Corey Hribar

© 1999 Corey Hribar

November 11, 1999

Introduction

During the late 1700s, Adam Smith and Thomas Malthus each entered their predictions on the future of the world’s economies into the history books. In his writings in An Inquiry into the Nature and Causes of the Wealth of Nations, Smith theorized that national economies could be continuously improved by means of the division of labor, efficient production of goods, and international trade. In An Essay on the Principle of Population, Thomas Malthus predicted that the sustainable production of food in relation to population was vital to the mere existence of national economies in order to ensure an able labor force. Smith believed that the success or failure of a nation to progress toward development was dependent upon the quantity of labor and money invested in the production of manufactured goods. Malthus calculated that labor and funds would better serve a country if invested in agricultural enterprises aimed at feeding its own people.

Their vast differences in viewpoints concerning development make it interesting to examine each author in the context of the United States’ reactions to the plight of the Third World. It seems that since the end of World War II, U.S. foreign aid policy has been largely based on the principles set forth by Adam Smith in The Wealth of Nations. However, while Adam Smith has seemingly been the U.S. foreign aid advisor of the past, it may be time for U.S. policymakers to turn their attention to the prescriptions of Thomas Malthus in order to resolve the worsening plight of the world’s poorest.

This paper will first examine the implications and consequences of Adam Smith’s influence on U.S. foreign aid policy since the end of World War II. In order to address this subject, it is necessary to discuss The Marshall Plan, transfers of aid money to developing nations, and the encouragement of industrial development in the Third World. The outcome of these attempts to bolster development will then be investigated, and finally the writings of Thomas Malthus will be used to provide insight into developing policy prescriptions.

Adam Smith, U.S. Foreign Aid Advisor

The wealth of a neighboring nation, though dangerous in war and politicks, is certainly advantageous in trade. In a state of hostility it may enable our enemies to maintain fleets and armies superior to our own; but in a state of peace and commerce it must likewise enable them to exchange with us to a greater value, and to afford a better market, either for the immediate produce of our own industry, or for whatever is purchased with that produce. As a rich man is likely to be a better customer to the industrious people in his neighborhood, than a poor, so is likewise a rich nation (Smith, 1776: 494).

Throughout The Wealth of Nations, Adam Smith contends that in order for a nation to increase its own national wealth, it must engage in trade with its neighbors. As explained in the quote above, wealthy neighboring nations are largely preferred over poorer ones in order to maximize the advantages gained through international exchange. The more money an individual nation has, the more capable they will be of purchasing your goods, and in this way increasing your national wealth. With this wealth, you will be better able to produce and consume those goods which you desire, and which you intend to sell so that the cycle can be continued on a presumably endless basis.

While some may argue that U.S. aid to developing countries is given partly due to national benevolence it appears that in most cases, foreign aid policymakers fully supported Smith’s discussion of the importance of wealthy trading partners to national economic success. For this reason, the United States, in accordance with the rest of the international community, has adopted an "income analysis" approach to the definition and resolution of poverty and development for the Third World. "Income analysis assumes that poverty is a direct function of income and individual purchasing power within nations" (Ferraro, 1994: 334).

Foreign aid programs from the end of World War II until the present have been largely aimed at increasing national GDP levels, due to an assumption that has been termed "trickle down economics." This assumption states that "an increase in the productivity and relative wealth of a nation will eventually trickle down to benefit every sector of a country’s economy" (Ferraro, 1994: 335), and therefore those laborers employed by those sectors. Smith himself established that precedent in his statement that "the demand for those who live by wages...naturally increases with the increase of national wealth, and can not possibly increase without it" (Smith, 1776: 87). By raising the GDPs of underdeveloped countries, and therein raising incomes and standards of living for the impoverished, the United States would create new markets for its goods, and increase its own sources of wealth. Over the years, the United States, in conjunction with the rest of the developed nations of the world, has taken a variety of approaches to achieving this goal of increasing the wealth of the Third World and thereby gaining new wealthy trading partners.

The Marshall Plan

Adam Smith’s theory that "a nation that would enrich itself by foreign trade is certainly most likely to do so when its neighbors are all rich, industrious, and commercial nations," (Smith, 1776: 495) is arguably one basis behind President Harry Truman’s intention for the implementation of the Marshall Plan. In 1947, following the end of the Second World War, the economies of Western Europe were still far from recovery mostly due to the destruction of their industrial sector. This rendered them unable to produce goods for export, or purchase goods imported from the United States. It also left Western Europe vulnerable to Communist persuasion or invasion. In order to assist the economies of Western Europe and enable them to protect themselves, Truman’s Secretary of State George Marshall drafted an aid program. Upon its approval, Western Europe was granted a sum of US$12 billion in economic aid intended to help them rebuild their industrial economic base (Peiser, 1994: 387).

The Marshall Plan was a success. The money given to Western Europe by the U.S. government was used to rebuild European economies and resume participation in the international market place. U.S. foreign aid "coincided with an economic revival across the continent" (Bovard, 1996: 1). By granting the governments of the nations of Western Europe a large sum of money, the United States regained itself a group of prosperous trading partners with which to exchange goods.

The success of the Marshall Plan in achieving economic revival for U.S. trading partners, which Smith deemed to be of great importance, would prove to be the basis for Third World aid policy in years to come. Since the end of World War II and the implementation of the Marshall Plan, the United States has provided over US$321 billion in foreign aid assistance to Third World countries (Majewski, 1987: 1). This aid has taken a variety of forms; however, it has been largely aimed at increasing national GDP levels via the establishment of an industrial sector

Loans and Government-to-Government Transfers

Adam Smith states that "when the quantity of gold and silver imported into any country exceeds the effectual demand, no vigilance of government can prevent their exportation" (Smith, 436). He goes on to explain that if the supply of gold and silver within a country exceeds demand, the value of those metals will fall, and it will require more of each to buy goods; in other words, inflation will occur. In many respects, private bank lending to Third World countries was the result of a lack of demand for "petrodollars." Following the oil crisis of 1973-74, U.S. and international banks were overloaded with "petrodollars," and eager to "put this wind fall capital to productive use" for fear that they would further lose value (Ferraro, 1994: 336). U.S. banks made tremendous loans to the governments of Third World nations at low interest rates, never assuming that the governments would be unable to repay them. "By the end of the 1970’s, private banks were supplying two thirds of the total capital inflow to less developed countries (LDCs)" (Vockrodt, 1).

Present John F. Kennedy established the United States Agency for International Development (USAID) in 1961 to help him begin what he called the "decade of development" (Bovard, 1986: 2). Since its establishment, USAID has facilitated the distribution of an average of US$7.2 billion dollars of non-military aid per year, intended for development and humanitarian purposes within the Third World. Between 1994 and 1996, the United States granted approximately US$45 billion in economic assistance to over seventy countries (U.S. Census Bureau, 1998: 797). A majority of this money was granted without the expectation of repayment and intended for use in programs that would improve the economies, and therefore the standards of living for the members of the recipient nations. Following the example of developed nations, many recipient countries used their money to try and establish a more manufacture-based economy.

The Encouragement of the Production of Manufactures

Those systems which preferring agriculture to all other employments, in

(Smith, 1776: 686).

While Smith may not have had reason to make an argument for or against the transfer of funds from one government to another, he certainly did state his position on which types of enterprise would be most beneficial to the economic success of a nation. Smith’s support of the manufactures industry for the purpose of exporting goods is explicitly and repeatedly stated throughout The Wealth of Nations. He believed the production and exportation of manufactures to be the driving force for the division of labor, and therefore, the efficiency of a given economy. Smith presents the idea that "no large country, it must be observed, ever did or could subsist without some sort of manufactures being carried on in it" (Smith, 1776: 407). He goes on to explain that the "finer and more improved" of those exports should be used for export, as it is assumed that they will bring higher prices back to the country of origin.

Smith’s theory has proven to work very well for industrialized nations. This is exemplified by the simple fact that, in general, countries that have the status of being "developed" are those with a well-established industrial base. These countries have the higher GDPs, and lower levels of poverty and hunger. It can be assumed, therefore, that the fastest way for a country to raise its GDP and in turn, its standard of living (see the previous discussion of trickle-down-economics), and become more able to participate in trade is to increase its production of manufactured goods and export them. Wolfgang Sachs points out that in the current international system

"an image that the economic societies of the North had increasingly

acquired about themselves has been projected upon the rest of

the world: the degree of civilization in a country is to be indicated

by the level of its production" (Sachs, 1995: 429).

Smith points out that "in manufactures the same number of hands, assisted with the best machinery, will work up a much greater quantity of goods than with more imperfect instruments of trade" (Smith, 1776: 287). The problem with promoting a manufactures industry in the Third World proved to be a lack of the technology and national infrastructures needed to produce manufactured goods. As Christopher Vockrodt discusses in his essay "Debt Crisis in the Third World", following World War II, over 100 new countries were created as a result of decolonization. These new nations were "dreadfully far behind their former imperial leaders technologically" (Vockrodt, 1). Furthermore, as pointed out by The World Bank’s report on "Developing Industrial Technology" "the capabilities needed to deploy efficiently a new manufacturing facility are generally not present in most developing countries" (World Bank, 1995: 3).

In order to address these problems, Third World nations tried, and continue to try to gain access to Northern technological developments in order to build up their infrastructures and produce those manufactured good which are appropriate to their available resources. For example, The United States Trade Development Agency (USTDA) currently conducts a number of feasibility studies to help American companies and developing industries determine whether or not American technology will be marketable and applicable to the energy needs of the Third World. Some examples of their current studies include:

• $225,000 grant to the Ghana Tema Oil Refinery Cogeneration Power Plant for a feasibility study to install technology to meet the demand for electricity
• $400,000 grant to the Bangladesh Strategic Gas Utilization Study to support a feasibility study "to evaluate the alternatives and make recommendations for specific projects" that could utilize the country’s gas reserves
• $351,400 grant to the Federal Ministry of Energy, Mining and Industry in Bosnia for a feasibility study of the rehabilitation of coalmines (TDA, 1999: 2).

The TDA also conducts similar studies for the development of transportation and information systems. Both USAID and the World Bank engage Third World governments in the development of programs to improve infrastructures and energy supplies as well.

In order to bypass the technological and structural gap that inhibits Third World production of capital intensive manufactured good, nations have chosen to focus on goods that are more labor intensive. Many nations, especially those in Latin America and South East Asia have developed massive export markets for low-tech, labor intensive manufactures, which the United States imports in great quantity. Articles of apparel and related products, for example, occupied over US$48 billion dollars worth of U.S. imports in 1997 (U.S. Census Bureau, 1998: 808). Furthermore, of the top 20 countries from which the United States imports, 13 of them are LDCs (U.S. Census Bureau, 1998: 807). Due to the low costs and high quantities of labor available in these areas, the manufacture of such goods is profitable because it does not require expensive machinery or employee training to produce.

Many LDCs are still attempting to expand the industrial base and manufacturing capabilities within their countries through the use of foreign aid. The transfer of technology to the developing world is being highly debated, and aid money is continuously being pumped into the development of more advanced infrastructures that will potentially be able to support more industrialized economies for the future. For now, however, LDC manufacturing industries and export products are largely occupied in labor intensive, low-tech goods that these nations currently seem most suited to produce.

To review, Adam Smith’s influence on the U.S. mind set historically played a large part in how the United States dealt with Third World poverty, and continues to play a role in current policies. The United States sought to encourage wealth in Third World nations not only to provide relief to the poor, but also to establish strong new markets with which to trade. Based on the success of the Marshall Plan, the United States believed that by increasing national wealth through aid grants and loans, underdeveloped nations would be able to spark an industrial manufacture base, increase their levels of production, raise GDP levels and standards of living, and eventually become active participants in international trade, namely trade with the United States.

While the application of Smith’s theories have proven to be successful for developed nations, their extension into the developing world has resulted in anything but a success. The 1998 Human Development Report issued by the United Nations Development Project presents the following picture of the living conditions of the 4.4 billion people currently living in developing countries:

• nearly three-fifths lack basic sanitation
• a third have no access to clean water
• a fifth do not have enough dietary energy and protein
• a quarter do not have adequate housing
• only a privileged minority has motorized transport, telecommunications and modern energy (UNDP, 1998: 2).

Many nations are actually poorer than they had previously been due to the sharp rise in the interest rates of their loans. Doug Bandow points out that "fully 70 developing countries are poorer today than they were in 1980; 44 are worse off than they were in 1960" (Bandow, 1997: 1). Vincent Ferraro calculated that

"in 1970 the fifteen most heavily indebted nations had an external

1987" (Ferraro, 1994: 333).

Currently, there is a movement to forgive the debts of Third World nations, however a conclusion has not been reached. Mismanagement of foreign aid money has resulted in a dependence of the Third World on developed nations for more and more aid money just to maintain the current situation, without successful relief of poverty.

Why Did Aid Fail?

U.S. foreign aid policy has failed up until this point for a number of reasons. The debt crisis has already been addressed; any money that developing nations could be using as profit to make improvements in their systems has been used to repay debts incurred in the early to late seventies. Corruption and lack of commitment by recipient countries has also proven to be a large source of the problem. John Majewski gives a brief description of the corrupt ways in which foreign aid money was used:

"Foreign aid was also used to build expensive capital cities, such as

James Bovard uses the term "white elephants" to describe the idle cement plants, near-empty convention centers, and abandoned roads that were never fully completed after aid money was initially invested (Bovard, 1986: 1).

Another problem seems to be the continuous investment in projects, which have repeatedly proven to be useless. USAID continues to invest in steel plants, oil refineries, and aluminum factories "which can not hope to compete with well established firms, and only serve to pull labor away from the private sector" (Bandow, 1985: xix.). In the USAID 1998 Financial Audit Reports, there were US$251,000 questioned or unsupported costs incurred by non-based U.S. recipients, compared to the US$189,000 that were designated as a "better use of funds" (USAID, 1999: 54-56). Doesn’t it seem that The United States Agency for International Development should be very careful with each dollar it spends based on past problems? One would think so.

"Decades of experience demonstrate that government-to-government transfers do not generate self-sustaining economic growth" (Bandow, 1997: 1). Smith’s theory of using exports to increase national wealth to raise standards of living and create trading partners may have worked in some cases within the Third World. For example, in the case of the Asian Tigers, high- and low-tech exports initially helped to improve the living situations within the newly industrialized nations. However, in these cases, foreign direct investment by well established companies and corporations were largely responsible for the export industry’s success; government-to-government transfers and private bank loans were not.

The attempt of U.S. foreign aid policy makers to jump-start these types of industrial economies in the Third World by distributing huge sums of money amongst governments has not proven to be a success. Is it time to look for a new way of aiding the plight of the world’s poorest, and possibly make them able to participate in the world market in the long run?

The increasing wealth of the nation has little or no tendency to better the condition of the laboring poor (Malthus, 1798: 110).

For centuries, Thomas Malthus has been regarded as the primary "doomsday" economist. His predictions in An Essay on the Principle of Population were disproved by the ingenuity of mankind. Malthus claimed that "the productivity of the land impose[d] inescapable constraints upon the overall level of output attainable in any society" (Malthus, 1798: 15). He supported his thesis with the argument that society would only be able to increase in size if the produce of the land at its disposal could support the population. The main constraint on population growth would be that food production and population growth increased in drastically different proportions; means of subsistence increased arithmetically (1,2,3,4...), while population sizes increased exponentially (1,2,4,8...) (Malthus, 1798: 13). According to Malthus, population growth would reach such a level that the land would no longer be able to support it, and widespread starvation would occur. For this reason, Malthus believed that in order to ensure that everyone within a population had access to their basic needs, the main focus of a society’s labor should be on the production of agricultural goods, not manufactures for export. While U.S. foreign aid policy has historically been focused on Smith’s goals of raising standards of living by increasing national wealth, it may be time to reconsider Thomas Malthus’ suggestions and apply them to relieving poverty in the Third World.

While Smith supported the income analysis approach to poverty, Malthus would base his evaluation of poverty on the basic needs approach which argues "it is not a lack of money that causes people to live impoverished lives, it is a lack of food, shelter, education, sanitation, safe drinking water, and health care" (Ferraro, 1994: 337). According to Malthus, even if an increase in individual income did result from a rise in GDP, "the increase in the price of labor...would have little or no effect in giving the laboring poor greater command over the necessaries and conveniences of life" (Malthus, 1798: 109). Increased access to necessary means of subsistence would only occur if "the increase of stock or revenue of the society be convertible into a proportional quantity of provisions" (Malthus, 1798: 108). Therefore, in order for a nation to meet the basic needs of its population, the majority of its available labor should be employed in the production of subsistence products, not in the acquisition of wealth.

Change, Not Growth

In modern application, Malthus would have the focus of Third World development moved from a vision of growth to one of change. According to Herman Daly, the current use of the term "develop" to describe the goals of foreign aid programs would in itself be inaccurate. "When something grows, it get bigger. When something develops, it gets different" (Daly, 1990: 285). In order for the current problem of poverty to be resolved, Malthus would call Third World nations to change their approach toward development through growth and wealth. He would require that the developing world concentrate on meeting its basic needs of survival before attempting to increase its manufactured output.

In order to meet the subsistence needs of current day populations, Malthus would have to support a certain level of investment in agricultural technology, as well as the practice of sustainable farming methods. In order to supply the food necessary to support the populations of developing nations, massive amounts will need to be produced in a continuos manner. USAID has addressed this problem and shown great interest in "research to provide improved agricultural technologies" (USAID, 1997). These technologies, if used in a sustainable manner would vastly increase the level of food production possible in the developing world. Rather than investing in technology for the production of manufactured goods and the building of lavish, unused city structures, Malthus would see nations investing in the construction of well-functioning irrigation ditches and the purchase of highly enriched fertilizers.

Another program that Malthus would support would be USAID’s Farmer-to- Farmer program. This program is designed to help farmers of the developing world improve the effectiveness of their farming practices by acting as "a mechanism for transferring technology, knowledge, and skills of U.S. agricultural volunteers to farmers, farm groups, and agribusinesses worldwide" (USAID: 1999). In place of providing economic assistance intended for the development of non-specific programs, this program and others like it provide technical assistance directly to the affected individuals, insuring that the desired result is achieved.

While food security is of great importance to the implementation of Malthus’ principles in the area of foreign aid, it is important to note that Malthus would not support the direct donation of food to impoverished nations in the long term. While food aid is valuable in that it does supply relief to starvation immediately when properly distributed, if practiced in the long term it tends to

"restrict agricultural growth...by allowing the governments

Malthus believed that vice and misery exist in the world "not to create despair, but to encourage activity" (Malthus, 1798: 137). World hunger should not be addressed by creating a situation in which the poor are completely dependent upon the North, for their means of survival. It should rather be addressed by creating programs in which the poor can take an active role in their problems. Food aid on a long-term basis does not call the poor to be active - it allows them to become dependent.

Based on his belief that population must be kept at a supportable level, Malthus would require the expansion of programs to encourage family planning, birth control, and greater access to post-natal care in the developing world. These programs have proven very successful in reducing infant mortality rates, as well as reducing the number of children women in developing nations give birth to; "the LDC fertility rate in 1965 to 1970 was six children per woman. Now it’s three" (Wattenberg, 1997: 2). USAID’s 1999 Budget request included a request for US$404.6 million for its Child Survival and Disease Program aimed at reducing infant and child mortality (USAID Budget Request, FY1999). While it may seem that these programs may be contrary to Malthus’ policy for population control, in the long run, they reduce the number of children women have, and provide for a healthier, better nourished society.

Malthus saw the produce of the land in terms of a non-renewable resource. In Chapter Ten, he addressed the concept in terms of food production. As society grows, food will become more and more scarce. Because no more food could be produced, it would have to be divided among a larger number of people and the question would arise as to "whether one man should give to another...the food which was absolutely necessary for his own existence" (Malthus, 1798: 71). Eventually, one man’s gain would be another’s loss because food consumed by one would not be available for consumption by another. In order to avoid such a situation in the long term, Malthus would have to support the practice of sustainable development in the area of food production. As defined by the World Commission on Environment and Development (WCED), sustainable development "is development that meets the needs of the present without compromising the ability of future generations to meet their needs" (WCED, 1987: 48). Malthus would require programs aimed at eliminating and relieving the effects of deforestation, desertification, land degradation, and environmentally harmful products to insure the continuity of food production for future generations.

Training, Not Funding

In summary, Thomas Malthus would greatly adjust the focus of the U.S. foreign aid program to pull attention away from industrial production and increased incomes and move it towards technical assistance and education aimed at helping the world’s poor meet their basic needs for survival. Malthus proposed the idea that

respects have even the contrary tendency" (Malthus, 1798: 117).

In the case of U.S. foreign aid to the Third World, Malthus’ prescriptions may be more applicable than the continued reliance on the "remote and uncertain manner" of the benefits of fortunes of trade.

Neither Adam Smith nor Thomas Malthus published their works before the industrial revolution was fully under way. Neither had any reason to address the way the international community should address the vast and growing disparity that exists between the developed and the developing world. However, upon examination of their theories and suggestions for the improvements of society, they become entirely applicable to the different views concerning the elimination of Third World poverty. Smith’s influences have played a great role in the U.S. foreign aid policies of the past. Aid policy based on his prescriptions for economic success have proven to be unsuccessful when applied to the situations of the developing world.

It is ironic that Thomas Malthus, who for centuries was considered to have been proven incorrect, may hold the key to the resolution of poverty issues. It seems that his tactics for providing a population with their basic needs before trying to increase their wealth may prove to be a more successful way of alleviating poverty than the failed tactics of the current approach. His concept will not improve the society’s ability to compete in the international market, however it will, at the very least, allow them to feed themselves and improve their standard of living from the ground up. While it is impossible to determine the absolute success of Malthus’ prescriptions, it is time to bring them to the surface and make them the focus of U.S. foreign aid policy.

Bibliography

Bandow, Doug. 1985. "The U.S. Role in Promoting Third World Development." In Doug Bandow, ed. U.S. Aid to the Developing World: A Free Market Agenda. Washington, D.C: The Heritage Foundation.

Bandow, Doug. 1997. "Foreign Aid Costs Us More and Gains Us Less." Washington, D.C: The Cato Institute.

Bovard, James A. 1986. "The Continuing Failure of Foreign Aid." Cato Policy Analysis. No. 65. January 31, 1986. Washington, D.C: the Cato Institute.

Campbell, R.H. and A.S. Skinner, eds. 1981. And Inquiry into the Nature and Causes of the Wealth of Nations. Glasgow edition of the words and correspondence of Adam Smith, 1776. Indianapolis: Liberty Classics. Cited throughout paper as "Smith, 1776.

Daly, Herman E. 1990. "Sustainable Growth: An Impossibility Theorem." In John Dryzek and David Schlosberg, eds. 1990. Debating the Earth. New York: Oxford University Press. pages 285-289.

Ferraro, Vincent and Melissa Rosser. 1994. "Global Debt and The Third World." In Michael Klare and Daniel Thomas, eds. World Security: Challenges for a New Century. New York: Saint Martin’s Press. Pages 332-335.

Malthus, Thomas. 1986 [1798]. An Essay on the Principle of Population. London: Pickering and Chatto Publishers, Limited.

Majewski, John. 1987. "Third World Development: Foreign Aid or Free Trade?" The Freemen (July 1987). Washington, D.C: The Foundation for Economic Education.

Peiser, Andrew and Michael Serber. 1994. U.S. History and Government. New York: Amasco School Publications, Incorporated.

Sachs, Wolfgang. 1995. "Global Ecology and the Shadow of Development." In George Sessions ed. Deep Ecology for the 21st Century. Boston: Shambhala Press. Pages 428-444.

United Nations Development Programme. 1998. Human Development Report 1998. Cary, North Carolina: Oxford University Press.

United States Agency for International Development. 1997. USAID Congressional Presentation 1997. http://www.info.usaid.gov/pubs/cp97.

United States Agency for International Development. 1999. USAID Congressional Presentation 1999. http://www.info.usaid.gov/pubs/cp99.

United States Census Bureau. 1998. Statistical Abstract of the United States: 1998. (118th edition). Washington, D.C: United States Census Bureau.

United States Trade Development Association. 1999. "Promoting U.S. Technology in Mining and Minerals." January, 1999. Arlington, Virginia: The United States Trade Development Association. http://www.tda.gov/region/sectoral/mining.html.

Vockrodt, Christopher M. "Debt Crisis and the Third World: A Look Into the Growing Inequality Between The North and The South." http://www.ucsub.colorado.edu/~vockrodt/debt.html.

Wattenberg, Ben. 1997. "The Population Explosion is Over." The New York Times. (November 23, 1997), Section 6, page 60.

World Bank. 1985. Developing Industrial Technology: Lessons for Policy and Practice. Report Number 14983. Washington, D.C: The World Bank. http://www.worldbank.org/html/oed/14983.htm#technology problem.

World Commission on Environment and Development. 1987. Our Common Future. Oxford: Oxford University Press.