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Corruption and Foreign Aid

Mises Daily: Thursday, November 14, 2002 by

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For a few billion dollars you might expect to be able to bribe some small third world country into cleaning up its act, to defend the property rights of its citizens, to provide a stable currency, and to establish a non-interventionist economic and foreign policy.

With little Switzerlands and industrial revolutions developing around the globe, the U.S. could provide the examples that would establish a classical liberal world order within one generation with less than 1% of the federal budget.

Alas, Americans are united in their opposition to foreign aid—and with good reason! Foreign aid, military aid, debt relief, economic development assistance, and even disaster assistance money—all with "strings attached" to ensure proper behavior—are associated with "fraud, waste, and abuse."

U.S. aid designed to bring about peace in the Middle East is an ideological seedbed of hatred, war, and terrorism. The big players in foreign aid, the International Monetary Fund and the World Bank, are more likely to bring about economic meltdown and social calamity than economic stability.

Ludwig von Mises pointed out (Planning for Freedom) that foreign aid doesn't create friends in foreign lands, it creates ideological enemies who wish to do us harm:

The United States, they think, is aiding them because its people have a bad conscience. They themselves pocket this bribe but their sympathies go to the socialist system. The American subsidies make it possible for their governments to conceal partially the disastrous effects of the various socialist measures they have adopted.

Mises is here referring to our "friends" in Europe, but the same could be applied to the Middle East, Africa, the Western Hemisphere, and Asia, with the only possible exception being countries like Vietnam and Australia who receive limited or no foreign aid from the United States or the international organizations that we control.

The fraud and failure of foreign aid is now so obvious that it has ended up in the pages of the American Economic Review!

Economists Alberto Alesina and Beatrice Weder ask the simple question, "Do Corrupt Governments Receive Less Foreign Aid?" in the September 2002 issue. Using a host of international economic statistics and several surveys of government corruption, they find that there is no evidence that nations and multinational institutions direct their foreign aid to less corrupt governments and away from more corrupt governments. They state their conclusion quite emphatically:

There is no evidence that less corrupt governments receive more foreign aid. Our vast exploration of the data never uncovered any even weak evidence of a negative effect of corruption on received foreign aid. The same result applies to debt relief programs, an additional form of aid.

Scandinavian countries and Australia do seem to avoid highly corrupt regimes, but the US actually seems to favor highly corrupt governments and democracies over dictatorships (this would seem to suggest some correlation between democracy and corruption, but one that the authors do not address).

The authors write that "We do not intend to claim that the United States favors more corrupt government on purpose." This rather bold academic disclaimer seems to call for a translation: "We do claim that the United States favors more corrupt governments on purpose, but we can't say that in the AER."

The authors also tentatively conclude that foreign aid, over time, increases government corruption in beneficiary nations. In complete contrast to our naïve classical liberal model of foreign aid, government-to-government "gifts" actually make government worse over time in terms of both government corruption and economic growth and creates what the authors call a "voracity effect" in recipient countries.

The authors' brief review of the academic literature on foreign aid and corruption finds the following:

  • Foreign aid is used largely for "wasteful public corruption."     
  • Aid money is counterproductive for good public policies.     
  • Foreign aid money is given for "strategic" reasons, not real needs.     
  • Debt relief is not effective.     
  • Corruption has a negative impact on economic growth

What goes unsurveyed, unstudied, and unsaid in the article is the ultimate corruption of foreign aid: Our government gives away the taxpayers' money and it ends up in the pockets of the domestic "friends" of our politicians; the multinational corporations, the military arms and munitions manufacturers, big contractors and construction companies, and dirty dealers of every sort.

The fact that some of the largess ends up in the pockets of foreign politicians is not surprising, but what is important here is that it identifies the real purpose of foreign aid, and it isn't a classical liberal , humanitarian, altruistic, or even strategic purpose.  The primary purpose is to extend the semi-secret shakedown of the American taxpayer.

Most copies of the American Economic Review are never opened and read. There is good reason for this and it is something for which we should be thankful. This article however deserves to be read, copied, and spread around to all thinking Americans.


Mark Thornton is a senior fellow of the Mises Institute. Send him MAIL. See his Mises.org Articles Archive and his scholarly pieces in the QJAE, the RAE, and the JLS. The article in question is Alberto Alesina and Beatrice Weder, "Do Corrupt Governments Receive Less Foreign Aid?" American Economic Review 92 (4): (September 2002) pp. 1126–1137.