December 15, 1996

December 15, 1996 | Commentary on Foreign Aid and Development

ED121596a: Foreign Aid Fallacies

The bureaucrats and consultants who profit from America's $12 billion-per-year foreign-aid program argue that U.S. assistance is vital to the economic well-being of the world's less-fortunate. This argument is both self-serving and ignorant.

Self-serving because approximately 70 cents out of every foreign-aid dollar never makes it overseas: It funds the very bureaucracy so piously arguing for preserving foreign aid.

Ignorant because many poor countries around the world have been on the American dole for decades; yet, a substantial number of them are poorer today than when it all began.

Why? Because global poverty is largely a condition imposed on people by their governments. While climate, culture, education, infrastructure, land arability, 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 -- even if it receives buckets of U.S. aid.

Consider this: Of the 77 countries with the most repressed economies in the world, 34 have been receiving U.S. foreign aid for periods ranging from 35 years to 52 years. Of these 34 countries, 13 are poorer today than they were in 1965 and 10 others are just as poor as they were three decades ago. If foreign assistance was an effective development tool, every one of the 34 countries should have shown some improvement.

Look at Somalia. The Clinton administration has argued that cutting foreign aid to less-developed countries would produce "more Somalias." If this is meant to imply that Somalia is an economic basket case because it hasn't received enough U.S. aid, that's nonsense. Somalia has received nearly $1 billion in U.S. foreign aid over the last 41 years. Because the country has one of the world's least-free economies, however, the $1 billion has done little for Somalia, except, perhaps, line the pockets of Somali bureaucrats and overlords. Somalia's gross domestic product (GDP), meanwhile, was $123 per capita in 1965; in 1993 -- after some 40 years on the U.S. dole -- it was down to $111 per capita.

Closer to home, Haiti has been receiving U.S. foreign aid for 52 years. During its half-a-century on the dole, Haiti has received more than $1 billion from the United States, not including the money we spent on our 1994 military operation to "restore democracy" in Haiti and the additional money we're now spending to protect the current regime. How has Haiti benefitted? In 1965, Haiti's per capita GDP was $360; in 1994 it was $225. (All numbers are taken from the 1996 World Bank report, "World Data 1995 on CD ROM," and are expressed in constant 1987 dollars.)

Peru is another case in point. Peru has received nearly $2 billion in U.S. aid over the last 52 years. It's per-capita GDP has fallen from $1,137 in 1965 to $1,103 in 1994. A similar story can be seen in Niger, which has pocketed more than $500 million in U.S. assistance, only to see its per-capita wealth decline more than 60 percent, from $617 in 1965 to $272 in 1994.

These are, admittedly, extreme (though not rare) cases. Some aid recipients have increased their wealth -- but it's despite the foreign aid, not because of it.

My colleague William Beach, the former chief economist of Sprint Corp., Kansas City, uses sophisticated computer-modeling techniques to illustrate the point. In his chapter in the recently published 1997 edition of the "Heritage Foundation/Wall Street Journal Index of Economic Freedom," Beach looked at the South Asian country of Bangladesh -- and what its economic future would look like under various scenarios.

While the country's economy is not the most repressed in the world -- that honor is shared by Cuba, Laos and North Korea -- it currently ranks in the bottom third on the Index of Economic Freedom, 118th out of the 150 countries rated. The result of Bangladesh's high tax rates, closed trade policy, and highly regulated economy was a meager 2.1 percent average annual growth rate during the period 1980-1993.

Many other countries -- all of them with freer economies than Bangladesh's -- did much better. For example, Botswana's economy is one of the freest in sub-Saharan Africa, earning it a ranking of 59th on the list of 150 countries I studied. Botswana's economy grew at an average rate of 6.2 percent from 1980 to 1993. South Korea's economy (27th on the list) grew at an average annual rate of 8.2 percent. And Thailand's (23rd) grew at 6.4 percent per year.

Beach posed the following question: "What would happen if Bangladesh implemented [free-market] policies that enabled it to grow at the same long-term rates experienced" by Botswana, S. Korea and Thailand?

If Bangladesh simply stays the course, and continues to grow at just over 2 percent per year, Beach's calculations show that it would take Bangladesh 50 years to raise its living standards to that of contemporary Brazil (which ranks 94th on the Index) -- and 102 years to reach America's current standard of living. However, Beach found, if Bangladesh reforms its economy and can achieve long-term growth rates equal to Botswana's and Thailand's, in just 25 years it could raise its living standards "roughly" to the levels currently enjoyed by such European nations as Spain and Portugal, and in 40 years could be where America is today.

While short-term economic assistance can help newly independent countries develop commercial codes and achieve other concrete goals, the foreign assistance program that has been a staple of U.S. foreign policy for the past 50 years has achieved few lasting successes, and frequently does more harm than good by delaying needed economic reforms.

The next time Congress reviews U.S. foreign aid, it should face up to the fact that U.S. assistance rarely helps the poor. Only economic freedom can truly end the wrenching poverty that continues to plague the world.

About the Author

Bryan T. Johnson is co-editor of "The Heritage Foundation/Wall Street Journal Index of Economic Freedom" (Washington, D.C./New York, 1997, 520 pages, $24.95, plus shipping & handling). The book can be ordered by calling (in the U.S. only) 1-