It's a formula that sounds good, as it rings from editorial pages to U.N. conferences: More economic aid equals less world poverty.
It's what some cheerleaders for higher aid keep telling President Bush, who recently announced that he would boost U.S. foreign aid spending by $5 billion over three years. And even that's not enough for the United Nations and the World Bank, which are calling for the United States to double the amount of aid it currently gives ($11.5 billion).
But this chorus for ever-higher amounts of aid obscures an
inconvenient fact: Merely increasing economic aid to poor countries
does virtually nothing to make them richer.
Consider that, since 1945, the United States has given more than $500 billion to less developed countries. Yet the people in many of these countries are no richer today -- and in many cases actually are worse off -- than they were decades ago.
Case in point: Zambia, an African nation about the size of Texas, has been receiving U.S. foreign aid for the last 44 years ($37 million last year alone). Yet, despite this infusion of funds, its per capita gross domestic product (GDP) fell by $275 between 1964 (Zambia's first year of independence) and 1999. In the 1990s, its economy "grew" at a rate of minus 2 percent. Inflation stands at 27 percent.
Why? Primarily because Zambia, like so many other recipients of U.S. foreign aid, restricts economic freedom for its citizens. Corruption is rampant, and the government imposes a heavy regulatory burden. Acquiring a business license, for example, involves complex procedures and delays that discourage domestic investment.
Aid from other sources fares no better. The World Bank, for example, funneled more than $100 billion to sub-Saharan African countries between 1970 and 1999. Of the 31 for which data are available, 17 saw their per capita GDP decline.
The key to economic growth is freedom, not aid, as shown by the"Index of Economic Freedom," an annual survey measuring economic freedom in 161 countries around the world (co-published by The Heritage Foundation and The Wall Street Journal). Nations rated as having "free" economies in the 2002 Index have an average per capita income of $23,325. Those rated as economically "repressed," such as North Korea, have an average per capita income of only $3,829.
In country after country, the Index proves the folly of giving aid to a government with policies that make it difficult for people to open a business or trade with foreigners. You could increase U.S. foreign aid to an economically repressed country by a factor of 100 and still see its standard of living improve not one iota.
The responsibility for economic growth in the developing world lies largely with the countries themselves, because the main cause of a country's economic growth is its domestic policies, not the amount of foreign aid it receives. Nations with policies that promote economic freedom, such as low trade barriers or high protection of property rights, nearly always grow faster than those without them.
Which is why, as President Bush seems to realize, aid should go only to countries with sound economic policies. He wants his $5 billion increase to go to those countries that establish the rule of law, fight corruption and open their markets. The World Bank found that giving a country with good policies in these areas an amount equal to just 1 percent of its GDP prompts growth -- but giving aid to countries with weak economic policies causes their economies to shrink.
Here are a couple of suggestions the administration can use to move the debate in the right direction:
- Stress the effectiveness of aid, not the amount. President Bush should encourage other developed countries to consider not how much aid they give, but how they give it. Aid is effective only when it's disbursed to countries with policies that promote economic growth.
- Put economic growth first. Protecting labor rights, strengthening environmental standards and combating income inequality are worthy goals but should take a back seat to promoting growth.
Labor rights and environmental protections aren't a prerequisite for development. In fact, the best way to raise labor and environmental standards is to increase economic growth, because wealthier nations tend to have greater environmental protection and labor standards than poorer ones.
It's time to amend our foreign-aid formula so that it encourages governments to expand economic freedom -- without which no nation can reduce poverty.
Schaefer is the 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 (www.heritage.org).
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