Why U.S. Foreign Aid Fails

May 31, 2013

For upwards of 50 years the U.S. federal government has been sending developmental aid to other countries trying to create vibrant economies. Yet, there have been no recorded monumental successes with the use of developmental aid. Based on the high standard of living enjoyed in the United States, you might think that the U.S. government would know how to replicate that standard of living, but they don't, says Christopher Coyne, F. A. Harper professor of economics at the Mercatus Center.

In the minds of many first world leaders, development of impoverished nations does not come from going through the same long process first world countries did. Instead, it contains a top-down approach that promises great things like ending poverty. However, there are multiple reasons why state-provided aid cannot bring nations out of poverty:

  • Policymakers do not have access to the knowledge needed to allocate scarce resources to their best uses. In his critique of socialism in the 1930s and 1940s, Nobel Laureate Friedrich Hayek made this exact point, noting that even the most qualified and benevolent planners lack the knowledge to produce even the most basic items in a cost-effective manner.
  • Aid creates the incentive for already dysfunctional governments to remain ineffective. A cross-country study by Stephen Knack of the World Bank found that foreign aid undermines the quality of political institutions in recipient countries through weakened accountability of political actors, more corruption, greater chances of conflict, and a weakening of the incentive to reform inefficient institutions and policies.
  • Government agencies tend to focus on spending money as quickly as possible on observable outputs to signal their importance and the need for more money. In the absence of clear lines of accountability, money is often wasted.

The current operations of aid to foreign countries fail because there is not enough supervision as to where the funds go, or how the funds are spent specifically. The real solution to these problems is the guarantee of person liberty and property for citizens in those impoverished nation. Human nature will do the rest.

Source: Christopher Coyne, "Why Government Aid Programs Aren't the Best Way to End Poverty," Mercatus Center, May 21, 2013.

 

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