--><h3><span><font size="5">A Foreign Aid Disaster in the Making</font></span></h3>
<p class="MsoBodyText"><font size="4">By Thomas J. DiLorenzo</font>
<p class="MsoBodyText">[Posted
January 6, 2005]
<p class="MsoBodyText"><img alt src="http://www.mises.org/images3/aid.jpg" align="right" border="0" width="254" height="197">In
the wake of the tsunami disaster in Indonesia, governments throughout the world
are doing what governments always do: throwing money at the problem. In this
case, the money is referred to as"foreign aid."
<p class="MsoBodyText">The billions of dollars (or the equivalent in other
currencies) being sent to Indonesia, India, Sri Lanka, and other devastated
areas are bound to do <em>some</em> good; it would be impossible to spend all
that tax money without some of it leaking out to benefit some of the disaster
victims. Indeed, the television news networks are already filled with scenes of
American helicopters and cargo planes unloading in-kind aid of all kinds.
<p class="MsoBodyText">Politicians are bound to politicize this disaster, as
they do with all other world events, in a way that helps them accumulate more
power and confiscate more wealth from their citizens. Specifically, now that
they are becoming rather fond of portraying themselves as internationalized
Mother Teresas, coming to the aid of anyone, anywhere, as long as it is all paid
for by their hard-working, hapless taxpayers, they will be inclined to become
champions of ever-expanding foreign aid spending. To do this they will have to
ignore the truth about foreign aid: For over half a century, it has been either
ineffective or counterproductive in stimulating prosperity.
<p class="MsoBodyText">The late Peter Bauer (Lord Bauer) devoted his entire
career to studying the law of unintended consequences as it applied to foreign
aid, and many of his conclusions are summarized in his 1991 book, <em>The
Development Frontier.</em>
<p class="MsoBodyText">First of all, notes Bauer, foreign aid is not"aid"
but a <em>transfer</em> or <em>subsidy</em>. And it is typically not a transfer
to the poor and needy but <em>to governments</em>. Thus, the predominant effect
of"foreign aid" has always been to enlarge the size and scope of the
state, which always ends up impairing prosperity and diminishing the liberty of
the people. Worse yet, it leads to the <em>centralization</em> of governmental
power, since the transfers are always to the recipient country’s central
government.
<p class="MsoBodyText">Like every other government handout program, foreign aid
programs rely on a series of myths concocted by a statist intellectual class.
The most prominent among these myths is that economic development in"undeveloped"
countries depends on foreign aid. Not true. As Bauer wrote:"Economic
achievement depends on personal, cultural, social, and political factors...
and the policies of... rulers.... It diminishes the people of the Third
World to suggest that... unlike the people of the West they cannot achieve it
without subsidies" (p. 42).
<p class="MsoBodyText">This"vicious circle of poverty" theory was
championed for decades by Paul Samuelson, who argued that poor countries needed
capital subsidies to develop, for they had no resources to spare with which to
invest in capital. But, as Bauer correctly points out,"This hypothesis is
refuted by every individual family, group, community, or country that has
emerged from poverty without subsidies.... Indeed, if the hypotheses were
valid, the world would still be in the Old Stone Age" (p. 43).
<p class="MsoBodyText">Private capital markets have always funneled investment
funds to poor countries where there were prospects of the productive use of the
capital. That, indeed, is why the U.S. was a debtor nation from its inception
until about the early 1920s. As Bauer concludes:"Ability to borrow does
not depend on the level of income, but on responsible conduct and the ability to
use funds productively" (p. 44). (A hallmark of Samuelsonian economics has
always been its detachment from historical reality, to go along with its
mathematical virtuosity).
<p class="MsoBodyText">Since foreign aid goes from one government to another, it
inevitably diverts resources from the activity of production to the activity of
"rent seeking" or attempts to acquire governmental funds. It creates a
giant patronage machine, in other words, with all the attendant corruption that
such things have always entailed. Such corruption often leads to armed conflict
over the control of the patronage in many Third World countries. And, as more
and more resources are devoted to rent seeking instead of production and
entrepreneurship, the recipient countries become poorer and poorer. If anything,
it is foreign aid that <em>causes</em> a"vicious circle of poverty."
<p class="MsoBodyText">Foreign aid also lets corrupt, interventionist states off
the hook for their counterproductive, if not disastrous, economic policies.
Governments that retard economic growth with high taxes, spending and borrowing,
excessive regulation, protectionism, inflation, price controls, land
collectivization, and outright corruption, are spared a citizen revolt if
foreign aid can at least be used to put food on enough tables to keep the masses
happy and in line.
<p class="MsoBodyText">Bauer even found that many aid-receiving governments
intentionally wrecked their own economies as a strategy for acquiring additional
millions in foreign aid. This whole process may be bad for their economies, but
it consolidates their political power and enriches <em>them</em> at the same
time.
<p class="MsoBodyText">Like all forms of welfare, foreign aid also enforces an
attitude among aid recipients that circumstances are beyond their own control,
and therefore they must depend on begging from foreigners rather than on
entrepreneurship. Foreign aid creates a giant moral hazard problem, in other
words.
<p class="MsoBodyText">Consider the case of Micronesia. As David Osterfeld wrote
in <em>Prosperity vs. Planning: How Government Stifles Economic Growth</em> (p.
146):
The pauperization of Micronesia was a direct result of foreign aid. The United
States acquired Micronesia as a trust territory in 1945 following its
liberation from the Japanese. Outside private investment was discouraged
because it would, according to U.S. Navy officials, 'reduce the people to
cheap labor.' Instead, the people of Micronesia were given free food, clothes,
and other supplies. The result was bankruptcy of many local stores and
undermining of the incentive to work.
<p class="MsoBodyText">Osterfeld quoted a Micronesian political official as
saying,"We have no technicians, no plumbers, no electricians. We have no
economic base to be self sufficient because the U.S. government just handed us
everything..."
<p class="MsoBodyText">The donors of foreign aid are not always motivated by
charitable impulses, either. It is well known that foreign aid has long been
part and parcel of the U.S. government’s protectionist policies: Protectionism
at home allows politicians to buy votes from protected industries and their
employees, even though blocking imports from certain Third World countries may
be economically devastating to those countries. Then, having caused the economic
devastation, the same politicians will act like heroic angels and vote to send
welfare payments to those countries in the form of cash and in-kind"aid."
<p class="MsoBodyText">If the aid is in the form of say, farm tractors, then the
politicians create for themselves yet another opportunity to buy votes (and
solicit campaign contributions) with the tax dollars that are used to pay for
the American-made tractors. Thus, politicians and tractor manufacturers become
the <em>real</em> beneficiaries of the"aid."
<p class="MsoBodyText">Food aid has at times been disastrous for countries in
Africa and elsewhere. Dumping millions of tons of grain and other foods
depresses agricultural prices in the recipient countries, driving many of their
farmers into bankruptcy, and creating even more dependence on foreign aid. The
farmers then migrate to the cities to find work, driving up food prices there,
which is often met with price controls on food, which creates even more food
shortages and appeals for even more foreign food aid.
<p class="MsoBodyText">Sometimes this particular calamity is avoided because of
the fact that the political rulers of the aid-receiving country simply
confiscate all of the food aid and sell it on international markets, pocketing
the proceeds with the help of Swiss bank accounts.
<p class="MsoBodyText">Foreign aid has also caused all kinds of inappropriate
capital investments, as well as overinvestment, because of the calculation
problem. Whenever a business considers a capital investment it weighs the
benefits and costs of the investment to determine whether or not the investment
is worthwhile. But with foreign aid in the form of capital, the cost is zero.
The benefits will always outweigh the costs if someone else is picking up the
bill.
<p class="MsoBodyText">Consequently, there is little or no concern over whether
these subsidized investments will benefit consumers and be profitable. They are
viewed as merely a pork barrel, get-rich-quick opportunity for a small number of
politically-connected people in the recipient country, period. Thus, foreign aid
has funded such things as"double-deck suspension bridge for non-existent
railroads, giant oil refineries in countries that neither produce nor refine oil,
giant crop-storage depots... that are not accessible to farmers, and numerous
other white elephants," wrote Osterfeld (p. 150).
<p class="MsoBodyText">As Robert Higgs wrote in his classic book, <em>Crisis and
Leviathan,<span class="543182414-06012005"> </span></em>emergencies always
result in a ratcheting up of governmental powers at the expense of liberty and
prosperity. Once the emergency is ended, the size and scope of government is
never reduced to the level that it was at before the emergency. Thus, over time,
crises and emergencies—or the perception of them—is a major cause of the
growth of the Leviathan state.
<p class="MsoBodyText">This is also true in the case of international
emergencies, such as the recent events in Indonesia. This natural disaster has
already led to a burgeoning growth of the U.S. foreign aid bureaucracy, and such
growth will continue for years, along with all the undesirable, if not
disastrous effects that are inherent in all forms of"foreign aid."
<hr align="left" width="33%" color="#000080" SIZE="1">
<p class="MsoBodyText">Thomas DiLorenzo is professor of economics at Loyola
College. His latest book is <em>How
Capitalism Saved America: The Untold History of Our Country, From the Pilgrims
to the Present</em> (Crown Forum/Random House, 2004). He is also the author
of <em>The
Real Lincoln</em> (Three Rivers Press/Random House, 2003). [email]
Visit the Mises.org Blog. See Dr.
DiLorenzo's Daily
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