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Foreign Aid: There are No Free Lunches


Raymond He

By

May 21st, 2020


Foreign aid, a helping hand or a contract to benefit? Raymond He explores two sides of the coin to address concerns of foreign aid


China’s foreign policy was heavily scrutinised even before the outbreak of COVID-19 and China’s initial mishandling of it. Once heralded as Xi Jinping’s “project of the century”, China’s Belt and Road Initiative is now described as an effort to cement Chinese global influence by financially binding countries to Beijing by way of “debt-trap diplomacy”. While these concerns have merit, [1] China is not the first country to use foreign aid to further its domestic policy goals. 

Ostensibly, foreign aid appears to be about lifting impoverished countries out of poverty. The United Nation’s Millennium Development Goals (MDGs), which was adopted by world leaders in 2000, set ambitious targets on many important issues such as poverty, health, the environment, and more, all to be reached by 2015. [2] While important poverty reduction milestones have been reached, there is still much to be done. Moreover, China’s growth is mostly responsible for this success, a country that was not a significant beneficiary of Western foreign aid. 

The MDGs are not the first unsuccessful aid initiative. In 1949, President Truman created the Point 4 Program, which was designed to make technological innovations accessible to developing countries. In 1954, Senator Humphrey enacted the Food for Peace Program, and in 1960, President Kennedy created the United States Agency for International Development (USAID). [3] Yet, decades later, there is still little evidence to suggest that the world is much closer to accomplishing these goals.

Flatly decrying foreign aid as a failure is akin to arguing that surgeries kill people. In a counterfactual world, perhaps the foreign aid recipients would’ve been much worse off without it. However, the remarkable success of the Marshall Plan suggests that aid can be effective. After much of Europe’s infrastructure and human capital was devastated after World War II, the U.S. launched the Marshall Plan, which adjusted for inflation, costed $182 billion from 1946 to 1952. So why did the Marshall Plan succeed while so many other subsequent foreign aid projects have failed?

That is because foreign aid is a form of foreign policy, designed to advance the benefactor’s interests. USAID itself says that it “carries out U.S. foreign policy…creates markets and trade partners for the United States”. [4] Foreign aid deals between governments are precisely struck because each party has something to give that the other values.  

The Marshall Plan succeeded because both the U.S. and Western Europe wanted Western Europe’s economy to be healthy. The U.S. needed a strong Western Europe as an ally in the Cold War. The democratic Western European politicians needed successful economic policies because as democratic governments, they depend on the broad approval of their people. In contrast, autocratic leaders can pilfer much of the foreign aid it receives because they only need to pay off their few supporters in which power is concentrated.   

Despite 40.9% of its citizens living on $1.90 a day in 2016, [5] Liberia is another example of this political logic. At the height of the Cold War, Liberia received $50 million per year from the U.S. to adopt an anti-Soviet stance and for various defence cooperation pacts to be signed. [6] Yet, when the Cold War neared its end, the value of Liberia’s anti-Soviet policies waned and so did the U.S.’ foreign aid to Liberia, despite Liberia entering a civil war in 1989 and the people needing aid more than ever.

Other nations use foreign aid to buy favours too. [7] As a workaround against international trade laws that outlaw direct government subsidies, governments often tie their foreign aid to conditions that they benefit from, such as how that aid is to be spent. For example, approximately 40% of Canada’s foreign aid is conditional on purchasing Canadian goods and services. [8] Additionally, aid to African countries from the European Union is growingly contingent on the beneficiaries curbing migration to Europe. [9]

Just as China has been buying votes on the United Nations voting assembly, so has Japan on the International Whaling Commission (IWC). Despite being internationally unpopular, the Japanese government works hard to fight for its voters’ affinity for whale blubber to maintain democratic support. Therefore, when IWC instituted a moratorium on commercial whale hunting, Japanese foreign aid to dramatically increased. [10]

Figure 1: Fluctuation of Overseas Investment Flows from Korea and Japan

Source: UNCTAD, Jan 1

Since then, the IWC’s membership has increased with many of its new members having any history of whaling. Some new members, such as Laos, Mali, and Mongolia, are entirely landlocked.

The history of foreign aid is fraught with political manoeuvrings, (sometimes violent) regime changes, corruption scandals and very gradually, economic development. There is no free lunch, certainly not in foreign policy, where millions and even billions of dollars are on the line. China’s foreign aid may indeed benefit itself more than the people of recipient nations in the long run. However, that is not unique to any individual country; it is an uncomfortable facet of foreign policy, designed by politicians all trying to keep their job. 

[1] Brookes, P. (2007, March 26). Into Africa: China’s Grab for Influence and Oil. Heritage Lectures. 

[2] United Nations. Millennium Development Goals and Beyond 2015. Retrieved from United Nations: https://www.un.org/millenniumgoals/

[3] Bovard, J. (1986, January 31). The Continuing Failure of Foreign Aid. The Cato Institute Policy Analysis. 65. 1 – 15. 

[4] United States Agency for International Development. WHO WE ARE. Retrieved from USAID: https://www.usaid.gov/who-we-are

[5] The World Bank. (2019). Poverty and Equity Data Portal. Retrieved from The World Bank:http://povertydata.worldbank.org/poverty/country/LBR

[6] Lawson, S. (2007). U.S. Africa Policy Since the Cold War. Strategic Insights, 6(1). 1 – 15. https://apps.dtic.mil/dtic/tr/fulltext/u2/a520352.pdf

[7] Scrader, P. J., Hook, S. W., & Taylor, B. (1998). Clarifying the foreign aid puzzle: A comparison of American, Japanese, French, and Swedish aid flows. World Politics, 50(2). 294 – 323.

[8] Engineers without borders. Untie Aid. Retrieved from Engineers without borders: https://www.ewb.ca/en/what-we-do/advocating-for-change/campaigns/untie-aid/

[9] Hansen, S. (2020, January 29thEU aid increasingly taken hostage by migration politics.  Retrieved from Oxfam International: https://www.oxfam.org/en/press-releases/eu-aid-increasingly-taken-hostage-migration-politics

[10] Kang, S. J., Lee, H., & Park, B. (2011). Does Korea follow Japan in foreign aid? Relations between aid and foreign investment. Japan and the World Economy, 23(1). 19 – 27.

The views expressed within this article are those of the author and do not represent the views of the ESSA Committee or the Society's sponsors. Use of any content from this article should clearly attribute the work to the author and not to ESSA or its sponsors.

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