Mises Wire

Foreign Aid and the Politicization of Economic Life

The conservative government in the United Kingdom champions the view that giving more foreign aid to developing countries will fuel economic growth that, as a bonus, will help to resolve the ongoing migration crisis. The international development minister has explained the government’s reasoning, namely that “giving development aid to countries was morally ‘the right to do,’ but a core argument should also be that it prevented refugees and migrants heading to Britain.”

The government’s hope is that sending foreign aid to the Third World will discourage economic migration to the West. Under pressure to stem the flow of refugees and asylum seekers attracted by the UK’s generous welfare state, the Home Secretary has duly come up with a plan to “stop the flight of capital and workers, by providing them with the tools and trade links to develop their economies.” Trade links are depicted as some sort of generous gift by one country to another, yet the goods and services to be exchanged are never identified. The plan pays lip service to the importance of free trade in facilitating economic growth, but it soon becomes clear that trade agreements in this context serve primarily as an opportunity to secure political agreement to advance the priorities of donor countries. In addition to “providing” trade links, other government proposals involve plans to police the world, for example, by “smashing the people-smuggling gangs and supporting countries which wish to settle more refugees.”

The UK government is assuming that foreign aid will promote economic growth, but it won't do this. Even if, contrary to the facts, it did promote growth, what is the evidence that this would have a substantial effect in discouraging immigration to the UK? None is offered.

Political Wheeling and Dealing

Peter Bauer, the distinguished development economist, pointed out the folly of attempting to achieve economic growth through this type of political wheeling and dealing, and he warned that this approach causes damage by increasingly politicizing economic life. Foreign aid plays a central role in fueling the persistent belief that political scheming is the best path to economic prosperity. The UK has allocated £8.3 billion to its 2024/25 overseas aid budget, not including ad hoc sums sent out for various forms of “international cooperation” and “humanitarian aid.” The US budget is “$63.1 billion for foreign assistance and diplomatic engagement.” Yet even the most casual observer will have noticed that foreign aid does nothing to induce goodwill toward the West. On the contrary, such aid seems to drive deeper resentment. As Rod Liddle wrote in The Times, in relation to the £40 billion in foreign aid sent to Africa every year: “We are mugs . . . the more aid we give, the worse Africa becomes and the more it hates us. Isn’t it time we changed the narrative a little and brought some facts into play?”

Bauer points out that far from bringing about global peace, foreign aid only fuels further conflict by arbitrarily dividing the world into “First” and “Third” worlds and promoting the idea that the First World has a duty to transfer wealth to the Third World. This relies on inducing a sense of moral obligation in the First World, as displayed by the UK government, while inciting further entitlement and resentment in the Third World. This is no blueprint for peaceful relations between the global “North and South.” As Bauer warns, in his book Reality and Rhetoric:

Foreign aid is the source of the North-South conflict, not its solution. The paramount significance of aid lies in this very important, perhaps momentous, political result. A further pervasive consequence of aid has been to promote or exacerbate the politicization of life in aid-receiving countries. These major results have been damaging both to the West and to the peoples of the less developed world.

Bauer’s concern with the politicization of life in the developing world is that foreign aid schemes encourage the view that economic growth can best be achieved by seizing political power and using that power to redistribute wealth. In the context of Africa, Bauer argues that the origin of this politicization is partly traceable to the final years of British colonial administration when the idea took hold that the task of economic development falls to the government. Gaining control of the government and embarking on central planning soon came to be regarded as the most important path to economic progress, which in time sparked endless conflict over the allocation of political power. In From Subsistence to Exchange, Bauer explains:

Extensive politicization of life enhances the prizes of political power and thus the stakes in the fight for them. This in turn exacerbates political tension, at least until opposition is forcibly suppressed or effectively demoralized. And because people’s economic fortunes come to depend so largely on political and administrative decisions, the attention, energies, and resources of forward-looking, perceptive, and ambitious people are diverted from economic activity to political machination.

Universal Economic Principles

The idea that economic development is a gift to be “provided” by the West to the Third World through interventions such as foreign aid disregards the reality of how economies are built, which as Bauer points out requires adherence to general economic propositions that are universally applicable. Bauer argues that while each country is unique in important ways, and while the specific challenges of underdeveloped countries must be acknowledged, basic economic principles cannot simply be ignored: “Although many of the differences between the different parts of the under-developed world are very deep seated, some of the basic tools and concepts of economics apply widely to under-developed countries.”

One important principle of general application is that “economic achievement depends primarily on people’s abilities and attitudes and also on their social and political institutions.” Bauer’s key insight here is that “money expenditure by itself will not achieve much without changes in institutions and attitudes.” One attitude that needs to change is the expectation that money, by itself, can generate economic growth. Many African countries that receive billions in foreign aid from the West are governed by communist central planners who do not respect the right to private property. Achieving economic growth in these circumstances purely through wealth transfers is impossible.

Foreign aid is a favored political strategy because it fulfills the Western desire to “do something” about global poverty, seems simple enough to implement, and fits conveniently with dominant notions of distributive justice. The idea is that both justice and progress can be advanced by sending money round the globe from rich to poor countries without regard to the prevailing social, political, and economic conditions. There is no reason to suppose that such schemes will ever work. Governments only persist with them because they serve as a useful platform for interventionist foreign policy. The correct approach in encouraging economic development is to argue for private property and free market capitalism, not these types of financial interventions. In the words of Ron Paul:

I believe our founding fathers had it right when they argued for peace and commerce between nations, and against entangling political and military alliances. In other words, noninterventionism.

Noninterventionism is not isolationism. Nonintervention simply means America does not interfere militarily, financially, or covertly in the internal affairs of other nations. It does not mean that we isolate ourselves; on the contrary, our founders advocated open trade, travel, communication, and diplomacy with other nations.

Note: The views expressed on Mises.org are not necessarily those of the Mises Institute.
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