Democrats claim that USAID provides life saving funding to impoverished people all over the world. Republicans claim that USAID is a corrupt and criminal organization, which has failed to alleviate global poverty. What does evidence tell us about foreign aid, generally?
Dozens of countries in the industrialized West have given billions of dollars in foreign aid over decades. How has this worked? Extreme poverty persists especially in Africa and Asia. Why has poverty persisted in an age where wealthy nations provide foreign aid? One answer is that the amount of money devoted to foreign direct aid has been inadequate; we need to give more. Another possible answer is that foreign aid fails to address the root causes of poverty
A little while back I ran some numbers on per capita GDP in different nations, and the level of corruption and free trade in these nations. What did I find?
If we measure corruption on a scale where 100 means minimal corruption and zero means rampant corruption, we find that highly corrupt nations have low per capita GDP, and nations with low levels of corruption have high per capita GDP.
Correlation doesn’t imply causation, but the data I show just above makes economic sense. Nations that focus on rule of law and the security of property rights get wealthy through gains from trade, both internally and on global markets. Hence, trade freedom correlates with high per capita GDP. Nations with governments that focus on rent- seeking (using state powers to transfer wealth, rather than to secure a property rights) scare off the investors. People who might embark on entrepreneurial ventures within a nation won’t do so if they know that their government will rob them blind. The prospect of being expropriated by corrupt government also scares off foreign direct investment by capitalists on global markets. The graphs I posted above aren’t the only evidence that corruption breeds poverty. economic analysis by Hernando De Soto indicates that corruption breeds poverty by scaring off those who might invest in accumulating capital.1 Singapore is a recent example of a nation that prospered after a successful anti corruption campaign.
Foreign direct aid has failed to alleviate worldwide poverty. Nations with secure property rights have prospered. Nations with corrupt officials who violate property rights have failed. There would be a strong case for shutting down USAID even if it isn’t corrupt. The real question isn’t whether or not USAID should be shut down now. The question we should ask is why it wasn’t shut down long ago.
Originally published at On the Other Hand...
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See https://archive.org/details/TheMysteryOfCapital/page/n13/mode/2up
