Foreign Assistance



The Issue


Supporters of traditional development assistance programs assert that they spur economic growth in the less-developed world. However, evidence to support that assertion is inconclusive. In fact, many economic studies find no correlation or even an inverse correlation between provision of development assistance and economic growth and development.

The Organization for Economic Co-operation and Development calculates that donors have provided over $4.27 trillion (in constant 2013 dollars) in net official development assistance (ODA) disbursements between 1960 and 2013. About one-fifth—$810 billion—was provided by the United States. This bilateral and multilateral development and humanitarian assistance is spent on programs intended to support social welfare, agriculture, health care, food aid, and reform of institutions.

Yet studies by economists such as Professor William Easterly of New York University have shown repeatedly that there is no robust correlation between ODA and long-term, sustainable economic development: economic growth, job creation, and higher living standards. Foreign aid rarely generates sustained prosperity, and 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 distorts the economies of recipient nations. 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.

As Professors Daron Acemoglu and James Robinson stressed in their 2012 book, Why Nations Fail: The Origins of Power, Prosperity, and Poverty, a developing country needs fundamental political and economic change to build strong institutions along with a societal willingness to permit creative destruction if it is to climb out of poverty. Professors Wayne Grudem and Barry Asmus emphasized in their 2013 book, The Poverty of Nations: A Sustainable Solution, that the achievement of these fundamental changes in attitude and philosophy must rest on a foundation of core cultural values based on personal freedom and the pursuit of happiness.

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. There is a significant positive correlation between higher economic freedom scores and reduced poverty as measured by the United Nations Development Program’s Human Development Index as well as improved democratic governance and political stability as tracked by The Economist Intelligence Unit’s Index of Democracy.

The U.S. bilateral and multilateral development assistance requested for fiscal year (FY) 2016 includes $1.425 billion for the operating budget of the U.S. Agency for International Development (USAID); $21.67 billion for bilateral economic assistance; and $3.13 billion for multilateral economic assistance. Included in these totals are funds for humanitarian assistance and global health programs.

Targeted U.S. political, security, and humanitarian assistance can be an effective foreign policy tool. 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 in fragile and post-conflict states. Assistance is an important aspect of our engagement with allies and other countries (for example, Afghanistan, Israel, and Pakistan) to support America’s national interests. Programs to combat hunger and reduce maternal mortality and HIV/AIDS help to maintain America’s credibility as a moral world leader.

Traditional development assistance, which relies on a government-to-government assistance model, 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 concentrate control of the market, create economic distortions and opportunities for corruption, and promote dependence on government. With rare exceptions, traditional ODA has tended to reinforce the problems that undermine sustainable development and dilute the impact of efforts to address the consequences of economic stagnation, such as illiteracy and gender inequity.

In any case, rapidly increasing private financial flows to the developing world are marginalizing ODA. According to the World Bank, “Officially recorded remittances to developing countries are expected to reach $435 billion [in 2014], an increase of 5 percent over 2013.” According to the World Investment Report 2015, more than $1.2 trillion of private foreign direct investment flowed into countries around the world and accounted for “more than 40 per cent of external development finance to developing and transition economies.” 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 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 allocate assistance to countries that have embraced policies linked to economic growth. The objective criteria used by the Millennium Challenge Corporation (MCC) 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—creating the so-called MCC effect. MCC programs promote sustainable economic development deals in such areas as transportation, water and industrial infrastructure, agriculture, education, private-sector development, and capacity building.

The Administration and Congress must understand that they are stewards of American taxpayer dollars and have a responsibility to ensure that economic, humanitarian, and security assistance dollars are not squandered. They must endeavor to ensure that assistance is effectively and efficiently achieving its intended purpose whether it is augmenting economic development, alleviating suffering during a crisis, or supporting America’s national interests. Congress and the Administration should regularly assess U.S. aid programs to determine whether they are performing well or are in need of reform. Similarly, as the world and America’s interests change, so should our assistance allocations change.


Recommendations


Conduct an Independent Evaluation of All U.S. Assistance Programs. As a matter of due diligence, Congress and the Administration should evaluate all U.S. assistance programs to determine whether they are doing what America needs them to do and, if not, implement changes to address those failings.

Enact New Foreign Assistance Legislation that Includes a Phasing Out of USAID. USAID was established as a “temporary” federal agency under the Foreign Assistance Act of 1961. The lessons learned about the ineffectiveness of its programs over decades indicate that it is time for a new approach.

Redirect Development Assistance from USAID to Other Relevant U.S. Agencies. USAID’s operating budget ($1.425 billion requested for FY 2016) should be phased out gradually along with other programs such as the Complex Crises Fund, the Development Credit Authority, and the Overseas Private Investment Corporation. Remaining core development assistance responsibilities should be transferred to the State Department and the MCC. USAID and State Department funding for development assistance to Europe and Eurasia—over $500 million in FY 2014—should be cut by 50 percent and then phased out.

Pursue Free Trade Agreements (FTAs) with Responsible Developing Countries. Genuine and lasting development comes from private sector–led economic growth through trade and investment, strong protection of property rights, and the rule of law. The U.S. should seek to expand economic relations with large and friendly emerging economies through FTAs and other trade deals. FTAs encourage the strengthening and deepening of democratic free-market institutions in both government and civil society in developing countries.

Channel Future Aid Through More Modern and Focused Delivery Systems, Such as the MCC as Initially Envisaged. The original MCC model (one that has been weakened under the Obama Administration) encourages the rule of law and economic freedom so that the poor empower themselves rather than remaining dependent on inefficient or even corrupt government bureaucracies.

Reform America’s Food Assistance Programs. The U.S. should eliminate costly legal requirements for the use of U.S. food and shipping, end monetization programs, and trim the food assistance budget to reflect the greater reach enabled by these efficiency reforms.

Increase U.S. Leadership at the U.N. by Explicitly Linking Development Assistance to Support for U.S. Priorities and Forging Coalitions with Nations that Govern by the Principles of Political and Economic Freedom. Over the past 10 U.N. General Assembly sessions, about 82 percent of the recipients of U.S. development aid have voted against the U.S. most of the time on overall non-consensus votes, and 69 percent have voted against the U.S. most of the time on non-consensus votes deemed important by the Department of State.


Facts and Figures


  • Bilateral economic assistance increased over 50 percent from $13.2 billion ($16.5 billion in 2014 dollars) in FY 2004 to $20.7 billion in FY 2014. USAID operating expenses more than doubled from $613 million (about $768 million in 2014 dollars) in FY 2004 to $1.3 billion in FY 2014.
  • The Organization for Economic Co-operation and Development data indicate that since 1960, donor nations have provided more than $4.27 trillion in development assistance (2013 dollars), with about one-fifth of that provided by the United States.
  • Economic studies by William Easterly, Raghuram G. Rajan, Arvind Subramanian, and other experts have found either no relationship or a negative relationship between economic assistance and growth and development in recipient nations.

Selected Additional Resources


Ambassador Terry Miller and Anthony B. Kim, 2015 Index of Economic Freedom.

Bryan Riley and Brett D. Schaefer, “Congress Should Reject Proposed Food Aid Shipping Mandate,” Heritage Foundation Issue Brief No. 4228, May 23, 2014.

Bryan Riley and Brett D. Schaefer, “Time to Privatize OPIC,” Heritage Foundation Issue Brief No. 4224, May 19, 2014.

James M. Roberts, “Not All Foreign Aid Is Equal,” Heritage Foundation Backgrounder No. 2523, March 1, 2011.

Brett D. Schaefer, “11 Issues for Congress in the President’s FY 2015 International Affairs Budget Request,” Heritage Foundation Issue Brief No. 4179, March 24, 2014.

Brett D. Schaefer and Ambassador Terry Miller, “U.N. Repeating Past Mistakes in New Sustainable Development Goals,” Heritage Foundation Issue Brief No. 4251, July 23, 2014.

Brett D. Schaefer and Anthony B. Kim, “U.N. General Assembly: Foreign Aid Recipients Vote Against the U.S.,” Heritage Foundation Issue Brief No. 3862, February 25, 2013.