Third World poverty is one of the most pressing
problems of our age, condemning billions of people to lives of hardship
and misery. Such poverty has led many Americans to want to help Third
World peoples, both for humanitarian reasons and to increase our own
trade and national security.
In response to Third World poverty, the U.S. government
has provided over $321 billion in assistance since World War
II.1 As this figure indicates, foreign aid is politically
popular. Besides its humanitarian supporters, many special interest
groups lobby for foreign aid. For example, American farmers back food
assistance because such programs help eliminate politically embarrassing
food surpluses caused by agricultural subsidies.2
While foreign aid is a political success, it is an
economic and social failure. By increasing government power, destroying
economic incentives, promoting unprofitable enterprises, and subsidizing
misguided policies, foreign aid increases Third World poverty. In this
essay we will examine two types of foreign aid: humanitarian and
development assistance. We will then discuss alternatives to aid in
helping the Third World, especially the policy of free trade.
Humanitarian Assistance
Humanitarian assistance - aid designed to avert
immediate disaster - mainly takes the form of food aid that is allocated
through Public Law 480, widely known as the Food for Peace program.
Since the establishment of FFP in 1954, the United States has
distributed some $34 billion worth of food to the Third World, and
currently provides some $1.2 billion a year in food
transfers.3 Although it reduces the surpluses of our
government farm programs, Food for Peace has actually increased hunger
abroad in the long run.
One problem with food aid is that the dumping of free
food in Third World countries depresses prices for local farmers,
therefore resulting in less domestic production. According to George
Dunlop, chief of staff of the Senate Agricultural Committee, millions of
Indians may have died of starvation because American wheat dumped in
India bankrupted thousands of Indian farmers.4 Thousands of
Guatemalan farmers were likewise hurt when food aid poured into the
country after the 1976 earthquake. For these unfortunate farmers, "the
price of domestic crops dropped at a time when farmers desperately
needed cash to improve and repair their homes. . . . "5 In
Bangladesh, the upper and middle classes receive free food from foreign
aid programs, thus impoverishing local farmers with artificially low
prices.6
A second major problem with food aid is that it
encourages the recipient nations to adopt policies that discourage
production. With food aid to "cover-up" the most grievous results of
their actions, Third World governments can pursue such counterproductive
policies as forced collectivization and price controls on farm products.
For example, Tanzanian President Nyerere was able to collectivize farms
and engage in massive relocations of peasants because food aid "hid" the
consequences of such actions.7 In many cases, such as in
Bangladesh, food aid leads to the neglect of agricultural production
because of the belief that other nations will provide sufficient amounts
of free food:
Bangladesh officials are convinced that the
international donors will not allow them to starve. Since it is easier
to order a shipment of food through the embassy in Washington than to
spend time and money on a domestic procurement program, a definite
complacency has settled over the bureaucracy. The technocrats who
dominate the powerful ministries of finance, planning and food are
resigned to continued reliance on American, Canadian, Australian
surpluses of food grains. One symptom of the relief mentality is a
reluctance to invest too much of the country's limited resources away
from the more glamorous industrial sector and into low profile
agricultural projects.8
The end result of programs such as Food for Peace is a
complete dependence on food aid for many countries. Food aid destroys
Third World food production, creating a perpetual crisis that requires
more aid to avoid famine. The cycle continues until the country is
completely dependent upon free food from abroad. As one analyst put it,
foreign aid has become "the opiate of the Third World" that keeps the
less developed countries (LDCs) permanently dependent on the West for
their very existence.9
A third consequence of government-to-government food
aid is the destruction of more efficient private efforts. Before World
War II, private charities provided hundreds of millions of dollars in
emergency aid. Because private food aid is administered directly to the
poor - it is an exchange between individuals, not governments - it does
not destroy markets through indiscriminate dumping or lead to
destructive farm policies. Government food aid hinders private efforts
by limiting the feeling of moral responsibility among citizens of more
wealthy nations. Even more important, government food aid has
"politicized" many private organizations by providing the bulk of the
budgets, therefore destroying their incentives to be efficient. Without
private alternatives, Third World nations are quick to accept public aid
that increases the likelihood of future food shortages.10
Development Aid
Development aid attempts to promote long-run growth of
the LDCs by building large projects, giving budgetary and balance of
payments help, and funding a variety of research and planning efforts.
Since 1946 the United States has given over $131 billion in development
assistance.11 Despite the scale of these international
transfers, they have not led to sustained growth. Rather, aid has
significantly impaired LDC progress by expanding the role of the public
sector in the recipient nations.
Development aid is based on the premise that Third
World nations don't grow because they lack financial resources. But
financial resources have relatively little impact on growth rates when
compared to other factors. As P. T. Bauer argues, "Economic achievement
depends on personal, cultural, social and political factors, that is
people's own faculties, motivations and mores, their institutions and
the policies of their rulers."12 Even if financial resources
were vital to growth, the Third World does not lack the means of
obtaining international credit. If anything, the more than $800 billion
total debt accumulated by LDCs shows that they may have had too much
financial capital, rather than too little.13
As with food aid, development assistance politicizes
Third World economic life. Aid helps incumbents expand their power
through political patronage. According to economist Doug Bandow, ''The
tendency of ruling groups, particularly in societies where political
power is so important, is to use aid, or funds released by aid, to
strengthen their own position, reward their supporters, and buy off or
crush opposition movements."14 By limiting political
competition, foreign aid inhibits the implementation of badly needed
market-oriented reforms.
Even aid that is not used for overt political
repression leads to the growth of large, unproductive bureaucracies.
According to a recent Agency for International Development report: "Many
African institutions officially responsible for planning and
implementing development are saturated with development assistance,
paralyzed by administrative inefficiency, staggering beneath a burden of
complex and differing donor requirements, and are themselves in danger
of become obstacles to development."15 Some countries that
receive large amounts of development aid, such as Zambia, use over 20
per cent of their GNP to provide civil service employees with a standard
of living which is "totally out of synch with the rest of the
economy."16
Through these large bureaucracies, development aid.
fosters political exploitation. There are many examples of Third World
governments using aid to enrich the ruling elite at the expense of the
masses. President Sese Seko of Zaire, for instance, used foreign aid
money to partly fund the construction of eleven presidential
palaces.17 Foreign aid is also used to build expensive
capital cities, such as Brasilia, Islamabad, Abuja in Nigeria, Lilongwe
in Malawi, and Dodoma in Tanzania, that benefit few people except the
ruling classes.18 in some of the poorest parts of Africa,
government officials are known as "Wabenzi"- men of the
Mercedes-Benz.19 Foreign aid is also used to subsidize
expensive Third World airlines. These airlines benefit only the elite of
the country, while taking away resources from needed private sector
activities.20
Even if development aid didn't lead to political
exploitation, it would still foster economic inefficiency. Unlike firms
in the private sector, government projects are not subjected to the
discipline of profit and loss accounting. Because they operate outside
the market, government projects - the kind financed by foreign aid-have
low or negative rates of return. In many cases, aid agencies explicitly
undertake such projects because the private sector refuses to finance
them. Foreign aid thus channels the recipient nation's resources into
unproductive areas of investment:
The broadest ill effect of development assis-tance is
that it distorts market signals and in-centives. It therefore diverts
economic re-sources from their most productive uses in developing
nations. Whenever resources are made available outside of normal market
channels, buyers and sellers in related market activities receive
inappropriate signals and change their behavior, reducing locally
generated incomes. The resulting distortions may be major or minor, but
they always occur. 21
Without the price system to guide them, Third World
nations have attempted to develop by simply building the same type of
enterprises that flourish in more advanced countries. Steel plants,
aluminum factories, and oil refineries funded with aid money dot the
Third World, despite the fact that the markets for these products are
already saturated. Because they cannot hope to compete with more
established firms, these aid projects drain skilled labor and other
resources away from the private sector with no corresponding
benefits.22
Foreign aid not only wastes scarce resources in the
very nations which can least afford waste, it also creates international
tensions. Foreign aid has united the governments of the Third World into
a cohesive unit that has but one goal: secure more aid. To accomplish
this, the Third World has found that the politics of confrontation work
best. In their eyes, the world is divided between rich and poor, with
the former having an obligation to help the latter. The result is
international conflict:
The West has created an entity hostile to itself-this
is the biggest and most intriguing of the many anomalies of aid.
Individual Third World countries are often neutral or even friendly to
the West, but the organized and articulate Third World is at best
critical and more often hostile. The purpose of the Third World qua
collectivity is to coax or extract money from the West.23
Finally, we must note that development aid
significantly drains our own resources. Many people support foreign aid
because of the perception that it helps our export industries. In fact,
there are stipulations on most aid packages requiring the use of
American goods whenever possible. Because foreign aid subsidizes
American companies which deal with the Third World, it shifts assets
from more efficient firms, thereby reducing our overall economic
performance. Supporting aid in the hope that some of it might be spent
in the United States is like a supermarket giving money away in the hope
that consumers will spend part of it in the store-there is always a net
loss.24
Another Way?
The basic problem with both types of foreign aid is
that they strengthen the institutions which prevent progress while
weakening the institutions of the Third World which could bring true
prosperity. Aid increases the role of government and bureaucracy in the
economic life of the Third World, while it minimizes the role of markets
and private entrepreneurship. If we are to help developing nations
prosper, we must find a method that creates a bigger role for
institutions such as the market.
One way of aiding Third World nations is through free
trade. By lowering our import barriers, we can allow the private sectors
of the Third World easier access to our markets. With the huge markets
of the United States available for their products, entrepreneurs will
have the opportunity to develop new industries or expand old ones. As
Lord Bauer writes, removing protectionist barriers will allow more Third
World countries to experience the success of such Pacific Basin
countries as Hong Kong and Singapore:
As for economic development, the West can best promote
this by the reduction of its often severe barriers to imports from poor
countries. External commerce is an effective stimulus to economic
progress. It is commercial intercourse with the West which has
transformed economic life in the Far East, South-East Asia, and parts of
Africa and Latin America.25
Free trade also has the advantage of helping our own
economy. While this is no place to explode the numerous protectionist
fallacies, free trade will increase our wealth with a great influx of
goods and services from abroad. Like all voluntary exchanges,
international trade is a positive sum activity; both America and the
Third World benefit from it. Even if we make the heroic assumption that
foreign aid actually helps Third World countries, it would still be only
a zero sum activity; it can only help the recipient nation by hurting
the donor nation.
Foreign aid fails as a development policy because it
destroys the incentives of the marketplace and extends the power of
ruling elites. Because it leads the Third World away from the free
market, it actually increases Third World poverty. On the other hand,
the alternative policy of free trade will give the private sector of the
LDCs an opportunity to expand and flourish.
It must be emphasized that free trade alone will not
solve all the problems of Third World poverty. Free trade only increases
the opportunities of the less developed nations. It will not eliminate
the shackles of government regulation and intervention that dominate
Third World economies. That task can only be done by the people of the
Third World themselves. Yet, eliminating foreign aid and instituting
free trade will at least encourage Third World peoples to develop
institutions such as private property rights and free markets which will
lead to growth and prosperity.
At the time of the original publication, John Majewski
was an economics major at the University of Texas at Austin.
1. Doug Bandow, "The U.S. Role in Promoting Third World
Development," in Doug Bandow, ed., U.S. Aid to the Developing World: A
Free Market Agenda (Washington: The Heritage Foundation, 1985), p. ix.
2. Daniel A. Sumner and Edward W. Erickson, "The Theory
and Practice of Development Aid" in Bandow, op. cit., p. 57.
3. Bandow, op. cit., p. xiii; Budget of the United
States Government: Fiscal Year 1987, p. 5-20.
4. James Bovard, "The Continuing Failure of Foreign
Aid," Cato Policy Analysis, January 31, 1986, p. 4.
5. Mark Huber, "Humanitarian Aid," in Bandow, op. cit.,
p. 7.
6. Stephan De Vylder, Agriculture in Chains (London:
Zed Press, 1982), p. 46.
7. P. T. Bauer, Reality and Rhetoric: Studies in the
Economics of Development (Cambridge, Mass.: Harvard University Press,
1984), p. 52.
8. Stephan De Vylder, op. cit., p. 47.
9. Bovard, op. cit., p. 2.
10. Arthur E. Farnsley, 11, "Humanitarian Aid in the
Twentieth Century: Public and Private" in Bandow , op. cit., pp. 3-24.
11. Bandow, op. cit., p. xi.
12. Bauer, op. cit., pp. 43-44.
13. Bandow, op. cit., p. xvii.
14. Ibid., p. xx.
15. Bovard, op. cit.. p. 11.
16. Ibid., p. 12.
17. Ibid., p. 19.
18. Bauer, op. cit., pp. 50-51.
19. Bovard, op. cit., p. 19.
20. Bauer, op. cit., p. 51.
21. Sumner and Erickson, op. cit., p, 57.
22. Bandow, op. cit., p. xix.
23. Bauer, op. cit., p. 41.
24. Ibid., pp. 54-55.
25. Ibid., p. 62.
Reprinted with permission from The
Freeman, a publication of the Foundation for Economic Education, Inc.,
July 1987, Vol. 37, No. 7.
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