Wednesday, August 20, 2008

Foreign Aid

Members of the federal government are now talking about providing the government of Georgia with about $1 billion in foreign aid to help that nation rebuild following the recent Russian incursion.

In general, I have a number of problems with government funded foreign aid,. It carries with it a number of hazards that may well make it the case that it may do more harm than good. In other words, the more money the federal government spends on foreign aid, the worse off the rest of the world (particularly its poorer parts) become.

The Hazard of Corporate Welfare

Let us start with the fact that a great deal of foreign aid is not foreign aid at all. Much of it is corporate welfare. The money does not go from the taxpayers to the people of another country. It goes from the taxpayer to American businesses who will allegedly provide the foreign government with something of value. In reality, what they provide is often more valuable to the company that provides it than to the people who receive it.

We can look at the war in Iraq as an example of this. It would not be a stretch to view the invasion as a huge foreign aid package – one that was at least allegedly created to provide the people of Iraq with a benefit – political freedom. In fact, however, a great deal of the money spent on this foreign aid package was money that went from the American taxpayer to American corporations – a wealth redistribution scheme that funneled money from the poor and the middle class to the rich.

The federal government did not only take money from the pockets of the poor and the middle class. It also taxed them out of their liberty (calling them up into military service), their well-being (from the sacrifies made in order to serve to the injuries they received as a result of that serve), and in some cases their lives. All of this so that the government could give the gift of hundreds of billions of dollars of aid to American corporations.

Measuring Help and Harm

It is still reasonable to ask in this case about the degree to which the people of Iraq obtained a benefit from this ‘foreign aid’. Remember that on the question of provided a benefit, we should not compare an action to the option of doing nothing and decide if the beneficiary is better off. We need to ask whether the aid offered was better than the next best alternative.

For example, let’s assume that I was to force you to invest $1000 in a projet that pays a 5% annual dividend. At the end of the year, you end up with $1050. It does not follow that I provided you with a $50 benefit. Let us add the assumption that you had the option to invest $1000 in a project that pays 10% interest. If I had not forced you into this option, you would have had $1100. Instead, I forced you into an option that left you with $1050. As a matter of fact, my action did not provide you with $50 in benefit. Instead, it cost you $50.

Was there an alternative available to the Iraqi people the world and to the Iraqi people that would have left them better off at the end of 5.5 years than they are today? If there was, then our foreign aid provided no benefit. Our foreign aid imposed a cost – one that denied the people of Iraq the benefits of this alternative.

Here’s an example. What would have been the result of paying Saddam Hussein $5 billion to call for free elections to create a congress, and then to leave the country, plus another $100 billion to the new government to help it get established?

I do not know what the answer to this question is. However, if the answer is that, at the end of 5.5 years, Iraq would have suffered less of a loss of infrastructure, life, and well-being than it did under the invasion plan, then the invasion plan provided no net benefit. Instead, it provided a net cost – the cost being the difference (to Iraq) between the invasion option and the bribery option.

The Hazard of Political Welfare

Much of foreign aid is not only corporate welfare, it is political welfare. It is not only used as a mechanism for transferring money (and other forms of well-being) from the middle and lower classes to the rich, it is a way of transferring money from the average American to those who belong to organizations politically aligned with the President’s party.

We can put much of the government expenditures to fight AIDS in Africa in this category. This is a transfer of wealth from the average American to organizations that share the President’s views on abortion, family planning, and sex education. Specifically, it was a way for the Bush Administration to funnel money to religious people who were politically aligned with the Republican Party. Given the harm that is done to the people of Africa by following these policies, this was not an aid package to Africa at all. It was a sacrifice of the people of Africa – an exploitation of their plight – for the purpose of making a political payoff in the United States.

The Hazard of Aiding Tyranny

A third hazard to foreign aid is that the money goes to the government of the recipient country. That government, with an additional lump of money to spend, will also be working to make sure that the money gets funneled to people and projects that will keep them in power. They will funnel the money to their political allies – underlings whose support and loyalty are valuable to the political leaders, and who expect to be well paid for their services.

If we are providing foreign aid to a country, then perhaps we are keeping people in power who are not particularly interested in helping the poor people in their country as much as they are interested in preserving power for themselves and their friends. In fact, many of the countries that are in need of our foreign aid are in that situation because they are doing a poor job of handling their own affairs, and this is usually because of a political system that does more harm than good.

Concluding Remarks

Many of these points tie in with the issues that I have raised for the past couple of days regarding rational ignorance. The reason that foreign aid can be used as a tool for generating corporate welfare, or political welfare, or supporting tyranny, is because the politician knows that the average voter does not have the time or the inclination to audit the line-item details of each government expenditure. The government puts the money down as ‘foreign aid’, and the people think in terms of convoys of trucks bringing food and medicine to an impoverished community.

Indeed, some of that happens – enough to put these images on the screen from time to time and to manipulate the people through a judicious application of selection bias into thinking that this is the norm. In fact, there is a great deal of room available for foreign aid to be diverted to any of these other objectives without anybody caring enough to protest.

It is not worth it to protest. The average taxpayer, considering a $1 billion contribution, can expect to pay only a few tens of dollars, if he pays anything at all. And even those who will pay nothing will have a vote.

For this reason, there are very few people who know the details of even one foreign aid package, let alone have a working understanding of America’s entire foreign aid policy. This level of necessary ignorance is what makes it possible for legislators to sneak corporate welfare into a foreign aid bill.

A common rhetorical trick is to take the value of a particular project and to divide the amount by the total number of taxpayers. This yields a price per taxpayer that has the ability to scare any taxpayer. Yet, as a matter of fact, more than half of the cost will be borne by a small percentage of the taxpayers, and many taxpayers will pay nothing. The average taxpayer – the number that makes up the majority – will pay significantly less than the average amount for any given project. We do not gain any political insight by pretending that all tax payers will pay the average amount. Any conclusions drawn from this assumption will be drawn from a false premise.

So, given the significantly-less-than-average-dollar-value of the contributions made by a majority of the voters, the cost of determining the merits of any given foreign aid proposal far outstrips the benefits of having that information.

This, of course, is what the political manipulators count on in order to manipulate the system in favor of their constituents – the fact that it will not be worthwhile for the majority of voters to care about what is going on. However, it is definitely worthwhile for the few beneficiaries to share the haul that these types of programs bring in. Given the amount of money to be gained, it certainly pays the political manipulator to find some way to get the majority of the population to support their pet project.

This is not to say that foreign aid is necessarily a bad idea. This is simply to say that there are some traps that we need to watch out for. That if we do not watch out for them, then our foreign aid can do more harm than good – not only to the people of another country, but to the average American as well. If we do not care to avoid these traps because the playoff is too low, we should are to avoid these traps because we actually want to help the beneficiaries of foreign aid, not make them worse off in a scheme that ultimately aims to profit people who do not need it.


Unknown said...

Much of what you say is confirmed by this book:

which I heartily recommend. :)

anton said...

A great piece! A provoking topic! While it may get more people thinking about the formulae associated with "foreign aid", I would suggest that it does not address the most important aspect of foreign aid, which is "The money MUST be spent purchasing products and/or services from the benevolent nation (in this case US American suppliers or corporate entities controlled by US interests), most often at inflated prices, with no warrantees or guarantees, and from a list of approved products supplied by the US government"

For example, if my company manufactured a vacuum cleaner that didn't get consumer acceptance in the US, and I was a "favourite son" of the current administration, my vacuum cleaners would be on the list, and usually at an inflated price. Also, I would not have to provide a warrantee or guarantee. I could "top up" any shipments with vacuum cleaners that failed quality control inspection. In fact, the entire shipment could be made up of "rejects". In many instances, the local power supply may not even match the requirements to make my vacuum cleaners work. Mind you, I would make certain that a "super" version of my vacuum cleaner was presented to the local leader, King, etc.

The financial picture may look something like the following"

Total aid package = $10 million
Actual Cost = $2 million
"Value" of goods = $ 250,000
Corporate Tax deduction = $5 million

Publicity value to corporation and US = priceless!

And then there are the situations where some of the uses of our "benevolence" get back to our citizens. To site an instance:

"Several million dollars of aid were given to an African Nation. They used it to buy garbage trucks, one of a very few items on the shopping list provided. The African nation then used the garbage trucks as "tanks" and "troop transportation". When the story got back to North America its citizens were outraged that their "aid" had been so outrageously misused. The manufacturer of those "garbage trucks" had a very profitable year. The trucks didn't last very long, not because they were inferior, but because they were originally intended for NA streets, not for traveling in Sahara sands. The story got back to NA when a mechanic employed by the NA supplier and hired by and paid for by the African nation, told the story, complete with pictures, to the North American press. Very few of our continents "newspapers" or "magazines" would carry the story. I wonder why??

Hume's Ghost said...

Jeffrey Sachs has some relevant practical recommendations for the sort of effective foreign aid we should be engaging in in his most recent book Common Wealth (which I found to be excellent, one of the best books I've read this year.)