The most famous Hungarian-born economist in my opinion is the late Peter Thomas Bauer, known as Lord Bauer. He once famously said that foreign aid given to a poor country means that poor people in rich countries are taxed to support the lifestyles of rich people in poor countries. At that time in the 1970’s he was considered for that view as a conservative ideologue. Now it is almost universally agreed among development economists that he was right and development aid proved to be a failure. The fastest growing poor country in the world in the past 30 years has been China. Guess how much foreign aid the Chinese have received per capita from the rich countries. My guess would be zero.
This is what I usually think of when the large sums of money the EU gives us to make us “converge” is shown as a big triumph as it is these days: we will receive much more money we had expected before the talks on the EU budget for the period 2014-2020 began. That means we won, doesn’t it?
The answer tends to be “no” if you think, as I do, that what makes a country rich is honest business on free markets, a limited and honest government, innovation and hard work, and a culture respecting all these.
Imagine what would happen if every Hungarian person were given 700,000 HUF in a sack. Would that make them rich? Maybe, but only for a short while. Prices would rise and they would end up being as poor (or rich) as before. This is a wrong example, you might say, because EU funds are targeted and are required to spend on investments that are deemed to help development. Yes. But first of all, it has been known for at least 50 years that capital accumulation cannot make a country rich. Second, it is not easy to find out what is needed. That requires the knowledge of local businessmen – something a bureaucrat in far-a-way city cannot have even if he has good intentions.
Honest business is not fuelled by government grants, either, even if the government is that of Brussels not of Budapest. Rather, it fuels a competition for the grants provided for which you have to please the bureaucratic and political elite and not the consumers in your city or village. You have to know what is trendy not what is needed. That is how everything becomes “green” and “bio”. These words are in vogue in the circles of the elite who allocates these funds. That is how we build nice education centres or concert halls that hardly anyone attends and bicycle paths that hardly anyone uses.
Grant money does not strengthen honest government either. Instead it gives the politicians non-tax revenues to give it to cronies and spend on shiny things that increase the probability of their re-election. Yes, there are strict bureaucratic rules regulating how the money can be spent. But we Hungarians are world champions in pretending to be following the rules that we are avoiding.
Innovation and hard work can be enhanced by grant money but they will be directed wrongly. Productive innovation is to discover new ways of making profit through producing something that the consumers are willing to pay for. Government grants make you discover new ways of applying for funds regardless, again, for what the consumers would be willing to pay for. Entrepreneurs will be more alert to invitations to tender than to real business opportunities. These grants may make you work hard, too. But you will work hard on writing tenders which you probably not win instead of working on something useful. In this way your innovation and work go to waste. It not only does not make good, it makes harm because your efforts would have been employed in a better way, too.
And finally, EU grants do not help us develop a business- or market-friendly culture. It helps us develop a culture which looks at political power as the source of wealth. That is the culture we know well: the culture of wangling, subservience, masterfulness and alms-giving. That is a culture that suggests that you will be wealthy if a powerful master gives you money. But in reality, wealth is produced, not given.