Helping Poor Countries Jude Wanniski April 11, 2000

To: President Bill Clinton
From: Jude Wanniski
Re: The Growth Alternative

Well into your last year as President, you are still wrestling with the problems of poverty in the undeveloped world. If anything, there is more poverty, disease and social unrest around the world today than when you became President. Now I read in Sunday's NYTimes that you are forced to oppose the World Bank's proposal to lower tariffs on imported goods from the poorest and most indebted nations. As David Sanger wrote, you do so out of "fear that it would inflame sentiments in Congress against [your] efforts to win passage of an African trade bill and give China permanent normal trading status." I heartily agree with your decision, but only because the proposal basically asks the poorest Americans to shoulder the burden of aiding the poorest nations. Sanger wrote: "The proposal...could provide a huge economic advantage for those developing countries, going significantly beyond the Administration's efforts to get Congress to forgive their debts as they undergo economic reforms." He said officials of your administration "feared that if they made such a commitment, it would undercut the delicate support for the Africa trade bill, which has been stuck in Congress, and that any promise of further opening America's markets could undermine the huge effort to persuade Congress to normalize trade with China." An Administration official said, "The best way to lift nations out of poverty is through trade. But doing the right thing here is not easy. We can't even get far more modest measures through the Hill."

Please focus your attention on the assertion that "The best way to lift nations out of poverty is through trade." It is a widespread error made by almost all professional economists, including those in your administration. It has thereby kept you from finding a politically acceptable way of bringing prosperity to the 80% of the world's people who live out their lives with the wolf at the door. I'm sure you have heard the term "export-led recovery." It is a term Keynesian economists have used since the Great Depression as one of two possible ways to climb out of an economic decline. The other way is to "go for growth," which really amounts to making changes in your internal fiscal and monetary policies intended to expand the economy from within. For poor countries, this is almost always the best way to proceed, but the economists of the World Bank and International Monetary Fund almost never consider it. Why? To a Keynesian, it invariably means increasing spending, but if a country is poor, how can it spend? On the other hand, an "export-led expansion" that increases exports to the United States by lowering tariffs here automatically means that Americans who are now making goods to be imported will become unemployed. It is in most cases a zero-sum solution, where poor people abroad benefit at the expense of poor people at home. You want to do the "right thing," Mr. President, but this way means organized labor is on your back.

A classical (supply-side) economist instead thinks of a country as being impoverished because there are factors which are preventing their own people from producing and trading WITH EACH OTHER. Take a country like Haiti, which is the poorest in our hemisphere. Your administration spent enormous resources on Haiti these past six years, but the island nation is no closer to economic growth than it was when political strife forced you to intervene. Imagine, though, that every country on earth disappeared, except Haiti. How would an economist go about getting Haiti to grow if it could not do so by trade, there being no foreign nation with which it could trade? Once you focus on the problem in this way, you can begin to look at ways by which poor countries can "go for growth " by eliminating factors that are preventing their own people from producing and exchanging the fruits of their production. One way is to examine the tax system, to see if tax rates on labor and/or capital might be higher than they need to be to produce a revenue stream required by the government. If tax rates are producing little revenue anyway, there is a good chance they would produce more if they were lowered. The IMF and World Bank economists never, ever take this into consideration, Mr. President. It is what the "Laffer Curve" was all about in the Reagan administration. The lowering of rates that had swelled as a result of the great inflation of the 1970s did produce a great increase in the level of wealth in the United States. As the lower rates invited more Americans to produce and trade with each other, our IMPORTS also soared, as the rest of the world became eager to invest their own talents and energies in our booming economy. They sent us more goods than they bought from us, happy to make up the difference by accepting stocks and bonds of the U.S. Our economic growth has not been "export led," as has been clear. We went for growth and got it in a big way.

I'm sure you would find, Mr. President, that if you carefully examined the structure of the Haitian economy, you would find that it could be easily fixed, with a small number of changes in the tax and regulatory structure, and a monetary policy appropriate to a nation that wishes to operate without inflationary or deflationary monetary forces. You may be surprised to learn that when Haiti was coming unglued early in your administration, I urgently advised then Senate Minority Leader Bob Dole to urge you to send a supply-side delegation to Port au Prince, for this purpose. It was at the same time I urged him to suggest to you that General Colin Powell be sent to Haiti, to try to head off a military conflict and a need for us to invade the island. Senator Dole did make the latter suggestion, which you took. I don't know if he ever had an opportunity to suggest the former, as I did offer the idea that Jack Kemp would be a natural to lead the economic fact-finding group.

It is not too late, Mr. President. You could easily manage this initiative, and it would not give your natural supporters in organized labor any concern that they would be paying for Haiti's growth. The initiative would be a great success, I would predict, and its recommendations would be useful for every other country in the world that is having growth problems because of an inappropriate focus on trying to grow through external trade. If a poor country does concentrate on supply-side solutions to internal growth, it becomes a magnet for foreign capital and runs trade deficits as a result. The best development model is that of the United States, which went from a standing start to the greatest economic power on earth by going for growth.