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01/21/2007

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Sophia

Very insightful points, as always. I'd add that another effect of extensive foreign aid, whether public or private, may be to undermine the accountability of a government to its constituents. If people come to expect basic social services such as healthcare, education, and emergency relief from foreign sources, they won't be demanding them from their government. Governments are thus exculpated, even as the citizens come to rely on and trust them less - an ultimately lose-lose situation for democracy.

Lawrence Indyk, University of Kansas School of Law

Practically no economist has put forward compelling objections to the post-war temporary aid programs such as the Marshall Plan for Western Europe and the reconstruction of Japan or doubts those programs to have had significant positive impact on the economies of those nations. Large sums of aid also used to flow to South Korea and China which are now seen as prime examples of rapid development. So aid is probably not problematic per se, and can be helpful given fertile soil in which to grow.

It's possible there is a failure bias inherent in the analysis since countries that succeed go off aid and fall off the historic data charts while countries which enact failing policies must stay on assistance indefinitely thereby skewing the apparent results.

Also, the simplified Solow theory of growth teaches that per-capita capital accumulation (and the wealthier capital-labor production ratios that go along with it) is impossible if either the population grows faster than accumulation minus depreciation or workers are not able to shift to higher capital-to-labor production (caused by, for example, a lack of infrastructure or education or restrictive trade policies). These attributes would make any country a poor candidate for aid to have anything but a humanitarian disaster prevention effect.

Finally, the poorest countries in the world may be in a relatively tougher spot than a generation ago in terms of building basic capacity to encourage growth. Though IT and communications costs have plummeted, the costs of infrastructure, materials, and energy are higher in real terms than the average over the last 20 years and will likely stay high owing to increasing Chinese consumption.

If an American farmer complains bitterly about high diesel and fertilizer prices, then the African farmer who must pay the same price will probably never think about buying a tractor or ammonia and will be trapped in low-yield, labor-intensive farming practices - hardly a hallmark of economic progress.

Peter Pearson

When tallying non-governmental foreign aid from the US, does one identify and count the money that recent immigrants send to relatives back in the homeland? I bring this up to illustrate two points: First, that there is no clear demarcation between "altruistic" foreign aid and more self-interested transfers; and second, that unofficial transfers might be hard to measure.

Ross Anderson

You're forgetting the late Peter Bauer, who spent much of his life studying foreign aid and concluded that its effects were largely negative. He explained all this about fifty years ago, and was largely ignored during his life. Eventually Margaret Thatcher raised him to the peerage, but even Conservative governments in London preferred not to act on his analysis, however much they may have known its truth in their hearts. Outside the UK he is largely unknown.

Joel Pinheiro

Private charities which engage in good causes have my full support.

However, donations by government, especially when they go to other governments, are terrible for the poor people living in any country.
It merely allows a bad government to continue with its disastrous policies unharmed.

Wes

A while back Becker and Posner discussed wealth inequality and the statistic was given that 2% of the people in the world own half the wealth. If wealth was proportional to economic output, that would mean that if everyone in the world was willing to take a 50% decrease in consumption then 98% of the world could go on permanent vacation leaving the most productive 2% to do all the work. It's clear, of course, that if 98% of the people in the world went on permanent vacation then economic output would decline by much more than 50%.As more and more economic productivity is automated, less and less human labor is required to maintain a minimal standard of living. Furthermore, those people with the skills to manage the automation are vastly more productive than those without such skills. These considerations raise an interesting question: does everyone on the planet actually need to work?What if, for example, the government provided a minimal standard of living to everyone who wanted it, for free? What if those people who wanted more than a minimal standard of living could go out and get the highly productive jobs overseeing the automated production and some of their high production was used to provide everyone else with a minimal standard of living?There are roughly 6 billion people in the world and if it cost $1 per day per person to provide a minimal standard of living then the total cost would be around $2 trillion per year. That's on the order of the federal budget of the USA. Not exactly small potatoes.Unfortunately, this calculation suggests that economic productivity is not sufficiently automated (efficient) to allow most people to go on permanent vacation. Maybe in 100 years. Certainly in 1000 years. Not today.Incidentally, this recognition of the limitations of the USA extends beyond charity. The USA lacks the resources to support the world at even a minimal standard of living. The USA also lacks the ability to police the world effectively. The USA is only 1/20th of the world's population. It can certainly take the lead in getting the world to police itself but can the USA, on its own, use its military to prevent all violations of human right and international law? It certainly hasn't and, in fact, it couldn't even if it wanted to.

N.E.Hatfield

As has been pointed out, there are economic, social, cultural pros and cons to the use of "Foreign Aid". But the most important issue is its use as a tool of National Policy. Especially, during the Cold War when it was used as device to control the aggressive expansionary policies of the Sino-Soviet block. Just as they used "Foreign Aid" as device to control what they construed as aggressive expansionary policies by the West. Unfortunetly, it got to the point where the receipients of the Aid began to use it as a form of blackmail against the West or the Sino-Soviet block. Such that, it was a case of "Give us the Aid or we will realign ourselves with the other side."

With the collapse of the Cold War and the need to buy allies and loyalty, it has pretty much lost its political and military justification. Except now we are confronted with the issue of Global Terrorism. So we are now back to the old blackmail. "Give us the aid so that we can hunt down the terrorists in our midst and keep everyone safe and Oh BTW, we have other problems that you need to solve for us."

Owinok

Looking at how low-income countries, and those in Africa in particular, have applied the foreign assistance that they received makes it monumentally difficult to argue for the merits of foreign financial assistance. In spite of that evidence, I have often been surprised that most of this assistance is administered in the same manner irrespective of the kind of good that is sought. There appears to be no distinction between public and private goods. To my mind, this is material.

It is possible then that most of the valid criticism about the poor outcomes are conditioned to a large extent by the methods of advancement and not necessarily because all foreign assistance lacks merit and is inherently corrupting. For instance, many children are able to receive some schooling (quality aside) by virtue of the fact that foreign governments have chosen to support their school lunch programmes. I think that the reservations by Prof. Becker and Judge Posner aside, a direct voucher for education for these students would substantially improve the outcomes for foreign assistance in general. This approach could also circumvent the very sophisticated corruption networks that operate in many African countries.

In sum, where foreign governments choose to advance financial assistance, then it would be helpful to distinguish between the goods that may be directed at the recipient without involving administrative structures of both the recipient and benefactor that admittedly consume valuable portions of that assistance.

I admit that the recipient countries would loudly protest that the circumvention of government is an affront to their sovereignty. In light of their gross incompetence in managing the large sums advanced to them, no rational interlocutor should allow them to get away with this specious claim.

Corwin

Learned Hand supposedly murmured after the Alcoa case-when asked why he didn't comment on a monopoly formed legally,"Too big"
I don't feel I can give a legitmate opinion,Judge.But your comments were interesting.

Hans Meier

In my opinion, eliminating all military aid has a higher priority than cutting poverty aid.

The US should follow the example of more libertarian countries, like Switzerland, where thanks to our strict political neutrality, taxes are low, the ESTV (swiss IRS) doesn't bully swiss citizens overseas, and we don't have arabs with a grudge trying to kill us.

But, we still do a lot of charity in poor countries.

Hong Kong and Singapore don't finance other people's wars either and they don't have arabs trying to blow them up.

N.E.Hatfield

Hans, It would be nice if the U.S. could function as a politically and militarily neutral country like Switzerland. But, the problem was and is, that the responsibility was thrust upon us at the end of WWII and so we have had to pickup the gauntlet then and now wherever it is found. Much to the detriment of our National Treasure and standing.

Tim Fowler

Re: "Practically no economist has put forward compelling objections to the post-war temporary aid programs such as the Marshall Plan for Western Europe and the reconstruction of Japan or doubts those programs to have had significant positive impact on the economies of those nations. Large sums of aid also used to flow to South Korea and China which are now seen as prime examples of rapid development. So aid is probably not problematic per se, and can be helpful given fertile soil in which to grow."

The Marshall plan was reconstruction of countries that had been developed, but which suffered massive destruction from a (hopefully) rare event, a major world war.

China and South Korea received aid, and they developed, but most of the development was not funded by aid. Their example doesn't show that aid leads to development, only that it doesn't guarantee lack of development.

Even if Posner is wrong and aid does have a net overall positive effect, the points he mentions show how it will at least be much lower than what many would expect.

I think aid is most likely to be effective in either redevelopment (Marshall Plan) or to stave off a particularly large catastrophe, but in both of these cases. In the case of aid to stave off a catastrophe the downsides still clearly apply, but they might be worth it to prevent mass famine. In the case of redevelopment of an already modern sophisticated country these downsides might be overcome more easily then with most aid that is sent to the third world. One reason for is that the aid is clearly seen as a one time deal. Another is that the "redeveloping" countries will have skills and institutions to efficiently use the money, and living memory of living standards well beyond what the aid can give them.

MC

Let me disaggregate the discussion of aid a little and bring the focus to sub-Saharan Africa aid. Military aid and aid to countries like Iraq are in quite a different ball-park than the general aid flows seen in this region. Also, the most recent focus of the Aid drive has been on eliminating poverty in this region, so it deserves its own, unique attention.

With this region in mind I imagine, Posner puts forward the idea that foreign governments might lose the incentive to develop when they can depend upon foreign aid instead. We do a lot of finger pointing at foreign governments for being guilty of this particular dependence, but we are equally as guilty:

A great deal of ODA is technical assistance, something that Posner and a great deal of economists ignore when they look at aggregate aid flows. While you certainly can be dependent on technical assistance, it's hard to argue that an expert placed in a relevant ministry is going to do a great deal of harm (although he/she may be ineffectual).

The only problem is, a great deal of aid and TA is spent on the inflated benefits of consultants and resident officers that live in the country. While this money certainly has important effects on the microeconomy (think about what would happen to your hometown if a couple of billionaires showed up and started spending money), it doesn't channel directly into country-level assistance.

Things get even worse when one realizes that Posner's incentive problem *applies to aid workers as well.* A decent salary, extremely generous benefits, house staff and self-importance are not things many people would wish to give up by standing up and saying "The project I was sent here to work on is infeasible."

While the aid machine may cause dependency on the recipient side, remember that those that drive the machine, especially on the ground, have no *personal* incentive to see the wheels stop turning.

I can only speak from personal experience, which, while is limited, is ongoing. I am TA working for a foreign government in a Sub-Saharan country.

Paul Trupo

While foreign development assistance is highly inneficient, may carry political ties, obtains a pathetic return on investment, and is less effective than tariff reduction I believe that it is absurd to imply that it is harmful and that poor countries suffer from it.


If it were posible to take an inventory of all developing nation's institutions and associations created with foreign assistance as well as new legislation passed with ODA you'd fill an encyclopdeia with the names of media watchdogs, NGOs, improved tax legisislation, foreign investment councils, farmers associations, improved pension plans, mortgage markets, micro-finance institutions, millions of foreign trained scholars, engineers, and architects, and so on.


As others have pointed out: there are many indogenous and exogenous factors that affect economic growth, so simply concluding that because poverty and corruption remains after years of foreign aid therefore foreign aid is not useful - in my opinion is an erroneous conclusion.

Assuming people know what is in their own best interest: are any developing nations refusing ODA because they feel it is useless and harmful?


Another way to think about it. if total ODA is 92 billion then than amounts to less than 0.3% of world's gdp transfering from developed to developing country. This is similar to a neighbor who earns $100,000 a year giving $390 to a poorer neighbor who earns $30,000 a year and then ridiculing him because he's still poor.

Michael E  Sullivan

Hans, It would be nice if the U.S. could function as a politically and militarily neutral country like Switzerland. But, the problem was and is, that the responsibility was thrust upon us at the end of WWII and so we have had to pickup the gauntlet then and now wherever it is found. Much to the detriment of our National Treasure and standing.

I think I agree that it would be untenable for us to draw back into switzerland or Hong Kong style neutrality, but we certainly could adopt a far more defensive, circumspect and multilateralist posture than we have under the current administration, much to the benefit of our national coffers, those in the armed forces, and our worldwide reputation.

My personal preference would be to draw back even quite a bit further in that regard than was the norm before our recent imperialists came to power. While the results of such a strategy would be debatable (having never really been tried), I beleive they would be successful as long as we were able to avoid conveying real weakness.

The current exceptionally hawkish (by modern standards) strategy has been proven a dismal failure by any reasonable cost/benefit analysis. It's pure lunacy that we continue on such a course. If any other country in the world behaved in a manner similar to the way we have in the last six years and was not our explicit ally, we would consider it our great enemy, as we did the Soviets pre-Glasnost and breakup.

I can only hope that the electorate does the right thing in 2008, and Bush II doesn't do that much more damage in the meantime.

David

I think Posner asks an overly simplistic question: is foreign aid, as a whole, "good" or "bad?" I doubt that we can answer that question in the abstract. A better question would be to ask whether a particular grant given to a particular country is likely to further the goals that underlie the grant. For example, will military aid to Taiwan allow it to retain its independence? Or, will Tsunami relief help victims? Or will food aid to country "X" help, at least temporarily, to prevent hunger? Or will economic aid to country "Y" help that country develop its infrastructure and further our political relationship with that country?

I find it very unhelpful to debate the question of "foreign aid" in a vacuum.

Dweep

The question - if IDA is bad - may be simplistic, but very necessary. I've reached much the same conclusion, based on a similar analysis. There are too many negative effects of aid, and the incentives IDA creates simply do not address the goal. A particularly new discovery, here, is the contradiction between the enthusiasm for IDA but the general derision of welfare in developed economies.

Curiously, the problems of IDA are more pronounced in very poor countries. Interestingly, this implies that countries like India with significant resources of their own - that don't need IDA - can put it to the most efficient use, and conversely IDA does the most damage where it is supposed to help the most!

Once we do reach the conclusion that IDA has far too many negative effects the next question to ask is if it is better than the alternative, and whether there is any alternative at all. Perhaps Richard Posner will address that next!

Jon

DDT? Really? And realting the domestic welfare program to foreign aid, I don't think that can show much more than the inherent flaws in our countries welfare system. If some one was making $20K a year, recieving $2K welfare, and then got a $1K raise, the net gain would be -$1K, which I think makes your point perfectly. But you can't cut someone off cold turkey of welfare amounting to 10% of what they were already earing. That is a pretty large chunk of change, and I think more should be done here, as well as in third world countries, to reform the system.

Chairman Mao

A fine post Judge P.

It is indeed naïve to think that modern nation states are sending money (public or private) to developing countries out of the kindness of their hearts. The ultimate goal - whatever the short-term or long-term side effects - is to maintain power and enhance national security. Many argue that USAID has been more successful in intelligence gathering these days than CIA. Even religious charity usually is aimed at gaining adherents or at least sympathizers of that faith’s policies.

Corey

"We generally and I think rightly applaud the substitution of workfare for welfare, because welfare promotes dependency by taxing work heavily"

No, we do not, but perhaps you are referring to the royal "We", which may or may not include your cadre of loyal supporters.

Welfare is a subsidy for socially beneficial activities like child care, job training, education, and the like. It also provides minimal living allowances to people who are disabled, ill, fundamentally unskilled, or otherwise more costly to employ than to pay to stay home.

"Workfare" is just the classic "get a job you bum" refrain dressed up in economics. Nevermind that the "bum" is disabled, unemployable, or needs to devote time to care of loved ones.

There are inevitable inefficiencies and disincentives to welfare but they also map to positive externalities. Citizens feel good about the collective generosity of government with their tax dollars. Recipients are able to pursue goals that we all would value more than $5.15 an hour.

Or are we cynical. Do we think people are selfish, stingy with their tax contributions, and constantly shirking? The whole rationale of "workfare" and welfare reform is based on the assumption that people will take advantage of every possible disincentive to work and self-fulfillment. I find that view of the world uninspiring and sad. Self reliance has to be enabled in a community of support, not compelled through Dickensian austerity.

You seem conscious of the pending unpopularity of your extension of this thinking to international relations. You will be proven right. Foreign Aid may serve as an opiate for the masses, covering up much larger trade inequities, but that is rather a great argument for attacking the trade inequities.

There is no "trade-off" between foreign aid and tariff reductions. Tariff reductions are a particularily effective form of foreign aid. We could do it all at the same time. By setting up this false dichotomy you are going to encourage hostility to current forms of aid without building any positive consensus towards tariff reductions. Your followers will simply argue against foreign aid ad nauseum using the familiar toolbox of scope narrowing L&E arguments until even less is being accomplished.

As a nation, we should try generosity as a foreign policy. Policeman of the world isn't making us new friends or trading partners. If we are nice, we will feel good. If we do our best to make the world a better place, the world will respect us, even if we aren't always perfectly efficient. The small inefficiencies of foreign aid pale in comparison to the massive inefficiency of bombing entire national infrastructures into oblivion and then trying to rebuild them in the midst of a civil war.

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