Foreign Aid Hasn't Worked…And It Never Will

Government aid reinforces the disastrous trend to politicize life in poor countries.

The widening gap between the developed and developing countries has become a central issue of our time.
—Partners in Development (Pearson Report), Report of the Commission on International Development

It is obvious that official aid is vitally important because it has special characteristics which make it indispensable to the developing countries.
—Richard Wood, Minister for Overseas Development, in Parliament

Point Four of President Truman's message to Congress of January 1949, which proposed aid to underdeveloped countries, inaugurated a new political, economic, and ideological movement in our times. It has had far-reaching and sometimes brutal consequences, enormous costs, little success, and virtually no adverse criticism.

The early days of foreign aid were marked by high hopes and what must now seem absurd optimism. In the 1950's, prominent American economists argued that limited aid over a few years would ensure the self-sustaining economic development of the recipients and thus would remove the need for external assistance. But now aid is envisaged as a practically open-ended commitment extending into the indefinite future. Incredible as it may seem, multinational aid even goes to the oil states of the Middle East and North Africa (a 1977: update: this still appears to be so).

The explanation is, of course, that foreign aid is an act of faith.

WHY FOREIGN AID?

The case for foreign aid is usually taken for granted. The results of aid and the conduct of recipient governments are rarely discussed, and then only in the most cursory fashion. Since the case for foreign aid is regarded as axiomatic, either progress or lack of progress can be used to argue for more—the first as evidence of success, the second as evidence that more must be done. But then evidence has always been irrelevant to an act of faith.

Aid advocates often say that aid is indispensable for the development of the recipient countries or that it is necessary to relieve poverty or even to avert starvation. These statements are merely unsubstantiated assertions. Moreover, promotion of development and relief of poverty are quite different arguments for aid. Alms to a beggar or charity to an invalid differs materially from scholarships to promising young people or loans for their training or for setting up in business. The purpose of the help, its likely duration, the criteria of its allocation, and the likely results all differ substantially. Promotion of development and relief of poverty are thus altogether different. But neither provides a worthwhile economic argument for official aid.

Foreign aid is patently not necessary to emerge from poverty. Many poor countries and regions have progressed rapidly before foreign aid was ever heard of—Mexico and a number of other Latin American countries, West Africa, Southeast Asia, Hong Kong, and many others. Some of these areas have been largely transformed in a few decades. In the 1890's Malaya was a sparsely populated country of small hamlets and fishing villages; by the 1930's it had developed into a country with substantial cities, thriving commerce, and an excellent system of roads, largely the result of the emergence of the rubber industry. In 1900 slavery, slave-raiding, and local wars were widespread in the areas of northern Nigeria which have now become centers of the groundnut trade. And the present developed countries progressed without external gifts, usually in much more difficult conditions than those which now face poor countries, for these have access to skills and technology developed elsewhere and to huge markets and varied sources of supply abroad.

It is unconscionably patronizing to say that the peoples of poor countries desperately want material progress but cannot achieve it without alms or gifts from us (the bulk of Western foreign aid is in outright grants, the rest in very soft loans of which the grant element is well over half the total). Indeed, a patronizing attitude pervades the whole discussion on aid. We are supposed to have caused the poverty of less-developed countries in the Third World (a phrase that is often ambivalent and almost always misleading but is perhaps unavoidable). Whatever happens to them is supposed to depend on us, which makes us feel superior even as we express feelings of guilt. We go on in our patronizing way by calling the recipients of handouts partners in progress, as if they were children unaware of simple realities.

But aid is clearly not necessary for progress, nor is it sufficient. A society which cannot develop without external gifts is altogether unlikely to so with them.

AID NEEDS PEOPLE

An economy consists of people whose performance determines its material achievement. Economic achievement depends primarily on people's aptitudes and attitudes (e.g., interest in material success) and their social institutions and political arrangements (e.g., in encouraging people to take long views). Societies, groups, and individuals differ widely in these matters. Contrary to what might be inferred from so much "development literature," humanity is not an undifferentiated mass whose components differ only in conventionally measured incomes. Differences in economic achievement and rates of progress are largely accounted for by differences in the human determinants mentioned above. External contacts, market opportunities, and natural resources play a part, but a much less important one; and, again, their effective use depends on personal and social factors.

Investible resources are even less significant, and both their supply and their productivity depend on the personal and social factors. In the development process, investible funds are at least as much a result as a cause. The volume of such funds was relatively unimportant in the material progress of many societies. And the historical phenomenon of economic decline would be inexplicable if material progress depended on the capital available.

PRIVATE INVESTMENT

A 1972 House of Commons debate on aid is instructive. Mrs. Judith Hart attempted to spell out the reasons why aid is indispensable. Private capital, she said, cannot finance the "infrastructure" necessary for development—such as roads, power supplies, and schools; many poor countries are too small for profitable investment; and private investment is unpredictable. These frequently heard arguments are quite invalid.

Private investment may indeed fail to finance some parts of the infrastructure. As a matter of fact, however, much infrastructure in less-developed countries (ldc's) has been financed and operated privately until recently and often still is, as for instance, transport enterprises and utilities and sometimes even roads, schools, and hospitals established by plantation and mining enterprises.

But if private investment should fail in this respect, the government can always borrow abroad for this purpose and service the loans from higher tax revenues, as used to be standard practice. Moreover, infrastructure is not a precondition of development but a collection of facilities which emerge in the course of material progress.

Contrary to Mrs. Hart's assertion, the small size of the domestic market does not preclude private investment. Whatever the size of the market, if the required conditions (other than capital) are present, investment will be generated locally or supplied commercially from abroad. Hong Kong, Taiwan, Malaysia, Israel, and a number of Latin American countries are among the most obvious examples. Mrs. Hart gave Uganda as an example of a small country unable to secure private capital. In fact the country had no such difficulties until its government became hostile to private capital!

A flow of private investment may well be unpredictable, notably so when the political climate is hostile to private capital, especially foreign capital. But the flow of aid is also uncertain.

A MIXED BLESSING

Aid is an inflow of subsidized or gratis resources and in this sense enriches the recipients. But, unlike manna from heaven, it does not descend indiscriminately on everybody. It sets up a whole variety of repercussions, and these have to be taken into account.

• Official aid reinforces the disastrous tendency to politicize life in poor countries, the trend toward politique d'abord. The handouts increase the power, resources, and patronage of governments compared to the rest of society, and this is exacerbated by the more favorable treatment of governments that try to establish state-controlled economies. Politicization of life provokes political tension because it becomes supremely important, often a matter of life and death, who has the power—witness Indonesia, Nigeria, Pakistan, Uganda, and Zaire (the Congo). This politicization diverts the attention, energies, and activities of able and enterprising people from economic activity to politics and administration, sometimes from choice (because this diversion is profitable), but quite often from necessity (because economic or even physical survival comes to depend on political developments and administrative decisions).

• Official aid similarly reinforces the pursuit of policies damaging to material progress (and often also inhuman). Many recipient governments restrict the activities of highly productive and economically successful minorities—Chinese in Indonesia, Asians in Africa, Indians in Burma, Europeans everywhere. And many have also maltreated and persecuted politically ineffective groups, especially ethnic minorities. Such policies reduce current and prospective incomes in these countries and widen income differences between them and the West. Even where it does not promote economic advance, aid represents current resources accruing to the governments, resources which are available for the purchase of imports or for the distribution of largesse, so that it helps governments temporarily to conceal from their own people some of the economic consequences of their actions.

• Aid often supports extremely wasteful projects which make large losses year after year and which can absorb more local resources than the value of their output. For political reasons, such hopeless projects often have to be continued for years after it has become plain that they are thoroughly wasteful. This consideration applies not only to industrial ventures and other familiar prestige projects but often also to agricultural schemes.

• Aid is often linked to balance-of-payments difficulties, and the detailed economic controls which they promote all engender a widespread feeling of insecurity or even a crisis atmosphere, a sequence which inhibits domestic saving and investment and even promotes a flight of capital. These sequences, in turn, serve as arguments for further external assistance.

• The insistence on the need for external assistance helps to perpetuate the ideas and attitudes widespread in these countries, which are damaging to economic progress: that opportunities and resources for advance of oneself and one's family must come from someone else—the state, the rulers, one's superiors, richer people, or foreigners. In this sense aid pauperizes those it purports to assist.

• Aid frequently influences policies into inappropriate directions by promoting unsuitable external models, such as Western-style universities whose graduates cannot get jobs, Western-style trade unions which are only vehicles for the self-advancement of politicians, and a Western pattern of industry even where quite inappropriate (e.g., national airlines and steelworks).

• Aid is money that could be used more productively in the donor countries (or, at any rate, by their citizens), so that it reduces the combined national incomes of donors and recipients. It also retards the material advance of the donors by affecting adversely their own balance-of-payments; and payments difficulties in donor countries have often brought about restrictive domestic economic policies—with adverse effects on the Third World's export markets.

• As a result of the operation of various sectional interests, the most important donor countries erect substantial barriers against the exports from the ldc's to whom they are giving aid. Foreign aid unfortunately diminishes the political resistance to the erection of these barriers, both within the donor countries and by spokesmen of recipient countries.

MARGINAL BENEFITS

All these adverse repercussions—and the list could easily be extended—even when taken together, do not mean that foreign aid cannot promote development. But it is certainly unwarranted to assume that it must do so simply because it represents an inflow of subsidized resources. Aid may well improve current economic conditions in the recipient countries, but it does not follow from this that it necessarily or even generally promotes the longterm progress of these countries.

The contribution of aid to long-term development is at best marginal. It means that some investible funds are available more cheaply than would be the case otherwise. These funds are likely to be less productive than capital supplied commercially since their use cannot be adjusted so readily to market conditions, including complementary factors of production. And when capital is productive, it will usually be generated locally or be readily available from abroad on commercial terms.

Moreover, the adverse repercussions of aid are likely to offset, or more than offset, the benefits from the inflow of subsidized investible funds in otherwise propitious circumstances. There is, therefore, not even a general presumption that aid is more likely to promote development rather than retard it.

In the last few years the aid lobbies have changed their emphasis from development to the relief of poverty. If the advocacy has become much more strident, it is perhaps because the new emphasis on "need" itself implicitly recognizes the previous failure of aid as an instrument for "development."

SHAKY STATISTICS

Poverty is said to be indicated by comparison of per capita incomes, coupled with references to hunger, famine, and starvation and the alleged "ever-widening gap between the haves and the have-nots." These arguments are even less substantial than earlier ones for aid as an instrument for development.

• The statistics of income per head in ldc's are quite useless for international comparison and for the measurement of need. Professor Dan Usher, a Canadian statistician who lived for years in Southeast Asia, has written pertinently on this subject. The following passages from the introduction and summary of his book The Price Mechanism and the Meaning of National Income Statistics epitomize his conclusions.

Using Thailand as an example this book shows that statistics like these may contain errors of several hundred per cent.…the discrepancy is not due primarily to errors in data.…the fault lies with the rules [of national income comparisons] themselves…[which] generate numbers that fail to carry the implications expected of them.

In Thailand I saw a people not prosperous by European standards but obviously enjoying a standard of living well above the bare requirements of subsistence.…But at my desk I computed statistics of real national income showing people of underdeveloped countries including Thailand to be desperately if not impossibly poor.

The contrast between what I saw and what I measured was so great that I came to believe that there must be some large and fundamental bias in the way income statistics are compiled. Something is very wrong with these statistics. For instance, if the figure of $40 for Ethiopia means what it appears to mean, namely that Ethipians are consuming per year an amount of goods and services no larger than could be bought in the United States for $40, then most Ethipians are so poor that they could not possibly survive let alone increase in numbers.

Even the population statistics of the Third World (which underlie per capita incomes) are subject to wide margins of error. Thus the 1963 census put the population of Nigeria at 55.6 million, while a prominent American scholar of Nigerian affairs estimated it at 37.1 million for the same year. Conceptual and statistical problems apart, there are also frequent instances of deliberate manipulation of national income statistics and similar data for political purposes. All this should put into perspective the value of statistics which purport to estimate changes in Afro-Asian per capita incomes to within one or two percent. Yet such estimates feature prominently in the advocacy of aid.

MEASURING NEEDS

• Foreign aid is paid by governments to governments. Unlike voluntary charity (or, for that matter, domestic progressive taxation), it cannot take into account differences in incomes and conditions of families and persons. Indeed, it operates perversely. The poorest are largely untouched by aid—as, for instance, desert people in Africa and Asia; aborigines in Southeast Asia, Africa, and Latin America; and various other backward groups—categories which total many millions. Much of aid only benefits the urban population, among whom the more articulate, influential, educated, skilled, and enterprising people are disproportionately represented (notably, politicians, civil servants, academics, and urban businessmen).

• Evident anomalies or absurdities result from the uncritical adoption of need as a ground for aid, especially need as conventionally measured by per capita income. The maltreatment and expulsion of minorities by aid recipients, already mentioned, provides an instructive example. These minorities have been the main agents of economic progress in these countries, and their incomes were above the average. Hence their elimination necessarily reduces per capita incomes. Should aid be increased because these policies have thus aggravated need? And should it be increased yet again if this encourages further maltreatment and expulsions?

There are also many societies where the local attitudes, aptitudes, and institutions are such that aid (especially government-to-government aid) can do little or nothing to relieve need—either because the official machinery will ensure that it does not reach the needy, or because aid promotes policies which aggravate poverty, or because the attitudes of the people themselves may largely resist improvements in their material conditions.

PEOPLE AND FOOD

Three further variants of the general argument for aid deserve to be noted: the population explosion, large-scale starvation, and the widening gap.

The rapid growth of population in the Third World does not rescue the conventional arguments for aid. For it reflects a fall in mortality, a longer life expectation of both infants and adults, that is, some improvement in basic conditions. This improvement is omitted in conventional statistics of per capita incomes, as they do not recognize health, life expectation, and children as components of living standards.

It is often asserted that without foreign aid there would be widespread starvation in the Third World. People in these countries are supposed to be living at subsistence levels and under persistent threat of starvation, while at the same time alarm is expressed at the growth of their populations—a paradox which is seldom noticed. If there is not enough food for the existing population, there could be no large-scale increase in numbers. And much aid directly or indirectly finances uneconomic enterprises or activities which produce neither food nor exports to purchase it.

The widening gap is another plausible but insubstantial argument for aid. To begin with, the argument again prejudges the effects of aid by implying that aid promotes the long-term improvement in living standards in poor countries. Aid certainly removes resources from the donors, but this does not mean that it improves incomes or living standards of the recipients. To make the rich poorer does not make the poor richer.

The concept of the so-called gap is vague to a degree. There is continuous gradation and no clear gap or discontinuity in the international range of per capita incomes. The distinction between what are called rich and poor countries on the basis of per capita incomes depends simply on where the line between the two categories is drawn, and in the absence of clear discontinuity this is quite arbitrary.

Moreover, in recent years many Afro-Asian lands—South Korea, Thailand, Hong Kong, Malaysia, Kenya, the Ivory Coast, Nigeria, and the oil states of the Middle East—have developed much faster than most rich countries. Thus the difference in conventionally measured per capita incomes between some of these countries and many developed countries has narrowed, not widened.

When referring to international income differences and to the widening gap, aid advocates often suggest that the higher income of the West has been somehow secured at the expense of the Third World. But this allegation is quite without substance. The poorest societies in the less-developed world are those with the fewest (or no) external economic contacts, so that their poverty cannot be the result of deprivation by external powers. Conversely, those involved in extensive foreign trade are the most prosperous. Obvious examples are Malaysia and Ghana, not to speak of the oil-producing countries. The material prosperity of Western societies and of Japan is the achievement of their own people, whose activities have also promoted such economic advance as has taken place in the Third World. But the advocacy of aid is presumably made easier by suggesting the contrary.

WORLD TRADE AND WELL-BEING

The burden of indebtedness and the alleged deterioration of the position of the Third World in world trade are often-heard subsidiary arguments for aid, straddling the promotion of development and the relief of need. Though insubstantial, these notions are worth examining, both because they are so widely discussed and because they show up the regrettable lack of understanding (or scruple) in the advocacy of aid.

The indebtedness of many ldc's reflects soft loans, usually with large grant elements, incurred under earlier aid agreements, often supplemented by outright grants. With the worldwide rise in prices, the real burden even of these soft loans has diminished greatly. The inability to service these loans suggests that they have been wasted and have not increased incomes or taxable capacity. This waste of earlier aid now becomes an argument for more of it.

The so-called deterioration of the external trade position of ldc's as an argument for aid takes two forms: a decline in their share in world trade and deterioration in their terms of trade.

The first allegation is untrue. The share of ldc's in world trade has not decreased but has increased in recent decades, notably since before World War I. Of course, the whole discussion usually ignores exports of mineral oil, by far the most important export from the Third World—even before OPEC, worth well over double that of any other export.

But even if it were true, it is irrelevant. The decline in the share of a country or group of countries in world trade has no adverse welfare implications and is not evidence of adverse external conditions. For instance, since the 1950's the large increase in the foreign trade of Japan, the reconstruction of Europe, and the liberalization of intra-European trade have brought about a decline in the share of other groups in world trade, including that of the United States and the United Kingdom. Exports from a country or group of countries often decline as a result of increased domestic use of previously exported products (Nigerian groundnuts and palm oil), the intensification of protectionist policies of their governments, domestic inflation, or special taxation of exporters (Burma rice). A decline in the share of a group of countries in external trade is no evidence whatever of unfavorable external developments.

Allegations about the persistent deterioration in the terms of trade (the ratio of import and export prices) of ldc's or primary producers (these categories are often treated as if they were interchangeable) are, again, meaningless or untrue, and usually both. The lack of similarity in the trading patterns of the Third World (which comprises well over half the world) makes aggregation of their terms of trade practically meaningless. In any case, the terms even of individual poor countries are of almost no interest if they relate to more than a very short period—unless changes in the cost of production of exports, in the range and quality of imports, and in the volume of trade are also considered. What matters is the amount of imports which can be purchased with a unit of domestic resources or a specified volume of resources, and this cannot be inferred from the ratio of import and export prices. And in fact, when production costs, improved imports, and the huge increase in the volume of trade are taken into account, the external purchasing power of ldc's is now extremely favorable.

WHOSE MORAL DUTY?

The belief that foreign aid is the discharge of a moral obligation to help the poor is perhaps the most influential argument—or emotion—behind the advocacy of aid in popular discussion. This suggestion is usually based on the poverty of the Third World as compared to the West. I have already noted, however, that the assumption that aid is bound to raise recipients' living standards is quite unwarranted, that the income comparisons bandied about in this context are worthless, and, further, that much of aid benefits the relatively well-off and leaves the poorest untouched or even affects them adversely.

Yet the argument that aid is the discharge of a moral duty to help the poor is open to a further, and perhaps even more fundamental, objection. The implicit analogy between foreign aid and the morality of voluntary charity fails. Foreign aid is taxpayers' money—the donors have to pay whether they like it or not. By and large they do not even know that they do in fact contribute aid. Aid lobbyists do not give away their own money. They propose taxes on others. The moral obligation to help one's fellow man rests on persons who are prepared to make sacrifices. It cannot be discharged by entities such as governments.

AID AS SELF-HELP

The arguments and sentiments in favor of aid usually focus on the needs of the recipients, but aid is often said also to benefit donors by promoting political strategy or developing export markets.

Yet aid can hardly serve to promote the security of the donors. It reduces their resources and, to that extent, weakens their position. Moreover, in the unlikely event of aid substantially promoting the material development of the recipient countries, this would improve their military potential, enabling them to become a threat to the donors.

Is it still necessary to cite specific examples to show that the granting of aid has not actually promoted the political interests of the Western donors? The recipients usually find it satisfying to assert their independence, and they find regular occasions to abuse and embarrass the Western donor—which is not surprising, for the indiscriminate distribution of Western millions understandably arouses suspicion, especially of political domination.

Nor can aid provide markets for exports, since exports bought with aid are given away. This benefits donors as little as a shopkeeper would benefit from being burgled because the thief may spend part of the proceeds in his shop. The suggestion that aid benefits donors through the long-term development of the recipients again anticipates the success of aid, also ignoring the alternative and more productive uses of resources within the donor countries and elsewhere.

Supporters of aid generally seem to be well intentioned. But they appear to be interested not so much in the effects of aid or in the welfare of the recipients as in giving away money—sometimes their own, but more often that of other people. There is a widespread if vague feeling of guilt in the West, often unaccompanied by any sense of responsibility for the consequences of the actions that issue from it.

AID—WHO BENEFITS?

Foreign aid may not do much for its supposed beneficiaries and often contributes to their suffering and hardship. But it does demonstrably benefit influential and articulate sectional interests in the West. These include the staffs of international agencies and of government departments; bored, power- and money-hungry academics; the churches, which increasingly look upon themselves as secular welfare agencies; and exporters who benefit from sheltered markets. There are also supporters of aid who favor it on political grounds, such as its use as an instrument for what they call social change in the recipient countries, that is, the establishment of socialist societies there.

There are thus reasons why both the actual effect of aid and the shortcomings of the arguments in its favor will continue to be ignored. The substantial flow both of aid and of the familiar arguments for it is therefore almost certain to continue.

P.T. Bauer is Professor of Economics at the London School of Economics, University of London. He has written a number of books and many articles, primarily on development economics. His latest book on this subject, Dissent on Development, was reviewed in the November 1975 REASON. His article here is adapted by REASON from one originally appearing in Encounter magazine (1974) and is used with permission from Encounter and from P.T. Bauer.