17 November 2017

Development through Aid or Trade? – On the Intellectual Legacy of Peter Bauer


 

On the Intellectual Legacy of Peter Bauer

 

The towering life achievements of certain eminent Hungarians remain curiously unrecognised. Péter Bauer, referred to in economics circles as P. T. Bauer, or as Lord Bauer in British politics, is one of those. His name will not ring many bells among young Hungarian economists today. But this is curious; few Hungarian-born economists have ever been elevated to the Lords. In a country that is so keen on being recognised internationally for national merits and achievements, noted personalities of Hungarian stock, whether they regard themselves as Hungarian or not, deserve more acknowledgement.

There are fortunately many great economists of Hungarian background who have gained fame around the world. I had the honour and sad duty to pay tribute to Alexander Lamfalussy, born Lámfalussy Sándor, later Baron Lamfalussy (1929– 2015) on the pages of our sister journal Magyar Szemle (2015, No. 7/8) when he passed away. Although he declared himself a Belgian (well, a Wallonian, to be exact) in his autobiography, I as a Hungarian take the liberty to still regard him as a Hungarian economist. It is well known that Lámfalussy hosted and entertained major Hungarian writers, like Illyés and Pilinszky in the 1970s during their visits to Belgium, and was an economic advisor to Prime Minister József Antall (1990–1993). And there are several others. The great Hungarian economist Miklós Káldor (1908–1986) – that is Nicholas Kaldor, Nicki Kaldor or Baron Kaldor for others –, has earned an undisputed place in the Pantheon of Hungarian economists. Both Kaldor and Lamfalussy are read extensively in Hungary, either in English or in Hungarian translation, and their views resonate in our contemporary economics. Kaldor was much older but his memory lives on in Hungary; it is nourished for example by the Corvinus University where we hold an annual Káldor Conference offering the Káldor Prize to an outstanding Hungarian economist for important contribution to economic policy research or teaching.

Káldor’s life is known through books, memoires and the media. As a young man he attended university in Berlin in the 1930s, then continued his studies at the London School of Economics. Later he became a Cambridge professor and a prominent figure in British intellectual and political life. An internationally renowned economist, Káldor was much more than an academic: among his various duties, he served once as chief economic advisor to the government of Harold Wilson, teamed-up, interestingly enough, with another Hungarian: Tamás (Thomas) Balogh, later Baron Balogh (1905–1985).

I did not have the chance to meet Káldor, but had the good fortune to attend, as a young researcher and lecturer, an academic event in Budapest where Thomas Balogh gave a lecture to Hungarian economists which I can still vividly recall. During the Q&A session, an older professor without noticing it addressed the speaker as Comrade Balogh, as was typical at the time within the nomenclature of the People’s Republic of Hungary. We, younger staff, chuckled. But Balogh, a Labour Party member, took it quite naturally.

Compared to Káldor, T. Balogh is somewhat less known in present economic circles in Hungary. According to Wikipedia, he was the son of a wealthy Budapest Jewish family. Young Balogh studied at the Budapest Lutheran Gymnasium, the famous secondary school of the city, considered “‘the Eton of Hungarian youth”‘. This was also the school of John (János) Harsányi, another eminent economist who as an American professor received the Nobel Prize in 1994. Tamás Balogh enrolled at the universities of Budapest and Berlin, then took a research position at Harvard University. He worked in banking in Paris, Berlin and Washington before going to England where he became a lecturer and later Reader at Balliol College, Oxford, and was also the economic correspondent for the New Statesman. As mentioned, he became an economic advisor to Harold Wilson’s Cabinet office following the 1964 Labour Party victory. Balogh was created a Life Peer as Baron Balogh, “of Hampstead in Greater London”.

It is interesting to re-read his book Unequal Partners (1963) in which he formulates his views on Europe and the UK. As a Socialist, I have always disliked and distrusted the so-called ‘Common Market’ concept of uniting Europe… I rely on the robust common sense of Parliament (not in much evidence today) to take us out of the common market – Rome treaties or not.” This is a clear message from a Labourite. At the same year, by contrast, Alexander Lamfalussy, a young economics professor in Belgium, offered a very different view in his own book on the relationship between Britain and the then six Common Market members (The United Kingdom and the Six. An Essay on Economic Growth in Western Europe, 1963). This is what he thought: “… I do not regard the Common Market as a mythical land of promise that will (automatically) banish all economic troubles from its member countries, I do believe that the Common Market is a good thing, that 1st January 1958, is turning point in Western European history, and that it would be in the interest of all parties if Britain joined the Community as a full member.”

But let us get back to P. T. Bauer, the least known of these important international personalities. His books, to my knowledge, have remained untranslated in Hungary. The economics professor László Csaba notes in his monograph on the history of Hungarian economic thinking that Bauer is not much known in contemporary Hungarian economics, unlike Káldor and Balogh, or two outstanding personalities of the American economic policy community: Vilmos (William) Fellner, chief Economic Advisor in the Ford administration, and Béla Balassa of Johns Hopkins University, an influential figure shaping the World Bank’s development policy. This relative neglect cannot be ascribed to intellectual inferiority of those concerned. According to the valuation of Otto Hieronymi, the renowned Hungarian economist living now in Switzerland, P. T. Bauer belongs to the rank of the twelve to fifteen economists of Hungarian origin who had gained international standing within the Western economics community in the decades following the Second World War.

There must be thus other reasons. One of them could be what Bauer himself mentioned in a comment on the Tribute that was published in his honour by the Institute of Economic Affairs, a Conservative think-tank, in 2002. Namely: he did not really have followers. This is so mainly because his views frequently contradicted the economic and political mainstream of that era. To quote again Hieronymi: “Bauer was rather critical of the leftish, pretty anti-market theories of Káldor and Balogh, and particularly of the statist views of Mr and Mrs Myrdal, the Swedish economists – and he was right.” Let us add that the oeuvre of Gunnar Myrdal who advocated central planning as the best instrument for the advancement of the Third World was among the very firsts to receive the Nobel Prize for economics. True, the social democrat Myrdal had to share the Prize with Friedrich Hayek, the powerful representative of free market economics. But what is important in the Bauer case is that Myrdal and other economists with leftish views had a decisive influence on the shaping international aid programmes and on development policy concepts in those years, as well as for some time to come afterwards.

Therefore Peter Bauer had to formulate his professional views against a pretty strong mainstream of that era. But this all the more justifies interest in his life and thoughts that – as always with profound thinkers – offer messages for posterity. Interesting hence to note that the Hungarian version of Wikipedia is silent about him. The only Péter Bauer listed is a namesake, a third division soccer player...

Bauer’s father was a Budapest bookmaker who perished in the Holocaust. Péter first studied law for a year at Budapest University, and following some friendly advice he moved to Britain in 1934 to read economics at Gonville and Caius College, Cambridge, where he later became a Fellow. In his recollection he admitted being short of money and lacking adequate English. Still, as he added, when he presented himself at six colleges, “five accepted me immediately, and the sixth the next day”. Well, those days were different. The young student attended a few of Keynes’ lectures. As he remembered: “He didn’t give many lectures... I was a member of the society called the Keynes Club, which met at Keynes’ room twice a term, and which consisted of some dons and some promising undergraduates. Joan Robinson supervised me for a year. She was a very good supervisor. She was my supervisor, but she gradually came very much to dislike me because I was then becoming market oriented, and she was totally hostile to the market.” This characterisation of Robinson sounds justified to me; Deirdre N. McCloskey, in her impressive book Bourgeois Equality (2016) refers to Joan Robinson as a “leftwing Keynesian, and later Maoist economist”.

McCloskey knows well and appreciates the oeuvre of P. T. Bauer, although she also has critical remarks. The subtitle of her book, by the way, is telling and has a bearing on our topic: How Ideas, Not Capital or Institutions, Enriched the World. The issue of economic advancement was also in focus in the research of P. T. Bauer, while he also acknowledged the critical significance of the role of ideas and culture. He worked at first for banks, then conducted his pioneering study in South-East Asia, in particular on the rubber industry in the 1940s. West African Trade, his classic book of 1954, challenged many of the central tenets of mainstream development literature. He published most of his academic research while at the London School of Economics and Political Science where he taught from 1960 to 1983. In 1983, he became a life peer.

I myself heard of him a lot in Ghana in the 1980s while working as an advisor for the United Nations Development Programme, but did not have the chance to meet him in person. Bauer came to Hungary much later (by that time as Lord Bauer), in the exciting months that led up to the regime change. Otto Hieronymi recalled the three-day meeting of local economists and those living abroad held in a government guesthouse in Budapest just before the first free elections. Hieronymi himself was among the Western economists of Hungarian origin, and still recalls how Bauer, who came to Budapest for the first time in many decades, was dismayed at the depressing scene of neglected buildings and streets of the capital.

But what was it that put Bauer on a collision course with the development mainstream of his time? Or to put it differently: what was the development mainstream of the era? He summarised the credo of the then received wisdom in his book Reality and Rhetoric (1984): external trade is at best ineffective for the economic advance of less-developed countries (LDCs), and more often it is damaging. Instead, the advance of LDCs depends on ample supplies of capital to provide for infrastructure, the rapid growth of manufacturing industry, and the modernisation of their economies. The capital required cannot be generated in the LDCs themselves because of the inexorable constraints of low incomes: funds must come from donors. Bauer himself, however, found very different patterns for success in the Caribbean, Malaysia, Ghana and India: progress through trade. Wherever the elementary rules of law were respected, the merchants and local businesspersons, even if their formal education lagged much behind, reacted to demand signals the same way as businesses in advanced Western countries.

He questioned many assertions of well-intentioned but ideologically biased intellectuals and officials of some Western countries and international aid agencies, such as those made about the causes of economic backwardness. Many believe, he wrote, that the prosperity of relatively well-to-do persons and societies is always achieved at the expense of the less well off – i.e. that incomes are not generated by those who earn them but are somehow extracted from others, thus economic activity is akin to a zero-sum game, in which the gains of some are always balanced by the losses of others. This ideology, shared by both those on the political Left as much as on the Right nowadays, is mistaken. The classics of economics since Adam Smith and David Ricardo have taught us that the gain from trade of one of the parties will not be miraculously cancelled out by a similar loss of another party. Voluntary trade is, in modern parlance, not a zero sum game but a positive sum game.

Take note that there is no empirical or theoretic foundation to a claim that the overall positive welfare balance of voluntary trading transactions would result in a proportional distribution of the gain among the trading partners. What one particular party to a deal gains is not stationary, as the production conditions and costs change, and prices move, and various other factors fluctuate, even simply luck or the lack of it shapes the size of the gain. But trade is important; Bauer found in various real life cases that those developing countries whose international trade links had increased tended to record dynamic economic growth. In contrast, the countries that stayed outside global trade flows remained poorer. They may have received generous international (bilateral or multilateral) aid, yet most of them failed to achieve sustained economic progress. Whether the country is an aid-recipient or its economy is driven by domestic and international trade instead, the gain – it is important to note – will not be shared equally among the numerous stakeholders. The government of a Third World aid-recipient country tends to become a winner through its additional instrument of power: distribution of the aid. The nature of such an instrument tempts top politicians and those with preferential links to them to acquire rent-like income. Once empowered by the additional control device, i.e. the right to allocate external aid, the government loses incentives to concentrate on its very duties to society that would legitimise its legal use of force. In fact, international aid strengthens the state bureaucracy vis-à-vis the society and the economy. The process of allocation of international transfers aggravates the politicisation process of the society, so typical anyway in the Third World.

Bauer also noticed that the recipients tend to become ungrateful. The growing volume of Western aid doled out to the developing countries in the post-World War Two decades failed to strengthen the pro-Western attitude of the public, even less of the governments that had, in fact, profited a lot from their aid- distribution position. On the contrary, some LDC governments had skilfully played the Western guilt card in order to receive more funds. The prospect of aid encourages governments to seek them through blackmail, rather than to consider the potentialities of change at home. As he concludes (Development Aid: End it or Mend it, 1993): such attitude can spread from the government to the population. This is the very attitude that would hinder development in the so- called developing world.

He did not hesitate to lay the blame for the spread of Western guilt and anti- market sentiments upon Western intellectuals, and on the persons and institutions involved in the allocation of international aid. Not surprisingly, Bauer was not loved at all in progressive circles. He was, in fact, depicted as an extreme marketeer, insensitive to income inequalities. Still, he did not seem to be deterred by this labelling and stood by the market solutions. As for the issue of income inequalities, he certainly did not share the then mainstream. He added in an interview to the Institute of Economic Affairs (2002) that we should not talk about inequalities, but differences, because difference is a neutral term, and inequality is a loaded term. Inequalities often are equated with inequity. This leads to the idea that the poor are poor because the rich are rich, i.e. that the rich have extracted their incomes or wealth from the poor. He added: people accept the idea that we all differ greatly in athletic ability, musical ability and mathematical ability; but people do not seem to realise that there are also great differences in economic qualities, particularly in the perception and utilisation of economic opportunities.

Being an advisor and a friend to PM Margaret Thatcher made him even more a target of the Left who saw him as a reactionary and market fundamentalist. The Guardian described him in its obituary as “the shrillest Thatcherite spokesman against development aid for the Third World”, and concluded that “his views were old-fashioned as well as rightwing”.

I however found his articles and speeches much more nuanced, and his real-world experiences gave weight to his statements. In his maiden speech he expressed gratitude for becoming a member of the House of Lords, adding that “there are many others here, some even from my native Hungary, to confirm that Britain is an open society, as it has been for centuries”. In the same speech he did not mince his words about the welfare state as such, and particularly about the British welfare state:The fundamental issue is not economic. It is moral. I say this although I am an economist. The issue is the responsibility of people to manage their own affairs.”

So far we have discussed global issues such as development strategy or the welfare state, but Bauer’s arguments have a direct bearing on our time and on the Central Eastern European region as well. His statements concerning the role of external transfers of funds are particularly thought-provoking here and now. Do so-called converging nations of the CEE region still need aid? What are the lessons of the Marshall Aid in this context? He lived long enough, fortunately, to witness the regime change. He offered his thoughts about the case of his native Hungary and other former planned economies concerning external aid. Although he certainly was very critical of the practice and ideology of external aid to modernise economies (in contrast with growth through trade), he did approve of the Marshall Plan, recalling the particular situation of Europe right after the devastating war. In war- stricken Europe the American aid was not meant to fund some catch-up efforts but to ease reconstruction, with predetermined goals and set time limits: under such conditions, the Marshall Plan worked well. As he put it in an interview: there was no comparison at all between foreign aid and the Marshall Plan. The economies of Western Europe had to be restored, not developed. The economies of the so-called Third World, to use a fashionable cliché, had to be developed.

Concerning the formerly Communist-run countries, his position was not ideological or rigid. In his essay of 1993 (Development Aid. End it or Mend it) he acknowledged the need for some Western aid: the new governments in Eastern Europe and the constituent republics of the former Soviet Unionface formidable obstacles resulting from the legacy of decades or generations of totalitarian command economies. Attempted reforms engender popular discontent, which is exacerbated by a shortage of consumer goods including necessities. In such conditions, subsidies having a firmly limited period of operation and linked to the pursuit of reformist policies may be helpful or even necessary for the survival of the reformers. This, in turn, may serve the humanitarian and political interests of Western donors.”

Let us here offer a comment: life took a different direction. When Lord Bauer made the above statement about the need to support governments and people that embarked on a heroic task, in the critical years of the early 1990s, foreign aid of marginal proportion was only offered for the region. I had the chance to discuss the topic on these pages (Why There Was No Marshall Aid after 1990. Vol. V, No. 5, 2014). There existed indeed a very strong case for Western aid (yes, aid, and not just loans and IMF funds under strict conditionality) as well as preferential access to Western markets – not to be reciprocated for some given period of time. But this was not what history brought to us. One of the explaining factors behind this strategic mistake is, I guess, the overestimation of the level of advancement and competitiveness of the former “Eastern Bloc”. This was a case of professional miscalculation. But there was another mistake, and I would call it a political miscalculation: the Western political class did not realise the necessity of financial support of the nations of the CEE region in their efforts to return to democracy and market order.

The anti-aid P. Bauer could support an aid programme limited to the medium term for the nations facing the particular challenges of the regime change – lest public disenchantment undermine the capabilities of the first freely elected governments. Yet the West remained pretty passive, and the first governments could not avoid their fate – it is now a closed chapter in history. But the second decade of the transition process turned out to be totally different. From the middle of the 2000s, massive aid of long term nature flew into the countries of the region in the forms of EU convergence funds and common agricultural policy funding. And the distribution and utilisation of those funds turned out to be mostly in line with the critical analysis and gloomy forecast of P. Bauer: we now witness the politicisation of life, corruption, the usual ungrateful psychological attitude towards the donors, and the survival of previously held, outdated social attitudes towards “cheap money”.

So mistakes after mistakes. Hardly any financial support at the very start of the transformation of the post-Communist societies (mistake one), and then later unnecessarily generous gifts from Western taxpayers (mistake two). There have been rather unwise decisions – and they cost a lot. Guilt, as detected by Bauer in other cases of transfers, did not play a role in the second decision this time. The West did not feel guilty about the region. There are some people in Eastern Europe, and in large numbers at that, who would expect some guilt from “the West” – whatever this term means today. But the peoples of Western Europe, and their political classes, do not entertain such feelings – with perhaps the exception of the Germans – towards the nations of Central and Eastern Europe. People from the former colonial powers of Europe obviously look at the CEE region differently from their former colonies. This is why the recent declarations from Polish party circles to make Germany pay for crimes committed three generations ago will most likely not move much ground.

This is now a very different Europe. Why former planned economies did not receive much funding before 2004 and why they are awash with convergence funds now has its own logic. To start with, at the time of the accession of the former planned economies the European institutions had been running aid programmes (under the name of convergence and cohesion policies) for the Mediterraneum and for Ireland, as a consequence of earlier enlargement of the original Commonwealth of Six. Later, when the Union chose to carry on the policy of “ever closer union”, with a growing number of member states, who happened to be at widely varying degrees of economic advancement, the concept had to be supplemented by massive transfers from the better-off to the less advanced, on both ethical and practical grounds. These mixed motives and considerations had led to the mechanisms and institution of international development transfers within the much enlarged European Union.

Who knows what Peter Bauer might have thought of the present European situation? But most of his critical observations gained in the practice and forms of development aid in Third World may be well applied to our present case. The convergence or catch-up process of most new member states has been, according to macro data, rather uneven. The speed of economic growth in our region has certainly been not impressive enough to satisfy the people of the “convergence countries” dreaming about catching up to richer neighbours in their lifetime. This is, and was, obvious. In one of his last interviews with P. Bauer, the partner raised the issue: if Bauer is so sceptical about the efficiency of external aid in the hoped- for convergence process, what advice he would give to less-developed countries that hope to compete these days with advanced Western economies? Bauer’s reaction was that these nations should benefit from the presence of Western economies: “They don’t have to compete with them. They can take advantage of the presence of advanced Western economies which provide sources of raw materials or industrial goods, and advanced technology. It’s like what the open frontier was to America in the early days of western American colonisation.”

There is no room here to elaborate on the complexity of these problems and it would be pointless to second-guess the probable political and professional position of a scholar who is no longer with us. What can be said is that if shortage of capital were responsible for underdevelopment, then this barrier could be easily removed through massive flows of international loans and incoming Foreign Direct Investments since we now live in a world of abundance of funds. Knowing that, his interlocutor raises instead the question of the potential lack of human capital. At that juncture, P. Bauer rather than just nodding approvingly, interjected that he never used the term human capital. “I think although it is very widely accepted, it is not a fortunate expression. For example, in South- East Asia, particularly Malaysia, the immigrant Chinese (who are penniless as well as illiterate) can hardly be said to contain much capital, in the generally accepted sense of the term. They have the right motivation for material progress. I don’t like the term human capital. You see, capital is a man-made instrument of production; that is not the case for human beings.”

These thoughts are interesting, provocative and go against the mainstream. But they do not amount to curiosities. It is enough to quote the trilogy of D. McCloskey which names civic values, virtues and thoughts as the final causes of progress and growth. Soon an academic event will be held in Budapest in honour of the life and oeuvre of P. T Bauer, or Péter Bauer. We have good reasons to dwell on the drivers and movers of development here, in the periphery of Europe. Our society cannot spare the efforts of such an analysis, as the lessons of the past decade and the ongoing changes in Europe provoke serious questions. Shall we still count on the material support of the European Community in our development process? Have the Hungarian state and the Hungarian economy utilised efficiently the inflows that have amounted to four to five per cent of the GDP annually? A hint: the average growth rate of our economy has remained below two per cent in the past ten years.

If recent trends continue, the better-off new member states like the Czech Republic and Slovenia will come close to graduation from the net recipient status during the next seven year financial framework. The fast growing Slovak, Polish and Baltic economies will also receive less from the convergence budget of the European Union, due to their impressive growth performance from the next medium term EU budget. Such changing circumstances may have an important impact on the attitude of their populations and their political classes toward countries in heavily net recipient positions (such as Hungary or Bulgaria). Also, the decreasing size of the cheques from the common European budget will most likely influence their attitude toward the Union as such.

But let us return from prognostics. We face already serious challenges as trends evolve in Europe and in the world. It is the duty of the present generation of Hungarian scholars and decision makers to know of the oeuvre of Bauer and Káldor, Balassa and Lámfalussy and several other eminent Hungarian scholars, and to gain inspiration from their thoughts. Each generation must of course find the best possible answers to the questions raised by their era.




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