The Heritage Foundation

Executive Summary #1546 on Trade, Economic Freedom

May 6, 2002

May 6, 2002 | Executive Summary on Trade, Economic Freedom

BG1546ES: America's International Development Agenda

The international community frequently demands that wealthy nations increase their development assistance to poor nations. The United States will provide additional assistance, but President Bush is also prudently pursuing a system that measures the effectiveness of aid.

In the days leading up to the International Conference on Financing for Development, held in Monterrey, Mexico, from March 18 to 22, 2002, both World Bank President James Wolfenson and United Nations Secretary General Kofi Annan called for the United States to double funding for development assistance. Oxfam, an international aid organization, claims that 56 million children will die needlessly over the next 15 years if wealthy nations do not provide an extra $100 billion each year in aid.

In the wake of these calls for increased international aid, President George W. Bush proposed increasing America's development assistance budget by $10 billion over a three-year period. Current plans are to increase development assistance by $1.7 billion in 2004, $3.3 billion in 2005, and $5 billion in 2006.

This is no capitulation to international pressure, however. President Bush's proposal seeks to use that additional assistance to improve the effectiveness of aid through a "Millennium Challenge Account" that would disburse aid only to countries that show improvement in rooting out corruption, raising health and education standards, or promoting economic freedom. Countries that do not make such improvements would not be eligible.

Thus, the Millennium Challenge Account would encourage economic development by creating a positive competition among potential recipients, with this competition rewarding those countries that adopt policies that help their citizens. Now President Bush must ensure that there are procedures in place both to verify that the aid actually gets to the recipient and to measure progress.

Although President Bush has identified broad criteria for distributing foreign aid, he has not specified how progress in the various categories would be measured. To further ensure the effectiveness of U.S. aid, President Bush should:

  • Allocate foreign aid based on improvements in economic freedom. Research has shown that development aid can contribute to economic growth only when a country embraces economic freedom.

  • Stress the benefits of economic freedom. Economic freedom has a salutary effect on the major priorities of both critics and proponents of development assistance. Economic freedom provides an avenue to increased per-capita income and, thereby, economic development in poor nations. With higher incomes, developing countries are able to make greater investments to improve labor, environmental, health, and education standards. In addition to the benefits that it provides by raising per-capita income, economic freedom has proven beneficial as a prerequisite in countering terrorism and rooting out corruption.

  • Administer the foreign aid in the Millennium Challenge Account through grants rather than loans. One of the conclusions of the congressionally appointed International Financial Institution Advisory Commission (Meltzer Commission) on reforming the World Bank and the International Monetary Fund was that development aid should be administered through performance-based grants rather than loans. The President should use the Millennium Challenge Account as a prototype for this proposal to demonstrate that performance-based grants are not only possible, but also more effective than conventional aid in raising standards of living and stimulating economic development.

    With this new approach to administering development assistance, President Bush would increase the level of accountability for how U.S. aid is administered to underdeveloped countries. Development assistance administered through performance-based grants would ensure that development funds are being devoted to projects that are producing results.

    Moreover, once the Administration chose a measure of economic freedom as a standard for the granting of development assistance, it would be easy to verify that aid is being administered to proper recipients: Countries that are making improvements in economic freedom should receive the most development assistance, while countries failing to make improvements should not receive development assistance. Because experience has demonstrated that aid is effective only in countries with sound economic policies, the success of this new approach should be determined by the Administration's ability to disburse development assistance to those countries that are making demonstrated improvements in economic freedom.

By adopting these measures, President Bush would radically transform the way in which the United States administers bilateral aid, set the stage for significant changes in America's policy toward disbursal of multilateral aid, and help to ensure that U.S. taxpayers' dollars are being allocated wisely and effectively.

Brett D. Schaefer is Jay Kingham Fellow in International Regulatory Affairs and Aaron Schavey is a Policy Analyst in the Center for International Trade and Economics at the Heritage Foundation.

About the Author

Brett D. Schaefer Jay Kingham Senior Research Fellow in International Regulatory Affairs
The Margaret Thatcher Center for Freedom

Aaron Schavey Policy Analyst
Finance and Accounting

Related Issues: Trade, Economic Freedom