All Commentary
Thursday, February 1, 1990

The Failures and Fallacies of Foreign Aid

David Osterfeld is Associate Professor of Political Science at St. Joseph’s College in Rensselaer, Indiana.

The case for foreign “aid” is seldom made; it is taken as axiomatic. In its 1980 report, North-South: A Program for Survival, the Brandt Commission states that “The poorer and weaker countries have not been able to raise much money on commercial terms. For them, Official Development Assistance or aid is the principal source of funds” (1980, p. 224). Such questions as why some countries remain poor and weak while others progress, or why these countries are unable to raise money on commercial terms are never raised. “Aid” is simply assumed to be “essential.”

The Commission laments the “disappointing record” of such developed countries as the United States which have not met the 0.7 percent target for Official Development Assistance established by the United Nations in the early 1970s. “An increase in total aid,” says the Commission, “must remain a high priority,” and “the overall flow of wealth must increase” (pp. 226-27).

In its follow-up report three years later, the Brandt Commission reiterated its call for increased “aid.” The Commission asserted that despite “a few glaring examples of misused or unsuccessful aid loans,” most “aid” was effectively used (1983, p. 78); observed that there remained substantial unmet needs, especially in the poorest of the less-developed countries (LDCs) (p. 75); deplored the “strong current mood in the donor com munity to require greater efforts by aid recipients to improve their own economic performance”; called on donor countries to “respect . . . different economic systems” (p. 73); and urged “donors to double by 1985, in real terms, the aid flows which the poorest countries received in the five years up to 1981.”

The report also called on the donor countries to waive all “official debt” for the least developed countries (pp. 76- 77). And, just in case there was any doubt, the Commission emphasized that even if the LDCs did implement the policy reforms called for by the World Bank and many donor countries, such “reform is not a substitute for more assistance; it requires more assistance to be successful” (p. 74, emphasis in original). Nowhere in either of the Brandt Commission reports is the question even considered of whether “aid” is the appropriate vehicle for stimulating economic development.

Indeed, that any but the misanthropic could oppose programs whose stated goal is to provide “aid” to the less fortunate is generally met with incredulity. For example, in December 1983 on a panel on “Liberation Theology and Third World Development,” Lord Peter Bauer presented a critique of foreign “aid.” Dr. Murdith McLean, who followed Bauer on the panel, opened by commenting that “I was going to begin by saying that everyone thinks foreign aid is at least a good thing to those less well-off than ourselves. It may appear that we have at least one disagreement on that contention in the panel” (p. 39).

But using the term “foreign aid” to describe the political process of transferring wealth from First World taxpayers to Third World governments prejudges the results. There is, as Thomas Sowell notes (p. 239) no more a priori justification for calling it “foreign aid” than “foreign hindrance.” Whether wealth transfer is an aid or a hindrance, Sowell points out, is an empirical question, not a forgone conclusion.

The point is well taken. What are the results of foreign “aid”?

1. The Record

In The Economics of Developing Countries, Wayne Nafziger asks “How effective has aid been?” After listing several criticisms, he concludes (pp. 396-397) that “Nevertheless, the evidence suggests that aid has been essential to many low- income countries in reducing savings and foreign exchange gaps.” However, no evidence is presented to support this assessment. Similarly, Nafziger acknowledges several criticisms of food aid but concludes (p. 401) that “Nevertheless, food aid has frequently been highly effective” and “plays a vital role in saving human lives during famine or crisis.” Again, no supporting evidence is provided.

Whether bilateral or multinational, the official original purpose of foreign aid—the transfer of resources from one government to another—was to stimulate economic development. However, with the passage of the U.S. Foreign Assistance Act of 1973 and the adoption of the New International Economic Order by the General Assembly of the United Nations in 1974, the additional goal of directly increasing the living standards of the poorest strata in the recipient countries was added to, if it did not in fact replace, the original goal (Eber-stadt, 1985b, pp. 25-26; Erickson and Sumner, pp. 1-21).

Clearly, “aid,” at least according to its original intent, was to be temporary. Once the capacity for self- sustaining economic growth had been achieved, “aid” would no longer be required. Yet, as Paul Craig Roberts has observed (p. 20), “Far from developing, most Third World countries seem to be more dependent than ever on aid.” In fact, it was precisely because of the growing dissatisfaction with the results of foreign “aid” that the “reforms of 1973” altered the focus of the program. As Eberstadt put it (1985b, p. 25) the problem “was that the strategy of export-oriented, self-sustaining growth which we had advocated since the 1940s did not actually benefit the common people of the countries it transformed.”

Yet, by either goal, that of generating self-sustaining economic growth or improving the lot of the poorest segments of the recipient countries, the evidence lends precious little support for the contention that “aid” actually aids.

The total net transfer of capital, private and public, from the West to the Third World between 1950 and 1985 amounted to the staggering sum of over $2 trillion in 1985 prices. Private investment accounted for about 25 percent of this total, but its share has fallen from about 40 percent in the 1950s to only about 16 percent in the 1980s. The $2 trillion, Eberstadt notes (1985a, p. 25), was enough to purchase not only all the companies on the New York Stock Exchange but, in addition, the entire American farm system. What has this massive transfer accomplished?

“Aid” has been directly responsible for the pauperization of large segments of the population in places such as the U.S. trust territory of Micronesia and elsewhere (Fitzgerald, pp. 275-84; Manhard, pp. 207-14).

“Aid” has in many places actually destroyed the possibility for sustained economic growth by driving local producers, especially farmers, out of business. Such was the case in Micronesia, Bangladesh, India, Egypt, Haiti, Guatemala, Kenya, and many other places (Bovard, p. 18; Bandow, p. xiv; Fitzgerald, p. 278 and 288; Eberstadt, 1985b, p. 22).

Some experts believe that food “aid” to India “may have been responsible for millions of Indians starving” (Bovard, p. 18). Other studies have shown that malnutrition in Bangladesh actually rose as food aid to that country increased (Krauss, p. 160). It is unlikely that these are isolated occurrences. Countries such as Peru, Haiti, and Guatemala have either refused to accept U.S. “food aid” or pleaded with the U.S. government to restrict such “aid” (Bovard, p. 18).

Africa, traditionally a food exporter, “lost its historic ability to feed itself,” notes Sowell (p. 239), precisely when donor agencies began to “smother Africa with project aid.” Many observers believe that the relationship is not accidental and that Africa’s economic deterioration, and in particular its tragic agricultural situation, was caused, in part, by “aid” (Ayittey, 1988; Fitzgerald, pp. 287-89; Bauer, 1984, pp. 46, 51-52).

In practically every case, the influx of “aid” has been immediately followed by the emergence of a massive, unproductive, parasitic government bureaucracy whose very existence undercuts the recipients’ ability for sustained economic growth (Fitzgerald, pp. 283, 285-86; Sowell, p. 240; Man-hard, p. 209).

More systematically, the World Bank notes (1983, p. 18) that Official Development Assistance totalled five percent of the gross domestic investment of the low-income countries of South Asia, but over 40 percent in the low-income countries in Africa. It also notes (1980, Table 2.8, p. 11) that for the decade of the 1970s per capita income in South Asia’s low-income countries grew over five times faster than it did in the low-income countries of Africa.

Conversely, the most economically developed parts of the world—Western Europe, the United States, and Japan—developed without aid. Similarly, Hong Kong and Singapore, two of the most economically vibrant areas over the past two decades, received only negligible “aid.”

Finally, Taiwan and South Korea are often touted as “foreign aid” success stories. However, their impressive economic performances began only after large-scale economic aid from the U.S. was discontinued (Krauss, p. 190).

In short, despite the truly massive infusion of “aid” into Third World countries, there is little to suggest that this has succeeded in either stimulating self-sustaining economic growth or improving the plight of the poorest strata of people in the recipient countries.

2. Reforming Foreign “Aid”

Many who acknowledge that foreign “aid” has done little or nothing to help the people of the LDCs believe that the solution lies in reforming the aid program. What is needed, they maintain, is better accounting methods, a closer scrutiny of program grants, or simply better, or more public-spirited, administrators.

It is no doubt true that such reforms, if implemented and followed, would eliminate some of the more unsavory aspects of the aid program, such as the blatant waste, mismanagement, and corruption that has been a part of foreign “aid” since its inception.

One problem, however, is that “aid” has increasingly come to be viewed, by recipient as well as donor countries, not as something freely granted by the latter to the former, but as something the more-developed countries (MDCs) owe the less-developed countries (LDCs). And since the LDCs have a “right” to the “aid” it is impermissible, in fact “immoral,” for donor countries to place restrictions on how the “aid” is to be used.

The view that everyone has a moral and legal right to have his “basic needs” supplied was the thrust behind the Foreign Assistance Act of 1973 as well as the Report of the Presidential Commission on World Hunger, commissioned by the Carter administration. The later suggested that a principal goal of foreign “aid” is to reduce hunger in the world and that this could be achieved by “redirecting income from the rich to the poor” (in Eberstadt, 1985b, p. 28). Similarly, the United Nations’ New International Economic Order states that “every country has the right to adopt the economic and social system that it deems to be the most appropriate for its own development and not to be subjected to discrimination of any kind.” Put simply, the MDCs have an obligation to provide the LDCs with “aid” but no right to stipulate any conditions for its use. Given this outlook, and also given the fact that “aid” is now channeled increasingly through multilateral agencies dominated by the LDCs, it is unlikely that such reforms will be implemented.

But there is a far more serious difficulty. Proposals to reform foreign “aid” do not call into question the aid program itself. They assume that, if only the programs could be successfully administered, beneficial results would follow. In fact, even if the proposed reforms were implemented, the expected beneficial results would not appear. The basic problem lies not in the way the programs are administered; it lies in the nature of programs, themselves. Foreign “aid,” by its very nature, retards economic growth and development.

3. Economic Problems of Foreign “Aid”

The economic case against foreign “aid” can be subdivided into two categories: (a) the problem of incentives and (b) the problem of calculation. Each will be dealt with in turn.

a. Incentives. Individuals act to maximize their utility. One of the ways they do this is by making trade-offs between additional units of wealth (and thus work) and additional units of leisure. Each person must decide whether an additional unit of wealth is more valuable to him than the unit of leisure he would have to forgo in order to obtain that wealth. If so, he will prefer to increase his wealth at the expense of his leisure; if not, he will prefer to increase his leisure by reducing his work, and thus his wealth.

The implications are significant. If individuals find themselves in positions where the benefit from a unit of leisure exceeds the benefit resulting from an additional unit of work, it will be rational for them to choose leisure over work. For example, a 100 percent tax on all production, it is safe to assume, would eliminate all productive behavior. This is so since it would sever any connection between an individual’s economic behavior and his economic position. That is, his individual economic activity would have no bearing on his economic status, which, in turn, would render any productive work on his part utterly worthless to him. While each increment of leisure would be less valuable than each preceding increment, it would still retain at least some value. Consequently, when confronted with a choice between work, which has no value to the individual, and leisure, which has at least some value, the rational choice would be to choose leisure over work. Similarly, insuring individuals of a certain level of wealth or supplying them with certain economic goods, regardless of circumstances, artificially reduces the value of work relative to leisure. If this is correct then one would expect to find that the more lucrative such benefits become, the greater the amount of leisure individuals would choose (See, e.g., Osterfeld, 1986; Osterfeld, 1988b).

The evidence bears this out. The Great Society and War on Poverty programs of the 1960s not only failed to eliminate poverty in the United States, but actually led to an increase in the number and in the percentage of the poor. The poor, notes sociologist Charles Murray (p. 9), “continued to respond, as they always had, to the world as they found it, but we . . . changed the rules of their world . . . . The first effect of the new rules was to make it profitable for the poor to behave in the short term in ways which were destructive in the long run. Their second effect was to mask these long term losses—to subsidize irretrievable mistakes. We tried to provide more for the poor and produced more poor instead.”

In short, in an effort to aid the poor, a large segment of American society has been pauperized. The pauperization of the once-proud Navaho Indians, after decades of being heavily subsidized by the U.S. government, is another case (Bauer, 1981, p. 113).

The Micronesians

There is no reason to believe that the disincentive effects of “aid” are limited to domestic programs. The pauperization of the U.S. trust territory of Micronesia is a direct result of “foreign aid.” The U.S. acquired Micronesia as a trust territory in 1945 following its liberation from the Japanese. Outside private investment was discouraged because it would, according to U.S. Navy officials, “reduce the people to cheap labor” (in Fitzgerald, p. 276-77). Instead, the people of Micronesia were given free food, clothes, and other supplies. One result was that the distribution of free food and clothes bankrupted many local stores. Another was that it undermined the incentive to work. Not surprisingly, Micronesians preferred “to accept free and usually gratuitous welfare, thus avoiding the work and sacrifice required for real economic progress” (Manhard, pp. 213-14).

As productivity plummeted, Micronesia became entangled in a vicious circle: the more the economy deteriorated, the more “aid” it received; and the more “aid” it received, the more the economy deteriorated. Between 1947 and 1985 this territory of less than 150,000 people received $2.4 billion, and its inhabitants were eligible for close to 500 government programs (Manhard, p. 213; Fitzgerald, p. 279).

The statistics are indeed revealing. Nearly two-thirds of all Micronesians are now employed by island governments financed by American taxpayers. In terms of acreage cultivated, every category of agriculture declined. Between 1963 and 1973, acreage devoted to coconuts fell by 50 percent, vegetables by 70 percent, and citrus fruit by nearly 60 percent. During the same period, imports of food that traditionally had been produced locally rose five-fold while exports declined by half (Fitzgerald, p. 279). And a 1984 U.S. State Department report lamented the fact that despite massive infusions of funds, the local fisheries sector is no more productive than it was in 1945 before Micronesia became a trust territory (Fitzgerald, p. 282).

Minister of Administration Hauro Willter has publicly complained that “We have no technicians, no plumbers, no electricians. We have no economic base to be self-sufficient because the U.S. Government just handed us everything and didn’t ask us to do anything for ourselves” (Fitzgerald, p. 275). Yet, the American response to the alarming deterioration has been to increase “aid” to Mi-cronesia over the next 15 years to a rate more than double the average of the first 38 years!

The point, of course, is not that Micronesians are inherently lazy. It is that they behaved rationally given the context within which they found themselves. There was no need for them to trade off leisure for wealth since they could have as much or more wealth, at least in the short run, without sacrificing leisure than they could obtain by working.

What makes Micronesia so pertinent is that it is composed of more than 2,100 islands comprising numerous cultures and nine distinct languages. One might expect the results of foreign “aid” to vary from culture to culture. But as Fitzgerald points out (p. 275-76), this was not the case: “What should confound sociologists but vindicate free-market enthusiasts is that nothing of the sort occurred. The uniform application of government in Micronesia, placing it at the center of economic life, produced in every culture and among every is-land group a uniform result—stagnation, dependence, disaster and despair.”

“Food for Peace”

There is little doubt about the disincentive effect of foreign “aid.” The “Food for Peace” program, or PL-40, began in 1940. The program distributes surplus U.S. food overseas. In country after country, including Bangladesh, India, Haiti, and Guatemala, the result, Bovard (p. 18) notes, is that the program “has fed the same people for more than a decade, thereby permanently decreasing the demand for locally produced food and creating an entrenched welfare class.”

Perhaps even more tragic is that since “consumers naturally will not pay for what they can get free” (Bandow, p. xiv), the program has driven local producers out of business. Thus, not only has “food aid” pauperized large segments of the Third World, it has also penalized local producers, thereby resulting in a “de-skilling” of the local population as well as retarding the development of those attitudes—thrift, industry, and self-reliance—that are essential for economic development.

But what of emergency relief such as that extended to famine-stricken countries like Ethiopia? Again, the record speaks for itself. During the 1973-74 famine, Ethiopia received large amounts of food from Europe and America. Although the provinces of Eritrea and Tigre were most affected, food was diverted from them to starve the rebels there into submission. The government of Haile Selassie sold much of the donated food on the world market; the money went to line the pockets of regime members. The government even offered to sell the U.S. 4,000 tons of grain, which the U.S. would then donate back to Ethiopia, thereby helping the U.S. to fulfill its pledge of 22,500 tons of donated food. The offer was declined (Shepard; Legum; Osterfeld, 1985, pp. 264- 66).

The actions of the Mengistu government during the 1984-85 famine were remarkably similar. Though thousands starved, the government not only spent over $200 million to celebrate the tenth anniversary of the Marxist revolution, it also earned $15 million in revenues by charging ships loaded with donated food a port- entry fee of $50.50 a ton. Ships unable to pay the fee were turned away, cargo unloaded (Fenwick). Again, the Eritrea-Tigre area was sealed off, and those smuggling food into the area were attacked by the army. Food shipments were seized and some of it used to feed the army. Some has been sold on the world market, and the money earned used to buy munitions for the war against the rebels.

“Most of the food destined for Eritrea—as much as 100,000 tons each month—has arrived at the Ethiopian- controlled port cities of Aseb and Mitsiwa.” But, says Anthony Suau (pp. 391,400), since “Ethiopia tries to prevent outside aid from reaching the people in Eritrea . . . food aid and medicine must enter the way I did: from Sudan; crossing the border without official permission and moving only at night to avoid Ethiopian planes.” The steady trickle of Eritrean refugees into Sudan, about 400,000 between 1967 and 1984, has turned into a flood, with many of them either starving or wounded from strafing and the bombing of civilian centers by the Ethiopian military (Kaplan).

But even under the best of circumstances, the benefits of emergency aid for victims of famine or other natural disasters may be only an illusion. First of all, if the “aid” is distributed free of charge, it will, as already noted, drive local shops and markets out of business, thus retarding recovery, or even preventing it altogether. But if the food is sold at local, pre-disaster prices, it will tend to freeze domestic production at the disaster level. That is, if enough food is provided by outside “aid” programs to prevent food prices from rising, there will be little incentive for local farmers to return to their pre-disaster level of production, since the additional food could be sold only at lower prices. Thus, even if donated food were sold at pre-disas-ter local prices, it would still permanently displace much local production. And finally, while there are shortages of food in particular places, there is no shortage of food in the world as a whole. And, if necessary, food production could be greatly expanded (see, e.g., Osterfeld, 1988a). Consequently, the reduction in local output due to drought or other natural disasters would, if local prices were permitted to rise, stimulate the importation of food. Significantly, this would not disrupt the recovery process. On the contrary, the higher prices would actually stimulate it since they would encourage local producers to return to their pre-disaster levels of production. As these levels were reached, local prices would fall, crowding out not the local producers but the foreign importers.

That is what would happen in the event of an actual natural disaster. But, as Eberstadt (1985a, p. 25) notes, the fact is that there is very little that is natural about today’s “natural disasters.” “Acts of God,” he writes, “cannot be prevented, but the quotient of human risk and suffering can be vastly and systematically reduced.” During the first decade of the 20th century more than 8,000 Americans died in hurricanes. During the last ten years there have been only 100 hurricane-related deaths. How does one explain this decline despite a doubling of the population? “Improvements in communications, transportation, weather tracking, emergency management, rescue operations, and relief capabilities have made it possible to reduce dramatically the human price exacted by even the worst hurricanes in the most populated areas. Purposeful private and governmental actions,” Eber-stadt continues (1985a, p. 26), “can now substantially cut the toll from other natural disasters as well, even in the poorest nations.”

Given the surplus of world food coupled with the use of “early warning systems” ranging from aerial and meteorological surveillances to using price fluctuations in local markets as a barometer of the size of regional harvests, there is no reason in today’s world for local crop failures, due to such natural conditions as drought, to result in famine. Where famine has occurred, it is traceable to government policies which have, intentionally or unintentionally, short- circuited both the early warning systems and the price-induced transfer of food to the affected areas. In many cases, such as the starvation of millions of Russians in 1929-39, the starvation of at least a million Ibos in Nigeria in the late 1960s, the starvation of 100,000 Timorese after Timor’s annexation by Indonesia in the mid- 1970s, the starvation of an estimated two million Cambodians after the Khmer Rouge seized power in the late 1970s, the mass starvation in Afghanistan following the deliberate destruction of Afghanistan’s food system after the 1979 invasion by the Soviet Union, and massive famines in Eritrea in the 1970s and 1980s, starvation was the deliberate intention of the government (Eberstadt, 1985a, pp. 25-27; Zinsmeister, pp. 22-30).

In other cases, such as the starvation of 20 to 30 million Chinese during the “Three Lean Years” from 1959 to 1962, and the massive famine in most of the sub-Saharan countries in the 1980s, starvation, while not the intention of the government, was nevertheless the direct, albeit unintentional, consequence of ill-advised government policies such as price controls, colloctivization, marketing boards, and other interventionist measures which not only reduced the production of food locally but discouraged or even prohibited the importation of food from abroad.

In the former case, aid was not desired, since starvation was the direct intention of the government. In the latter case, “aid” may have done more harm than good since by subsidizing the effects of ill-advised government policies, it enabled, even encouraged, the governments to continue pursuing the very policies that were responsible for the catastrophe in the first place, thereby compounding the harm.

b. Calculation. Another problem inherent in the nature of foreign “aid” is that of economic calculation. It is economically rational to pursue a project only when the (expected) benefits exceed the costs. Although this may be occasionally overridden by non-economic considerations, any co retry interested in economic growth and development must adhere to this general principle.

This poses a serious problem for the recipients of “aid.” Since the transferred resources would be scarce, their transfer at zero cost to the recipients would seriously distort cost data. Thus, even assuming that the public officials honestly desire to benefit their people, the artificial lowering of costs entailed by the transfers would make many projects appear profitable which in fact are economically unsound. That is to say, trying to determine whether costs exceed benefits in the absence of accurate cost data is rather like trying to cut a piece of paper with a single blade of scissors. In such circumstances, it is inevitable that numerous mistakes will be made and the waste of resources will be enormously high.

Moreover, private investors risking their own capital are under the economic constraint of serving consumers. But public officials to whom resources are transferred are largely relieved of this constraint. In fact, since they receive resources at zero cost to themselves, they are able to treat these as “free goods.”

Even when public officials are not corrupt, they are human. Relief from the economic constraint of serving consumers enables public officials to substitute their own priorities, however well intentioned, for those of consumers. Since economic development is often confused with industrialization, the result has been the diversion of resources from the satisfaction of consumer desires to use in capital-intensive projects even when there is little or no demand for their products or the products can be bought more cheaply elsewhere. This has included such projects as the construction of steel mills, hydroelectric dams, modern airports, double-deck suspension bridges for nonexistent railroads, giant oil refineries in countries that neither produce nor refine oil, giant crop-storage depots that have never been used because their locations are not accessible to local farmers, and numerous other “white elephants” (Ayittey, 1988; Ayittey, 1987, p. 210-11; Fitzgerald, pp. 284-85; Bauer, 1988, p. 5; Chapman).

Although such projects are undertaken in the name of industrialization, they do not contribute to economic growth. They are the modern counterparts of the Egyptian pyramids: colossal, impressive, and a wasteful drain on the resources of the country. As a result, foreign “aid” has historically led to a “notable increase in the amount of capital devoted to economically wasteful projects” (Fleming, pp. 78-79. And Bauer and Yamey, 1980, p. 61; Friedman, pp. 205-06).

4. Political Problems of Foreign “Aid”

There are also serious political problems endemic in foreign “aid” programs.

a. Centralization. Foreign “aid,” the transfer of resources from government to government, inevitably means the centralization of governmental power over the economic affairs of the recipient country. Aside from the potential for serious restrictions on individual freedom that this centralization involves, there are other untoward ramifications.

One of these is the diversion of activity from economic production to political distribution. As Bauer has put it (1978, p. 162)

The question of who runs the government has become paramount in many Third World countries and is especially so in multiracial societies, like those of much of Asia and Africa. In such a situation the energies and resources of people, particularly the most ambitious and energetic, are diverted from economic activity to political life, partly from choice and partly from necessity. Foreign aid has contributed substantially to the politicization of life in the Third World. It augments the resources of governments as compared to the private sector, and the criteria of allocation tend to favor governments trying to establish state controls.

This diversion of energies into political activity is especially pernicious since what is not produced cannot be consumed. Thus, in contrast to market relations in which the economic output expands to the benefit of everyone, the politicization of economic life, by reducing the amount of energy devoted to production, reduces overall economic output relative to what it would be in the absence of politicization. Moreover, the conflicts generated by the political process of distribution must likewise retard production. The result is that foreign “aid” transforms the economic process of production on the market with its corollary, voluntary exchange for mutual benefit, into the political process of transferring wealth from politically weak to politically powerful groups, with its corollary of coerced “exchange” where one group benefits itself at the expense of another. It transforms a process that is inherently positive-sum, where the sum of the gains exceeds the sum of the losses, into a process that is inherently negative-sum, where the sum of the losses exceeds the sum of the gains.

b. Environment. Further, it is a mistake to regard “aid” as a net addition to the capital stock of a country. The expansion of government control over the economy reduces “pressure on the government to maintain an environment favorable to private enterprise.” Since this discourages private investment, domestic and foreign, the result is often a net reduction in the amount of capital available (Friedman, p. 207).

This is especially true of multilateral “aid.” The U.N.’s New International Economic Order has discouraged private investment by encouraging LDCs to adopt policies that militate against protection of private property. It has, for example, referred to nationalization as an “inalienable right.” And the International Development Association (organized by the World Bank in 1960) encouraged large-scale borrowing by making “soft” or in- terest-free loans readily available to LDC governments.

Private banks were encouraged to make loans to LDCs by the availability of export credit insurance provided by government organizations such as the U.S. Export-Import Bank (Ayittey, 1984, p. 32; Fitzgerald, p. 284), by less formal government pressures and assurances about the soundness of the loans (Meigs, p. 114), and by the inflationary macro-economic policies of the U.S. government during the 1970s which, by reducing real interest rates, encouraged lending, and especially foreign lending, by U.S. banks (Mussa, p. 82). The result was that many LDCs began systematically substituting foreign borrowing for foreign investment. Private investment in the LDCs, as we have already noted, over the last three decades has fallen from 40 percent to less than 16 percent of total transfers from the First to the Third World.

This means that far from additional “aid” being necessary to relieve the foreign debt burden of the Third World, it is, in fact, foreign “aid” that bears a large responsibility for the foreign debt crisis. It can hardly be a coincidence that the debt crisis emerged promptly following the adoption of the New International Economic Order in 1974. For example, between 1975-80 Argentina’s debt rose by over 300 percent, Brazil’s by 250 percent, and Mexico’s by 280 percent (Bartlett, p. 207).

The “capital flight” that has bedeviled so many Third World nations is in part due to the hostile environment for private investment, and in part due to rampant corruption resulting from the politicization of economic life. But both are at least in part a consequence of foreign “aid.” As George Ayittey has observed (1988), “More than-S10 billion in capital leaves Africa every year. That is more than comes in as foreign aid. Much of this capital is booty, illegally shipped abroad by the ruling elites.” Zaire’s President Mobutu places more money in his personal Swiss bank account each year than the $45 million a year that the U.S. contributes in “aid” to Zaire (Ayittey, 1986a). And economist James Henry observed that “More than half the money borrowed by Mexico, Venezuela and Argentina during the last decade has effectively flowed right back out the door, often the same year or even month it flowed in” (in Ayittey, 1986b).

In short, there would be neither a Third World “debt crisis” nor a capital flight problem were the domestic environments in the LDCs more receptive to private investment. But since foreign “aid” not only removes the pressure on governments to foster such an environment, but also contributes to the politicization of Third World economies, foreign “aid” makes it neither necessary nor, in some cases, even possible to create such an environment.

c. Incentives. Related to the foregoing is the problem of the political incentives created by foreign “aid.” Foreign “aid” is a multi-billion dollar industry. The net transfer of resources, bilateral and multilateral, public and private, from the more-developed countries to the less-developed countries has been placed at as much as $80 billion a year (Eberstadt, 1985a, p. 28). The U.S. spent over $12 billion on bilateral “aid” in 1985 alone (U.S. Department of Commerce, 1987, p. 766, Table 1339). In donor countries the result is large foreign “aid” bureaucracies with vested interests in maintaining the programs. In the recipient countries, the result is often unscrupulous rulers who all too often divert the money into their own and their cronies’ pockets. It is no accident that some of the world’s wealthiest individuals are or were rulers of some of the world’s poorest coun tries. The Marcos, Duvalier, and Mobutu fortunes are only the tip of the iceberg.

It is important to understand that foreign “aid” “goes not to the pitiable figures we see on aid posters or in aid advertisements,” Bauer and

Yamey point out (1983, p. 125), “it goes to their rulers.” Dispensing “aid” on the basis of need, which has become increasingly the case with multilateral programs, especially after the adoption of the New International Economic Order, as well as with bilateral “aid,” following the passage of the “Reforms of ‘73,” creates a perverse incentive: it provides Third World rulers with an incentive to perpetuate the poverty of their subjects.

There is little doubt that this is the case. Throughout the Third World one finds entire occupations being outlawed, and hardworking and industrious groups being subjected to brutal treatment, ranging from discrimination to exclusion from choice occupations to outright slaughter. An example of the former is Mobutu’s expulsion of traders or middlemen that promptly reduced Zaire’s per capita income, thereby qualifying Zaire, i.e., President Mobutu, for increased “aid” (Bauer and Yamey, 1983, p. 125). Examples of the latter include the brutal mistreatment of economically wealthy but politically weak groups in Algeria, Burma, Burundi, Egypt, Ethiopia, Ghana, Indonesia, Iraq, Kenya, Malaysia, Nigeria, Sri Lanka, Tanzania, Uganda, Zaire, and Zambia. “Because the victims’ incomes were above the national average,” says Krauss (p. 158), “their maltreatment promptly reduced average incomes and thereby widened income differences between these countries and the West.” The result is that the serf-inflicted economic deterioration qualified these countries for additional “aid.”

Since “bureaucratic success” is measured by the size of an agency’s budget, or, in the case of transfer organizations, by the volume of loans dispensed, these agencies have far more incentive to increase the amount of wealth transferred than to be concerned about how it is used (Sowell, p. 238; Man-hard, pp. 212-13). Both the World Bank and the International Development Association are examples. The Bank’s authorized capital increased from an initial $22 billion in 1944 to $86.4 billion in 1981. The International Development Association’s increased from an initial $916 million in 1960 to $12 billion in 1981.

Some observers, however, have defended World Bank and International Development Association activities. The Brandt Commission reports (1980, p. 226) that “the overwhelming proportion of aid money has been usefully spent” and that it has “done much to diminish hardships in low-income countries.” And Robert Ayres (pp. 15, 37, 63) argues that while there have been difficulties, World Bank and International Development Association loans have benefited the world’s poor and that any curtailment would cause “societies in transition” to suffer. Yet one finds little concrete evidence to support these conclusions. On the contrary, there are numerous references to such things as “benefit deflections” (pp. 103, 124, 193) and “shortfalls” (p. 126). Ayres states that the World Bank always “seeks assurances from the recipient country” about the way the loan will be used, but then observes that “the Bank can obtain all of the assurances it wants, but it is up to the recipient country to make good on them, and the Bank does not always possess the leverage or supervisory capability for seeing to this” (pp. 43-44).

Elsewhere Ayres says that “the political elite in most recipient countries does not care about the poor majority. Where there is the absence of political will and commitment it is difficult for the Bank to be effective” (p. 57). He acknowledges that “In several of the countries many of the housing units in the Bank-financed projects had in fact been occupied by families with incomes higher than originally intended by the Bank. In some instances . . . it reflected a deliberate decision by the government” (p. 193). He notes that “World Bank re sources could free recipient-country resources for the pursuit of other projects” (p. 216). When the Bank financed $23 million for a rural development project and $23.5 million for educational development, Ayres (p. 217) notes that “The Brazilian government has $46.5 million to spend on other, including non-developmental concerns. Seen in this light, Bank resources financed not only the projects that had been appraised and approved but also projects, perhaps even perverse ones, that had not. Even the approved projects may have entailed side benefits going not to the poor but to those allied with the political regime.” And finally, Ayres acknowledges that some bank officials “admitted that they cooked up the evidence” (p. 108).

In short, foreign “aid” generates incentives which, by their nature, militate against economic growth and development.

5. Conclusion

Far from stimulating growth and development as was its original intention, foreign “aid” actually retards development and perpetuates, even exacerbates, poverty. While reforms might reduce some of the damage caused by the program, the real causes for the failure of foreign “aid” lie in the nature of the program.

Foreign “aid” retards the development of those attitudes—thrift, industry, and self-reliance—that are essential for economic growth and development; it blurs lines of investment and distorts cost data, resulting in a massive waste of scarce resources; it politicizes life in the recipient country, thereby diverting energy from economic to political activities; it reduces pressure on the recipient governments to maintain an environment favorable to private enterprise, thereby discouraging private investment; and by providing money to governments on the basis of the poverty of its subjects, it gives the ruling elites in the recipient countries a vested interest in policies that impede or prevent economic development.

Moreover, since there are large, politically powerful foreign “aid” bureaucracies in both donor and recipient countries with vested interests in maintaining or even expanding the size of the “aid” programs, it is highly unlikely that effective reforms, even were that possible, could be implemented. For example, the occasional proposals made to reform the U.S. “aid” programs to Micronesia and elsewhere have never been seriously considered (Fitzgerald, pp. 289-90). Certainly one reason for the plethora of nearly 500 different “welfare” programs available there is that it is a beautiful island chain that is a perfect vacation spot. And once a bureaucrat’s agency has a program there, he naturally finds that he must visit the island chain in order to see that his agency’s program is being operated properly. Since the visit is in the line of duty it is, of course, at taxpayer expense (see, e.g., Manhard, pp. 212-13).

Finally, many maintain that the more fortunate have a moral obligation to help those who are less fortunate. However this may be, foreign “aid” cannot be justified on such grounds for, as already alluded to, it does not transfer wealth from the more to the less fortunate. True, it transfers wealth from rich to poor nations, but this is hardly the same as transferring wealth from rich to poor individuals. Many of the taxpayers in the rich nations are themselves either poor or middle-income wage earners; many of the recipients in the poor nations are the economic elite. As Ayittey (1986a, p. 9) points out, “Aid, rather incongruously, often turns out to be a tax on the poor people in rich nations for distribution to the rich people in poor nations.” Thus, foreign “aid” is actually a program for transferring wealth upward, from the poor to the rich.

Foreign “aid” is not “aid” at all; it is foreign “harm,” and the sooner this is recognized the better. The capitalist countries of the West developed without “aid,” as did Japan. The most rapidly developing Third World countries—Taiwan, Hong Kong, Singapore, and South Korea—received little “aid” or began developing only after massive amounts of “aid” were discontinued. What is needed, as Melvyn Krauss perceptively points out (p. 109), is not the transfer of wealth but the transfer of prosperity, i.e., the “transfer of the ability to produce adequate amounts of real income.” Since the public sector can only transfer wealth while the private sector produces wealth, “the transfer of prosperity,” Krauss points out, “depends greatly on private sector participation.”

As Peter Bauer has written (1972, pp. 97-98): “If all conditions for development other than capital are present, capital will soon be generated locally or will be available . . . from abroad . . . . If, however, the conditions for development are not present, then aid . . . will be necessarily unproductive and therefore ineffective. Thus, if the mainsprings of development are present, material progress will occur even without foreign aid. If they are absent, it will not occur even with aid.” 


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  • Dr. Osterfeld was assistant professor of political science at Saint Joseph's College, Rensselaer, Indiana.