Testimony

Foreign Assistance and U.S. Foreign Policy

Committee on International Relations
United States House of Representatives

Mr. Chairman, thank you for the opportunity to appear before the Committee on International Relations to discuss the topic of foreign assistance and U.S. foreign policy. It is relevant to state at the outset that the Cato Institute does not have and never has had any federal grants or contracts; moreover, it is the institute’s policy, as spelled out in its bylaws, not to accept tax moneys from any unit of government - federal, state, or local.

It is distressing that the administration has requested a $1.2 billion increase in money for the State Department and the Agency for International Development (U.S. AID). Mass poverty, famine, and violence continue to blight our globe, but the understandable desire to do something about those problems should not become an excuse to maintain the failed policies of the past. That is especially true of the foreign aid budget. For nearly half a century the policy of foreign aid has been tried and found wanting. There is no evidence whatsoever of a correlation between foreign aid to developing countries and the economic growth rates of those countries. Indeed, there is mounting evidence that aid programs have been counterproductive, producing disappointing and sometimes disastrous results.

Other justifications for preserving—to say nothing of expanding—such expenditures are no more compelling. The latest favorite rationale—that aid programs are needed to prevent crises like those that engulfed Somalia and Rwanda—ignores the fact that both countries received extensive amounts of aid in the decades before their political implosion. Since billions of dollars in foreign aid failed to forestall such tragedies, advocates of assistance to prevent humanitarian crises have a difficult time making the case that additional sums would have done so.

Similarly weak are arguments that foreign aid programs are needed to preserve America’s influence in the world and to neutralize threats to the security of the United States. Unfortunately, even some Republican officials have supported the administration proposal to increase funding for the State Department and U.S. AID. Former President George Bush suggested that critics of the proposed funding increase did not recognize the existence of “any more threats in the world.”

Proposals to increase international affairs outlays appear to have little to do with the existence of threats in the world. After all, there has been no measurable increase in threats over the past year. To the contrary, we continue to live in a post-Cold War world in which the severity of the dangers faced by America is substantially less compared to past decades. That is a crucial point, for foreign affairs spending—with the exception of emergency humanitarian aid—at any level can be justified only if it clearly advances essential American interests.

If the proposed spending on embassies, diplomatic programs, the United Nations, and foreign aid was linked to the extent of international threats, it should have been cut radically since 1989, when the Berlin Wall fell. Today there is no more Soviet Union, no more Warsaw Pact, no more international hegemonic communist menace, and no more network of Soviet satellite states. Cuba’s Fidel Castro, North Korea’s Kim Jong Il, and Serbia’s Slobodan Milosevic are meager replacement threats.

Instead of declining, however, international affairs outlays have been accounting for ever more money. Expenditures rose steadily from 1987 through 1994, before dipping slightly. The State Department’s budget is more than one-quarter larger today than in the mid 1980s.

So at the very time that great power threats against the United States have ebbed and the relevance of Third World quarrels to America is more obscure than ever, the State Department is spending more money. True, some of the funds have gone to open embassies in the new countries that have arisen out of the ashes of the Soviet Union and the former Yugoslavia. However, America has no pressing need for a large diplomatic presence in such countries as Armenia, Georgia, and Slovenia.

There is no reason other than international vanity to believe that Washington must be heavily represented everywhere in the world, irrespective of the importance of its interests at stake. With the advent of rapid modes of transportation and communications (including exponential increases in the use of fax machines and e-mail), much of the work that has traditionally been performed by embassy and consular staffs can be done from Washington. In a devastating published critique of State Department operations, retired foreign service officer Charles A. Schmitz has confirmed that he and his colleagues spent an appalling amount of their time on “make work” paper-shuffling projects. The State Department does not need more financial resources; it needs to use the financial resources it now has more intelligently and efficiently.

It is also the height of bureaucratic conceit to suggest that America’s influence in the world is dependent on the level of State Department and U.S. AID funding. A nation with a nearly $8 trillion economy, by far the most capable military forces, and enormous cultural and ideological appeal based on its commitment to the values of limited government and individual rights will not lack influence in world affairs.

The largest cuts in the administration’s proposed budget should apply to foreign aid expenditures. Since World War II the United States has spent nearly $1 trillion (in 1997 dollars) on bilateral and multilateral foreign aid. The result is debt, dependency, and poverty throughout much of Third World.

Even many advocates of foreign assistance acknowledge that the results have been unimpressive. U.S. AID 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.” Administrator Brian Atwood acknowledges that in the case of Zaire, “the investment of over $2 billion of American foreign aid served no purpose.” In an earlier, detailed review of assistance policies, the agency reported that “only a handful of countries that started receiving U.S. assistance in the 1950s and 1960s has ever graduated from dependent status.”

The administration is promising better management, but that cannot save programs that are inherently flawed. Decades of experience demonstrate that international government-to-government financial transfers do not yield self-sustaining economic growth in poor countries. Virtually every Third World state has received significant amounts of foreign aid, yet the majority have ended up stagnating economically; indeed, many nations have been losing ground. Fully ‘70 developing countries are poorer today than they were in 1980; 43 are worse off than they were in 1970. No where do aid levels correlate with economic growth. Many of the biggest recipients of foreign assistance, such as Bangladesh, Egypt, India, Sudan, and Tanzania, have been among the globe’s worst economic performers.

Even correlation of aid with positive economic growth would not be enough to justify such expenditures. The real issue is causation, and on that point there is no evidence whatever that aid generates growth. Particularly instructive are the devastating conclusions contained in studies by Peter Boone of the London School of Economics. After assessing the experience of nearly 100 nations, he concluded that “Long-term aid is not a means to create growth.” As Boone 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.”

Perhaps the best broad-based study of economic policies is “Economic Freedom of the World: 1975-1995,” by economists James Gwartney, Robert Lawson, and Robert Block. They created an index of 17 component parts 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 some Latin American and numerous African countries. The nations that improved the most between 1975 and 1990 were Chile, Iceland, Jamaica, Malaysia, and Pakistan.

Two particularly important lessons emerge. First, economic policies matter. Countries earning a rating of A or B averaged real per capita GDP growth of 2.4 percent from 1980 to 1994 and 2.6 percent from 1985 to 1994. Quite different was the experience of the 27 countries graded an F-: their economies actually declined. 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.”

Second, changes in economic policy affect national growth rates. According to the study, the 17 nations with the greatest increases in economic freedom enjoyed an average growth rate of 2.7 percent in per capita GDP from 1980 to 1990, and 3.1 percent from 1985 to 1994. All 17 grew, while 11 of the 16 nations with the largest drops in economic freedom suffered a decline in per capita GDP.

Similar are the results of the 1996 Index of Economic Freedom, written by Heritage Foundation analysts Bryan Johnson and Thomas Sheehy. Although their study offers somewhat less systematic international comparisons, the conclusions are nearly the same. 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.” Their data also demonstrate that countries which place the greatest reliance on open markets consistently have the highest growth rates.

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

A decade ago economists E. Dwight Phaup and Bradley Lewis surveyed a dozen “winners” (with average annual growth rates exceeding six percent) and a score of “losers” (average growth rates below 2.2 percent a year). The average annual growth rates were 7.7 percent and one percent, respectively. Phaup and Lewis concluded: “It would appear that whether LDCs [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.”

Foreign aid bureaucracies—particularly U.S. AID, the World Bank, and the International Monetary Fund—after spending decades encouraging and funding nearly every authoritarian regime that socialized its economy, now claim to favor market reforms. But government-to-government assistance helps preserve bad regimes by increasing the resources at their control. Some of those governments may want to foster economic development, but they are unwilling to pay the political price of adopting the policies necessary to do so. Others treat ideological objectives as paramount. Still others are simply interested in staying in power regardless of the economic consequences.

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 Ln London: “Third World states are neither the instruments of international capital nor of an indigenous bourgeoisie, but are rational actors who will industrialize 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.” 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.”

Aid can inhibit the commitment to reform of even more responsible governments. “Without reform,” warns Cindy Williams of the Congressional Budget Office, “aid can reinforce policies that do not further development.” By masking the pain of economic failure, outside economic assistance allows recipients to delay politically sensitive reforms, worsening the underlying problem. “Scarcity of resources” in such cases “is good for reform,” writes Dani Rodrik of Columbia University.

The point is, it is necessity, brought on by the disastrous effects of collectivist and populist economics, that almost always drives the reform process. Admit’s 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.”

Governments that understand and see the necessity for reforms are likely to reform, irrespective of aid levels. Those that lack such a commitment are unlikely to do so, also irrespective of aid levels. Equally important, such governments are unlikely to make the many ancillary reforms that are also critical to promote economic growth. It is not just one set of reforms, but a range of changes over time that are needed to move poor societies toward prosperity. Even if aid is able to bribe a regime into adopting an occasional constructive change, unless the government is committed to making all of the other reforms that are necessary, U.S. AID or any other agency will achieve little with the taxpayers’ money. Thus, if Congress truly wants to increase pressure on poor states to reform their economies, it should cut, not increase, U.S. aid outlays.

That doesn’t mean that America can do nothing to help Third World countries. instead of offering new aid programs, industrialized states should reform their own economies, encouraging faster global growth, and open their markets to Third World products. The latter step is particularly important, since poor nations need to participate in the international economy to grow. The benefit of free access to Western markets would vastly exceed the value of foreign aid now or likely to be offered. J. Michael Finger, the leading trade policy economist at the World Bank, figures that developing world’s GNP runs about three percent lower than it otherwise would because of Western protectionism. That is twice the total aid provided by the leading industrialized states.

Of course, government agencies dedicated to surviving a changed international environment now offer new justifications for old programs. In particular, U.S. AID has pointed to international crises like those in Rwanda and Zaire as a reason to increase its budget. Administrator Brian Atwood terms such missions “crisis prevention” and “preventive investment” in “nation building.” Similarly, the U.N. High commissioner for Refugees asked in 1995: “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?”

However, Rwanda did not go unaided before its implosion. To the contrary, between 1971 and 1994 that nation received $4.5 billion in foreign assistance—a sum that amounted to nearly twenty percent of the country’s GDP. In fact, nearly every country that has suffered internal catastrophe collected abundant outside transfers from a variety of sources beforehand. Over the same period, Sierra Leone received $1.8 billion, Liberia $1.8 billion, Angola $2.7 billion, Haiti $3.1 billion, Chad $3.3 billion, Burundi $4.1 billion, Uganda $5.8 billion, Zaire $7.8 billion, Somalia $8 billion, Mozambique $10.4 billion, Ethiopia $11.5 billion, and Sudan $13.4 billion. (See Table 1)

Table 1
Nation Aid: 1971-1994 (Millions of Dollars)
U.S. Total International Annual Average
Angola 117 2,743.1 114.3
Burundi 139 4,090.5 170.0
Chad 239 3,281.6 136.7
Ethiopia 999 11,499.6 479.2
Haiti 1,425 3,120.7 130.0
Liberia 639 1,795.0 74.9
Mozambique 616 10,419.3 434.1
Rwanda 416 4,505.0 187.0
Sierra Leone 172 1,769.0 73.7
Somalia 1,770 8,064.2 336.0
Sudan 1,692 13,415.9 559.0
Uganda 295 5,798.8 241.6
Zaire 529 7,800.0 325.0

In none of these cases did foreign assistance forestall catastrophe. obviously, there are numerous reasons why so many nations suffer so, but in none of them is inadequate international aid the cause. To the contrary, foreign aid helped create and exacerbate problems in Ethiopia, Somalia, Sudan, and Zaire, in particular, by subsidizing especially odious dictators who wrecked their nations. Government-to-government transfers only reinforced selfsdestructive domestic policies.

Aid advocates insist that they will do better in the future, since, with the end of the Cold War, there is less pressure to use assistance as de facto bribes to anti-communist but corrupt and authoritarian regimes. However, the bulk of foreign transfers to such failed nations was always economic, not security aid. Between 1971 and 1994 the United States accounted for barely one-fifth of total assistance received by Somalia. The rest was economic aid from a variety of sources—the multilateral institutions and European countries, in particular. During the same period Rwanda received more from the World Bank alone than from the United States; Burundi collected 3.6 times as much from the Bank as from Washington. In short, the problem with past aid is not that it was overly oriented towards political and military purposes. Rather, it is that so-called aid turned out not to be aid at all.

The attempt of the administration, and other advocates of foreign aid expenditures to put old wine into new wineskins—to offer new justifications for yesterday’s failed policies—won’t work. Foreign assistance has consistently failed to deliver self-sustaining economic growth or prevent poor societies from collapsing into chaos. New aid flows will yield no better results. Congress should say no to proponents of more aid, whether in the form of old or new programs.