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The case against foreign aid

By Doug Bandow / September 29, 1999



Foreign aid, argues President Clinton, is "designed to keep our soldiers out of war." He has threatened to veto the $12.7 billion foreign assistance appropriation bill passed by Congress, which reduces his request by $2 billion. But evidence is overwhelming that increasing foreign aid would only throw good money after bad.

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The United States alone has contributed more than $1 trillion (in current dollars) in foreign assistance since World War II. Yet in 1996 the United Nations reported that 70 countries, US aid recipients all, were poorer than they were in 1980; 43 were worse off than they were in 1970.

In its report, Development and the National Interest, the US Agency for International Development (USAID) admitted that "much of the investment financed by [the US] and other donors between 1960 and 1980 has disappeared without a trace." This is supported by the recent New York Times expos detailing an investigation by the Office of the High Representative in Bosnia, which concluded that as much as $1 billion in public money has been stolen since 1995 even as the West was providing $5.1 billion in aid.

The State Department argues that the bulk of the loss was the Bosnians' own funds, but money is fungible. Western taxpayers are subsidizing local corruption. The misuse and abuse of aid is a "major impediment [to development] all over the entire region," Carl Bildt, former chief UN envoy to the Balkans, has warned.

Russia has collected more than $20 billion from the International Monetary Fund (IMF) alone since 1992; the money has disappeared to no effect. John Odling-Smee, director of the IMF's European II Department, has acknowledged Moscow's "lies and the failure to meet commitments." A $640 million July IMF loan was simply shifted among Fund accounts to pay down Russia's outstanding debt.

Looted IMF funds may have been laundered through the Bank of New York, which appears to have become a transit station for the Russian mob. But the IMF says it can't track the disbursements.

The aid experience in Indonesia is little better. The World Bank held up planned lending before the parliamentary election earlier this year to prevent government manipulation of aid for political purposes and has threatened to halt its entire program because of a recent banking scandal.

In a new study for the National Bureau of Economic Research, economists Alberto Alesina and Beatrice Weder conclude "that according to most measures, corrupt governments actually receive more foreign aid rather than less."

Earlier this year Stephen Knack of the University of Maryland completed a study that found "higher aid levels erode the quality of governance, as measured by indexes of bureaucratic quality, corruption, and the rule of law."

The failure of aid has forced Mr. Clinton to come up with a new argument: Foreign assistance prevents wars. Without $2 billion to $3 billion for Kosovo and related programs, he warns, "make no mistake - there will be another bloody war."

It's a superficially appealing claim. Before departing in July, USAID administrator J. Brian Atwood said that without more aid "you could see more countries becoming anarchies in Africa. You certainly could see that as a possibility in Russia."

But US and international assistance has flowed freely not just to Russia, but to virtually every country that has descended into anarchy and/or war. Organization for Economic Cooperation and Development data show that between 1971 and 1994, Sierra Leone collected $1.8 billion; Liberia $1.8 billion; Angola $2.9 billion; Haiti $3.1 billion; Chad $3.3 billion; Burundi $3.4 billion; Rwanda $4.7 billion; Uganda $5.8 billion; Somalia $6.2 billion; Zaire $8.4 billion; Mozambique $10.5 billion; Ethiopia $11.5 billion; and Sudan $13.4 billion.

Aid failed to forestall crises in all of these states because money was never the basic problem. Most of these nations are riven with clan, ethnic, or tribal rivalries. Most lack a basic rule of law. Most have repressive, dishonest governments. Most suffer from highly politicized militaries.

More money from abroad would solve none of these problems. To the contrary, "aid" to such nations as Ethiopia, Somalia, Sudan, and Zaire subsidized the very worst autocratic and corrupt dictators. This made chaos and war more, not less, likely. The belief that advocates of assistance will do better in the future brings to mind the classic assessment of second marriages: The triumph of hope over experience.

Clinton's attempt to dress up yesterday's failed policies with new justifications won't work. There is perhaps no greater tragedy today than the failed societies that dot the globe. But there is no evidence that increasing aid flows would prevent more such human catastrophes.

*Doug Bandow is a senior fellow at the Cato Institute in Washington and co-editor of 'Perpetuating Poverty: The World Bank, the IMF, and the Developing World.' (Cato Institute, 1994).

(c) Copyright 1999. The Christian Science Publishing Society