NCPA - National Center for Policy Analysis

Foreign Aid VS. Economic Development

March 11, 1997

World financial institutions which provide subsidized loans to poor countries are at best irrelevant and at worst have consistently failed to stimulate growth in the Third World, by some assessments. A number of international economists see the subsidized or "soft" loans as pork-barrel programs used to drum up business for influential First World firms.

  • When Congress refused to fund the Asian Development Fund and the International Development Association at levels promised by presidents Clinton and Bush, the institutions barred U. S. firms from bidding on projects that its soft loans fund.
  • The IDA recently agreed to open bidding on $1 billion in projects to U. S. firms, but only if Congress agrees to Clinton's request for a $980 million U.S. payment to it.
  • Singapore refused to help replenish the Asian Development Fund in 1996, saying it did not think that such subsidies boost development.

Critics say that poor nations must generate capital themselves via individual savings. China is a case in point.

  • In 1991, when China was growing at double-digit rates, official foreign development assistance amounted to $2 per person and foreign direct investment was $10 per person.
  • But these sums were dwarfed by the average Chinese' savings rate of 38 percent of annual income.

In 1995, developing countries received $97 billion of net private capital inflows. A growing economy, such as that of China, attracts far more foreign capital than sluggish economies. In fact, of the $97 billion, $38 billion went to China and $12 billion to Eastern and Central Europe.

Trade and development experts say that governments of poor nations must pursue sound economic policies -- competitive markets and free trade -- that let their private sectors grow.

Source: Robert I. Webb (University of Virginia), "Development Loans: Aid or Pork?" Investor's Business Daily, March 11, 1997.


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