This week, world leaders are reviewing the United Nations’ Millennium Development Goals (MDGs) at a summit in New York. They should have the courage to admit to each other and to their constituents that although some progress has been made toward achieving the MDGs in the past decade, there is little evidence that this progress is the consequence of vast sums of tax dollars expended on Official Development Assistance (ODA, or foreign aid) by U.N. donor governments. In fact, foreign aid may actually impede the economic growth needed to achieve the MDGs.
The U.N.’s statist approach to development has led to the design of ineffective and sometimes wasteful development projects in Africa and elsewhere that generally do not address the underlying problems—corruption coupled with the absence of property rights and rule of law—even as they strengthen the corrupt regimes that are the main obstacle to progress.
No one disputes the desirability of achieving the MDGs in the world’s poorest nations: reducing poverty, hunger, infectious disease, and infant mortality, as well as access for their citizens to clean water, education, and a healthy environment. But those worthy goals cannot be realized through the U.N. approach. President Obama should examine the evidence (outlined below) and conclude that the failed, aid-centric paradigm to achieve the MDGs championed by the U.N. should be abandoned in favor of private-sector-led solutions that have a better track record in reducing poverty. The President should then seek to convince other heads of state at the summit to do the same.
Aid Strengthens Corrupt Regimes
Swedish development economist Fredrik Segerfeldt argues in a 2009 book analyzing the failure of foreign aid to lift people out of poverty over the last 50 years—despite decades of effort and the expenditure of at least $1.65 trillion by taxpayers in donor countries—that the corruption-related development problems in those countries cannot be resolved with foreign aid.
One of the MDGs’ main objectives is to require donor nations like the U.S. to increase official development assistance to 0.7 percent of their gross domestic product (GDP). For the U.S., this would be a huge increase. According to the Organization for Economic Cooperation and Development, the U.S. spent $28.7 billion on ODA in 2009—roughly 0.2 percent of GDP. If the U.N. had its way, U.S. aid would have been over $100 billion.
By focusing on increasing ODA, the MDGs enable a culture of dependency and strengthen the governing regimes of corrupt elites by funding some level of social services that take a concomitant amount of political heat off of their own governments. These regimes also often devise ways to rake off a portion of the development assistance proceeds for their own enrichment and the perpetuation of their political power.
The chart above illustrates the symbiosis between foreign aid, dependency, and corruption in Africa. Countries with the highest dependency on foreign aid (e.g., Guinea Bissau) have the lowest economic freedom and corruption scores. And the foreign aid strengthens corrupt regimes: It is probably no accident that in the last 30 years the average African leader has been in power three times longer than the leaders of the developed industrial countries.
U.S. Secretary of State Hillary Clinton reported recently that corruption costs Africa an estimated $150 billion a year and “scares away investment, stifles innovation, and slows trade.” She also noted that rule of law is vital to maintain a successful market, attract investment, and promote sustainable development.
Uneven Progress Toward MDGs
The U.N. Development Programme (UNDP) spares no expense to trumpet its successes, regularly churning out slickly produced progress reports with glossy photos of smiling aid recipients in developing countries. Yet as Ambassador Terry Miller of The Heritage Foundation points out, the plethora of UNDP reports never include the information most important to taxpayers: rigorous analysis linking the UNDP’s programming to those happy outcomes. In fact, there is little evidence that development assistance from the U.N. (or the U.S. or other bilateral nation) has contributed much to economic growth.
For instance, in a September 16 report, the UNDP says the number of people in the world living on less than $1.25 a day has fallen from 1.8 billion to 1.4 billion in the last 20 years. But the countries singled out in the UNDP study as having made major gains in reducing poverty—China, India, Vietnam, and Brazil—did so by largely rejecting the UNDP development model. According to the UNDP Human Development Index, the poverty rate in China dropped from 84 percent in 1981 to 16 percent in 2005, meaning China’s economic development lifted 635 million people out of poverty.
India is another good example where economic growth—not foreign aid—has lifted people out of poverty. A report by Standard Bank said millions in that country escaped poverty when the size of India’s middle class “quadrupled to almost 250 million” between 1986 and 2006.
In both countries, ODA was a negligible factor contributing to their economic growth. The same holds true for the other countries at the top of the UNDP list: Brazil and Vietnam.
- Average of China’s net ODA received as a percentage of GDP 1981–2008: 0.315 percent,
- Average of India’s net ODA received as a percentage of GDP 1981–2008: 0.524 percent,
- Average of Brazil’s net ODA received as a percentage of GDP 1981–2008: 0.04 percent,
- Average of Vietnam’s net ODA received as a percentage of GDP 1989–2008: 3.9 percent.
Problem: ODA Does Not Work
Dr. Russ Roberts of George Mason University reviewed the multi-decade failure of development assistance programs to generate economic growth (and progress on those MDGs) in Africa. He calls it an “ideal test of Keynesian stimulus.” Unfortunately, foreign aid flunked the test.
Most African aid recipients have high unemployment rates, so according to Keynesian theory those available resources should have been mobilized. Dozens of dams, bridges, roads, and other infrastructure projects were constructed with funds from the international donor community.
But Professor Roberts reports that the foreign aid spending rarely generated any sustained prosperity. The money was spent and then it was gone—no multipliers materialized because the economies in the countries receiving the aid are fundamentally broken. They suffer from inefficient governments, corrupt practices, and stagnant labor markets. The influx of development assistance did not create economic growth; it merely stimulated rent-seeking behavior by the politically well-connected.
Research by New York University economist William Easterly finds that, while humanitarian aid has improved disease prevention in developing countries, foreign aid for African agriculture has been a failure (crop yields have decreased or stagnated over the past 40 years) and development assistance programs in general have not mitigated the effects of corruption. As a result, Easterly concludes, foreign aid programs often weaken governance.
A Call for Free-Market-Led Economic Growth
The annual Index of Economic Freedom (published by The Heritage Foundation and The Wall Street Journal) measures a country’s openness to competition, the degree of state intervention in the economy (whether through taxation, spending, or overregulation), and the strength and independence of a country’s judiciary in enforcing rules and protecting private property.
The Index consistently finds that free markets and entrepreneurship are the keys to prosperity. The results of the 2010 Index demonstrate a significant positive correlation between higher economic freedom scores and reduced poverty as measured by the UNDP Human Development Index as well as improved democratic governance and political stability as tracked by the Economist Intelligence Unit’s Index of Democracy.
At the U.N.’s Millennium Development Goals Summit, President Obama should affirm Secretary Clinton’s recent call for an end to corruption, a strengthening of the rule of law, and a return to the principles of economic freedom by all countries. He should lead his colleagues in a call for a complete refocus of development assistance away from the statist programs of traditional ODA and toward incentives for free-market-led economic growth.
James M. Roberts is Research Fellow for Economic Freedom and Growth in the Center for International Trade and Economics (CITE) at The Heritage Foundation. CITE Intern Andre Rougeot made valuable contributions to this report.