I very much want to reduce poverty in poor nations, of course, but the evidence is very strong that government handouts don’t do a very good job.
Moreover, we also have lots of data showing poor nations can enjoy dramatic improvementsin living standards so long as they adopt good policy.
Yet some people haven’t learned this lesson. Consider the current debate over Trump’s threat to end aid to Central America if illegal immigration isn’t reduced.
A column in Fortune makes the case that handouts to Central America are necessary to reduce human smuggling.
President Donald Trump ordered the State Department to cut funding for Guatemala, Honduras, and El Salvador this weekend in retaliation for the recent influx of migrants from these nations, reversing a longstanding policy that saysaid helps abate immigration. …According to Liz Schrayer, president and CEO of the U.S. Global Leadership Coalition—a nonprofit coalition of businesses and NGOs dedicated to American development and diplomacy—pulling back aid “exasperates the exact root causes that are creating the migration numbers’ increase.” …“It will only result in more children and families being forced to make the dangerous journey north to the U.S.-Mexico border,” said the five Democratic lawmakers in a statement.
A piece in the New York Times makes the same argument.
The Trump administration’s decision to cut off aid to El Salvador, Guatemala and Honduras to punish their governments for failing to curb migration is a rash response to a real policy dilemma. …it will exacerbate migration from the region without twisting Central American politicians’ arms. …The decision to cut off aid is bound to drive up migration numbers.
Ironically, the author admits that aid is ineffective.
…we shouldn’t pretend that the aid itself was doing much good… it is mostly distributed inefficiently in large blocks by foreign contractors.
Though he seems to share the naive (and presumably self-interested) arguments of international bureaucrats about the potential efficacy of aid.
Central American governments and elites have gotten away with abdicating their fiduciary, social and legal responsibilities to their citizens. They have failed to collect tax revenue and to invest in social programs and job creation that alleviate the plight of their poor.
Even some small-government conservatives seem to think that more aid would make recipient nations more prosperous and thus reduce illegal immigration.
What President Trump is doing now — cutting aid — is wrong. …As former White House Chief of Staff and SOUTHCOM Commander, General John Kelly, has noted, “If we can improve the conditions, the lot in life of Hondurans, Guatemalans, Central Americans, we can do an awful lot to protect the southwest border.” …We risk undermining our longterm national interests by cutting foreign aid. We should, instead, spend it wisely in those countries to ensure stable governments that view us as allies and work with them to root out crime, corruption, and cartels. The present policy to cut foreign aid cuts off our national nose to spite our face.
This is not an impossible prescription.
But it’s also the triumph of hope over experience.
In the real world, we have mountains of evidence that foreign aid weakens recipient economies by subsidizing corruption and larger burdens of government.
Let’s look at some analysis on this issue.
In a piece published by CapX, Matt Warner recommends less redistribution rather than more.
…the poor know how to get themselves out of poverty. They just need more opportunity to do it. The question we must ask ourselves is: to what degree are our current development aid strategies aligned with this insight? …If the intervention itself is part of the problem, what can outsiders really do to help? Today there are at least 481 research and advocacy organisations in 92 countries pushing reform agendas to provide more economic opportunity and prosperity for all. The “Doing Business” report provides a blueprint for change. Local reform organisations, supported by private philanthropy, provide the leadership to achieve it and the world’s poor will show us their own paths to prosperity if we will all just learn to get out of their way.
Writing for Barron’s, Paul Theroux notes that Africa regressed when it was showered with aid.
Africa receives roughly $50 billion in aid annually from foreign governments, and perhaps $13 billion more from private philanthropic institutions… Africa is much worse off than when I first went there 50 years ago to teach English: poorer, sicker, less educated, and more badly governed. It seems that much of the aid has made things worse. …Zambian-born economist Dambisa Moyo calls aid a “debilitating drug,” arguing that “real per-capita income [in Africa] today is lower than it was in the 1970s, and more than 50% of the population — over 350 million people — live on less than a dollar a day, a figure that has nearly doubled in two decades.” The Kenyan economist James Shikwati takes this same line on aid, famously telling the German magazine Der Spiegel, “For God’s sake, please stop.”
Brad Lips of the Atlas Network explains why aid often is counterproductive.
The international community has donated more than $1.8 trillion to poor countries since 2000 – but this development aid hasn’t lifted many people out of poverty. Arguably, it has made some recipient nations poorer. …the aid has bred corruption, fostered dependence and impeded reforms that deliver sustainable economic growth. …Between 1970 and 2000 – a period in which aid to Africa skyrocketed – annual gross domestic product growth per capita on the continent fell from about 2 percent to zero growth, according to a study by an economist at New York University.
A column in the U.K.-based Times is very blunt about what all this means.
…the international development secretary should have abolished her department as soon as she was appointed to it… We kid ourselves that this aid works, to salve our consciences about being better off. But as we know, the money benefits charities, quangos, bureaucrats, tyrants and the predatory elite, and all these years later your average African is no better off.
Let’s close by looking at a thorough 2005 study from the International Policy Network. Authored by Fredrik Erixon, it documents the failure of foreign aid.
…the ‘gap theory’…assumes that poor countries are trapped in a vicious cycle of poverty because they are unable to save and hence have insufficient capital to invest in growth-promoting, productivity-enhancing activities. But there simply is no evidence that this savings/investment ‘gap’ exists in practice. As a result, aid has failed to ‘fill the gap’. Instead, it has, over the past fifty years, largely been counterproductive: it has crowded out private sector investments, undermined democracy, and enabled despots to continue with oppressive policies, perpetuating poverty. …The reason countries are poor is…because they lack the institutions of the free society: property rights, the rule of law, free markets, and limited government. … many studies point to the fact that government consumption in SubSaharan Africa has increased when aid has increased.
By the way, the International Monetary Fund deserves unrestrained scorn for recommending higher tax burdens on Africans, thus making economic growth even harder to achieve.
Last but not least, here’s some very encouraging data from Africa.
I already mentioned that Botswana is an exception to the rule. As you can see, that nation’s success is definitely not the result of more handouts.
The bottom line is that President Trump is right, even if his motives are misguided.
Foreign aid is not the recipe for prosperity in Central America.