The United Nations Doesn’t Understand Wealth Creation

U.N._LogoThe United Nations is wrapping up their latest summit with the approval of a new 15-year plan, containing 17 audacious Sustainable Development Goals, which include everything from eradicating extreme poverty and hunger to providing everyone with work, clean water and affordable energy. While evidently well-intentioned, none of these goals will be achieved through expensive top-down U.N. programs. Instead, only institutional reforms and economic growth will be able to bring about the kind of prosperity that the poorer nations should be able to enjoy.

The latest 17 goals are similar to, and an extension of, the Millennium Development Goals that were adopted as a U.N. initiative in 2000, with a goal end-date of 2015. The fact that these are 15-year plans already hints at what is intrinsically faulty with the U.N. perspective: that growth and prosperity can be centrally planned and socially engineered. The former Soviet countries and the current Chinese government also have 5 and 10-year plans.

The biggest error underpinning these varied U.N. goals is the fanciful notion that governments and U.N. programs can provide sustainable solutions to these problems by transferring wealth from one country to another. The cost is already estimated to be at least $175 trillion over the 15-year period. There certainly are goals which aid programs can attain, especially measurable and short-term projects such as delivering food to a disaster-struck area or vaccinating a specific population. But no program can engineer long-term economic growth, which is ultimately the only way to eradicate poverty.

If this seems unconvincing, consider that up until just a few hundred years ago, the entire world had lived in poverty for thousands of years (save for a handful of kings and nobles.) If redistributing wealth from rich countries to poor countries really fostered economic growth, then how did poor countries become wealthy to begin with, when there were no rich countries around at the time to help them? How did the ‘hockey stick’ of growth happen?

Economists have been debating this for many years, and it was actually the main question that spurred the work of one of the founding fathers of the field of economics. Adam Smith’s famous work is often referred to as simply “The Wealth of Nations.” But the actual title is “An Inquiry Into the Nature and Causes of The Wealth of Nations.” Smith, like today’s economists, wanted to know how so much wealth and prosperity was becoming commonplace, while in the past it was the exception.

Look around today, and you will see that the improvement in people’s lives in developed countries was not due to transfers of wealth from others. Rather, it was wealth creation that uplifted the masses of people from poverty to lives of comfort. In fact, one of the original Millennium Development Goals has now been reached, namely Goal Number One of halving the number of people living on less than $1 per day. This was driven largely by East Asia, specifically China, which has seen incredible prosperity as the country relaxed economic restrictions and opened up to more trade.

These are the exact things Adam Smith identified as drivers of wealth: the gains from trade and the specialization that ensued. Just as Smith observed factory workers each performing specific tasks in a pin factory, so we have seen the Chinese move away from subsistence agriculture where everyone works a plough, to modern factories where each worker has a specific assigned task.

Instead of focusing on how to transfer $175 trillion from developed countries to poor countries, the U.N. and government leaders would be better served by concentrating on how to foster the creation of wealth. Obviously, this is easier said than done, and there are no clear answers.

However, we do know that the difference between rich and poor countries isn’t due to geography, natural resources, culture, technology or a host of other factors. Rather, the difference lies in their institutions, policies and ‘rules of the game.’ There are glaring examples that ably demonstrate this: China vs. Hong Kong, East vs. West Germany, and North vs. South Korea. All of these pairings have similar geographic regions, cultures and people, but they have different rules – depending on which side of the border you live on.

We know economic freedom is highly correlated to prosperity and quality of life indicators (see economic freedom rankings here and here.) But we also know there is a causative relationship as well. When people are allowed to own property and voluntarily trade with each other, increases in wealth follow as more people specialize and long-term investments are rewarded.

U.N. and government officials should therefore focus on policies that encourage property ownership for all, eradicate corruption and promote free trade. Of course, this isn’t easy, but acknowledging that the true origin of prosperity is wealth creation is the first step in allowing these goals to be accomplished.

Chris Kuiper, CFA is currently a student and researcher at George Mason University, pursuing a Master’s of Economics. His previous experience includes asset management, investing and banking.