Foreign aid: giving until it hurts.

ITEM: The Washington Post for January 31 reported: "After getting off to a painfully slow start, President Bush's signature foreign aid program is poised to begin ramping up the amount of money it spends on development projects in poor countries, according to its new chief executive--who vows that the impact will be 'transformative.' John J. Danilovich, the former ambassador whom Bush installed as head of the Millennium Challenge Corp. in November, said the agency is adopting a new strategy to fulfill its mission of providing aid to well-governed nations. It will winnow recipients to a short list but intends to give them significantly bigger grants than those bestowed in previous programs."

The Post continued: "Implementing such an approach would mark an important shift for the federally funded corporation, which Bush proposed creating in 2002 as an innovative way to dole out development assistance. The idea was to establish an agency that, instead of giving funds to a broad cross section of countries, would funnel aid only to poor nations deemed to have relatively honest governments and good policies--the theory being that aid works best that way."

ITEM: Secretary of State Condoleezza Rice's remarks to the USAID staff on January 19 appear on the agency's website (www.usaid.gov), which celebrates "a major change in the way the US government directs foreign assistance." Rice's remarks, in part, asserted: "Foreign assistance is an essential component of our transformational diplomacy. In today's world, America's security is linked to the capacity of foreign states to govern justly and effectively.... America's foreign assistance must promote responsible sovereignty, not permanent dependency."

Correction

If the countries in line for foreign assistance were really well governed, they would say, "No, thank you."

Perhaps the foremost pioneer of development economics, the late Peter T. (Lord) Bauer, rightly concluded, "Development aid is ... not necessary to rescue poor societies from a vicious cycle of poverty. Indeed it is far more likely to keep them in that state." Even the World Bank knows this to be so. The countries of sub-Saharan Africa provide perhaps the clearest illustration of this inescapable fact. After the spending of hundreds of billions of dollars in Africa, the World Bank has pointed out, "average per capita income [in sub-Saharan Africa] is lower than that at the end of the 1960s." The failure rate of the World Bank's African programs in 2000 was 73 percent, according to the Meltzer Commission.

It is almost staggering to realize that most African countries are poorer than they were three or four decades ago, adjusted for purchasing power parity. And it is sheer idiocy to believe that the decades of harm caused by foreign aid will turn out differently because the process for the next round of handouts has been tweaked.

Who Helped Developed Countries Develop?

Many African leaders recognize this. As Senegal's President Aboulaye Wade has remarked: "I've never seen a country develop itself though aid or credit. Countries that have developed--in Europe, America, Asian countries like Taiwan, [South] Korea and Singapore--have all believed in free markets. There is no mystery there. Africa took the wrong road after independence."

Keep in mind, however, that the presence of corrupt administrations, even those who flaunt terrorist leaders, doesn't necessarily halt the flow from international organizations--monies that are subsidized or guaranteed by U.S. and other Western taxpayers. When the murderous thugs of Hamas took over the Palestinian government recently, World Bank President Paul Wolfowitz emphasized to the Financial Times that he wanted its aid to continue. The Palestinian Authority, reports Reuters, is the largest single employer in the Gaza Strip and West Bank and "relies on foreign aid to stay afloat."

Thomas Dichter, who spent four decades in developing countries, including working for a variety of national and international aid agencies, admitted that late in his career he finally understood that, "as a means of reducing world poverty, aid has not worked, is not likely to work in the future, and cannot work." (Emphasis in original.) In a Cato Institute policy briefing last fall, Dichter, the author of Despite Good Intentions: Why Development Assistance to the Third World Has Failed, also noted: "Whereas a large corporation cannot lose money forever without facing some consequences, the aid industry has gone on for 60 years with hardly anything to show for the two trillion dollars it has spent (something it does not really bother to deny), and yet it is still very much in business."

"Aid" Retards Economic Growth

While it might be comforting to think so, having a recipient government with "good policies" is not a recipe for "successful" foreign aid. Former World Bank economist William Easterly was the prime author of a groundbreaking 2003 study for the National Bureau of Research that found that aid given to countries with good governance had no positive economic effect. A subsequent study by Harold Brumm, an economist with the federal government, went even further, concluding that "foreign aid has a negative growth effect even where economic policy is sound."

Peter Bauer questioned whether the word "aid" was appropriate, saying it prejudged its value; he maintained it is more accurate to call the transactions "gifts or doles." The very word "aid," he argued, "obscures the fact that it refers to official inter-governmental wealth transfers, to the transfer of the taxpayers' money to foreign governments. Aid also suggests plainly that it must inevitably be of benefit to peoples of the recipient countries, and in particular that it promotes development and relieves poverty and suffering. As we have seen, these assumptions are unwarranted, and indeed often the opposite of the truth. It is the rulers who usually benefit, and not the population at large."

The administration of Kenya's Daniel Arap Moi provides an archetype. That regime was found to have embezzled $3 billion to $4 billion during its more than two decades in power. A subsequent Kenyan commission found that as much as $3 billion was transferred overseas, not an uncommon occurrence among aid recipients. The World Bank also determined that "nearly 40 percent of Africa's aggregate wealth has fled to foreign bank accounts."

The equivalent of four "Marshall Plans" in Western aid was spent in Africa over four decades, in the neighborhood of half a trillion dollars. Yet, as several African free-market analysts (who head foundations and think tanks in Nigeria, Ghana, South Africa, and the U.S.) pointed out in a Cato institute study last September: "Instead of increasing development, aid has created dependence. The budgets of Ghana and Uganda, for example, are more than 50 percent aid-dependent."

In July of 2005, the authors report, "Nigeria's Economic and Financial Crimes Commission revealed that a succession of military dictators stole or squandered $500 billion--equivalent to all Western aid to Africa over the past four decades. Even when the loot is recovered, it is quickly re-looted."

"Aiding" Governments, Not the Poor

Despite a plethora of evidence showing that such "aid" is of dubious value at best, and more likely to hurt the recipients, the developed G-8 nations, the United Nations, and the Bush administration (which has tripled assistance to Africa since taking office in 2001) all want to dispense even more of our tax dollars to other countries.

Yet, assistance from U.S. private charitable organizations and foundations far outstrip even the government's billions. A study a few years ago by Carol Adelman, a former official for the U.S. Agency for International Development, found that such private aid was about 3.5 times that of the U.S. government. Moreover, as attested by any number of people who have seen the difference in person, such private aid is much less bureaucratic and more likely to reach people in need.

Nevertheless, the administration will go ahead with the supposed new idea to provide aid to only well-governed nations. Yet even the administration has found a problem with doling out the gifts: it has had trouble finding enough worthy recipients. The government-funded Millennium Challenge Corporation has fallen behind its disbursement goals--which, sadly, is probably the best thing it could do.

One way or another, all foreign aid is political. And the potential for corruption is heightened for even the best-intentioned governments. If foreign officials don't pocket the funds outright, the aid still is largesse that almost inevitably becomes convertible into favors designed to keep the regime in power. Recipient governments habitually decide to run enterprises that no reasonable private investor would back.

The foreign handout scam seems perpetual. If good intentions really are the goal, why are we rendering recipients more dependent and thrusting a growing potential for graft on them?

This transfer of wealth, comments Freeman editor Sheldon Richman, "is harmful because it politicizes societies, enriches politicians and parasitic organizations, and discourages productive activity. Political decision-making in economic matters, which is strengthened by aid, is not good for people, because it makes the possession of political power the overriding imperative; one's life may depend on it." Continues Richman in Freedom Daily: "This is why the popular idea that aid should be given only if African governments root out corruption is nonsense. Even if they could end corruption (have the G8 governments ended it yet?), aid would be inimical to progress."

In truth, however, international aid schemes boil down to chiseling on a grand economic scale: advocates and participants inexorably talk about principles and act on interest--their own.