Why Foreign Aid Fails

The history of foreign aid is littered with good intentions and bad outcomes. Even the world's hyperpower was unable to take advantage of substantial foreign aid in the aftermath of Hurricane Katrina. Granted, it is not moral quibbling to question taking charity from poorer nations, but the United States allowed donations to be ruined by the elements while needy people went without.

Given the failure of the United States to effectively harness foreign aid, it is unsurprising that most poor countries don't use it well either. But after decades of experience in the post-WW2 period, wealthy donor countries haven't figured out how to make the system work. Foreign aid doesn't even result in warm feelings these days. Developing countries have a highly developed sense of sometimes justified exploitation, and just as understandably, many rich nations don't feel like giving billions to help the less fortunate if all they receive in return is a public relations black eye.

Foreign aid fails because one-time donations aren't used to invest in the future. It's not surprising to economists that behavior doesn't change when the underlying incentive structure doesn't alter one bit. Yet one-time gifts are unlikely to change incentives because they only influence the present. Tying future gifts to specific goals being reached is the economic prescription, but the political reality is that rich countries won't want to give to countries that are getting along fine on their own, and poor countries can't get big projects going without substantial start-up capital.

Giving foreign aid from a long-term perspective is the only way to actually leverage change, but long-term foreign aid is not particularly desired by anyone.

Ironically, only an iron-fisted dictatorship that is capable of forcing unpalatable changes down the throats of unwilling poor people is likely to make good use of foreign aid. Of course, depending on the good will of dictators is a losing strategy as well.

The only reliable course to economic growth is for a country to help itself. Sadly, the sorts of changes required will be sufficiently unpopular that poor people are almost always going to be unable to help themselves.

Social Responsibility of Corporations

What role should the business community play in addressing the emerging issues that face our society? From a strictly economic point of view, subjecting rich people to additional regulations on their business practices is precisely as onerous as charging them higher marginal tax rates. Business regulations that only really affect large corporations are an accepted fact of life these days. Of course, so is hiring a flotilla of high-paid corporate lawyers to come in and find/make loopholes that drive the effective rate of taxation way down. From the point of someone strictly concerned with societal welfare, creating a system that entrenches an enormous bureaucracy doesn't seem like a real winner.

But the real truth of life these days, especially on issues that affect the political establishment, isn't about finding the best or even a very good outcome. The real trick is finding a better than status quo outcome that is feasible given all of the relevant constraints.

Free market libertarians aren't wrong about the inherent weakness associated with attaching the profit motive and charitable work at the hip. Most corporations engage in a large amount of charity that amounts to little more than advertising for their products. It isn't unusual for corporate scholarships to take the place of fairly significant employment compensation. If corporate charity coffers were controlled by someone without a big stake in the company profits, then there would be a lot fewer corporate logos on little league jerseys and many more donations to the world's most efficient charities.

Still, when corporate profits are returned to shareholders, either through dividends or stock buy-back programs, the number of shareholders who spend even a quarter of that money on charity is minuscule. This indicates that having corporations engage in wildly inefficient charity still results in more than just giving the money back to shareholders. Now some people will no doubt point out that there are other priorities than just increasing charitable giving, but they really miss the point.

The entire mantra of corporate responsibility only serves to advance the interests of very large corporations that get big returns from advertising and charitable causes. Never mind that guilting the rest of society into totally changing the way everything is done will inevitably result in unintended side-effects. Corporate social responsibility is a handout to the charity lobby.

There are lots of places that government handouts would be more misspent than on charity, but that presumes that handouts to charity represents a bad thing. To the contrary, free markets are notorious for externalities that result in tragic underinvestment in obvious goods that charities step in to fix. Government policy to temper the free market with inefficient charity may be more efficient than directly solving those problems. Or it might not be. Not even time will tell, only very carefully collected and analyzed data from unbiased sources could provide that insight. So we may never know.