Dilemma of Foreign Aid

November 8, 1965

In 1947, in a book on foreign aid, Will Dollars Save the World?, written when the program was first launched, I pointed out that intergovernmental loans and grants “are on the horns of this dilemma. If on the one hand they are made without conditions, the funds are squandered and dissipated and fail to accomplish their purpose. . . . But if the lending government attempts to impose conditions, its attempt causes immediate resentment. It is called ‘dollar diplomacy’; or ‘American imperialism’; or ‘interfering in the internal affairs’ of the [recipient] nation.”

In the eighteen expensive years since then, the champions of foreign aid have persistently ignored or denied the existence of such a dilemma. But in practice they have swung uncertainly from one horn to the other—imposing conditions, dropping them when criticized, silently watching the aid funds being misused, then trying to impose conditions again.

And today, two decades and $115 billion later, the danger is that the dispensers of our foreign aid will follow the worst policy of all—imposing conditions, but exactly the wrong conditions.

In signing the new $3.2 billion foreign-aid bill, President Johnson declared that our future foreign aid will go to those countries “willing not only to talk about basic social change but who will act immediately on these reforms.”

‘LAND REFORM’

The next day Senator Aiken of Vermont indicated the nature of the “reforms” that our aid dispensers want. “American aid,” he said, “was based on an assumption that there would be substantial amounts of self-help—that the rich of a poor nation would invest in their own economies, that they would pay their taxes, that they would support land reform and show some interest in the poor of their own societies. This has proved largely a false expectation.”

What Washington apparently now has in mind is to ask of the countries that receive our foreign aid, not that they give guarantees of the security of property, the integrity of their currencies, refrainment from crippling government controls and encouragement to free markets and free enterprise, but that they move in the direction of the welfare state, the redistribution of land and other wealth and government planning.

When Senator Aiken and others demand “land reform,” precisely what are they asking for? Do they mean the breaking up of big estates, with inadequate or no compensation, and the redistribution of land to the peasants? Have they studied the recent history of most such “reforms” in Mexico, for example—and how and why they have been followed by less food production rather than more? When the senator complains that the rich in a poor nation do not “invest in their own economies” but place their funds abroad, has it occurred to him to ask why they do so?

WHY FUNDS GO ABROAD

If he asks them confidentially, they will tell him. Abroad, they are free to choose their investments. They are free to look for the best returns. They are not subject to excessive taxation. They are not holding a currency that is constantly falling in value. (In the last ten years the currency of the Argentine has lost 92 percent of its purchasing power; the currency of Chile has lost 94 percent; of Bolivia 95 percent; of Brazil 96 percent.) The rich in most such countries live in constant fear of expropriation. Will “land reform” reassure them?

In the last twenty years foreign aid may have made American taxpayers $115 billion poorer, but it has not made the recipients that much richer. The funds have not gone into the most productive ventures, but largely into grandiose but wasteful socialistic projects.

If our economic aid were tapered off, the poor countries would have to try to attract private investment, both domestic and foreign. They would have to give guarantees that capital and profits could be repatriated, and guarantees against currency exchange restrictions, against discriminatory taxation, price and profit controls, government-owned competition and above all against expropriation.

And the government that reluctantly gave such guarantees would be amazed to find how suddenly its country would begin to prosper.