February 1, 1999

Foreign Aid Fallacies and Follies

By: AF Editors

The Clinton Administration is preparing to ask the new Congress to spend some $2.8 billion in “emergency” foreign aid–U.S. taxpayer dollars that will in theory be used to bolster developing nations world-wide. This new request arrives on the heels of last year’s budget that contained some $18 billion to underwrite the International Monetary Fund, an organization whose record of assisting developing nations is far from stellar. In other words, having just finished months of negotiations with the White House over the 1999 Omnibus Appropriations Act, apparently Clinton and foreign aid proponents believe they have stumbled upon a new secret elixir: more money for developing nations. While the foreign aid debate providing funds for next year supposedly was fought and ended in October, this new turn of events demonstrates an old Washington truism: it’s not really over, even when the fat lady does sing.

What the Clinton Administration and other foreign aid cheerleaders do not seem to understand is, not only has the U.S. foreign-aid program been a colossal failure in significantly promoting economic growth and self-sufficiency, but many recipients are worse off today than when they first started to receive U.S. aid.

For example, despite the billions we spend each year on economic assistance, only 30 cents out of every foreign-aid dollar ever makes it overseas. Most of the other 70 percent, some$10 billion each year, goes to funding bureaucrats in Washington whose job is basically to beg Congress and the Administration for more foreign-aid handouts. The rest is squandered on special interest groups, non-governmental organizations, and “private” aid organizations (otherwise know as beltway bandits) that suck out all the money and send crumbs to the world’s poorest. This is like robbing the American taxpayer, taking their money and dining in one of New York’s finest restaurants, ordering the filet minon, and giving the parsley to the begger outside. Not surprisingly, the 30 cents that does reach its destination seems to have little impact.

Why? Because global poverty is largely a condition imposed on people by their governments. While climate, culture, education, infrastructure, natural resources, technological innovation, and other factors all may contribute to a country’s economic success, no country can succeed in the long run unless it has a free economy based on enforceable private property rights. And this is true even if a country receives millions of U.S. taxpayer dollars annually.

According to the 1999 Index of Economic Freedom, co-published by the Heritage Foundation and The Wall Street Journal, of the 90 countries that were ranked “mostly unfree” or “repressed,” 38 have received U.S. foreign aid for at least 38 years–some for as long as 54 years. Of these 38 countries, 27 are no better off economically today than they were in 1965. And of these 27 recipients, 15 are actually poorer today than they were in 1965. If foreign assistance was an effective development tool, every one of these 38 countries should have shown at least some improvement.

Consider the case of Haiti. This island nation has received nearly $1 billion in U.S. foreign aid over the past 54 years (this figure does not include the money American taxpayers spent on the 1994 military operation to restore democracy and the additional money now being spent to protect the current regime). In 1965, Haiti’s per-capita gross domestic product (GDP) was $360. In 1996 it was $165.

A similar story can be seen in Sudan. Sudan has been the recipient of U.S. foreign aid for 41 years. In 1965, Sudan had a per capita wealth of only $806. Some three decades later, the country’s per capita wealth has remained essentially the same, measuring only $800 in 1996.

These are, admittedly, extreme (though not rare) cases. Some recipient countries have grown wealthier. For example, the country of Lesotho’s per-capita GDP in 1965 was a mere $126. By 1996 it had nearly tripled to a staggering $360, or less than one percent of the level in the United States. Even if foreign aid does have a positive impact on economic growth, it is usually negligible. The fact is, despite nearly $400 million in U.S. foreign aid, Lesotho remains one of the poorest countries in the world.

If the Index of Economic Freedom and the history of international foreign aid provide any insight into the economic development process, it is not to suggest which countries deserve economic development aid, for none do. Instead, the Index and history demonstrate the general futility of providing economic development assistance in the first place. In other words, no country deserves the sort of aid the United States has been doling out for the past thirty years, or any economic aid for that matter. Although a well-intentioned foreign aid program may help a newly independent country to pay for the development of a commercial code, for example, it is far more likely to hinder the country’s economic development process.

True and lasting economic development depend on a free and open economy. Take the Czech Republic for example. Unlike many of its ex-Soviet bloc brother nations, the Czech Republic has privatized most of its formerly state run industries, reduced trade tariffs, and instituted a strong system of private property rights. On the other hand, the Czech Republic has shunned foreign aid, accepting less than the tiny, aforementioned country of Lesotho. The result has been impressive: strong per capita GDP and wealth creation that show no sign of ebbing anytime in the near future.

Foreign aid, as practiced for the past 30 years, has delayed economic growth by prolonging the implementation of true reforms such as the privatization of state-owned industries, and/or the lowering of taxes and tariffs. Until the less-developed countries adopt these free-market reforms, they will continue to be impoverished no matter how much foreign aid money they receive.