All Commentary
Thursday, October 1, 1970

Foreign Investment vs. Foreign Aid

At the beginning of Chapter III of his History of England, Thomas Babington Macaulay wrote:

“In every experimental science there is a tendency toward perfec­tion. In every human being there is a wish to ameliorate his own condition. These two principles have often sufficed, even when counteracted by great public ca­lamities and by bad institutions, to carry civilization rapidly for­ward. No ordinary misfortune, no ordinary misgovernment, will do so much to make a nation wretched as the constant effort of every man to better himself will do to make a nation prosperous. It has often been found that profuse expendi­tures, heavy taxation, absurd commercial restrictions, corrupt tribunals, disastrous wars, seditions, persecutions, conflagrations, inundations, have not been able to destroy capital so fast as the ex­ertions of private citizens have been able to create it. It can easily be proved that, in our own land, the national wealth has, dur­ing at least six centuries, been almost uninterruptedly increasing…. This progress, having con­tinued during many ages, became at length, about the middle of the eighteenth century, portentously rapid, and has proceeded, during the nineteenth, with accelerated velocity.”

We too often forget this basic truth. Would-be humanitarians speak constantly today of “the vicious circle of poverty.” Pov­erty, they tell us, produces malnu­trition and disease, which produce apathy and idleness, which per­petuate poverty;, and no progress is possible without help from out­side. This theory is today pro­pounded unceasingly, as if it were axiomatic. Yet the history of na­tions and individuals shows it to be false.

It is not only “the natural effort which every man is continually making to better his own condi­tion” (as Adam Smith put it even before Macaulay) that we need to consider, but the constant effort of most families to give their children a “better start” than they enjoyed themselves. The poorest people under the most primitive conditions work first of all for food, then for clothing and shelter. Once they have provided a rudimentary shelter, more of their energies are released for in­creasing the quantity or improv­ing the quality of their food and clothing and shelter. And for pro­viding tools. Once they have ac­quired a few tools, part of their time and energies can be released for making more and better tools. And so, as Macaulay emphasized, economic progress can become ac­celerative.

One reason it took so many cen­turies before this acceleration ac­tually began, is that as men in­creased their production of the means of subsistence, more of their children survived. This meant that their increased produc­tion was in fact mainly used to support an increasing population. Aggregate production, population, and consumption all increased; but per capita production and consumption barely increased at all. Not until the Industrial Revo­lution began in the late eighteenth century did the rate of production begin to increase by so much that, in spite of leading to an unprece­dented increase in population, it led also to an increase in per capita production. In the West­ern world this increase has con­tinued ever since.

So a country can, in fact, start­ing from the most primitive con­ditions, lift itself from poverty to abundance. If this were not so, the world could never have arrived at its present state of wealth. Every country started poor. As a matter of historic fact, most na­tions raised themselves from “hopeless” poverty to at least a less wretched poverty purely by their own efforts.

Specialization and Trade

One of the ways by which each nation or region did this was by division of labor within its own territory and by the mutual ex­change of services and products. Each man enormously increased his output by eventually special­izing in a single activity—by be­coming a farmer, butcher, baker, mason, bricklayer, or tailor—and exchanging his product with his neighbors. In time this process ex­tended beyond national boundaries, enabling each nation to spe­cialize more than before in the products or services that it was able to supply more plentifully or cheaply than others, and by ex­change and trade to supply itself with goods and services from others more plentifully or cheaply than it could supply them for it­self.

But this was only one way in which foreign trade accelerated the mutual enrichment of nations. In addition to being able to supply itself with more goods and cheaper goods as a result of foreign trade, each nation supplied itself with goods and services that it could otherwise not produce at all, and of which it would perhaps not even have known the existence.

Thus foreign trade educates each nation that participates in it, and not only through such obvious means as the exchange of books and periodicals. This educational effect is particularly important when hitherto backward countries open their doors to industrially advanced countries. One of the most dramatic examples of this occurred in 1854, when Commo­dore Perry at the head of a U. S. naval force “persuaded” the Japa­nese, after 250 years of isolation, to open their doors to trade and communication with the U.S. and the rest of the world. Part of Perry’s success, significantly, was the result of bringing and showing the Japanese such things as a mod­ern telescope, a model telegraph, and a model railway, which de­lighted and amazed them.

Some Steps May Be Skipped

Western reformers today, prais­ing some hitherto backward coun­try, in Africa or Asia, will ex­plain how much smarter its natives are than we of the West because they have “leaped in a single decade from the seventeenth into the twentieth century.” But the leap, while praiseworthy, is not so surprising when one recalls that what the natives mainly did was to import the machines, instru­ments, technology, and know-how that had been developed during those three centuries by the sci­entists and technicians of the West. The backward countries were able to bypass home coal furnaces, gaslight, the street car, and even, in most cases, the rail­road, and to import Western auto­mobiles, Western knowledge of road-building, Western airplanes and airliners, telephones, central oil heaters, electric light, radio and television, refrigerators and air-conditioning, electric heaters, stoves, dishwashers and clothes washers, machine tools, factories, plants, and Western technicians, and then to send some of their youth to Western colleges and universities to become technicians, engineers, and scientists. The backward countries imported, in brief, their “great leap forward.”

In fact, not merely the recently backward countries of Asia and Africa, but every great industri­alized Western nation, not exclud­ing the United States, owes a very great part—indeed, the major part—of its present technological knowledge and productivity to dis­coveries, inventions, and improve­ments imported from other na­tions. Notwithstanding the elegant elucidations by the classical econ­omists, very few of us today ap­preciate all that the world and each nation owes to foreign trade, not only in services and products, but even more in knowledge, ideas, and ideals.

International Investment

Historically, international trade gradually led to international in­vestment. Among independent na­tions, international investment de­veloped inevitably when the exporters of one nation, in order to increase their sales, sold on short-term credit, and later on longer-term credit, to the import­ers of another. It developed also because capital was scarcer in the less developed nation, and interest rates were higher. It developed on a larger scale when men emigrated from one country to another, start­ing businesses in the new country, taking their capital as well as their skills with them.

In fact, what is now known as “portfolio” investment—the pur­chase by the nationals of one coun­try of the stocks or bonds of the companies of another—has usu­ally been less important quanti­tatively than this “direct” invest­ment. In 1967 U. S. private invest­ments abroad were estimated to total $93 billion, of which $12 billion were short-term assets and claims, and $81 billion long-term. Of American long-term private in­vestments abroad, $22 billion were portfolio investments and $59 bil­lion direct investments.

The export of private capital for private investment has on the whole been extremely profitable for the capital-exporting countries. In every one of the twenty years from 1945 to 1964 inclusive, for example, the income from old di­rect foreign investments by U. S. companies exceeded the outflow of new direct investments. In that twenty-year period new outflows of direct investments totaled $22.8 billion, but income from old direct investments came to $37.1 billion, plus $4.6 billion from royalties and fees, leaving an excess inflow of $18.9 billion. In fact, with the exception of 1928, 1929, and 1931, U. S. income from direct foreign investments exceeded new capital outlays in every year since 1919.1

Our direct foreign investments also greatly stimulated our mer­chandise exports. The U. S. De­partment of Commerce found that in 1964, for example, $6.3 billion, or 25 per cent of our total exports in that year, went to affiliates of American companies overseas.

It is one of the ironies of our time, however, that the U. S. gov­ernment decided to put the entire blame for the recent “balance-of payments deficit” on American in­vestments abroad; and beginning in mid-1963, started to penalize and restrict such investment.

The advantages of international investment to the capital import­ing country should be even more obvious. In any backward country there are almost unlimited po­tential ventures, or “investment opportunities,” that are not under­taken chiefly because the capital to start them does not exist. It is the domestic lack of capital that makes it so difficult for the “un­derdeveloped” country to climb out of its wretched condition. Outside capital can enormously accelerate its rate of improvement.

Investment from abroad, like domestic investment, can be of two kinds: the first is in the form of fixed interest-bearing loans, the second in the form of direct equity investment in which the foreign investor takes both the risks and the profits. The politicians of the capital-importing country usually prefer the first. They see their nationals, say, making 15 or 30 per cent annual gross profit on a venture, paying off the foreign lender at a rate of only 6 per cent, and keeping the difference as net profit. If the foreign investor makes a similar assessment of the situation, however, he naturally prefers to make the direct equity investment himself.

But the foreigner’s preference in this regard does not necessari­ly mean that the capital-importing country is injured. It is to its own advantage if its government puts no vexatious restrictions on the form or conditions of the private foreign investment. For if the foreign investor imports, in addi­tion to his capital, his own (usu­ally) superior management, ex­perience, and technical know-how, his enterprise may be more likely to succeed. He cannot help but give employment to labor in the capital-importing country, even if he is allowed to bring in labor freely from his own. Self-interest and wage-rate differentials will probably soon lead him to displace most of whatever common or even skilled labor he originally brings in from his own country with the labor of the host country. He will usually supply the capital-import­ing country itself with some arti­cle or amenity it did not have before. He will raise the average marginal productivity of labor in the country in which he has built his plant or made his investment, and his enterprise will tend to raise wages there. And if his in­vestment proves particularly prof­itable, he will probably keep rein­vesting most of his profits in it as long as the market seems to justify the reinvestment.

There is still another benefit to the capital-importing country from private foreign investment. The foreign investors will naturally seek out first the most profitable investment opportunities. If they choose wisely, these will also be the investments that produce the greatest surplus of market value over costs and are therefore eco­nomically most productive. When the originally most productive in­vestment opportunities have been exploited to a point where the com­parative rate of return begins to diminish, the foreign investors will look for the next most pro­ductive investment opportunities, originally passed over. And so on. Private foreign investment will therefore tend to promote the most rapid rate of economic improve­ments.

Foreigners Are Suspect

It is unfortunate, however, that just as the government of the private-capital-exporting country today tends to regard its capital exports with alarm as a threat to its “balance of payments,” the government of the private-capital importing country today tends to regard its capital imports at least with suspicion if not with even greater alarm. Doesn’t the private capital-exporting country make a profit on this capital? And if so, mustn’t this profit necessarily be at the expense of the capital-im­porting country? Mustn’t the lat­ter country somehow be giving away its patrimony? It seems im­possible for the anticapitalist men­tality (which prevails among the politicians of the world, particu­larly in the underdeveloped coun­tries) to recognize that both sides normally benefit from any volun­tary economic transaction, wheth­er a purchase-sale or a loan-invest­ment, domestic or international.

Chief among the many fears of the politicians of the capital-im­porting country is that foreign investors “take the money out of the country.” To the extent that this is true, it is true also of domestic investment. If a home owner in Philadelphia gets a mort­gage from an investor in New York, he may point out that his interest and amortization payments are going out of Philadel­phia and even out of Pennsylvania. But he can do this with a straight face only by forgetting that he originally borrowed the money from the New York lender either because he could not raise it at all in his home city or because he got better terms than he could get in his home city. If the New Yorker makes an equity investment in Pennsylvania, he may take out all the net profits; but he probably employs Pennsylvania labor to build his factory and operate it. And he probably pays out $85 to $90 annually for labor, supplies, rent, etc., mainly in Pennsylvania, for every $10 he takes back to New York. (In 1969, American manufacturing corporations showed a net profit after taxes of only 5.4 per cent on total value of sales.) “They take the money out of the country” is an objection against foreign investors resulting even more from xenophobia than from anticapitalism.

Fear of Foreign Control

Another objection to foreign investment by politicians of the capital-importing country is that the foreign investors may “dom­inate” the borrowing country’s economy. The implication (made in 1965 by the de Gaulle govern­ment of France, for example) is that American-owned companies might come to have too much to say about the economic decisions of the government of the countries in which they are located. The real danger, however, is the other way round. The foreign-owned com­pany puts itself at the mercy of the government of the host coun­try. Its capital in the form of buildings, equipment, drilled wells and refineries, developed mines, and even bank deposits, may be trapped. In the last twenty-five years, particularly in Latin Amer­ica and the Middle East, as Amer­ican oil companies and others have found to their sorrow, the dangers of discriminatory labor legisla­tion, onerous taxation, harass­ment, or even expropriation, are very real.

Yet the anticapitalistic, xeno­phobic, and other prejudices against private foreign investment have been so widespread, in both the countries that would gain from importing capital and the countries that would profit from exporting it, that the governments in both sets of countries have im­posed taxes, laws and regulations, red tape, and other obstacles to discourage it.

At the same time, paradoxically, there has grown up in the last quarter-century powerful political pressures in both sets of countries in favor of the richer countries giving capital away to the poorer in the form of government-to-gov­ernment “aid.”

The Marshall Plan

This present curious giveaway mania (it can only be called that on the part of the countries mak­ing the grants) got started as the result of an historical accident. During World War II, the United States had been pouring supplies—munitions, industrial equipment, foodstuffs—into the countries of its allies and cobelligerents. These were all nominally “loans.” Ameri­can Lend-Lease to Great Britain, for example, came to some $30 bil­lion and to Soviet Russia to $11 billion.

But when the war ended, Amer­icans were informed not only that the Lend-Lease recipients could not repay and had no intention of repaying, but that the countries receiving these loans in wartime had become dependent upon them and were still in desperate straits, and that further credits were necessary to stave off disaster.

This was the origin of the Mar­shall Plan.

On June 5, 1947, General George C. Marshall, then American Secre­tary of State, made at Harvard the world’s most expensive com­mencement address, in which he said:

“The truth of the matter is that Europe’s requirements, for the next three or four years, of foreign food and other essential products—principally from America—are so much greater than her present ability to pay that she must have substantial additional help, or face economic, social, and political de­terioration of a very grave char­acter.”

Whereupon Congress authorized the spending in the following three-and-a-half years of some $12 billion in aid.

This aid was widely credited with restoring economic health to “free” Europe and halting the march of communism in the recipi­ent countries. It is true that Europe did finally recover from the ravages of World War II—as it had recovered from the ravages of World War I. And it is true that, apart from Yugoslavia, the countries not occupied by Soviet Russia did not go communist. But whether the Marshall Plan accel­erated or retarded this recovery, or substantially affected the extent of communist penetration in Eu­rope, can never be proved. What can be said is that the plight of Europe in 1947 was at least as much the result of misguided Eu­ropean governmental economic pol­icies as of physical devastation caused by the war. Europe’s re­covery was far slower than it could have been, with or without the Marshall Plan.

This was dramatically demon­strated in West Germany in 1948, when the actions between June 20 and July 8 of Economic Minister Ludwig Erhard in simultaneously halting inflation, introducing a thoroughgoing currency reform, and removing the strangling net­work of price controls, brought the German “miracle” of recovery.

As Dr. Erhard himself described his action: “We decided upon and re-introduced the old rules of a free economy, the rules of laissez-faire. We abolished practically all controls over allocation, prices, and wages, and replaced them with a price mechanism controlled pre­dominantly by money.”

The result was that German in­dustrial production in the second half of 1948 rose from 45 per cent to nearly 75 per cent of the 1936 level, while steel production dou­bled that year.

It is sometimes claimed that it was Germany’s share of Marshall aid that brought on the recovery. But nothing similar occurred in Great Britain, for example, which received more than twice as much Marshall aid. The German per capita gross national product, mea­sured in constant prices, increased 64 per cent between 1950 and 1958, whereas the per capita in­crease in Great Britain, similarly measured, rose only 15 per cent.

Once American politicians got the idea that the American tax­payer owed other countries a liv­ing, it followed logically that his duty could not be limited to just a few. Surely that duty was to see that poverty was abolished every­where in the world. And so in his inaugural address of January 20, 1949, President Truman called for “a bold new program” to make “the benefits of our scientific ad­vances and industrial progress available for the improvement and growth of underdeveloped areas…. This program can greatly increase the industrial activity in other nations and can raise substantially their standards of living.”

Because it was so labeled in the Truman address, this program be­came known as “Point Four.” Un­der it the “emergency” foreign aid of the Marshall Plan, which was originally to run for three of four years at most, was universalized, and has now been running for more than twenty years. So far as its advocates and built-in bu­reaucracy are concerned, it is to last until foreign poverty has been abolished from the face of the earth, or until the per capita “gap” between incomes in the backward countries and the advanced coun­tries has been closed—even if that takes forever.

The cost of the program already is appalling. Total disbursements to foreign nations, in the fiscal years 1946 through 1970, came to $131 billion. The total net interest paid on what the U. S. borrowed to give away these funds amounted in the same period to $68 billion, bringing the grand total through the 25-year period to $199 billion.²

This money went altogether to some 130 nations. Even in the fis­cal year 1970, the aid program was still operating in 99 nations and five territories of the world, with 51,000 persons on the payroll, in­cluding U. S. and foreign person­nel. Congressman Otto E. Pass-man, chairman of the Foreign Op­erations Subcommittee on Appro­priations, declared on July 1, 1969: “Of the three-and-a-half bil­lion people of the world, all but 36 million have received aid from the U. S.”

Domestic Repercussions

Even the colossal totals just cited do not measure the total loss that the foreign giveaway pro­gram has imposed on the Ameri­can economy. Foreign aid has had the most serious economic side-effects. It has led to grave distor­tions in our economy. It has undermined our currency, and contributed toward driving us off the gold standard. It has accel­erated our inflation. It was sufficient in itself to account for the total of our Federal deficits in the 1946-70 period. The $199 billion foreign aid total exceeds by $116 billion even the $83 billion in­crease in our gross national debt during the same years. Foreign aid has also been sufficient in itself to account for all our balance-of-pay­ments deficits (which our govern­ment’s policies blame on private foreign investment).

The advocates of foreign aid may choose to argue that though our chronic Federal budget deficits in the last 25 years could be im­puted to foreign aid, we could alternatively impute those deficits to other expenditures, and assume that the foreign aid was paid for entirely by raising additional taxes. But such an assumption would hardly improve the case for foreign aid. It would mean that taxes during this quarter-century averaged at least $5 billion higher each year than they would have otherwise. It would be difficult to exaggerate the setbacks to per­sonal working incentives, to new ventures, to profits, to capital in­vestment, to employment, to wages, to living standards, that an annual burden of $5 billion in additional taxation can cause.

If, finally, we make the “neutral” assumption that our $131 or $199 billion in foreign aid (whichever way we choose to calculate the sum) was financed in exact pro­portion to our actual deficit and tax totals in the 25-year period, we merely make it responsible for part of both sets of evils.

In sum, the foreign aid program has immensely set back our own potential capital development. It ought to be obvious that a foreign giveaway program can raise the standards of living of the so-called “underdeveloped areas” of the world only by lowering our own living standards compared with what they could otherwise be. If our taxpayers are forced to contribute millions of dollars for hydroelectric plants in Africa or Asia, they obviously have that much less for productive invest­ment in the U. S. If they contrib­ute $10 million dollars for a hous­ing project in Uruguay, they have just that much less for their own housing, or any other cost equiva­lent, at home. Even our own so­cialist and statist do-gooders would be shaken if it occurred to them to consider how much might have been done with that $131 or $199 billion of foreign aid to mitigate pollution at home, build subsidized housing, and relieve “the plight of our cities.” Free enterprisers, of course, will lament the foreign giveaway on the far more realistic calculation of how enormously the production, and the wealth and welfare of every class of our popu­lation, could have been increased by $131 to $199 billion in more private investment in new and better tools and cost-reducing equipment, and in higher living standards, and in more and better homes, hospitals, schools, and uni­versities.

The Political Arguments

What have been the economic or political compensations to the United States for the staggering cost of its foreign aid program? Most of them have been illusory. When our successive Presidents and foreign aid officials make in­spirational speeches in favor of foreign aid, they dwell chiefly on its alleged humanitarian virtues, on the need for American gener­osity and compassion, on our duty to relieve the suffering and share the burdens of all mankind. But when they are trying to get the necessary appropriations out of Congress, they recognize the ad­visability of additional arguments. So they appeal to the American taxpayer’s material self-interest. It will redound to his benefit, they argue, in three ways:

1.       It will increase our foreign trade, and consequently the profits from it.

2.                   It will keep the underdeveloped countries from going communist.

3.                   It will turn the recipients of our grants into our eternally grateful friends.

The answers to these arguments are clear:

1.         Particular exporters may profit on net balance from the foreign aid program, but they necessarily do so at the expense of the American taxpayer. It makes little difference in the end whether we give other countries the dollars to pay for our goods, or whether we directly give them the goods. We cannot grow rich by giving our goods or our dollars away. We can only grow poorer. (I would be ashamed of stating this truism if our foreign aid advocates did not so systematically ignore it.)

2.         There is no convincing evi­dence that our foreign aid played any role whatever in reversing, halting, or even slowing down any drift toward communism. Our aid to Cuba in the early years of the program, and even our special favoritism toward it in assigning sugar quotas and the like, did not prevent it from going communist in 1958. Our $769 million of aid to the United Arab Republic did not prevent it from coming under Russian domination. Our $460 million aid to Peru did not prevent it from seizing American private properties there. Neither our $7,715 million aid to India, nor our $3,637 million aid to Pakistan, pre­vented either country from moving deeper and deeper into socialism and despotic economic controls.

Our aid, in fact, subsidized these very programs, or made them pos­sible. And so its goes, country after country.

3.       Instead of turning the recipi­ents into grateful friends, there is ever-fresh evidence that our foreign aid program has had pre­cisely the opposite effect. It is pre-eminently the American em­bassies and the official American libraries that are mobbed and stoned, the American flag that is burned, the Yanks that are told to go home. And the head of almost every government that accepts American aid finds it necessary to denounce and insult the United States at regular intervals in order to prove to his own people that he is not subservient and no puppet. So foreign aid hurts both the economic and political interest of the country that extends it.

The Unseen Costs of Utopian Programs

But all this might be overlooked, in a broad humanitarian view, if foreign aid accomplished its main ostensible purpose of raising the living levels of the countries that received it. Yet both reason and experience make it clear that in the long run it has precisely the opposite effect.

Of course, a country cannot give away $131 billion without its doing something abroad (though we must always keep in mind the reservation—instead of something else at home). If the money is spent on a public housing project, on a hydroelectric dam, on a steel mill (no matter how uneconomic or ill-advised), the housing or the dam or the mill is brought into existence. It is visible and unde­niable. But to point to that is to point only to the visible gross gain while ignoring the costs and the offsets. In all sorts of ways—eco­nomic, political, spiritual—the aid in the long run hurts the recipient country. It becomes dependent on the aid. It loses self-respect and self-reliance. The poor country be­comes a pauperized country, a beggar country.

There is a profound contrast between the effects of foreign aid and of voluntary private invest­ment. Foreign aid goes from gov­ernment to government. It is therefore almost inevitably statist and socialistic. A good part of it goes into providing more goods for immediate consumption, which may do nothing to increase the country’s productive capacity. The rest goes into government proj­ects, government five-year plans, government airlines, government hydroelectric plants and dams, or government steel mills, erected principally for prestige reasons, and for looking impressive in col­ored photographs, and regardless of whether the projects are eco­nomically justified or self-support­ing. As a result, real economic improvement is retarded.

The Insoluble Dilemma

From the very beginning, for­eign aid has faced an insoluble dilemma. I called attention to this in a book published in 1947, Will Dollars Save the World?, when the Marshall Plan was proposed but not yet enacted:

“Intergovernmental loans [they have since become mainly gifts, which only intensifies the problem] are on the horns of this dilemma. If on the one hand they are made without conditions, the funds are squandered and dissipated and fail to accomplish their purpose. They may even be used for the precise opposite of the purpose that the lender had in mind. But if the lending government attempts to impose conditions, its attempt causes immediate resentment. It is called ‘dollar diplomacy’; or `American imperialism’; or ‘inter­fering in the internal affairs’ of the borrowing nation. The resent­ment is quickly exploited by the Communists in that nation.”

In the 23 years since the for­eign-aid program was launched, the administrators have not only failed to find their way out of this dilemma; they have refused even to acknowledge its existence. They have zigzagged from one course to the other, and ended by following the worst course of all: they have insisted that the recipient govern­ments adopt “growth policies”—which mean, in practice, govern­ment “planning,” controls, infla­tion, ambitious nationalized proj­ects—in brief, socialism.

If the foreign aid were not of­fered in the first place, the recipi­ent government would find it ad­visable to try to attract foreign private investment. To do this it would have to abandon its social­istic and inflationary policies, its exchange controls, its laws against taking money out of the country. It would have to abandon harass­ment of private business, restric­tive labor laws, and discriminatory taxation. It would have to give assurances against nationaliza­tion, expropriation, and seizure.

Specifically, if the nationals of a poor country wanted to borrow foreign capital for a private proj­ect, and had to pay a going rate of, say, 7 per cent interest for the loan, their project would have to be one that promised to yield at least 7 per cent before the foreign investors would be interested. If the government of the poor coun­try, on the other hand, can get the money from a foreign government without having to pay interest at all, it need not trouble to ask itself whether the proposed project is likely to prove economic and self-liquidating or not. The essential market guide to comparative need and utility is then completely re­moved. What decides priorities is the grandiose dreams of the gov­ernment planners, unembarrassed by bothersome calculations of com­parative costs and usefulness.

The Conditions for Progress

Where foreign government aid is not freely offered, however, a poor country, to attract private foreign investment, must establish an ac­tual record of respecting private property and maintaining free markets. Such a free-enterprise policy by itself, even if it did not at first attract a single dollar of foreign investment, would give enormous stimulus to the economy of the country that adopted it. It would first of all stop the flight of capital on the part of its own na­tionals and stimulate domestic in­vestment. It is constantly forgot­ten that both domestic and foreign capital investment are encouraged (or discouraged) by the same means.

It is not true, to repeat, that the poor countries are necessarily caught in a “vicious circle of pov­erty,” from which they cannot escape without massive handouts from abroad. It is not true that “the rich countries are getting richer while the poor countries are getting poorer.” It is not true that the “gap” between the living standards of the poor countries and the rich countries is growing ever wider. Certainly that is not true in any proportionate sense. From 1945 to 1955, for example, the average rate of growth of Latin American countries in na­tional income was 4.5 per cent per annum, and in output per head 2.4 per cent—both rates appreci­ably higher than the corresponding figure for the United States.3

Intervention Breeds Waste

The foreign aid ideology is merely the relief ideology, the guaranteed-income ideology, ap­plied on an international scale. Its remedy, like the domestic relief remedy, is to “abolish poverty” by seizing from the rich to give to the poor. Both proposals system­atically ignore the reasons for the poverty they seek to cure. Neither draws any distinction between the poverty caused by misfortune and the poverty brought on by shift­lessness and folly. The advocates of both proposals forget that their chief attention should be directed to restoring the incentives, self-reliance, and production of the poor family or the poor country, and that the principal means of doing this is through the free market.

In sum, government-to-govern­ment foreign aid promotes stat­ism, centralized planning, social­ism, dependence, pauperization, in­efficiency, and waste. It prolongs the poverty it is designed to cure. Voluntary private investment in private enterprise, on the other hand, promotes capitalism, produc­tion, independence, and self-reli­ance. It is by attracting foreign private investment that the great industrial nations of the world were once helped. It is so that America itself was helped by Brit­ish capital, in the nineteenth cen­tury, in building its railroads and exploiting its great national re­sources. It is so that the still “un­derdeveloped areas” of the world can most effectively be helped today to develop their own great potentialities and to raise the liv­ing standards of their masses.



1 See The United States Balance of Payments (Washington: International Economic Policy Association, 1966), pp. 21 and 22.

2 Source: Foreign Operations Sub­committee on Appropriations, House of Representatives, July 1, 1970.

3 Cf.”Some Observations on ‘Gapology,’ ” by P. T. Bauer and John B. Wood in Eco­nomic Age (London), November-Decem­ber 1969. Professor Bauer is one of the few academic economists who have seri­ously analyzed the fallacies of foreign aid. See also his Yale lecture on foreign aid published by The Institute of Eco­nomic Affairs (London), 1966, and his article on “Development Economics” in Roads to Freedom: Essays in Honour of Friedrich A. von Hayek (London: Rout-ledge & Kegan Paul, 1969). I may also refer the reader to my own book, Will Dol­lars Save the World? (Appleton, 1947), to my pamphlet, Illusions of Point Four (Irvington-on-Hudson, New York: Foun­dation for Economic Education, 1950), and to my chapter on “The Fallacy of Foreign Aid” in my Man Vs. the Welfare State (Arlington House, 1969).


  • Henry Hazlitt (1894-1993) was the great economic journalist of the 20th century. He is the author of Economics in One Lesson among 20 other books. See his complete bibliography. He was chief editorial writer for the New York Times, and wrote weekly for Newsweek. He served in an editorial capacity at The Freeman and was a board member of the Foundation for Economic Education.