The Death of Foreign Aid

This article originally appeared in the Korea Herald on October 21, 1999.
On the day that President Bill Clinton vetoed the $12.6 billion foreign aid bill for being too stingy, the body of former Tanzanian dictator Julius Nyerere was returned to his nation’s capital of Dar es Salaam for burial. Nyerere’s death should signal the death of foreign assistance as well.

Nyerere was representative of the “big men” who emerged in Africa through decolonization. A nationalist who led his country to independence from Britain in 1961, he was a vocal exponent of “African socialism.” Though he collectivized the economy, instituted one-party rule, and barred a free press, Nyerere was nevertheless feted by Western intellectuals and showered with Western aid.

He expanded state control to most economic activities, nationalized all the industries that mattered, and instituted the forced collectivization “ujamaa” program.

By 1985, when Nyerere retired, economists James Gwartney and Robert Lawson figure Tanzania was the seventh least economically free country.

Along the way, the West showered billions of dollars on Tanzania $6.4 billion through 1985 alone. The United States alone contributed $352.5 million through 1985. The World Bank, demonstrating that it lacked both a conscience and common sense, directly underwrote his brutal ujamaa scheme.

The result of such hubris that a powerful elite should forcibly organize the lives of millions of people was, not surprisingly, a disaster. Peasants resisted being uprooted from their ancestral homes and refused to produce food at confiscatory prices for Nyerere’s bureaucrats. Nationalization created one money-losing black hole after another.

Between 1965 and 1986, the economy actually shrunk 0.3 percent a year.

His manifold failures forced his successors to change course. Tanzania rose from No. 103 on Gwartney’s and Lawson’s economic freedom list in 1990, when Nyerere relinquished his remaining power by retiring as chairman of the ruling party, to No. 70 in 1995.

Unfortunately, however, Tanzania still suffers from Nyerere’s pernicious policies. By the mid-1990s, the World Bank ranked Tanzania as the third poorest country on the globe. Between 1980 and 1992, its economy grew not at all. It will be years before Tanzania’s people recover from his mistakes and from the Western “aid” that allowed Nyerere to turn his philosophical fantasies into Tanzania’s economic practices.

Alas, Tanzania is not alone. As of 1996, 70 poor countries were worse off than in 1980; 43 were poorer than they had been in 1970. All had received generous doses of so-called assistance.

The pervasive corruption now evident in Russia and Bosnia is problem enough. Much aid simply disappears, as has much of the $5.1 billion so far given to Bosnia, and more than $20 billion provided by the International Monetary Fund to Russia.

In fact, the flood of Western cash has actually stoked the fires of corruption.

Even more pernicious, though, is foreign aid’s role in subsidizing economically destructive policies. Most Third World governments have mismanaged their economies by trying to manage them.

Ill-considered state intervention includes creating bloated, inefficient public sectors, restricting prices and production, adopting perverse monetary, fiscal, and credit policies, and discouraging foreign investment. Yet, foreign aid has effectively rewarded governments for implementing such policies.

At times, donors have advanced bad policies. The IMF, for instance, is responsible for tax increases and currency devaluations throughout the Third World. For decades, the World Bank unquestioningly backed state-run development programs.

In 1983, senior bank staffer Stanley Please wrote that “as a committed socialist … I was surprised and shocked by the emphasis which the bank at the time gave to the public sector in general, and to the government, in particular.” The institution “had more confidence in the rationality, morality and competence of governments than I ever had.”

Even when Western governments and multilateral institutions formally deplored recipient policies, they continued to effectively subsidize the very policies being criticized. Donors regularly provided cash to nations irrespective of their actions. In such cases, money spoke far louder than words.

Consider the IMF, which has a fearsome reputation for imposing “conditionality.” The Fund has subsidized the world’s economic basket cases, like Egypt, India, and Sudan, for decades, without result. Moscow continues to collect new loans no matter how much is wasted or stolen.

In short, the constant flow of foreign funds, however targeted or conditioned, has given governments sufficient resources to allow them to implement policies that wreck their economies. True, many collectivist regimes throughout the developing world, including Tanzania, have finally had to face reality. But Western assistance unnecessarily prolonged the adjustment process, essentially treating Third World debtors like drunks who were handed a wad of cash and told to drink no more.

Foreign aid should be called foreign hindrance. Instead of trying to overturn Clinton’s veto, Congress should pass a new appropriations bill zeroing out failed assistance programs. It’s time to bury foreign aid along with Julius Nyerere.

Doug Bandow is a senior fellow at the Cato Institute.