Academic journal article Policy Review

A Better Approach to Foreign Aid

Academic journal article Policy Review

A Better Approach to Foreign Aid

Article excerpt

FRUSTRATION WITH U.S. foreign aid is widespread. The left complains that the United States does not provide enough money to developing countries. The right laments that aid is an inefficient use of resources. Both sides are to some degree correct. While the United States distributed $23 billion in 2006-more than any other country--it was still very little for the billion people living on less than one dollar a day. And for every dollar given to sub-Saharan Africa, less than 44 cents reached the ground, partially because of inefficient spending and corruption.

Given the justifiable frustration with the current system, there have been surprisingly few attempts to fundamentally alter the architecture of foreign aid. Suggestions for change usually take the form of either advocating for more aid or calling for a different distribution of existing resources. Typifying the first of these approaches, Barack Obama recently suggested that the United States double its aid spending to $50 billion a year.

Epitomizing the second is the Millennium Challenge Corporation, a government initiative touted by President Bush in his 2007 State of the Union address that distributes a portion of U.S. foreign aid based on the political and economic environment in the recipient country.

This focus on either growing the pie or distributing it differently takes as a premise that the current system of government-to-government aid is the best way forward. We suggest a different path. Rather than providing aid according to the wishes of foreign governments, the United States should provide incentives to encourage corporations and individuals to distribute development dollars. In 2006, $380 billion of foreign direct investment flowed to developing countries and $220 billion in remittances was sent home by developing-country migrants. As figure 1 indicates, these numbers far surpassed the $104 billion in official foreign aid flows. Government policy can act to shape the direction of these dynamic flows of private development capital rather than solely relying on the old model of government-to-government transfers.


One simple way to provide incentives for private development finance is to give tax credits to American companies that invest in developing countries. We will argue that shifting money from government-to-government aid to tax credits would allow more total dollars to be distributed without increasing the cost to the taxpayer (addressing the critique of the left); would reduce money lost to mismanagement and corruption (addressing the critique of the right); and would more effectively foster the building of institutions necessary for sustainable economic development. We will outline how such a system can be put into operation, addressing the types of investments that should qualify for tax credits and which countries should be eligible to benefit from them.

A second way to channel private development finance is to give tax breaks to individuals working in the United States who remit money home. It is easy to forget that the most effective unit of redistribution is the family. Frequently, families are straddled across poor countries and rich countries like the United States. Tax breaks can increase the amount of intra-family redistribution and therefore contribute to global poverty reduction. And by restricting remittance tax breaks to certain countries, U.S. policymakers can involve poor-country diasporas in lobbying for positive political change in their home countries.

Fixing foreign aid is vital to the U.S. national interest. Not only does aid play an essential humanitarian role, but it provides a number of direct benefits to Americans, from opening new markets to alleviating conditions that aid terrorist recruitment. The current system has proven over the past half century that it faces serious challenges. Tax credits for companies, and tax breaks for individuals offer a pragmatic, incremental solution that should appeal to both sides of the aisle. …

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