Development or just poverty reduction?

Many of the debates about foreign aid and development assistance seem to pivot on different visions of the goal: development or just poverty reduction?

  • Remittances from labor migration certainly help poverty reduction in the sending country, but do they tend to help or perhaps even retard development?
  • The discovery of natural resources in a developing country will lead to some poverty reduction (at least for the elites) but does it tend to help or retard development?
  • Within the US, gambling casinos on Indian reservation land have certainly helped reduce poverty but will they also lead to economic development for the Native American peoples?
  • Microfinance programs seem to often provide a dignified form of poverty reduction but can they even remotely live up to the hype as a road to development?

These questions hardly make sense unless one makes some distinction between poverty reduction and development. Too many commentators on aid, both lay and professional, seem to slip into a discourse that takes poverty reduction as the end goal of foreign aid and development assistance, and then debate about specific programs is rather pointless without refocusing on this basic distinction.

Development as a social learning process

As we see in the rise of China, economic development certainly leads to poverty reduction; it is the reverse sequence that is problematic. The concept of development can be better delineated by looking at what it is and what it isn’t. Basically, development is a process of social learning to understand and master the industrial technologies and social systems of a modern society. Learning about a technology to deploy it and buying a device that uses the technology are two different things. As emphasized by the management thinker, Russell Ackoff, development is not about what one has but about what one can do given the material means.

We might imagine do-gooder aliens bringing us some marvelous technical device that we might widely use and even depend upon—all without any understanding of how it works or any ability to make it on our own or repair it. We would have acquired the semblance and artifacts of technological development without the substance. This parable repeats itself in a more worldly form when people use money acquired from natural resources, remittances, or casinos, or money acquired from loans, to “buy” development. As the late Jane Jacobs put it in her 1984 book, Cities and the Wealth of Nations:

But that process, the actual process of developing, is thwarted when backward cities or their nations try to rely instead upon simpler two-way dead-end trade with more advanced economies, whether by buying “development” as the Shah [of Iran] or Peter [the Great] did, or by acquiring “development” on credit or through gifts. [p. 148]

In contrast, she considers the social learning process by which the Japanese improvised and learned in the early twentieth century to produce bicycles, sewing machines, radios, and the panoply of modern goods—rather than trying to buy the artifacts of development without the social learning process.

At the time when the Japanese developed their own bicycle manufacturing, the bicycles they imported were being made in highly integrated, huge, complete factories in America, as the sewing machines also were. Had the Japanese tried to import complete factories for these purposes, whether by buying them outright or obtaining them on credit, they would have lost the opportunity of developing their own producers’ goods and production methods, and the bicycles, sewing machines, and so on, would have been more expensive as well, probably too expensive for Japanese to buy. Instead they used their trade with currently more advanced economies only as a springboard for their own development. [pp. 148-9]

The resource curse

The Japanese example is also appropriate to illustrate the theme of the “resource curse” since Japan developed in spite of having few natural resources. An abundance of natural resources may well function as a “curse” to hinder development. There are several mechanisms at work here.

  • One is the corruption of government and the elites brought on by abundance of natural resource revenues. Government can be even less responsive to the population when it is propped up by revenues from oil, gas, gems, or minerals.
  • Another reason, also known as the Dutch disease, is the appreciation of the local currency (which hinders other export industries) when foreigners have to buy the currency in order to pay for the resources—but this is usually avoided by doing the whole transaction in dollars or some other reserve currency.
  • Another reason is that when a government flush with resource revenues devises a development plan, it will tend to be some attempt to “buy” ersatz development rather than to fund the longer process of social learning that is central to development. For instance, will the revenues from oil or casinos be used to fund college educations for young people and the development of businesses independent of oil and casinos, or will it be used to buy the “best” consumer goods, glitzy real estate development (Dubai!), and businesses to be operated largely by others?
  • And finally there is a type of generalized moral hazard that underlies the resource curse. Technically, “moral hazard” refers to a “disconnect” (e.g., excessive insurance) between actions and consequences so that people are sheltered from the adverse results of their actions or inactions. Resource revenues provide such a disconnect; they shelter people in the short run from the untoward results of their activities. When one gets an automatic income from natural resources, casinos, trust funds, or the like, then is the response likely to be: “Now I can fund a good education” or “Why bother?”.

Labor Migration: Poverty reduction but not development

A related set of problems arise from the poverty reduction due to remittances from labor migration. The remittances are not as “automatic” as natural resource revenues but many of the same factors in the resource curse still apply. And there are other problems. Why should a government foster local development when the unemployment and poverty problem can be “exported” by labor migration to a developed country? Why develop manufacturing for export-driven industries if foreign currencies can be obtained from the remittances by “exporting” relatively-unskilled labor? Why should young people go through an extensive educational process to take part in local development when they can quickly get relatively large incomes from doing the 3D unskilled jobs (dirty, difficult, and dangerous) in a nearby developed country?

For reasons such as these, labor migration is a poverty reduction program that is not very developmental. The unspoken “Devil’s deal” being offered is for the developing country to forsake much of its own development (for the reasons outlined above) in favor of becoming a long-range bedroom community for the unskilled workers to do the dirty, dangerous, and difficult jobs in a nearby developed country. Thus the labor migration issue is a good example to illustrate the difference between development and poverty reduction, and it even shows how successful poverty reduction can lead to something like an anti-development trap.

Some countries, such as post-earthquake Haiti, may be so bad off that this Devil’s deal is the best deal they have, but it should not lead us to think that labor mobility is an important road to development rather than just poverty reduction.

These arguments about labor migration were developed at some length along with citations to the extensive literature in World Bank Policy Research Working Paper #3117 that I wrote while at the World Bank and were later republished in a short article in Oxfam’s Development in Practice journal. The WB report can be downloaded here while the DiP paper can be downloaded here. The arguments about development assistance are covered in my 2005 book: Helping People Help Themselves: From the World Bank to an Alternative Philosophy of Development Assistance. Foreword by Albert O. Hirschman, University of Michigan Press.