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Archive for the ‘Foreign Aid’ Category

I wrote last October about how poor nations that followed the pro-market recipe of the “Washington Consensus” in the 1980s and 1990s got good results. Johan Norberg addresses the same topic in this video.

Sadly, international organizations are infamous nowadays for the bizarre argument that developing nations should try to boost prosperity by imposing higher taxes and bigger government. I’m not joking.

I was even a credentialed participant at a conference on precisely this topic at the United Nations. It was a strange experience to be surrounded by anti-empirical people, but at least I wasn’t threatened with arrest, as happened at an OECD event.

Needless to say, these folks also think it’s a good idea to use foreign aid to finance bigger fiscal burdens in poor nations.

I’ve previously explained why this is a bad idea, at least if we care about achieving more prosperity for people. Simply stated, there’s considerable evidence that foreign aid retards economic growth by subsidizing bad policy.

Today, though, let’s focus on a different adverse consequence of aid, which is that it erodes the quality of governance.

For instance, the Economist reports on some spiked research from the World Bank, which showed that foreign aid subsidizes corruption.

Their conclusion was dispiriting. World Bank payouts to 22 aid-dependent countries during 1990-2010 were followed by a jump in their deposits in foreign financial havens. The leaks averaged about 5% of the bank’s aid to these countries. …The…working paper…passed an exacting internal review by other researchers in November. But, according to informed sources, publication was blocked by higher officials. They may have been worried about how it would look if the bank’s own researchers said that a chunk of its aid ended up in Swiss bank accounts and the like.

I’m a fan of “Swiss bank accounts” and “foreign financial havens,” but I want them available for taxpayers, not politicians and government insiders.

Sadly, foreign aid helps the wrong people get rich.

Jose Nino draws the most appropriate conclusion.

In 2019, a total of $39.2 billion was spent on foreign assistance, and at a quick glance it has left a lot to be desired. …Foreign aid is not a get-rich-quick scheme for developing countries. Instead of building wealth, it comes with some not-so-pleasant consequences for the recipient nation. …governments receiving aid no longer have to be accountable to their citizens. Knowing that US taxpayers will bail them out, some governments have no incentive whatsoever to innovate or keep corruption in check. …It is the height of naivete to believe that developing countries will magically become rich via wealth transfers from First World countries. It ignores many of the institutions of freedom—private property and federalism—that enabled countries like the US to become the most prosperous societies in human history.

Some folks may think Jose’s conclusion is too sweeping.

So let’s cite some more scholarly evidence.

Three economists, including one from the World Bank, found that foreign aid undermines democracy.

In this paper we investigate the relationship between aid and political institutions. One view of this relationship suggests that aid is needed to advance democratic institutions in developing countries. …A second view holds that foreign aid could leads politicians in power to engage in rent-seeking activities in order to appropriate these resources… By doing so political institutions are damaged because they became less democratic and less representative. Our findings support the second view. Foreign aid damages the political institutions of the country by reducing democratic rules. The magnitudes are striking. If the average share of foreign aid over GDP in a country were 1.9% over the period 1960-1999, then the recipient country would have gone from the average level of democracy in recipient countries in the initial year to a total absence of democratic institutions.

Here’s a graph from the study showing the negative relationship between aid and democracy.

The bottom line is that foreign aid doesn’t work. At least not if the goal is to improve the lives of the less fortunate.

If we want to help poor people in poor nations, the only practical answer is pro-capitalism policies such as small government, rule of law, and free trade.

P.S. Bigger government also enables corruption in rich nations.

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Last century, I remember reading about the “Washington Consensus,” which was a term that was used to describe the kind of policy advice in those days provided to (or imposed upon) the developing world by the IMF, World Bank, and U.S. Treasury.

I never studied the topic since I was focused at the time on domestic issues such as tax reform, Social Security reform, and the economic effect of government spending.

But I recall thinking that the Washington Consensus was pro-market, but nonetheless a bit timid because it did not include a plank to limit the size of government.

Wikipedia helpfully lists the 10 policies that defined this consensus.

  1. Fiscal policy discipline, with avoidance of large fiscal deficits relative to GDP;
  2. Redirection of public spending from subsidies (“especially indiscriminate subsidies”) toward broad-based provision of key pro-growth, pro-poor services like primary education, primary health care and infrastructure investment;
  3. Tax reform, broadening the tax base and adopting moderate marginal tax rates;
  4. Interest rates that are market determined and positive (but moderate) in real terms;
  5. Competitive exchange rates;
  6. Trade liberalization: liberalization of imports, with particular emphasis on elimination of quantitative restrictions (licensing, etc.); any trade protection to be provided by low and relatively uniform tariffs;
  7. Liberalization of inward foreign direct investment;
  8. Privatization of state enterprises;
  9. Deregulation: abolition of regulations that impede market entry or restrict competition, except for those justified on safety, environmental and consumer protection grounds, and prudential oversight of financial institutions;
  10. Legal security for property rights.

With the benefit of hindsight, I now want to praise the Washington Consensus.

Yes, it would be nice if there had been some focus on the size of government, but all of the advice on trade, regulation, monetary policy, and quality of governance was very sound. And those policies account for 80 percent of a nation’s grade according to Economic Freedom of the World.

Moreover, the planks on fiscal policy were good, even if they didn’t go far enough.

Additionally, it was good to have multilateral institutions such as the International Monetary Fund and World Bank using their leverage to push for pro-market reforms (unlike today, when international bureaucracies often push a statist agenda).

So what was the effect of – to use the terms of opponents – this emphasis on “neoliberalism” or “market fundamentalism”?

Well, it seems to have made a difference. Here the data from the Fraser Institute on economic freedom for all nations. As you can see, economic liberty around the world increased significantly between 1980-2000, the years when the Washington Consensus was most influential.

But did that period of pro-market reform lead to better outcomes?

The answer is a resounding yes, at least in my humble opinion.

Here’s the most persuasive evidence, showing the dramatic decline in extreme poverty.

Let’s also look at some new research from Professor William Easterly, who worked for many years as an economist at the World Bank.

He notes that many people think the Washington Consensus was a failure. So he took a fresh look at the data.

Many authors…have proclaimed the failure of a package of market-oriented reforms proposed in the 1980s and 1990s — variously known as the Washington Consensus, …globalization, or neoliberalism. This paper seeks to update the stylized facts on policies and growth that influenced this verdict. …The earlier stylized facts featured the zero or low per capita growth in the regions that were the focus of reform: Africa and Latin America. …these stylized facts have not been updated in the literature, as much more data have become available with the passage of time. …This paper will report new stylized facts. First, there has been additional and quite remarkable progress on reform outcomes since the late 1990s — this is a principal finding of this paper. Earlier judgments on the reforms often happened before the reform process was complete and/or had enough post-reform growth data to evaluate reforms. …The second stylized fact is that there is a strong correlation between improvements in policy outcomes and changes in growth outcomes. The third stylized fact is that growth has recovered in Africa and Latin America in the new millennium, and the regression of growth on policy outcomes explains a substantial part of the growth recovery. …This paper will extend the method of analyzing extremely bad and moderately bad policy outcomes to other policies, specifically — in addition to inflation — the black market premium on foreign exchange, overvaluation of the domestic currency, negative real interest rates on bank savings deposits, and abnormally low trade shares to GDP. Updating the data on these outcomes is not trivial and constitutes one of the main contributions of this paper.

And what did Prof. Easterly discover?

It turns out that the prevalence of bad outcomes has declined.

Figure 6 shows a summary measure of share of countries with any bad policy. Any bad policy is defined as having any of the moderate or extreme policy dummies set to one, with a minimum of 4 policy observations available for that country-year. The summary measure shows a downward trend in bad policy outcomes worldwide, in Latin America, and in Sub-Saharan Africa. The sharpest break is around the mid-1990s, somewhat after the formulation of the Washington Consensus and the first negative reactions it received.

Here’s the aforementioned Figure 6.

And he also looks at the prevalence of extremely bad poliicy.

Figure 7 shows a similar graph to Figure 6, but now limited to extremely bad policy outcomes. It shows if any of the extremely bad policy dummies is set to one, for the sample with a minimum of at least two out of five policy outcomes available. The decline in the prevalence of any extreme policy is even more dramatic beginning in the early 1990s, going from surprisingly common (above 35 percent of countries up to the early 1990s) to almost non-existent for the world. The same pattern is even more striking for Africa and for Latin America.

Here’s Figure 7.

Most important, these better outcomes also are associated with stronger growth.

This paper showed these changes in policy outcomes – especially away from extreme policies — were accompanied by growth increases. It documented that the policy reforms can explain the growth increases in the regions most emphasized earlier – Africa and Latin America. We have seen that the old data available through 1998 was indeed consistent with the reform pessimism, partly because of weaker results on growth payoffs associated with reform outcomes and partly because less reform had happened.

Prof. Easterly acknowledges that there are still many issues to investigate and that his research is just one slice at a big pie.

But the bottom line is that we now have some good evidence that the Washington Consensus led to better results. Simply stated, capitalism produces more growth and less poverty. Too bad the IMF and other international bureaucracies have forgotten this lesson.

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Even though I (correctly) doubted the Trump Administration’s sincerity, I applauded proposed reductions in foreign aid back in 2017.

I very much want to reduce poverty in poor nations, of course, but the evidence is very strong that government handouts don’t do a very good job.

Moreover, we also have lots of data showing poor nations can enjoy dramatic improvements in living standards so long as they adopt good policy.

Hong Kong, Singapore, Chile, and Botswana are very good examples.

Yet some people haven’t learned this lesson. Consider the current debate over Trump’s threat to end aid to Central America if illegal immigration isn’t reduced.

A column in Fortune makes the case that handouts to Central America are necessary to reduce human smuggling.

President Donald Trump ordered the State Department to cut funding for Guatemala, Honduras, and El Salvador this weekend in retaliation for the recent influx of migrants from these nations, reversing a longstanding policy that says aid helps abate immigration. …According to Liz Schrayer, president and CEO of the U.S. Global Leadership Coalition—a nonprofit coalition of businesses and NGOs dedicated to American development and diplomacy—pulling back aid “exasperates the exact root causes that are creating the migration numbers’ increase.” …“It will only result in more children and families being forced to make the dangerous journey north to the U.S.-Mexico border,” said the five Democratic lawmakers in a statement.

A piece in the New York Times makes the same argument.

The Trump administration’s decision to cut off aid to El Salvador, Guatemala and Honduras to punish their governments for failing to curb migration is a rash response to a real policy dilemma. …it will exacerbate migration from the region without twisting Central American politicians’ arms. …The decision to cut off aid is bound to drive up migration numbers.

Ironically, the author admits that aid is ineffective.

…we shouldn’t pretend that the aid itself was doing much good… it is mostly distributed inefficiently in large blocks by foreign contractors.

Though he seems to share the naive (and presumably self-interested) arguments of international bureaucrats about the potential efficacy of aid.

Central American governments and elites have gotten away with abdicating their fiduciary, social and legal responsibilities to their citizens. They have failed to collect tax revenue and to invest in social programs and job creation that alleviate the plight of their poor.

Even some small-government conservatives seem to think that more aid would make recipient nations more prosperous and thus reduce illegal immigration.

What President Trump is doing now — cutting aid — is wrong. …As former White House Chief of Staff and SOUTHCOM Commander, General John Kelly, has noted, “If we can improve the conditions, the lot in life of Hondurans, Guatemalans, Central Americans, we can do an awful lot to protect the southwest border.” …We risk undermining our longterm national interests by cutting foreign aid. We should, instead, spend it wisely in those countries to ensure stable governments that view us as allies and work with them to root out crime, corruption, and cartels. The present policy to cut foreign aid cuts off our national nose to spite our face.

This is not an impossible prescription.

But it’s also the triumph of hope over experience.

In the real world, we have mountains of evidence that foreign aid weakens recipient economies by subsidizing corruption and larger burdens of government.

Let’s look at some analysis on this issue.

In a piece published by CapX, Matt Warner recommends less redistribution rather than more.

…the poor know how to get themselves out of poverty. They just need more opportunity to do it. The question we must ask ourselves is: to what degree are our current development aid strategies aligned with this insight? …If the intervention itself is part of the problem, what can outsiders really do to help? Today there are at least 481 research and advocacy organisations in 92 countries pushing reform agendas to provide more economic opportunity and prosperity for all. The “Doing Business” report provides a blueprint for change. Local reform organisations, supported by private philanthropy, provide the leadership to achieve it and the world’s poor will show us their own paths to prosperity if we will all just learn to get out of their way.

Writing for Barron’s, Paul Theroux notes that Africa regressed when it was showered with aid.

Africa receives roughly $50 billion in aid annually from foreign governments, and perhaps $13 billion more from private philanthropic institutions… Africa is much worse off than when I first went there 50 years ago to teach English: poorer, sicker, less educated, and more badly governed. It seems that much of the aid has made things worse. …Zambian-born economist Dambisa Moyo calls aid a “debilitating drug,” arguing that “real per-capita income [in Africa] today is lower than it was in the 1970s, and more than 50% of the population — over 350 million people — live on less than a dollar a day, a figure that has nearly doubled in two decades.” The Kenyan economist James Shikwati takes this same line on aid, famously telling the German magazine Der Spiegel, “For God’s sake, please stop.”

Brad Lips of the Atlas Network explains why aid often is counterproductive.

The international community has donated more than $1.8 trillion to poor countries since 2000 – but this development aid hasn’t lifted many people out of poverty. Arguably, it has made some recipient nations poorer. …the aid has bred corruption, fostered dependence and impeded reforms that deliver sustainable economic growth. …Between 1970 and 2000 – a period in which aid to Africa skyrocketed – annual gross domestic product growth per capita on the continent fell from about 2 percent to zero growth, according to a study by an economist at New York University.

A column in the U.K.-based Times is very blunt about what all this means.

…the international development secretary should have abolished her department as soon as she was appointed to it… We kid ourselves that this aid works, to salve our consciences about being better off. But as we know, the money benefits charities, quangos, bureaucrats, tyrants and the predatory elite, and all these years later your average African is no better off.

Let’s close by looking at a thorough 2005 study from the International Policy Network. Authored by Fredrik Erixon, it documents the failure of foreign aid.

…the ‘gap theory’…assumes that poor countries are trapped in a vicious cycle of poverty because they are unable to save and hence have insufficient capital to invest in growth-promoting, productivity-enhancing activities. But there simply is no evidence that this savings/investment ‘gap’ exists in practice. As a result, aid has failed to ‘fill the gap’. Instead, it has, over the past fifty years, largely been counterproductive: it has crowded out private sector investments, undermined democracy, and enabled despots to continue with oppressive policies, perpetuating poverty. …The reason countries are poor is…because they lack the institutions of the free society: property rights, the rule of law, free markets, and limited government. … many studies point to the fact that government consumption in SubSaharan Africa has increased when aid has increased.

Here’s the evidence showing has more development assistance is associated with weaker economic performance.

By the way, the International Monetary Fund deserves unrestrained scorn for recommending higher tax burdens on Africans, thus making economic growth even harder to achieve.

Now let’s look at how two Asian regions have enjoyed growth as aid lessened.

Last but not least, here’s some very encouraging data from Africa.

I already mentioned that Botswana is an exception to the rule. As you can see, that nation’s success is definitely not the result of more handouts.

The bottom line is that President Trump is right, even if his motives are misguided.

Foreign aid is not the recipe for prosperity in Central America.

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Because of their aggressive support for bigger government, my least-favorite international bureaucracies are the International Monetary Fund and the Organization for Economic Cooperation and Development.

But I’m increasingly displeased by the European Bank for Reconstruction and Development, which is another international bureaucracy (like the OECD and IMF) that is backed by American taxpayers.

And what does it do with our money? As I explained earlier this month in this short speech to the European Resource Bank in Prague, the EBRD undermines growth with cronyist policies that distort the allocation of capital.

In some sense, the argument against the EBRD is no different than the standard argument against foreign aid. Simply stated, you don’t generate growth by having the government of a rich nation give money to the government of a poor nation.

Poor nations instead need to adopt good policy – something that’s less likely when profligate and corrupt governments in the developing world are propped up by handouts.

That being said, the downsides of the EBRD go well beyond the normal problems of foreign aid.

I recently authored a study on this bureaucracy for the Center for Freedom and Prosperity.

Here are some of the main findings.

The EBRD was created with the best of intentions. The collapse of communism was an unprecedented and largely unexpected event, and policymakers wanted to encourage and facilitate a shift to markets and democracy. …But good intentions don’t necessarily mean good results. Especially when the core premise was that growth somehow would be stimulated and enabled by the creation of another multilateral government bureaucracy. …Unfortunately, even though its founding documents pay homage to markets…, there’s nothing in the track record of the EBRD that indicates it has learned from pro-intervention and pro-statism mistakes made by older international aid organizations. Indeed, there’s no positive track record whatsoever.

• There is no evidence that nations receiving subsidies and other forms of assistance grow faster than similar nations that don’t get aid from the EBRD.
• There is no evidence that nations receiving subsidies and other forms of assistance enjoy more job creation than similar nations that don’t get aid from the EBRD,
• There is no evidence that nations receiving subsidies and other forms of assistance have better social outcomes than similar nations that don’t get aid from the EBRD.

I also delved into three specific downsides of the EBRD, starting with its role in misallocating capital.

In a normal economy, savers, investors, intermediaries, entrepreneurs, and others make decisions on what projects get funded and what businesses attract investment. These private-sector participants have “skin in the game” and relentlessly seek to balance risk and reward. Wise decisions are rewarded by profit, which often is a signal for additional investment to help satisfy consumer desires. There’s also an incentive to quickly disengage from failing projects and investments that don’t produce goods and services valued by consumers. Profit and loss are an effective feedback mechanism to ensure that resources are constantly being reshuffled in ways that produce the most prosperity for people. The EBRD interferes with that process. Every euro it allocates necessarily diverts capital from more optimal uses.

I explain why taxpayers shouldn’t be subsidizing cronyism.

…the EBRD is in the business of “picking winners and losers.” This means that intervention by the bureaucracy necessarily distorts competitive markets. Any firm that gets money from the EBRD is going to have a significant advantage over rival companies. Preferential financing for hand-picked firms from the EBRD also is a way of deterring new companies from getting started since there is not a level playing field or honest competition. … cronyism is a threat to prosperity. It means the playing field is unlevel and that those with political connections have an unfair advantage over those who compete fairly. To make matters worse, nations that receive funds from the ERBD already get dismal scores from Economic Freedom of the World for the two subcategories (“government enterprises and investment” and “business regulations”) that presumably are the best proxies for cronyism.

Here’s a chart from the study showing that recipient nations already get low scores from Economic Freedom of the World for variables that reflect the degree of cronyism in an economy.

Last but not least, I warn that the EBRD enables and facilitates corruption.

When governments have power to arbitrarily disburse large sums of money, that is a recipe for unsavory behavior. For all intents and purposes, the practice of cronyism is a prerequisite for corruption. The EBRD openly brags about the money it steers to private hands, so is it any surprise that people will engage in dodgy behavior in order to turn those public funds into private loot? …Recipient nations get comparatively poor scores for “legal system and property rights” from Economic Freedom of the World. They also do relatively poorly when looking at the World Bank’s “governance indicators.” And they also have disappointing numbers from Transparency International’s “corruption perceptions index.” So, it’s no surprise that monies ostensibly disbursed for the purpose of development assistance wind up lining the pockets of corrupt insiders. For all intents and purposes, the EBRD and other dispensers of aid enable and sustain patterns of corruption.

And here’s the chart showing that recipient nations have poor quality of governance, which means that EBRD funds are especially likely to get misused.

I also cite several EBRD documents that illustrates the bureaucracy’s hostility for free markets and limited government.

Just in case you didn’t want to watch the entire video, here’s the relevant slide from my presentation.

And remember that your tax dollars back this European bureaucracy. Indeed, American taxpayers have a larger exposure than any of the European countries.

P.S. I’m also not a fan of the United Nations, though I take comfort in the fact that the UN is not very effective in pushing statist policy.

P.P.S. I’m most tolerant of the World Bank, though that bureaucracy periodically does foolish things as well.

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President Trump’s new budget is getting attacked by politicians and interest groups in Washington. These critics say the budget cuts are too severe and draconian.

My main reaction is to wonder whether these people are illiterate and/or innumerate. After all, even a cursory examination of Trump’s proposal shows that the federal government will expand over the next decade by an average of 3.46 percent every year, considerably faster than inflation.

For what it’s worth, I’m sure most of the critics actually do understand that government will continue growing under Trump’s budget. But they find it politically advantageous to engage in “Washington math,” which is when you get to claim a program is being cut if it doesn’t get a sufficiently large increase. I’m not joking.

That being said, while the overall federal budget will get bigger, there are some very good proposals in the President’s budget to terminate or reduce a few specific programs. I don’t know if the White House is actually serious about any of these ideas, but some of them are very desirable.

  • Shutting down the wasteful National Endowment for the Arts.
  • Defunding National Public Radio and the Corporation for Public Broadcasting.
  • Terminating the scandal-plagued Community Development Block Grant program.
  • Block-granting Medicaid and reducing central government funding and control.

Today, let’s add a fifth idea to our list. The Trump budget proposes a substantial reduction in foreign aid (for numbers, see line 18 of this OMB excel file).

I hope these cuts are implemented.

In part, I want to save money for American taxpayers, but I’m even more motivated by a desire to help the rest of the world. Simply stated, foreign aid is counterproductive.

The great paradox of government-to-government aid transfers is that they won’t work if recipient nations have bad policy. Yet we also know that nations with good policy don’t need handouts.

In other words, there’s no substitute for free markets and small government. That recipe works wherever it’s tried.

My colleague at the Cato Institute, Marian Tupy, embraces the idea of less foreign aid in a Reason column.

President Donald Trump is said to be considering large cuts to foreign aid. Those cuts cannot come soon enough.

And he explains why in the article. Here’s the passage that caught my eye.

Graham Hancock’s 1994 book, The Lords of Poverty: The Power, Prestige, and Corruption of the International Aid Business, is still worth reading. As the author explains, much of foreign aid is used to subsidize opulent lifestyles within the aid establishment. “Only a small portion of [aid money],” Hancock writes, “is ever translated into direct assistance. Thanks to bureaucratic inefficiency, misguided policies, large executive salaries, political corruption, and the self-perpetuating ‘overhead’ of the administrative agencies, much of this tremendous wealth is frittered away.”

The problems are not specific to the United States. Foreign aid also is used as a scam to line the pockets of contractors in the United Kingdom.

The British aid contracting industry has more than doubled in value from £540 million in 2012 to £1.34 billion last year. The proportion of every pound of taxpayers’ aid money that is spent on consultants has risen from 12p in 2011 to 22p. …Budget breakdowns showed the public being charged twice the going rate for workers. One contractor on a project had a margin of 141 per cent between staffing costs charged to Dfid and the cost at market rates.

By the way, one study even found that foreign aid undermines democracy.

Foreign aid provides a windfall of resources to recipient countries and may result in the same rent seeking behavior as documented in the “curse of natural resources” literature. …Using data for 108 recipient countries in the period 1960 to 1999, we find that foreign aid has a negative impact on democracy. In particular, if the foreign aid over GDP that a country receives over a period of five years reaches the 75th percentile in the sample, then a 10-point index of democracy is reduced between 0.6 and one point, a large effect.

Last but not least, Professor William Easterly explains in the Washington Post that foreign aid does not fight terrorism.

President Trump’s proposed budget includes steep cuts in foreign assistance. Aid proponents such as Bill Gates are eloquently fighting back. …The counter-terrorism argument for foreign aid after 9/11 indeed succeeded for a long time at increasing and then sustaining the U.S. foreign aid budget. …the link from aid to counter-terrorism never had any evidence behind it. As it became ever less plausible as terrorism continued, it set up aid for a fall. …the evidence for a link from poverty to terrorism never showed up. …studies since 9/11 have consistently shown that terrorists tend to have above-average income and education. Even if there had been a link from poverty to terrorism, the “aid as counter-terrorism” argument also required the assumption that aid has a dramatic effect on the poverty of entire aid-receiving nations. Today’s proponents of aid no longer make the grandiose claims of aid lifting whole societies out of poverty.

Heck, foreign aid keeps societies in poverty by enabling bigger government.

Yet international bureaucracies such as the United Nations keep peddling the discredited notion that developing nations should have more money to finance ever-bigger government.

The bottom line is that people who care about the world’s poor people should be advocating for freedom rather than handouts.

P.S. If you’re still skeptical, I invite you to try to come up with an example that answers either of these two questions.

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While President Trump apparently intends to waste taxpayer money for more childcare subsidies and presumably is going to duck the critical issue of entitlement reform, there is some good news for advocates of limited government and fiscal responsibility. According a recent news report., he’s not a big fan of outlays for foreign aid.

The White House budget director confirmed Saturday that the Trump administration will propose “fairly dramatic reductions” in the U.S. foreign aid budget later this month. …news outlets reported earlier this week that the administration plans to propose to Congress cuts in the budgets for the U.S. State Department and Agency for International Development by about one third. …The United States spends just over $50 billion annually on the State Department and USAID.

Trump’s skepticism of foreign aid is highly appropriate. Indeed, he’s probably being too soft on the budget for foreign aid.

Government-to-government handouts have a terrible track record. Indeed, the main impact of such transfers is to undermine good reform and enrich corrupt elites in poor nations.

Moreover, if the goal is to actually create prosperity in developing countries, there is no substitute for free markets and limited government.

Let’s look at some additional evidence about the harmful impact of aid.

We’ll start with a rather amazing admission from a 2016 study published by the International Monetary Fund.

Foreign aid is a sizable source of government financing for several developing countries and its allocation matters for the conduct of fiscal policy. This paper revisits fiscal effects of shifts in aid dependency in 59 developing countries from 1960 to 2010. …we show that upward shifts and downward shifts in aid dependency have asymmetric effects on the fiscal accounts. Large aid inflows undermine tax capacity and public investment while large reductions in aid inflows tend to keep recipients’ tax and expenditure ratios unchanged. …we find that the undesirable fiscal effects of aid are more pronounced in countries with low governance scores and low absorptive capacity, as well as those with IMF-supported programs.

Wow, I’m not a big fan of the IMF, but you have to give the authors credit for honesty. They admit that aid is especially harmful in nations that are also receiving IMF bailouts.

But the main takeaway is that foreign governments simply use foreign aid money as an excuse to raise and spend their own money. That outcome presumably should irk leftists. From my perspective, such nations have too much spending, regardless of whether it’s being financed by their own taxpayers or foreign taxpayers.

Instead, these nations should be copying the small-government policies that enabled western nations to move from agricultural poverty to middle class prosperity.

Let’s consider a couple of real-world examples.

We’ll start in South Sudan, where aid has subsidized awful behavior. Ian Birrell explains in an article for CapX.

…the fledgling state stumbles from the savagery of civil war into the horror of famine. …sadly these events also illustrate another example of the dismal failure of Western aid policies. …our politicians would be wise to stop spouting their usual nonsense about saving the world’s poor and start considering the corrosion caused by the billions already poured in to this failed state, pursuing naive ideas about state building based on floods of cash. …Experts such as the academic Alex de Waal say “looting food aid was elevated to military strategy” by militia commanders who later controlled the country. Despite these activities, $1 billion a year was handed over in aid in the years before independence, rising to $1.4 billion following arrival as the 193rd nation represented at the UN. …An estimated $4 billion was missing “or simply put, stolen”… But still aid poured in, leading to public spending per capita more than three times the levels seen in neighbouring Kenya. …there was a fake ministry of finance to deal with gullible donors and well-meaning armies of advisers, while the real version carried on under the generals with its backdoor dealings. …For all the fine words and good intentions, the West has ended up assisting and empowering a callous kleptocracy – again.

The bottom line is that foreign aid enabled and subsidized an awful government doing awful things.

Now let’s look at another African jurisdiction, only this one has been neglected by the international community.

But as Negash Tekie explains in another article of CapX, benign neglect can be a positive thing.

Over the years, the West has spent many millions to help stabilise the Horn of Africa, and alleviate the grinding poverty of many of its residents. …In Somalia, meanwhile, the international community is still trying – as it has for decades – to build a functioning government. Yet despite massive amounts in aid, …there is little hope of either building resilient and inclusive state institutions. What a stark contrast there is with neighbouring Somaliland. …Somaliland is, admittedly, desperately poor… But it is, in a volatile region, a beacon of security and stability. …Somaliland…claimed its independence from Somalia in May 1991, amid the chaos of the civil war there. But international bodies, and the African Union, have refused to recognise it.

But this absence of recognition has been a blessing in disguise.

The result has been that, without international aid and support, Somaliland has had to fall back on its own resources. In contrast to other African nations, state-building programmes and public services have been entirely financed by domestic income, rather than being supported by international donors. …countries that are dependent on aid can afford to neglect tax collection, countries without it are forced to use taxation appropriately. In 1990-2000, the Somaliland ministry of finance reported that “95 per cent of the resource that finance the activities are locally mobilised, mostly through taxation”. Not only are taxes collected in a non-coercive manner… For example, in early 2000s the government attempted to increase taxes on the private sector and proposed a VAT rate of 30 per cent, but the business sector lobbied against it and the policy was reversed. …A number of aid experts have argued that heavy dependence on external assistance undermines democracy, creates a dependency culture, diminishes political accountability and makes the state more accountable to donors than its own citizens.Somaliland is an example that…the inhabitants of the Horn of Africa can still build functioning states. …Somaliland is a lesson to the world in how to achieve successful state-building without aid.

Somaliland is far from a success story, and the article acknowledges big problems with drought, Chinese influence, and other factors, but at least there are some positive developments.

The key lesson is that the absence of aid has a very sobering effect.

And you know I get a “thrill up my leg” when I read about a place that fights against the value-added tax.

So I’m crossing my fingers that Somaliland stays independent and begins to prosper.

Let’s close by sharing a startling confession by a former senior aid bureaucrat in the United Kingdom.

Foreign aid spending is “out of control” and the department responsible for it should be abolished, according to its own former minister of state. …Grant Shapps, who was second-in-command at the Department for International Development (DfID) until 14 months ago, attacked its “profoundly worrying” tendency to “shovel cash out of the door”. …Shapps, whose criticisms are unprecedented from a former insider, said he had “agonised” for more than a year about going public. …He described how, in the Foreign Office, he would protest to African dictators about their “denial of human rights and democratic values” but “then, with my DfID hat on, I would rifle through my red box [of ministerial papers] to find cheques for hundreds of millions of pounds payable to the same countries. …Money was thrown at wasteful multilateral aid providers, such as the European Union and the United Nations, to reach the required spending level.

Too bad we don’t have enough ethical bureaucrats to blow the whistle on similar examples of waste and corruption in America’s foreign-aid system (though at least we have two former officials who were in charge of the federal government’s asset-forfeiture office and now say it should be shut down).

P.S. Next time leftists want to make a satirical video attacking libertarianism, they should use Somaliland rather than Somalia.

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At the start of the year, I argued that capitalism was the way to get more growth in poor nations.

Foreign aid, by contrast, hasn’t worked very well.

…there’s a big difference between good intentions and good results. If you examine the evidence, it turns out that redistribution from rich nations to poor nations is just as counterproductive as redistribution within a society.

But don’t believe me. Professor William Easterly of NYU spent many years at the World Bank working on issues relating to economic development and he’s written entire books on the failure of foreign aid.

And here’s some of what he wrote for Cato back in 2006.

The West’s efforts…have been even less successful at goals such as promoting rapid economic growth, changes in government economic policy to facilitate markets, or promotion of honest and democratic government. The evidence is stark: $568 billion spent on aid to Africa, and yet the typical African country no richer today than 40 years ago. Dozens of “structural adjustment” loans (aid loans conditional on policy reforms) made to Africa, the former Soviet Union, and Latin America, only to see the failure of both policy reform and economic growth. The evidence suggests that aid results in less democratic and honest government, not more. …Economic development happens, not through aid, but through the homegrown efforts of entrepreneurs and social and political reformers. While the West was agonizing over a few tens of billion dollars in aid, the citizens of India and China raised their own incomes by $715 billion by their own efforts in free markets.

One of the best critiques of foreign aid was written by an Indian back in 1972. The late Minoo Masani, who began his political career as a believe in socialism, learned through experience that markets work better than handouts.

…government-to-government aid distorts the international division of labour. It comes in the way of the natural laws of the market which should decide which country should produce what. …Government-to-government loans encourage socialism, communism and Statism, concentration of power, and waste. When a government aids another government, who disburses that aid? The government of that country. Aid thus transfers economic power from the people, the industrialists, the businessmen and the people to the hands of bureaucrats and politicians. The patronage the politician can dispense increases; the politicisation of economic life goes on. So, in a very direct way, every rupee of aid given by America or any other country or the World Bank to any aided country, including India, directly strengthens the forces of Statism, socialism and communism and weakens the forces of people’s free enterprise. It also breeds irresponsibility and waste.

He makes a great point that it is private investment that produces sustainable growth, not government-to-government transfers.

…one of the greatest disadvantages of government-to-government aid is that it discourages the investment of private equity capital in these countries. It does so because when one gets government-to-government aid at cheap rates, the temptation is not to raise equity capital abroad. This is a pity because our countries need foreign equity capital desperately. When foreign capital comes into India from any part of the world, it brings in foreign plant or machinery and engages Indian labour to work on it. It takes its profits out of the country only when it makes a profit. So such investment is in the interests of the Indian people. When a government-to-government loan comes, we have to repay the capital and the interest to the foreign government, however badly the money may have been wasted by our government. This is against the interests of the Indian people. So foreign private equity capital is good for India; government-to-government loans are bad for India. Let us hope we shall be spared them from now on.

Let’s look at some real-world evidence from the modern era.

In her recent Wall Street Journal column, Mary Anastasia O’Grady explains how aid has stifled the private sector in Haiti.

…why are so many Haitians still living in such dire poverty in the 21st century? Paradoxically, the answer may be tied to the way in which humanitarian aid, necessary and welcome in an emergency, easily morphs into permanent charity, which undermines local markets and spawns dependency. …The trouble is their assumption, too often, that poverty is caused by a lack of money or resources. This produces the wrong solution, one that prescribes getting as much free stuff to the target economy as possible. …The country has also been the recipient of billions of dollars in foreign-government bilateral and multilateral aid over the last quarter century. This enormous giving has created harmful distortions in the local economy because when what would otherwise be traded or produced by Haitians is given away, it drives entrepreneurs out of business.

Mary shares a couple of concrete examples.

The country was once self-sufficient in rice thanks to the work of rural peasants. That changed, according to the testimony of one development expert in the film, in the early 1980s. That’s when Haiti opened its rice market and the U.S. began dumping subsidized grain in the country with the goal of ending hunger—and helping Arkansas rice growers with U.S. taxpayer money. Most Haitian farmers could not compete with Uncle Sam’s generosity, and they lost their customers. …Donations of bottled water, clothing, shoes and even solar panels destroy local businesses in the same way. Just ask Jean-Ronel Noel, who co-founded the solar-panel company Enersa in his garage in the mid-2000s and expanded it to more than 60 employees. He is proud of his workforce…comes mainly from Port-au-Prince’s notorious slums. …The company was doing a robust business until the 2010 earthquake. “After the earthquake we were competing mostly against NGOs . . . coming with their solar panels . . . and giving them away for free. So what about local businessmen?” As Alex Georges, Mr. Noel’s partner puts it, “The demand stopped because it’s hard to compete with free.”

And here is the problem from a national and cultural perspective.

Mr. Noel zeroes in on another related problem: “Those NGOs are changing the mentality of the people. Now you have a generation with a dependency mentality.”

In other words, handouts from rich nations are destroying the social capital of Haiti.

Let’s go back to 2009 and see what Dambisa Moyo wrote about foreign aid to her home continent.

Kibera, the largest slum in Africa…is…just a few yards from…the headquarters of the United Nations’ agency for human settlements… Kibera festers in Kenya, a country that has one of the highest ratios of development workers per capita. …Giving alms to Africa remains one of the biggest ideas of our time — millions march for it, governments are judged by it, celebrities proselytize the need for it. Calls for more aid to Africa are growing louder, with advocates pushing for doubling the roughly $50 billion of international assistance that already goes to Africa each year. Yet evidence overwhelmingly demonstrates that aid to Africa has made the poor poorer, and the growth slower. The insidious aid culture has left African countries more debt-laden, more inflation-prone, more vulnerable to the vagaries of the currency markets and more unattractive to higher-quality investment. It’s increased the risk of civil conflict and unrest… Aid is an unmitigated political, economic and humanitarian disaster.

She has some very grim numbers.

…aid can provide band-aid solutions to alleviate immediate suffering, but by its very nature cannot be the platform for long-term sustainable growth. …Over the past 60 years at least $1 trillion of development-related aid has been transferred from rich countries to Africa. Yet real per-capita income today is lower than it was in the 1970s, and more than 50% of the population — over 350 million people — live on less than a dollar a day, a figure that has nearly doubled in two decades. …The most obvious criticism of aid is its links to rampant corruption. Aid flows destined to help the average African end up supporting bloated bureaucracies in the form of the poor-country governments and donor-funded non-governmental organizations. …A constant stream of “free” money is a perfect way to keep an inefficient or simply bad government in power.

If foreign aid money was “merely” wasted, that would be a bad outcome.

But that’s the optimistic version of the story.

In reality, the evidence suggests that these handouts actually subsidize bad policy in the developing world.

None of this would surprise the late Peter Bauer.

Lord Bauer was famous for observing that “government-to-government transfers . . . are an excellent method for transferring money from poor people in rich countries to rich people in poor countries.”

That’s good, if you happen to be a third world kleptocrat and you have a nice bank account filled with stolen funds in New York.

But if you’re a poor person in a poor country, you’re the one victimized by a bigger government that’s riddled with more corruption.

Amazingly, many western politicians accept corruption as the price of giving away money.

But this brings me back to where we started. If foreign aid achieved good results, then there would be a utilitarian case for accepting a degree of waste and corruption.

But since the evidence shows that these programs lead to slower growth and less prosperity, it’s a lose-lose-lose situation.

Here’s a video trailer for a great documentary on how foreign aid is helpful, but only for the people in charge of the programs.

Let’s close with something that probably should be called Bauer’s Paradox since I’m almost sure he said something making this point.

But until I find proof (maybe it was Easterly or some other scholar), we won’t attribute this sentiment to anyone in particular. We’ll simply go with a rather anodyne title.

But even if the title is boring, this Paradox makes a critical point. The poor nations that have become rich nations in recent decades did not rely on handouts and redistribution.

Instead, they generated growth by limiting the size and scope of government while allowing markets to function.

The nations that got the most aid, however, have stayed relatively poor.

P.S. The foreign aid bureaucrats and contractors have been the only real beneficiaries, much as the “poverty pimps” are the only real beneficiaries of the failed War on Poverty.

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