What Causes the Economic Development of Nations?

What causes the economic development of nations in their rise out of poverty? What prevents the development of poor nations?

The poverty of African nations has seemed intractable but advances in our economic understanding of development is encouraging. What the development research shows is that Africa’s poverty has remained constant in spite of World Bank efforts and foreign aid and that there is another, more important factor that causes development. The Meltzer Commission in 2000 found that the World Bank’s aid projects failed 55% to 60% of the time reports Investor’s Business Daily.

Research into what causes economic development shows that simplistic solutions like more foreign aid fail because most of the money, about 80%, is diverted, stolen, by corrupt governments to maintain repressive regimes. As a result, the per capita GDP of Africa declined by nearly 0.6% over the past 25 year period in spite of $450 billion provided by rich nations, and the per capita income in Africa is 11% lower than it was in 1960. And comparing Africa to South Asia’s progress from 1975 to 200 shows that Africa’s lack of progress occurred in spite of significant foreign aid while South Asia grew. South Asia grew at an annual per capita average of nearly 3% while getting only about 20% of the aid Africa receive on a per capita basis.

This Asian growth is good news because it means that economic development can be triggered without huge development costs; and we now know conclusively how to raise a nation out of poverty. It’s relatively simple (although politically challenging). The difference between economically healthy nations and those remaining poor is the degree to which they possess the fundamentals of economic freedom. The key to lifting a nation out of poverty lies in the establishment of freedom whose essentials are personal choice rather than collective choice, voluntary exchange through free markets rather than through political processes, free entry and activity in markets, and the protection of persons and their property from aggression. In short, freedom that comes from protection from repressive, excessive governments and from crime.

These fundamentals of economic health in societies do not require massive infusions of money, only people’s freedom to engage in economic exchange. Massive foreign aid apparently is even counter productive. Giving money to nations with corrupt governments largely tends to be diverted to supporting the repression, not freeing the people for constructive economic activity.

Economic aid is not necessary for economic development; the only necessary and sufficient factor in producing a nation’s development is freedom. The massive data collected for the Economic Freedom Index by the Fraser Institute clearly verify that the essential factor of development and the way out of poverty is the economic freedom of a nation. The ranking of nations according to their economic freedom directly correlates with their economic development and per capita income. In those cases where nations—for example Hong Kong, Singapore, New Zealand, etc.—have changed their governmental policies from a repressive, high taxation central government to one allowing more freedom of economic exchanges, their development has soared. These are now both free and rich nations with very high per capita incomes. But the African nations with repressive governments are at the bottom of the freedom rankings, and they cannot produce per capita income above the poverty level nor can they even sustain healthy growth. In fact, many are actually economically regressing.

The "foreign aid" that can actually help poor nations is to give people freedom, not money. And we can promote freedom not only at no cost to rich nations but at a net gain to all nations both rich and poor. Free trade never hurts anyone and always helps everyone. We can eliminate poverty through free trade with these nations. Without it, poor nations cannot develop.

And there is evidence that free trade puts pressure on repressive governments to reform. For example, in China a change in government policy is happening where its own economic activity, not a concern for human rights, has caused the Chinese government to expand property rights. If we truly want to aid poor nations not only can we open trade with them, we can also put direct pressure on their governments to reform, and when there is a moral imperative, to encourage the overthrow of a repressive regime.

The path out of poverty by establishing economic freedom and trade is now clearly established, freedom works, and enlightened leaders no longer need to rely on the misconception that more monetary aid will somehow help. We can now see how it instead tends to reinforce the poverty of nations. What causes the economic development out of poverty of nations is freedom, not foreign aid. The only foreign aid that works is to give people freedom, not money, if we want to help them grow and develop.