus Center has estimated that by far the most effective intervention to spur development would be to complete the Doha round of multilateral trade negotiations, with total benefits in excess of $533 trillion and a benefit to costs ratio of over 2000 to 1. While those negotiations remain stalled, Britain should use the opportunities from Brexit to be a true global leader on free trade. We should unilaterally lower our tariffs to low income countries, and substantially replace the CAP with a new British Agricultural Policy, focussed on public goods rather than distorting food prices.

In short, Britain should be a champion of the power of markets, innovation and free trade. Aid isn’t a substitute for that, but it can be a complement – helping reduce the burden of disease, easy poverty, and develop new technologies to tackle some of the world’s most pressing challenges.

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