Bradley in DC
10-03-2007, 08:35 AM
http://www.fee.org/publications/the-freeman/article.asp?aid=560
The Freeman: Ideas on Liberty - February 1990
Vol. 40 No. 2
The Failures and Fallacies of Foreign Aid
By David Osterfeld
David Osterfeld is Associate Professor of Political Science at St. Joseph’s College in Rensselaer, Indiana.
The case for foreign “aid” is seldom made; it is taken as axiomatic. In its 1980 report, North-South: A Program for Survival, the Brandt Commission states that “The poorer and weaker countries have not been able to raise much money on commercial terms. For them, Official Development Assistance or aid is the principal source of funds” (1980, p. 224). Such questions as why some countries remain poor and weak while others progress, or why these countries are unable to raise money on commercial terms are never raised. “Aid” is simply assumed to be “essential.”
The Commission laments the “disappointing record” of such developed countries as the United States which have not met the 0.7 percent target for Official Development Assistance established by the United Nations in the early 1970s. “An increase in total aid,” says the Commission, “must remain a high priority,” and “the overall flow of wealth must increase” (pp. 226-27).
In its follow-up report three years later, the Brandt Commission reiterated its call for increased “aid.” The Commission asserted that despite “a few glaring examples of misused or unsuccessful aid loans,” most “aid” was effectively used (1983, p. 78); observed that there remained substantial unmet needs, especially in the poorest of the less-developed countries (LDCs) (p. 75); deplored the “strong current mood in the donor com munity to require greater efforts by aid recipients to improve their own economic performance”; called on donor countries to “respect . . . different economic systems” (p. 73); and urged “donors to double by 1985, in real terms, the aid flows which the poorest countries received in the five years up to 1981.”
The report also called on the donor countries to waive all “official debt” for the least developed countries (pp. 76- 77). And, just in case there was any doubt, the Commission emphasized that even if the LDCs did implement the policy reforms called for by the World Bank and many donor countries, such “reform is not a substitute for more assistance; it requires more assistance to be successful” (p. 74, emphasis in original). Nowhere in either of the Brandt Commission reports is the question even considered of whether “aid” is the appropriate vehicle for stimulating economic development.
Indeed, that any but the misanthropic could oppose programs whose stated goal is to provide “aid” to the less fortunate is generally met with incredulity. For example, in December 1983 on a panel on “Liberation Theology and Third World Development,” Lord Peter Bauer presented a critique of foreign “aid.” Dr. Murdith McLean, who followed Bauer on the panel, opened by commenting that “I was going to begin by saying that everyone thinks foreign aid is at least a good thing to those less well-off than ourselves. It may appear that we have at least one disagreement on that contention in the panel” (p. 39).
But using the term “foreign aid” to describe the political process of transferring wealth from First World taxpayers to Third World governments prejudges the results. There is, as Thomas Sowell notes (p. 239) no more a priori justification for calling it “foreign aid” than “foreign hindrance.” Whether wealth transfer is an aid or a hindrance, Sowell points out, is an empirical question, not a forgone conclusion.
The point is well taken. What are the results of foreign “aid”?
1. The Record
In The Economics of Developing Countries, Wayne Nafziger asks “How effective has aid been?” After listing several criticisms, he concludes (pp. 396-397) that “Nevertheless, the evidence suggests that aid has been essential to many low- income countries in reducing savings and foreign exchange gaps.” However, no evidence is presented to support this assessment. Similarly, Nafziger acknowledges several criticisms of food aid but concludes (p. 401) that “Nevertheless, food aid has frequently been highly effective” and “plays a vital role in saving human lives during famine or crisis.” Again, no supporting evidence is provided.
Whether bilateral or multinational, the official original purpose of foreign aid—the transfer of resources from one government to another—was to stimulate economic development. However, with the passage of the U.S. Foreign Assistance Act of 1973 and the adoption of the New International Economic Order by the General Assembly of the United Nations in 1974, the additional goal of directly increasing the living standards of the poorest strata in the recipient countries was added to, if it did not in fact replace, the original goal (Eber-stadt, 1985b, pp. 25-26; Erickson and Sumner, pp. 1-21).
Clearly, “aid,” at least according to its original intent, was to be temporary. Once the capacity for self- sustaining economic growth had been achieved, “aid” would no longer be required. Yet, as Paul Craig Roberts has observed (p. 20), “Far from developing, most Third World countries seem to be more dependent than ever on aid.” In fact, it was precisely because of the growing dissatisfaction with the results of foreign “aid” that the “reforms of 1973” altered the focus of the program. As Eberstadt put it (1985b, p. 25) the problem “was that the strategy of export-oriented, self-sustaining growth which we had advocated since the 1940s did not actually benefit the common people of the countries it transformed.”
Yet, by either goal, that of generating self-sustaining economic growth or improving the lot of the poorest segments of the recipient countries, the evidence lends precious little support for the contention that “aid” actually aids.
The total net transfer of capital, private and public, from the West to the Third World between 1950 and 1985 amounted to the staggering sum of over $2 trillion in 1985 prices. Private investment accounted for about 25 percent of this total, but its share has fallen from about 40 percent in the 1950s to only about 16 percent in the 1980s. The $2 trillion, Eberstadt notes (1985a, p. 25), was enough to purchase not only all the companies on the New York Stock Exchange but, in addition, the entire American farm system. What has this massive transfer accomplished?
“Aid” has been directly responsible for the pauperization of large segments of the population in places such as the U.S. trust territory of Micronesia and elsewhere (Fitzgerald, pp. 275-84; Manhard, pp. 207-14).
“Aid” has in many places actually destroyed the possibility for sustained economic growth by driving local producers, especially farmers, out of business. Such was the case in Micronesia, Bangladesh, India, Egypt, Haiti, Guatemala, Kenya, and many other places (Bovard, p. 18; Bandow, p. xiv; Fitzgerald, p. 278 and 288; Eberstadt, 1985b, p. 22).
Some experts believe that food “aid” to India “may have been responsible for millions of Indians starving” (Bovard, p. 18). Other studies have shown that malnutrition in Bangladesh actually rose as food aid to that country increased (Krauss, p. 160). It is unlikely that these are isolated occurrences. Countries such as Peru, Haiti, and Guatemala have either refused to accept U.S. “food aid” or pleaded with the U.S. government to restrict such “aid” (Bovard, p. 18).
Africa, traditionally a food exporter, “lost its historic ability to feed itself,” notes Sowell (p. 239), precisely when donor agencies began to “smother Africa with project aid.” Many observers believe that the relationship is not accidental and that Africa’s economic deterioration, and in particular its tragic agricultural situation, was caused, in part, by “aid” (Ayittey, 1988; Fitzgerald, pp. 287-89; Bauer, 1984, pp. 46, 51-52).
In practically every case, the influx of “aid” has been immediately followed by the emergence of a massive, unproductive, parasitic government bureaucracy whose very existence undercuts the recipients’ ability for sustained economic growth (Fitzgerald, pp. 283, 285-86; Sowell, p. 240; Man-hard, p. 209).
More systematically, the World Bank notes (1983, p. 18) that Official Development Assistance totalled five percent of the gross domestic investment of the low-income countries of South Asia, but over 40 percent in the low-income countries in Africa. It also notes (1980, Table 2.8, p. 11) that for the decade of the 1970s per capita income in South Asia’s low-income countries grew over five times faster than it did in the low-income countries of Africa.
Conversely, the most economically developed parts of the world—Western Europe, the United States, and Japan—developed without aid. Similarly, Hong Kong and Singapore, two of the most economically vibrant areas over the past two decades, received only negligible “aid.”
Finally, Taiwan and South Korea are often touted as “foreign aid” success stories. However, their impressive economic performances began only after large-scale economic aid from the U.S. was discontinued (Krauss, p. 190).
In short, despite the truly massive infusion of “aid” into Third World countries, there is little to suggest that this has succeeded in either stimulating self-sustaining economic growth or improving the plight of the poorest strata of people in the recipient countries.
2. Reforming Foreign “Aid”
Many who acknowledge that foreign “aid” has done little or nothing to help the people of the LDCs believe that the solution lies in reforming the aid program. What is needed, they maintain, is better accounting methods, a closer scrutiny of program grants, or simply better, or more public-spirited, administrators.
It is no doubt true that such reforms, if implemented and followed, would eliminate some of the more unsavory aspects of the aid program, such as the blatant waste, mismanagement, and corruption that has been a part of foreign “aid” since its inception.
One problem, however, is that “aid” has increasingly come to be viewed, by recipient as well as donor countries, not as something freely granted by the latter to the former, but as something the more-developed countries (MDCs) owe the less-developed countries (LDCs). And since the LDCs have a “right” to the “aid” it is impermissible, in fact “immoral,” for donor countries to place restrictions on how the “aid” is to be used. . .
3. Economic Problems of Foreign “Aid”
The economic case against foreign “aid” can be subdivided into two categories: (a) the problem of incentives and (b) the problem of calculation. Each will be dealt with in turn.
a. Incentives. Individuals act to maximize their utility. One of the ways they do this is by making trade-offs between additional units of wealth (and thus work) and additional units of leisure. Each person must decide whether an additional unit of wealth is more valuable to him than the unit of leisure he would have to forgo in order to obtain that wealth. If so, he will prefer to increase his wealth at the expense of his leisure; if not, he will prefer to increase his leisure by reducing his work, and thus his wealth. . .
But even under the best of circumstances, the benefits of emergency aid for victims of famine or other natural disasters may be only an illusion. First of all, if the “aid” is distributed free of charge, it will, as already noted, drive local shops and markets out of business, thus retarding recovery, or even preventing it altogether. But if the food is sold at local, pre-disaster prices, it will tend to freeze domestic production at the disaster level. That is, if enough food is provided by outside “aid” programs to prevent food prices from rising, there will be little incentive for local farmers to return to their pre-disaster level of production, since the additional food could be sold only at lower prices. Thus, even if donated food were sold at pre-disas-ter local prices, it would still permanently displace much local production. And finally, while there are shortages of food in particular places, there is no shortage of food in the world as a whole. And, if necessary, food production could be greatly expanded (see, e.g., Osterfeld, 1988a). Consequently, the reduction in local output due to drought or other natural disasters would, if local prices were permitted to rise, stimulate the importation of food. Significantly, this would not disrupt the recovery process. On the contrary, the higher prices would actually stimulate it since they would encourage local producers to return to their pre-disaster levels of production. As these levels were reached, local prices would fall, crowding out not the local producers but the foreign importers.
That is what would happen in the event of an actual natural disaster. But, as Eberstadt (1985a, p. 25) notes, the fact is that there is very little that is natural about today’s “natural disasters.” “Acts of God,” he writes, “cannot be prevented, but the quotient of human risk and suffering can be vastly and systematically reduced.” During the first decade of the 20th century more than 8,000 Americans died in hurricanes. During the last ten years there have been only 100 hurricane-related deaths. How does one explain this decline despite a doubling of the population? “Improvements in communications, transportation, weather tracking, emergency management, rescue operations, and relief capabilities have made it possible to reduce dramatically the human price exacted by even the worst hurricanes in the most populated areas. Purposeful private and governmental actions,” Eber-stadt continues (1985a, p. 26), “can now substantially cut the toll from other natural disasters as well, even in the poorest nations.”
Given the surplus of world food coupled with the use of “early warning systems” ranging from aerial and meteorological surveillances to using price fluctuations in local markets as a barometer of the size of regional harvests, there is no reason in today’s world for local crop failures, due to such natural conditions as drought, to result in famine. Where famine has occurred, it is traceable to government policies which have, intentionally or unintentionally, short- circuited both the early warning systems and the price-induced transfer of food to the affected areas. In many cases, such as the starvation of millions of Russians in 1929-39, the starvation of at least a million Ibos in Nigeria in the late 1960s, the starvation of 100,000 Timorese after Timor’s annexation by Indonesia in the mid- 1970s, the starvation of an estimated two million Cambodians after the Khmer Rouge seized power in the late 1970s, the mass starvation in Afghanistan following the deliberate destruction of Afghanistan’s food system after the 1979 invasion by the Soviet Union, and massive famines in Eritrea in the 1970s and 1980s, starvation was the deliberate intention of the government (Eberstadt, 1985a, pp. 25-27; Zinsmeister, pp. 22-30).
In other cases, such as the starvation of 20 to 30 million Chinese during the “Three Lean Years” from 1959 to 1962, and the massive famine in most of the sub-Saharan countries in the 1980s, starvation, while not the intention of the government, was nevertheless the direct, albeit unintentional, consequence of ill-advised government policies such as price controls, colloctivization, marketing boards, and other interventionist measures which not only reduced the production of food locally but discouraged or even prohibited the importation of food from abroad.
In the former case, aid was not desired, since starvation was the direct intention of the government. In the latter case, “aid” may have done more harm than good since by subsidizing the effects of ill-advised government policies, it enabled, even encouraged, the governments to continue pursuing the very policies that were responsible for the catastrophe in the first place, thereby compounding the harm.
b. Calculation. Another problem inherent in the nature of foreign “aid” is that of economic calculation. It is economically rational to pursue a project only when the (expected) benefits exceed the costs. Although this may be occasionally overridden by non-economic considerations, any co retry interested in economic growth and development must adhere to this general principle. . .
4. Political Problems of Foreign “Aid”
There are also serious political problems endemic in foreign “aid” programs.
a. Centralization. Foreign “aid,” the transfer of resources from government to government, inevitably means the centralization of governmental power over the economic affairs of the recipient country. Aside from the potential for serious restrictions on individual freedom that this centralization involves, there are other untoward ramifications.
One of these is the diversion of activity from economic production to political distribution. As Bauer has put it (1978, p. 162)
The question of who runs the government has become paramount in many Third World countries and is especially so in multiracial societies, like those of much of Asia and Africa. In such a situation the energies and resources of people, particularly the most ambitious and energetic, are diverted from economic activity to political life, partly from choice and partly from necessity. Foreign aid has contributed substantially to the politicization of life in the Third World. It augments the resources of governments as compared to the private sector, and the criteria of allocation tend to favor governments trying to establish state controls. . .
b. Environment. Further, it is a mistake to regard “aid” as a net addition to the capital stock of a country. The expansion of government control over the economy reduces “pressure on the government to maintain an environment favorable to private enterprise.” Since this discourages private investment, domestic and foreign, the result is often a net reduction in the amount of capital available (Friedman, p. 207). . .
c. Incentives. Related to the foregoing is the problem of the political incentives created by foreign “aid.” Foreign “aid” is a multi-billion dollar industry. The net transfer of resources, bilateral and multilateral, public and private, from the more-developed countries to the less-developed countries has been placed at as much as $80 billion a year (Eberstadt, 1985a, p. 28). The U.S. spent over $12 billion on bilateral “aid” in 1985 alone (U.S. Department of Commerce, 1987, p. 766, Table 1339). In donor countries the result is large foreign “aid” bureaucracies with vested interests in maintaining the programs. In the recipient countries, the result is often unscrupulous rulers who all too often divert the money into their own and their cronies’ pockets. It is no accident that some of the world’s wealthiest individuals are or were rulers of some of the world’s poorest coun tries. The Marcos, Duvalier, and Mobutu fortunes are only the tip of the iceberg.
It is important to understand that foreign “aid” “goes not to the pitiable figures we see on aid posters or in aid advertisements,” Bauer and
Yamey point out (1983, p. 125), “it goes to their rulers.” Dispensing “aid” on the basis of need, which has become increasingly the case with multilateral programs, especially after the adoption of the New International Economic Order, as well as with bilateral “aid,” following the passage of the “Reforms of ‘73,” creates a perverse incentive: it provides Third World rulers with an incentive to perpetuate the poverty of their subjects.
There is little doubt that this is the case. Throughout the Third World one finds entire occupations being outlawed, and hardworking and industrious groups being subjected to brutal treatment, ranging from discrimination to exclusion from choice occupations to outright slaughter. An example of the former is Mobutu’s expulsion of traders or middlemen that promptly reduced Zaire’s per capita income, thereby qualifying Zaire, i.e., President Mobutu, for increased “aid” (Bauer and Yamey, 1983, p. 125). Examples of the latter include the brutal mistreatment of economically wealthy but politically weak groups in Algeria, Burma, Burundi, Egypt, Ethiopia, Ghana, Indonesia, Iraq, Kenya, Malaysia, Nigeria, Sri Lanka, Tanzania, Uganda, Zaire, and Zambia. “Because the victims’ incomes were above the national average,” says Krauss (p. 158), “their maltreatment promptly reduced average incomes and thereby widened income differences between these countries and the West.” The result is that the serf-inflicted economic deterioration qualified these countries for additional “aid.”
Since “bureaucratic success” is measured by the size of an agency’s budget, or, in the case of transfer organizations, by the volume of loans dispensed, these agencies have far more incentive to increase the amount of wealth transferred than to be concerned about how it is used (Sowell, p. 238; Man-hard, pp. 212-13). Both the World Bank and the International Development Association are examples. The Bank’s authorized capital increased from an initial $22 billion in 1944 to $86.4 billion in 1981. The International Development Association’s increased from an initial $916 million in 1960 to $12 billion in 1981.
Some observers, however, have defended World Bank and International Development Association activities. The Brandt Commission reports (1980, p. 226) that “the overwhelming proportion of aid money has been usefully spent” and that it has “done much to diminish hardships in low-income countries.” And Robert Ayres (pp. 15, 37, 63) argues that while there have been difficulties, World Bank and International Development Association loans have benefited the world’s poor and that any curtailment would cause “societies in transition” to suffer. Yet one finds little concrete evidence to support these conclusions. On the contrary, there are numerous references to such things as “benefit deflections” (pp. 103, 124, 193) and “shortfalls” (p. 126). Ayres states that the World Bank always “seeks assurances from the recipient country” about the way the loan will be used, but then observes that “the Bank can obtain all of the assurances it wants, but it is up to the recipient country to make good on them, and the Bank does not always possess the leverage or supervisory capability for seeing to this” (pp. 43-44).
Elsewhere Ayres says that “the political elite in most recipient countries does not care about the poor majority. Where there is the absence of political will and commitment it is difficult for the Bank to be effective” (p. 57). He acknowledges that “In several of the countries many of the housing units in the Bank-financed projects had in fact been occupied by families with incomes higher than originally intended by the Bank. In some instances . . . it reflected a deliberate decision by the government” (p. 193). He notes that “World Bank re sources could free recipient-country resources for the pursuit of other projects” (p. 216). When the Bank financed $23 million for a rural development project and $23.5 million for educational development, Ayres (p. 217) notes that “The Brazilian government has $46.5 million to spend on other, including non-developmental concerns. Seen in this light, Bank resources financed not only the projects that had been appraised and approved but also projects, perhaps even perverse ones, that had not. Even the approved projects may have entailed side benefits going not to the poor but to those allied with the political regime.” And finally, Ayres acknowledges that some bank officials “admitted that they cooked up the evidence” (p. 108).
In short, foreign “aid” generates incentives which, by their nature, militate against economic growth and development.
5. Conclusion
Far from stimulating growth and development as was its original intention, foreign “aid” actually retards development and perpetuates, even exacerbates, poverty. While reforms might reduce some of the damage caused by the program, the real causes for the failure of foreign “aid” lie in the nature of the program.
Foreign “aid” retards the development of those attitudes—thrift, industry, and self-reliance—that are essential for economic growth and development; it blurs lines of investment and distorts cost data, resulting in a massive waste of scarce resources; it politicizes life in the recipient country, thereby diverting energy from economic to political activities; it reduces pressure on the recipient governments to maintain an environment favorable to private enterprise, thereby discouraging private investment; and by providing money to governments on the basis of the poverty of its subjects, it gives the ruling elites in the recipient countries a vested interest in policies that impede or prevent economic development.
Moreover, since there are large, politically powerful foreign “aid” bureaucracies in both donor and recipient countries with vested interests in maintaining or even expanding the size of the “aid” programs, it is highly unlikely that effective reforms, even were that possible, could be implemented. For example, the occasional proposals made to reform the U.S. “aid” programs to Micronesia and elsewhere have never been seriously considered (Fitzgerald, pp. 289-90). Certainly one reason for the plethora of nearly 500 different “welfare” programs available there is that it is a beautiful island chain that is a perfect vacation spot. And once a bureaucrat’s agency has a program there, he naturally finds that he must visit the island chain in order to see that his agency’s program is being operated properly. Since the visit is in the line of duty it is, of course, at taxpayer expense (see, e.g., Manhard, pp. 212-13).
Finally, many maintain that the more fortunate have a moral obligation to help those who are less fortunate. However this may be, foreign “aid” cannot be justified on such grounds for, as already alluded to, it does not transfer wealth from the more to the less fortunate. True, it transfers wealth from rich to poor nations, but this is hardly the same as transferring wealth from rich to poor individuals. Many of the taxpayers in the rich nations are themselves either poor or middle-income wage earners; many of the recipients in the poor nations are the economic elite. As Ayittey (1986a, p. 9) points out, “Aid, rather incongruously, often turns out to be a tax on the poor people in rich nations for distribution to the rich people in poor nations.” Thus, foreign “aid” is actually a program for transferring wealth upward, from the poor to the rich.
Foreign “aid” is not “aid” at all; it is foreign “harm,” and the sooner this is recognized the better. The capitalist countries of the West developed without “aid,” as did Japan. The most rapidly developing Third World countries—Taiwan, Hong Kong, Singapore, and South Korea—received little “aid” or began developing only after massive amounts of “aid” were discontinued. What is needed, as Melvyn Krauss perceptively points out (p. 109), is not the transfer of wealth but the transfer of prosperity, i.e., the “transfer of the ability to produce adequate amounts of real income.” Since the public sector can only transfer wealth while the private sector produces wealth, “the transfer of prosperity,” Krauss points out, “depends greatly on private sector participation.”
As Peter Bauer has written (1972, pp. 97-98): “If all conditions for development other than capital are present, capital will soon be generated locally or will be available . . . from abroad . . . . If, however, the conditions for development are not present, then aid . . . will be necessarily unproductive and therefore ineffective. Thus, if the mainsprings of development are present, material progress will occur even without foreign aid. If they are absent, it will not occur even with aid.”
The Freeman: Ideas on Liberty - February 1990
Vol. 40 No. 2
The Failures and Fallacies of Foreign Aid
By David Osterfeld
David Osterfeld is Associate Professor of Political Science at St. Joseph’s College in Rensselaer, Indiana.
The case for foreign “aid” is seldom made; it is taken as axiomatic. In its 1980 report, North-South: A Program for Survival, the Brandt Commission states that “The poorer and weaker countries have not been able to raise much money on commercial terms. For them, Official Development Assistance or aid is the principal source of funds” (1980, p. 224). Such questions as why some countries remain poor and weak while others progress, or why these countries are unable to raise money on commercial terms are never raised. “Aid” is simply assumed to be “essential.”
The Commission laments the “disappointing record” of such developed countries as the United States which have not met the 0.7 percent target for Official Development Assistance established by the United Nations in the early 1970s. “An increase in total aid,” says the Commission, “must remain a high priority,” and “the overall flow of wealth must increase” (pp. 226-27).
In its follow-up report three years later, the Brandt Commission reiterated its call for increased “aid.” The Commission asserted that despite “a few glaring examples of misused or unsuccessful aid loans,” most “aid” was effectively used (1983, p. 78); observed that there remained substantial unmet needs, especially in the poorest of the less-developed countries (LDCs) (p. 75); deplored the “strong current mood in the donor com munity to require greater efforts by aid recipients to improve their own economic performance”; called on donor countries to “respect . . . different economic systems” (p. 73); and urged “donors to double by 1985, in real terms, the aid flows which the poorest countries received in the five years up to 1981.”
The report also called on the donor countries to waive all “official debt” for the least developed countries (pp. 76- 77). And, just in case there was any doubt, the Commission emphasized that even if the LDCs did implement the policy reforms called for by the World Bank and many donor countries, such “reform is not a substitute for more assistance; it requires more assistance to be successful” (p. 74, emphasis in original). Nowhere in either of the Brandt Commission reports is the question even considered of whether “aid” is the appropriate vehicle for stimulating economic development.
Indeed, that any but the misanthropic could oppose programs whose stated goal is to provide “aid” to the less fortunate is generally met with incredulity. For example, in December 1983 on a panel on “Liberation Theology and Third World Development,” Lord Peter Bauer presented a critique of foreign “aid.” Dr. Murdith McLean, who followed Bauer on the panel, opened by commenting that “I was going to begin by saying that everyone thinks foreign aid is at least a good thing to those less well-off than ourselves. It may appear that we have at least one disagreement on that contention in the panel” (p. 39).
But using the term “foreign aid” to describe the political process of transferring wealth from First World taxpayers to Third World governments prejudges the results. There is, as Thomas Sowell notes (p. 239) no more a priori justification for calling it “foreign aid” than “foreign hindrance.” Whether wealth transfer is an aid or a hindrance, Sowell points out, is an empirical question, not a forgone conclusion.
The point is well taken. What are the results of foreign “aid”?
1. The Record
In The Economics of Developing Countries, Wayne Nafziger asks “How effective has aid been?” After listing several criticisms, he concludes (pp. 396-397) that “Nevertheless, the evidence suggests that aid has been essential to many low- income countries in reducing savings and foreign exchange gaps.” However, no evidence is presented to support this assessment. Similarly, Nafziger acknowledges several criticisms of food aid but concludes (p. 401) that “Nevertheless, food aid has frequently been highly effective” and “plays a vital role in saving human lives during famine or crisis.” Again, no supporting evidence is provided.
Whether bilateral or multinational, the official original purpose of foreign aid—the transfer of resources from one government to another—was to stimulate economic development. However, with the passage of the U.S. Foreign Assistance Act of 1973 and the adoption of the New International Economic Order by the General Assembly of the United Nations in 1974, the additional goal of directly increasing the living standards of the poorest strata in the recipient countries was added to, if it did not in fact replace, the original goal (Eber-stadt, 1985b, pp. 25-26; Erickson and Sumner, pp. 1-21).
Clearly, “aid,” at least according to its original intent, was to be temporary. Once the capacity for self- sustaining economic growth had been achieved, “aid” would no longer be required. Yet, as Paul Craig Roberts has observed (p. 20), “Far from developing, most Third World countries seem to be more dependent than ever on aid.” In fact, it was precisely because of the growing dissatisfaction with the results of foreign “aid” that the “reforms of 1973” altered the focus of the program. As Eberstadt put it (1985b, p. 25) the problem “was that the strategy of export-oriented, self-sustaining growth which we had advocated since the 1940s did not actually benefit the common people of the countries it transformed.”
Yet, by either goal, that of generating self-sustaining economic growth or improving the lot of the poorest segments of the recipient countries, the evidence lends precious little support for the contention that “aid” actually aids.
The total net transfer of capital, private and public, from the West to the Third World between 1950 and 1985 amounted to the staggering sum of over $2 trillion in 1985 prices. Private investment accounted for about 25 percent of this total, but its share has fallen from about 40 percent in the 1950s to only about 16 percent in the 1980s. The $2 trillion, Eberstadt notes (1985a, p. 25), was enough to purchase not only all the companies on the New York Stock Exchange but, in addition, the entire American farm system. What has this massive transfer accomplished?
“Aid” has been directly responsible for the pauperization of large segments of the population in places such as the U.S. trust territory of Micronesia and elsewhere (Fitzgerald, pp. 275-84; Manhard, pp. 207-14).
“Aid” has in many places actually destroyed the possibility for sustained economic growth by driving local producers, especially farmers, out of business. Such was the case in Micronesia, Bangladesh, India, Egypt, Haiti, Guatemala, Kenya, and many other places (Bovard, p. 18; Bandow, p. xiv; Fitzgerald, p. 278 and 288; Eberstadt, 1985b, p. 22).
Some experts believe that food “aid” to India “may have been responsible for millions of Indians starving” (Bovard, p. 18). Other studies have shown that malnutrition in Bangladesh actually rose as food aid to that country increased (Krauss, p. 160). It is unlikely that these are isolated occurrences. Countries such as Peru, Haiti, and Guatemala have either refused to accept U.S. “food aid” or pleaded with the U.S. government to restrict such “aid” (Bovard, p. 18).
Africa, traditionally a food exporter, “lost its historic ability to feed itself,” notes Sowell (p. 239), precisely when donor agencies began to “smother Africa with project aid.” Many observers believe that the relationship is not accidental and that Africa’s economic deterioration, and in particular its tragic agricultural situation, was caused, in part, by “aid” (Ayittey, 1988; Fitzgerald, pp. 287-89; Bauer, 1984, pp. 46, 51-52).
In practically every case, the influx of “aid” has been immediately followed by the emergence of a massive, unproductive, parasitic government bureaucracy whose very existence undercuts the recipients’ ability for sustained economic growth (Fitzgerald, pp. 283, 285-86; Sowell, p. 240; Man-hard, p. 209).
More systematically, the World Bank notes (1983, p. 18) that Official Development Assistance totalled five percent of the gross domestic investment of the low-income countries of South Asia, but over 40 percent in the low-income countries in Africa. It also notes (1980, Table 2.8, p. 11) that for the decade of the 1970s per capita income in South Asia’s low-income countries grew over five times faster than it did in the low-income countries of Africa.
Conversely, the most economically developed parts of the world—Western Europe, the United States, and Japan—developed without aid. Similarly, Hong Kong and Singapore, two of the most economically vibrant areas over the past two decades, received only negligible “aid.”
Finally, Taiwan and South Korea are often touted as “foreign aid” success stories. However, their impressive economic performances began only after large-scale economic aid from the U.S. was discontinued (Krauss, p. 190).
In short, despite the truly massive infusion of “aid” into Third World countries, there is little to suggest that this has succeeded in either stimulating self-sustaining economic growth or improving the plight of the poorest strata of people in the recipient countries.
2. Reforming Foreign “Aid”
Many who acknowledge that foreign “aid” has done little or nothing to help the people of the LDCs believe that the solution lies in reforming the aid program. What is needed, they maintain, is better accounting methods, a closer scrutiny of program grants, or simply better, or more public-spirited, administrators.
It is no doubt true that such reforms, if implemented and followed, would eliminate some of the more unsavory aspects of the aid program, such as the blatant waste, mismanagement, and corruption that has been a part of foreign “aid” since its inception.
One problem, however, is that “aid” has increasingly come to be viewed, by recipient as well as donor countries, not as something freely granted by the latter to the former, but as something the more-developed countries (MDCs) owe the less-developed countries (LDCs). And since the LDCs have a “right” to the “aid” it is impermissible, in fact “immoral,” for donor countries to place restrictions on how the “aid” is to be used. . .
3. Economic Problems of Foreign “Aid”
The economic case against foreign “aid” can be subdivided into two categories: (a) the problem of incentives and (b) the problem of calculation. Each will be dealt with in turn.
a. Incentives. Individuals act to maximize their utility. One of the ways they do this is by making trade-offs between additional units of wealth (and thus work) and additional units of leisure. Each person must decide whether an additional unit of wealth is more valuable to him than the unit of leisure he would have to forgo in order to obtain that wealth. If so, he will prefer to increase his wealth at the expense of his leisure; if not, he will prefer to increase his leisure by reducing his work, and thus his wealth. . .
But even under the best of circumstances, the benefits of emergency aid for victims of famine or other natural disasters may be only an illusion. First of all, if the “aid” is distributed free of charge, it will, as already noted, drive local shops and markets out of business, thus retarding recovery, or even preventing it altogether. But if the food is sold at local, pre-disaster prices, it will tend to freeze domestic production at the disaster level. That is, if enough food is provided by outside “aid” programs to prevent food prices from rising, there will be little incentive for local farmers to return to their pre-disaster level of production, since the additional food could be sold only at lower prices. Thus, even if donated food were sold at pre-disas-ter local prices, it would still permanently displace much local production. And finally, while there are shortages of food in particular places, there is no shortage of food in the world as a whole. And, if necessary, food production could be greatly expanded (see, e.g., Osterfeld, 1988a). Consequently, the reduction in local output due to drought or other natural disasters would, if local prices were permitted to rise, stimulate the importation of food. Significantly, this would not disrupt the recovery process. On the contrary, the higher prices would actually stimulate it since they would encourage local producers to return to their pre-disaster levels of production. As these levels were reached, local prices would fall, crowding out not the local producers but the foreign importers.
That is what would happen in the event of an actual natural disaster. But, as Eberstadt (1985a, p. 25) notes, the fact is that there is very little that is natural about today’s “natural disasters.” “Acts of God,” he writes, “cannot be prevented, but the quotient of human risk and suffering can be vastly and systematically reduced.” During the first decade of the 20th century more than 8,000 Americans died in hurricanes. During the last ten years there have been only 100 hurricane-related deaths. How does one explain this decline despite a doubling of the population? “Improvements in communications, transportation, weather tracking, emergency management, rescue operations, and relief capabilities have made it possible to reduce dramatically the human price exacted by even the worst hurricanes in the most populated areas. Purposeful private and governmental actions,” Eber-stadt continues (1985a, p. 26), “can now substantially cut the toll from other natural disasters as well, even in the poorest nations.”
Given the surplus of world food coupled with the use of “early warning systems” ranging from aerial and meteorological surveillances to using price fluctuations in local markets as a barometer of the size of regional harvests, there is no reason in today’s world for local crop failures, due to such natural conditions as drought, to result in famine. Where famine has occurred, it is traceable to government policies which have, intentionally or unintentionally, short- circuited both the early warning systems and the price-induced transfer of food to the affected areas. In many cases, such as the starvation of millions of Russians in 1929-39, the starvation of at least a million Ibos in Nigeria in the late 1960s, the starvation of 100,000 Timorese after Timor’s annexation by Indonesia in the mid- 1970s, the starvation of an estimated two million Cambodians after the Khmer Rouge seized power in the late 1970s, the mass starvation in Afghanistan following the deliberate destruction of Afghanistan’s food system after the 1979 invasion by the Soviet Union, and massive famines in Eritrea in the 1970s and 1980s, starvation was the deliberate intention of the government (Eberstadt, 1985a, pp. 25-27; Zinsmeister, pp. 22-30).
In other cases, such as the starvation of 20 to 30 million Chinese during the “Three Lean Years” from 1959 to 1962, and the massive famine in most of the sub-Saharan countries in the 1980s, starvation, while not the intention of the government, was nevertheless the direct, albeit unintentional, consequence of ill-advised government policies such as price controls, colloctivization, marketing boards, and other interventionist measures which not only reduced the production of food locally but discouraged or even prohibited the importation of food from abroad.
In the former case, aid was not desired, since starvation was the direct intention of the government. In the latter case, “aid” may have done more harm than good since by subsidizing the effects of ill-advised government policies, it enabled, even encouraged, the governments to continue pursuing the very policies that were responsible for the catastrophe in the first place, thereby compounding the harm.
b. Calculation. Another problem inherent in the nature of foreign “aid” is that of economic calculation. It is economically rational to pursue a project only when the (expected) benefits exceed the costs. Although this may be occasionally overridden by non-economic considerations, any co retry interested in economic growth and development must adhere to this general principle. . .
4. Political Problems of Foreign “Aid”
There are also serious political problems endemic in foreign “aid” programs.
a. Centralization. Foreign “aid,” the transfer of resources from government to government, inevitably means the centralization of governmental power over the economic affairs of the recipient country. Aside from the potential for serious restrictions on individual freedom that this centralization involves, there are other untoward ramifications.
One of these is the diversion of activity from economic production to political distribution. As Bauer has put it (1978, p. 162)
The question of who runs the government has become paramount in many Third World countries and is especially so in multiracial societies, like those of much of Asia and Africa. In such a situation the energies and resources of people, particularly the most ambitious and energetic, are diverted from economic activity to political life, partly from choice and partly from necessity. Foreign aid has contributed substantially to the politicization of life in the Third World. It augments the resources of governments as compared to the private sector, and the criteria of allocation tend to favor governments trying to establish state controls. . .
b. Environment. Further, it is a mistake to regard “aid” as a net addition to the capital stock of a country. The expansion of government control over the economy reduces “pressure on the government to maintain an environment favorable to private enterprise.” Since this discourages private investment, domestic and foreign, the result is often a net reduction in the amount of capital available (Friedman, p. 207). . .
c. Incentives. Related to the foregoing is the problem of the political incentives created by foreign “aid.” Foreign “aid” is a multi-billion dollar industry. The net transfer of resources, bilateral and multilateral, public and private, from the more-developed countries to the less-developed countries has been placed at as much as $80 billion a year (Eberstadt, 1985a, p. 28). The U.S. spent over $12 billion on bilateral “aid” in 1985 alone (U.S. Department of Commerce, 1987, p. 766, Table 1339). In donor countries the result is large foreign “aid” bureaucracies with vested interests in maintaining the programs. In the recipient countries, the result is often unscrupulous rulers who all too often divert the money into their own and their cronies’ pockets. It is no accident that some of the world’s wealthiest individuals are or were rulers of some of the world’s poorest coun tries. The Marcos, Duvalier, and Mobutu fortunes are only the tip of the iceberg.
It is important to understand that foreign “aid” “goes not to the pitiable figures we see on aid posters or in aid advertisements,” Bauer and
Yamey point out (1983, p. 125), “it goes to their rulers.” Dispensing “aid” on the basis of need, which has become increasingly the case with multilateral programs, especially after the adoption of the New International Economic Order, as well as with bilateral “aid,” following the passage of the “Reforms of ‘73,” creates a perverse incentive: it provides Third World rulers with an incentive to perpetuate the poverty of their subjects.
There is little doubt that this is the case. Throughout the Third World one finds entire occupations being outlawed, and hardworking and industrious groups being subjected to brutal treatment, ranging from discrimination to exclusion from choice occupations to outright slaughter. An example of the former is Mobutu’s expulsion of traders or middlemen that promptly reduced Zaire’s per capita income, thereby qualifying Zaire, i.e., President Mobutu, for increased “aid” (Bauer and Yamey, 1983, p. 125). Examples of the latter include the brutal mistreatment of economically wealthy but politically weak groups in Algeria, Burma, Burundi, Egypt, Ethiopia, Ghana, Indonesia, Iraq, Kenya, Malaysia, Nigeria, Sri Lanka, Tanzania, Uganda, Zaire, and Zambia. “Because the victims’ incomes were above the national average,” says Krauss (p. 158), “their maltreatment promptly reduced average incomes and thereby widened income differences between these countries and the West.” The result is that the serf-inflicted economic deterioration qualified these countries for additional “aid.”
Since “bureaucratic success” is measured by the size of an agency’s budget, or, in the case of transfer organizations, by the volume of loans dispensed, these agencies have far more incentive to increase the amount of wealth transferred than to be concerned about how it is used (Sowell, p. 238; Man-hard, pp. 212-13). Both the World Bank and the International Development Association are examples. The Bank’s authorized capital increased from an initial $22 billion in 1944 to $86.4 billion in 1981. The International Development Association’s increased from an initial $916 million in 1960 to $12 billion in 1981.
Some observers, however, have defended World Bank and International Development Association activities. The Brandt Commission reports (1980, p. 226) that “the overwhelming proportion of aid money has been usefully spent” and that it has “done much to diminish hardships in low-income countries.” And Robert Ayres (pp. 15, 37, 63) argues that while there have been difficulties, World Bank and International Development Association loans have benefited the world’s poor and that any curtailment would cause “societies in transition” to suffer. Yet one finds little concrete evidence to support these conclusions. On the contrary, there are numerous references to such things as “benefit deflections” (pp. 103, 124, 193) and “shortfalls” (p. 126). Ayres states that the World Bank always “seeks assurances from the recipient country” about the way the loan will be used, but then observes that “the Bank can obtain all of the assurances it wants, but it is up to the recipient country to make good on them, and the Bank does not always possess the leverage or supervisory capability for seeing to this” (pp. 43-44).
Elsewhere Ayres says that “the political elite in most recipient countries does not care about the poor majority. Where there is the absence of political will and commitment it is difficult for the Bank to be effective” (p. 57). He acknowledges that “In several of the countries many of the housing units in the Bank-financed projects had in fact been occupied by families with incomes higher than originally intended by the Bank. In some instances . . . it reflected a deliberate decision by the government” (p. 193). He notes that “World Bank re sources could free recipient-country resources for the pursuit of other projects” (p. 216). When the Bank financed $23 million for a rural development project and $23.5 million for educational development, Ayres (p. 217) notes that “The Brazilian government has $46.5 million to spend on other, including non-developmental concerns. Seen in this light, Bank resources financed not only the projects that had been appraised and approved but also projects, perhaps even perverse ones, that had not. Even the approved projects may have entailed side benefits going not to the poor but to those allied with the political regime.” And finally, Ayres acknowledges that some bank officials “admitted that they cooked up the evidence” (p. 108).
In short, foreign “aid” generates incentives which, by their nature, militate against economic growth and development.
5. Conclusion
Far from stimulating growth and development as was its original intention, foreign “aid” actually retards development and perpetuates, even exacerbates, poverty. While reforms might reduce some of the damage caused by the program, the real causes for the failure of foreign “aid” lie in the nature of the program.
Foreign “aid” retards the development of those attitudes—thrift, industry, and self-reliance—that are essential for economic growth and development; it blurs lines of investment and distorts cost data, resulting in a massive waste of scarce resources; it politicizes life in the recipient country, thereby diverting energy from economic to political activities; it reduces pressure on the recipient governments to maintain an environment favorable to private enterprise, thereby discouraging private investment; and by providing money to governments on the basis of the poverty of its subjects, it gives the ruling elites in the recipient countries a vested interest in policies that impede or prevent economic development.
Moreover, since there are large, politically powerful foreign “aid” bureaucracies in both donor and recipient countries with vested interests in maintaining or even expanding the size of the “aid” programs, it is highly unlikely that effective reforms, even were that possible, could be implemented. For example, the occasional proposals made to reform the U.S. “aid” programs to Micronesia and elsewhere have never been seriously considered (Fitzgerald, pp. 289-90). Certainly one reason for the plethora of nearly 500 different “welfare” programs available there is that it is a beautiful island chain that is a perfect vacation spot. And once a bureaucrat’s agency has a program there, he naturally finds that he must visit the island chain in order to see that his agency’s program is being operated properly. Since the visit is in the line of duty it is, of course, at taxpayer expense (see, e.g., Manhard, pp. 212-13).
Finally, many maintain that the more fortunate have a moral obligation to help those who are less fortunate. However this may be, foreign “aid” cannot be justified on such grounds for, as already alluded to, it does not transfer wealth from the more to the less fortunate. True, it transfers wealth from rich to poor nations, but this is hardly the same as transferring wealth from rich to poor individuals. Many of the taxpayers in the rich nations are themselves either poor or middle-income wage earners; many of the recipients in the poor nations are the economic elite. As Ayittey (1986a, p. 9) points out, “Aid, rather incongruously, often turns out to be a tax on the poor people in rich nations for distribution to the rich people in poor nations.” Thus, foreign “aid” is actually a program for transferring wealth upward, from the poor to the rich.
Foreign “aid” is not “aid” at all; it is foreign “harm,” and the sooner this is recognized the better. The capitalist countries of the West developed without “aid,” as did Japan. The most rapidly developing Third World countries—Taiwan, Hong Kong, Singapore, and South Korea—received little “aid” or began developing only after massive amounts of “aid” were discontinued. What is needed, as Melvyn Krauss perceptively points out (p. 109), is not the transfer of wealth but the transfer of prosperity, i.e., the “transfer of the ability to produce adequate amounts of real income.” Since the public sector can only transfer wealth while the private sector produces wealth, “the transfer of prosperity,” Krauss points out, “depends greatly on private sector participation.”
As Peter Bauer has written (1972, pp. 97-98): “If all conditions for development other than capital are present, capital will soon be generated locally or will be available . . . from abroad . . . . If, however, the conditions for development are not present, then aid . . . will be necessarily unproductive and therefore ineffective. Thus, if the mainsprings of development are present, material progress will occur even without foreign aid. If they are absent, it will not occur even with aid.”