October 16, 1996 | Executive Memorandum on International Organizations
The Economic Freedom Report
The appropriations bill for foreign operations, passed in November 1995 and signed into law by President Clinton in February 1996, requires AID to "submit to the appropriate congressional committees an annual report providing a concise overview of the prospects for economic and social growth.... For each country, the report shall discuss the laws, policies and practices of that country that most contribute to or detract from the achievement of this kind of growth."1
Why this report has not been completed is a mystery. The reason certainly cannot be a lack of resources. With operating expenses of $465 million, 2,400 permanent employees, and some 6,000 long-term contractors and consultants, AID should have had no difficulty finding the resources to produce such a report and submit it to Congress on time.2 Nor can the reason be a lack of information on levels of economic freedom in the world. There now are three privately produced studies this subject: The Heritage Foundation's Index of Economic Freedom, Freedom House's World Survey of Economic Freedom, and the Fraser Institute's Economic Freedom of the World. While there are minor differences among these studies in the methodologies used to measure economic freedom, all three agree that economic freedom is essential to economic growth.
The most likely reason for AID's failure to submit its report is the low priority the foreign aid bureaucracy gives to economic freedom. For example, of the $12 billion in foreign aid spending, AID earmarks only 13 percent for what it calls "achieving sustainable development." Of this 13 percent, most of money is spent to protect the environment, educate the poor, control populations, and immunize infants. Some of these programs may be useful, but they hardly qualify as programs aimed at promoting economic growth in less developed countries. A well-educated person living in a clean environment and given good health care will not be able to enjoy those benefits if private property is outlawed, there is no rule of law, and people are not free to work. Economic freedom, not environmental or population controls, creates economic growth.
AID's Neglect of Economic Freedom
This failure to understand the central role of economic freedom in economic development is a principal reason for AID's failed approach to foreign aid. The Heritage Foundation's 1996 Index of Economic Freedom evaluates the level of economic freedom in 142 countries. Examining taxation, trade and investment, banking, regulation, monetary, and other policies, the Index demonstrates that of these 142 countries, those with the greatest economic freedom also are the richest. Conversely, those that are the most economically repressed are the poorest. Consider the following:
The evidence in the Index demonstrates what many economists have known for years: No matter how much foreign aid is pumped into less developed economies, they will not grow economically until they begin to free their economies from excessive government constraint.
It was Congress's belief in this fact that prompted it last year to require that AID submit a report on economic freedom. Critics of AID will be watching to see how reliable and accurate it will be in evaluating the economic policies of U.S. aid recipients. They will be scrutinizing AID's assessment of barriers to U.S. exports, whether American companies are free to invest in other countries, and whether aid recipients still do not respect private property rights.
With over 8,000 employees, consultants, and contractors, and $465 million in operating expenses, AID surely has enough resources to fulfill its legal obligations to Congress and the American people. By not submitting its report on economic freedom to Congress, AID is violating a specific congressional directive. Whether AID is finally giving economic freedom the attention it deserves cannot be known until it submits its report. However, one thing is already clear: The agency remains one of the most poorly run and ineffective in the U.S. government. AID should release its report on economic freedom immediately.