Nobel Prize-winning economist: Western financial aid is poisoning poor countries’ future

The World Bank president says there is a chance to eradicate poverty in just 15 years, but considering the state of the planet today, can one believe this? The gap between the rich and poor is growing every day, and even rich countries, such as the US and European states, are seeing more and more poor and homeless people, while those few at the top enjoy a life of luxury and immense wealth. Many pin their hopes on technology, promising that machines will save the poor, but is this true? What instruments should we use to fix the world’s economy, and can money buy you happiness? We ask a Nobel Prize winner in economics, best known for his work on inequality. Dr Angus Deaton is on Sophie&Co today.

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Sophie Shevardnadze:  2015 Nobel Prize winner in economic sciences, Princeton professor best known for his work on consumption and inequality, Dr. Angus Deaton, welcome to the show, it's really great to have you with us, sir.

Angus Deaton: Thank you.

SS: So, your Nobel Prize winning research, like you've said, on poverty, focuses on individual people explaining why people are poor. Have your findings made an impact on actual policies? Do governments listen to what you're saying?

AD: certainly think that governments listen to what I tell them about measurement, and it seems to me that if you can't measure things, you have no idea whether the policies that you're undertaking are really any good and whether they are doing any good. So, what you should think of me as doing is trying to keep people honest, whether they're governments or other academics or the press who write about these things.

SS: Now, in your Nobel speech, you spoke of luck and you've said that those who are lucky enough to be born in the right countries have a moral obligation to reduce poverty in the world. Which countries need to take more responsibility exactly?

AD: Well, I think you ought to find out first how we are to do this. So, I said that people have a moral responsibility, but I think people are stepping up and trying to fulfill that moral responsibility in the wrong way by giving large sums of aid to poor countries with very small GDP and giving it to their governments. It is not something that's likely to help very much.

SS: But who exactly should take this responsibility? Do you have anyone or anything in particular in mind? Governments, individuals, organisations like EU, corporations?

AD: No, I think it's individuals and I think that individuals have to press their own governments into doing these sort of things that make sense from their point of view. And that's why I wrote my book, "The Great Escape" for instance, to persuade people to pressure their governments in somewhat different ways.

SS: Now, as you said, one of the instruments to fight global poverty is direct foreign aid to poor countries. Now you said that the aid is more about what's going on inside the donor country than inside the recipient country - what exactly do you mean? Are governments giving out aid just to look good in the eyes of their voters?

AD: Well, that sometimes happens, I'm sure,, and for ordinary people who are desperate to help the poor people of the world, they need to make sure that they're doing it in a way that help as opposed to a way that just makes them feel good or makes their elected officials feel good. You can't really blame elected officials for doing what makes their people feel better.

SS: Do money donations help?

AD: It depends how they're made and I think there's lots of things that money donation would help for, but there's lots of things where they wouldn't help.

SS: What form of money donation do you think is the most efficient?

AD: Well, I think that form of money donations is those that would help, for instance, do more research on diseases that affect poor people in the world and don't affect the rich people. Donating to things like that would be a really good idea.

SS: I want to talk a bit about aid money still. However misspent it may be, does reach the ground level - food is given out to the poor people, schools are being built, water wells, hospitals, et cetera - do you think that should be scrapped?

AD: Some of the aid does that, a lot of aid doesn't do that at all. A lot of it goes to the government. A lot of U.S. aid to Egypt, for instance, effectively gets spent for military expenditure. There's a lot of military expenditure in aid, so that is the first thing. A lot of the aid is not given out to help people at all, it’s given out for geopolitical purposes by the rich countries. Even the aid that does reach people which is something that is very difficult to access, even that can have its problems. I mean, it's a very positive thing if it reaches the people; it's not such a positive thing if it helps the government in that country escape its responsibility to provide these things for its own people.

SS: You have also said that "good governments and economic growth" is the alterative to aid. So, countries with poor governance, which is most African countries, should they be left without aid until they clean up their shop?

AD: I didn't say that most African countries have poor governance...

SS: No, no, I just said that as an example.

AD: Yeah... there are countries in Africa with poor governments, and I think they would be better off in the long run without aid, but I... you know, I'm not naive about this, and I think if you withhold aid, then things are not going to get better and certainly not in the short run, but I don't think there's any real chance of long-term economic development when half of all government expenditures are coming from foreign aid.

SS: So where's the balance? How do you balance it out?

AD: Well, I mean, I would... How you balance it out depends on what you persuade people to do, but I would have a rule, for instance, which says: "It should be no more aid for countries who have, say, more than 20% of government expenditure as aid".

SS: I also spoke to Muhammad Yunus who is another Nobel laureate, a micro financier from Bangladesh, and his microcredit bank is successfully fighting poverty in the country. Is loaning money to poor people directly better than constructing social programs and giving them charity money?

AD: Well, there's two things to be said there: one is that the Grameen bank is an internal organisation and so there's a big difference between people in a country organizing together to try and take people among them out of poverty, from the money coming entirely from the outside. So, that's the first thing to say. Secondly, the evidence on microfinance around the world is not particularly positive, so I'm not sure that any sort of general solution to taking people out of poverty. It’s certainly not true that microfinance... you know, there are many rich countries today, those rich countries didn't get out poverty by using microfinance.

SS: So, there's poverty not only in underdeveloped countries, obviously, but also in rich Western states. U.S. taxpayers spend a lot of money fighting poverty - so why does poverty in the U.S. still exist? I mean that money is surely isn’t misused by corrupt government.

AD: That's not true. The U.S. has a very weak social safety net compared with most of the European countries. They spend very little on poverty.

SS: So what do you think should be done there? Because, you know, people from outside of the U.S. - you know, we look at America and we say: "This is #1 economy in the world, this is #1 military power in the world, how come there's such a huge gap between rich and poor?" What should be done there?

AD: That's one of the big questions of the day, and it's not just in the U.S., it's happening in rich countries around the world; though, it's true that inequality is, probably, the largest in the U.S., and I do think that very bad things are happening in the U.S., so I certainly wouldn't begin to defend it; I mean, the recent work we've been doing, for instance, has shown that there's been a large increase in mortality rates among middle-aged white people in the U.S., something that really we haven't seen for a very-very long time and it's very distressing.

SS: I am asking you about America because you are an American economist, who knows much more about what should be done than anyone else outside your country. What do you think should be done to fight that poverty gap, which is getting only bigger and bigger with each year?

AD: Well, I think you're confusing inequality and poverty. You were talking about inequality before, now you're talking about poverty gap...

SS: I'm talking about gap between rich and poor.

AD: Yeah, well that's inequality, and I think we've plenty of tools for fighting inequality, and if I were the dictator, you know, I would certainly have higher marginal tax rates on top of the income distribution that we do now, and I would have a larger social safety net rather than a smaller one. Unfortunately, I'm not the dictator and this is subject to the democratic process, and it seems that most Americans don't want that. So, my guess is that compared to most of the European countries, Americans actually prefer more inequality than, say, French people do or Swedish people do.

SS: Why do you think most Americans are opposed to such measures?

AD: Well, I think there's a different history of America from different countries, it's very self-reliant country, it was a frontier that was live for a very-very long time and people did not get help from the government. I think at many parts of America people's experience of the government has been very negative, that the government has not treated them well, and so many Americans think that the government is not there to really help them. I think, there's also a very difficult factor in the U.S., which is the whole issue of race, and one of the reasons that America has not developed such a large social safety net is because of concerns that people will be giving money to people who are different from them.

SS: How do you think that perception can change?

AD: It can change through debate, through democratic political debate. One of the things that's very encouraged me about the U.S. over the last 4-5 years, is that inequality just used not to be talked about at all, and it used to be that people on the left side would say that inequality is really bad and then people on the right just ignored it as inequality is not the problem that needs to be addressed, and I think that's really changed and I think that people are talking about inequality in a very serious way on both sides of the political spectrum, and that's enormously to be welcomed.

SS: Like you've said, that U.S. right-wing is now talking about inequality, acknowledging the need to fight it. What made them change their mind?

AD: I think the evidence made them change their minds. I think, for instance, the work that Saez and Piketty did, using the income tax records to demonstrate just how much incredible expansion has been there in the incomes of the people on the very top of the income distribution, and these people are getting enormously wealthy while most people were not really getting very much at all. I think, that was part of it. I think, also, part of it was the financial crisis and so that in 2008 and in the years after there's been sense that these people, particularly in financial sector, are getting paid enormous sums of money while, perhaps, not really helping the economic; in fact, worse than that, they may have been helping bring down the economy and causing enormous amount of misery of poor people. Now, not everybody agrees with that narrative, and whole causes and understanding of the financial crisis is yet to be written. But, there certainly was a feeling that this is really a problem in a way that people didn't think it was a problem before. I think a lot of people are also seriously worried, including me, about the influence of money on politics.

SS: So, just in a nutshell for people who aren’t economists: should there be more spending to battle inequality or less spending, lesser tax burden for everyone?

AD: It really depends on who's answering that question, and this, as I've said a couple of times... you know, it's not for me to say what there should be. If it were me, if I was setting policy all by myself, I would certainly argue for more spending and for higher taxes. But most Americans don't seem to want that, it's not a very popular policy. I think, this debate is good because this debate on inequality and how to tackle it may actually change people's minds.

SS:  You've also said that income inequality is a consequence of progress - how is technical advancement causing inequality?

AD: I mean, that's fairly easy to see: I mean, you can take a little example. Imagine, someone comes along and invents an iphone or invents a smartphone that everybody likes. You now who I’m talking about. Then, that progress gets richly rewarded, because people buy that phone, they make billions of dollars selling that phone. And, a few people, the people who are involved in that do get very-very rich. And that's terrific as far as I'm concerned, because that's a great benefit to mankind, and the people who've made that progress are richly rewarded, which is what turning up inequality. So, that's fine. What is the potential problem is that what happens after that, and whether it's the case that people who reap these reach rewards can somehow share them with people more generally. But, the other issue, too, of course, is that inequality acts as an incentive to progress among other features. You know, if I don't have very much and I see someone a lot like me, who has suddenly done incredibly well, then that gives me big incentive to work hard and try to do as well as that person. That could not just be in money, I remember when I was young, when I was in my 20s, and one of my colleagues in Cambridge, in England, when I was there, was promoted to a professorship when he was in his mid-20s too, and I thought... I hadn't realized that that was even possible, and I thought: "Oh, maybe I can do that too", and so I worked very hard and I became a professor too, not when I was 26, but you know, when I was 29 or something, and that's an example of how an inequality acts as an incentive. So, that's a good side of inequality, but there's lots of risks too, if the rich people do things to hurt people with their wealth and that we have to be really worried about.

SS: Like what, exactly?

AD: I mean, one of the things that I certainly see in the U.S., and I'm not sure how effective that is, and my guess it's a problem in Russia too, if the newspapers are at all accurate, that you have a few people who have very-very large sums of wealth, and they use that to subvert the democratic process, so those of us who are not incredibly wealthy don't have as much chance to decide what's going to happen or participate in society or decide how we deal with roads or with healthcare or with schools, or how we treat the elderly, and all these important aspects of public policy - they should not be determined just by the people who have a lot of money.

SS: So how do you fix that?

AD: You fix that by democratic debate. It's really the only way, and, you know, we see that happening in the U.S., I mean, there's pressures on both sides and a functioning democracy, one of the great virtues of functioning democracy is that as long as it is functioning it's impossible for very rich to capture it, because these people who are supported by the very rich can be voted out and not win elections. You know, the U.S. politics is very heavily influenced by money, but it's terribly unpredictable and you really have very little idea who's going to win anything. So, it is certianly not true that the vested interest of very rich has captured the whole political process. They don't get to decide what happens.

SS: Talking of democratic debate, do you have a favorite for a presidential candidate in pre-election campaign? Because, we certainly see candidates that are quite unusual for American presidential campaign. For instance, we have a person who calls himself "a democratic socialist".

AD: Well, that's right. I'm not sure who my favorite is, I'm not tremendously enthusiastic about anything that I've seen so far. My favorite would be if President Obama was to run again, for a third term. Unfortunately, that's not permitted in the American Constitution.

SS: Doctor, you know, many people I spoke to - engineers or philosophers - they think that technology will be the cure for humanity's economic problems. People talk of robots taking over menial jobs or the advances of the Internet, you have 3D printing making things almost free. Do you believe this?

AD: In a somewhat shaded form - yes. I think, the great benefit of humanity over hundreds of years has been scientific understanding and deep basic knowledge, that's deeper than just technology. Technology is a product of that. This idea that people pursuing their own interest, pursuing their own happiness, and trying to make their lives as best as they can in their own right, is an enormous engine of progress. So, I have no doubt about that and techology that comes out of that basic science, really, is absolutely essential to this progress. However, I don't think, you know, you can mechanically solve things with technology - I don't think you can make the world not poor by handing out laptops or handing out cell phones or whatever. There's no simple mechanical thing where the technology can solve everything. It's also true that it has to be very carefully handled because, after all, the pace of technological change today is really very rampant and there's lots of dangers of people losing their jobs, and we have to be careful, so that we still can get the benefits of the technology without hurting people too much - though, inevitably, some people will be hurt.

SS: I want to talk to you about happiness, which is an eternal topic. There's a famous Buddhist priest, I don't know if you know him, Kazuo Inamori, and he has made billions by focusing on making his employees happy.

AD: Making who happy?

SS: His employees happy.

AD: Okay.

SS: Is that a secret to a successful business? Are Western capitalist ways less effective? Because this guy has made billions of dollars.

AD: I do know that many companies in the U.S. are certainly focusing on well-being as an essential part of managing a good company. I do some work with Gallup organisation, and they are measuring well-being and they're using well-being within companies as a very successful tool of management, so yes, I think there's a lot to be said for thinking about well-being, and just within companies but within society as a whole, we need to focus much more broadly on economic well-being than just maximizing GDP.

SS: For instance, in Sweden, a 6-hour working day is becoming a norm, okay. They're adopting this new model and they're saying it's allowing people to stay focused on work and feel better at the end of the day. We have opponents who argue that it's a very costly measure. Could it be worth it?

AD: It might be - depends of what people want. I mean, it's one of these things that, if you say, well, some people like apples and some people like oranges, there's nothing that says that apples are better than oranges. I worked a lot more than many other people do, and that really works for me and it makes me happy, and I think people should be free to decide that as they want. A six-hour day is certainly likely to be very costly, but if people wish to pay that cost, then good luck to them.

SS: Then, there's another Nordic state, Finland, it's planning to give out a minimum income of 600 euros for every citizen. Is it going to ruin the country, be terribly abused, or, on the other hand, help its economy and just make more people happy?

AD: It might do that. Once again, I don't know Finland well enough and you named a specific figure, that figure would have to be financed, that would have to be figured through higher taxes - so, you know, there's a lot to be said for a basic income grant, which is just what you described. That's, if you like, the ultimate social safety net, and many people think that's a really very good way, it has no disincentive effects, there's a lot of economic arguments for it, but as you say, it's extremely costly, and if the Finns are approving that cost, then they can do it - once again, good luck to them! I can't imagine Americans wanting to do that for one minute.

SS: I can't imagine that either. Now, professor, you are known for answering the age-old question if money buys happiness, and you say that it does if you earn $75,000 a year. But then you have really poor countries like Bhutan or Panama or Costa Rica, and they regularly rank quite high in various happiness ratings. So, does it really buy happiness, money?

AD: That was the study in the U.S., so it said, "in the United States", when we did that study in 2010 or whenever it was. Then, having less than $75,000 a year was not very good for your emotional well-being or your day-to-day emotional life. I think that's because it stopped people socializing, spending time with their friends, having fun, and above that there was no barrier anymore. I think in many of these other countries, spending time with your friends, doing what makes life to you, is going to cost a lot less, and in fact, a lot of those countries, very poor countries, do rather better on their emotional lives than rich countries do. For instance, Rwanda does much better than Denmark, for example.

SS: So, World Bank President Jim Yong Kim says that by 2030 we'll be able to almost completely eradicate poverty. That's a pretty big statement. Do you think that's possible?

AD: I'd think it's possible, defining poverty in a way that he does it - it will be tough, but if the world is lucky and some of these poor countries in Africa are lucky, then maybe that will be achieved. Elimination is not quite elimination, there's still a few percent left at that point, and a few percent of total population in the world is still a lot of people.

SS: Dr. Deaton thank you very much for this interview, and thank you for your beautiful mind. We were talking to Dr. Angus Deaton, distinguished economist, 2015 Nobel laureate, we were discussing problems of inequality and if there's way to shorten the ever growing gap between the rich and the poor. That's it for this edition of Sophie&Co, I will see you next time.