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Foreign Aid and International Crises

Doug Bandow

Mr. Bandow is a senior fellow at the Cato Institute and a nationally syndicated columnist. He is the author of several books, most recently, Tripwire: Korea and U.S. Foreign Policy in a Changed World.

Few programs have consumed as many resources with as few positive results as foreign aid. Since World War II the United States alone has contributed more than $1 trillion (in current dollars) in bilateral and multilateral assistance to other countries. Other nations and international aid agencies have provided hundreds of billions of dollars more.

American assistance comes in various forms—grants and loans for bilateral projects, primarily through the U.S. Agency for International Development (USAID), as well as credit from U.S.-funded multilateral agencies, including the International Monetary Fund (IMF) and World Bank, to underwrite borrower development projects and provide aid for structural economic reforms. Other programs underwrite military purchases and provide disaster relief. Although some individual development projects have no doubt worked, and humanitarian aid can help alleviate the effects of crises, there is little evidence, despite the presumption of the term foreign assistance, that American cash transfers, whether bilateral or multilateral, actually do much to advance growth or stability throughout the developing world.

Even many advocates of foreign assistance acknowledge the disappointing results. For instance, USAID admitted in 1993 that much of the investment financed by U.S. AID and other donors between 1960 and 1980 has disappeared without a trace.

Nor is there any reason to believe that better management would enable foreign aid to assist poor nations in achieving self-sustaining economic growth. Decades’ worth of financial transfers have not stopped developing countries from stagnating economically; indeed, many nations have been losing ground. Fully 70 developing states are poorer today than they were in 1980; 44 are worse off than they were in 1960. International comparisons are obviously fraught with difficulty, but aid levels don’t correlate with economic growth, and many of the biggest recipients of foreign assistance, such as Bangladesh, Egypt, India, Sudan, and Tanzania, have been among the globe’s worst economic performers.

Of course, even correlation would not be enough. The real issue is causation, but there is no evidence that aid generates growth. Particularly impressive are studies by Peter Boone of the London School of Economics. After assessing the experience of nearly 100 nations, he concluded that Long-term aid is not a means to create growth. As Boone explained, it is not optimal for politicians to adjust distortionary policies when they receive aid flows.

The failure of foreign assistance to meet its traditional goals has led to a search for new justifications. The current favorite is that financial transfers can be used to prevent social catastrophe, the veritable implosion of entire nations. In June 1994 USAID was ordered to start putting together a socioeconomic and political early warning system, to identify the vulnerabilities of weak developing states, and to start putting some resources behind them. Administrator Thomas Atwood calls this mission crisis prevention and preventive investment in nation building.

Similarly, the U.N. High Commissioner for Refugees has suggested using aid for forestall crises. Last year the agency asked: What might have happened in Rwanda if the estimated $2 billion spent on refugee relief during the first two weeks of the emergency had been devoted to keeping the peace, protecting human rights and promoting development in the period that preceded the exodus?

Nothing probably. Rwanda did not go unaided before its implosion. To the contrary, between 1971 and 1994 that nation received $4.5 billion in foreign assistance. In fact, almost every country in crisis received abundant outside transfers from a variety of sources beforehand. Over the same period, Sierra Leone received $1.8 billion, Liberia $1.8 billion, Angola $2.7 billion, Haiti $3.1 billion, Chad $3.3 billion, Burundi $4.1 billion, Uganda $5.8 billion, Zaire $7.8 billion, Somalia $8 billion, Mozambique $10.4 billion, Ethiopia $11.5 billion, and Sudan $13.4 billion. (See the table.)

In none of these cases did foreign assistance forestall catastrophe. Indeed, few nations in Africa, irrespective of aid levels, have escaped social breakdown. Conflict and economic decline have resulted in tens of thousands of refugees fleeing Gambia, Mali, Mauritania, Niger, Senegal, Togo, and Western Sahara, as well as the states listed above.

Obviously, there are numerous reasons that so many nations, including some in Southeast Asia and the Transcaucasus, suffer so. In none of them is inadequate international aid the cause. To the contrary, foreign aid helped create and aggravate problems in Ethiopia, Somalia, Sudan, and Zaire, in particular, by subsidizing especially odious dictators who wrecked their nations. Among the most important causes of social division and catastrophe is what has been called the overpoliticized state. Yet government-to-government aid only strengthens the very same overpoliticized state.

All aid advocates can now argue that they would do better this time, since, with the end of the Cold War, there is less pressure to use assistance as de facto bribes to assorted dictators. However, the bulk of foreign transfers to such failed nations was always economic, not security. Between 1971 and 1994 the United States accounted for barely one-fifth of total assistance received by Somalia. The rest was economic aid from a variety of sources—the multilaterals and Europeans, in particular. During the same period Rwanda received more from the World Bank alone than from the United States; Burundi collected 3.6 times as much from the Bank as from Washington. In short, the problem with past aid is not that it was overly oriented toward political purposes. Rather, it is that such transfers turned out not to be aid at all. And the impact of new aid flows would be no different.

For nearly half a century the policy of foreign aid has been tried and found wanting. Today’s attempt to put old wine into new wineskins—to offer new justifications for yesterday’s failed policies—won’t work. There is simply no evidence that increased aid flows can prevent future failed societies.

The most important thing that developed nations can do to assist poorer states is to first do no harm. Washington should end government-to-government assistance, which has so often buttressed brutal and venal regimes and eased pressure for reform. At the same time, the United States should drop its trade barriers, which now prevent poorer nations from participating in the international marketplace. The World Bank’s J. Michael Finger figures that Western protectionism reduces the Third World’s GNP by a full three percentage points, twice current foreign aid transfers.

Mass poverty, famine, and murder blight our globe. However, the understandable desire to do something should not become an excuse to maintain the counterproductive policies of the past. For five decades foreign assistance has failed to deliver self-sustaining economic growth or prevent poor societies from collapsing into chaos. New aid flows will do no better.

Aid: 1971-1994 (Millions of Dollars)
Nation       U.S.       Total International       Annual Average

Angola             117       2,743.1             114.3

Burundi       139       4,090.5             170.0

Chad             239       3,281.6             136.7

Ethiopia       999       11,499.6             479.2

Haiti             1,425       3,120.7             130.0

Liberia             639       1,795.0             74.9

Mozambique       616       10,419.3             434.1

Rwanda       416       4,505.0             187.0

Sierra Leone       172       1,769.0             73.7

Somalia       1,770       8,064.2             336.0

Sudan             1,692       13,415.9             559.0

Uganda       295       5,798.8             241.6

Zaire             529       7,800.0             325.0

(Source: Organization for Economic Co-operation and Development, Geographical Distribution of Financial Flows to Developing Countries, volumes covering 1971 through 1994.)

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