Recently dozens of heads of state gathered in New York for a U.N. summit that discussed, among other things, foreign aid. According to a U.N. progress report, the Millennium Development Goals, one of which is to halve extreme poverty by 2015, will almost certainly not be achieved. Despite the fact that in 2004 foreign aid reached a record 80 billion dollars, the report concludes, "in low-income countries higher levels of aid are needed".
Foreign aid was invented in 1948 with President Truman's Four Point Program. In almost six decades, some 2.3 trillion dollars have been dished out worldwide to poor countries by rich ones - about half the cost of World War II! In that time, not a single country has significantly reduced poverty as a result of foreign aid.
If we examine U.S. foreign aid in the last decade, we find that there is no relation between these transfers and the reduction of poverty. In Egypt, extreme poverty as a percentage of the population has remained the same despite the money given to that country, the second biggest beneficiary of U.S. largesse. China, while receiving two thousand times less aid than Egypt, reduced extreme poverty by half. Bolivia, one of the eleven biggest recipients of U.S. assistance, has managed to double the percentage of people living in extreme poverty.
If the world's top leaders lacked information about the causes of the wealth of nations, one might understand why this week's summit is filled with bad-conscience rhetoric. But the causes of the wealth of nations are well known: open economies and secure property rights. The countries that are moving in that direction are reducing poverty; those that are not are getting worse. (On average, the first type of countries reduced poverty from 60 to 19 percent of the population in the last three decades, while the second type has managed only a twelve percent reduction.) What has helped Chile become a country on the path to development is not foreign aid, which it has received in negligible amounts, but economic reforms that have lured 100 billion dollars of productive investment since the mid-1970s.
One wonders why a learned man like Jeffrey Sachs, who until a few years ago advised poor countries to open their economies, is today the intellectual force behind the Millennium Development Goals approach. He is pushing rich countries to devote 0.7 percent of their GDP to foreign aid. He argues the figure is not arbitrary because it would take 0.6 percent of their GDP to give one dollar every day to the more than one billion destitute people worldwide. But, as economist Surjit Bhalla has responded, if you take into account the fact that one dollar will buy you different amounts of goods and services in different countries, in terms of purchasing power, foreign aid already adds up to twice the amount needed to give one dollar a day to every destitute person!
In fact, aid to the least developed countries has consistently gone up in absolute terms. In the last fifteen years, the U.S. has doubled the aid given to those nations. The United Kingdom has almost tripled it. Australia, Germany, the Netherlands, and Spain have expanded theirs by between 50 and 60 percent.
Foreign aid has become a propaganda tool. It does not have as much to do with alleviating poverty as with blaming rich countries for being rich. It is interesting to note that the U.N. report includes detailed lists of how much aid each donor country is giving but not of how much aid each recipient country is getting. In other words, the donors, rather than the beneficiaries, are accountable for the money!
It is no surprise extreme poverty will not be halved by 2015. It is only because of China and India, two countries that have been opening up their economies, that extreme poverty has been somewhat reduced in total numbers since 1990. In Sub-Saharan Africa, where a large portion of foreign aid is destined, extreme poverty has actually risen by two percentage points; in Latin America it has declined by just over one percent! Very few countries in Sub-Saharan Africa have engaged in major reform; and in Latin America, reform has been half-hearted or misguided compared to reform in Central Europe or Eastern Asia.
The perversion of foreign aid is that it creates a dependency that makes it very difficult to eliminate it in the future because of the suffering this might bring. That is not to say people in rich countries should not be free to make private donations. Of course, they should and they do. But unlike private donors, governments are driven by political pressure to persist in their policies at the expense of citizens who have no choice in the matter.
Politicians tend to idolize poverty. But poverty is a horrible condition. Precisely because getting rid of it is a very worthy goal, the U.N. should focus on reform and on those aspects of its report that are more relevant to development, such as the need to reduce protectionism. Currently, one third of the exports from developing nations are subjected to trade barriers in wealthy nations. Why not direct all that political energy to getting rid of commercial barriers rather than pushing rich nations to throw more capital into the bottomless pit?