Foreign Aid's Feeble Rate of Return

Article excerpt

On May 7, the House International Relations Committee voted to spend $16.4 billion on foreign aid in 1998. At the behest of the Clinton administration, the Republican panel raised foreign aid next year by $800 million. Ironically, this comes at a time when economists have reached a virtual consensus on the failure of foreign aid.

Indeed, even the liberal Brookings Institution now concedes that foreign aid simply does not work. In "A Half Penny on the Federal Dollar," Brookings scholars Michael O'Hanlon and Carol Graham take a careful look at the effectiveness of U.S. foreign aid. While they favor continuation of foreign aid for political and humanitarian reasons, they are forced to conclude that it does nothing whatsoever for economic growth.

"One of the most paradoxical findings of recent studies of aid effectiveness," Mr. O'Hanlon and Miss Graham write, "is that, at least in the case of conditioned policy-based lending, financial flows are negatively correlated with growth performance. That is, countries getting more aid do worse macroeconomically, on average, than those getting less."

Among the studies cited is one by Peter Boone of the London School of Economics. Based on data from 96 countries, he found that the reason foreign aid does not stimulate growth is because virtually none of the aid goes into investment. All it does is increase consumption and expand the size of government, without conferring any benefits on the poor in the process.

A major factor in why foreign aid is consumed rather than invested is because much of it is stolen by elites in developing countries. Nowhere is this more apparent than in Zaire, where rebels have just ended the 32-year dictatorial regime of its leader, Mobutu Sese Seko.

In a fascinating expose on May 12, London's Financial Times newspaper estimated that Mr. Mobutu has stolen some $4 billion from foreign aid, much of it from the International Monetary Fund. …