Interesting Perspective on US Foreign Aid

[storealex]

Sorry, but Im too lazy to read the whole thing. Maybe if you could sum up their arguments, and if we found it interesting or disagreed, we would read more into it.

 

[Pokurcz]

Foreign aid is good as long as it does not spoil the local market of the donation receiver.
The aid in the shape of food and clothes more often than not destroys local production and manufacture because the aid is always cheaper if not for free as intended.

Industrialised countries often give food of their own production to give their own market a boost and get rid of their exes.
In stead the money should be used by people from the donor country to by local food and the likes if possible.
In this way the local economy gets a well needed boost and can get on its feet more quickly. (I am guessing this was not the case with India before the eighties.)

 

[Erik Mesoy]

I usually favor cutting tolls and tariffs and debts whatnot as effective foreign aid anyway.

 

[BasketCase]

I had no idea that even if you total US gov and private aid it is still less than UK gov aid alone.

Sorry but unless you make specific points this seems to be a "Hay we're the tightest people in the developed world - but we really feel ok about that!" thread.

Instead of the civilized world, point your microscope at the wilderness.

And, paradoxically, the politically correct line becomes: "don't mess with it. Don't feed wild animals; in the short term you help them, but in the long term you impair their ability to survive".

Suddenly, it's not so simple, is it? What's really best for the human race?

Exploitation of Third World oil reserves, for example. The forces of the Politically Correct hurl insults at the developed world for sending drillers into developing nations to drill their oil and "stealing their wealth". That's not actually what happens. Some of the wealth goes to the nation where the oil is located, but nobody's going to drill that stuff for free, so the oil company gets a cut. Meaning that over the long term, that nation will get less money from the oil.

But on the other hand, what if you don't drill over there? Then that nation doesn't get any oil money at all until they develop their own drilling industry. The fact that so many nations choose to allow foreign companies to drill inside their borders, shows that most people of the Earth are not willing to languish in poverty until they can drill it themselves.


So, which is it? Help them in the long term, or leave them to their own devices? Either way, you're going to have problems.

@Fifty: Scuse the delay, man, but it took me a while to work all this out. It's a complicated one. Sometimes, the only thing to do when you want an answer is to wait longer.

 

[Enkidu Warrior]

Saying that foreign aid encourages people to be lazy is either a stunning lack of imagination or just dumb.

Giving aid to a village in Indonesia or Pakistan in the aftermath of an epic natural disaster encourages people to not be dead. We are morally obligated to act, regardless of the inherent problems. Americans can use whatever convoluted nonsense they want to justify their stinginess - what it is is what it is.

 

[downtown]

US Foreign Aid should be zero, except to those countries where our interests are served by the aid.

Well, thats the whole point of aid isn't it? We don't give out money just to be nice...we hope that eventually, it comes back to help us. Money to aid the developing world is often repaid in goodwill, and hopefully, a growing economy that we could use as a trade partner. These exersizes in soft power are even more important now, in my view, because of the war on terror.

Saying that foreign aid encourages people to be lazy is either a stunning lack of imagination or just dumb.

Giving aid to a village in Indonesia or Pakistan in the aftermath of an epic natural disaster encourages people to not be dead. We are morally obligated to act, regardless of the inherent problems. Americans can use whatever convoluted nonsense they want to justify their stinginess - what it is is what it is.

I dont see what its so dumb. We can see that just handouts can hamper a workforce on a mirco level, in a community, or even at the macro level, with a nation...thats why workfare is more effective than perpetual welfare. Surely that same principle can be applied to the international scene. Obviously, in the example that you cited, aid would be good idea....an example of aid waste would be to throw millions at a country, hoping that it will develop industry...when it finds thats it cheaper to just pocket the money, instead of using it to deveop internally.


I read the first article Fifty, and I'm flipping around the second. I think it makes some good points, but it doesnt really change my opinion that foriegn aid is still important (although certainly we can be more careful about we administer it). One thing that we as Americans ought to look into is using aid to develop the militaries more of friendly nations. American military might is a bit of one of those, what are they called, "common goods" problems? We pay for it, so nobody else has to? If other countries built up their own militaries *more*, we wouldn't have to spend so much money on our own. Hopefully, that could eventually save us some dough.

We must be careful to not get other countries addicted to our dole, as that really screws both of us. Giving targeted grants is, in my view, still an effective use of soft power, because of all the gains the country gets that can't always be measured in dollars and cents.

 

[Enkidu Warrior]

I dont see what its so dumb. We can see that just handouts can hamper a workforce on a mirco level, in a community, or even at the macro level, with a nation...thats why workfare is more effective than perpetual welfare. Surely that same principle can be applied to the international scene.

No it can't. "Handouts" in a developed nation are utterly incomparable to international aid. If you're denied welfare in America you will likely at least eke out a miserable life. There are people dying right now that could be saved by international aid. You can't pull yourself up by your bootstraps when you're dead. Countless people dying can hamper your workforce too. If you want a comparison then look to disaster aid given after Katrina.

 

[BasketCase]

Giving aid to a village in Indonesia or Pakistan in the aftermath of an epic natural disaster encourages people to not be dead. We are morally obligated to act, regardless of the inherent problems. Americans can use whatever convoluted nonsense they want to justify their stinginess - what it is is what it is.

Then why don't you give up your house (or apartment or whatever) to homeless people and move into a tent?

There ya go.

 

[downtown]

No it can't. "Handouts" in a developed nation are utterly incomparable to international aid. If you're denied welfare in America you will likely at least eke out a miserable life. There are people dying right now that could be saved by international aid. You can't pull yourself up by your bootstraps when you're dead. Countless people dying can hamper your workforce too. If you want a comparison then look to disaster aid given after Katrina.

We're talking about two different things. There is a HUGE difference between a temporary cash infusion after a hurricane or natural disaster, and long term developmental relief.

 

[Enkidu Warrior]

We're talking about two different things. There is a HUGE difference between a temporary cash infusion after a hurricane or natural disaster, and long term developmental relief.

I completely agree, but both aim to stop people dying through poverty, which is thankfully not usually the case with welfare in our countries. Once again, you can't be incentivised to work when you're dead, so the comparison is meaningless. If we really want to help poor countries to deal with disasters and development without our help we should actually implement a global trade system that gives them at least a cat in hell's chance of doing it. But then that's not going to happen any time soon.

 

[JerichoHill]

It is common among those who are dissatisfied with US governmental policy to cite the fact that, as a percentage of GDP, the USA does not give nearly as big a chunk as other 1st world countries in terms of foreign aid.

With that in mind, I give you the following commentaries. These aren't just random bloggers, they are a nobel prize winning economist and one of the most respected legal scholars (in the area of law and economics) in the world.

The Title of the Article is "Should the US Provide Foreign Aid?"

Spoiler Richard Posner's Comment :

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.

Spoiler Gary Becker's View :

My answer is essentially "no", with a few small qualifications. Posner gives the main arguments against aid, so I will not go over them.

William Easterly among others has written several articles that examine the empirical evidence on the relation between foreign aid and economic growth-see for example, chapter 2 of his book The Elusive Quest for Economic Growth. He and others have discussed foreign government aid to countries in Africa, Pakistan and other Asian countries, and typically have not been able to find any noticeable positive effects of aid on a country's economic growth

In this book Easterly discusses in detail aid to Ghana in the early 1960's that helped it build a huge dam and the largest man made lake in the world. This project was at the time supported by some economists with extravagant claims about what it would accomplish: create a new fishing industry, generate electricity, encourage a new aluminum smelting plant, and other benefits. At a huge cost, it accomplished few of these goals-there is a smelting plant run by a private multinational that has had slow growth in its output- but little else that is positive. Indeed, the lake had some serious negative consequences, such as destruction of considerable agricultural land because of the wide area flooded, and the importing to those living near the lake of water-borne diseases, such as malaria, river blindness, and hookworm.

India is my favorite example to illustrate the failure of government foreign aid. From the fifties until the end of the 1980's more private and government aid went to India than to any other country. Yet during that same time period, India had a very modest growth in per capita income of about 1 percent per year-sometimes resignedly called in those days the "Hindu rate of growth". I am not claiming that foreign aid was the main source of India's mediocre performance, but it clearly did not overcome the bad economic policies of its government. In fact, aid may well have encouraged these policies as the India government could always count on foreign aid to help it out of the worst aspects of any mess caused by its restrictions on foreign trade, severe controls over private investment even by Indian companies, and neglect of basic education, roads, and agriculture.

Fortunately, in the early 1990's, the Indian government recognized that the real cause of its economic problems was not insufficient aid, but its own policies. Reforms at that time include opening up more investments to the private sector, greatly lowering tariffs, quotas, and other barriers to foreign trade, and changes in its thinking about relying on rich countries to help its development. Indeed, India can legitimately claim that now one important obstacle to its growth comes from the very same rich countries which had been important donors because of their import restrictions that hinder the access of Indian farmers and manufacturers to their markets.

Foreign aid programs other than of a humanitarian nature are destined to fail because they involve transfers of resources from one government to another. No economist who has closely examined the evidence concludes that the reason why some poor countries fail to have significant economic growth is because their governments have insufficient resources. The complaint is typically that governments do the wrong things with the resources they have, including their regulatory powers. They discourage entrepreneurship, give cronies special advantages in investments or in rights to import and export, over-regulate labor markets, spend too much on public prestige projects, such as domestic airlines and large dams that of little use and yet drain valuable resources, neglect basic education in order to create expensive universities, and so on. Foreign aid only makes it easier to continue to promote projects and policies that are not merely neutral with respect to growth, but hinder any take off into rapid growth.

Donor nations are also subject to political pressures that influence the form their aid takes. They attach various strings to the aid that help powerful interest groups in their own countries at the expense sometimes of the aid having any chance of helping recipient countries grow faster. Given the distortions away from effectiveness on both sides of the donor-recipient equation, it is no surprise then most foreign aid has been at best ineffective, and at worst negatively affects the growth prospects of recipients.

Does my discussion mean that I oppose all foreign aid except sometimes for military assistance, and for humanitarian purposes? My answer, to repeat, is yes. However, I include in humanitarian assistance aid to combat some of the major diseases in poor countries, although I prefer such aid to be from private foundations and other groups since they tend to be more effective than governments -see my January 1 post on private charities. However, if governments of rich countries do give resources to help fight diseases in poor countries, they should give to private groups in these countries. If they have to give to government agencies, they should stipulate in the grants that recipient governments have to match their own tax revenues in specified proportions to the amounts received in aid.

SOURCE

So what do you guys think of their arguments? I'm interested because I don't really know a whole ton about the relevant issues so I'm interested in seeing whether you guys have any major points of contention with their arguments (backed up with relevent argument and proof, of course, not just rolleye smilies )

Becker and Posner Blog is awesome!

 

[JerichoHill]

Posner's hypothesis that foreign aid enables agribusiness and farmers to get and maintain their trade protections is implausible on its face. In the battle over those protections, the voice of advocates of poor countries is an insignificant force. You think Oxfam America's lobbyists can take on those of Archer Daniels Midland? So few American voters are even aware of the relationship between tariffs and third world misery, there is no "issue" to provide "cover" for.

You need to explain why its implausible, because as best as I've seen, such aid transfers do indeed enable protectionism

 

[JerichoHill]

Saying that foreign aid encourages people to be lazy is either a stunning lack of imagination or just dumb.

Giving aid to a village in Indonesia or Pakistan in the aftermath of an epic natural disaster encourages people to not be dead. We are morally obligated to act, regardless of the inherent problems. Americans can use whatever convoluted nonsense they want to justify their stinginess - what it is is what it is.

I see. So Posner, a renowned judge, and Becker, a nobel winning economist, are dumb?

 

[Enkidu Warrior]

I see. So Posner, a renowned judge, and Becker, a nobel winning economist, are dumb?

Oh, how ridiculous of me, I only bothered to consider the content of their arguments, not who they are, just a moment while I reconsider my opinion...

Errr, yes, if they hold the view that letting people starve to death is an economic incentive then they are dumb.

 

[Riffraff]

Oh, how ridiculous of me, I only bothered to consider the content of their arguments, not who they are, just a moment while I reconsider my opinion...

Errr, yes, if they hold the view that letting people starve to death is an economic incentive then they are dumb.

yes this is exactley the point - no matter that there are good arguments against foreign aid concerning long-term effects on economy and administration - those arguments are up against tens of thousands of people dying on a daily basis

 

[Ayatollah So]

You need to explain why its implausible, because as best as I've seen, such aid transfers do indeed enable protectionism

You quote my explanation, then say I need to explain

OK I'll try again. Consider the Senate voting on some bit of trade protectionism favoring US farmers and agribusiness. Consider the political forces aligned on each side. On the side of protectionism you have 600-pound gorilla lobbying teams like ADM. On the other side, you have (a) consumer groups, (b) free-trade ideologues, and (c) charity-minded groups like (to take just one example) Oxfam America, which are seeking to improve the lot of third-worlders.

First Point: (a)+(b)+(c) << 600 lb gorilla. Therefore, protectionism is here to stay for the forseeable future.

Second Point: (c) << (a)+(b). Therefore, to the extent that there is hope of ending protectionism (which is not much, see First Point), the "foreign aid" crowd is still just a bit player. Throwing them a bone does next to nothing to change the political balance on the protectionsim question.

 

[The Last Conformist]

I agree entirely with Becker. Foreign aid via governments is always doomed to be lost by corruption.

So, in your opinion, all the money spent under the Marshal Plan was lost by corruption?

Don't have time to read the articles right now. Tomorrow, perhaps.

 

[willemvanoranje]

The reason that aid has not worked for so long has so many reasons.. Tying aid might be one of the most important. For decades aid only went to supporting allies in the cold war...usually highly corrupt governments who made the money dissapear in their own pockets. Other aid was only given if the aid money was used to buy products from the donor country, including consultants. Jeffrey Sachs calculated, for example, that for every american dollar spent, only like 15 cents actually went to the needing persons.

Of course corruption is a problem. I think it's a good plan to skip 3rd world government in the future, and give money to local organizations that have proven their ideas work. Those ideas can be scaled up, implemented and adjusted to local conditions where necessary. Some kind of institution, maybe the UN, could keep an eye on everything so that we don't get 20 agencies providing malaria bed nets and none offering to build a well.

The only things that should be done on a really large massive scale is, in my opinion, the battle against diseases. The world has done it many times in the past century, and it can be done again. It would be a nice idea to finally put a hold to african river blindness for example.

Also collective action problems should be dealt with by the state. Some money could be given to them in those cases. Someone has to provide roads, energy cables and maybe even at some stage mobile phone networks.

In short, it's not about giving the people development, it's about shaping the circumstances in such a way that they can start it themselves. You can't really know what is needed in advance, so go out there and try small things until one works, then try to expand. Dying of hunger? Try to educate them on crop rotation, provide cheap fertilizers.. kids get sick of worms? try to educate them on how to not get them, try providing medicine, look what works and pick it.

These are all examples picked from just two books, possibly the two best-selling books on aid.

 

[Paradigne]

OK, I'll admit I'm lazy and didn't read the whole thing but, this just talks of what the US government has given, or does it consider private donations as well?

I would be more interested in private donation totals than government totals...

 

[GinandTonic]

OK, I'll admit I'm lazy and didn't read the whole thing but, this just talks of what the US government has given, or does it consider private donations as well?

I would be more interested in private donation totals than government totals...

The private donation level was very similar to the gov donation level.