Why Foreign Aid Doesn't Work
May 21, 1997
On May 7, 1997, the House International Relations Committee voted to spend $16.4 billion on foreign aid in 1998, an $800 million increase over 1997. Ironically, says Bruce Bartlett, economists have reached a virtual consensus that foreign aid is a failure.
Indeed, even the liberal Brookings Institution now concedes that it simply does not work. Brookings scholars Michael O'Hanlon and Carol Graham took a careful look at the effectiveness of U.S. foreign aid. Paradoxically, they say, "countries getting more aid do worse macroeconomically, on average, than those getting less."
The reason why, according to a study of 96 countries by Peter Boone of the London School of Economics, is because virtually none of it goes into investment. All it does is increase consumption and expand the size of government, without conferring any benefits on the poor.
A major reason why foreign aid is consumed rather than invested is because much of it is stolen by elites in developing countries. Nowhere is this more apparent than in Zaire, where rebels ended the 32-year dictatorial regime of its leader, Mobutu Sese Seko.
London's Financial Times estimated that Mobutu stole some $4 billion from foreign aid, much of it from the International Monetary Fund. This amounts to almost half of all the foreign aid received by Zaire between 1970 and 1994. Amazingly, the IMF was well aware of the expropriation of its funds, yet continued to lend Zaire money.
Mobutu used most of this money to buy lavish estates in France and establish huge secret bank accounts in Switzerland, Luxembourg and elsewhere. He also kept himself in power through bribes and by otherwise buying support.
Meanwhile, Zaire slid downward economically. Its real per capita income is 40 percent lower today than when Mobutu took power. Thus an internal World Bank report concluded that "it would be hard to argue much was achieved in Zaire, either in economic or social terms, as a result of the aid."
The dismal experience of Zaire may be one reason why the World Bank now seems to be rethinking the whole concept of foreign aid. World Bank economists Craig Burnside and David Dollar looked at the relationship between foreign aid, economic policies and growth in 56 countries. They found that when combined with good economic policies, such as low taxes and deregulation, aid had a positive impact on growth. But there is no correlation between aid and the adoption of good policies, and no relationship at all between aid and growth in the absence of good policies.
In the 1950s, critics like Peter Bauer and Milton Friedman argued that by itself foreign aid would never stimulate economic growth. All it would do is strengthen government at the expense of the private sector, which is the true source of prosperity. Now, after 40 years of experience, it appears that they were right all along.
Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, May 21, 1997.
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