Foreign aid is the problem not the solution

Posted: Mar 15, 2002 12:00 AM
On March 18, the United Nations convenes a major conference in Monterrey, Mexico, on the need to sharply increase foreign aid. President Bush will be heavily pressured to go along when he addresses the conference on Friday. The plight of the developing world cannot be exaggerated. Poverty, disease, unemployment and a general sense of hopelessness affect most of the world's population. It is impossible not to be moved by their condition and want to help. However, it doesn't follow that more foreign aid is the answer. Indeed, a strong case can be made that foreign aid has been the problem for many developing countries, rather than the solution. The issue is very analogous to the debate on welfare. Reformers argued that welfare often did more harm than good by allowing people to avoid the hard actions needed to straighten out their lives -- such as getting off drugs, avoiding pregnancies, getting married, finishing school and taking jobs. Welfare enabled people to make bad choices without paying the price. After innumerable failed efforts to fix welfare by tinkering, a consensus emerged that only a "tough love" solution would work. People had to be forced off welfare in order for them to do what had to be done to fix their lives and become productive citizens. In 1996, Congress enacted and Bill Clinton signed landmark legislation that did exactly that. By all accounts, welfare reform has worked better than even the optimists thought possible. Millions of former welfare recipients have found jobs and managed to hold them even through the recession. So successful has the U.S. experience been that other countries, like Great Britain, are starting to experiment with similar reforms. Sadly, the success of welfare reform has not carried over into the foreign-aid debate, even though the issues are identical. Governments are no less susceptible to bad behavior than are individuals, especially when someone enables them to continue with it by subsidizing them and allowing them to avoid the consequences. The list of ways in which poor countries have sabotaged development is almost endless. Industries were nationalized and private enterprise snuffed out by high taxes, regulations and corruption. Price controls are pervasive in the agricultural sector, leading to lower output and famine. Much foreign aid is simply stolen by elites, and almost all the rest has been wasted on projects that yielded no economic benefits whatsoever. The real tragedy is not the waste, but the fact that foreign aid allowed poor countries to escape market discipline, resist changing their economies and their laws to encourage growth, and continue with failed policies year after year after year. When tragedy struck, as it did so often, foreign aid filled the gap and kept them afloat for a while longer. As a result, negative policies were perpetuated in the same way that welfare perpetuated dependency. Any number of serious academic studies have looked carefully at the failure of foreign aid. Among the most influential are those by economist William Easterly, formerly of the World Bank and now with the Center for Global Development in Washington. In a new paper, Easterly presents overwhelming evidence that it is almost impossible for foreign aid to succeed because the bureaucratic nature of the aid system virtually guarantees failure. In response, the World Bank has tried to prove that aid can work if the right conditions are present. Maybe so, but there is no evidence that the Bank has ever figured out how to create the right conditions as long as the aid flows. Since aid is never cut off, countries know that they never really have to reform. They just play games, pretend to change, adopt purely cosmetic reforms and continue to cash their aid checks. Indeed, there is a perverse incentive not to adopt meaningful reform, because that really would lead to a cutoff of aid. True reform would cause a country to grow so rapidly that it would no longer qualify for aid. Since it would also require that elites give up much of their power and eliminate many of their opportunities for personal enrichment through corruption, they retain the anti-growth policies. In effect, they keep their countries in poverty to keep the aid flowing. Not only is there no case for doubling foreign aid, as the U.N. conference hopes to accomplish, there is no case for existing aid. The United States would do far more to help the world's poor by cutting off the subsidies that enable them to avoid adopting sensible policies. Increasing aid will only make a bad situation worse. What worked for welfare will work internationally if given a change. Tough love, not more aid, is the answer.