Free trade vs. state aid

Aid to developing nations helps them feed their starving, but trade helps them raise their standard of living.

Damir Sagolj / Reuters / File
A flood victim shows her hands, decorated with henna by aid workers, as Pakistani Muslims prepare to celebrate Eid al-Fitr at their relief camp in Muzaffargarh, Pakistan, in this file photo from Sept. 10. After the catastrophic flooding, both aid and trade were pursued for relief: While the lucrative trade package remained locked in negotiations, the US and EU sent emergency aid.

This morning I spoke at the opening session of The Freedom Association’s ‘Freedom Zone’, a libertarian mini-conference at the Conservative Party Conference in Birmingham. The subject was “Free Trade NOT State Aid”.

I was speaking last on a panel of six (the other speakers were John Redwood MP, the Cobden Centre’s Toby Baxendale, and the excellent new parliamentarians Steve Baker, Robert Halfon, and Sajid Javid) so I kept my remarks short, highlighting three policy areas in which free trade was superior to state aid. Needless to say, it was not an exhaustive list.

My first point was about international development. It’s an easy case to make. Every country in the world that has ever become rich has done it through trade. No country has ever become rich through aid. Of course, that’s not to say that half a trillion in aid has done nothing for sub-Saharan Africa – on the contrary, we’ve sustained corrupt, tyrannical governments in power by insulating them from their voters, while also crowding out private sector development. Even when it comes to something as seemingly unimpeachable as supporting free education in Africa, the evidence is not exactly positive. As James Tooley has shown, better, smaller, cheaper private schools have been pushed out of the market by big state ‘comprehensives’ and fewer Africans have ended up in education as a result.

My next point was about energy. Here, the problem is straightforward – we don’t have enough baseload capacity, and we’re going to start suffering energy shortages c.2016. The market solution is similarly straightforward – investment in new baseload infrastructure, which in the current climate probably means gas. But energy policy is driven by politics, not economics – which is why we’re going hell-for-leather for a renewable energy target that is both unachievable and uneconomic. If your concern is lowering carbon emissions, I said the best option to raise the price of carbon through a simple carbon tax, and then let the market do the rest. All the state aid – picking winners, providing subsidies – should be dropped. It does more harm than good.

Finally, I talked about healthcare. We are know our state aid system – the NHS – has problems. But in the grand scheme of things, these problems are pretty irrelevant. The real cause for concern is that universal, free-at-the-point-of-use healthcare is soon going to be rendered completely unaffordable by demographic change and technological advance. We need to start moving to a free trade system system – with empowered consumers and genuine competition on price – sooner rather than later. In the long run, we don’t have much choice.

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