Issues 2012

The Issue

Supporters of traditional development assistance programs assert that they spur economic growth in the less developed world. There is not, however, any clear evidence of a correlation between the two. In fact, the track record demonstrates just the opposite—an inverse correlation. Nations that have become dependent on significant amounts of donor assistance are more likely to fall behind economically than they are to prosper.

Over the past 40 years, the developed nations in the Organisation for Economic Co-operation and Development have donated over $3 trillion in official development assistance (ODA), with about one-third of it—nearly $1.1 trillion in constant 2008 dollars, according to the Congressional Research Service—coming from the United States. This assistance is spent such programs as bilateral and multilateral development (social welfare, agriculture, health care, food aid, and reform of institutions) as well as humanitarian, economic and political security, and military assistance.

Yet studies by economists such as Professor William Easterly of New York University have repeatedly shown that ODA fails to produce sustainable economic development through economic growth, job creation, and higher living standards. Foreign aid rarely generates sustained prosperity; if it does achieve short-term success, it does so at a very high price. For the most part, no multipliers materialize after the aid is spent because it leaves the economies of recipient nations fundamentally distorted. The influx of development assistance often stimulates rent-seeking behavior by the politically well-connected, weakens institutions of democratic governance, and perpetuates the corrupt regimes that are the main obstacles to growth.

The Index of Economic Freedom, published annually by The Heritage Foundation and The Wall Street Journal, measures a country’s openness to competition; the degree of state intervention in the economy (whether through taxation, spending, or overregulation); and the strength and independence of the judiciary in enforcing rules and protecting private property. It consistently finds that free markets and entrepreneurship are keys to prosperity. The 2011 Index highlighted a significant positive correlation between higher economic freedom scores and reduced poverty as measured by the United Nations Development Programme’s Human Development Index as well as improved democratic governance and political stability as tracked by the Economist Intelligence Unit’s Index of Democracy.

Even though traditional U.S. development assistance programs do not have a good track record, President Barack Obama dramatically increased spending on foreign aid; he requested $35.9 billion in foreign operations funding (excluding State Department operations) for fiscal year (FY) 2012, up from $26.1 billion requested for FY 2009 (the last budget of the George W. Bush Administration).

The U.S. bilateral and multilateral development assistance requested for FY 2012 includes $1.5 billion for the operating budget of the U.S. Agency for International Development (USAID); $1.125 billion for the Millennium Challenge Corporation (MCC); $6 billion (combined State Department and USAID funding) for the President’s Emergency Plan for AIDS Relief (PEPFAR); $625 million for family planning and reproductive health; and funding for other global health and child survival programs, international humanitarian and disaster assistance, migration and refugee assistance, and economic support funds (ESF).

The total FY 2012 request for HIV/AIDS, tuberculosis, and other international programs in the budgets of USAID, the State Department, and the Department of Health and Human Services comes to over $7.15 billion, including funding for the Joint United Nations Program on HIV/AIDS. While some of these targeted programs—like the MCC—produce good results, others do not.

The problem with traditional development assistance is that it relies on a government-to-government model that has not generated significant and sustainable opportunities on the ground for people in developing nations. Instead, it has tended to promote statist approaches to development that increase control of the market by those in power, create distortions in the economy and new opportunities for corruption, and promote dependence on the government. With rare exceptions, traditional ODA has tended to reinforce the problems that undermine lasting development. Moreover, while attempting to reduce illiteracy and gender inequity in developing countries is important, traditional development assistance aimed at such problems is simply insufficient to overcome the impediments to growth.

The need for ODA is further disputed by the fact that, today, private financial flows to the developing world that contribute to economic growth dwarf ODA. According to the Hudson Institute’s Index of Global Philanthropy, billions of American dollars from faith-based and other charitable, academic, and humanitarian groups go to the needy overseas every year and show far better results than government ODA. The key is to facilitate these flows, not compete with them. Private flows go where they obtain the best return or best navigate the policy hurdles. The U.S. should encourage developing countries to remove the barriers that impede these flows.

Over the past decade, the U.S. government has attempted to achieve more measurable results from its aid programs. The Millennium Challenge Account program was innovative in that it was designed to overcome the shortcomings of the traditional USAID model by allocating assistance to countries that have embraced the policies linked to economic growth. The objective criteria used by the Millennium Challenge Corporation to determine which countries will receive funding—“their performance in governing justly, investing in their citizens, and encouraging economic freedom”—mirror principles used in preparing the annual Index of Economic Freedom.

Participation in MCC programs requires recipient governments to take high-level ownership of the projects funded and commit to reducing corruption and improving transparency and accountability. MCC programs to promote sustainable economic development deal with such areas as transportation, water and industrial infrastructure, agriculture, education, private-sector development, and capacity building.

U.S. security assistance has made direct and short-term contributions to national security. This assistance includes the Foreign Military Sales (FMS) program to subsidize sales of U.S. military equipment, services, and training to friendly developing countries; International Military Education and Training (IMET) grants for training foreign military professionals; and some funding of international peacekeeping operations.

Targeted U.S. political, security, and humanitarian assistance can be an effective foreign policy tool. It is an important aspect of our engagement in many countries with which the U.S. holds important national interests, such as Afghanistan, Pakistan, Egypt, and Iraq, but that would not yet qualify for MCC funding. Programs such as those that focus on combating hunger and reducing maternal mortality and HIV/AIDS, for example, maintain America’s credibility as a compassionate and moral world leader. However, many of these programs could be administered by the State Department or other government agencies such as the Centers for Disease Control and Prevention.