Development aid theory by Lord Peter Bauer
After World War II, a new "development economics" began to dominate policy in poor countries, often under pressure from international institutions like the World Bank. She claimed that poor countries are victims of a vicious circle of poverty, doomed to remain poor because not enough income that provides savings, when invested, generate economic growth. The answer? Rich countries must provide capital in the form of foreign aid. To use capital efficiently, the governments of poor countries should plan their economies and create new industries to replace foreign imports. And to give a chance to these emerging industries, competition should be limited by monopolies and barriers to international trade.
And the theory and its practice terrified Lord Bauer. His studies of small sections in the Malaysian rubber industry and the importance of small traders in West Africa convinced him that there could be creating wealth even in poor economies, if only to allow market forces to work. Trade barriers and monopolies simply destroy entrepreneurship.
With its uncompromising way Lord Bauer put alternative theories of the 50s to 70s of the 20th century were heresy. All countries have started poor, he argued. If the vicious circle theory was true, mankind would still lived in the Stone Age. Opportunities for private profit and non-governmental plans, hold the key to development. Governments have a limited but crucial role in protecting property rights, contract enforcement, equal treatment of all before the law, minimize inflation and keeping taxes low. It was a tragedy that countries ignored that role.
Above all, Lord Bauer argued that there was no concept at all "third world" if it was not the invention of foreign aid. Using politicized economies, directing money in the hands of governments, rather than a profitable business. Therefore interest groups fight for control of the money instead to engage in productive activity. Aid increases paternalism and authority of the recipient governments often pursue policies that stifle entrepreneurship and market forces. Indeed, the aid has proved to be "a great method of transferring money from poor people in rich countries to rich people in poor countries."