Rethinking Foreign Aid

Last January, Office of Management and Budget Director David Stockman proposed cutting $2.6 billion in federal subsidies to farmers, aircraft manufacturers, international banks, and multinational corporations. The proposal promptly ran into a buzz saw of opposition—not just from the interest groups themselves but from…the State Department. For the subsidies in question go by the name of foreign aid.

Mention this term to the average person, and you create an image of starving children in the Sahel, care packages, and courageous doctors wiping out malaria. That's a very convenient image for Chase Manhattan Bank, Boeing, and General Electric to cultivate. But it's a fraud on the American taxpayer—a fraud that is long overdue for exposure.

The fact is that the major foreign aid programs serve the interests of large corporations, the foreign service bureaucracy, and ruling elites of the recipient countries. Individual citizens of those countries benefit little, if at all, from these billion-dollar boondoggles.

You'd like specifics? The Food for Peace Program (PL 480) was created specifically to dispose of agricultural surpluses generated by the government's farm subsidy programs. Further tax dollars are used to buy up this food (which would otherwise remain in the marketplace exerting downward pressure on prices) and send it to places like Bangladesh—where it is not given to the poor at all but sold by Bangladesh's government to the urban middle class.

Aid dispensed by the International Monetary Fund and the World Bank serves primarily to prevent Third World governments from defaulting on their loans from Citibank, Chase Manhattan, and Manufacturers Hanover Bank. Direct US aid—even its supporters admit—is spent largely on contracts with US multinationals to construct huge government-owned infrastructure projects, thereby helping to increase the power of ruling elites in those countries—witness the Shah of Iran.

And two other components of foreign aid explicitly subsidize big business. The Export-Import Bank provides subsidized loans to foreign governments so they can buy US-made products; in recent years, the major beneficiaries have been Boeing and McDonnell-Douglas. And the Overseas Private Investment Corporation (OPIC) provides taxpayer-funded insurance against nationalization for facilities constructed overseas. Half of all OPIC's coverage extends to just 10 giant firms, including Chase Manhattan, General Electric, Manufacturers Hanover, Hooker Chemical, and International Paper. (Smaller firms, interestingly enough, are increasingly finding that they can purchase political risk insurance in the private marketplace.)

The critics of this giant con game span the political spectrum. Liberal agricultural specialists William and Elizabeth Paddock spent 10 years working in Guatemala in the 1960s; their 1973 volume on foreign aid and the attempt to promote development was titled, aptly, We Don't Know How. Classical economist P. T. Bauer, in Dissent on Development (1972), showed how aid programs inhibit development because they are based on economic misconceptions. More recently, in Aid as Obstacle, leftist writer Frances Moore Lappe reluctantly concluded, as well, that "the aid we give is actually making development in dozens of countries worse, not better."

Even if foreign aid did what its supporters claim it does—improve the lives of people in Third World countries by promoting economic development—it is not a legitimate function of the US government to do so. So argues economist Dwight Phaup in the Heritage Foundation's Agenda for Progress (1981). Stating that spending for foreign aid must be judged on the same basis as domestic spending programs, Phaup concludes that "the taxpayers should be able to have a reasonable expectation that foreign affairs programs will generate some benefit which clearly accrues to the citizens of the US (and which would not otherwise be provided through private arrangements)." Nearly all of the existing foreign aid programs, Phaup concludes, fail this test.

But Phaup's basic point—that aid should involve a quid pro quo—all too easily provides a license for interventionism. "If you don't have foreign aid, you don't have a workable foreign policy," an alarmed diplomat told Time in the aftermath of Stockman's proposed cutbacks. In other words, if the government's aim is to control and manipulate affairs in other lands, foreign aid is an essential lever. By the same token, if one's aim is to end that sort of intervention, getting rid of foreign aid is an essential precondition. Only where buying off other governments can directly contribute to the defense of this country should such quid pro quos even be considered.

What about the plight of the world's impoverished masses, then? Isn't there anything our government can legitimately do? In fact, there are several things it could do. One would be to eliminate the laws that prevent Third World peoples from selling their products to Americans—tariffs, import quotas, "orderly marketing agreements," etc. Another would be to get rid of tax and regulatory policies that discourage US firms from investing capital in other countries.

But the most important efforts lie in the intellectual arena. Through participation in international forums and through its own communications media (for example, the Voice of America), our government could educate Third World people on what it takes for real development to occur. As Jude Wanniski and other supply-siders have pointed out, the countries that have prospered have been precisely those that did not follow the advice of "development economists" of the IMF and the World Bank by imposing progressive income taxes and building up a costly governmental infrastructure (see Bruce Bartlett's article on p. 48). Instead, places like Hong Kong, Taiwan, and the Ivory Coast created a climate that fostered entrepreneurship: low taxes, minimal regulation, and secure property rights.

What a tremendous success story we have to sell, if only those who make US foreign policy could be brought to understand it themselves! As long as they remain the captives of the status quo interests of Boeing and Chase Manhattan, our policymakers will continue to promote big government in the Third World. Only a rediscovery of the principles of individualism and free enterprise will make possible a radically different foreign policy—one that offers hope for creating real wealth by unleashing entrepreneurship around the world.