Foreign Aid

Foreign Aid Is a Failure

Throwing good money at bad governments makes poor countries worse off.

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It's been almost a decade since one of the deadliest natural disasters in modern history devastated the coast of South Asia. In the final days of 2004, a 9.1-magnitude undersea earthquake triggered a tsunami in the Indian Ocean, killing over 230,000 people in places such as Indonesia and Sri Lanka and leaving thousands stranded without the basic necessities of life.

International leaders immediately called on the global community to provide help. What happened after that underscores the flaws in the developed world's approach toward foreign aid: Governments gave generously, pledging more than $10 billion. Yet the humanitarian response to the crisis fell far short, and many desperate needs went unmet.

For years, it was believed that solutions to complex global problems could be engineered if only wealthy nations mustered enough will and funding to see them through. But despite a desire to help and a willingness to give, the international community keeps stumbling to address both short-term crises, such as natural disasters, and longer-term challenges, such as global poverty and economic development.

In his 2013 book Doing Bad by Doing Good, the George Mason University economist Christopher Coyne explains why measures intended to alleviate suffering often go so wrong. Most people agree that wealthy countries have some responsibility to help relieve hardship in distressed areas. But while we are usually clear about our goals, we rarely stop to consider whether government can realistically accomplish them. Our efforts abroad tend to be marred by culturally illiteracy. Without meaning to, we frequently create perverse incentives that harm the people we are trying to assist.

Foreign aid is the main tool of state-led humanitarian efforts among wealthy members of the Organization for Economic Co-operation and Development (OECD). While such spending accounts for a mere drop in the bucket of the donating nations' budgets, the combined sum from governments around the world is enough to cause big problems in developing economies. In Fiscal Year 2013, OECD countries spent a total of $138 billion on foreign aid. From 1962 to 2012, they contributed a cumulative $3.98 trillion.

It was long believed that directing money to stagnant communities could jump-start economic growth. Yet numerous studies have found little evidence that foreign aid actually leads to greater economic development.

Take Africa as an example. To date, the continent has received well over $600 billion in outside assistance. World Bank data show that a majority of African countries' government spending comes directly from foreign aid. Yet much of Africa remains impoverished, and rampant corruption continues.

Top recipients of U.S. foreign aid, 2012.
Veronique de Rugy, Mercatus Center at George Mason University

Dambisa Moyo has a personal perspective on the matter. In her 2009 book Dead Aid: Why Aid Is Not Working and How There Is a Better Way to Help Africa, the Zambian-born economist characterizes foreign aid to Africa as an "unmitigated economic, political, and humanitarian disaster" that has actually made the continent poorer. Africans will never see their governments as legitimate, she explains, as long as most of the spending for education and health care comes from foreign countries.

To Moyo, continued aid spending reinforces the perception that African governments are ineffective and makes it nearly impossible for them to break free from dependence on foreign help. Sketching the sad outcome for outside observers, she writes: "Stuck in an aid world of no incentives, there is no reason for governments to seek other, better, more transparent ways of raising development finance."

Of course, no amount of evidence can dissuade a true believer. Among the foreign-aid faithful is the Columbia University economist Jeffrey Sachs, author of 2006's The End of Poverty and champion of the United Nations' experimental (and controversial) Millennium Villages Project. Sachs acknowledges that foreign aid often fails, yet he still calls for the design of "highly effective aid programs." He is short on details about the specific changes that would distinguish those ideal programs from existing, mistake-riddled boondoggles.

Sachs takes it on faith that aid programs can be made effective. Unfortunately, he and his acolytes have failed to grapple with the fundamental reason so much aid fails: Governments simply do not have enough information to know what each dollar's best use would be. People are forced to compete for resources in the political arena, and money ultimately goes to those with the most connections, not to those most in need.

Aid providers also have trouble figuring out which investments are most appropriate for a particular developing economy, so money ends up being poured into bad projects. These white elephants not only fail to encourage economic growth but frequently divert scarce resources to destructive ends. Aid money becomes a tool of oppression rather than empowerment. As Moyo put it in a 2009 Wall Street Journal essay, "A constant stream of 'free' money is a perfect way to keep an inefficient or simply bad government in power."

New York University's Bill Easterly does an excellent job describing international organizations' tendency to double down on their failures in his 2008 book The White Man's Burden. Like governments, multilateral aid institutions can suffer from central-planning paralysis, which makes it difficult to isolate mistakes and find ways to better serve their "clients."

Foreign aid suffers from a principal-agent problem, in which organizations prioritize donors' political and commercial interests over recipients' needs. In 2012, for example, Egypt received $1.3 billion in U.S. military aid. Most of those funds flowed through Foreign Military Financing (FMF), a program that provides foreign governments with grants for the acquisition of U.S. defense equipment and services. One of the program's objectives, according to the State Department, is to "support the U.S. industrial base by promoting the export of U.S. defense-related goods and services." Translated from bureaucratese, that means FMF funnels dollars to foreign governments for the explicit purpose not of helping people on the ground but of benefitting U.S. contractors and manufacturers. The same is true of many other aid programs.

The problems caused by poverty and natural disasters are enormous, but aid's track record suggests that it too often only makes matters worse. Our global neighbors deserve more from us. To serve them well, we must have the humility to admit we don't have all the answers.

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  1. Governments repeatedly screw up their domestic spending even though they are familiar with the country, language, culture, religion, etc of that country

    Why would I expect a government to do a good job spending money in a foreign country where they don’t know the language, culture, religion, etc of that country.

    1. “Governments mafias repeatedly screw up their domestic spending stealing even though they are familiar with the country, language, culture, religion, etc of that country

      Why would I expect a government mafia to do a good job spending stealing money in a foreign country where they don’t know the language, culture, religion, etc of that country.”

      Translated from minarchist-speak to anarchist-speak, the underlying assumptions seem … naive.

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  3. Poor people, rich countries, rich people, poor countries, we all know the drill.

    1. Actually its more like

      Taxpayers, rich countries, tax consumers, rich/poor countries
      countries

  4. I always substitute “mafia” for “government” to get a clearer picture of what the person talking is actually proposing:

    To Moyo, continued aid spending reinforces the perception that African governments mafias are ineffective and makes it nearly impossible for them to break free from dependence on foreign help. Sketching the sad outcome for outside observers, she writes: “Stuck in an aid world of no incentives, there is no reason for governments mafias to seek other, better, more transparent ways of raising raiding development finance.”

    1. Those three substitutions make the whole paragraph a “no duh, Sherlock” moment.

  5. The overwhelmingly dominant factor in predicting economic development is non-predatory government (okay, yeah, I know, let’s settle for less predatory government). It really is the sine qua non of countries getting out of poverty. Foreign aid doesn’t help countries get out of poverty because it only serves to reinforce government predation.

  6. Aid to Dependent Dictators.

    1. That about sums up the reality of “foreign aid.”

  7. The IRS is whining about a lack of funding. They should secede. They aren’t following our laws anyways and foreign aid to them would be a small price to get rid them.

  8. If the soon to be in control of Congress Republicans have any common sense, given all the recent history, one of the first things on the top of their lists should be to reign in the IRS. Of course no one has ever accused, or even had a suspicion of, Republicans having anything resembling common sense.

  9. It’s also worth reading the work of the late Peter Bauer, who was the first recipient of the Friedman Prize (unfortunately he became the late Peter Bauer a week or so before the ceremony).
    The influence of his work on Coyne is obvious (subtle clues like:

    “We are not the first to recognize this. In fact, Peter Bauer dedicated most of his career to consistently criticizing the development establishment (see Bauer 1963, 1972, 1981,1991 and Bauer and Yamay 1957). ”

    http://mercatus.org/uploadedFi…..ations/The Role of Economists in Economic Development.pdf

    The second winner of the Friedman Prize was Hernando de Soto (the economist not the explorer), who is one of my personal heros. It’s one thing to work at a free market think tank in the face of snippy editorials and fewer cocktail parties. It’s another thing to do so in the face of car bombs.

    Hayek was in London by 1931, and Von Mises was out before the Nazis ; de Soto was fighting against Shining Path (Sendero Luminoso). He was armed with words and ideas – his book “El Otro Sendero” (The Other Path), preaching the gospel of alienable property rights, is vital reading.

    Maybe Veronique or one of the editors could add affiliate links to some of these author’s books.
    The Fall 2005 of Cato Journal was dedicated to articles about the influence of Lord Bauer: http://www.cato.org/cato-journal/fall-2005

    1. I have a copy of deSoto’s The Mystery of Capital on my bookshelf. For anyone who even remotely pretends to care about the wealth and poverty of nations, it should be required reading.

  10. It’s like the parent who throws money at his kid, when all the kid
    really wants is some quality time and maybe some instruction. Sure, the kid can buy a new computer/bike/car but what happens when the parent isn’t there to fork over dinero…

    We could start with a basic economic plan–agriculture, housing, infrastructure, education, medical facilities, and a rudimentary export agenda. If govts don’t comply, we cut their aid. The problem is, no one takes the time to do a comprehensive follow-up and direct these countries to success esp. in Africa.

    1. The problem is, no one takes the time to do a comprehensive follow-up and direct these countries to success esp. in Africa.

      This is just a repackaged, technocratic version of the White Man’s Burden.

      There is nothing deficient about Africans as people that they cannot, or should not, be expected to make lives for themselves.

      The problem with aid isn’t that Westerners aren’t shepherding the noble savages well enough; the problem with aid is that it treats the recipient as subhuman.

      Africa doesn’t need more welfare money, it doesn’t need better chaperoning, and it doesn’t need more poverty-worship and racial socialism.

      1. Africa doesn’t need … more poverty-worship and racial socialism

        This part wasn’t directed at OP but was just a more general observation.

  11. Give a man a fish, he’ll eat for a day.

    Teach a man to fish, he’ll eat for life.

    Hell, most foreign aid doesn’t even give free food that the natives want, but still drives their farmers out of work.

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  13. Just before I looked at the check that said $4396 , I accept …that…my brother woz like they say actualie making money parttime from there pretty old laptop. . there best friend started doing this for under 11 months and by now cleard the mortgage on there villa and got a great new Cadillac .
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  17. One of the biggest problems with foreign aid — and something governments that provide the aid are completely incapable of fixing — is, as Bill Gates put it, the “final 10 mile problem”. Getting goods from wherever the foreign government puts them into the hands of the people who actually need them is extremely difficult, especially in countries with poor infrastructure (as is likely the case). You can literally have 10 thousand pounds of food aid sitting in a warehouse just over a hill from people who are starving with no way to tell them about the food nor an effective way for them to get it.

    Best case, the food sits there for weeks until it is figured out how to get food to the starving people; worst case, the food is given to less-needy people (or even a corrupt government agency), the likelihood of which increases the longer the food sits there.

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  19. If you give money to the governments, you get good PR, photo ops, etc. What can peasants do for government officials?

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