NCPA - National Center for Policy Analysis

Foreign Aid Hurts

March 11, 1996

Western Europe, Japan and the United States provide about $50 billion a year in assistance to developing countries. However, the donor governments haven't asked whether such aid does any good -- or actually harms the nations receiving it.

Economist Peter Boone of the London School of Economics examined data from 97 countries that receive aid to determine what, if any, effect it had. He reports that:

  • There is no relationship between levels of aid received and rates of economic growth, implying that a shortage of capital isn't the primary cause of poverty in poorer countries.
  • Aid levels have no impact on lowering tax rates or eliminating other government policies that retard growth in poorer countries.
  • Aid has an insignificant impact on improvements in basic measures of human development such as infant mortality and the percentage of youngsters in primary schools.
  • However, foreign aid is very effective at increasing the size of recipient governments, since 75 percent of it is used to raise public-sector spending.

In fact, since foreign aid represents about 9 percent of poorer countries' gross domestic product, it greatly increases the patronage and power of governments, draining energy and resources from the private sector.

Since 1975, the United Nations has urged developed countries to transfer 0.7 percent of their annual gross domestic product to developing countries. Denmark, Norway, Sweden and the Netherlands all exceed the UN guideline, while France comes close. The U.S., however, contributes only a little over 0.1 percent of its GDP to the developing world, to the consternation of foreign aid fanatics.

Vaclav Klaus, prime minister of the Czech Republic, has said "we are deeply convinced that such aid, assistance, help is wrong and counterproductive." That attitude may explain why the Czech Republic is the most successful ex-communist country.

Source: Steve H. Hanke, "Guilt, Anyone?" Forbes, March 11, 1996.


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