DEATH TO FOREIGN AID OPINION
(FORTUNE Magazine) – Washington has shipped $1 trillion of foreign aid (in current dollars) to needy nations around the world since World War II. Next year, Congress proposes to spend another $16 billion. No one seems to be asking the question, To what end?
The answer, supported by considerable research, is that foreign aid has failed. Assistance was originally supposed to move developing states into the industrialized world. Now an increasing number of supporters acknowledge that aid only works--if it works at all--in cases in which countries have already moved away from state-led economic planning and adopted market reforms. There is no positive relationship between aid levels and economic growth.
A few examples:
--The United Nations Development Programme reported last year that 70 developing countries--aid recipients all--are poorer today than they were in 1980; 43 are worse off than in 1970.
--The U.S. Agency for International Development acknowledged in 1989 that "only a handful of countries that started receiving U.S. assistance in the 1950s and 1960s has ever graduated from dependent status."
--World Bank economists Craig Burnside and David Dollar, while arguing that assistance can work in a good policy environment, note that foreign transfers tend to increase spending by recipient governments. Countries as diverse as India, Mexico, and Tanzania expanded their public sectors as they collected extensive grants and loans from abroad. This phenomenon, Burnside and Dollar conclude, "provides some insight into why aid is not promoting growth in the average recipient." They dismiss the idea that aid promotes policy reform: For each case where one can argue assistance advanced reform, they find "there is a Zambia, in which policy deteriorated continuously from 1970 until 1993, while aid receipts rose continuously."
--In A Half Penny on the Federal Dollar: The Future of Development Aid, Michael O'Hanlon and Carol Graham of the Brookings Institution find "the negative relationship between aid flows and performance is clear at a general level." While endorsing limited aid programs, they caution that "larger initiatives are unlikely to be effective unless recipients have sound economic and demographic policies."
--A development task force created by the Center for Strategic and International Studies concludes in its final report that "development cannot be induced by resource transfers alone, but depends heavily on appropriate policies, functioning institutions, and cohesive societies." Such conditions are evident across East Asia but also account for the success of nations like Botswana and Chile.
In fact, nations with good policies don't need assistance. Investors easily fill the role sought by aid bureaucrats. Today private capital accounts for 80% of net long-term financial transfers to developing states. Last year private resource flows hit $244 billion, up $60 billion, or 32%, from 1995. However well intentioned, assistance even to the best governments risks reducing the incentive to reform. This is why it has taken poor countries like India so long to adopt reforms long seen as necessary. At the start of this decade, an astounding 70% of India's above-ground employment was in the public sector. Just last month the government abandoned legislation to open the insurance market to foreign competition.
Some advocates say aid should become more selective. Harvard economist Jeffrey Sachs--known for his pivotal role in the reform of economic policy in nations like Bolivia and Poland--calls for "a carefully designed" and "better focused" foreign aid program; one "limited in duration" with "a plan to phase it out." But can bureaucrats and legislators be trusted to act so wisely, given their record over the past 50 years? An even better idea would be to admit that foreign aid has failed, and scrap it altogether. --Doug Bandow
DOUG BANDOW is a senior fellow at the Cato Institute.