Follies: With Aid Like This…

Farmers in Somalia doubled their sorghum production from 1980 to 1985. Corn output climbed 170 percent. Unfortunately, during the same period, U.S. food aid doubled, and virtually all 1985 and '86 deliveries arrived at the worst possible time, the harvest months, instead of the critical "hungry period" just prior to harvest. As a result, the prices paid Somalian farmers fell, and excess food aid, which cost the Somalian government $2.5 million, spoiled.

Such stories of well-intentioned development efforts gone awry are all too common. A review of audits performed by the Agency for International Development (AID)'s own inspector general reveals that: U.S. food aid continues to depress agricultural prices abroad; subsidized credit is displacing rather than supplementing conventional finance; project designs do not fit local needs; and projects often cannot be sustained after AID assistance ends.

AID, the State Department bureaucracy of over 4,700 men and women that administers all U.S. foreign economic aid, has known for decades how U.S. food aid depresses producer prices throughout the Third World, harming local farmers. Massive transfers of U.S. wheat to India in the 1950s and 1960s put thousands of Indian farmers out of business. Colombia imported over one million tons of U.S. wheat from 1955 to 1971 and fixed the price of it so low that Colombian farmers received 50 percent lower prices. Yet AID continues to pour $1.1 billion a year of food aid into Third World countries.

AID also mismanages the small development banks it funds. These are supposed to lend to small farmers and entrepreneurs—to correct for an alleged lack of credit from domestic financial organizations. Instead, however, borrowers are most often well-connected businessmen who should be able to secure conventional finance.

For example, the inspector general examined a Caribbean bank that AID set up in 1983 with over $17 million in assistance. Although AID intended the bank to finance innovative start-up projects, auditors found 90 percent of its loans were to well-established businesses. Loans were generally not less than $100,000, and several stemmed from relationships with the bank's board members. One board member's nephew received a $50,000 loan to finance equipment for water sports, an activity the bank had defined just three months before as not falling within its lending strategy.

Many AID projects suffer from gross design problems: often the wrong equipment is procured or foreign governments are unable to maintain sophisticated projects in good order. In Jamaica, for example, AID designed a multimillion-dollar agricultural project without consulting the farmers who would use it. As a result, the project included a fancy $154,000 weighing and grading station that vastly exceeded their needs—and for which they could not afford the payments. AID money also bought a $58,000 red-pea sorter; red peas are not grown in Jamaica.

Equally wasteful have been many overly ambitious projects that cannot be sustained after AID assistance ends. Reliance on inappropriate, sophisticated technology is one reason. Another is the frequent failure to design projects in a way allowing them ultimately to "spin off" to the indigenous peoples.

A prime example is AID's renewable energy program, on which it has spent nearly $500 million since 1978. Auditors repeatedly have found that most of the projects require large capital investments, involve complex and expensive technologies, suffer from high operating costs, and are not suited to the needs of the end users. A 1986 audit concluded: "It is highly unlikely [the projects] will ever become commercially viable."

In the Philippines, for instance, AID spent $528,000 to build a single 315-kilowatt electric plant to power a government-owned rice mill using rice hulls as fuel. A solar dryer in the Dominican Republic cost $500,000. A small-scale hydroelectric system in a remote, rural Indian village cost $467,000. The Indian project involved a computer system so sophisticated that software had to be specially developed, and no one in the inaccessible village knew how to maintain it.

In Mali, a $4.5-million AID project aimed to generate gas from animal dung. Auditors found the system was too complex and expensive for intended small-scale uses such as cooking. In fact, the audit disclosed that the machine remains inoperable because "daily inputs of water and dung required for continuous operation were scarce and daily cleaning and filling of the digester were [too] time- consuming."

Congress is as much at fault here as AID. In 1980, it passed legislation mandating "research and development and use of small-scale, decentralized, renewable energy resources for rural areas," even though the esoteric technologies are generally expensive and not ready for mass production.

And Congress vastly overestimated what these technologies could achieve: "Such programs shall also be directed toward the earliest practicable development and use of energy technologies which are environmentally acceptable, require minimum capital investment, are most acceptable to and affordable by the people using them, are simple and inexpensive to use and maintain, and are transferable from one region of the world to another. "

Perhaps no single example better reveals the result of contrived development projects than the Jamaica Agricultural Development Foundation. In 1984, AID approved a project proposed by Land O'Lakes Inc., the U.S. dairy cooperative, and Grace, Kennedy & Co., a Jamaican food conglomerate. The idea was to sell surplus U.S. butter and cheese to fund a private, nonprofit foundation that would provide loans, grants, and equity investments to finance Jamaican agricultural development.

But neither AID nor the promoters apparently took account of Jamaicans' preference for butter with a lower salt content than found in U.S. butter or the ready availability in Jamaica of lower-priced substitutes such as margarine. As a result, sales have been very slow and the foundation is unlikely ever to become self-sustaining. As of March 1986, the foundation had more than 1,200 tons of donated butter in storage, the cost of which was a serious drain on its scarce resources. Yet AID poured another $1.6 million into the project, including money to hire a marketing specialist to help unload the donated butter.

As with other financial intermediaries created by AID, the foundation also displaced conventional finance. The Jamaican government had approved the foundation as a venture capital company. But most of the enterprises receiving loans or equity financing were not new ventures but well-established firms that could put up the large amounts of collateral requested. Further, although the project was supposed to focus on the Jamaican dairy industry and small farmers in general, the foundation avoided both. Foundation officials explained that dairy loans are too risky because the Jamaican government holds down milk prices.

Finally, auditors also found that the companies who pushed to get the foundation started remained intertwined with its operations. When the foundation's cheese supply deteriorated, for example, Land O'Lakes recommended that newer cheese be acquired and blended with existing supplies. Since there was no "young" cheese in the U.S. food aid pipeline, the foundation had to purchase the cheese on the open market. Land O'Lakes received the contract—at three times the world market price.

These and numerous other failures show that rather than promoting Third World development "from within," many AID projects vainly try to instantly transplant development from the United States. They are worse than wasteful. They bolster the state-run sector of the economy and often hinder indigenous growth.

Melanie S. Tammen is a policy analyst at the Competitive Enterprise Institute in Washington. She conducted this study as a research associate with the Heritage Foundation.