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Foreign Aid, Help or Hindrance? Part 1

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There may be no more pitiful sight than tides of impoverished and starving refugees; and there may be no greater irony than grievous want in the Third World amidst exploding possibilities in the First World. Supporters of foreign aid rely on such images in an attempt to shake more money out of seemingly tight-fisted voters.

The Clinton administration originally proposed a 7 percent increase in funding for its overall international-affairs budget this year. Before leaving office, Secretary of State Warren Christopher warned of “a new isolationism” emerging among GOP opponents of more foreign aid. Seeking to prove him wrong, last year the Republican-controlled House Foreign Affairs Committee, after listening to testimony from seven advocates of increased foreign aid and only one opponent, approved an increase in foreign aid of $800 million.

Secretary of State Madeleine Albright called on former President George Bush to add a bipartisan gloss to the foreign aid increase. Stephen Rosenfeld of the Washington Post complained that we cannot afford to conduct our foreign policy “on the cheap.” First Lady Hillary Rodham Clinton invited reporters to the White House to listen to a plea for more aid, a plea, she explained, that was “aimed at the American public.”

The multilateral development banks also stressed the importance of new initiatives, debt forgiveness, and new programs. Last June the IMF, which has warned that its vault is being exhausted by the latest frenetic round of international bailouts, lectured the United States to hike foreign aid outlays and to delay any tax cuts. The Organization for Economic Cooperation and Development made its own pitch last May for new efforts to improve aid. Almost all of these initiatives and programs point to the need for U.S. “leadership.”

Yet even as the foreign affairs establishment rallies around foreign aid, the political and economic foundations of the program continue to crumble. Throughout the Cold War, a large part of foreign assistance was recognized — by realistic analysts, anyway — to be little more than bribes — walking-around-money for the secretary of state. With the collapse of the Soviet Union, there was no longer a contest for control of, say, mineral-rich Zaire, and thus no longer any conceivable need to underwrite assorted venal autocrats.

Nevertheless, contrary to myth, most aid even during the Cold War was for development purposes. Here, too, the case for aid collapsed most ingloriously. There were the spectacular failures, of course. Zaire received some $8.5 billion between 1970 and 1994, but imploded last year. (So bad was this experience that even U.S. AID administrator Brian Atwood had to acknowledge that “the investment of over $2 billion of American foreign aid served no purpose.”) Yet last year, UN Ambassador Bill Richardson made a pilgrimage to the Democratic Republic of Congo, as the country is now known, promising to provide $50 million in aid, despite the authoritarian tendencies of the new government and the evidence of atrocities by its military.

Why not? Almost every nation in crisis — from Somalia to Liberia to Haiti to Burundi — has received billions of dollars from the West. Perhaps even more staggering is the failure to discern any positive relationship between aid levels and economic growth. The United Nations Development Program reported in 1996 that 70 developing countries were poorer than they had been in 1980; 43 were poorer than they had been in 1970.

Bryan Johnson of the Heritage Foundation points out that the vast majority of 66 states that have been borrowing from the World Bank for 25 years or more are as poor as they were before they took their first loan; a third are actually worse off.

The IMF has accumulated a similar long-term dole. By my count a few years ago, nearly one-third of the world’s countries had been on Fund programs, without positive effect, for 10 to 20 years. Another 30 had been borrowing continually for more than 20 years.

This experience has been evident for quite some time. One does not need a Ph.D. in economics to note the differing levels of development in China and Taiwan, North and South Korea, or Asia and Latin America. Even government agencies occasionally have taken note. As U.S. AID acknowledged in a detailed 1989 report, “Only a handful of countries that started receiving U.S. assistance in the 1950s and 1960s has ever graduated from dependent status.”

But still the ideological commitment to state-led development planning funded by the West remained in the academic and development communities.

No longer, however. Today there is no serious dispute that markets are required for growth. There is growing agreement that assistance cannot buy market reforms. All that an increasingly beleaguered band of aid defenders now claim is that foreign assistance may be useful if extended to governments which have already adopted good economic policies.

Perhaps the best broad-based study of economic policies over the last two decades is Economic Freedom of the World: 1975-1995 (updated last year) by economists James Gwartney, Robert Lawson, and Robert Block. They created an index of 17 component parts to measure economic freedom, as well as three alternative summary indexes. Although international comparisons are fraught with difficulty, two particularly important lessons emerge. First, economic policies matter, with better policies yielding higher rates of growth. Second, changes in economic policy affect growth rates.

Similar are the results of the 1996 Index of Economic Freedom, written by Heritage Foundation analysts Bryan Johnson and Thomas Sheehy. They explain that their analysis “demonstrates that economic freedom is the single most important factor in creating the conditions for economic growth and prosperity.” Their data, also updated in a new volume last year, demonstrate that countries that place the greatest reliance on open markets consistently have the highest growth rates. Studies by other analysts and organizations, including the World Bank, yield the same general conclusion. One can still argue about the exact role of government, but statism is no longer an intellectually serious option.

For years economist P.T. Bauer was almost alone in criticizing the efficacy of foreign aid. His views are now mainstream. Particularly impressive are studies by Peter Boone of the London School of Economics and the Center for Economic Performance. After assessing the experience of nearly 100 nations, he concluded that foreign transfers had no impact on recipient country investment levels. “Long-term aid is not a means to create growth,” reported Boone.

He also reviewed the impact of foreign assistance on recipient regimes and found that it mostly benefited local political elites. As he explained, “Aid does not promote economic development for two reasons: Poverty is not caused by capital shortage, and it is not optimal for politicians to adjust distortionary policies when they receive aid flows.”

His conclusion has been supported by World Bank economists Craig Burnside and David Dollar. In a recent report, they endorsed Boone’s findings. Although they argue that aid can work in a good policy environment, they note that foreign assistance tends to increase spending by recipient governments. They further explain:

“This result is consistent with other evidence that aid is fungible and tends to increase government spending proportionately, not just in the sector that donors think they are financing. That aid tends to increase government consumption, which in turn has no positive effect on growth, provides some insight into why aid is not promoting growth in the average recipient.”

Also recently released is A Half Penny on the Federal Dollar: The Future of Development Aid by Michael O’Hanlon and Carol Graham of the Brookings Institution. They end up supporting continued aid funding, but their study gives little reason for such a policy prescription. At the most cursory levels, they admit that “the negative relationship between aid flows and performance is clear at a general level.”

Moreover, they write that “absent a sound economic framework and functioning market in a recipient country, few such efforts can work.” After endorsing limited aid initiatives, they caution: “Larger initiatives are unlikely to be effective unless recipients have sound economic and demographic policies.”

Only slightly less skeptical is the Task Force on the United States and the Multilateral Development Banks, operated by the Center for Strategic and International Studies. The Task Force reported:

“Substantial experience shows that development cannot be induced by resource transfers alone, but depends heavily on appropriate policies, functioning institutions, and cohesive societies.”

Similar is the conclusion of a new Congressional Budget Office study by Eric Labs. He says that the overall impact of aid is at best “marginal” and that assistance will “in the best of circumstances … play only a modest role in promoting economic development and improving human welfare.”

As these insights have reached Capitol Hill and spawned greater resistance to continued aid funding, the aid bureaucracy, led by the World Bank and U.S. AID, has desperately concocted a new justification for old aid programs: to promote policy reform. But a host of critical internal audits have raised serious doubts about the efficacy of this new foreign-aid rationale.

Burnside and Dollar go even further. Despite the Bank’s commitment of tens of billions of dollars to such assistance, these two Bank researchers conclude: “We find no systematic influence of aid on our index of fiscal, monetary, and trade policies.” For each case where one can argue that aid advanced reform, “there is a Zambia, in which policy deteriorated continuously from 1970 until 1993, while aid receipts rose continuously. The general result is no systematic effect of aid on policy.”

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    Doug Bandow is vice president of policy at Citizen Outreach, the Cobden Fellow in International Economics at the Institute for Policy Innovation, a senior fellow at the Cato Institute, and serves as adjunct scholar for The Future of Freedom Foundation. He is a former special assistant to President Reagan; he is also a graduate of Stanford Law School and a member of the California and D.C. bars. BOOKS BY DOUG BANDOW: Leviathan Unchained: Washington’s Bipartisan Big Government Consensus (forthcoming) Tripwire : Korea and U.S. Foreign Policy in a Changed World (1996) Perpetuating Poverty : The World Bank, the Imf, and the Developing World (1994) The Politics of Envy : Statism As Theology (1994) The U.S.-South Korean Alliance : Time for a Change (1992) The Politics of Plunder : Misgovernment in Washington (1990) Beyond Good Intentions : A Biblical View of Politics (1988)