Jakob Walter

Economic Empowerment: Providing Sustainable and Effective Help to Poor Countries

Most generally, effective altruism philosophy is using evidence and logical reasoning to determine the most efficient ways of helping others. Economic empowerment is a central component of that. For instance, the American charity-assessment organization GiveWell ranks GiveDirectly, which distributes cash to very poor individuals in Kenya and Uganda, among the best ways to improve the living condition of the poor in these countries. While this seems to be a good and immediate solution in the short-run, economic research suggests that significant effort should be directed to more long run solutions.

In their famous paper "The Colonial Origins Of Comparative Development: An Empirical Investigation", Acemoglu, Johnson, and Robinson (AJR) find (by means of an instrumental variables regression) that institutions are a decisive factor with respect to economic growth and thus economic empowerment. More specifically, they measure the effect of institutions on income differences by introducing an exogenous source of variation in institutions: settler mortality. AJR start by arguing that the history of colonization resulted in different institutions: extractive (in the sense of enabling the settlers to extract all resources without promoting growth or sustainable living) on the one and inclusive institutions on the other hand. The decision for that mainly depended upon the ability to settle. In countries with high settler mortality, e.g. due to diseases, colonizers did not wish to live in these places but simply take as many resources as possible and then leave (This was the fate of many African colonies). In contrast to that, countries with low settler mortality such as the Americas and Australia, the European settlers decided to build colonies with the best possible conditions for sustainable living leading to inclusive institutions in these areas. AJR argue that these institutions then persisted, and the effects can still be felt today. (The precise empirical strategy AJR use is omitted for the sake of simplicity).

From an EA perspective, one of the most interesting implications of this research is about the effectiveness of help in such countries: If countries are poor (in terms of GDP per capita), then this is largely a result of their bad institutional framework. To help economically empower the poor in these countries most effectively, resources should thus be directed towards working changes to move from bad to good institutions. But what makes a good and what a bad institution?

Broadly, good institutions shape human interaction and incentives in a way to align private and social returns. They roughly correspond to the following: (i) Functioning and largely competitive markets, (ii) Functioning fair and legal enforcement systems and an (iii) Government with checks and balances, i.e. sufficiently centralized state power but also accountability and broad participation. On the other hand, bad institutions largely fall into two broad categories: (1) Weak states (lack of centralized state power, e.g., Somalia) or (2) Extremely strong states with few checks and balances (e.g. North Korea). They are often associated with (i) dysfunctional or noncompetitive markets and (ii) dysfunctional or unfair courts. These institutions imply that people do not have the right incentives wither because markets are not competitive or because people have to worry about expropriation by others.

To sum up, current economic research suggests that the EA movement should increasingly focus on how to support and design institutional changes from bad extractive ones to good inclusive ones. The main reason for this is that good institution to align social and private returns leading to higher average incomes (higher GDP per capita), which, on average is associated with increases in living standards. Improving institutions can be a powerful tool in helping to raise the living standards in poor countries.