Dilemma of Foreign Aid

April 20, 1964

In 1947, when the foreign-aid program was first launched under the name of the Marshall Plan, I wrote a critical book on it called Will Dollars Save the World? In it I pointed out, among other things, that intergovernmental grants raised an insoluble problem regarding conditions:

“Intergovernmental loans 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. They may even be used for the precise opposite of the purpose that the lender had in mind. 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 borrowing nation.”

In the original debates on the foreign-aid program this dilemma was simply ignored. Even in the seventeen years since then it has been only dimly and occasionally suspected. Thus our government has alternated between one policy and the other. For a time it would try to attach conditions. When this gave rise to outcries of “Yankee domination” our government would hasten to assure the recipients that the aid was offered “without strings.” Then when the aid was shockingly abused we would return to a halfhearted insistence on some conditions.

SUBSIDIZING SOCIALISM

Today we seem to be following the worst policy of all. We have been imposing conditions, but exactly the wrong conditions. We tell our neighbors in Latin America that they will get aid in proportion to their commitment to “programs of economic and social progress.” But we have been interpreting this phrase to mean “land reform,” subsidized housing, bigger social-security payments, i.e., programs of government planning and socialization. (The Johnson Administration, however, has recently given signs of recognizing the dangers in this policy.)

What we have to recognize (as I pointed out in my 1947 book) is that the dilemma of conditions “is, in fact, inherent. It lies in the attempt of one government to bribe another into following economic policies which that other government does not believe in sincerely enough to follow without the bribe. The dictation must be resented even if accepted. The people in the borrowing nation are led to feel that they have sold their economic birthright for a mess of pottage. Everything that goes wrong is blamed on the conditions [of the aid]. The ill will caused by this is in itself enough to offset any good will [the aid] might have brought.”

TO MAXIMIZE GROWTH

This dilemma of conditions does not arise in private foreign investment. Such investment, in the first place, is usually in private firms. If a business in Ruritania, say, seeks a loan from American investment bankers, the conditions suggested by the American bankers are not essentially different from those that would be suggested by Ruritanian domestic investors. The American private investors would ask whether the proposed new plant promised to be profitable, what guarantees were offered, etc. If the applicant for a loan were the Ruritania government itself, foreign investors would not be interested unless the government seemed likely to balance its budget, to refrain from printing more money, from exchange control, and so on.

In short, the loans would not be politicalized. They would encourage free enterprise, instead of socialism, in the borrowing countries. They would tend to go into the most profitable enterprises—i.e., into the enterprises that promised to maximize real wealth creation. They would tend to promote maximum economic growth.

Government-to-government foreign aid has the opposite effect. It tends to discourage or drive away private foreign investment, because the recipient nations get this aid without making the necessary fiscal or monetary reforms. Worse, the American Government, in order to continue to make it possible to give away foreign aid that is wasted and abused, has asked for a punitive tax on the very private foreign investment that tends to maximize world economic growth.