USAID Failed Because Foreign Aid Doesn’t Work

The crudeness might not have been necessary, but the proposal itself was warranted. Foreign aid has too many (often conflicting) goals, including promoting democracy, stability and geopolitical ties. It is long past time for the U.S. government to scrutinize the entire foreign assistance program and recognize that one of the central goals – promoting economic growth – has been a failure.

That’s why it’s a good idea to close down USAID, drop economic development as a goal of U.S. foreign policy and assign the State Department to manage vital emergency and humanitarian aid. It does, however, need to be done lawfully and in accordance with the Constitution. Unfortunately the Trump administration has not been following the law in its push to shut down the agency, which needs to be rectified. But its approach shouldn’t obscure the fact that the policy change is a worthy one.

Reductions in wasteful aid may not put much of a dent in overall government spending. USAID spent about $32 billion out of a federal budget of $6.75 trillion in fiscal year 2024, or less than 1% of total spending. But the fact that foreign assistance is not accomplishing its goals fully justifies the cuts.

How does USAID spend its budget? Health and humanitarian aid make up the biggest portion of spending, with outlays of $17.4 billion, followed by economic development aid at $7.8 billion.

What has hundreds of billions of dollars in foreign assistance to promote economic development over the decades accomplished? First, the evidence shows that there is no correlation between aid and economic growth. Some countries that receive foreign aid grow, whereas others grow slowly or not at all, according to a 2005 paper for the International Monetary Fund’s research department.

Second, aid that goes to countries that have poor policies and weak institutions can actually harm growth. That is particularly true of government-to-government aid that strengthens regimes whose policies hurt growth. In those cases, aid finances the causes of poor people’s misery in the first place, often spurring corruption and greater debt.

A 2007 World Bank study that looked at 108 countries that received aid between1960 and 1999 concluded that “foreign aid has a negative impact” on political institutions and democratization. Aid windfalls – which often make up a large part of recipient governments’ budgets – weakened checks and balances and other democratic practices as countries became dependent on foreign aid.

Nobel laureate and Princeton University economist Angus Deaton wrote in his 2013 book “The Great Escape” that “large inflows of foreign aid change local politics for the worse and undercut the institutions needed to foster long-run growth.” That’s because they uphold political structures that inhibit growth and create special interest groups dependent on aid. Deaton argued that “aid also undermines democracy and civic participation,” because it makes the government more reliant on outside donors and less responsive to the needs or desires of the local population.

One attempt to deal with the problem of aid going to countries with poor political or policy environments has been to condition aid on recipient countries implementing market reforms that spur growth. However, such conditionality has been ineffective because government aid agencies have institutional incentives to lend money even when recipient countries fail to live up to their promises.

After all, aid agencies justify their existence and judge their success by how much money they give out. Former World Bank economist Paul Collier observed that whether or not governments undertake reform has little to do with the foreign aid they receive. “Obviously, the donors did not wish to admit that their conditionality was a charade,” he wrote.

Does foreign aid promote economic development in countries that have good policies and institutions, such as open markets and reasonably sound rule of law? The record is discouraging here, too. The 2005 study for the International Monetary Fund found “no evidence that aid works better in better policy or geographical environments, or that certain forms of aid work better than others.”

So if aid is ineffective, what determines whether a country experiences economic progress in the medium or long term? Centuries of economic history and mountains of scholarship provide the answer: domestic policies and institutions, not external factors such as foreign aid.

There is a strong relationship, for example, between economic freedom and prosperity. Countries that establish or move in the direction of free markets, property rights protection and limits on government power foster economic growth, wealth and improvements in the whole range of indicators of human well-being.

The move to shut down USAID is welcome because it recognizes the failure of foreign aid to promote development – and because it will force advocates of development to focus on the real causes of human progress instead.

But Congress established USAID as an executive branch agency and thus must be the body to close it. Just last year, an appropriations act explicitly required that Congress be consulted and notified before any reorganization, consolidation or downsizing of USAID.

There are solid reasons to shut down USAID, but let’s do it lawfully. That would also ensure that any changes will not be easily undone in the future.