Economics

Foreign Aid Hurts Foreigners

ForeignAssistance.gov shows $25.8 billion in planned foreign assistance worldwide for 2018. In contrast to $44.3 billion in planned foreign assistance for 2017 (actual spending was nearly $17 billion), this might signal a decrease in U.S. foreign spending in years to come. Let’s see how foreign aid hurts foreigners:

Let’s set aside the fact that involuntary wealth redistribution is unjust. There are other injustices that result from handouts to other countries by certain governments. Foreign aid is meant to help the poor in underdeveloped countries. If a country’s people are struggling with poverty, so is the government. A country can’t increase revenue through taxes if the people don’t have the wealth to tax.

This creates a situation where assistance is likely to be squandered through government corruption. This can happen in various ways. But, the data shows that greater amounts of foreign aid do not result in greater economic growth. This suggests a leakage by the state of the foreign aid being sent to impoverished people.

Page 34, “AID AND GROWTH: WHAT DOES THE CROSS-COUNTRY EVIDENCE REALLY
SHOW?”, Raghuram G. Rajan, Arvind Subramanian
Corrupt states aren’t the only reason foreign aid fails.

The chart above shows a negative correlation between economic growth and foreign aid. This can’t be only due to corrupt governments. A hypothetical econometric can help illustrate why foreign aid hurts foreigners. In the graphic below, the chart on the left represents a hypothetical economy with a free market. The chart on the right represents the same hypothetical economy when introduced to foreign aid.

The effects of foreign aid on a hypothetical economy

Introducing foreign aid hypothetically increases supply for a product. This shift in the supply curve results in a greater quantity demanded by consumers at a lower price. If the product is corn, how would this affect corn farmers in countries receiving foreign aid? If a country receives foreign aid money and purchases corn from the US to give to the people, there is a negative effect on the corn farmers in that country. Likewise, if charity organizations or governments send corn to foreign countries to be used by the people, corn farmers in that country suffer.

The greatest intentions can’t undo economic law.

The increase in supply from foreign aid means producers in the country that foreign aid is supposed to benefit have to sell at a lower price. Farmers and other producers in countries receiving foreign aid can’t compete with the organizations providing something for free. They suffer lower revenue as they are forced to lower prices as a result of the increase in supply from foreign aid.

The result is a cycle of dependency on foreign assistance as producers fail due to foreign assistance which then creates a need for more foreign assistance, and so on… The chart below shows economic growth per capita and aid as a percentage of GDP in Africa from 1970-2000. While aid to Africa has increased over this time frame, growth has fallen overall over this time frame.

Journal of Economic Perspectives—Volume 17, Number 3—Summer 2003, Can Foreign Aid Buy Growth?, William Easterly
Page 35, Journal of Economic Perspectives—Volume 17, Number 3—Summer 2003, “Can Foreign Aid Buy Growth?”, William Easterly

It is time to put facts before feelings, end handouts to developing countries, and let developing economies flourish through free markets.

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