Foreign Assistance

Talking Points

  • Despite trillions spent on foreign aid over the past six decades, studies have shown no robust correlation between aid and long-term, sustainable economic development; many have shown no relationship or an inverserelationship.
  • On the other hand, studies such as the annual Index of Economic Freedom show that policies enforcing rule of law, protecting private property, and promoting free markets and entrepreneurship do correlate strongly with long-term economic development and prosperity.
  • Developing countries need to build strong institutions, promote positive cultural values, and adopt policies that encourage entrepreneurship, investment, and economic engagement.
  • The U.S. should emphasize policy reforms linked to economic growth and development, adopt modern and focused delivery systems, pursue free trade agreements with responsible developing countries, reform America’s food assistance programs to maximize their efficiency and impact, and link U.S. development assistance at the U.N. explicitly to support for U.S.priorities.

The Issue

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

The Organisation for Economic Co-operation and Development calculates that donors have provided over $4.5 trillion (in constant 2011 dollars) in net official development assistance (ODA) disbursements between 1960 and 2011. About one-fifth—$916 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 ODA is not robustly correlated with 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 emphasize 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 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.

The U.S. bilateral and multilateral development assistance requested for fiscal year (FY) 2014 includes $1.4 billion for the operating budget of the U.S. Agency for International Development (USAID); $21.4 billion for bilateral economic assistance; and $3.2 billion for multilateral economic assistance. Included in these totals are funds for humanitarian assistance, the Millennium Challenge Corporation, 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 compassionate and 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 new 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. In 2012, for example, more than $1.5 trillion of private foreign direct investment flowed into countries around the world. 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 to promote sustainable economic development deal with 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 per-forming well or whether reform—such as that being considered in Congress for America’s food aid programs—is necessary. Similarly, as the world and America’s interests change, so should our assistance allocations change.


Recommendations

  1. 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.
  2. 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.
  3. Re-direct development assistance from USAID to other relevant U.S. agencies. USAID’s operating budget ($1.4 billion requested for FY 2014) should be phased out gradually along with nearly $200 million in other legacy programs such as the Capital Investment Fund, Complex Crises Fund, and Development Credit Authority. 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, Eurasia, and Central Asia—over $630 million in FY 2013—should be cut by 50 percent and then phased out.
  4. 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.
  5. Channel future aid through more modern and focused delivery systems, such as the Millennium Challenge Corporation 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.
  6. 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.
  7. 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 & Figures

  • International development and humanitarian assistance increased by 55 percent from $15.11 billion ($18.92 billion in 2013 dollars) in FY 2003 to $23.4 billion in FY 2013. USAID operating expenses more than doubled from $589 million (about $748 million in 2013 dollars) in FY 2003 to $1.35 billion in FY 2013.
  • The Organisation for Economic Co-operation and Development calculates that since 1967, donor nations have provided more than $4.5 trillion in development assistance, with about one-fifth of it provided by the United States.
  • Economic studies by William Easterly, Raghuram G. Rajan, Arvind Subramanian, and other experts have found no relationship or a negative relationship between economic assistance and growth and development in recipient nations.
  • The U.S. has provided over $4 billion in aid to the Palestinians since the 1993 Oslo peace accords were signed. In FY 2011, aid was set at $550 million, including $400 million in economic support funds and $150 million for training and equipping Palestinian security forces.

Selected Additional Resources

Heritage Experts on Foreign Assistance


  • Ambassador Terry Miller

    Director, Center for International Trade and Economics and the Mark A. Kolokotrones Fellow in Economic Freedom


  • James Roberts

    Research Fellow For Economic Freedom and Growth


  • Brett Schaefer

    Jay Kingham Fellow in International Regulatory Affairs

To talk to one of our experts, please contact us by phone at 202-608-1515 or by email.