Wednesday, July 19, 2006

Why Free Trade Is So Much Better Than Foreign Aid

Illustrating again how the best way of reducing world poverty is free trade, it is reported how salaries in India's software service firms is rising at an annual rate of 15% in nominal terms or more than 10% in real terms. Previously, there have been numerous stories ( like this one ) about how real wages in China have similarly risen at more than 10% per year, illustrating that free trade and globalization is beneficial for the world's poor.

Compare this to the various African countries who's economies are dependent upon foreign aid, who were stagnating or even falling behind until the recent commodity price boom. Free trade have proven far more effective than
foreign aid in reducing poverty. And unlike foreign aid, which of course hurts the donor countries, free trade is also mutually beneficial.

In some cases, foreign aid also subsidizes destructive wars, like in the case of the Palestinians. For free trade to provide any benefit, people must engage in productive activities, whereas being an aid recipient requires nothing, and in fact relieves the recipients of the need to produce food and other positive goods. If the Palestinians hadn't received any "humanitarian" foreign aid, they would have been forced to produce their own food (In say some of the evacuated Israeli settlements, which before the evacuation had highly productive agricultural production but which now produces no food) and wouldn't have had the time or the resources to shoot Quassam rockets into Israel or kidnap Israeli soldiers, which in turn of course would have meant that they wouldn't have received the Israeli retaliation that they now complain about.

In short, free trade encourages productive behavior, foreign aid is at best useless and in some cases encourages destructive behavior.


Blogger Jonathan said...

thanks so much for the post!
I completely agree with your view point.

8:37 PM  

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