Sure, developed countries have significant social issues to tackle. However, compared to the amount of poverty and human suffering that persists in underdeveloped nations, these issues are reduced to mere “first world problems.”

Despite vast increases in productivity allowed by technological development, millions of people remain stuck in poverty with little access to these technologies – and even less their fruits. A common perception seems to be that this is because of the selfishness of people in Western countries who don’t want to give up their consumerism and living standards and donate enough to charitable projects and foreign aid.

And yes, we could say that our short-sighted selfishness is a factor. But the problem is not that we “spend too much” and don’t “give enough” – which is what our outdated Protestant work ethic likes to keep us thinking. The main problem is that we don’t allow these people help themselves – and “give” to us! Ironically, it is not our consumerism that is keeping developing countries poor, but our desire to protect our citizens’ divine right to save. Let us explain.

A first, simple mathematical fact that no one wants to say out loud in mainstream political discussion is that the sum of all nations’ current accounts (apart from deviations in measurement) is zero!  (Few economists like to bring this fact up, although they very well know it.) The current account balances practically means how much a national economy (the private and public sector together) becomes further net indebted overseas (when negative) or accumulates net foreign assets (when positive).

As long as most developed economies (e.g. Germany, Japan, Korea, Denmark, Sweden), fast developing economies (e.g. China) and oil exporters (Norway, Saudi-Arabia, Iran, Arab Emirates) maintain their positive current account balances, other nations have to fall further and further into debt to them. It isn’t possible for e.g. African nations to release themselves from their debt leashes, accumulate local equity and start getting their share of capital income (including those generated with the help of their own natural resources) unless they manage to export more than they import plus pay dividends and interest abroad.

The best way to improve living standards in poor nations sustainably is to develop labor productivity and becoming competitive in a wider range of export industries by making better education opportunities available to their citizens. Giving more choices of earning opportunities to the citizens in this way is the most effective way to prevent the exploitation of workers. However, this would make them a threat to the competitiveness of rich countries, who want to maintain their trade surpluses.

The most effective form of foreign aid would be trying to help e.g. African companies into European markets and allowing all possible production to move into African countries. But foreign ministers, trade ministers and development ministries are doing the exact opposite: protecting their own countries’ industries (and jobs) by any means possible, blocking imports with farming subsidies, supporting export industries through public investments, support, and assistance in trade negotiations.

Meanwhile, citizens and NGOs call companies “socially irresponsible” if they give people in developing countries earning opportunities. They think they are alleviating the exploitation of poor people by boycotting products made with cheap labor and by increasing inequality within developing countries through schemes like “Fair Trade” (paying some significantly more than others for the same work).

Essentially, we are giving the poor exactly what we wouldn’t want for ourselves (charity, pity, dependence on foreigners, microloans) and depriving them of what we want for ourselves (jobs, economic growth, exports, and trade surpluses). And that’s what our outdated economic morals consider “economically ethical” and “responsible”. The upcoming book, The Guilt Economy, discusses in more detail how our guilt-orientation to social and environmental issues, together with our outdated economic ethics and severe misunderstandings regarding economic phenomena (e.g. money), result in well-intending people doing more harm than good.

On the systemwide level, we cannot get rid of poverty before (developed) countries stop fighting this unproductive and even self-defeating “economy war” of trying to indebt each other by any means possible. This neomercantilism (and neocolonialism) can be given up when real interest rates can turn negative enough when necessary to keep domestic supply and demand in balance, removing the need to keep current accounts positive. When “internal balance” can be maintained in all situations, there is no need to compensate for it with an intentional “external imbalance”.

Section 3.3 in Fixing the Root Bug also discusses different problems and dilemmas that are sustained by persistent poverty (or mercantilist agendas directly), though often blamed on completely different issues:

  • Famines and overpopulation
  • Millions dying prematurely of curable diseases
  • Regional instability and many armed conflicts

“[U]nder the system of domestic laissez-faire and an international gold standard such as was orthodox in the latter half of the nineteenth century, there was no means open to a government whereby to mitigate economic distress at home except through the competitive struggle for markets. For all measures helpful to a state of chronic or intermittent under-employment were ruled out, except measures to improve the balance of trade on income account.” … “But if nations can learn to provide themselves with full employment by their domestic policy (and, we must add, if they can also attain equilibrium in the trend of their population), there need be no important economic forces calculated to set the interest of one country against that of its neighbours.” – John Maynard Keynes, The General Theory of Employment, Interest and Money (1936, p. 240)

“[P]ractically all of today’s developed countries, including Britain and the US, the supposed homes of the free market and free trade, have become rich on the basis of policy recipes that go against the orthodoxy of neo-liberal economics. Todays’ rich countries used protection and subsidies, while discriminating against foreign investment – all anathema to today’s economic orthodoxy and now severely restricted by multilateral treaties, like the WTO Agreement, and proscribed by aid donors and international financial organizations (notably the IMF and the World Bank).” – Bad Samaritans: The Myth of Free Trade and the Secret History of Capitalism
(2008, p. 15)

(00:15->) “Economists disagree about a lot of things but one thing they all agree on is (that) the sum of all global exports has to equal the sum of all global imports. As long as trade with Mars and Moon remains limited.” … (25:17->) “Global instability is as much and more a result of the behavior of surplus countries as of the deficit countries.” … (26:20->) “It is simply impossible for all countries to have a surplus! That’s arithmetic.” – Joseph Stiglitz