Foreign Aid Doesn't Help the Poor - Economic Freedom Does

The drumbeat grows louder for increased foreign aid. The United Nations Millennium Development Goals aim to halve extreme poverty, provide universal primary education, and end the spread of HIV/AIDS. One thing is needed to do all this and much else – more money from rich nations.

The foreign aid debate is quite odd. Few ask the obvious question – does foreign aid actually help the poor?

True, aid bestows benefits. It scores political points for politicians that demand it; assuages rich-nation guilt; and makes those who favour government solutions very happy.

But I want my foreign aid tax dollars to help the poor.

Over the past 10 years, starting with seminal work by Peter Boone of the London School of Economics, researchers have used sophisticated empirical techniques to compare developing nations that have similar economic conditions but receive different levels of foreign aid.

The results can be succinctly summed up: Overall, foreign aid has no track record – zero – of creating prosperity. We are sending money abroad in a fit of self-indulgence to please ourselves, not to help the poor.

In this year’s Economic Freedom of the World Report New York University economist William Easterly, a world leader in development research, examines the impact of foreign aid and compares it to economic freedom in boosting prosperity. The report is published by independent research institutes in over 70 nations, led by Canada’s Fraser Institute.

Like others, Easterly finds the data show no evidence of any positive impact of foreign aid. In fact, there is weak statistical evidence that foreign aid slows economic growth but Easterly cautions that this result requires more research.

On the other hand, he finds that economic freedom – free markets – clearly boosts growth. Nobel Laureate Douglass North calls The Fraser Institute’s economic freedom report “the closest thing” available to an analytical description of efficient free markets.

Two distinctions are useful: firstly, between humanitarian aid, in the case of natural disasters, famine, epidemics, etc., and that of economic development aid. The first can be a moral obligation; the second is a failure. The second distinction is between true economic freedom and all-too-common crony capitalism, which is just another way for powerful governments and officials to reward their friends.

That brings us to another curious aspect of the foreign aid debate – most everyone, including the most outspoken foreign aid advocate, has all the information needed to know that foreign aid fails and markets succeed.

Sub-Saharan Africa is an aid magnet -- $400 billion has flowed in since 1970. If foreign aid worked, Africa would be humming with prosperity. In fact, the living conditions of most Africans deteriorated sharply during the aid deluge.

There are exceptions. Botswana, for example, has the highest level of economic freedom in Africa and is one of the few nations where the lives are improving.

On the other hand, places once poorer than much of Africa, such as South Korea, Singapore, Taiwan, and Hong Kong, moved to free markets at home and globalism in trade. The result was unimaginably better lives for the citizens of these nations, not through foreign aid but because of economic freedom. In South America, the freest economy, that of Chile, has led the continent in economic growth and poverty reduction by a wide margin.

What about the poverty trap – the argument that poor nations don’t have enough money to save and invest and therefore need an outside boost? Easterly finds that poor nations actually grow more quickly than free nations, unless they are hobbled by lack of economic freedom.

Why is this? Again common sense provides the answer. Individuals and families, when free to do so, look after themselves better than heroic government. And it is autocratic governments that absorb directly and indirectly the lion’s share of foreign aid.

These governments are all too often most interested in looking after the interests of the political elite that supports them and buying a better military to deal with everyone else. That sounds harsh, but you’ll often find fleets of Mercedes for government officials in aid-receiving nations while the poor stay poor.

The next time you hear someone condemn free markets and demand more foreign aid, see if they can connect the dots of knowledge they already possess.

Ask them to name just one nation that has produced better lives for its citizens through foreign aid; just one nation that has produced better lives for its citizens without economic freedom; just one nation that has had stable economic freedom (not crony capitalism) that has not improved the lives of its citizens over time.

Then ask them again about the evils of free markets and virtues of foreign aid.