February 26, 2004

February 26, 2004 | Testimony on Trade, Economic Freedom

U.S. Foreign Assistance After September 11: Major Changes, Competing Purposes, and Different Standards-But Is There an Overall Strategy?

Why Traditional Foreign Aid Is a Failed System

Experience has demonstrated that development assistance (i.e., government-to-government assistance intended to catalyze development in poor nations) is not a key factor in increasing economic growth in underdeveloped countries. On the contrary, development assistance has often proved to be counterproductive. Whether it is skimmed off by corruption, kept beyond the reach of poorer inhabitants due to regulations, or access is denied due to a lack of property rights or rigid credit markets, traditional aid usually fails to reach those below the top rungs. The lack of lasting impact is a demonstrable fact. 

Throughout the past 50 years, the United States has given more than $500 billion in foreign assistance to less-developed countries.[2] Yet the people in many of these countries are no better off today in terms of per capita gross domestic product (GDP) than they were decades ago; some, in fact, are actually poorer. Zambia, for example, has received U.S. foreign aid for four decades;[3] despite more than $800 million (constant dollars) in U.S. bilateral economic aid in just the past two decades,[4] however, Zambia’s real GDP per capita has fallen by almost 50 percent, from $664 in 1965 to $410 in 2002.[5] 

Kenya’s lot is even worse. Despite receiving almost $1.5 billion in constant-dollar bilateral aid from the United States since 1980, Kenya’s real GDP per capita is merely $325. The aid was squandered by former President Daniel arap Moi. According to media reports, the Kenyan “government believes between $1bn and $4bn was stolen from the country under Mr. Moi’s 24-year rule.”[6] According to a 2002 op-ed by Johnnie Carson, the former U.S. Ambassador to Kenya, corruption ranges from bribing policemen to “the submission of false invoices by politically-connected Government contractors….”[7] Ambassador Carson also noted the connection between corruption and international terrorism: 

Immigration officials who steal and sell Kenyan passports to foreign nationals and who take bribes to issue illegal visas could open the door to persons such as the men who perpetrated the heinous attack on Paradise Hotel on November 28, 2002, the destruction of the American embassy on August 7, 1998, and the bombing of the Norfolk Hotel on December 31, 1980. 

Kenya has not flourished from economic assistance and has not been held accountable for the assistance; instead, it has squandered the money in ways that stifle the free market and possibly advance acts of terror. 

Despite a change in the presidency, Kenya continues to struggle. According to the Office of the U.S. Trade Representative (USTR), “Kenya continues to experience reduced foreign investment as a result of corruption, poor infrastructure, high power costs and other factors.”[8] The USTR notes that Kenya is taking advantage of the opportunities given by the Africa Growth and Opportunity Act (AGOA), yet “Kenya continues…to rely on tariffs as the primary instrument of trade policy.”[9] Kenya’s score in the Index of Economic Freedom is little changed from 10 years ago. It remains “mostly unfree,” with a protectionist trade policy, high cost of government, high regulation, and high level of corruption.[10] Aid is not the root of Kenya’s poverty problem; a serious lack of economic freedom is. 

The failure of U.S. Official Direct Aid is illustrated in Appendix Table 1, which lists aid to countries between 1980 and 2002. The first two numerical columns indicate the total aid over that period in current and constant 2001 dollars. The next two columns compare the per capita GDP of the countries over the 22 years. Notice how per capita GDP growth averages at least 2 percent per annum in only about a quarter of the countries. In 70 percent of the countries, there is little change or a decline. The average per capita growth rate between 1980 and 2002 for all assisted countries with GDP data is a meager 0.81 percent per year. Not a stellar outcome. 

The dismal failure of development assistance to catalyze economic growth is not confined to acts of Congress. Multilateral lending institutions have had similar results. For instance, in sub-Saharan Africa, 16 countries experienced a decline in real per capita GDP between 1970 and 2002 despite receiving well over $100 billion in World Bank assistance.[11] 

Achieving prosperity in developing countries, like success for individuals, requires the acceptance of personal responsibility. The responsibility for economic growth in underdeveloped countries lies largely with the government of each country, since the primary determinant of economic growth is a country’s own institutions and policies. Countries with institutions and policies that promote economic freedom tend to have higher per capita incomes, on average, than countries that do not embrace economic freedom. A 1997 World Bank analysis of foreign aid underscored this premise, finding that assistance “has positive impact on growth in countries with good fiscal, monetary, and trade policies.”[12] Conversely, countries with poor economic policies did not experience sustained economic growth, regardless of the amount of assistance they received.[13]  

IMF and World Bank Are Part of the Problem

 This failure of the 20th century redistribution approach is not confined to the United States. Shifting the allocation of foreign aid from U.S. agencies to international institutions would not improve the chances for development. The track record of the IMF and World Bank in developing countries reveals that, far from being the solution to global economic instability and poverty, these two international institutions are a major problem. For one thing, their lending practices deter growth because the money they loan removes the pressure or incentives for governments to advance economic freedom. Shielded from change, corruption and harmful existing practices can flourish. For these reasons, the vast majority of recipient countries have been unable to develop despite huge handouts from these institutions for over 40 years. 

Appendix Tables 2 and 3 illustrate the point. Appendix Table 2 lists the top 10 recipients of World Bank aid, and Appendix Table 3 lists the top recipients of IMF aid. The tables list for each country the total amount of loans received, the GDP per capita in the first year aid was received, and the GDP per capita in 2002. The results are very clear: In all but one of these countries, per capita GDP grew only slightly or declined, despite massive aid for about 40 years. The far right column lists the country’s score in the 2004 Index of Economic Freedom. No wonder the repeated aid packages failed, for the overwhelming majority of countries remain “mostly unfree.” 

The sign over the entrance of the World Bank building in Washington, D.C., may read, “Our dream is a world without poverty,” but its actions have not had the desired effect. Not that no one has benefited, however: To fulfill that dream, the World Bank employs over 10,000 people in more than 100 offices around the world with an annual budget of $1.5 billion. 

The IMF has committed ever-greater resources to combat growing financial crises around the world over the past 15 years. However, in many cases the recipients of IMF loans are worse off today (e.g., Argentina) than before the IMF loans began to flow. The reason is simple. Financial crises are the result of poor policymaking and corruption, not of some inexplicable evil design. 

The Fund’s goal is “to promote international monetary cooperation [and] exchange stability…to foster economic growth and high levels of employment; and to provide temporary financial assistance to countries to help ease the balance of payments adjustment.”[14] However, if the IMF were to bail out a country from an impending crisis, it would not allow the country’s leaders to face the consequences of poor policymaking and corruption. Hence, the leaders would have no incentive to change the poor way in which they run the country. 

At the same time, the country’s government bonds would be sold in the market at a very high yield—reflecting the high risk of default from poor policymaking. But because the IMF continuously bails out the country, regardless of continued corruption and poor policy, buying the bonds would become a unique investment: a high-yield bond bearing no risk. 

Far from achieving the IMF’s stated goal, in other words, bailout loan packages reduce the political risks associated with faulty economic decisions, and recipient countries consequently end up with greater debt, lower standards of living, higher unemployment, and less savings. Rather than promoting economic self-sufficiency, the actions of both the IMF and World Bank have created client states for the international financial institutions. 

The debate on the effectiveness of international financial institutions in promoting reform peaked about five years ago, when the U.S. Congress created the International Financial Institutions Advisory Commission (IFIAC), chaired by Professor Allan Meltzer. The IFIAC assessed the role and effectiveness of the World Bank, the International Monetary Fund, the regional development banks, the Bank of International Settlements, and the World Trade Organization. 

Regarding the IMF and the World Bank, the IFIAC concluded that the work of these institutions left much to be desired. Specifically: 

The IMF has given too little attention to improving financial structures in developing countries and too much to expensive rescue operations. Its system of short-term crisis management is too costly, its responses too slow, its advice often incorrect, and its efforts to influence policy and practice too intrusive. 

High cost and low effectiveness characterize many development bank operations as well. The World Bank’s evaluation of its own performance in Africa found a 73% failure rate…. In reducing poverty and promoting the creation and development of markets and institutional structures that facilitate development, the record of the World Bank and the regional development banks leaves much room for improvement.[15] 

The ineffectiveness of the World Bank and the IMF is caused by the disincentives they create in the countries they are trying to help. Sending money to countries with misdirected policies and weak rule of law increases the recipients’ debt without visible economic growth. Nevertheless, no significant reform of these international institutions has taken place. 

The MCA: A Step in the Right Direction

The President’s Millennium Challenge Account (MCA) is a step in the right direction for reforming foreign aid. The MCA differs from previous aid programs because recipients earn eligibility by surpassing minimum criteria based on simple, transparent, and publicly available performance indicators. These indicators have been selected based on evidence that they contribute or are complimentary to long-term growth and prosperity rather than on subjective, political motivations unrelated to development. 

The Administration’s approach to aid reform is similar to the welfare reform that took place in 1996 when the Personal Responsibility and Work Opportunity Reconciliation Act (P.L. 104-193) replaced the failed Aid to Families with Dependent Children (AFDC) program with a new program called Temporary Assistance to Needy Families (TANF). The key to the success of welfare reform is self-reliance requirements. Under the reform act, a certain portion of TANF recipients were required to undertake constructive activities aimed at self-sufficiency: supervised job search, training, and community service work. When TANF recipients were required to undertake constructive activities as a condition of getting aid, the number of new applications for welfare fell precipitately, the length of stay on welfare dropped dramatically, and measures of childhood poverty fell dramatically, especially among African–American children.

Similarly, the MCA will link development assistance with economic reforms and good governance to move poor economies toward self-dependency. 

The MCA will not replace existing development assistance programs or subtract from their budgets. In fact, the Omnibus Appropriations bill included a separate $650 million to fund the MCA. As a separate and distinct entity, the MCA is essentially an experimental program that attempts to learn from past mistakes and explore new strategies to improve the effectiveness of future development aid programs. 

The President’s three broad criteria that recipients must meet to qualify for MCA assistance—good governance, investment in health and education, and sound economic policies—are consistent with the findings of numerous studies that show that good policies, not aid, are the primary drivers of development. At best, foreign development assistance will accelerate the economic growth that results from sound policies and good governance. 

The basic framework for the Millennium Challenge Account as presented by the Administration is sound, but Congress can improve its implementation and prevent the recurrence of past failures in development assistance. Here are a few steps that I urge Congress to consider taking as we move forward. 

First, it is critical that Congress conducts active and ongoing oversight of the Millennium Challenge Account program to ensure that the true intent of this promising groundbreaking legislation is upheld. I believe that a key component of this new approach is that Congress did not intend for the MCA to be a business-as-usual international aid program, and it should not be allowed to become one. 

Second, Congress must ensure that the core MCA principle—which is that we will help countries that are doing the right things to help their people help themselves—is not diluted in the regulatory writing and implementation of the MCA. The purpose is to teach impoverished nations how to fish, rather than annually appropriating fish to hand out. 

Third, Congress should ensure that eligibility for the MCA is determined solely according to a country’s performance in the 16 indicators identified by the Administration. Many of the civil servants who will be tasked with writing and implementing the MCA undoubtedly have a lot of experience running traditional international aid programs and, as a result, are more familiar and comfortable with that kind of approach. Accordingly, there is a very real prospect that without active and ongoing Congressional oversight, the MCA could become another business-as-usual program. 

Fourth, if it becomes apparent that the MCA is not being implemented as Congress intended, I encourage Congress to consider amending the underlying law to allow the MCA to be run by an independent public corporation as was envisioned in the original version of the MCA. 

But the MCA is likely to be only a small step toward more extensive alteration to a 21st century approach to foreign aid. If run correctly, the MCA approach should prove successful. In that case, the Administration and Congress should consider shifting a greater share of foreign aid funds to the alternative 21st century approach.  

The Alternative: The Index of Economic Freedom as Road Map to Prosperity 

Economic freedom is the most consistent and reliable determinant of economic growth. The 10 editions of the Index of Economic Freedom conclude that countries with the most economic freedom are more prosperous than are those with less economic freedom. This difference occurs because open markets promote healthy competition, which requires the institutionalization of transparency and the rule of law and also results in the most efficient allocation of resources. Contrary to popular myth, economic growth benefits the poor directly. In the words of a World Bank working paper on the effects of economic growth on the poor, “As overall income increases, on average [the] incomes of the poor increase exactly the same amount.”[16] The study concludes that economic growth does not worsen inequality. 

Policies that promote economic freedom often coincide with or directly result in good governance and permanent improvements in health and education standards. For example, an environment conducive to commercial enterprise requires fair and equitable dispute settlement in the form of an independent judiciary, which is also essential for good governance. Free-market policies that encourage open competition and minimal government intervention render corruption unprofitable or remove opportunities for corruption, creating a natural incentive for good governance. In contrast, excessive tariffs, taxation or regulation, or tightly controlled credit allocation or government procurement create opportunities and incentives for corruption to flourish. 

Economic freedom, in addition to advancing growth rates, also has implications for U.S. national security, such as in the war on terrorism. There is ample evidence that the poverty caused by a lack of economic freedom fuels the resentment, desperation, and hopelessness that terrorist organizations utilize to recruit new members and muster support for their activities. A key component of any long-term solution to terrorism, therefore, must be creating circumstances under which people become stakeholders in their countries. Promotion of economic freedom offers the opportunity to reduce susceptibility to the enticement of terrorists around the world. 

The concept of economic freedom therefore holds out the possibility of a very attractive road map to prosperity throughout the world. While concepts are useful, the acid test of any concept is whether it bears close empirical resemblance to the way the world works. Now that we have 10 years of data, at The Heritage Foundation we have been subjecting our Index of Economic Freedom to such empirical questioning. The answer the data have been giving us about the realism of our concept is a resounding “yes!” 

The findings of this study are straightforward: The countries where economic freedom increases most boast higher rates of economic growth. 

The Heritage Index of Economic Freedom evaluates about 160 countries based on 10 criteria. Each criterion receives a score between 1 (economically free or good) and 5 (economically repressed or bad). A simple (equal weight) average of the scores for a country’s 10 factors yields the overall score for the country. The 10 factors or criteria are:[17] 

  • Trade policy
  • Fiscal burden of government
  • Government intervention in the economy
  • Monetary policy
  • Capital flows and foreign investment
  • Banking and finance
  • Wages and prices
  • Property rights
  • Regulation
  • Informal market activities

An immediate question is whether it is appropriate to equally weight the factors. Perhaps some factors are more important than others. There is nothing that says equal weighting is appropriate. Then, again, there is nothing that says it is inappropriate either. 

To sort out this issue we asked Professor Richard Roll of the Anderson School of Business at UCLA to use the best statistical techniques available to evaluate this question. His conclusion: Equally weighting the factors is as good as the most optimal statistical weighting approach. 

In other words, the empirical tests show that each of the 10 criteria is equally important. The 10 criteria are like the parts of a car. What is the most important component of the car: the powerful engine, the transmission, the seats, the steering wheel, the brakes, or the tires? The question defies the answer, because without any of these components, the car is unlikely to go very far or very fast, much less reach the desired destination. 

In similar fashion, countries that try to achieve economic freedom in only three or four of the criteria are putting together a car that is missing valuable parts. Those countries are unlikely to grow very fast or very long, and therefore are unlikely to achieve their goal of economic prosperity. 

In contrast, those countries that are putting together complete (10 criteria) cars are likely to grow fast and long, catching up to the more developed world economies. That is why we often refer to the 10 factors of the Index as a “10-step plan to end aid dependency.” The 10 factors provide a road map, and only by sticking to the highlighted route can a country achieve economic freedom, prosperity, and self-sufficiency. 

A Case Study of What Works 

A wonderful example of the power of this 10-step plan is the difference between the neighboring countries of Chile and Bolivia. Between 1980 and 2002 (see Appendix Table 1), Bolivia received almost $3 billion (constant dollars) of Official Development Aid from the U.S. government. Over that period, its per capita GDP actually fell at an annual rate of 0.3 percent. 

On the other hand, Chile received less than $200 million (constant dollars) of aid. Yet its economy grew at an average annual rate of 3.3 percent, more than doubling over the period. How does one explain such a divergence of experience? The geography is similar, and Bolivia received over 10 times as much aid. 

But the two countries’ experiences with economic freedom have been very different. Over the past 30 years, Chile has stuck to the economic freedom road map by establishing the rule of law; knocking down tax rates, regulation, and foreign trade barriers; freeing the banking system and capital flows; and reducing the burden and scope of government. It has put together a whole car. In the 10 years of the Index, Chile has moved steadily from a rank of 24th out of the 101 countries covered in 1995 to 13th out of the 161 analyzed this year. Over the past 10 years, economic growth has been notably better in Chile than among its neighbors, and Chile has been largely immune from the latest round of South American economic disasters.[18] 

Bolivia by comparison had the same economic freedom score as Chile in the 1996 Index, yet has improved its score little if at all since then. The reason is that the Bolivian economy has weak property rights, high government expenditure, high regulation, and a high level of corruption. At most, Bolivia has resorted to picking a couple of tires, a passenger seat, maybe a steering wheel, and some brakes. No wonder its economy has sputtered.  

Lessons Learned

 The case of Chile and Bolivia is not isolated. It reflects a pattern throughout the world. For several years, we have published a chart showing that a country’s Index score is positively related to per capita GDP (Appendix Figure 1). The average per capita income of the “free” countries is twice that of the “mostly free” countries. That average drops precipitously as economic freedom drops to the last two categories. In other words, economically free countries have higher per capita incomes. 

But there is another, more important dimension to that relationship: one that involves the evolution of the score and of incomes over time. The next chart (Appendix Figure 2) demonstrates that seven-year average growth rates in countries are positively related to seven-year improvements in the Index scores. 

The 142 countries with available data were divided into fifths according to how much their Index scores had improved over the seven years. The countries with the most improvement are in the first quintile, and those with the least improvement (or most deterioration) are in the fifth quintile. Comparing the average growth rates of these two groups, the countries in the top quintile had almost twice as much growth (4.9 percent) as those in the bottom quintile (2.5 percent). Even for the middle three quintiles, growth rises and falls with changes in the Index score. 

In other words, countries moving further along the road map to economic freedom have higher growth rates. As long as they keep progressing along the road map, their growth rate tends to be above the average for all countries. The faster they move (the greater the improvement in the score), the higher the growth rate. This faster growth is especially important to those countries that are trying to play “catch-up” to developed countries. Once countries decide to stop by the roadside or to retrace their steps, however, growth plummets. 

So the important message to the countries of the world is that they can help themselves just by starting to adopt economic freedom. In the words of the Nike ad, “Just do it.” Just start increasing economic freedom somewhere. The more economic freedom they adopt, the faster they grow or the longer they have superior growth. More growth in turn means that the average level of prosperity is increasing. While foreign aid linked to measurable improvement in these indicators might be necessary at the very start of this process, for those countries that stay focused on improving economic freedom, any need for aid will soon disappear. 

And the good news for both the Congress and the administrators of aid is that countries’ efforts (or lack of efforts) to work toward these criteria are measured annually in Heritage’s Index of Economic Freedom. Compilation of this objective, quantitative and qualitative measure of countries’ movements along the road to self-reliance takes over six months each year. The Index is no cursory glance at countries’ progress. Using independent, reliable outside sources, each country is closely examined in terms of the 10 criteria. The Index can therefore serve as a guide to which countries deserve more assistance and which deserve less. It also holds out the real hope that countries that follow this road map will eventually graduate from the need for any assistance at all. Those mired as “client states” of international financial institutions suddenly have a path to liberation. 

Other Forms of Aid

Additional questions from the Committee’s background memo remain, such as whether foreign aid should be used to bolster national security, whether we should give aid to our enemies, and the extreme case of whether aid should ever be given to North Korea. The answer to all these questions is yes. 

The United States’ foreign aid strategy should support long-term U.S. national security and should be administered in a way that enhances the larger political goal of the United States. However, U.S. foreign aid strategy must still encourage free markets and growth while also addressing humanitarian crises through well-monitored aid assistance programs. The aid should also encourage self-reliance in recipient countries. 

Afghanistan and Iraq are examples of where post-war reconstruction assistance both fulfills a humanitarian mission and enhances U.S. national security. U.S. post-war commitments in Iraq and Afghanistan result from U.S. obligation not only to transfer resources, but also to empower these countries to follow the road map of economic freedom and good governance. In those two examples, the United States has used foreign operations funds to set the framework to support development and growth in the recipient countries. 

Not all the assistance requires large transfers of money. For example, the Administration has formally called upon the European powers (primarily Russia, Germany, and France) and Arab nations (including the Gulf states and Egypt) to forgive the huge debts owed by the Iraqi government. Forgiving these debts would constitute both an historic contribution to the economic development of post-Saddam Iraq and a major gesture toward permitting the Iraqi people to establish a new economy. 

As The Heritage Foundation pointed out last April,[19] the lessons learned from the immediate aftermath of the Versailles Treaty of 1919, when France demanded $32 billion in reparations from Germany, illustrate the dilemma. This onerous debt burden contributed to the hyperinflation that crippled Germany’s economy, Germany’s financial collapse in the 1930s, and the end of the Weimar Republic, paving the way for the rise of the Nazi Party. 

Estimates of Iraq’s indebtedness vary greatly from 60 billion to several hundred billion dollars. The most comprehensive study of Iraqi debts, by the Center for Strategic and International Studies (CSIS), calculates Iraq’s overall financial burden to be $383 billion. Based on these figures, Iraq’s financial obligations are 14 times its estimated annual GDP of $27 billion—a staggering $16,000 per person. 

Establishing fiscal and monetary stability and a stable currency will be virtually impossible if Iraq has no realistic prospect of paying down the debt to manageable levels in the near future. The Iraqi government has made virtually no debt-service payments since 1991. With its huge debt burden, Iraq will have extreme difficulty in attracting substantial foreign direct investment, and this will further limit economic growth. 

If it were free of debt and proceeding along the road map to economic prosperity, Iraq could well become an economic powerhouse in the Middle East and an example for others to follow. With the world’s second largest oil reserves (112 billion barrels) and vast supplies of natural gas (110 trillion cubic feet), Iraq’s economy can be transformed if it adopts sound principles such as keeping tariffs and taxes low, privatizing state monopolies, and upholding the rule of law. These principles will enhance economic freedom and create the conditions for a thriving entrepreneurship. Without substantial debt relief, however, Iraq’s economic rejuvenation will be significantly delayed. The efforts of Secretary Baker are therefore a prime example of effective, efficient relief.

U.S. involvement in Africa through the AIDS initiative exemplifies a case where foreign aid has been used for humanitarian reasons while, in the long-term, establishing a U.S. presence in the region. In 2003, the Bush Administration persuaded Congress to authorize $15 billion over the next five years to fight the AIDS pandemic in Africa and the Caribbean. The U.S. Leadership Against HIV/AIDS, Tuberculosis, and Malaria Act of 2003 is a bold legislative effort.[20] About 42 million people worldwide are dying of AIDS or are infected with the HIV virus that causes the disease. Of these individuals, 29 million live in Africa. In addition, Africa is home to a staggering 11 million orphans who have lost their parents to AIDS. These facts carry political as well as moral implications: Failure to confront the pandemic in nations ravaged by AIDS is a recipe for economic decline and social chaos.

But efforts should not stop at aid to contain these deadly diseases. While epidemics can distract internal moves to reform the economy, humanitarian aid can permit countries to refocus on how to attain economic self-reliance. Humanitarian aid is only a stopgap measure. The real test of the effectiveness of U.S. aid is whether it is followed by aid that encourages the countries that receive humanitarian aid to start down the road to economic self-reliance.

In the aftermath of the recent earthquake in Iran, the United States contributed a total value of $3 million in USAID donations and services and $2 million in Department of Defense assistance. Assistance included an 81-member USAID/DART team, four airlifts of relief commodities, seven C-130’s filled with 68 metric tons of medical supplies, and a 10k forklift to assist in offloading relief commodities.[21] While the United States does not support the Iranian regime and has labeled the country part of the “axis of evil,” cases of such extreme humanitarian crises are exceptions where the United States needs to provide assistance. Through our humanitarian actions, we can build trust and understanding, permitting the idea of economic self-reliance to become part of Iran’s public debate. 

The Bush Administration has taken a sound stance that it will not use food aid as a negotiating tool in dealing with rogue nations and totalitarian regimes. In North Korea, for example, the United States continues to supply food to help relieve the famine crisis. However, the United States has stopped all monetary assistance to North Korea, where it is unable to monitor North Korea’s use of the aid money and when it suspects that the regime might be using aid resources to develop and purchase weapons of mass destruction. Yet, if the North Korean government were to make a commitment to freeing its markets and working toward economic self-reliance, U.S. foreign aid would be justified in the initial stages. 

The purpose of U.S. foreign assistance should be to help other countries wean themselves from dependency on foreign aid by encouraging them to establish strong rule of law and policies of economic freedom to foster growth. The traditional foreign aid system that the United States employs does not advance such values. 

When Foreign Aid Should Be Used to Advance U.S. National Security 

Based both on evidence that traditional foreign aid has failed to improve the economic conditions of poor countries and on the empirical proof that economic freedom correlates with growth and prosperity, it is safe to say that the traditional foreign aid process will not help advance U.S. national security. 

Alternatively, if the Administration were to implement sound aid reforms based on countries’ progress toward economic freedom, foreign aid would, in the long term, always benefit U.S. national security because such an approach provides incentives for repressed countries to implement strong rule of law and other economic freedoms that will raise the level of prosperity, reducing the threat of terrorism. 

After 9/11, the United States and the global community proposed many new security initiatives to secure legitimate trade and travel from the threats of terrorism. Implementing these security regimes can be costly. Emerging economies have expressed concerns about the recent security regulations that have been imposed on the global trade arena. For example, the International Maritime Organization’s International Shipping and Port Security (ISPS) code requires that ports implement specific security measures by July 2004. The consequence of not meeting this deadline is alienation from trade until the country fulfills security demands. While these new security regulations attempt to address serious vulnerabilities of maritime commerce, emerging countries find themselves scrambling for financial resources to support security rules, for the consequence of not meeting the deadline could be devastating to a small economy. 

The answer, however, is not to lower the security standards. In the interim, foreign aid funds should be used to assist these countries to secure their ships and ports by the July 2004 deadline while concurrently helping these countries build trade capacity and increase efficiency through the use of effective technologies.

Conclusion

In sum, in line with the President’s 2002 National Security Strategy, foreign aid presents us with an opportunity to extend freedom across the globe by providing incentives for countries to pursue policies that promote rule of law and economic freedom, thereby generating growth and development. While the United States should always provide assistance in times of humanitarian need, a general strategy that moves countries toward self-generated prosperity is the most viable and measurable long-term plan to contribute to strengthening our national security. 

About the Author

Marc Miles, Ph.D. Senior Fellow
The Kathryn and Shelby Cullom Davis Institute for National Security and Foreign Policy

Related Issues: Trade, Economic Freedom

Show references in this report

[1]See http://www.whitehouse.gov/nsc/nss.pdf.

[2]Denise H. Froning, "U.S. Foreign Aid Program," in Stuart M. Butler and Kim R. Holmes, eds., Issues 2000: The Candidate's Briefing Book (Washington, D.C.: The Heritage Foundation, 2000), p. 800.

[3]Ibid., pp. 803-804.

[4]Organisation for Economic Co-operation and Development (OECD), Corporate Data Environment Database: Development Assistance Committee, available at http://www1.oecd.org/scripts/cde/.

[5]World Bank, World Development Indicators Online, available at www.worldbank.org/data.

[6]John Githongo, "No Moi Witch-Hunt in Kenya," BBC News, December 22, 2003.

[7]The Honorable Johnnie Carson, "Fighting Graft Should Be Kenya's Priority," East African Standard, December 27, 2002.

[8]Office of the U.S. Trade Representative, Foreign Trade Barriers, 2003, pp. 234-238, at http://www.ustr.gov/reports/nte/2003/kenya.pdf.

[9]Ibid.

[10]See Marc A. Miles, Edwin J. Feulner, and Mary Anastasia O'Grady, 2004 Index of Economic Freedom (Washington, D.C.: The Heritage Foundation and Dow Jones & Company, Inc.), p. 249.

[11]World Bank, World Development Indicators Online, available at www.worldbank.org/data.

[12]Craig Burnside and David Dollar, "Aid Policies, and Growth," World Bank, Policy Research Department, Macroeconomic and Growth Division, June 1997, cover.

[13]David Dollar and Lant Pritchett, Assessing Aid: What Works, What Doesn't and Why, World Bank Policy Research Report, 1998, p. 2.

[14]International Monetary Fund, About the IMF, at www.imf.org/external/about.htm.

[15]The full International Financial Institutions Advisory Commission (IFIAC) report is available in English at www.house.gov/jec/img/meltzer.htm and in Spanish at www.heritage.org/library/efp/efp00-04.html.

[16]David Dollar and Aart Kraay, "Growth Is Good for the Poor," World Bank Development Research Group, March 2000, p. 2.

[17]For details of the 10 factors, see William W. Beach and Marc A. Miles, Chapter 5, "Explaining the Factors of the Index of Economic Freedom," in 2004 Index of Economic Freedom.

Appendixes

[18]For more details, see Ana I. Eiras, "Chile: Ten Steps for Abandoning Aid Dependency for Prosperity," Heritage Foundation Backgrounder No. 1654, May 20, 2003.

[19]Nile Gardiner, Ph.D., and Marc Miles, Ph.D., "Forgive the Iraqi Debt," Heritage Foundation Executive Memorandum No. 871, April 30, 2003.

[20]Public Law 108-25.

[21]"Iran-Earthquake," Fact Sheet # 8, Fiscal Year (FY) 2004, U.S. Agency for International Development, Bureau for Democracy, Conflict, and Humanitarian Assistance, Office of U.S. Foreign Disaster Assistance, January 9, 2004, at http://www.usaid.gov/our_work/humanitarian_assistance/ disaster_assistance/countries/iran/fy2004/Iran_ND_FS08_1-09-2004.pdf.

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Sources:
International Monetary Fund, "IMF Lending Arrangements," at www.imf.org/external/np/tre/tad/extarr1.cfm; World Bank, World Development Indicators, 2003, on CD-ROM; Marc A. Miles, Edwin J. Feulner, and Mary Anastasia O'Grady, 2004 Index of Economic Freedom (Washington, D.C.: The Heritage Foundation and Dow Jones & Company, Inc., 2004).

Table 2

Sources:
World Bank, World Development Indicators, 2003, on CD-ROM; Marc A. Miles, Edwin J. Feulner, and Mary Anastasia O'Grady, 2004 Index of Economic Freedom (Washington, D.C.: The Heritage Foundation and Dow Jones & Company, Inc., 2004); and World Bank, The World Bank Annual Report 2002, at www.worldbank.org/annualreport/2002/pdf/IBRDAppendixes.pdf.

Table 1
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Sources: Organisation for Economic Co-operation and Development (OECD), Corporate Data Environment Database: Development Assistance Committee, available at http://www1.oecd.org/scripts/cde/; World Bank, World Development Indicators Online, available at www.worldbank.org/data.