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Half Penny on the Federal Dollar

By Michael O’Hanlon and Carol Graham

The authors argue that aid is important because it serves basic human rights, freedoms and opportunities. These basic matters are at least as important as U.S. national interests in giving aid.

Half Penny summarizes aid spending in detail, where it goes, who pays what. O’Hanlon and Graham write that official development assistance by the U.S. equaled about nine billion dollars in 1997, and it is falling. Development assistance is the foreign aid ear marked for human and economic development. By far the biggest chunks go to Egypt and Israel.

The United States devotes a smaller share of GDP to aid than other developed nations, but the authors make the noteworthy point that the U.S. pays far more in shared policing and military costs. About one-third of the $62 billion in western aid spending is devoted to basic needs and micro projects. The remainder is spent on macroeconomics, much of it wasted on bureaucracies, subsidies, power brokers and other inefficient practices. The authors argue that this $40 billion should be shifted to poor countries with decent policies and away from countries with terrible policies. The countries with bad policies will then have incentives to change. Some might claim that funds would then be shifted from poor countries, but the authors argue that there are plenty of poor countries with decent policies to help.

Amazingly, more money per capita currently goes to poor countries with bad policies than poor countries with decent policies. Research by David Dollar and Craig Burnside suggests that shifting aid from poor countries with poor policies to poor countries with decent policies would raise their mean growth rates from 1.10 percent to 1.44 percent. Research also suggests that in bad policy environments aid hurts growth.

Aid is a complex undertaking with many unexpected consequences. Some nations that experience hyperinflation have done better economically than their low inflation counterparts. The inflation itself did not add to growth, but the tragedies caused by the inflation spurred the countries to enact a wide range of reforms, including lowering inflation. Some countries with low inflation refuse to reform many of their bad policies.

Other consequences are more certain. Every nation that has somewhat free markets and secure property rights grows over the long haul, at least according to a study of 117 nations by

Sachs and Warner. Support for reforms within a nation is also critical.

The authors argue for debt forgiveness, then requiring countries to attract private capital on their own with freer markets in contrast to the present policy of constantly cajoling countries to pay old debts. Perhaps they should reform their policies first, then ask for and receive debt forgiveness. Half Penny argues that aid should be focused on macroeconomic growth rather than environmental policies and microeconomic projects.

They conclude that western nations should increase aid spending to $80 billion per year, which is about 0.35 percent of western GDPs. The United States would pay 15 to 20 percent of the increase. American aid bureaucracies should, they argue, be reduced by 2,500 employees, leaving 8,000 employees. The U.N. claims that Western nations should increase aid spending to $150 billion a year, but spending at that level, write O’Hanlon and Graham, would cause too many corruption, implementation and dependency harms. Recommended.

—Book review article by J.T. Fournier

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