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April 25, 1997
Policy Analysis no. 273

Help or Hindrance: Can Foreign Aid Prevent International Crises?

by Doug Bandow

Doug Bandow is a senior fellow at the Cato Institute and former special assistant to President Reagan. He is the author and editor of several books, including U.S. Aid to the Developing World: A Free Market Agenda and Perpetuating Poverty: The World Bank, the IMF, and the Developing World (with Ian Vásquez).

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Few programs have consumed as many resources with as few positive results as foreign aid. Since World War II the United States has contributed more than $1 trillion in assistance to other countries. Other nations and international aid agencies have provided more. Although individual development projects have no doubt worked, and humanitarian aid can help alleviate the effects of crises, there is little evidence that cash transfers do much to advance growth or stability in the developing world.

The failure of foreign assistance to meet its traditional goals has led to new justifications. A current favorite, especially of the Clinton administration, is that international financial aid can prevent social catastrophe. But almost every country that has suffered internal catastrophe collected abundant foreign aid beforehand. Foreign aid did not forestall catastrophe. To the contrary, in many countries it helped create and aggravate problems.

Decades of financial transfers have not fostered economic growth. Many nations have been losing ground. Seventy developing states are poorer today than they were in 1980, and 43 are worse off than they were in 1970. Aid levels do not correlate with economic growth.

To truly help poor nations, Washington should end government-to-government assistance, which has often buttressed brutal and venal regimes and eased pressure for reform, and drop its trade barriers, which now impede poor nations' participation in the international marketplace.

 

Introduction

Few programs have consumed as many resources with as few positive results as has foreign aid. Since World War II the United States alone has contributed more than $1 trillion (in 1996 dollars) in bilateral assistance to other countries. Other nations, directly and through such U.S.-funded multilateral institutions as the International Monetary Fund, the World Bank, and the United Nations, have provided hundreds of billions of dollars more.

Yet the recipients of that largesse have, by and large, failed to grow economically and develop democratically. In many cases, so-called aid has proved to be positively harmful, underwriting brutal dictators as they have pillaged their peoples; in other instances, Western financial flows have subsidized the creation of disastrously inefficient state-led development programs. Often, Washington and other sources of aid have backed regimes that were both corrupt and collectivist. ^[1]

Even many advocates of continued foreign assistance acknowledge the disappointing results of past policies. For instance, the U.S. Agency for International Development 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." ^[2] U.S. AID administrator Brian Atwood says of the assistance to Zaire, "The investment of over $2 billion of American foreign aid served no purpose." ^[3]

Instead of dismantling failed programs and reducing ineffective aid flows, however, the Clinton administration has simply concocted new justifications for more of the same. The administration wants to increase total foreign affairs spending by $1.2 billion for fiscal year 1998. Warned Secretary of State Warren Christopher before he left office, "The biggest crisis we're facing in our foreign policy today is whether we will spend what we must to have an effective American foreign policy." ^[4]

One of the administration's most creative arguments is that assistance can forestall social collapse--the kind of disasters that occurred in Rwanda and Somalia, which triggered expensive American rescue efforts. In his 1997 state of the union address, Clinton claimed, "Every dollar we devote to preventing conflicts . . . brings a sure return in security and savings." ^[5] That has also been a consistent theme of Atwood as he has attempted to defend his program from proposed congressional budget cuts.

However, there is nothing in five decades of foreign aid experience to indicate that Washington has a unique ability to predict which nations are in the greatest danger of dissolving, let alone to use assistance to forestall such human catastrophes. To the contrary, most of the countries that have collapsed into chaos received significant amounts of aid over the years. Unfortunately, not only was that money used poorly, it often buttressed the very governments that were most responsible for the ensuing disasters.

The Long Failure of Foreign Aid

U.S. economic assistance comes in various forms--grants and loans for bilateral projects, primarily through U.S. AID, as well as credit from multilateral agencies, including the IMF, the World Bank, and such regional agencies as the African Development Bank, to underwrite borrower development projects and provide aid for "structural" economic reforms. Other forms of foreign assistance include security programs, disaster relief, and subsidized crop shipments (primarily Food for Peace). Although there is no doubt that some individual development projects have worked, and that humanitarian aid can help alleviate the effects of crises, there is little evidence, despite the presumption of the term "foreign assistance," that official cash transfers, whether bilateral or multilateral, actually do much to advance growth or stability in the developing world. ^[6]

The Clinton administration has admitted that the record of aid has not been altogether good. One recent task force reported that "despite decades of foreign assistance, most of Africa and parts of Latin America, Asia and the Middle East are economically worse off today than they were 20 years ago." ^[7] As a result, the administration cut off funding to some 50 nations, mainly because they are, like Zaire, abject failures. The administration was even more critical of U.S. AID as an organization. Said Atwood, "We were an agency on the road to mediocrity, or worse." ^[8] The result was an intense administration effort to "reinvent" the agency.

Unfortunately, there is little evidence that better targeting and management would enable foreign aid to assist poor nations in achieving self-sustaining economic growth. ^[9] Steady financial transfers have not stopped developing countries from stagnating economically; indeed, many nations, particularly in sub-Saharan Africa, have been losing ground economically. The United Nations Development Programme calls the 1980s the "lost decade" for many poorer states. ^[10] "Over much of this period," explains the international agency, "economic decline or stagnation has affected 100 countries, reducing the incomes of 1.6 billion people--again, more than a quarter of the world's population. In 70 of these countries average incomes are less than they were in 1980--and in 43 countries less than they were in 1970." ^[11]

International comparisons are obviously fraught with difficulty, but overall aid levels do not correlate positively with economic growth, and many of the recipients of the most foreign assistance, such as Bangladesh, Egypt, India, the Philippines, Sudan, and Tanzania, have been among the globe's worst economic performers. Of course, even a positive correlation would not be enough to prove that aid actually aids. The real issue is causation, and there is no evidence that aid generates growth.

Particularly impressive are studies by Peter Boone of the London School of Economics and the Center for Economic Performance. In an assessment of the experience of nearly 100 nations, he concluded that foreign transfers had no impact on investment levels in recipient countries. "Long-term aid is not a means to create growth," reported Boone. His results yielded "strong evidence against many poverty trap models which predict that aid transfers will allow countries to escape from a low income equilibrium or poverty trap." ^[12] Boone also reviewed the impact of foreign assistance on recipient regimes and found that aid most benefited local political elites. As he explained, "Aid does not promote economic development for two reasons: Poverty is not caused by capital shortage, and it is not optimal for politicians to adjust distortionary policies when they receive aid flows." ^[13]

Not only is there no positive correlation between aid levels and economic growth, but most recipients of assistance remain dependent on foreign transfers. As U.S. AID acknowledged in a detailed 1989 report, "Only a handful of countries that started receiving U.S. assistance in the 1950s and 1960s has ever graduated from dependent status." ^[14] Similarly, some countries have been on IMF programs for literally decades. ^[15]

Aid for Policy Change

The failure of foreign aid to meet its traditional goals has led to a search for new justifications. One is advancement of market-oriented policy reform. ^[16] Some skepticism about aid agencies' newfound commitment to the market is in order, however, given the fact that for years foreign aid subsidized governments that were both authoritarian and collectivist.

The results of past policy-oriented lending are not much cause for confidence. Many governments simply are not interested in policy reform. Some of them want their countries to develop but are unwilling to pay the political price for adopting the policies necessary to do so. Others treat ideological objectives as paramount. Still others are simply most interested in staying in power. One need not be a reflexive critic of government to recognize that such regimes are an impediment to development. Writes Alan Carter of Heythrop College in London, "Third World states are neither the instruments of international capital nor of an indigenous bourgeoisie, but are rational actors who will industrialise their economies when practicable, but who often find it in their interests to be accomplices in the dependent development or even underdevelopment of their own economies." ^[17] In such cases, he warns, "aid primarily serves to prop up regimes that are complicit in the exploitation of their people and the destruction of their environment." [18] Unfortunately, that has been the experience of the IMF and the World Bank, which have for years supposedly been underwriting policy "reform" around the world. Yet most governments have simply taken the money and run, causing those taxpayer-funded organizations to extend new loans. ^[19]

Aid can inhibit the commitment to reform of even more responsible governments. Warns Cindy Williams of the Congressional Budget Office, "Without reform, however, aid can reinforce policies that do not further development." ^[20] By masking the pain of economic failure, development assistance allows borrowers to delay reforms, worsening the underlying problem. "Scarcity of resources" in such cases "is good for reform," writes Dani Rodrik of Columbia University. ^[21] Necessity, brought on by the failure of collectivist and populist economics, almost always drives the reform process. Observed U.S. AID, "Few people, least of all politicians, embark on a deliberate course of change without being motivated by some significant political or economic crisis. The simple fact behind most subsequently successful economic policy is the failure of the one that preceded it." ^[22] Surely that is the lesson of Russia, where aid has acted as a subsidy for the Yeltsin government, irrespective of its economic policies. The only colorable justification for

those payments is that they keep Boris Yeltsin in power, not promote capitalism.

Preventing Crises: The Newest Justification

Even newer is the argument that Western financial transfers can be used to prevent social catastrophe, the veritable implosion of entire nations. In June 1994 a State Department spokesman announced that President Clinton had instructed U.S. AID 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." ^[23] Atwood has called this mission "crisis prevention." ^[24] He has gone on to advocate "preventive investment" in "nation building." ^[25] He wants the agency to make special efforts to anticipate crises and handle transitions, "to help nations move progressively away from crisis and toward sustainable development." ^[26]

Others have made much the same argument. Sens. Nancy Kassebaum (R-Kans.) and Richard Lugar (R-Ind.) defended additional contributions to the International Development Association, a World Bank affiliate, on the basis that "a modest investment in development through IDA" will be less than "the costs of humanitarian relief and peacekeeping operations that follow failed regimes and weakened economies." ^[27] Tom Getman of the Christian relief organization World Vision advocates foreign aid as a means of combating "political and economic instability and regional conflicts." ^[28] Peter Bell of CARE, another humanitarian group, complains that "the world's wallet says refugee camps are better business than nation-building." He goes on to insist that "we must recognize the value of dollars to prevent conflicts." ^[29]

Sadako Ogata, the UN high commissioner for refugees, has also suggested using aid to forestall crises. She advocates being as concerned about the possible creation of refugees as about actual refugees. In 1995 her organization 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?" ^[30]

The Myth of Lack of Aid

That question is impossible to answer with certainty, but the answer is probably "nothing." Rwanda did not go unaided before imploding. Between 1971 and 1994 that nation received $4.7 billion in foreign assistance from the United States, the multilaterals, and European nations. In fact, almost every country in crisis received abundant outside transfers from a variety of sources before disaster struck. Over the same period Sierra Leone received $1.8 billion, Liberia $1.8 billion, Angola $2.9 billion, Haiti $3.1 billion, Chad $3.3 billion, Burundi $3.4 billion, Uganda $5.8 billion, Somalia $6.2 billion, Zaire $8.4 billion, Sri Lanka $9.8 billion, Mozambique $10.5 billion, Ethiopia $11.5 billion, and Sudan $13.4 billion. Through 1991, Yugoslavia received $530 million; through 1994, the territory had received $6.1 billion (see Table 1 and Appendix).

Table 1
Aid, 1971-94 (millions of nominal dollars)

Source: Organization for Economic Cooperation and Development, Geo-
graphical Distribution of Financial Flows to Developing Countries (Paris:
OECD, various years).

*Data through 1991. Including aid flows through 1994 to the states that
made up the former Yugoslavia, total U.S. aid amounts to -$250 million,
total international aid amounts to $6.1 billion, and the annual average
is $253.6 million.

 

Although those aid flows varied in importance to their recipients, in no case were they unimportant. In some years assistance accounted for 10 percent of the gross domestic product of Sri Lanka and Zaire, 20 percent of the GDP of Rwanda, 25 percent of the GDP of Uganda, and 30 percent of the GDP of Burundi. Between 1970 and 1994 aid was 10 percent of Haiti's GDP, 15 percent of Burundi's and Rwanda's, and nearly 20 percent of Chad's.

In none of those cases did foreign assistance forestall catastrophe. Moreover, 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.

Complex Domestic Factors Cause States to Fail

Obviously, there are numerous reasons why so many nations, including some in Southeast Asia and the Transcaucasus as well as those mentioned above, suffer so. Angola has been brutalized by a long civil war and military intervention by Cuba; only recently has the conflict moved toward resolution. Burundi and Rwanda have been rent by cycles of tribal violence, the genesis of which was colonial policies that favored one tribe over another. Chad has endured civil war and outside intervention by Libya. Ethiopia has suffered through three disasters: Marxist revolution, war with Somalia, and a separatist campaign by Eritrea. Haiti has spent most of its history under repressive authoritarian rule. Liberia, Mozambique, Sierra Leone, Sri Lanka, and Yugoslavia have undergone the ravages of particularly bitter civil wars. Somalia was victimized by a Western-backed strongman who proved unable to defeat either Ethiopia or indigenous guerrillas; when his rule collapsed, so did central authority, as competing clans struggled for control. Sudan has been rent by conflict between Muslims, Christians, and animists for decades. Uganda disintegrated under the effects of misrule by the grotesque Idi Amin, followed by domestic insurgency and outside intervention. Zaire had the misfortune to be an artificial state created for Belgian colonial interests and born of civil strife. Rebellion, UN intervention, and authoritarian rule by the egregiously corrupt Mobutu Sese Seko have sent that country spiraling into chaos.

However similar the general causes of those and other examples of economic and political collapse, the individual circumstances varied greatly by country. Few of the problems were amenable to outside intervention; in none of those cases was inadequate international aid the determining factor. Of course, had those nations been capable of better using capital, foreign transfers might have been of more use. But precisely because they are not capable of using capital to advantage, past aid has been wasted, as would have been any additional transfers as part of an "early warning system."

Aid Helped Cause Breakdown

Indeed, foreign aid almost certainly helped create and aggravate problems in Ethiopia, Somalia, Sudan, and Zaire, in particular, by subsidizing dictators whose rules proved especially disastrous. Among the most important causes of social division and catastrophe is what has been called "the overpolitisized state." ^[31] Yet government-to-government aid only strengthens overpoliticized states.

Even the most humanitarian sounding aid--so-called Food for Peace shipments--can accelerate social breakdown. Onetime relief worker Michael Maren criticizes a decade of assistance to Somalia. Of Western humanitarian personnel he writes, "Separately we'd arrived at the conclusion that the relief program was probably killing as many people as it was saving, and the net result was that Somali soldiers were supplementing their income by selling food, while the [Western Somali Liberation Front]--often indistinguishable from the army--was using the food as rations to fuel their attacks into Ethiopia." ^[32] At the same time, food assistance discouraged local production and enhanced the central government's control over the people. ^[33] Then, after the Barre government finally collapsed, Western assistance worsened the chaos by enriching the local militias and discouraging local reconstruction efforts. ^[34]

At best, advocates of aid can argue that they would do better this time, that now that the Cold War has ended, there is less pressure to use assistance as de facto bribes to assorted dictators. However, the bulk of aid to most Third World nations has always been economic, not security. Between 1971 and 1994 the United States provided barely one-fifth of the total assistance received by Somalia. The rest was economic assistance from a variety of sources--the multilaterals and the European governments, in particular. During the same period Rwanda received more from IDA alone than from the United States; Burundi collected 3.6 times as much from IDA as from Washington. In short, the problem with past aid to failed states was not that it was overly oriented toward political purposes. The problem was, rather, that international financial transfers turned out not to be aid at all.

What Causes Development

In the end, poor countries are largely responsible for their own destinies. Experience has demonstrated that sound domestic policies, not foreign aid, are what generate economic growth. ^[35] The West's dramatic escape from poverty has always been a good place to start in attempting to understand development. The rapid economic and social progress of Europe, during which people first rose out of the dismal poverty that characterized most of human history, occurred largely in countries that had a specific kind of regime--classical liberalism--which generally allowed markets to operate, respected the rule of law, protected private property, and permitted economic competition. ^[36] That experience has been repeated more quickly and spectacularly in East Asia, where it has taken but a generation or two for desperately poor nations to be included among the world's most successful economies. (That is not to say that the British or German, let alone the Japanese or South Korean, experiences were laissez faire. Rather, all broadly relied on market forces, despite varying degrees of government economic involvement.)

What was true of Great Britain, the United States, Japan, and South Korea is also evident in today's successful developing states. Perhaps the best broad-based study of economic policies over the last two decades is Economic Freedom of the World: 1975-1995, by economists James Gwartney, Robert Lawson, and Walter Block. They created an index of 17 variables to measure economic freedom, as well as three alternative summary indexes. Ranked highest were Hong Kong, Singapore, the United States, and New Zealand. At the bottom came numerous African and a handful of Latin American countries. Most improved between 1975 and 1990 were Chile, Iceland, Jamaica, Malaysia, and Pakistan. ^[37] The researchers found that economic policies matter. Obviously, the results for individual countries may be affected by many factors, but the overall result is compelling. Explain the authors, "No country with a persistently high economic freedom rating during the two decades failed to achieve a high level of income. In contrast, no country with a persistently low rating was able to achieve even middle income status." ^[38]

Similar are the results of the 1996 Index of Economic Freedom by Heritage Foundation analysts Bryan Johnson and Thomas Sheehy. Although their study offers somewhat less systematic international comparisons, it reaches the same conclusions. Johnson and Sheehy explain that their analysis "demonstrates that economic freedom is the single most important factor in creating the conditions for economic growth and prosperity." ^[39] Their data also demonstrate that the countries that place the greatest reliance on open markets consistently have the highest growth rates.

Domestic Factors Are Most Important for Growth

Studies by other analysts and organizations reach the same general conclusion. Researchers at Cornell University and the Organization for Economic Cooperation and Development have used a computable general equilibrium economic model in an attempt to measure the impact of different policy measures. Market-oriented reforms in exchange rate, fiscal, and monetary policies all improve economic growth rates. ^[40] Benefits tend to flow to poorer, rural residents; urban elites who were enriched through political manipulation of the economy are usually the biggest losers. ^[41]

A decade ago Union College economists E. Dwight Phaup and Bradley Lewis surveyed a dozen Third World "winners" (with average annual growth rates exceeding 6 percent) and a score of "losers" (average annual growth rates below 2.2 percent). ^[42] The two groups' average annual growth rates were 7.7 percent and 1 percent, respectively. Phaup and Lewis concluded, "It would appear that whether [less developed countries] are winners or losers is determined mainly by their domestic economic policies. Resource endowment, lucky circumstances, former colonial status, and other similar factors make little difference in the speed with which countries grow economically. The results of domestic policy choices pervade every economic area." ^[43]

More recently, Mancur Olson Jr., of the Center for Institutional Reform and the Informal Sector at the University of Maryland, came to the same conclusion. He reported that such factors as access to knowledge and capital cannot explain the relative income differences among nations. "The only remaining plausible explanation is that the great differences in the wealth of nations are mainly due to differences in the quality of their institutions and economic policies," he explained. ^[44] He found that poorer nations with the best economic policies consistently grow the fastest.

Phaup and Lewis relied in part on a detailed World Bank study, published as part of the World Development Report 1983. The bank assessed the relative economic distortions in 31 primarily developing nations and found that countries with the least interference with the marketplace had annual growth rates twice as high as those of nations with the most inefficient policies. The more market-oriented countries also enjoyed far greater domestic savings, additional output per unit of investment, and increases in both agricultural and manufacturing output. ^[45] Explained the study, developing nations that introduced fewer "distortions" into their economies--particularly price controls, import restrictions, interest rate limits, and similar policies--did better, while "those countries with the worst distortions experienced significantly lower domestic saving and lower output per unit of investment, thus leading to slower growth." ^[46] The bank estimated that inefficient intervention could cut annual GDP growth by as much as 2 percent. ^[47]

U.S. AID has reached similar conclusions. ^[48] Particularly important, in its view, were open trade policies--more outwardly oriented countries grew nearly four times as fast as more protectionist states. ^[49] The agency also pointed to the friendliness of the investment climate to domestic and foreign business alike. The difference in average annual per capita growth between the most open economies and the least open economies was seven percentage points. ^[50] Finally, the agency called "the level of distortion between domestic and international prices . . . another good aggregate indicator of economic policy." ^[51]

Specific Experiences

Those general assessments are reinforced by the results of narrower studies of different regions and nations. For example, David Osterfeld reviewed the economic impact of a range of variables: corruption, food, foreign aid, migration, multinational corporations, population, and resources. His conclusion was that development occurred most quickly in an "enabling environment" in which the rule of law was stable, property was protected, political power was decentralized, and most of the economy was private. ^[52] Sustained economic development is possible, he explained, but "the principal obstacle is an environment that penalizes individual initiative, is hostile to private ownership, discourages saving and investment, and severely restricts the operation of the free market. Accordingly, development will not occur in the absence of radical changes in the politico-legal frameworks now existing in most of the countries in the so-called Third World." ^[53]

Numerous examples support his thesis. The East Asian economic powerhouses of today--Hong Kong, Japan, Singapore, South Korea, and Taiwan--were much poorer than such Latin American countries as Argentina after World War II. Of the many differences between those regions, the most important was the economic model adopted. Latin America firmly embraced inward-looking policies that set up trade barriers and promoted domestic industries through an array of state subsidies and other privileges. The nations of Africa, the poorest on the globe, followed Latin America into the abyss of collectivist development strategies. After initially experimenting with Latin American-style protectionism, East Asia, in contrast, chose various forms of capitalism. ^[54]

The city-states of Hong Kong and Singapore possess little other than open economic markets. ^[55] They have developed nonetheless. Resource-rich countries like Mexico and Zaire have, in contrast, struggled economically for decades. States as varied as Argentina, Brazil, India, and Tanzania failed to prosper so long as they emphasized state-led development plans; all four have since adjusted their policies, leading to greater economic progress. A variety of World Bank studies of Africa has illustrated the problem of foolish policies. ^[56] A 1993 bank review of the adjustment experience of 18 developing countries, Boom, Crisis, and Adjustment, found that good policies, especially freer trade and macroeconomic stability, were important for economic success. ^[57] In its World Development Report 1995 the bank compared the experiences of Ghana, Malaysia, and Poland. The respective governments employed very different development strategies, and, not surprisingly, the bank reported that "the result has been wide differences in economic growth rates and labor outcomes," with market-oriented policies winning. ^[58]

Obviously, every country is the beneficiary or the victim of unique circumstances, and that makes any one pairing suspect. Nevertheless, the experience of all countries presents a consistent picture--one that is particularly telling when cultural groups are divided, as they have been in China, Germany, and Korea.

Conclusion

Foreign aid has been tried and found wanting. Aid transfers have not promoted self-sustaining economic development in the Third World. There is no positive correlation between foreign assistance and economic growth, and there is little evidence of causation in those nations that have succeeded economically.

Naturally, advocates of aid are attempting to come up with new arguments for preserving their programs. But this attempt to put old wine into new wineskins--to offer new justifications for yesterday's failed policies--will not work. There is perhaps no greater tragedy today than that of the broken-down societies that dot the globe. But there is no evidence that increased aid flows can prevent such human catastrophes in the future. Indeed, abundant foreign assistance to brutal and venal governments in the past helped create today's tragedies.

The primary responsibility for development lies with Third World states themselves. Governments must create an economic environment in which people are free to be productive. The industrialized nations can help--primarily by doing no harm. Washington should end government-to-government assistance, which has so often buttressed regimes dedicated to little more than maintaining power and eased the economic pressure for needed reforms.

The United States and other developed countries should allow poorer nations to participate more fully in the international marketplace. The Congressional Budget Office has observed, "The broad economic policies of the major Western countries--trade policies, budget deficits, growth rates, and the like--generally exert greater influence on the economies of the developing countries than does aid." ^[59] Access to the markets of wealthier nations is particularly important for poorer states. The World Bank's J. Michael Finger figures that Western protectionism reduces the Third World's GNP by a full three percentage points, twice the amount of foreign aid now provided by the industrialized nations. ^[60]

Mass poverty, famine, and murder blight our globe. However, the understandable desire to do something should not become an excuse for maintaining the failed policies of the past. Foreign aid has not delivered self-sustaining economic growth or prevented the collapse of numerous poor societies into chaos over the past five decades. It will do no better in the future.

Appendix: Aid to Selected Countries

In the following appendix, U.S. AID = U.S. Agency for International Development, IMF = International Monetary Fund, IBRD = International Bank for Reconstruction and Development, IDA = International Development Association, UNDP = U.N. Development Programme, NA = not available, and dashes = 0. Amounts are net official development assistance in millions of nominal dollars. IMF figures are for Structural Adjustment Facility and Enhanced Structural Adjustment Facility transactions only; they do not include tranche withdrawals. Values for gross domestic product are from World Bank, World*Data 1996: World Bank Indicators on CD-ROM (Washington: World Bank, 1996). All other values are from Organization for Economic Cooperation and Development, Geographical Distribution of Financial Flows to Aid Recipients (Paris: OECD, various years).

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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Notes

L. Jacobo Rodríguez, Marta Hummel, and Jeff Cohen provided research assistance for this paper.

[1]. For detailed critiques of the problems of foreign aid, see, for example, Doug Bandow, The Politics of Envy: Statism as Theology (New Brunswick, N.J.: Transaction Publishers, 1994), pp. 131-74; Perpetuating Poverty: The World Bank, the IMF, and the Developing World, ed. Doug Bandow and Ian Vásquez (Washington: Cato Institute, 1994); Doug Bandow, "A New Aid Policy for a New World," Cato Institute Policy Analysis no. 226, May 15, 1995; Patricia Adams, Odious Debts: Loose Lending, Corruption, and the Third World's Environmental Legacy (Toronto: Earthscan, 1991); Graham Hancock, Lords of Poverty: The Power, Prestige, and Corruption of the International Aid Business (New York: Atlantic Monthly Press, 1989); and Nicholas Eberstadt, Foreign Aid and American Purpose (Washington: American Enterprise Institute, 1988).

[2]. U.S. Agency for International Development, Africa: Growth Renewed, Hope Rekindled: A Report on the Performance of the Development Fund for Africa 1988-1992 (Washington: U.S. Agency for International Development, 1993), p. 17.

[3]. Quoted in "Zaire: Reign of Error," Online Focus, December 26, 1996, transcript p. 4.

[4]. Quoted in Steven Lee Myers, "Christopher Sees Threat of Isolation via U.S. Cuts," New York Times, January 16, 1997, p. A7

[5]. William Clinton, "State of the Union Address," New York Times, January 5, 1997, pp. A20-A21.

[6]. Humanitarian aid can also worsen disasters. See, for example, Michael Maren, The Road to Hell: The Ravaging Effects of Foreign Aid and International Charity (New York: Free Press, 1997).

[7]. Quoted in Al Kamen and Thomas W. Lippman, "Task Force Favors Restructuring and Refocusing Troubled AID," Washington Post, July 3, 1993, p. A16.

[8]. Quoted in A. D. Horne, "U.S. to Close 21 Foreign Aid Missions," Washington Post, November 20, 1993, p. A7.

[9]. Which is not to underestimate the problems with the design and implementation of aid programs. Analyst James Bovard has reviewed the failure of manifold U.S. AID projects. James Bovard, "The Continuing Failure of Foreign Aid," Cato Institute Policy Analysis no. 65, January 31, 1986. Researchers Karl Borgin and Kathleen Corbett studied foreign aid projects in Africa and found that money is routinely spent on small, transitory projects; wasted on programs the Africans could undertake themselves; and used to subsidize small-scale ventures that contribute little to development and promote inappropriate forms of agriculture. Karl Borgin and Kathleen Corbett, The Destruction of a Continent: Africa and International Aid (San Diego: Harcourt Brace Jovanovich, 1982), p. 187.

[10]. United Nations Development Programme, Human Development Report 1996 (New York: Oxford University Press, 1996),p. iii.

[11]. Ibid., p. 1.

[12]. Peter Boone, "The Impact of Foreign Aid on Savings and Growth," Center for Economic Performance Working Paper 1265, London, October 1994, pp. 25, 26.

[13]. Peter Boone, "Politics and the Effectiveness of Aid," National Bureau of Economic Research Working Paper 5308, Cambridge, Maryland, October 1995, p. 33.

[14]. U.S. Agency for International Development, Development and the National Interest: U.S. Economic Assistance into the 21st Century (Washington: U.S. Agency for International Development, 1989), p. 112.

[15]. Doug Bandow, "The IMF: A Record of Addiction and Failure," in Perpetuating Poverty, pp. 15-36.

[16]. See, for instance, Kenneth Lanza, "A.I.D. and Economic Policy," North-South, February-March 1994, pp. 34-38. Multilateral institutions like the World Bank have placed even greater emphasis on "adjustment" lending.

[17]. Alan Carter, "The Nation-State and Underdevelopment," Third World Quarterly 16, no. 4 (1995): 614.

[18]. Ibid., p. 615.

[19]. See Bandow, "The IMF," pp. 18-30; and Bandow, The Politics of Envy, pp. 167-73.

[20]. Cindy Williams, Statement on the Role of Foreign Aid in Economic Development before the Subcommittee on African Affairs of the Senate Committee on Foreign Relations, May 1, 1996, p. 17.

[21]. Dani Rodrik, "Understanding Economic Policy Reform," Journal of Economic Literature 34 (March 1996): 31.

[22]. U.S. Agency for International Development, Development and the National Interest, p. 59.

[23]. Quoted in Thomas Lippman, "U.S. Fears New Violence in Burundi," Washington Post, June 17, 1994, p. A19.

[24]. J. Brian Atwood, "Suddenly, Chaos," Washington Post, July 31, 1994, p. C9.

[25]. J. Brian Atwood, "Nation Building and Crisis Prevention in the Post-Cold War World," Brown Journal of World Affairs 2, no. 1 (Winter 1994), p. 13.

[26]. Ibid., p. 14.

[27]. Nancy Kassebaum and Richard Lugar, "Overdue Investment Overseas," Washington Post, June 26, 1996, p. A21.

[28]. Tom Getman, "U.S. Foreign Aid: Small Investment, Big Impact," World Vision, June-July 1996, p. 16.

[29]. Peter Bell, "Rwanda Aid Doesn't Add Up," Christian Science Monitor, February 2, 1996, p. 18.

[30]. Quoted in Refet Kaplan, "Refugee Agency Urges Prevention," Washington Times, November 16, 1995, p. A15.

[31]. S. N. Sangmpam, "The Overpoliticised State and International Politics: Nicaragua, Haiti, Cambodia, and Togo," Third World Quarterly 16, no. 4 (1995): 619-41.

[32]. Michael Maren, "Manna from Heaven? Somalia Pays the Price for Years of Aid," Village Voice, January 19, 1993,p. 23.

[33]. Similar criticisms have been raised by Alex de Waal and Rakiya Omaar, "Doing Harm by Doing Good? The International Relief Effort in Somalia," Current History, May 1993,pp. 198-202.

[34]. Michael Maren, "Nongovernmental Organizations and International Development Bureaucracies," Paper presented at Cato Institute conference on "The United Nations and Global Intervention," Washington, October 22, 1996. A devastating critique of the humanitarian aid industry and its activities throughout Africa is provided by Maren, The Road to Hell.

[35]. For a detailed analysis of this issue, see Doug Bandow, "Policy Reform: Necessary for Economic Growth and Poverty Reduction," Paper presented to Task Force on the United States and the Multilateral Development Banks, Center for Strategic and International Studies, Washington, July 22, 1996.

[36]. See, for example, David Osterfeld, Prosperity versus Planning: How Government Stifles Economic Growth (New York: Oxford University Press, 1992), p. 17; and Ralph Raico, "The Theory of Economic Development and the 'European Miracle,'" in The Collapse of Development Planning, ed. Peter Boettke (New York: New York University Press, 1994), pp. 37-58.

[37]. James Gwartney, Robert Lawson, and Walter Block, Economic Freedom of the World: 1975-1995 (Vancouver: Fraser Institute, 1996), p. xvi.

[38]. Ibid., p. xvii.

[39]. Bryan Johnson and Thomas Sheehy, 1996 Index of Economic Freedom (Washington: Heritage Foundation, 1996), p. 1.

[40]. Lionel Demery and Lyn Squire, "Macroeconomic Adjustment and Poverty in Africa: An Emerging Picture," World Bank Research Observer 11, no. 1 (February 1996): 46.

[41]. Ibid., p. 47.

[42]. Given their low base of economic development, even poorer countries with bad policies can for a time achieve surprisingly high growth rates.

[43]. E. Dwight Phaup and Bradley Lewis, "Winners and Losers: Differentiating between High-Growth and Low-Growth LDCs," in U.S. Aid to the Developing World: A Free Market Agenda, ed. Doug Bandow (Washington: Heritage Foundation, 1985), p. 90.

[44]. Mancur Olson Jr., "Big Bills Left on the Sidewalk: Why Some Nations Are Rich, and Others Poor," Journal of Economic Perspectives 10, no. 2 (Spring 1996): 19.

[45]. World Bank, World Development Report 1983 (Washington: World Bank, 1983), pp. 60-61.

[46]. Ibid., p. 57.

[47]. Ibid., p. 126.

[48]. U.S. Agency for International Development, Development and the National Interest, pp. 52-59.

[49]. Ibid., p. 54.

[50]. Ibid., p. 55.

[51]. Ibid., p. 55.

[52]. Osterfeld, p. 221.

[53]. Ibid., p. 245.

[54]. See, for example, Melvyn Krauss, Development without Aid: Growth, Poverty and Government (New York: New Press, 1983).

[55]. For a discussion of Hong Kong, see P. T. Bauer, Equality, the Third World, and Economic Delusion (Cambridge, Mass.: Harvard University Press, 1981), pp. 185-90.

[56]. See, for example, Demery and Squire, pp. 39-59; Ishrat Husain and Rashid Faruqee, eds., Adjustment in Africa: Lessons from Country Case Studies (Washington: World Bank, 1994); World Bank, Adjustment in Africa: Reforms, Results, and the Road Ahead (New York: Oxford University Press, 1994); and World Bank, Accelerated Development in Sub-Sahar-an Africa: An Agenda for Action (New York: Oxford University Press, 1981).

[57]. Ian M. D. Little et al., Boom, Crisis, and Adjustment: The Macroeconomic Experience of Developing Countries (New York: Oxford University Press, 1993), pp. 401, 403.

[58]. World Bank, World Development Report 1995 (New York: Oxford University Press, 1995), p. 17.

[59]. Congressional Budget Office, Enhancing U.S. Security through Foreign Aid (Washington: Congressional Budget Office, April 1994), p. 11.

[60]. J. Michael Finger, "The High Cost of Trade Protectionism to the Third World," in Perpetuating Poverty, p. 319.

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