The Foreign-Aid Folly

July 8, 1963

Though the United States has already poured more than $4 billion foreign aid into India, it is planning to pour in more, including nearly $1 billion for a government- owned steel mill.

The Clay Committee Report declared that “the U.S. should not aid a foreign government in projects establishing government-owned industrial and commercial enterprises which compete with existing private endeavors.” But the Administration seems determined to go ahead. India’s Minister of Steel and Heavy Industry warns us that India will build the plant “with or without United States aid.”

American officials who want our taxpayers’ funds to pay for this socialistic project argue that India “is starved for steel.” But even if we grant this, why can’t India simply import the steel? Why can’t she buy it from us? Our own steel industry is working far below capacity. Our steel exports have declined. Why should we further tax Americans, including our own steel industry, to subsidize more foreign competition?

BUYING STEEL ABROAD

Would a subsidized government steel industry be good for India itself? It is doubtful. Writing in the Indian magazine Swarajya, the American economist Milton Friedman declares: “The Achilles heel of the Indian economy at the moment is the artificial and unrealistic exchange rate. . . . So long as the exchange rate is as far as it currently is from a realistic rate, foreign assistance will simply be poured down a bottomless well.” He adds: “India has become a protected economy in which items are produced domestically at a multiple of the cost at which they could be obtained from abroad.” India wants a subsidized steel mill largely because a new privately financed mill at Bokaro simply would not pay.

Aid for such a steel mill would be a direct American subsidy for foreign socialism. But it does not follow that our foreign-aid program would be desirable even if it abstained from such follies. The principal reform needed in our foreign economic aid program is to abolish it.

Let us see what some of the beneficient results would be. The governments of the underdeveloped nations would want to continue their policies of government planning, socialism, wage-boosting, inflation, and “economic expansion.” They would let loose a propaganda barrage saying they had been betrayed, and if they could no longer get aid from us they would go to Russia. But it would soon occur to the more sober-minded among them—recalling Cuba, for instance—that this was not the most promising route to prosperity and freedom. A few of their statesmen would point out that some countries, like Canada and those of Western Europe, had done very well by attracting private American investments. So they would send officials here to consult with American corporations and investment bankers.

INVESTMENT CLIMATE

The bankers would tell them that American investors would be interested only if a climate were created attractive to investment. Asked what would bring such a climate, they would suggest that the borrowing government balance its budget, stop inflating its currency, stop “land reforms” that destroy property rights, stop excessive taxation, stop discriminating against foreign investments, stop expropriation and nationalization—in brief, stop socialism and try free enterprise.

“But this is dictating our internal policies!” some of the underdeveloped diplomats would protest. “Not at all,” the private bankers would reply, “this is merely telling you the conditions likely to attract investors.”

And if these reforms were adopted, the governments of the backward countries would be amazed to find not only that private foreign capital was attracted, but that their private domestic capital, instead of fleeing abroad for safety, was being invested at home, and that rapid progress was beginning as the result of increased domestic confidence.

Most of the sponsors of government-to-government foreign aid, alas, are socialists at heart, and have still to learn that the secret of prosperity is free enterprise.