The Failures and Fallacies of Foreign Aid; D. Osterfeld

The Commission laments the "disappointing record" of such developed countries as the United States which have not met the 0.7 percent target for Official Development Assistance established by the United Nations in the early 1970s. "An in crease in total aid," says the Commission, "must remain a high priority," and "the overall flow of wealth must increase" (pp. 226-27). In its follow-up report three years later, the Brandt Commission reiterated its call for in creased "aid." The Commission asserted that de spite "a few glaring examples of misused or unsuc cessful aid loans," most "aid" was effectively used (1983, p. 78); observed that there remained sub stantial unmet needs, especially in the poorest of the lessdeveloped countries (LDCs) (p. 75); de plored the "strong current mood in the donor com munity to require greater efforts by aid recipients to improve their own economic performance"; called on donor countries to "respect . . . differDavid Osterfeld is Associate Professor of Political Science at St. Joseph's College in Rensselaer, Indiana.

ent economic systems" (p. 73); and urged "donors to double by 1985, in real terms, the aid flows which the poorest countries received in the five years up to 1981." The report also called on the donor countries to waive all "official debt" for the least developed countries (pp. 76-77). And, just in case there was any doubt, the Commission emphasized that even if the LDCs did implement the policy reforms called for by the World Bank and many donor countries, such "reform is not a substitute for more assistance; it requires more assistance to be successful" (p. 74, emphasis in original). Nowhere in either of the Brandt Commission reports is the question even considered of whether "aid" is the appropriate vehicle for stimulating economic de velopment. Indeed, that any but the misanthropic could op pose programs whose stated goal is to provide "aid" to the less fortunate is generally met with in credulity. For example, in December 1983 on a panel on "Liberation Theology and Third World Development," Lord Peter Bauer presented a cri tique of foreign "aid." Dr. Murdith McLean, who followed Bauer on the panel, opened by comment ing that "I was going to begin by saying that every one thinks foreign aid is at least a good thing to those less well-off than ourselves. It may appear that we have at least one disagreement on that contention in the panel" (p. 39).

But using the term "foreign aid" to describe the political process of transferring wealth from First World taxpayers to Third World governments pre judges the results. There is, as Thomas Sowell notes (p. 239) no more a priori justification for calling it "foreign aid" than "foreign hindrance."

62 THE FREEMAN· FEBRUARY 1990 Whether wealth transfer is an aid or a hindrance, Sowell points out, is an empirical question, not a forgone conclusion. The point is well taken. What are the results of foreign "aid"? 1. The Record In The Economics of Developing Countries, Wayne Nafziger asks "How effective has aid been?" After listing several criticisms, he con cludes (pp. 396-397) that "Nevertheless, the evi dence suggests that aid has been essential to many low-income countries in reducing savings and for eign exchange gaps." However, no evidence is pre sented to support this assessment. Similarly, Nafziger acknowledges several criticisms of food aid but concludes (p. 401) that "Nevertheless, food aid has frequently been highly effective" and "plays a vital role in saving human lives during famine or crisis." Again, no supporting evidence is provided. Whether bilateral or multinational, the official original purpose of foreign aid-the transfer of re sources from one government to another-was to stimulate economic development. However, with the passage of the U.S. Foreign Assistance Act of 1973 and the adoption of the New International Economic Order by the General Assembly of the United Nations in 1974, the additional goal of di rectly increasing the living standards of the poor est strata in the recipient countries was added to, if it did not in fact replace, the original goal (Eber stadt, 1985b, pp. 25-26; Erickson and Sumner, pp.I-21).

Clearly, "aid," at least according to its original intent, was to be temporary. Once the capacity for self-sustaining economic growth had been achieved, "aid" would no longer be required. Yet, as Paul Craig Roberts has observed (p. 20), "Far from developing, most Third World countries seem to be more dependent than ever on aid." In fact, it was precisely because of the growing dissat isfaction with the results of foreign "aid" that the "reforms of 1973" altered the focus of the pro gram. As Eberstadt put it (1985b, p. 25) the prob lem "was that the strategy of export-oriented, self sustaining growth which we had advocated since the 1940s did not actually benefit the common people of the countries it transformed." Yet, by either goal, that of generating self-sustaining economic growth or improving the lot of the poorest segments of the recipient countries, the evidence lends precious little support for the contention that "aid" actually aids.

The total net transfer of capital, private and public, from the West to the Third World between 1950 and 1985 amounted to the staggering sum of over $2 trillion in 1985 prices. Private investment accounted for about 25 percent of this total, but its share has fallen from about 40 percent in the 1950s to only about 16 percent in the 1980s. The $2 tril lion, Eberstadt notes (1985a, p. 25), was enough to purchase not only all the companies on the New York Stock Exchange but, in addition, the entire American farm system. What has this massive transfer accomplished? "Aid" has been directly responsible for the pau perization of large segments of the population in places such as the U.S. trust territory of Micronesia and elsewhere (Fitzgerald, pp. 275-84; Manhard, pp.207-14). "Aid" has in many places actually destroyed the possibility for sustained economic growth by driv ing local producers, especially farmers, out of busi ness. Such was the case in Micronesia, Bangladesh, India, Egypt, Haiti, Guatemala, Kenya, and many other places (Bovard, p. 18; Bandow, p. xiv; Fitzgerald, p. 278 and 288;Eberstadt, 1985b,p. 22).

Some experts believe that food "aid" to India "may have been responsible for millions of Indians starving" (Bovard, p. 18). Other studies have shown that malnutrition in Bangladesh actually rose as food aid to that country increased (Krauss, p. 160). It is unlikely that these are isolated occur rences. Countries such as Peru, Haiti, and Guatemala have either refused to accept U.S. "food aid" or pleaded with the U.S. government to restrict such "aid" (Bovard, p. 18). Africa, traditionally a food exporter, "lost its historic ability to feed itself," notes Sowell (p. 239), precisely when donor agencies began to "smother Africa with project aid." Many observers believe that the relationship is not accidental and that Africa's economic deterioration, and in particular its tragic agricultural situation, was caused, in part, by "aid" (Ayittey, 1988; Fitzgerald, pp. 287-89; Bauer, 1984, pp. 46, 51-52).

In practically every case, the influx of "aid" has been immediately followed by the emergence of a massive, unproductive, parasitic government bu reaucracy whose very existence undercuts the reTHE FAILURES AND FALLACIES OF FOREIGN AID 63 cipients' ability for sustained economic growth (Fitzgerald, pp. 283, 285-86;Sowell, p. 240; Man hard, p. 209). More systematically, the World Bank notes (1983,p.18) that Official Development Assistance totalled five percent of the gross domestic invest ment of the low-income countries of South Asia, but over 40 percent in the low-income countries in Africa. It also notes (1980,Table 2.8, p. 11) that for the decade of the 1970sper capita income in South Asia's low-income countries grew over five times faster than it did in the low-income countries of Africa. Conversely, the most economically developed parts of the world-Western Europe, the United States, and Japan-developed without aid. Simi larly, Hong Kong and Singapore, two of the most economically vibrant areas over the past two decades, received only negligible "aid."

Finally,Taiwan and South Korea are often tout ed as "foreign aid" success stories. However, their impressive economic performances began only after large-scale economic aid from the U.S. was discontinued (Krauss, p. 190). In short, despite the truly massive infusion of "aid" into Third World countries, there is little to suggest that this has succeeded in either stimulat ing self-sustaining economic growth or improving the plight of the poorest strata of people in the re cipient countries. 2. ReformingForeign"Aid" Many who acknowledge that foreign "aid" has done little or nothing to help the people of the LDCs believe that the solution lies in reforming the aid program. What is needed, they maintain, is better accounting methods, a closer scrutiny of program grants, or simply better, or more public spirited, administrators. It is no doubt true that such reforms, if imple mented and followed, would eliminate some of the more unsavory aspects of the aid program, such as the blatant waste, mismanagement, and corrup tion that has been a part of foreign "aid" since its inception.