NCPA - National Center for Policy Analysis

Bartlett: "Mrs. Clinton, Foreign Aid Doesn't Help!"

July 14, 1997

A few weeks ago, First Lady Hillary Rodham Clinton invited some reporters to the White House for a sales talk. Her pitch? Foreign aid is good, not just for poor countries but for the United States. We need to give more of it, she said. Before Mrs. Clinton gives more such talks, however, she should bring herself up to speed on the growing number of nonpartisan studies that have concluded that foreign simply doesn't work.

The latest of these is a report from the Congressional Budget Office (CBO), "The Role of Foreign Aid in Development," published in May. This study looks specifically at the influence of foreign aid on economic growth. It concludes that the impact of aid is modest at best, and may even hinder development. The reason is because ultimately good economic policies in the recipient country will determine whether it grows or doesn't. For a country doing the right things -- like liberalizing trade, keeping inflation low, maintaining secure property rights -- foreign aid can only help a little.

But for a country doing the wrong things -- like raising tax rates, devaluing its currency, imposing trade restrictions -- foreign aid may actually hurt by cushioning the adverse economic effects of such policies. "In many cases," the CBO report says, "foreign aid has sustained governments in their pursuit of economically counterproductive political and economic policies." Indeed, insofar as foreign aid is linked to poverty, the adoption of bad economic policies may even encourage additional flows of aid.

Honduras is a good example of foreign aid being counterproductive. During the Cold War, this Central American country was a major recipient of U.S. foreign aid. It was supposed to improve the economy and make Honduras less vulnerable to Communist ideology. In fact, it did the opposite. As a July 2 Wall Street Journal article reported, "large transfers of unconditional aid to Honduras may have slowed development by making it possible for the government to put off economic reform." The CBO report concurs that from a developmental perspective, aid to Honduras in the 1980s "was largely unproductive."

Even some of foreign aid's strongest advocates are now willing to concede that it does little to stimulate growth, and may even hinder it. In the July-August issue of Foreign Affairs, aid supporters Carol Graham and Michael O'Hanlon of the Brookings Institution admit that "donors have often subsidized unsound economic policies," and that countries receiving more aid "do not grow faster than those that receive less."

In light of this, perhaps Mrs. Clinton should find a better cause to promote.

Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, July 14, 1997.


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