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Half Penny on the Federal Dollar

By Michael O’Hanlon and Carol Graham

O’Hanlon and Graham argue that aid is important because it serves basic human rights, freedoms, and opportunities, basic matters 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. Official development assistance, aid ear marked for human and economic development, by the U.S. was about nine billion dollars in 1997 and falling. 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 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 on macroeconomics, much of it wasted on bureaucracies, subsidies, and power brokers. The authors claim $40 billion should be shifted to poor countries with better policies and away from countries with terrible policies. The countries with bad policies will then have incentives to change. Some might claim funds would then be shifted from poor countries, but the authors allege many poor countries with decent policies exist. Many dictatorships, however, are little more than local occupation forces. They do not care about better policies.

Amazingly, more money per capita currently goes to poor countries with bad policies than poor countries with better policies. Research by David Dollar and Craig Burnside suggests shifting aid from poor countries with poor policies to poor countries with better policies would raise mean growth rates from 1.10 percent to 1.44 percent. Research suggests that in bad policy environments aid hurts growth. More thorough recent research, however, suggests aid does not work in better policy environments, either.

Aid is a complex undertaking with unexpected consequences. Some nations that experienced hyperinflation did better economically than their low inflation counterparts. The inflation itself hurt, but the tragedies caused by the inflation spurred the countries to enact reforms, including lowering inflation. Some countries with low inflation refuse to reform.

Other consequences are closer to 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 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.

The authors believe 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 claim, 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, O’Hanlon and Graham write, would cause many corruption, implementation, and dependency harms. This work focuses too much on dollars spent and not enough on finding ways to produce good results.

—Book review article by J.T. Fournier, last updated July 24, 2009

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