Public Aid, Public Harm

Foreign aid is back, with the support of the Bush administration as well as the United Nations.

Multiple disasters afflicting Southeast Asia have brought the problem of international poverty to the fore. Indeed, the Dec. 26 tsunami triggered an inter-governmental race to promise aid.

If the money is used well, there is no harm in competing to help people in need. But over the last half-century wealthy nations have poured hundreds of billions of dollars into the developing world with minimal results.

Much of the money has been stolen. Even more has been squandered.

Little has been used to promote long-term economic growth.

Local politicians established money-losing prestige projects and used state companies to win popular favor. Borrowers and lenders alike favored creating new roads and buildings rather than repairing old ones.

Even more important, absent market reforms, economies won’t develop. Prosperity and growth correlate with economic liberty, nothing else.

Not aid levels, not resource endowments, not population densities. Giving money to incompetent socialist politicians benefits no one.

Foreign transfers often hindered reform by relieving the price of economic failure. Ruling regimes used foreign aid to remain in power even as they impoverished their peoples.

When the awful record of official assistance became undeniable, multilateral development banks such as the International Monetary Fund began justifying their activities as promoting market reform. Yet it is an illusion that government-to-government aid can create prosperity.

Nevertheless, Jeffrey Sachs, leading the U.N. Millennium Project, proposes spending about $200 billion annually on a grand new initiative. World central economic planning is to succeed where national central economic planning failed.

Sachs believes that if he can carpet bomb the developing world with mosquito nets, malaria will be conquered. Give him enough fertilizer and the fields will bloom; enough drugs and disease will disappear.

“We are in a position to end extreme poverty within our generation,” he confidently proclaims. Alas, calculating the “right” number of mosquito nets is easier than getting nets over people’s heads.

Sachs’s rhetoric harkens back to the 1970s, when Robert McNamara ruined the World Bank by vastly increasing loans with no concern as to whether or not the money was used well. Scores of poor states ran up huge debts while deteriorating economically.

Real per capita GDP in Sub-Saharan Africa was lower in 2000 than in 1970.

The Bush administration, too, has bought into the misbegotten notion that more is better. It wants to reward its allies in Iraq, such as Poland and Ukraine, with tens of millions in aid. The administration would provide $200 million to the Palestinian Authority, even though past monies have been looted by the leadership and paid to the families of suicide bombers.

The administration has proposed to up contributions to the World Bank’s International Development Association and double funds for the U.S. Millennium Challenge Account. Even the conservative Heritage Foundation, once a scourge of wasteful foreign aid, is pushing Congress to spend more – though Third World governments haven’t used all that was approved last year.

Supposedly the recipient nations are better governed now than in the past. Then with the right economic policies they should grow without aid.

Globalization probably offers the best hope for poor countries. Western investment and trade have helped lift hundreds of millions of people out of immiserating poverty in China and India. Even the poorest states, such as Bangladesh, have found a glimmer of hope through export trades, such as textiles.

The nations hardest hit by the tsunami pay more annually in Western import duties – roughly $2 billion by Indonesia, India, Sri Lanka, and Thailand last year, for instance – than they recently received in aid. Thus, eliminating Western protectionist barriers is the surest method of aiding growth abroad.

If foreign assistance is to help, it must operate as aid rather than as hindrance. Massive new international schemes incorporating vast new resource transfers are a discredited throwback to the past rather than a sophisticated vision for the future.

Private programs operating outside of governments offer a better option. When the United Nation’s relief coordinator, Jan Egeland, accused the United States of being “stingy” after the tsunami, he was thinking only of official transfers.

Yet at that point Americans had privately contributed more than had their government. Private outlays probably exceed $30 billion annually.

The world’s poor desperately need help. But for years much foreign aid has ended up doing more harm than good. Congress should not let history repeat itself.