Should the United States Provide Foreign Aid?--Posner

The United States is frequently criticized for the meagerness, relative to the nation's aggregate wealth, of its contribution to what is called "overseas development assistance," which is to say government financial aid (other than for military purposes) to poor countries. Although U.S. ODA spending has increased substantially since 9/11, as a percentage of gross national income it is, at .22 percent, at the very bottom of the 22 wealthiest countries in the world. (Norway is at the top, with .93 percent.) Aggregate private giving by U.S. foundations, businesses, nongovernmental organizations, colleges (for scholarships), and religious organizations almost equals the government's expenditure; yet even ignoring private contributions by other countries, which though lower in percentage terms than American private giving are not negligible, total U.S. public/private ODA would as a percentage of gross national income fall short of many of the other wealthy nations. (For a useful compendium of statistics and commentary, see "Sustainable Development: The US and Foreign Aid Assistance," www.globalissues.org/TradeRelated/Debt/USAid.asp, visited Jan. 20, 2007.) These figures are meaningless from an ethical standpoint. To begin with, there is a big difference between the amount given and the amount received, administrative costs to one side. Most U.S. foreign aid requires the recipient to spend the money for U.S. goods and services, which are often much more expensive than those available elsewhere. Suppose the U.S. gives a foreign country $1 million for the purchase of goods in the United States that could be purchased elsewhere for $750,000. Then the net transfer is not $1 million but only $750,000. Nor should administrative costs, often inflated, be ignored, or the waste that is endemic in government programs. The largest recipient of U.S. foreign aid today is Iraq, and it seems that much of that aid has been squandered. On the other side of the ethical balance, however, the statistics ignore the benefits that the United States confers on foreign countries by virtue of its enormous defense expenditures (including financial assistance to foreign militaries, but that is only a small percentage of the total defense budget). The United States spends more than 4 percent of its gross domestic product on defense, compared to a world average of 2 percent--and only 1.9 percent for Norway. We really are the world’s policeman, holding a security umbrella over a large number of nations, which would have to spend much more on defense were it not for that umbrella. Of course we do not do this from the goodness of our heart, but to protect our national security--but then very little that government does is motivated by altruism toward foreigners. My own, unfashionable view is that charitable giving, both governmental and private, is more likely to increase than to alleviate the poverty, ill health, and other miseries of the recipient populations. That is a familiar proposition with regard to antipoverty policy on the national rather than international scene. We generally and I think rightly applaud the substitution of workfare for welfare, because welfare promotes dependency by taxing work heavily--if welfare is cut off when the recipient's income reaches, say, $20,000 a year, so that if he was receiving welfare payments in cash or kind worth $2,000 an increase in his income to $23,000 will net him only $1,000 ($23,000 - $2,000 = $1,000), this means that his marginal income tax rate is .67--a potent discouragement to working. Something like this occurs, I believe, on the international scale. Receipt of money enables a government to avoid grappling with the political, social, and economic conditions (cultures, institutions) that are impeding economic development. It has been argued that countries that have enormous natural resources (mainly oil) relative to population seem not to benefit from that gift, as wealth without effort does not create good attitudes toward work, enterprise, and savings, at the same time that it enables the government to defer consideration of its social and other problems. Foreign aid has similar effects. Moreover, the more "generous" the foreign aid, the worse these effects. When foreign aid becomes a significant part of a nation's income, the result is likely to be inflation, waste, corruption, rent-seeking, and indefinite postponement of needed economic and political reforms. Insignificant foreign aid does not have these bad effects, but, by the same token, has few good effects. Of course the donors, both public and private, can and often do attach conditions designed to assure that the money they give is used for constructive purposes. But, first, they do not know what these countries need (the major theme of William Easterly's 2002 book The Elusive Quest for Growth), and, second, unless foreign assistance is a large fraction of the total income of the recipient country, the effect of the assistance, however many strings are tied to it, will tend to be that of an unrestricted grant. If a country spends $100 million on health care, and receives foreign assistance for health care of $20 million, it may decide to reallocate $20 million of the health care expenditures that it makes out of its own resources to some other purpose, in which event the restriction on the grant will have no effect. This is a general problem of charitable giving and public welfare, but it is particularly difficult to solve when the donor is dealing with a foreign country. This point is pertinent to foreign aid for such projects as eliminating (realistically, greatly reducing) such Third World plagues as HIV/AIDS and malaria. The former can be effectively combatted with a combination of public health education and free condoms, and the latter with DDT spraying in people's bedrooms. These are projects within the financial capacity of most Third World countries. The substitution effect will disappear if the foreign money is given for a purpose on which the recipient nation spends nothing (or less than the grant). But if the nation does not value the project, often this will be because the project has little value to the nation. The chalice is poisoned in still another way. The "generous" gifts from wealthy countries--pluming themselves on their greater (apparent) generosity than the United States--enable those countries to hide, perhaps even from themselves, the extent to which their tariff policies immiserate poor countries. Most of them are agricultural producers with costs much lower than in wealthy countries, which use tariffs to shield their farmers from Third World competition even though their farmers are much wealthier that those in the Third World, and would be even without tariff protection. The non-farmer taxpayer in a wealthy country in effect pays his country's farmer twice: in higher food costs or in taxes that finance farm subsidies, and in the taxes that support the government's foreign aid program. No doubt some foreign aid, including nonmilitary aid, advances the foreign policy objectives of the donor nation (though quite possibly at the expense of the populations of the recipient nations), rather that just lining the pockets of domestic producers and enabling publics to feel better about (or simply ignore) their nations' tariff policies. The focus of my discussion has been on the question whether the recipient nations benefit at all. My guess is that they do not. It is just a guess, but it has support in empirical research. I mentioned Easterly's book, and there is much more. And sometimes gross data can be highly suggestive. Africa has received some $600 billion in foreign aid since 1960, yet most African nations are poorer today than they were then. I am mindful that recent economic research has tended to find a positive relation between foreign aid on the one hand and economic growth and improved health in recipient nations on the other; for a recent summary, see Steven Radelet, “A Primer on Foreign Aid” (Center for Global Development, Working Paper No. 92, July 2006). Considering that aggregate overseas development assistance amounts to $92 billion a year (2004), some positive effect can be expected. Yet I remain skeptical. The studies necessarily ignore the tradeoff between foreign aid and tariff reductions; if the former reduces pressure for the latter, the net effect of the aid on the recipient nations could be negative.

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