Foreign Assistance and U.S. Foreign Policy

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Mr. Chairman, thank you for the opportunity to appear before theCommittee on International Relations to discuss the topic offoreign assistance and U.S. foreign policy. It is relevant to stateat the outset that the Cato Institute does not have and never hashad any federal grants or contracts; moreover, it is theinstitute's policy, as spelled out in its bylaws, not to accept taxmoneys from any unit of government - federal, state, or local.

It is distressing that the administration has requested a $1.2billion increase in money for the State Department and the Agencyfor International Development (U.S. AID). Mass poverty, famine, andviolence continue to blight our globe, but the understandabledesire to do something about those problems should not become anexcuse to maintain the failed policies of the past. That isespecially true of the foreign aid budget. For nearly half acentury the policy of foreign aid has been tried and found wanting.There is no evidence whatsoever of a correlation between foreignaid to developing countries and the economic growth rates of thosecountries. Indeed, there is mounting evidence that aid programshave been counterproductive, producing disappointing and sometimesdisastrous results.

Other justifications for preserving--to say nothing ofexpanding--such expenditures are no more compelling. The latestfavorite rationale--that aid programs are needed to prevent criseslike those that engulfed Somalia and Rwanda--ignores the fact thatboth countries received extensive amounts of aid in the decadesbefore their political implosion. Since billions of dollars inforeign aid failed to forestall such tragedies, advocates ofassistance to prevent humanitarian crises have a difficult timemaking the case that additional sums would have done so.

Similarly weak are arguments that foreign aid programs areneeded to preserve America's influence in the world and toneutralize threats to the security of the United States.Unfortunately, even some Republican officials have supported theadministration proposal to increase funding for the StateDepartment and U.S. AID. Former President George Bush suggestedthat critics of the proposed funding increase did not recognize theexistence of "any more threats in the world."

Proposals to increase international affairs outlays appear tohave little to do with the existence of threats in the world. Afterall, there has been no measurable increase in threats over the pastyear. To the contrary, we continue to live in a post-Cold War worldin which the severity of the dangers faced by America issubstantially less compared to past decades. That is a crucialpoint, for foreign affairs spending--with the exception ofemergency humanitarian aid--at any level can be justified only ifit clearly advances essential American interests.

If the proposed spending on embassies, diplomatic programs, theUnited Nations, and foreign aid was linked to the extent ofinternational threats, it should have been cut radically since1989, when the Berlin Wall fell. Today there is no more SovietUnion, no more Warsaw Pact, no more international hegemoniccommunist menace, and no more network of Soviet satellite states.Cuba's Fidel Castro, North Korea's Kim Jong Il, and Serbia'sSlobodan Milosevic are meager replacement threats.

Instead of declining, however, international affairs outlayshave been accounting for ever more money. Expenditures rosesteadily from 1987 through 1994, before dipping slightly. The StateDepartment's budget is more than one-quarter larger today than inthe mid 1980s.

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

There is no reason other than international vanity to believethat Washington must be heavily represented everywhere in theworld, 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 ande-mail), much of the work that has traditionally been performed byembassy and consular staffs can be done from Washington. In adevastating published critique of State Department operations,retired foreign service officer Charles A. Schmitz has confirmedthat he and his colleagues spent an appalling amount of their timeon "make work" paper-shuffling projects. The State Department doesnot need more financial resources; it needs to use the financialresources it now has more intelligently and efficiently.

It is also the height of bureaucratic conceit to suggest thatAmerica's influence in the world is dependent on the level of StateDepartment and U.S. AID funding. A nation with a nearly $8 trillioneconomy, by far the most capable military forces, and enormouscultural and ideological appeal based on its commitment to thevalues of limited government and individual rights will not lackinfluence in world affairs.

The largest cuts in the administration's proposed budget shouldapply to foreign aid expenditures. Since World War II the UnitedStates has spent nearly $1 trillion (in 1997 dollars) on bilateraland multilateral foreign aid. The result is debt, dependency, andpoverty throughout much of Third World.

Even many advocates of foreign assistance acknowledge that theresults have been unimpressive. U.S. AID admitted in 1993 that"much of the investment financed by U.S. AID and other donorsbetween 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 servedno purpose." In an earlier, detailed review of assistance policies,the agency reported that "only a handful of countries that startedreceiving U.S. assistance in the 1950s and 1960s has ever graduatedfrom dependent status."

The administration is promising better management, but thatcannot save programs that are inherently flawed. Decades ofexperience demonstrate that international government-to-governmentfinancial transfers do not yield self-sustaining economic growth inpoor countries. Virtually every Third World state has receivedsignificant amounts of foreign aid, yet the majority have ended upstagnating economically; indeed, many nations have been losingground. Fully '70 developing countries are poorer today than theywere in 1980; 43 are worse off than they were in 1970. No where doaid levels correlate with economic growth. Many of the biggestrecipients of foreign assistance, such as Bangladesh, Egypt, India,Sudan, and Tanzania, have been among the globe's worst economicperformers.

Even correlation of aid with positive economic growth would notbe enough to justify such expenditures. The real issue iscausation, and on that point there is no evidence whatever that aidgenerates growth. Particularly instructive are the devastatingconclusions contained in studies by Peter Boone of the LondonSchool of Economics. After assessing the experience of nearly 100nations, he concluded that "Long-term aid is not a means to creategrowth." As Boone explained, "aid does not promote economicdevelopment for two reasons: Poverty is not caused by capitalshortage, and it is not optimal for politicians to adjustdistortionary 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 JamesGwartney, Robert Lawson, and Robert Block. They created an index of17 component parts to measure economic freedom, as well as threealternative summary indexes. Ranked highest were Hong Kong,Singapore, the United States, and New Zealand. At the bottom camesome Latin American and numerous African countries. The nationsthat improved the most between 1975 and 1990 were Chile, Iceland,Jamaica, Malaysia, and Pakistan.

Two particularly important lessons emerge. First, economicpolicies matter. Countries earning a rating of A or B averaged realper capita GDP growth of 2.4 percent from 1980 to 1994 and 2.6percent from 1985 to 1994. Quite different was the experience ofthe 27 countries graded an F-: their economies actually declined.The results for individual countries may be affected by manyfactors, but the overall result is compelling. Explain the authors:"No country with a persistently high economic freedom rating duringthe two decades failed to achieve a high level of income. Incontrast, no country with a persistently low rating was able toachieve even middle income status."

Second, changes in economic policy affect national growth rates.According to the study, the 17 nations with the greatest increasesin economic freedom enjoyed an average growth rate of 2.7 percentin per capita GDP from 1980 to 1990, and 3.1 percent from 1985 to1994. All 17 grew, while 11 of the 16 nations with the largestdrops 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 ThomasSheehy. Although their study offers somewhat less systematicinternational comparisons, the conclusions are nearly the same.Johnson and Sheehy explain that their analysis "demonstrates thateconomic freedom is the single most important factor in creatingthe conditions for economic growth and prosperity." Their data alsodemonstrate that countries which place the greatest reliance onopen markets consistently have the highest growth rates.

Studies by other analysts and organizations yield the samegeneral conclusion. Researchers at Cornell University and the OECDhave used a computable general equilibrium economic model in anattempt to measure the impact of different policy measures.Market-oriented reforms in exchange rates, fiscal, and monetarypolicies all improve economic growth rates. Benefits tend to flowto poorer, rural residents; urban elites who were enriched throughpolitical manipulation of the economy are usually the biggestlosers.

A decade ago economists E. Dwight Phaup and Bradley Lewissurveyed a dozen "winners" (with average annual growth ratesexceeding six percent) and a score of "losers" (average growthrates below 2.2 percent a year). The average annual growth rateswere 7.7 percent and one percent, respectively. Phaup and Lewisconcluded: "It would appear that whether LDCs [less developedcountries) are winners or losers is determined mainly by theirdomestic economic policies. Resource endowment, luckycircumstances, former colonial status, and other similar factorsmake little difference in the speed with which countries groweconomically. The results of domestic policy choices pervade everyeconomic area."

Foreign aid bureaucracies--particularly U.S. AID, the WorldBank, and the International Monetary Fund--after spending decadesencouraging and funding nearly every authoritarian regime thatsocialized its economy, now claim to favor market reforms. Butgovernment-to-government assistance helps preserve bad regimes byincreasing the resources at their control. Some of thosegovernments may want to foster economic development, but they areunwilling to pay the political price of adopting the policiesnecessary to do so. Others treat ideological objectives asparamount. Still others are simply interested in staying in powerregardless of the economic consequences.

One need not be a reflexive critic of government to recognizethat such regimes are an impediment to development. Writes AlanCarter of Heythrop College Ln London: "Third World states areneither the instruments of international capital nor of anindigenous bourgeoisie, but are rational actors who willindustrialize their economies when practicable, but who often findit in their interests to be accomplices in the dependentdevelopment or even underdevelopment of their own economies." Insuch cases, he warns, "aid primarily serves to prop up regimes thatare complicit in the exploitation of their people and thedestruction of their environment."

Aid can inhibit the commitment to reform of even moreresponsible governments. "Without reform," warns Cindy Williams ofthe Congressional Budget Office, "aid can reinforce policies thatdo not further development." By masking the pain of economicfailure, outside economic assistance allows recipients to delaypolitically sensitive reforms, worsening the underlying problem."Scarcity of resources" in such cases "is good for reform," writesDani Rodrik of Columbia University.

The point is, it is necessity, brought on by the disastrouseffects of collectivist and populist economics, that almost alwaysdrives the reform process. Admit's U.S. AID: "Few people, least ofall politicians, embark on a deliberate course of change withoutbeing motivated by some significant political or economic crisis.The simple fact behind most subsequently successful economic policyis the failure of the one that preceded it."

Governments that understand and see the necessity for reformsare likely to reform, irrespective of aid levels. Those that lacksuch a commitment are unlikely to do so, also irrespective of aidlevels. Equally important, such governments are unlikely to makethe many ancillary reforms that are also critical to promoteeconomic growth. It is not just one set of reforms, but a range ofchanges over time that are needed to move poor societies towardprosperity. Even if aid is able to bribe a regime into adopting anoccasional constructive change, unless the government is committedto making all of the other reforms that are necessary, U.S. AID orany other agency will achieve little with the taxpayers' money.Thus, if Congress truly wants to increase pressure on poor statesto reform their economies, it should cut, not increase, U.S. aidoutlays.

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

Of course, government agencies dedicated to surviving a changedinternational environment now offer new justifications for oldprograms. In particular, U.S. AID has pointed to internationalcrises like those in Rwanda and Zaire as a reason to increase itsbudget. Administrator Brian Atwood terms such missions "crisisprevention" 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 billionspent on refugee relief during the first two weeks of the emergencyhad been devoted to keeping the peace, protecting human rights andpromoting development in the period that preceded the exodus?"

However, Rwanda did not go unaided before its implosion. To thecontrary, between 1971 and 1994 that nation received $4.5 billionin foreign assistance--a sum that amounted to nearly twenty percentof the country's GDP. In fact, nearly every country that hassuffered internal catastrophe collected abundant outside transfersfrom a variety of sources beforehand. Over the same period, SierraLeone received $1.8 billion, Liberia $1.8 billion, Angola $2.7billion, Haiti $3.1 billion, Chad $3.3 billion, Burundi $4.1billion, Uganda $5.8 billion, Zaire $7.8 billion, Somalia $8billion, Mozambique $10.4 billion, Ethiopia $11.5 billion, andSudan $13.4 billion. (See Table 1)

Table 1
Nation Aid: 1971-1994 (Millions ofDollars)
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 forestallcatastrophe. obviously, there are numerous reasons why so manynations suffer so, but in none of them is inadequate internationalaid the cause. To the contrary, foreign aid helped create andexacerbate problems in Ethiopia, Somalia, Sudan, and Zaire, inparticular, by subsidizing especially odious dictators who wreckedtheir nations. Government-to-government transfers only reinforcedselfsdestructive 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 useassistance as de facto bribes to anti-communist but corrupt andauthoritarian regimes. However, the bulk of foreign transfers tosuch failed nations was always economic, not security aid. Between1971 and 1994 the United States accounted for barely one-fifth oftotal assistance received by Somalia. The rest was economic aidfrom a variety of sources--the multilateral institutions andEuropean countries, in particular. During the same period Rwandareceived more from the World Bank alone than from the UnitedStates; Burundi collected 3.6 times as much from the Bank as fromWashington. In short, the problem with past aid is not that it wasoverly oriented towards political and military purposes. Rather, itis that so-called aid turned out not to be aid at all.

The attempt of the administration, and other advocates offoreign aid expenditures to put old wine into new wineskins--tooffer new justifications for yesterday's failed policies--won'twork. Foreign assistance has consistently failed to deliverself-sustaining economic growth or prevent poor societies fromcollapsing into chaos. New aid flows will yield no better results.Congress should say no to proponents of more aid, whether in theform of old or new programs.