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Saturday, January 1, 2000

New Excuses for Old Failures

Foreign Aid Fails to Help Third-World Citizens

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

Foreign aid, argues President Bill Clinton, is “designed to keep our soldiers out of war.” He threatened to veto this year’s $12.7 billion foreign assistance appropriations bill after Congress reduced his request by $2 billion. But the evidence is overwhelming that increasing foreign aid would only throw good money after bad.

The United States alone has contributed more than $1 trillion (in current dollars) in foreign assistance since World War II. Although some individual development projects have undoubtedly worked, there is no evidence that what we inaccurately call “foreign assistance” has generated economic growth or promoted political stability in the developing world.

In 1996 the United Nations reported that 70 countries, aid recipients all, were poorer than they were in 1980; 43 were worse off than they were in 1970. Admits the U.S. Agency for International Development (U.S. AID): “much of the investment financed by U.S. AID and other donors between 1960 and 1980 has disappeared without a trace.”

The already overwhelming evidence that foreign aid is not aid just keeps accumulating.

There was, for instance, last summer’s New York Times exposé detailing an investigation by the Office of the High Representative in Bosnia, which concluded that as much as $1 billion of that artificial nation’s public money had been stolen since 1995 even as the West was providing $5.1 billion in aid. Alexandra Stiglmayer, spokeswoman for the High Representative, said “The figure is probably higher than $1 billion.”

To argue, as the State Department did, that the bulk of the loss was the Bosnians’ own funds ignores the fact that money is fungible and most of the economy remains under state control. It is bad enough to force Western taxpayers to subsidize local corruption. It is criminally irresponsible to make them underwrite a system that actively impedes economic development and growth.

Russian Woes

Russia is no different. Moscow has collected more than $20 billion from the International Monetary Fund alone since 1992; the money is gone and the country is poorer than ever. Russia defaulted on billions in loans in 1998 and last August reached an agreement with Western creditors to put off repaying $8.1 billion falling due in 1999 and 2000. A $640 million loan issued by the IMF in July was simply shifted among Fund accounts to pay down Russia’s outstanding debt.

Even the IMF makes little pretense that its activities promote economic reform. The Fund’s Stanley Fisher admits that “we were lied to” when Russia transferred hundreds of millions of dollars of its 1992 loan to offshore accounts to speculate in Russian bonds.

There are concerns that looted IMF funds may have been laundered through the Bank of New York, which appears to have become a transit station for the Russian mob. But Fund officials say that they can’t be expected to track the disposition of IMF disbursements: “We are not a bank,” Thomas Dawson, the director of external relations, told the Wall Street Journal.

Nor, it would appear, is the Fund a trustworthy forecaster. A Heritage Foundation study released last August found that while the organization did a reasonably good job of assessing the economies of industrialized states, it did a lousy job of predicting events in poor nations–the ones to which it was lending. Whether the IMF shaded the troth to justify its activities or displayed a hopeless naiveté in judging the creditworthiness of its borrowers is impossible to say for certain. However, wrote William Beach, Aaron Schavey, and Isabel Isidro, the Fund’s consistent failure weakened “the IMF’s effectiveness because early diagnosis of its member countries’ vulnerabilities to potential crises is critical to fulfilling the IMF’s mandate of ensuring the international financial system’s stability.”

It’s not just the IMF. The World Bank stood by for decades as the Suharto regime and especially his family looted the Indonesian economy. The organization finally felt compelled to hold up planned disbursements before parliamentary elections last year to prevent government manipulation of aid for political purposes and threatened to halt its entire lending program because of a banking scandal.

Also in 1999 economists Alberto Alesina and Beatrice Weder produced a shocking study for the National Bureau of Economic Research. In assessing the experience of aid from 1970 to 1996, they concluded that more assistance, whether bilateral or multilateral, tends to flow to more corrupt governments. Stephen Knack of the University of Maryland completed a survey which found that “higher aid levels erode the quality of governance, as measured by indexes of bureaucratic quality, corruption, and the rule of law.”

In short, aid has proved to be a disaster. Which may explain President Clinton’s attempt to come up with a new argument: foreign assistance will prevent wars. He warned that without the $2 to $3 billion he wants for Kosovo and related programs, “make no mistake there will be another bloody war.”

Old Argument

It’s a superficially appealing argument, but hardly new. Former U.S. AID Administrator J. Brian Atwood peddled the mission of “crisis prevention” for years. Before departing last July, he said that without more aid money “you could see more countries becoming anarchies in Africa. You certainly could see that as a possibility in Russia.”

In fact, however, U.S. and international assistance has flowed freely not just to Russia, but to virtually every country that has descended into anarchy and/or war. Between 1971 and 1994 the United States, Europe, and multilateral institutions gave Sierra Leone $1.8 billion, Liberia $1.8 billion, Angola $2.9 billion, Haiti $3.1 billion, Chad $3.3 billion, Burundi $3.4 billion, Rwanda $4.7 billion, Uganda $5.8 billion, Somalia $6.2 billion, Zaire $8.4 billion, Mozambique $10.5 billion, Ethiopia $11.5 billion, and Sudan $13.4 billion.

Aid failed to forestall crises in all of these states because money was never the basic problem. Most of these nations are riven with clan, ethnic, or tribal rivalries. Most lack a basic rule of law. Most have repressive, dishonest governments. Most suffer from highly politicized militaries.

More money from abroad would solve none of these problems. To the contrary, pouring cash into states such as Ethiopia, Somalia, Sudan, and Zaire subsidized the very worst autocratic and corrupt dictators who consciously wrecked their nations. This made chaos and war more, not less, likely. Observes Alex De Waal, onetime vice-director of Africa Watch: “The more aid a country receives, the less the government of that country has to answer to the people.”

President Clinton’s attempt to dress up yesterday’s disastrous policies with new justifications will fail. There is perhaps no greater tragedy today than the failed societies that dot the globe. But there is no evidence that increasing aid flows will benefit Third World peoples, let alone prevent new human catastrophes.

  • Doug Bandow is a senior fellow at the Cato Institute and the author of a number of books on economics and politics. He writes regularly on military non-interventionism.