The Issue in Brief

The United States is the largest bilateral donor to the developing world; in 2001, it contributed $10.9 billion--roughly the entire economic output of Kenya--in official development assistance (ODA) to developing countries.1 Yet most recipients of U.S. development aid are poorer now than they were before first receiving it. From 1980 to 2000, the United States disbursed $167 billion to 156 developing countries; but among the 97 countries that have reliable economic data covering that period, median per capita gross domestic product (GDP) declined from $1,076 in 1980 to $994 in 2000.2
Traditional economic aid has been ineffective because it is often directed toward governments that embrace misguided policies that undermine economic development or toward corrupt regimes that steal the money. For example, Nigeria--one of the world's most corrupt countries under a succession of dictators--received over $190 million in U.S. development assistance from 1980 to 2000.3 Per capita GDP in Nigeria today is $254. Directing more money to such countries only reinforces the policies that have retarded economic growth, exacerbating their predicament and increasing their dependence on international donors.

At best, foreign development assistance should accelerate the economic growth that results from sound policies and good governance. This is the principle behind the Bush Administration's proposal to establish a Millennium Challenge Account (MCA), an official development assistance program that would be separate and distinct from existing aid flows. Under this plan, aid would be distributed only to developing countries that "govern justly, invest in their people and encourage economic freedom."4 For the MCA to be an effective catalyst for development, however, it must primarily encourage economic freedom--the most reliable and consistent determinant of the economic growth that can alleviate poverty--by directing economic aid only to developing countries that have made demonstrable progress in adopting policies that promote economic freedom.

The President's plan reverses the traditional aid formula; instead of giving aid to get the hoped for reforms, it is based on reform before aid. The three broad criteria President Bush has established for MCA assistance--good governance, investment in health and education, and sound economic policies--are consistent with policies that studies show drive development. Economic freedom in particular has been the most reliable and consistent determinant of economic growth. Moreover, policies that promote economic freedom support good governance and increase per capita income, providing the environment and resources a country needs to improve its health and education standards.

The MCA will need an objective measure of policies that promote economic freedom, a methodology that permits comparisons among possible aid recipients and a monitoring of their progress over time. A model for such a measure is the methodology used by the Index of Economic Freedom, published annually by The Heritage Foundation and The Wall Street Journal.5 Since its inception in 1995, the Index has shown consistently that the freer the economy, the higher its real per capita GDP. The Index measures economic freedom by analyzing 50 economic indicators and grouping them into 10 independent factors: trade policy; the fiscal burden of government (taxes and spending); government intervention in the economy; monetary policy (the average rate of inflation); capital flows and foreign investment; banking and finance; wages and prices; property rights; regulation; and the black market.