What Happens to Aid?

June 22, 1964

When Nehru died, a number of newspapers pointed out that whatever his merits may have been, he had failed to solve India’s economic problems. Millions of Indians still live in abject poverty. Ninety percent of the houses in the country are one-room hovels, with no facilities whatever. Food consumption by the masses continues below acceptable standards. The use of cloth has steadily declined. India’s national income rises only about 2 percent a year, roughly the same as population growth. Industry is stagnant. Unemployment has risen.

And all this is in spite of massive foreign aid. Since 1948, the United States has spent $5.3 billion in all sorts of aid to India, from outright grants to loans and sales of surplus farm commodities for rupees. The week before Nehru’s death a consortium composed of the World Bank and ten nations pledged more than $1 billion for the fourth year of India’s current Five-Year Plan.

India’s poverty is immemorial. But the failure of conditions to improve in the seventeen years of Nehru’s rule, even with these massive doses of foreign aid, is not mysterious. India’s economic growth has been choked by the economic, fiscal, and monetary policies that Nehru and his party imposed on the country.

DOCTRINAIRE SOCIALISM

Nehru was a doctrinaire socialist. The establishment of a socialist society was, in fact, the principal goal of Indian economic planning. This objective was formally accepted by the Indian Parliament in 1954. In the words of the second Five-Year Plan: “The adoption of the socialist pattern of society as the national objective, as well as the need for planned and rapid development, require that all industries of basic and strategic importance, or in the nature of public utility services, should be in the public sector.”

In various ways the Indian Government has been throttling what is left of private industry, and diverting production into uneconomic channels. Government-imposed price controls have driven scarce funds from areas where they are most needed. Under selective and arbitrary price ceilings, investment in coal mining, cement manufacturing, and fertilizer production has lagged. Private steel mills have been starved of funds and unable to expand their facilities.

Though heavy government spending and deficits have led to inflation and rising domestic prices, the official value of the Indian rupee has remained unchanged since World War II. The result is a gross overvaluation of the rupee. Its official quotation is kept up only by exchange control. This overvaluation has penalized and discouraged exports, subsidized and encouraged imports, led to a startling increase in India’s external debt, depleted its currency reserves, and caused acute shortages of foreign exchange. It is estimated that without foreign aid, India’s balance-of-payments deficits would have averaged more than $800 million annually in recent years.

DISSERVICE TO INDIA

So our aid to India has gone mainly to subsidize and prolong socialism, price controls, and an artificial value for the rupee. As the eminent Indian economist B.R. Shenoy wrote in the May 21 issue of The Wall Street Journal: “Foreign aid actually is doing a disservice to the Indian economy. . . . Aside from helping to perpetuate industrial white elephants, foreign aid . . . provides the foreign exchange needed for illicit export of capital; for illegal imports of gold . . . for speculative accumulation of inventories; for the construction of urban property as a hedge against inflation; and for luxury living for those few who succeed in manipulating the nation’s economic controls to their own advantage.”

In brief, aid to India, in so far as it has not been merely a futile effort to fill a leaking tub, has been encouraging and prolonging socialism, controls, inflation, and an overvalued currency. And what is happening in India is typical of what is happening in other “underdeveloped” countries into which we have been pouring taxpayers’ dollars.

When, if ever, are we going to use foreign aid to encourage sound currencies, balanced budgets, private property, free enterprise, and increased productivity?