October 21, 2002

October 21, 2002 | News Releases on Foreign Aid and Development

Developing Countries Should Focus on Economic Growth First, Analysts Say

Millennium Challenge Accounts-President Bush's proposal to condition U.S. foreign assistance on economic and other reforms by recipient countries-could change the way the United States distributes foreign aid.

The proposal grew from frustration at watching the $167 billion the United States doled out between 1980 and 2000 fail to make matters better and, in many cases, make them worse. Rather than continue upon a path that reduced median per capita income from $1,076 to $994 in the 156 countries that received U.S. aid during that period, the president has proposed to reward countries that take it upon themselves to make matters better.

President Bush has proposed to funnel $5 billion over three years to countries that open their economies, promote good governance and invest in health and education. A "sense of the Senate" resolution supporting MCAs has passed, and analysts expect the House of Representatives also to approve.

Where should countries interested in receiving MCA money start? With their economies, says a new paper from The Heritage Foundation.

"The economic reforms should be the first among equal priorities," says Heritage policy analyst Paolo Pasicolan, who co-authored the paper with trade analyst Sara Fitzgerald. "A strong economy will promote growth and prosperity that make other reforms affordable. Plus, many of the changes needed to create an open economy coincide with those of good governance. For example, an independent, efficient judiciary means progress toward both an open economy and good governance."

Beyond that, Pasicolan and Fitzgerald say, countries that hope to receive Millennium Challenge funds should remove government-imposed barriers to the free flow of goods and services, reduce taxes and government spending to the extent possible, and curb government intervention in the economy.

If they accomplish these objectives and work to curb inflation, promote free flow of foreign and domestic capital, remove burdensome banking and finance regulations, reduce government price controls, protect private property, and crack down on black market activity, they will take steps toward stronger economies, better governance and better health and education that will only be augmented by the aid.

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