Foreign Aid

views updated May 21 2018

Foreign Aid






Pecuniary grants and other material donations by one government to another are among the recurrent features of interstate relations. The two basic types of grants are tribute and subsidy. Tribute is typically a donation from a state that is somehow more vulnerable to a less vulnerable state in exchange for protection or immunity; subsidy originates typically with a state that is at least financially stronger, and the donor expects in return a performance that serves his security strategy.

Contemporary foreign aid may comprise elements of tribute, when it secures immunity from verbal hostility and feelings of guilt, for instance. But its direct line of descent is from subsidies. The elementary political economy of subsidies is unchanging: the subsidy is an inducement for the recipient to behave in a way that would supplement the donor’s exertions or substitute for them, and do it at a cost that is less than the cost of alternative courses of action, including war and greater national exertions in war. The basic assumption is clearest in aid for military effort. It holds that there is a definable unit of fighting power or defense power that can be had more cheaply from outside the donor’s military establishment. The assumption is vindicated whenever domestic armaments have reached one or more of the limits set by internal supply of material resources, conditions of social stability within a political order, and countervailing responses by third states. The same basic principle of diminishing returns of strictly internal efforts can be applied to economic welfare and other non-military components of national security and international stability, and serves as the rationale of foreign aid.


The ultimate objective of the donor is to convert superior economic power into a pattern of political alignments that would improve his regional or global position. The recipient expects foreign aid to generate new resources of power, welfare, and prestige. His principal aim may be to consolidate the regime’s authority with respect to opposition forces, to keep abreast of growing popular needs or of growth in other states, or to equip himself for effective or even offensive action with regard to other countries. Calculation of political advantage to be derived from aid is at its most pragmatic when diplomacy of maneuver and alignment predominates in a relatively flexible and relaxed multi-polar situation; it may be temporarily subordinated to ideological determinants, or to the compulsions of force or the general interest when the global or regional balance of power is exposed to a hege-monial drive and polarized in consequence. Subsidies then become an emergency expedient to confirm lesser states in their readiness to resist the onslaught or to convert to resistance those states reluctant to subordinate their immediate concerns to the maintenance of the existing international system.

The expanded foreign aid activities following World War II conformed, on the whole, to the fundamental principles of the statecraft of subsidies. Foreign aid was part of a policy of coalition building by the United States, the preponderant yet defensive power in the system; it became part of a coalition-frustrating policy in the hands of the Soviet Union in a later phase of the cold war. The peculiar character of the contest enlarged the meaning of the coalition to be built or frustrated and drew into the compass of foreign aid not only active, military allies; economic and military aid were used to attract the uncommitted, floating allegiance of “independents” as well as to consolidate established commitments. The need to win the apparently decisive uncommitted states made both contestants edge away from damaging antecedents and associations. The more conservative United States repudiated the paternalistic and colonial elements in its past and among its allies; the revolutionary Soviet Union disclaimed its militant tradition as an export commodity and disowned its overly expansionist Chinese ally whenever expedient for reassuring alarmed neutrals. Yet the need to retain the allegiance of the inner core of committed partisans has imposed a limit on profitable opportunism also in the international contest; it is a dubious electoral and diplomatic strategy to woo untested new friends in such a way as to alienate old comrades-in-arms.

Difficulties in implementing the objectives . Three special circumstances have warped the implementation of the political economy of subsidies beyond the unavoidable measure of distortion introduced by hegemonial conflict.

One was an overemphasis on the role of economic changes and processes in assuring political stability and on the role of domestic politics in unstabilizing foreign policy activities. In this respect, the effect of liberal predispositions was comparable with the affirmations of Marxist ideology and was reinforced by the need of meeting the Soviet practice of internal political subversion and manipulation of economic malcontents. Growing demands for external assistance consequently acquired great authority, but the recipients all too often lacked the will and ability to use this assistance responsibly and effectively.

Another deforming influence has been the association of foreign aid with decolonization; it added psychological and propagandistic biases to those imparted by a deterministic ideology and an opportunistic political strategy. Foreign aid came to be widely regarded as a duty for the advanced states and as a reparation for the uncritically asserted grievances of recipients.

The consequent moral advantage of recipient countries was enhanced by a political advantage owing to the third distorting circumstance, the sharp increase in military-technological inhibitions on warlike settlements of conflicts between major powers. A demonstrable capacity to wage a major nuclear war has remained a fundamental condition of the efficacy of all political action by the principal powers, including dispensation of foreign aid; at the same time, however, the economic power and activities of the donor states have been largely deprived of their essential support in usable conventional military force. Thermonuclear stalemate and severance of economic power from the ultimate military sanction behind political control have combined to increase the ability of the more ambitious among the lesser states to act with impunity. Competitive economic growth has become the prime functional substitute for war as a test of superiority for the two competing superpowers and politicoeconomic systems. Consequently, foreign aid activities, the principal device for extending the economic competition to third and lesser states, were temporarily overstrained.

The distorting ideological, psychological, and military circumstances produced a disparity between power and control or influence that was unfavorable to the donors. This disparity at first intensified the donors’ competition over the Afro-Asian nations; only progressively and uncertainly has the disparity begun to foster a tacit understanding between the superpowers, regarding the rules and limits of foreign aid competition, that may eventually match comparable understandings in the domain of the arms race.

American and Soviet approaches . Undeniable differences of style and spirit have separated the so-called capitalist and the so-called socialist major donors. But both have been confounded by comparable uncertainties regarding the objectives of foreign aid and the means or strategies for attaining the objectives. The immediate, short-term objective of both the United States and the Soviet Union has been negative: to prevent forces favorable to the competitor from becoming established or consolidated to the detriment of one’s allies and sympathizers in embattled lesser countries. The long-term, positive objective has been to promote a structure of world order that would reflect the internal organization, or the domestic ideal, of the superpowers: the supremacy of one class or elite in one case, pluralism of competing forces within the limits of consensus on essentials in the other. The uneasy coexistence of short-term preventive objectives and long-term constructive objectives compelled both major donors repeatedly to decide between often uncongenial, immediate beneficiaries of foreign aid and ultimate, actually favored beneficiaries. In practice, this often meant that the Soviet Union aided or appeared to aid bourgeois-nationalists against local communists and that the United States helped dictatorial oligarchs, at least temporarily, against local liberals or democrats.

The ambiguity of objectives has been reflected in uncertainties over strategies. The unresolved issue has been whether to choose a strategy keyed to individual countries or a strategy keyed to the international system as a whole. A one-country strategy of foreign aid as implemented by the United States would promote the capacity for political independence of individual recipients, on the assumption that the exercise of such independence would be consistent with American interests. As implemented by the Soviet Union, this strategy would aim at subverting the identity of a noncom-munist regime, on the assumption that formal political independence no less than formal political democracy is only a disguise for rule by elements hostile to the Soviet Union. In both cases, the stress is on the peculiar needs, conditions, and opportunities in the target country, while the repercussions of aid to that country in comparable or related countries are downgraded.

The one-system strategy would reverse the priorities, assigning high priority to the foreign policy behavior of recipients and its international repercussions. An American one-system strategy of longer range would promote behavior conducive to an elementary world order and, secondarily, to the progressive breakup of the Sino-Soviet bloc. The corresponding strategy of the Soviet Union would promote the progressive erosion of Western positions in the less developed countries as a group, producing an irretrievable breakdown of the Western system rather than piecemeal subversion in one country after another.

No clear choice between the two principal kinds of strategy has been made by either superpower, in part because of the untoward relationships between domestic and external political behavior of many recipient regimes. The United States has had to cope with the problem of regimes that are internationally pro-Western but internally antireform; the Soviet Union has had the problem of countries that are internationally neutralist and outwardly anti-West but domestically anticommunist. On the whole, doctrinaire supporters of foreign aid as a panacea in the West and of communism and local Communist parties as paramount concerns in the Sino-Soviet bloc have tended to favor the one-country approach, concentrating on immediate and locally promising conditions. Those primarily concerned with foreign policy have stressed the immediate needs of a coherent foreign aid policy and the long-range requirements of a propitiously evolving international system, in view of the unlimited stakes of the global conflict and the limited efficacy of foreign aid in any one country, if administered in separation from over-all political and military strategies.

Types of aid

However used, foreign aid has differed from its antecedents in the modern European state system. Chief among them are the more or less overt dynastic subsidies for military manpower, chiefly in the seventeenth and eighteenth centuries, and the more or less officially sponsored but privately subscribed loans in the nineteenth and early twentieth centuries. Throughout, the principles and practices of “foreign aid” were adjusted to the type of control over individuals, whether authoritarian or constitutional, and to the prevailing scope of governmental functions, whether they were mercantilist, laissezfaire, or welfare-statist. They were also adapted to the predominant ways of managing international political alignments and military conflicts—as relatively temporary or hopefully indefinite commitments, implemented by levies of manpower or by advance building of infrastructures such as railroads and air bases.

However, political and technological changes have, on the whole, fostered a growing temporal and qualitative gap between grant and anticipated performance. The difference between economic grant and expected political performance was always there; but even in the field of military aid and security the typical performance of the recipient came to differ radically from the donor’s whenever concession of facilities replaced supplementary manpower as the principal return for the aid given. The balance between specific and immediate acts and slowly evolving general conditions, as the purposes of foreign aid, has tended to shift in favor of the conditions expected to generate policies congenial to the donor even after the termination of the aid relationship.

The growing gap between grant and performance has become increasingly hard to span for two interacting sets of reasons. One has had to do with the instability of governing elites and their frequent replacement by competing elites. Revolutionary break and repudiation of indebtedness, anticipated in the lot of French loans to the tsarist regime in Russia, has become the rule, albeit with exceptions. The other set of reasons has had to do with the diffusion of aid relationships as an apparently stable and permanent feature of international relations. Aid from a richer or well-established state has come to constitute a well-nigh automatic counterpart to diplomatic recognition and practically its most valuable by-product. However, this recognition in kind has not been governed by norms comparable with those of recognition in law, regarding effective internal political control, responsible international conduct, and nonidentification of material aid with moral approval.

Acquisitive and creative aid . The distance between grant and anticipated performance, whatever may be its long-range effect on foreign aid, helps distinguish between two types of aid in the post-World War Ii era through the maze of administrative and propagandistic nomenclature. One kind of aid may be described as acquisitive; it is closest to traditional subsidies in that it is extended in the anticipation of a relatively specific, tangible, or immediate advantage for the donor. The acquisition may range from a facility such as a military base or a base for political operations, through an alliance commitment (or repudiation of alliance commitment to the donor’s adversary), to the control over large segments of a country that would otherwise be economically and politically nonviable. Alternatively, the donor can give aid in anticipation of a long-range economic and political development in a favored direction. Such aid may be called creative or developmental. Acquisitive aid generally has large military components for internal or external security; creative aid typically is economic, even though it may release indigenous resources for military outlays. Although a few aid relationships may be wholly acquisitive or creative in motive and purpose, most are primarily one or the other. The volume of aid determines whether aid is merely token aid, designed to manifest the donor’s interest in the country as an encouragement to friendly groups, or whether more important aid constitutes a down-payment, committing the donor to long-term contributions as long as the recipient goes on displaying willingness and capacity to administer a politically and economically promising development process.

The two main types of aid, acquisitive and creative, have a different bearing upon two classes of problems that are raised by foreign aid: the distribution of aid and the control over aid and related policies. The problem of distribution has so far concerned chiefly the choice between military and economic aid and choice among alternative recipients.

Distribution of aid

Military versus economic . In the United States, allocation of resources between economic and milltary forms of assistance has been a major, if sometimes distracting, issue. The faith in economic means, in the guise of liberalized trade and private investments, was marked in American foreign policy before, during, and after the period of planning for peace during World War II. It received a confirmation from the successful economic reconstruction of western Europe under the European Recovery Program, which became the doubtfully valid model for subsequent programs of economic assistance elsewhere, following the disappointment of exaggerated expectations from technical-assistance programs short of large-scale aid for development. The military-political crises of the cold war produced countervailing stresses in favor of military assistance to countries and regimes threatened from within or without. The resulting debate over the proper ratio between economic and military aid was confused by ambiguous official categories of aid, such as “defense support.” The outcome of this debate was marked by the contrast between nominal victories for advocates of economic aid and the less spectacular shifts in the actual ratio, due in large part to the continuing demand by many recipients for substantial military aid.

The issue between economic and military aid has been largely a false one. As long as economic aid promotes development, it also fosters social mobilization and, thereby, some political instability. Not all governmental elites that administer outside assistance are anxious to be self-liquidating. To neutralize their increased vulnerability, they found that military aid for internal security was both necessary and legitimate. Moreover, military assistance can be a means to the goal of economic assistance by providing a developing country with forces not only for local defense but also for internal development that a nationwide, properly controlled and used military establishment can generate. The United States has, therefore, been justified in granting military assistance not only for the immediate purposes of its containment and alliance policy. On its part, the Soviet Union has been led to disseminate military assistance to willing takers by the desire to break open the containment ring and secure immediate political gains in crucially important or vulnerable noncommitted countries.

Alternative recipients—allies or neutrals? With regard to the distribution of aid among alternative recipients, both major donors have faced a related problem: whether to give preferential or exclusive assistance to their allies or to distribute aid widely among noncommitted countries as well. Only a minority power willing to remain so or prepared to rely on military conquest could probably afford the purism of aid only to allies. There is no other ready criterion. Different flaws vitiate such criteria as that of the need of potential recipients, their capacity to effect and absorb changes with outside assistance, or their ability and willingness to make their internal conduct or external policies conform to the interests and policies of the donor.

A distribution following any one criterion or coherent set of criteria becomes well-nigh impossible once there is an aid race between major donors. Such competition occurred between the United States and the Soviet Union and reached its peak in the late 1950s. The competition was aggravated by failures of perception. For one thing, the competing powers long ignored the similarity or identity of many of their problems and frustrations in the domain of foreign aid. For another, both insiders and outsiders tended to judge and compare the performance of the superpowers in not really comparable situations. The temporary beneficiary of the political and intellectual misapprehension was the Soviet Union, which gained easy, and apparently lasting, initial successes in the conflict-ridden Western orbit, displaying largesse toward noncommunist countries and reserving strict aid policies for communist countries.

Multilateral versus bilateral aid . Multilateral administration and distribution of foreign aid through international agencies has been widely advocated as a way out of the frustrations of bilateral methods. A change-over on a major scale has been inhibited, however, by the growing structural disequilibrium in the United Nations. The disequilibrium has favored numbers over the intrinsic weight of states and their contributions, and has been inimical to progressive expansion of the organization’s functional scope in regard to the dispensing of aid and similar long-range activities. Moreover, most recipient countries have actually been reluctant to rely primarily on multilateral modes of allocation and control of economic assistance.

A more practical way of dispersing donorrecipient relations, and distributing aid in a quasimultilateral manner, may occur by means of the multiplication of both Western and communist donors. A deliberately planned division of labor among ex-colonial powers has been preached in the West and practiced by the Soviet-bloc countries (excepting Communist China) in the late 1950s and early 1960s. The alternative way of dividing labor is a less concerted and even superficially competitive one, whenever one power acts in the place of and over the protests of another in an alienated country or part of the world. In the postwar period, the United States acted in countries bent upon repudiating both the presence and the presents of former colonial masters. As psychological decolonization in the former European empires advanced, as experience with powers other than the former metropoles grew, and as the colonial revolt spread to Latin America, the process has tended to be reversed. West Germany has been developing her economic activities abroad; France and Britain have been recovering their positions of the preferred donors in parts of Asia and Africa and have even moved to act by means of trade or aid on behalf or in lieu of the United States in disaffected countries of Latin America. It is unclear at the time of writing whether the competitive trade-and-aid activities of Communist China and the Soviet Union in Africa and Asia will ultimately prove to have been instruments of a break or of a more or less reluctant division of labor. In any event, the over-all result has been a larger total bulk of aid and its wider diffusion, if not a more rational distribution.

Control of aid

The other major problem is that of control. It concerns such issues as those of “strings” and “intervention,” and it has remained unresolved in either theory or practice, although regularization of foreign aid depends on a general acceptance of a few principles or propositions. Some form of control over each other’s behavior is the precondition of any cooperation between self-willed sovereign actors, not least in the sphere of foreign aid. Control becomes reciprocal whenever lesser states extract a greater leeway from stalemate among greater powers. Some strings are inevitably attached to grants by one state to another but are likely to be effective as well as legitimate only if they are adapted to suit particular types of aid and the corresponding kinds of anticipated performance. And no effort can do away with at least indirect or unintended intervention by the donor once a government accepts aid and thus admits its inability to cope with its tasks in a strictly internal manner. The donor’s right to intervention generally stops short of forcible or dictatorial interference, but there are two exceptions. First, the assistance may be so massive that it creates responsibility for the recipient’s existence, and circumstances could be so critical that they endanger the vital interests of both recipient and donor. Alternately, an invitation to intervene may be extended by the recipient, induced by past or anticipated assistance from the interventionist power and directed against a force other than clear majority will of the people concerned.

The occasions for intervention would be reduced by a policy that may be described as one of remote control. Under such a policy, the donor seeks to act on policies of sensitive governing elites by way of precedent-creating action in comparable situations accessible to a more direct exercise of influence. Alternatives to remote control are direct control, over the internal or external activities of a pliant or trustful government, and indirect control, obtained by promoting congenial political groups likely to sway politics in the direction favored by the donor without his constant interference. The previously noted one-country strategy overtaxes the capacity for relatively direct forms of controls, notably if the donor is unable to act upon reliable theoretical knowledge of relationships between economic aid and economic development and between economic development and political stability. The one-system strategy by contrast heightens the bearing of remote control by consistent policies in comparable situations, creating a body of rules by way of discernible authoritative precedents; flexibility is subordinated to the rule-making function of policy and reserved for diplomatic instruments with an immediate, predictable, and easily manipulable impact on men and events.

Critique and prospects

The problems besetting foreign aid indicate its shortcomings. The political future of foreign aid depends on its qualities as an instrument of current policies and as a foundation of a new system of international politics and of a new world order. There is a possible conflict between the two tests insofar as the traits that constitute the standing of foreign aid as an instrument of national policy tend to endear assistance to proponents of new forms of relations among nations. Foreign aid as an economic weapon too frequently tends to be separated from a complementary exercise of political influence and military power. Furthermore, aid is often rendered in the anticipation of counter-performance, the maturity of which is commonly all the more delayed and uncertain the more voluminous is the assistance. Consequently, results are not forthcoming, cannot be convincingly related to the grant, or are reversible by contrary developments before they are consolidated. The paucity of demonstrable positive returns encourages negative appraisals of foreign aid: as a waste or an expedient without which things would be still worse. The difficulty in consolidating provisional results is frustrating to the donor, even though it may be stabilizing internationally if it besets all the rival donors.

The shortcomings of foreign aid as an instrument of foreign policy become critical when changes in the international system reduce the donors’ needs that commonly motivate aid. Among such changes are technological developments that lessen the dependence of the major powers on alliances and military facilities on foreign soil, and political events that dampen the intensity of competition over intermediate unaligned states. The task of controlling aid relationships from a position of exploitable political weakness becomes less impossible for major donors, but also less pressing. Military-political competition that has polarized the state system is apt to give way either to an outright military clash or to international politics of increasing diplomatic flexibility, marked by a shift of the focus of sought gains and feared losses from small, uncommitted states to relations and combinations among middle and great powers. Insofar as trends of this kind prevail, international agencies might get a chance to supersede bilateral foreign aid activities and routinize the allocation and administration of aid for economic development through application of objective criteria of need and capacity; the agencies themselves might, however, first have to undergo a change in their structure or spirit, and conform more realistically to the balance of material needs and contributions of the aid-giving and the aid-receiving countries. Conversely, if foreign aid were made multilateral, it might be hampered in a multipolar world by the diffusion of the tendency for each major economic power center to claim and obtain a preferential right to foreign aid activities in its regional orbit.

As long as the rendering of foreign aid and its results remain in large part the function of more pressing and compelling political, military, and diplomatic strategies, foreign aid activities in themselves are unlikely to constitute a basis of a new system of international politics. Such a system would implement a scientific theory of economic and political development, so far largely lacking, and would rest on the willingness of both donors and recipients to implement common interests in the expansion of individual and group welfare, of political choices, and of exchanges of all kinds. A sustained program of foreign aid free from subservience to political contests would provisionally take the place of free trade as the chief integrating element in a system of international relations governed by the distribution of developmental functions among unevenly endowed states. So conceived, the new system of international politics would supplement the older ideal of dividing the production and consumption of security among more or less favored states in a system of collective security; and it would supplant the diametrically opposed view of foreign aid as a perpetuation of subsidies by partly altered means in a still essentially mercantilist statecraft marked by contest over insufficiently expanding and expandable assets.

Barring unpredictable upheavals, the ultimate test of foreign aid as a positive and enduring factor in but slowly evolving international politics is a long-range one. It concerns the fitness of foreign aid to contribute to a stable world order. To a limited but real extent, international order and stability rest on domestic orders. Foreign aid makes a contribution in this area when it promotes coalitions of political and functional elites, meaning especially the modernizers and the guardians of the modernization process in developing countries. To be both stable and stabilizing, the coalitions must be able to agree on the scope and rate of manageable change, to be implemented by the elites and absorbed by the masses, in a process of growth that is largely independent of intercessions, restraints on modernizers, and compensations to dispossessed groups from the outside. Only very few underdeveloped countries, not necessarily representative of the fundamental problem, have managed to initiate and perpetuate such a process that would be largely self-sustaining politically as well as economically. The liberal explanation that failure to overcome underdevelopment in backward countries is a source of instability and war has been gaining ground over its Leninist counterpart, that the source is found in maladjustments due to economic overdevelopment in industrialized, capitalist-imperialist countries. To the extent that these hypotheses are valid and foreign aid helps relieve critical economic maladjustments, not least by reducing the gap between unequally developed countries, foreign aid can promote international stability.

In the international arena, foreign aid activities tend to promote stability when they provide rival powers with outlets for moderately competitive behavior, reducing the incentive to violent forms of rivalry. Foreign aid activities can relieve international tensions when they are informed by a realistic appraisal of possible gains for either side, and they may stabilize the international system both in the short and the long run insofar as contemporary major powers accept the fact that they are building up new economic and military powers that may eventually recast alignments to their disadvantage. The generation of reserve power may reduce the pressures on governments to avert by force unfavorable developments that may be foreshadowed by trends in the arms race or by rates of competitive economic growth. Such an anticipation may have been partly responsible for some major wars in the past, including both world wars of the twentieth century.

Two decades after the end of World War II, there has been a widespread desire to evaluate the intervening experience with different forms of large-scale governmental aid. A continuing retreat of foreign aid from the forefront of direct great-power competition would favor a new balance between acquisitive and creative aid. This might entail depoliticization of foreign aid in one respect, that of allowing considerable autonomy to objective needs of development, and its politicization in another respect, that of a progressive definition and acceptance of reciprocal rights and obligations on the part of recipients as well as donors. The new balance would reflect the growing need for the so-called revolution or rising expectations to come to terms with the less spectacular but no less significant decline of expectations attached to foreign aid. Any new compromise between the demands of the revolution in the less developed countries and the consequences of the evolution in the industrial donor countries could not but alter the manifestation of a technique that can be shown to be a recurrent, but not continuous, and a useful, but not indispensable, feature of international statecraft.




The writings on foreign aid in the West, and in the United States in particular, can be grouped into categories of official and scholarly publications.

Among the official sources, the most important are records of the annual hearings before the foreign relations committees of the two houses of Congress and the special reports occasionally ordered by both branches of the government. Major examples are U.S. Congress 1957, prepared for a special committee of the 85th Congress; U.S. President’s Committee 1959; U.S. Committee . . . 1963.

Among the scholarly sources, the executive-legislative process in relation to foreign aid is analyzed in Haviland 1958. The school of thought stressing the long-range economic development of foreign aid is represented by Milli-kan & Rostow 1957 and 1958. The school of thought stressing short-range political control and objectives is represented by Liska 1960 and Morgenthau 1962. The background writings for the two contrasting approaches are Rostow 1960 and Staley 1954, respectively. A successful attempt to present a balanced approach is Millikan & Blackmer 1961.

A larger body of scholarly literature is concerned with the description, analysis, and evaluation of particular forms and programs of economic and military aid, with reference to particular countries or regions. Outstanding among these are Brown & Opie 1953; Price 1955; Montgomery 1962; Jordan 1962. While also regionally focused, Wolf 1960 is valuable mainly as an attempt to evolve theoretical criteria for the allocation of aid.

The foreign aid activities of the communist-bloc countries have been described in U.S. Department of State 1958; Berliner 1958; Allen 1960. Important information regarding assistance through the United Nations can be found in Asher et al. 1957 and Sharp 1952 and in such periodicals as Foreign Affairs, International Organization, and International Conciliation.

Sources on the antecedents of foreign aid are uneven. A classic source on the liberal period is Feis 1930, which can be supplemented with Michon 1927. No single source deals exhaustively with dynastic subsidies. However, see Braubach 1923 and less systematic references in Horn 1930 and Pinkham 1954. Relevant for the understanding of the broader contemporary context of foreign aid activities are Calvocoressi 1962; Emerson 1960; Ehrhard 1957; Martin 1962.

ALLEN, ROBERT L. 1960 Soviet Economic Warfare. Washington: Public Affairs Press.

ASHER, ROBERT E. et al. 1957 The United Nations and Promotion of General Welfare. Washington: Brookings Institution.

BERLINER, JOSEPH S. 1958 Soviet Economic Aid: The New Aid and Trade Policy in Underdeveloped Countries. Published for the Council on Foreign Relations. New York: Praeger.

BRAUBACH, MAX 1923 Die Bedeutung der Subsidien fur die Politik im spanischen Erbfolgekriege. Bonn and Leipzig: Schroeder.

BROWN, WILLIAM ADAMS; and OPIE, REDVERS 1953 American Foreign Assistance. Washington: Brookings Institution.

CALVOCORESSI, PETER 1962 World Order and New States. London: Chatto & Windus.

EHRHARD, JEAN (1957) 1958 Le destin du colonialisme. 3d ed. Paris: Éditions Eyrolles.

EMERSON, RUPERT 1960 From Empire to Nation: The Rise to Self-assertion of Asian and African Peoples. Cambridge, Mass.: Harvard Univ. Press. ⇒ A paperback edition was published in 1962 by Beacon.

FEIS, HERBERT (1930) 1961 Europe, The World’s Banker, 1870-1914: An Account of European Foreign Investment and the Connection of World Finance With Diplomacy Before the War. New York: Kelley.

HAVILAND, H. FIELD 1958 Foreign Aid and the Policy Process: 1957. American Political Science Review 52:689-724.

HORN, DAVID B. 1930 Sir Charles Hanbury Williams and European Diplomacy (1747-1758). London: Harrap.

JORDAN, AMOS A. 1962 Foreign Aid and the Defense of Southeast Asia. New York: Praeger.

LISKA, GEORGE 1960 The New Statecraft: Foreign Aid in American Foreign Policy. Univ. of Chicago Press.

MARTIN, LAURENCE W. (editor) 1962 Neutralism and Nonalignment: The New States in World Affairs. New York: Praeger.

MICHON, GEORGES (1927) 1929 The Franco-Russian Alliance, 1891-1917. London: Allen & Unwin. ⇒ First published in French.

MILLIKAN, MAX F.; and BLACKMER, DONALD L. M. (editors) 1961 The Emerging Nations: Their Growth and United States Policy. A study from the Center for International Studies, Massachusetts Institute of Technology. Boston: Little.

MILLIKAN, MAX F.; and ROSTOW, W. W. 1957 A Pro-posal: Key to an Effective Foreign Policy. A study from the Center for International Studies, Massachusetts Institute of Technology. New York: Harper.

MILLIKAN, MAX F.; and ROSTOW, W. W. 1958 Foreign Aid: Next Phase. Foreign Affairs 36:418-436.

MONTGOMERY, JOHN D. 1962 The Politics of Foreign Aid: American Experience in Southeast Asia. Published for the Council on Foreign Relations. New York: Praeger.

MORGENTHAU, HANS J. 1962 A Political Theory of Foreign Aid. American Political Science Review 56:301—309.

PINKHAM, LUCILE 1954 William III and the Respectable Revolution: The Part Played by William of Orange in the Revolution of 1688. Cambridge, Mass.: Harvard Univ. Press.

PRICE, HARRY B. 1955 The Marshall Plan and Its Meaning. Ithaca, N.Y.: Cornell Univ. Press.

ROSTOW, W. W. (1960) 1963 The Stages of Economic Growth: A Non-Communist Manifesto. Cambridge Univ. Press.

SHARP, WALTER R. 1952 International Technical Assistance: Programs and Organization. Chicago: Public Administration Service.

STALEY, EUGENE (1954) 1961 The Future of Underdeveloped Countries: Political Implications of Economic Development. Rev. ed. Published for the Council on Foreign Relations. New York: Harper.

U.S. COMMITTEE TO STRENGTHEN THE SECURITY OF THE FREE WORLD 1963 The Scope and Distribution of United States Military and Economic Assistance Programs: Report to the President of the United States. Washington: Government Printing Office. ⇒ Known as the Clay Committee report.

U.S. CONGRESS, SENATE, SPECIAL COMMITTEE TO STUDY THE FOREIGN AID PROGRAM 1957 Foreign Aid Program: Compilation of Studies and Surveys. 85th Congress, 1st Session, Senate Document No. 52. Washington: Government Printing Office.

U.S. DEPARTMENT OF STATE 1958 The Sino-Soviet Economic Offensive in the Less Developed Countries. Department of State Publication No. 6632; European and British Commonwealth Series, No. 51. Washington: Government Printing Office.

U.S. PRESIDENT’S COMMITTEE TO STUDY THE UNITED STATES MILITARY ASSISTANCE PROGRAM 1959 Composite Report. 2 vols. Washington: Government Printing Office. ⇒ Known as the Draper Committee report.

WOLF, CHARLES JR. 1960 Foreign Aid: Theory and Practice in Southern Asia. Princeton Univ. Press.


The international transfer of economic resources is the essence of foreign economic aid. The flow of public assistance consists of grants and loans in cash and kind, including technical assistance, from a donor government or international organization to other governments or enterprises in recipient countries. The sources, forms, and purposes of financial and technical assistance are extremely varied [See TECHNICAL ASSISTANCE]. Of primary importance, however, is the flow of resources to poor countries in order to accelerate their development. The purely economic function of this aid should be distinguished from that of direct military assistance, which may also be received by a developing country; moreover, aid should properly be considered as only that part of the foreign capital inflow that normal market incentives do not provide. [See INTERNATIONAL MONETARY ECONOMICS, article On PRIVATE INTERNATIONAL CAPITAL MOVEMENTS.]

Several aspects of foreign economic aid require particular emphasis: the historical evolution of aid programs; the determination of the objectives and magnitude of aid; the appraisal of the relative merits and demerits of different types of aid; the criteria of effective use of aid; and the burden of aid.

Evolution of aid programs . Foreign assistance programs have evolved through a series of legislative measures and administrative procedures required at different times for various purposes. Before World War II economic aid came mainly from metropolitan countries in support of overseas colonies and dependencies, was on a purely bilateral basis, and involved relatively small amounts of financial grants. [See COLONIALISM, article on ECONOMIC ASPECTS.]

The United States, however, early supported a large-scale assistance program through loans from the Export-Import Bank of Washington; since 1954 this bank has concentrated increasingly on capital assistance to less-developed countries. Aside from the lend-lease arrangements, which provided economic support to wartime allies, the first general foreign aid program supported by the United States came with the Economic Cooperation Act of 1948. This initiated the European Recovery Program (Marshall Aid Program), which during 1948-1952 furnished loans and grants to 17 western European countries that confronted problems of reconstruction and balance of payments pressures. Although aid under this program was not directly related to the problems of newly developing countries, it demonstrated the potential of international aid and was a prototype for subsequent aid programs.

In 1950 the U.S. Congress passed the Act for International Development, which incorporated a technical assistance program (“Point Four”). This was the first of a series of Foreign Assistance Acts. A variety of agencies have administered U.S. aid in the course of these successive programs. The United States has also provided, under Public Law 480 and “Food for Peace” programs, for the sale of surplus agricultural commodities for local currencies. In 1957 the Development Loan Fund was

Table 1United Stales government foreign aid by program: fiscal years 1941-1960°(converted to millions of U.S. dollars)
a. Fiscal years ending June 30; details may not add to totals because of rounding.
b. Includes net accumulation of foreign currency claims deriving from farm surplus disposal.
c. Includes post-UNRRA and Interim Aid.
d. ERP—European Recovery Program; MSA—Mutual Security Act; other aid includes contributions to UN agencies, technical assistance to Latin America, Inter-American and related highways, Trust Territory development, Libyan Special Purpose Fund, etc.
e. Donations of agricultural products plus dollar equivalent of foreign currency grants derived from farm surplus disposal.
f. MDAP—Mutual Defense Assistance Program.
g. Greek-Turkish, Chinese stabilization, and military aid; Philippine, Korean, and other Far East aid grants.
h. Dollar equivalent of loans made in foreign currencies derived from the farm surplus disposal programs, plus the net accumulation of such currencies.
i. Less than $500,000.
Sources: Foreign Grants and Credits by the United States Government, 1952, p. 81, appendix B; U.S. National Advisory Council on International Monetary and Financial Problems; Higgins 1962, table 3-1.
 1947-19481949-19521953- 19561957195819591960Total
Gross total—all programsb70,31821,52923,8935,4725,4296,6905,077138,408
Investment in international financial institutions3,385--354-1375804875
Gross grants57,16718,95920,9244,1423,9633,8603,654112,669
UNRRA and related aidc3,47353-----3,526
Aid to occupied areas3,5912,79127011226658
ERP, MSA, and other economic aidd51411,7786,622150212441369131424,343
Farm surplus disposale-496532813653123141974
MDAP and MSA military aidf-3,07313,377235823532177202325,361
Other grants g9141,2142----2130
Gross creditsb9,7662,5702,9691,2951,4661,4551,34320,864
Lend-lease settlement2,95756-6---3019
Export-Import Bank2,5708801,5472377607083997,101
British loan3,750------3750
ERP and MSA economic aid-1,5325121062322403152,937
Farm surplush--8609374745066293406
other credits487102499iii647

created to administer long-term, low-interest loans from the United States. The magnitude of American foreign aid from 1941 to 1960 is summarized by program in Table 1.

Although the United States has been the largest donor, many other countries have also participated in international economic assistance. Since 1954 the Soviet Union has entered into assistance agreements with developing countries and has also extended technical assistance on an increasing scale. While a considerable part of aid from non-communist Western countries has consisted of grants, the Soviet system has concentrated on long-term “bulk” credits, under which agreements for deliveries of goods on credit are negotiated. Although there has not been much difference in the length of loans and terms of repayment between Soviet and Western agreements, a larger proportion of Soviet aid has allowed for repayment in local currency or local products, and Soviet loans have had lower interest rates.

Soviet technical assistance has usually been supplied as part of a larger, integrated program

Table 2—Commitments by the central planned economies of bilateral economic aid to underdeveloped countries, 1954—1960 (millions of U.S. dollars)
Source: UN, Department of Economic and Social Affairs 1961, table 16, p. 34.
 Before 1958195819591960Total
China (mainland)8226-21129
East Germany7-22-29
Total, donor countries8224609539633198
of which:     
Latin America41026120232
Middle East2032822722701027
Southeast Asia615764945131698
Total recipient countries8224609539633198

consisting of loans, development goods, and bilateral trade; in contrast, technical aid from Western countries has usually been connected to individual projects or to specific training objectives. Communist-bloc technical experts have also concentrated on relatively few conspicuous projects that entail complex technology, while American technical assistance has emphasized the broader and more basic needs of agriculture, health, and education.

As may be noted in Table 2, commitments (which were not in all instances implemented) made by the centrally planned economies to the underdeveloped countries amounted, by the end of 1960, to approximately $3,200 million. Table 3 compares the magnitude of aid from the Sino-Soviet bloc with that of the United States.

Other countries have also sponsored bilateral aid programs—notably the United Kingdom, France, West Germany, Canada, and Japan. Table 4 summarizes the magnitude of bilateral aid during 1958-1960.

Regional organizations have also been significant contributors to aid: the Colombo Plan for Cooperative Economic Development in South and Southeast Asia, inaugurated in 1950; the Organization for American States, formed in 1951 and strengthened by the Inter-American Development Bank in 1959, the Act of Bogota of 1960, and the Charter of Punta del Este, which launched the “Alliance for Progress”; and the Organization for Economic Cooperation and Development (OECD), which in 1961 succeeded the Organization for European Economic Cooperation (OEEC).

Finally, the United Nations and a number of its specialized agencies play a prominent role in foreign aid: the International Bank for Reconstruction and Development (IBRD), International Finance Corporation (IFC), United Nations Special Fund (UNSF), International Development Association (IDA), Technical Assistance Board (TAB), World Health Organization (WHO), Food and Agriculture Organization (FAO), and regional economic commissions.

Utilizing the capital subscribed by member nations, the loans raised in the markets of member countries, and the return on its own operations, the IBRD has been the principal development-financing institution of the United Nations. The IDA has provided loans at very long term and with no or low interest, and it has had great latitude in its selection of projects for financing. This has enabled the IDA to meet the special needs of developing countries that, for balance of payments reasons, were nearing the limit of their capacity

Table 3—Comparison of economic credits and grants extended fo less-developed countries by the Sino-Soviet bloc and the United States (millions of U.S. dollars)
* U.S. figures include credits and grants from ICA obligations; DLF loans approved; Export-Import Bank long-term loans authorized; and Public Law 480 funds earmarked for country use under Title I, authorizations under Title II, and shipments under Title III.
Source; U.S. Congress, Committee on Appropriations, p. 207.
 Mid-1955-December 1961Mid-1955-December 1961Mid-1948-December 1961
Latin America4651,3412,080
Middle East1,0771,8962,723

to borrow abroad for development projects on conventional terms. The IFC has been instrumental in assisting private industrial development by investing without government guarantee in productive private enterprises. During the year 1961/1962, the IBRD and its two affiliates, the IFC and IDA, made new commitments of more than $1,000 million. Although not itself a lending agency, the UNSF has made greater investment feasible and more effective by granting assistance for preinvestment work in the form of surveys, training, and applied research. Contributions to the United Nations

Table 4—Bilateral aid to underdeveloped countries, 1958-1960 (millions of U.S. dollars)a
a. Omits aid from Sino-Soviet bloc.
b. Fiscal years ending 30 June of years stated.
c. Advances to Ruanda-Urundi with no specific schedule of repayment are treated as grants.
d. Fiscal years ending 31 March of years stated.
Source: UN, Statistical Office 1961, table 157, p. 467.
Contributing countryGrantsLoansRepaymentsGrantsLoansRepaymentsGrantsLoansRepayments
Germany (FRG)5.274.416.06.646.
New Zealandd4.20.2-5.00.3-6.3--
United Kingdom143.067.020.0151.0137.025.0165.0176.022.0
United States1132.0796.0167.01157.0733.0205.01320.0723.0220.0

Expanded Program of Technical Assistance amounted to over $41.5 million in 1961, compared with less than $20 million a decade earlier.

The amount of capital assistance from the United Nations has been small in comparison with bilateral programs, but it has particular importance because of its multilateral character. The same is true for the technical assistance programs provided by the United Nations itself and by several of its specialized agencies. Table 5 indicates the magnitude of multilateral aid, 1958-1960, while Table 6 shows the magnitude of public aid by source and type, 1953/1954-1958/1959. In recent years the relative share of the flow of capital to underdeveloped countries has been approximately 90 per cent on a bilateral basis and only 10 per cent on a multilateral basis, with the IBRD, IFC, and IDA accounting for slightly over one-half of the multilateral aid.

Objectives and magnitude of aid . Foreign aid is usually a component of a nation’s foreign policy; for this reason its objectives are diverse. The underlying objectives may be mixed even for a particular act of assistance by a single government

Table 5—Multilateral aid to underdeveloped countries, 1958-1960 (millions of U.S. dollars)
* The following abbreviations have been introduced in the table: EOF, Development Fund of the European Economic Community; IBRD, International Bank for Reconstruction and Development; IFC, International Finance Corporation; UNICEF, United Nations Children’s Fund; UNRWA, United Nations Relief and Works Agency for Palestine Refugees in the Near East; UNSF, United Nations Special Fund; UNEPTA, United Nations Expanded Programme of Technical Assistance; and other UNTA, all programs of technical assistance administered by the United Nations, the specialized agencies, and the International Atomic Energy Agency, other than EPTA.
Source: UN, Statistical Office 1961, table 157, p. 467.
Other UNTA10.8--11.3--13.5--
Table 6 - Total governmental aid, multilateral and bilateral, by fype, 1953/1954-1958/1959
Source: UN, Secretary-General 1961, p. 48.
 1953/1957-1955/1956 ANNUAL AVERAGE1957/1958-1958/1959 ANNUAL AVERAGE
 GrantsLoans (net)TotalGrantsLoans (net)Total
Total aid in billions of U.S. dollars1.50.522.21.13.3
Bilateral aid1.
Multilateral aid0.
Total aid as percentage distribution by type74.425.610066.034.0100
Bilateral aid77.023.010070.929.1100
Multilateral aid48.351.710027.272.8100

to another—since humanitarian motives, military interests, and political purposes tend to fuse with the purely economic objective.

Solely in terms of the direct economic goal, foreign aid is intended to augment the resources of the recipient country so that its rate of development may be raised. The largest proportion of the flow of public funds has been devoted to investment projects in industry, agriculture, mining, and basic “overhead” facilities, such as power and transportation [See CAPITAL, SOCIAL OVERHEAD]. To achieve a higher rate of economic development, however, a country must also experience social development through investment in human resources, introduction of new techniques of production, and institution building. Technical assistance programs fulfill some of these requirements by improving health and education and supporting rural community development. Even though social projects are difficult to evaluate in terms of economic criteria alone and hence are a questionable objective of economic aid, financial and technical assistance may nonetheless be necessary to initiate social programs that will contribute to higher productivity. An even more controversial objective of foreign aid is stabilization assistance in the form of balance of payments, or general purpose, loans to a country that has current external liabilities in excess of its international reserves or to a country that cannot meet its current liabilities out of current foreign exchange earnings without restricting essential imports.

Clarity on the objectives of foreign aid is the necessary first step in determining how much aid is needed by a recipient country. But even when the objectives are clearly defined, it is still extremely difficult to calculate the magnitude and duration of external assistance required to attain these objectives. Nonetheless, such calculations are commonly attempted, especially in relation to the recipient country’s development plan. Although the statistical exactitude of this type of calculation is illusory, its logic is of interest, and improvement of the concepts and methodology underlying these quantitative estimates may result from more intensive consideration of the problems involved.

The usual type of calculation proceeds as follows: A target is set for the desired increase in per capita real income over a given time period. On the basis of estimated annual population growth and the economy’s marginal capital-output ratio (the ratio between the value of additional capital and the value of additional annual output produced), it is concluded that a certain percentage of national income must be saved and invested to attain the per capita income target. If domestic saving is less than this amount and cannot be immediately raised by domestic policy measures, the balance must be sought from external sources. To the extent that private foreign investment does not fill the gap, public funds from abroad are required.

This exercise is, however, a highly oversimplified way to calculate aid requirements. Capital-output ratios have not yet been measured accurately enough to justify their use in deriving quantitative conclusions. Moreover, exclusive concentration merely on the relationships between a capital-output ratio, a savings ratio, and population growth is a much too mechanical and narrow interpretation, for it misses the inner complexity and subtleties of the development process. Other factors besides investment are strategic in accelerating development, and the full implications of external aid cannot be appreciated without a more comprehensive analysis of the role of foreign capital. In the broadest context the analysis should consider how the foreign aid relates to a greater national effort to increase the rate of development, and it should examine the differential impact of various forms of capital assistance in terms of their costs and benefits.

Although the calculation of foreign aid requirements is difficult, the underlying rationale for such aid is clear. It is not possible to relate any one source of funds to a specific type of use, but the net capital imports can offset, or “finance,” the difference between the value of products used and the value of products produced domestically; or the difference between net investment and net domestic savings; or the value of imports and factor payments abroad minus the value of exports and factor receipts. All these differences constitute a shortfall in real resources that results when the claims of the development plan exceed the available domestic resources. This gap in real resources is in turn reflected in a foreign exchange gap. To the extent that the use of foreign exchange reserves or an inflow of private capital does not fill the gap, public capital assistance from abroad will be necessary to give command over the additional resources. The size of a development plan is therefore constrained by the amount of foreign economic aid that is forthcoming.

While the dependence on external aid may have to be large at the outset of the development program, most plans aim for a progressive reduction in aid and the eventual realization of a self-financing plan. To achieve this the plan relies on a high marginal rate of domestic saving. It is expected that the proportion that can be saved out of an increase in output will be much higher than the average savings ratio at the plan’s beginning. The proportion of national income invested and financed by domestic savings would then increase, and the ratio of net foreign capital imports to additional investment would decline. The reliance on foreign aid will also diminish if, as development proceeds, the composition of investment alters toward projects with a lower import content, the production of import-substitutes increases, export revenue expands, and total domestic output grows without inflationary financing.

Forms of aid . The significance of foreign aid depends not only on its magnitude but also on the terms on which it is made available. The various forms of financial assistance can be differentiated by their terms—whether “hard” loans, “soft” loans, or grants; by the parties they involve—whether government-to-government or government-to-enterprise and whether furnished by national or multilateral agencies; and by their conditions—whether for specific projects or for a general development program.

Hard loans carry a commercial rate of interest, have a relatively short amortization period, and require repayment in foreign currency. Various types of soft loans are possible: very long-term loans repayable in foreign currency at a low rate of interest or without interest; loans repayable in local currency; long-term loans at low interest with a long grace period for payment of principal and interest.

Since they require neither servicing nor repayment, grants rather than loans are sometimes proposed for projects involving “social” development. It is thought that loans are appropriate for selfliquidating “economic” projects, where the criterion can be ability to service the loan, but that grants should be made for such nonself-liquidating projects as education, health, and community development, where the criterion is simply “need.” International grants do have the merit of adding no burden of interest and amortization charges upon the recipient country, and they are a clear manifestation of the donor’s willingness to offer a unilateral income transfer.

There is, however, little justification in differentiating between “social” and “economic” capital, insofar as both can contribute to an expansion of total output, which is the basic consideration in determining the recipient country’s capacity to service foreign obligations. If in the interest of assuring effective use of grants, the granters attempt to exercise more control over the recipient country than would be the case for loans, then grants may, of course, be resented. And while it may be politically inexpedient for a donor nation to offer grants, there may be less political opposition to loans—even with generous low-interest and long-term provisions.

Although the greater part of all economic aid has been on a bilateral basis, several arguments are advanced in favor of providing more aid through multilateral channels: better coordination of assistance activities can be achieved; the aid is more acceptable to recipient nations; the practice of discrimination among recipients is more difficult, and the aid program is less susceptible to political influences; tied loans (requiring expenditure in the lending country) are avoided; and more appropriate technical assistance may be obtained by drawing upon the experience of all nations.

In some areas and for some activities international auspices may not be feasible. And few would insist that all types of aid be administered by international agencies. Short of complete multilateralism, however, there is still considerable scope and need for the multilateral coordination of bilateral programs—multilateral supervision of the technical, financial, and commodity aid supplied by individual countries.

Another major issue is whether aid should be given only for a specific project or extended for general purposes too. Advocates of the project approach claim that only by financing soundly conceived projects will foreign aid contribute to an increase in productive capital. The IBRD, for instance, has tended to give prime consideration to the foreign exchange requirements of specific projects, emphasizing the economic soundness of the projects and their direct contribution to the productivity of the borrowing country. Moreover, it is claimed that the review of specific projects has some educational value and allows the donor to act more readily as a critic of the details of the recipient’s development plan.

It has become increasingly clear that the effectiveness of aid depends not merely on the productivity of specific projects but more generally on the complementarity of different projects and the appropriateness of the developing country’s allocation of total investment expenditures from both domestic and foreign sources. Similarly, the narrow view that aid should be confined to the foreign exchange component of specific projects misses the fundamental principle that the receipt of aid allows the country to acquire command over resources in general, not simply to increase command of foreign resources in particular. Insofar as changes occur in the general program of development, it is impossible to identify exactly the inflow of capital with a specific project; the inflow contributes to the whole program. The effectiveness of aid depends upon the country’s allocation of its general resources. The same consideration is relevant for determining the country’s capacity to service foreign debt, as noted below.

Use of aid . Even if aid is provided in substantial amounts and on favorable terms, there remains the ultimate problem of achieving its most effective use. External assistance should add to—not substitute for—the country’s own developmental efforts. If capital assistance is to result in a higher rate of investment, it must be prevented from simply substituting for domestic sources of financing investment, and it should not be dissipated in supporting higher personal consumption or an increase in nondevelopment current expenditure by the government.

If external assistance were to be used for bolstering current consumption, the scope for the use of foreign capital would obviously be practically boundless. When this use is excluded, the economically warranted demand for capital is limited by the country’s ability to use capital productively—that is, by the country’s “capital absorptive capacity.” In the short run, even if not in the long run, there may be a limit to how much capital assistance can be effectively used when the investment must not only cover its costs but also yield a reasonable increase in income. It should also be recognized that the effective use of capital assistance may depend in large part upon the effectiveness of technical assistance. For the purpose of contributing technical aid is essentially to raise absorptive capacity. Once the pace of development gains momentum, the absorptive capacity will be higher, and foreign capital can then be utilized more effectively.

When capital assistance is not confined to specific investment projects but is available on a general-purpose basis, the allocation of the foreign capital is decisive in determining whether it contributes as much as possible to raising the growth potential of the recipient economy. An efficient allocation of investment resources then depends upon the application of investment criteria based on the country’s entire development program and the adoption of appropriate domestic policy measures to supplement the use of foreign aid. Since the formation of capital depends, in the last resort, on domestic action, there can be no simple equivalence between the amount of aid received and the subsequent rate of development. The effectiveness of the use made of foreign aid in the country’s entire development program will be more decisive in determining whether development is to be sustained than is the initial amount of aid received.

It is therefore proper to emphasize the necessity of self-help measures, as American aid programs have increasingly done. Unless recipient governments adopt measures to mobilize fully their own resources and to implement their plans, the maximum potential from aid will not be realized. It has become increasingly evident that to realize this objective in many poor countries it is necessary to undertake basic reforms in land tenure systems, the tax structure, education, and governmental administration. Additional attention must therefore be given to the sociocultural and political aspects of aid.

Burden of aid . Significant as the benefits from aid may be, they are not without their costs. For the donor there is a burden in mobilizing aid; for the recipient, a burden of debt servicing and repayment.

Although the mobilization of aid is not limited by a physical incapacity on the part of donor countries to provide the needed resources, there is a problem of paying for the transference of the resources. Unless inflation is to be endured, it is necessary to withdraw—by taxation or government borrowing—the money equivalent of the resources to be transferred.

Moreover, the donor nation may be intensifying the difficulty of maintaining equilibrium in its balance of payments, unless it requires that its loans and grants be expended in the country of origin. If such “tied” aid is necessary out of balance of payments considerations, and the alternative to tied funds would be no aid at all, then the larger amount of tied aid is to be preferred, even though the condition that the aid be expended in the donor country may diminish the value of the aid to the recipient country as compared with freedom to import from a third country.

The willingness of an individual country to bear the burden of providing resources out of public funds may depend on the willingness of other countries to share in the burden. An increase in the total flow of aid becomes politically more feasible if there is a belief that the burden is being shared equitably. But there is no unambiguous formula for determining what constitutes an equitable distribution among the contributors of aid. A refined proposal would have the developed countries contribute according to a progressive tax schedule applied to the country’s per capita real gross national product. Perhaps the most practicable solution is to accept the commonly advocated proposal of a flat-rate levy on national income—say, one per cent of the national income of the donor nations.

For the recipient country the burden of foreign aid depends upon the country’s capacity to service its external obligations. When the return flow of interest and of amortization payments exceeds the inflow of new capital assistance, the country confronts a transfer problem in servicing the debt. It will have to generate an export surplus to cover the net outward transfer of amortization on capital account and of interest payments on current account. This entails a transformation of the economy such that resources can be reallocated to the sector producing exports or import-substitutes. To accomplish this the country may have to endure internal and external controls or experience exchange depreciation. The adverse effects of these measures of balance of payments adjustment might be interpreted as the indirect costs of foreign aid, to be added to the direct costs.

The direct cost of servicing capital assistance, however, is not a burden in itself. Even though part of the increased production from the use of foreign capital has to be paid abroad in interest—and this is a deduction that would not be necessary if the savings were provided at home—nonetheless the country has benefited from additional investment. What does matter in mitigating the burden of the debt is the country’s ability to avoid the necessity of adopting restrictive measures in order to find sufficient foreign exchange for the remittance of the external service payments. To minimize these indirect costs the country’s development program must give due consideration to the debt-servicing capacity of the country.

This becomes part of the problem of selecting appropriate investment criteria. To provide for adequate servicing of the foreign debt the capital should increase productivity sufficiently to yield an increase in real income greater than the interest and amortization charges. If this is done, the economy will have the capacity to raise the necessary funds—either through a direct commercial return or greater taxable capacity. Moreover, to provide a sufficient surplus of foreign exchange to avoid a transfer problem, the capital should be utilized in such a way as to generate a surplus in the other items of the balance of payments equal to the transfer payments abroad. If it is realized that the ability to create a sufficiently large export surplus depends on the operation of all industries together, not simply on the use made of foreign investment, it is then apparent that a project financed by foreign aid need not itself make a direct contribution to the balance of payments. Instead of such a narrow balance of payments criterion, the basic test for the allocation of capital aid is simply that it should be invested in the form that yields the highest social marginal product. As long as capital is distributed according to its most productive use and the excess spending associated with inflation is avoided, the necessary export surplus can be created indirectly. The essential point is that the allocation of foreign aid according to the criterion of productivity will also be the most favorable for debt servicing, since it maximizes the increase in income from a given amount of capital and thereby contributes to the growth of foreign exchange availabilities.

The problem of debt servicing will also be eased for the aid-receiving country when capital assistance is offered at lower interest, for longer terms, and with more stability and when the creditor country follows a more expansionary domestic policy and a more liberal trade policy.

Need for further research . Foreign aid has been extended mainly in an ad hoc fashion in response to immediate policy situations and without the opportunity for a substantial amount of prior research. Its practice, however, has suggested several areas of basic research that merit considerably more investigation. Of fundamental importance is the need for clear criteria in determining aid requirements, its optimal allocation among recipients, and its most effective use.

Since foreign economic aid is only a single component of the total flow of resources from rich to poor countries, it is important to investigate more thoroughly the relationships between capital assistance, private foreign investment, and international trade. Under what conditions can loans and grants stimulate private foreign investment? And under what conditions are they competitive? To what extent are the benefits of foreign aid being offset by adverse foreign trade policies? Might not more be gained from policies that stabilize the poor countries’ foreign exchange earnings than from additional capital assistance?

Insofar as the effective use of foreign aid may depend on social and political reforms, it would be instructive to examine more systematically the sociocultural and political aspects of foreign aid. This should serve to correct the tendency to overemphasize capital productivity and technical productivity at the expense of noneconomic variables that are strategic in the development process. [See ECONOMIC GROWTH, article on NONECONOMIC ASPECTS.]

The impact of technical assistance might also be greater if additional research were undertaken on the special problems of adapting techniques of production to the special circumstances of the poor countries. Not only should research be directed toward new scientific advances of particular utility to underdeveloped economies, but the problems of diffusing the new technology and gaining its acceptance in the recipient society must also be solved.

Further, attention should be given to the possible means of coordinating the many different actual and potential sources of foreign assistance and to feasible arrangements for giving greater continuity to the flow of aid.

Finally, on the basis of accumulated experience in a variety of countries it would be useful to have a number of case studies of foreign aid as a basis for a comparative study of the conditions under which different types of aid have proved effective.




ALTER, G. M. 1961 The Servicing of Foreign Capital Inflows by Underdeveloped Countries. Pages 139-162 in International Economic Association, Economic Development for Latin America. Edited by Howard S. Ellis. New York: St. Martins.

ASHER, ROBERT E. 1961 Grants, Loans, and Local Currencies: Their Role in Foreign Aid. Washington: Brookings Institution.

BENHAM, FREDERIC C. 1961 Economic Aid to Underdeveloped Countries. Oxford Univ. Press.

BERLINER, JOSEPH S. 1958 Soviet Economic Aid: The New Aid and Trade Policy in Underdeveloped Countries. New York: Praeger.

BROWN, WILLIAM A.; and OPIE, REDVERS 1953 American Foreign Assistance. Washington: Brookings Institution.

CHENERY, HOLLIS B.; and STROUT, ALAN M. 1966 Foreign Assistance and Economic Development. American Economic Review 56:679-733.

FEI, J. C. H.; and PAAUW, D. S. 1965 Foreign Assistance and Self-help: A Reappraisal of Development Finance. Review of Economics and Statistics 47:251-267.

Foreign Grants and Credits by the United States Government. ⇒ Issued since 1948, under various titles, by the U.S. Department of Commerce, Office of Business Economics. Reports prior to No. 15 (1948) are classified restricted and are available only to authorized officials of the U.S. Government. See especially the issue for 1952, page 81, Appendix B.

HIGGINS, BENJAMIN 1962 United Nations and U.S. Foreign Economic Policy. Homewood, I11.: Irwin.

LITTLE, I. M. D.; and CLIFFORD, J. M. (1965)1966 International Aid: A Discussion of the Flow of Public Resources From Rich to Poor Countries, With Particular Reference to British Policy. London: Allen & Unwin; Chicago: Aldine.

NEALE, ALAN D. 1961 The Flow of Resources From Rich to Poor. Cambridge, Mass.: Harvard Univ., Center for International Affairs.

OHLIN, GORAN 1966 Foreign Aid Policies Reconsidered. Paris: Organization for Economic Cooperation and Development, Development Center.

PINCUS, JOHN A. 1965 Economic Aid and International Cost Sharing. Baltimore: Johns Hopkins Press.

ROSENSTEIN-RODAN, P. N. 1961 International Aid for Underdeveloped Countries. Review of Economics and Statistics 43:107-138.

SINGER, H. W. 1965 External Aid: For Plans or Projects? Economic Journal 75:539-545.

UN, DEPARTMENT OF ECONOMIC AND SOCIAL AFFAIRS 1961 International Flow of Long-term Capital and Official Donations: 1951-1959. New York: United Nations. ⇒ See especially page 34, Table 16.

UN, SECRETARY-GENERAL 1961 International Economic Assistance to the Less-developed Countries: Report to the Economic and Social Council. New York: United Nations. ⇒ See especially page 48.

UN, SECRETARY-GENERAL 1962 The United Nations Development Decade; Proposals for Action: Report. New York: United Nations.

UN, STATISTICAL OFFICE 1961 Statistical Yearbook, 1960. New York: United Nations. ⇒ See especially Table 157, page 467. Copyright United Nations 1961. Data reproduced by permission.

U.S. CONGRESS, HOUSE, COMMITTEE ON APPROPRIATION Foreign Operations Appropriations: Hearings. ⇒ See especially the hearings for 1963.

U.S. CONGRESS, JOINT ECONOMIC COMMITTEE 1961 Economic Policies Toward Less Developed Countries. 87th Congress, 1st Session. Washington: Government Printing Office.


WOLF, CHARLES JR. 1960 Foreign Aid: Theory and Practice in Southern Asia. Princeton Univ. Press.

Foreign Aid

views updated Jun 08 2018

Foreign Aid

Katherine A. S. Sibley

The United States government first recognized the usefulness of foreign aid as a tool of diplomacy in World War II. Such a program, policymakers believed, would fulfill three goals: it would furnish humanitarian assistance to needy peoples, it would promote liberal capitalist models of development in other countries, and it would enhance national security. The U.S. commitment to foreign aid since has amounted to well over $1 trillion in current dollarsnot counting hundreds of billions more donated through the International Monetary Fund, World Bank, and other multilateral agencies. Always a controversial program, foreign assistance drew its broadest support in the early Cold War era. At that time, the effort to undermine communism permeated all other aid considerations, including the plight of the poor, the expansion of democracy abroad, and U.S. economic goals that might be served by foreign assistance, such as stimulating private investment and opening up markets to American products. All of these objectives, however, generated wide support from members of Congress, ranging from those whose chief focus was U.S. security to those who were most interested in developing the Third World.

In the Vietnam era, however, the consensus of support began to unravel. Like the war itself, foreign aid programs were variously attacked as imperialistic, paternalistic, harmful, wasteful, or just plain useless. (Indeed, these imperialistic attributes of aid had contributed to the United States's own birthwithout the assistance of the empires of France and Spain, the nascent republic would hardly have survived.) Although American foreign aid has changed its emphasis frequently since the Vietnam era in response to such criticisms, the flow has never stopped and has continued to generate calumny from all sides of the political spectrum. Notwithstanding these attacks, foreign aid has undoubtedly racked up some solid achievements. Third World residents have experienced great advances in their standard of living since the 1960s. The eradication of smallpox, the halving of poverty, the doubling of literacy from 35 to 70 percent, and the sharp rise in life expectancy from forty-one to sixty-three years, are evidence of this. Unfortunately, such improvements have not headed off a broadening economic gap between the rich and poor nations. For instance, Africa's average annual income in adjusted dollars in the 1990s was about the same as it had been in the 1960s, approximately a dollar a day. There, too, the AIDS epidemic has proved as devastating as smallpox. The great ambitions of President John F. Kennedy for foreign aid (see sidebar) were not met in the 1960s "decade of development," nor have they been realized since.

During the Cold War era, bilateral assistance (on a government-to-government level, including that channeled via nongovernmental organizations) broke down in unadjusted dollars to $139 billion in military and economic assistance to the Middle East and South Asia, $70 billion to East Asia, $48 billion to Europe, $29 billion to Latin America, and $23 billion to Africa. In the 1990s, both the demise of the Soviet Union, whose influence U.S. foreign aid was long designed to check, as well as the spectacular economic growth of such former aid recipients as South Korea, led the United States to adopt new targets. Indeed, as Secretary of State Madeleine Albright declared in 1999, "traditional notions of 'foreign aid' have become virtually obsolete." The 1997 State Department strategic plan outlined the following goals for foreign aid: creating "institutions that support democracy, free enterprise, the rule of law and a strengthened civil society"; providing humanitarian aid; and "protecting the United States from such specific global threats as unchecked population growth, disease, the loss of biodiversity, global warming, and narcotics trafficking." At the turn of the twenty-first century, U.S. funds were defending peace in Kosovo, East Timor, and the Middle East, dismantling Soviet nuclear weapons, disarming drug dealers in Central America, democratizing Nigeria, and developing the armies of America's erstwhile enemies, the former socialist countries. Yet, as Albright herself acknowledged in 2000, the programs continued to support very traditional aims, such as "promoting U.S. exports, spurring overseas development and helping other countries to achieve viable market economies"in other words, expanding the adoption of liberal capitalist norms of development. While recipient countries have certainly changed, the United States continued to spend about the same amount as it had at the end of the Cold War, utilizing Cold War foreign aid instruments like the Foreign Assistance Act and the Agency for International Development. According to the State Department, in 2000 the United States spent $16.5 billion on foreign operations, ranging from the Peace Corps ($244 million) to the foreign Military Training Program ($4.8 billion).


Prior to World War II, U.S. government-to-government assistance and loans were extremely rare and limited to emergency situations. The impulse to spend money to spread goodwill and influence abroad was not absent, of course: in the nineteenth century, private individuals supported such causes as Greek independence in the 1820s and victims of the Irish famine in the 1840s; later, major corporations set up international philanthropic arms like the Rockefeller Foundation. During and after World War I, the U.S. government became directly involved in disaster relief, assisting German-occupied Belgium and sending $20 million to Russian famine victims in 1921. Subsequently, enormous U.S. lending helped rebuild Germany and other countries, alongside the efforts of American religious organizations like the American Friends Service Committee and the Young Men's Christian Association. The U.S. loans stopped, however, in the Great Depression and were never repaid. Campaigning in 1932, Franklin D. Roosevelt promised that the United States would sanction no more such foreign investments.

But military aid continued to flow throughout the interwar years to pro-U.S. regimes in neighboring countries, including Cuba, Mexico, and Nicaragua. During World War II, moreover, the State Department's Coordinator for Inter-American Affairs, Nelson Rockefeller, set up the Institute of Inter-American Affairs, which furnished food and sanitation assistance as a counterweight to Nazi influence in Latin America. In the late 1930s, President Roosevelt developed a Western Hemisphere Defense Program to further U.S. influence in the region with greater trade and cultural ties, as well as military aid. Like the subsequent $50 billion lend-lease program for Europe and Asia, which included the first major U.S. effort to export arms outside Latin America, these initiatives were all defense measures. They were supplemented by other programs, such as the $6.1 billion that the United States contributed to the Government and Relief in Occupied Areas program from 1943 to 1951, as well as the $2.6 billion it furnished the United Nations Relief and Rehabilitation Administration from 1943 to 1947. In the immediate aftermath of the war, the United States also sent military surplus items to France, Britain, Nationalist China, and the Philippines, where it maintained bases following independence in 1946. Such assistance remained ad hoc, since Congress as yet resisted an expansion of U.S. military aid. "We should not be sending military missions all over the world to teach people how to fight in American ways," said the Republican senator Robert Taft of Ohio.

Also during World War II, the Bretton Woods Conference led to the creation of the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (the World Bank), two key instruments of economic relief and reconstruction that were aimed at ending the kinds of economic nationalism that many felt had led to the Great Depression and the war. The IMF established the dollar as the international currency, facilitated international trade, and made loans to governments to fix trade imbalances; the World Bank ensured that foreign investment in developing areas would be less risky by extending loans for reconstruction and development projects, and promoting investment and international trade. The United States dominated both organizations, in 1945 holding one-third of the votes in each and supplying one-third of the financing of the bank, or $3 billion. At century's end, the United States still supplied one-fifth of all IMF funds, and these institutions and their policies continued to generate controversy. In September 2000, at World BankIMF meetings in Prague, the debts owed by Third World governments sparked riots as thousands of protesters, dissatisfied with the agencies' debt relief policies and the pace of economic globalization, threw Molotov cocktails and rocks at police and at such bastions of global capitalism as a McDonald's restaurant, cutting short the meetings.


The postwar commitment of the United States to foreign aid stemmed from its vast aid role in World War II but also involved a number of new considerations. Initially, American foreign aid programs in the early Cold War demonstrated the nation's assumption of the economic and political role previously played by Great Britain, as exemplified by the Truman Doctrine and its support to such former British clients as Greece and Turkey. The United States also used foreign aid to promote free-market standards for development, including the integration of West European economies and the curtailing of economic protectionism, through such instruments as the Marshall Plan. These programs, and especially the Marshall Plan, would greatly benefit the U.S. economy by generating orders at home. Finally, and most importantly, these efforts were designed to prevent the spread of international communism. By early 1946, U.S. policymakers were becoming increasingly convinced that the Soviet Union had embarked upon a path toward world domination. The following year, the State Department official George F. Kennan called for "longterm, patient but firm and vigilant containment of Russian expansive tendencies," and the United States adopted containment as its doctrine for dealing with the Soviet Union.

It was Soviet pressure in the Mediterranean that led the United States to announce the Truman Doctrine in March 1947, thereby launching its Cold War foreign aid program in earnest. Extending an unprecedented peacetime aid amount of $650 million, the doctrine proclaimed that "it must be the policy of the U.S. to support free peoples who are resisting attempted subjugation by armed minorities or by outside pressures." It was the first time that the United States had put cold cash as well as warm bodies, in the form of technical advisers, behind the containment policy. In a joint session of Congress, Truman declared that totalitarian regimes "spread and grow in the evil soil of poverty and strife," and thus, U.S. helpthe only help available, he declaredwas necessary to stop the spread of communism.

Less than three months later, the United States proposed the Marshall Plan, or European Recovery Program, in response to the postwar economic crisis in western Europe that many U.S. officials felt would only make it easier for communist parties to take hold there. Secretary of State George C. Marshall, outlining the aid plan in an address at Harvard University on 5 June 1947, stated that the United States "should do whatever it is able to do to assist in the return of normal economic health to the world, without which there can be no political stability and no assured peace." If not for American aid, the Truman administration contended, no parliamentary regime in western Europe would survive and U.S. security would therefore be threatened. The Marshall Plan provided a $12 billion package to sixteen countries in western Europe that not only rebuilt the economies of its recipients but also instituted liberal economic practices such as lower tariffs and instruments to coordinate economic policies.

U.S. officials envisioned that foreign aid, by establishing beneficiaries' internal political stability, promoting their general economic development, and building military strength, was the best way to counteract Soviet expansion. As the program grew during the Cold War, aid recipients fell into two categories: forward defense countries bordering the communist bloc as well as those located in other strategic areas like South Asia and the Middle East, and the less strategically placed countries. In the forward defense countries, but also in sensitive areas like Latin America, aid was often designed to support existing, pro-American governments, through arms and personnel as well as through economic aid to mitigate internal discontent. It was hoped that aid would prevent these countries from falling into the Soviet orbit, which as a result often put the United States on the side of reactionary domestic forces, as was the case in Vietnam, Iran, and Cuba.

Economic assistance programs faced resistance in a tight-fisted Republican postwar Congress, but Cold War threats helped squelch such recalcitrance. Foreign aid quickly expanded to include the economic stabilization of non-European areas, as well as a new emphasis on military assistance. For example, the United States gave limited aid to such nations as South Korea, the Philippines, and Iran. Its biggest expenditure outside of Europe was the $2.5 billion in military and economic aid to the Nationalists in China, aid that continued even after Chiang Kai-shek's government had proved itself utterly beyond help. Then, at his inauguration in January 1949, Truman put forward a pioneering foreign aid proposal that included (1) support for the United Nations; (2) U.S. programs for world economic recovery; (3) support for "freedom-loving countries against aggression"; and 4) "a bold new program for making the benefits of our scientific advances and industrial progress available for the improvement and growth of undeveloped areas." In the wake of China's "fall" to communism, and the Soviet atomic blast, the military threat of Soviet expansion appeared grave, and Truman's third point, to assist "freedom-loving countries," was quickly put into effect. In October 1949, two months after the United States had officially joined NATO, the Truman administration created a Military Assistance Program under the auspices of the Mutual Defense Assistance Act, with a budget of $1.3 billion. Expenditures continued to rise, and in its first three years, as Chester Pach has noted, the program extended $8 billion in military aid to western Europe, largely with the aim of enhancing "the psychological attitudes and morale of our allies." Despite controversies that have dogged military assistance ever sincefor instance, that it was an unwieldy program with "no organized, careful thought about what it was that we were trying to do," as Secretary of State Dean Acheson aptly put itthe program continued to grow. U.S. officials reckoned that if military aid were not continued in ever larger amounts, demoralization would set in, weakening western Europe's military position still further.

Point Four, which the inaugural address is best remembered for, was the basis for the Agency for International Development (AID), a $35 million program that provided technical assistance to the Third World. The Point Four program, according to a State Department official, sought "to strengthen and generalize peace by counteracting the economic conditions that predispose to social and political instability and to war." Europe, now recovering with Marshall Plan aid, would no longer be the major recipient of American economic assistance. Despite Europe's continuing importance, as Acheson told Congress in 1950, "economic development of underdeveloped areas" had become a national concern, since "our military and economic security is vitally dependent on the economic security of other peoples." The process of decolonization had made these countries a key battleground in the Cold War, with both Russia and America vying for influence over the newly formed nation-states of Asia and Africa. (Another undeveloped area, Latin America, received less attention in the 1950s.) The UN and the World Bank also shifted their focus from reconstruction of war-torn Europe to the problems of the Third World at this time. The Third World's stash of raw materials further heightened its importance. In 1952 the President's Materials Policy Commission recommended that the United States look to the countries of Africa, the Middle East, southern and southeastern Asia, and Latin America for imports of minerals and tied aid programs to this end in the 1950s.

Truman's initiatives were incorporated into the Mutual Security Act (MSA) of 1951, which succeeded the Marshall Plan and offered a new program of economic and, especially, military aid both for Europe and the developing world. In its first year, for example, the act extended to Europe a combined military and economic package of $1.02 billion; in 1952, as the Korean War ground on, it included $202 million in military support to Formosa (Taiwan) and Indochina. In the wake of National Security Council document NSC 68 of 1950, which had called for large-scale military aid along with an enormous defense buildup, security-related assistance would become a hallmark of the Eisenhower era (19531961). Thus, while military assistance had been a little more than a third of the $28 billion in aid that the United States had extended during the Marshall Plan era (19491952), during the succeeding eight years, it was almost 50 percent of a larger, $43 billion total. Meanwhile, technical assistance under Point Four went to such countries as Liberia, Ethiopia, Eritrea (where the United States had a large surveillance post), Libya, Egypt, Saudi Arabia, Lebanon, Iraq, Israel, and Iran. Latin America was largely left out of Point Four until the end of the 1950s, although certain countries in which the United States countered perceived communist threats received significant security assistance.


Senator Tom Connally, chairman of the Senate Foreign Relations Committee, demonstrated the popular sentiment toward foreign aid when he declared in 1951, "We can't go on supporting countries all over the world with handouts just because we like themor any other reason." Indeed, many members of Congress in this era were reluctant to vote public funds for development purposes, because they believed that such funds should not replace private investment. Beginning with the Marshall Plan, aid had been traditionally aimed at stimulating private investment through trade liberalization and by making improvements in the global economic climate. In fact, in his first State of the Union message, President Dwight D. Eisenhower unabashedly proclaimed that the explicit purpose of American foreign policy was the encouragement of a hospitable environment for private American investment capital abroad. He called for trade, not aid. Such hard-headed motives did not preclude a significant expansion of U.S. economic aid in the Eisenhower administration, however, as confirmed by a significant augmentation of U.S. Export-Import Bank loans and an increase in soft loans in 1954. Cold War pressures as well as the lobbying efforts of individual countries helped further this trend, and the Mutual Security Act of 1954, the first single piece of legislation to embrace the entire foreign assistance program, became the instrument for this new policy. The United States also launched the Agricultural Trade Development and Assistance Act in 1954, commonly called the Food for Peace program, which was still thriving a half century later. This program initially authorized $350 million in food surplus shipments, payable in local currency. Known as Public Law 480, it was the product of some heavy lobbying by Senator Hubert Humphrey, a Democrat who hailed from the farmfilled state of Minnesota. Designed to "increase the consumption of United States agricultural commodities in foreign countries, to improve the foreign relations of the United States and for other purposes," Public Law 480 would authorize $3 billion in sales by 1956 and become an important element in the foreign aid program, while helping to lower U.S. food surpluses. The foodstuffs served as a development subsidy, enabling recipient countries to sell them on the domestic market and then use the proceeds for development projects. Unfortunately, food aid significantly damaged Third World producers, including many Indian farmers, pushing India close to famine in the 1950s and 1960s.

In addition to providing food, foreign aid was also an important weapon of anticommunist intervention during the mid-1950s. After the United States brought down Iran's nationalist, anti-American prime minister, Mohammad Mossadegh, in 1953, replacing him with Shah Mohammad Reza Pahlavi, it gave that country $85 million in foreign aid, and the shah's army was soon among the best-equipped in the Middle East. Eisenhower and Secretary of State John Foster Dulles also used foreign aid to gain friendship and allies in Latin America. In 1954, the United States intervened in Guatemala to overturn the regime of Jacobo Arbenz Guzmán and assist in the military coup of Carlos Castillo Armas. Guzmán, according to U.S. Ambassador John Peurifoy, "talked like a communist, he thought like a communist, and he acted like a communist, and if he is not one, he will do until one comes along." American aid to Guatemala, which had amounted to just $600,000 over the preceding ten years, rose to $130 million in the six years following Castillo Armas's coup. One of Guatemalan aid's most vigorous supporters was Vice President Richard Nixon, who touted construction of the country's Inter-American Highway as promoting everything from trade to security. Guatemala thus became a "testing ground" in the Eisenhower administration's newly expanded foreign aid program.

At the same time, however, U.S. officials grew increasingly uncomfortable with another Latin American client, Cuban leader Fulgencio Batista, who used American military aid meant for "hemispheric defense" against his own people in the late 1950s. Washington welcomed his departure and, initially, the ascendance of Fidel Castro. Soon, however, American military aid, training, and scuba suits would be furnished to the Cuban foes of the Soviet-leaning Castro, though to little effect. In 1957, the State Department's International Cooperation Administration set up a Development Loan Fund chiefly to assist India, which faced a serious foreign exchange crisis. This program represented the first significant use of subsidized (or soft) loans, which by the end of the decade would become the most important tool employed in U.S. foreign aid programs, replacing development assistance. By 1961, the World Bank had also set up a soft loan agency, the International Development Association. U.S. and World Bank lending to India helped the government build fertilizer plants, power plants, highways, railroad locomotives, and airplanes. In the process, however, it strengthened India's national economic planning apparatus, as Shyam Kamath noted in a 1994 article, and "facilitated the growth of the public sector at the expense of the private sector." Thus, though the United States professed that its aid and technical assistance was aimed at creating a better environment for investment and a more liberal economy, as the Indian example shows it often assisted instead in the entrenchment of heavy-handed central planning agencies in the Third World.

As the loans to India demonstrated, the less-developed countries continued to be a vital battleground for U.S.-Soviet competition. In January 1957, in response to the deepening of relations between Egyptian leader Gamal Abdul Nasser and Soviet premier Nikita Khrushchev, the Eisenhower Doctrine pledged U.S. support to any nation in the Middle East that wanted help "resisting armed attack from any country controlled by international communism," and Congress approved a $200 million economic and military aid program for the defense of this region. Then, as 1960 ushered in the "development decade" (see sidebar), Washington finally recognized its largely neglected neighbors at the Conference of the Organization of American States in Bogotá, pledging $500 million for the Inter-American Fund for Social Development. This fund included a bank to furnish improved sanitation, housing, and technical training, in order to enable "the individual citizen of Latin America to live a better life and to provide him the fullest opportunity to improve his status." At the Punta del Este Conference the following year, the Kennedy administration would launch the Alliance for Progress. This program, funded largely by the United States, had as its goal the modernization of Latin America through reform of its political and economic structures, and the injection of capital and technical assistance.


Upon entering office in 1961, President John F. Kennedy very much hoped to burnish the image of American foreign assistance, which had been skewered in such recent books as Eugene Burdick and William J. Lederer's best-selling The Ugly American (1958), a novel about an ignorant, insular set of foreign service officers-at-large in Southeast Asia, hopelessly losing the battle to communism owing to their maladroit application of foreign aid. Kennedy saw the Peace Corps as one way to revamp this impression of America abroad. The notion of volunteers living alongside those they sought to help was a far cry from The Ugly American 's out of touch bureaucrats and was particularly appealing in an era that came to represent the "high-water mark of idealism concerning what overseas aid could achieve," as Paul Mosley wrote. Kennedy established the agency by executive order less than six weeks after he took office.

While The Ugly American no doubt had a salubrious influence on him, perhaps the president should have paid closer attention to a far more chilling and penetrating critique of American foreign intervention in this era, Graham Greene's The Quiet American (1955). In this novel, an arrogant, clean-cut young American character, Alden Pyle, idealistically destroys innocent lives in order to save the Vietnamese from communism, eerily foreshadowing the U.S. role in that country that Kennedy helped propel in the early 1960s, in part through foreign aid.

In September 1961, Congress enacted the Foreign Assistance Act (FAA), still the governing charter for U.S. foreign aid. Like the MSA earlier, the FAA attempted to systematize all existing foreign aid programs and included a Development Loan Fund, which would assist with large projects, as well as a Development Grant Fund for technical development. In addition, the FAA provided a "supporting assistance" program (later called the Economic Support Fund) to promote economic and political stability and launched a program to protect American business abroad, the antecedent of the Overseas Private Investment Corporation.

Later that fall, the Agency for International Development (USAID) opened for business, coordinating U.S. assistance programs under the aegis of the State Department. As this flurry of activity shows, Kennedy was a great promoter of foreign aid, which he envisioned as part of his goal to "pay any price, bear any burden" to assist the free world. The fundamental task of our foreign aid program in the 1960s, he said idealistically, "is not negatively to fight Communism it is to make a historical demonstration that in the twentieth century, as in the nineteenth economic growth and political democracy can develop hand in hand." As Michael Hunt notes skeptically, Kennedy and other foreign aid advocates were convinced that "thanks to American wisdom and generosity and to the marvels of social engineering, the peoples of these new nations would accomplish in years what it had taken the advanced countries decades to achieve."

Despite Kennedy's words, fighting communism remained a priority. By its very dynamic, as he recognized, the modernization process that was necessary for economic growth could also unleash unpredictable forces, including mass unrest. This was just the sort of milieu that communists might exploit through sponsorship of internal insurrection, "the so-called war of liberation," as Kennedy put it in a June 1961 speech. An American military response alone would be ineffective in combating such uprisings; aid, too, was necessary, as it would "help prevent the social injustice and economic chaos upon which subversion and revolt feed." Foreign assistance and American counterinsurgency expertise, it was believed, would steer countries through these difficult transitions without their resorting to revolutionary, communist regimes.

As USAID administrator Fowler Hamilton put it plainly to Congress in budget hearings in 1962, "The communists are active. The total commitments they are putting out now run on the order of $1.2 billion to $1.3 billion a year." Fortunately, "the free world" was more than holding its own, supplying the Third World with $8 billion in both aid and private investment. "I think that we have the resources and the good sense to prevail," said Fowler, mindful of his budgetary ambitions.

Yet Representative Marguerite Stitt Church of Illinois raised one of foreign aid's most vexing questions during Fowler's testimony. While agreeing with the importance of defending "the cause of human freedom, as exemplified by the ideals of this country," she also worried that the emphasis still placed on major huge projects "would not reach the lives of the 'little people' whom we must touch." A similar plea was made at the time by the foreign aid analyst John D. Montgomery in The Politics of Foreign Aid, who argued that the United States was too willing to overlook the undesirable aspects of certain recipient regimes, giving the United States the reputation of being "divorced from the social progress" of the people in these countries.

As such observations revealed, even in the heyday of foreign aid the program faced sharp criticism. Representative J. L. Pilcher asserted that despite over $1 billion already spent in Vietnam, leader Ngo Dinh Diem's lack of popular support would mean that the country would be "in the hands of the communists" within twenty-four hours of the departure of U.S. troopsnot such an inaccurate prediction, as it turned out. "Where is all our economic aid going to help stop communism in that country?" he wondered. It was an unanswerable question, and the spending continued.

Indeed, U.S. representatives in the newly decolonizing countries quickly learned that aid would get them improved access to government officials, and by 1963, there were twenty-nine aid programs operating in Africa. Some members of Congress, however, remained dubious about the expansion of foreign aid, and, for that reason, Kennedy asked a prominent detractor of foreign assistance, General Lucius Clay, to look into the matterthe confident Kennedy certain that even the critic Clay would be convinced of the program's value once he looked into it. However, Clay's committee's findings showed that "these new countries value their independence and do not want to acquire a new master in place of the old one there is a feeling that we are trying to do too much for too many too soon and that no end of foreign aid is either in sight or in mind." Clay's verdict as to the indeterminate nature of this program was certainly borne out. And despite Kennedy's fervent conviction of the effectiveness of foreign aid, programs like the Peace Corps and the Alliance for Progress were hard-pressed to meet the social and economic challenges they confronted in the Third World.

Kennedy's idealism, too, could not alter the fact that throughout the 1960s, foreign aid programs were conceived with increasingly close attention to U.S. security interests. Foreign assistance remained largely focused on keeping the Third World from turning to communism, and included support to strengthen resistance to internal communist movements as well as to meet the external Soviet threat. Funds for infrastructural improvements and education were a favorite vehicle for these objectives. Secretary of Defense Robert McNamara, demonstrating the close link Washington envisioned between aid and U.S. predominance in the Cold War, declared in 1964 that "the foreign aid program and the military assistance program [have] now become the most critical element[s] of our overall national security effort." Making the connection even more precise, President Lyndon B. Johnson added that the foreign aid program was "the best weapon we have to ensure that our own men in uniform need not go into combat."

Actually, foreign aid went right into war alongside the soldiers in Vietnam, as part and parcel of the large U.S. pacification program in the southern half of that country. Vietnam drew the fervent involvement of USAID, which, as Nicholas Eberstadt has pointed out, made that country the donor for nearly half of its development grants by 1966. Much of this went to fund the ill-fated strategic hamlet program and other disastrous measures, which, while feeding the dislocated South Vietnamese, gutted their economic foundations and thus worked exactly against the traditional objectives of foreign aid. But at the same time, the United States also showed its sensitivity to indigenous economic conditions by hosting the Tidewater conference in Easton, Maryland, where representatives of seventeen nations mobilized in 1968 in response to the threat of famine in India. Their work led to the "green revolution," a movement that brought innovations to agricultural cultivation in the Third World to produce more staple foods and prevent famine.


Despite such successes, disillusionment arising from the deepening commitment in Southeast Asia led many Americans across the political spectrum to disparage foreign aid, and for the first time such criticisms were heard at the highest levels of the U.S. government. For much of the postWorld War II period, the policymaking establishment held foreign assistance as sacrosanct in American politics and diplomacy and often oversold its virtues to a skeptical public and Congress. Democratic and Republican administrations outbid each other in extending aid programs; liberal and conservative members of Congress joined in bipartisan voting on aid appropriations, even as individual members grumbled; and labor, management, religious, and educational groups all voiced approval of foreign aid. Yet the interventionist consensus articulated in the Truman Doctrine and Point Four, and widely supported for two decades, foundered in Vietnam. Arguments that for twenty years had given the greatest urgency and immediacy to the cause of foreign aidincluding the threat of communism, the need for continued access to vital raw materials, the economic benefits to be gained through increased trade, and the political dividends to be reaped in terms of peace and democracylost much of their force, at least temporarily. At the deepest point in U.S. involvement in the Third World, many Americans began to question the rationale for any involvement.

Thus, by 1970, Washington had dropped its commitment in Africa to ten countries, and in 1971 and 1972 the Senate refused to fund foreign assistance at all, although a year-end catchall resolution covered the budgets. Antiwar legislators joined members of Congress who opposed government waste in tightening the reins on USAID, as the agency became subject to heightened congressional oversight that gave legislators veto power over even the smallest items. Despite considerable public and congressional debate over the objectives and techniques of foreign aid programsparticularly from conservatives in both parties who objected to what Representative Otto Passman called "the greatest give-away in history"Congress decided to keep foreign aid in the 1970s, although revising its aims significantly.

Meanwhile, Third World nations were also becoming increasingly critical of the existing system of aid distribution. Rejecting reform proposals of the foreign aid establishment such as those contained in the Rockefeller Report (1969), which urged the United States to widen its use of private investment, skills, and other initiatives, these nonaligned nations proposed a new international economic order, which Jeremy Brecher and Tim Costello note called for "the regulation of global market forces in the interest of the development process" through a program of subsidies and other supports for exports. Critics of the proposal like Nicholas Eberstadt, however, claimed that it was simply an attempt to "disassembl[e] the liberal international economic order augmenting instead the capacity of states and the authority of their leaders to plan their local economies" at Western expense.

In the self-critical angst that characterized the late Vietnam era, the United States was only too willing to shed its old shibboleths about capitalism's virtues. Under the U.S. Foreign Assistance Act of 1973 and the Mutual Development and Cooperation Act, also passed that year, the liberal capitalist model for Third World progress and its associated large-scale development projects came under withering criticism. The mantra of the 1973 reforms, known as "New Directions," became the goal of meeting "basic human needs." USAID focused on programs that assisted in the provision of food, medicine, and housing, especially in rural areas, rather than more grandiose infrastructure projects. The act's categories of assistance grants and development loans were replaced with "functional categories aimed at specific problems such as agriculture, family planning, and education," an organizational structure that has largely remained. The new program in some ways resembled the technical assistance efforts of the early 1950s, but in keeping with the move away from liberal capitalist tenets, the U.S. effort emphasized instead top-down government "development planning" as the best tool to foster Third World growth. Unfortunately, this was often "planning without facts"especially when Texas-style cattle raising proved untenable in sub-Saharan Africa. The World Bank, meanwhile, participated in a $2.4 billion investment in African agriculture in the 1970s, largely for vast state farms and irrigation programs, with dismal results. In a 1994 article, James Bovard attributed these failures to inappropriate technology as well as "soil unsuitability." By the 1980s, food output in Africa had fallen 20 percent from twenty years earlier. Governments' zeal for complex technologies in place of simple and workable changes, coupled with widespread political corruption, was largely responsible for the disasters in Africa.

In the 1970s, the United States increasingly turned to the World Bank and similar agencies as a favored instrument for dispensing aid, a process called multilateralization. Ostensibly, multilateral aid diluted the pressure that bilateral aid placed on recipient countries, although these agencies' funds came with their own chafing leash. During Robert McNamara's tenure at the bank (19701981), its lending rate increased thirteen times, from $883 million to $12 billion. This aid was not always helpful to the people of the Third World. In his article, Bovard quotes a former executive director of the International Monetary Fund, who charged that such "unseemly" lending only ratcheted up Third World politicians' control over their own people, assisting the repressive collectivization programs of such leaders as Julius Nyerere of Tanzania in the early 1970s and the brutal social engineering of the Vietnamese government later in that decade.


When President Jimmy Carter entered office in 1977, he made human rights an important priority in U.S. foreign policy, and this focus led him to cut back on aid to such brutal regimes as that of Ethiopia's Mengistu Haile-Mariam. Military aid, however, continued to the Somalian enemies of the now Soviet-backed Mengistu; by 1980, 75 percent of total African aid was going to the Horn of Africa, reflecting Cold War priorities. Carter's human rights campaign helped reform oppressive governments in Brazil and Argentina, but elsewhere, such as in El Salvador, South Korea, and China, Carter's message was more inconsistently applied, with security interests outweighing human rights concerns. Most egregious, perhaps, was his approach to Iran, where Carter, despite strong congressional criticism, sold the shah of Iran sophisticated AWACS radar systems. American support for the shah helped lead to the revolution of Ayatollah Khomeini. At the same time, Carter administration officials sought to deflect criticisms that USAID was a U.S. foreign policy "tool," and they removed it from the State Department, placing it under the new International Development Cooperation Agency (IDCA). USAID remained closely connected with the State Department, however, and foreign aid continued to serve America's state interests. (The IDCA was closed down in 1998.) Carter also continued a practice begun in the wake of the 1973 Yom Kippur War of extending heavy aid to the Middle East, especially Israel and Egypt, following the 1978 Camp David peace accords between those two nations. In 2001 Egypt and Israel remained the largest recipients of U.S. foreign aid.

When Ronald Reagan entered office, his rhetoric harked back to the Eisenhower administration in its emphasis on traditional liberal capitalist models of development that would stimulate private investment, an outlook that over the following decade slowly took hold in the foreign policy establishment, replacing the 1970s New Directions ethos. By the 1990s, this model was manifest in the foreign aid establishment's support for globalization, essentially a process that promotes the opening of national borders and the internationalization of economic and social ties through capitalist models of free trade and investment. However, in the 1980s, USAID administrator M. Peter McPherson could still insist that overpopulation, not underinvestment, corruption, and mismanagement, was the "primary obstacle" to Third World development. Indeed, the United States continued to fund hopelessly crooked regimes in order to keep them from linking up with the Soviet Union, like that of Mobuto Sese Seko in Zaire (now the Democratic Republic of the Congo). As an exasperated USAID official noted later, Washington's $2 billion investment in Zaire "served no purpose."

During the Reagan administration military aid once again became a high priority, with more than 40 percent of U.S. bilateral aid being distributed in the form of loans for military training and equipment between 1981 and 1986. Outside of Israel and Egypt, a good deal of this aid went to Central America's anti-leftist regimes, including the government of El Salvador. Another key shift in foreign aid in the Reagan era was the new importance placed on Africa. Owing in part to the efforts of a growing number of African-American members of Congress, as well as the increasingly influential nongovernmental organizations, Congress created the Development Fund for Africa, which, as Carol Lancaster notes could not be "raided" by other programs. By the early 1990s, the U.S. African effort had more than recovered from the cutbacks of the early 1970s. USAID had programs in forty-three African countries, with thirty field missions.

While the United States certainly changed priorities in its economic aid programs in the wake of Vietnam, Congress was ready to gut military programs in this era. In 1976, President Gerald Ford tried to stem congressional zeal for cutting military assistance, as exemplified in the Foreign Assistance Act of 1974, which called for such aid to be "reduced and terminated as rapidly as feasibly consistent with the security of the United States." Ford compromised by cutting such assistance in the 1977 budget. However, Congress then passed the International Security Assistant and Arms Export Control Act of 1976, which made legislators the final arbiter of arms transfers and deployment of military advisers abroad.

The 1980s, however, also saw a growing debt crisis in the Third World, as many countries defaulted on their foreign obligations. In Africa, debt grew from $55 billion to $160 billion between 1980 and 1990, and servicing the debt proved a crippling task for many governments. The International Monetary Fund and other multilateral agencies, reflecting the growing ethos of "neo-liberalism" in this era, emphasized the importance of markets and market-based reforms to get nations out of debt. Continued aid was made contingent upon policy reforms designed to bring stabilization, such as cutbacks on borrowing and currency devaluation. Gambia, for instance, devalued by 90 percent. In Nigeria, the World Bank made loans conditional on the ending of subsidies and large-scale irrigation schemes and the furthering of market reforms. In many countries, however, these changes often proved as difficult and culturally dissonant as cattle raising had in the 1970s. As Nguyuru Lipumba noted in a 1988 article, in countries like Tanzania, "streamlining public enterprises and letting them operate as commercial enterprises without central government interference is considered a secondbest policy."


With the fall of the Soviet Union in 1991, U.S. foreign aid programs faced a deep crisis. Senators like Patrick Leahy proclaimed that American aid had lost its purpose and vision and that its connection to foreign policy goals was tenuous at best. This transitional period has provided an opportunity for business groups, among others, to call for a more traditional use of aid: to provide markets for U.S. exports, a sentiment that also led to the 1992 signing of the North American Free Trade Agreement (NAFTA) between the United States, Canada, and Mexico. The NAFTA negotiations were a direct result of Mexico having moved away from more traditional patterns of Third World development, including import substitution and high tariffs, toward a more open market in the 1980s. Such economic openness was touted by foreign aid officials as the best means to improve the plight of the Third World.

The postCold War reassessment of aid also brought sharp budget cuts, and by 1997 USAID had lost twenty-four foreign missions and one-third of its staff from a peak in the early 1990s. While traditional in-country development did not disappear, the new emphasis on globalization helped create an agenda of transnational issues, or problems that affect a community of nations, often in a specific region. In 1993, the Clinton administration established the Task Force to Reform AID and the International Affairs Budget, which offered a number of broad-based initiatives reflecting the new transnational perspective on foreign aid such as preventing the spread of disease, environmental destruction, and drug trafficking, and addressing concerns such as child survival, migration, population growth, and the promotion of democracy. The task force's Wharton Report became part of the administration's Peace, Prosperity, and Democracy Act proposal, which called for making foreign assistance more amenable to "emerging international realities" thus challenging the more narrowly construed national security premises of the venerable Foreign Assistance Act of 1961. This effort did not succeed. Senate Foreign Relations Committee Chairman Jesse Helms decided in 1994 that cuts to foreign aid were more important than an ambitious retooling: "We must stop this stupid business of giving away the taxpayers' money willy-nilly." However, some revamping was unavoidable; the world had changed. To assist the former socialist states, in 1994 Congress enacted the Freedom Support Act and the Support for East European Democracies Act. USAID accordingly set up its Center for Democracy and Governance and an Office of Transition Initiatives. Sixteen Eastern European and former Soviet Union countries were targeted for assistance ranging from election financing to media advice. As a result of such initiatives, in 1996 the United States was giving aid to more countries (130) than it did in 1985. Still, traditional priorities did not disappear; while more countries were now getting development aid, it was a small total compared to the security aid that went to the two nations of Israel and Egypt.

The 1990s were also a decade of close reexamination of foreign aid in the international giving arena. The United Nations Development Program issued a study in 1996 that noted that in the 1980s, 100 countries, or 1.6 billion people, had experienced economic declinedespite enormous amounts of global aid. Most of these countries had lower average incomes in 1990 than in 1980, and almost half had smaller incomes than in 1970. The few who seemed to be holding their own were civil servants, whose salaries totaled 20 percent of Zambia's GNP, for instance.

Foreign aid's role in forestalling crises looked dubious too. Much U.S. aid, for example, had gone to so-called "collapsed states," meaning states that have fallen apart due to mismanagement, corruption, civil war, or oppressive leadership, including Somalia, Liberia, Zaire, Rwanda, Sierra Leone, and Sudan. And where states survived, it became difficult to argue that such aid did not have distorting effects on local economies. In 1995, for example, such funds accounted for 46 percent of Lesotho's government expenditures; 77 percent of Ghana's, 97 percent of Malawi's, and an unbelievable 101.4 percent of Madagascar's. In the 1990s, recognition of this fact and its contribution to corrupt practices led the United States to cut off bilateral aid to fifty countries. Washington later replaced some of this aid with assistance designated for humanitarian purposes. The AIDS epidemic in Africa, which by 2001 had created 11 million orphans, was a major impetus behind this new agenda.

In 2000, Congress allocated $715 million to child survival programs that promote maternal and child health and provide vaccines, oral rehydration therapy, and education. Nongovernmental organizations (NGOs) like the Global Alliance for Vaccines and Immunization, backed by corporate constituents including the International Federation of Pharmaceutical Manufacturers Associations, have played a leading role in administering these programs. In 1995, in fact, NGOs registered with USAID spent $4.2 billion on overseas programs, and fourteen of them raised more than $100 million in cash and kind, including government food and freight assistance. These ranged from the giant CARE, with a total of $460 million, to Project Hope with $120 million. The NGO projects were often both simple and innovative. Project HOPE, for instance, used USAID funds to work with tea plantations in Malawi to provide health care for women and children.

Another priority was the promotion of democratic politics in the so-called Second World of former socialist countries. In Serbia, U.S. aid supported resistance movements like Otpor, whose activism helped bring about the ouster of the dictator Slobodan Milosevic. Aid administrators were also tying their works to new transnational priorities. The Clinton administration's Climate Change Initiative, for example, assisted forty-four countries in lowering greenhouse gas emissions. In addition, growing sensitivity to local economies prompted the United States to begin to send farmers along with food supplies in the Food for Peace Program. More than five thousand were sent abroad in the 1990s. Perhaps the largest priority as far as spending was concerned were peacekeeping efforts. These included the well-established programs in the Middle East as well as newer initiatives in the Balkans and in Northern Ireland.

The USAID Development Assistance request from Congress for 2001 illustrated the new global priorities, with $234 million for economic growth, $12 million for human capacity development, $92 million to support democratic participation, $225.7 million for the environment, and $385 million for population programs and protecting human health. The increase in spending on child survival, which rose from $650 million to $724 million between 1998 and 2000, was notable, as was the rise in the International Fund for Ireland (that is, Northern Ireland), which rose from $2.4 billion to $2.7 billion, and the Assistance to Independent States, which rose from $770 million to $836 million. The new emphasis on such programs as child health, which over-shadowed development aid, highlighted a continuing debate among the foreign aid establishment as to the relative merits of relief initiatives versus developmental ones.

U.S. economic assistance in the early twenty-first century came through many channels. For example, the Development Assistance program was a mammoth account that included such programs as the Narcotics Control Program of the Department of State, the Development Fund for Africa, Economic Support Funds, Support for East European Democracy, Food for Peace, the InterAmerican Foundation, and the Peace Corps. In addition, many U.S. cabinet agencies, like the Departments of Transportation and Commerce, also provided their own aid and technical assistance programs in such countries as Egypt, Kazakhstan, Russia, South Africa, and Ukraine.


Many of the new priorities reflected a growing recognition of the ongoing process of globalization, which has flourished since the breakdown of rigid trading blocs in the former communist world, as well as the embrace of free trade by Third World nations such as Mexico and South Korea. As noted, it has also brought new attention to transnational issues such as environmental destruction, infectious disease, and terrorism. Globalization has certainly greatly accelerated international communication and trade. It has, for instance, allowed U.S. exports to Central America to double since 1992 to almost $10 billion annually. The process has won a wide following in U.S. foreign aid circles; in 1989 a study conducted by USAID pointed to a seven-point annual growth rate difference between the most and least open economies. In 2000, the World Trade Organization (WTO), an international body that promotes free trade and supports developing countries with technical assistance training, published a paper by Dan Ben-David and L. Alan Winters that argues that poor countries engaged in free trade are able to lift their living standards. The authors cite the experience of South Korea, whose economy jumped 700 percent since the 1960s. In a similar study of eighty countries over four decades, the World Bank agreed that economic openness is linked to higher living standards and growth. The rise of globalization has thus been used by foreign aid administrators to make the case for liberal capitalist models of development, and has undermined the 1970s ethic of direct government-togovernment economic transfers to the Third World. As a result, while USAID did not abandon its development projects, it began to tailor them more closely to market results. Yet the U.S. support for just such policies, as exemplified in its leading role in the agencies that promote globalization such as the World Bank, International Monetary Fund, and World Trade Organization, has opened it to criticism that it is forcing them onto Third World nations who would prefer a different path to development.

The 1999 World Trade Organization summit in Seattle, Washington, vividly revealed the wide opposition to globalization, drawing a huge force of protesters from both poor countries and wealthy ones. Many of the protesters would agree with the arguments of Jeremy Brecher and Tim Costello, who have asserted that the WTO "work[s] hand-in-hand with the IMF and the World Bank to impose the Corporate Agenda on developing countries." This corporate agenda, they write, seeks "to reduce all barriers to downward leveling of environmental, labor, and social costs" The American Friends Service Committee went so far as to claim that globalization "has undermined basic rights, cultural and community integrity, the environment, and equity [and] caused economic insecurity." Critics point out that it has also lessened the importance of nations that once could use their resources or strategic locations as bargaining chips for aid, and has helped to create global disasters like the banking crisis in Asia in 19971998. Moreover, while some Third World nations like Mexico and Chile were enjoying rebounding economic success from globalization, many were being left behind.

Despite the critics, the process continued apace; in 1998, U.S. exports to the Third World reached $295 billion, showing the increasing importance of these markets to the global economy. Meanwhile, foreign investment in developing nations rose from $70 billion to $118 billion in just two years, 19961998. But some globalization supporters have pointed out that Americans and other Westerners could help still further by fully embracing the process themselves and allowing larger quantities of the most impoverished nations' goods to land on their shores. In a 1994 article J. Michael Finger pointed to the stark fact that developed countries' protectionism "reduces developing countries' national income by roughly twice the amount provided by official development assistance."


Attacks on globalization and its supporters in the foreign aid establishment, interestingly, resembled earlier excoriations of the imperialistic taint of foreign aid programs. In a 1987 study, Michael Hunt contended that "development was the younger sibling of containment" and "drew its inspiration from the old American vision of appropriate or legitimate processes of social change and an abiding sense of superiority over the dark-skinned peoples of the Third World." Writing in 1978, Ian J. Bickerton noted that "foreign aid has enabled former colonial powers, such as the United Kingdom and France, to maintain their historic political, economic, and cultural ties with former colonies it is precisely this network of Atlantic-European domination and imperialism that forms the basis of the current aid programs." This assessment was echoed by the World Trade Organization protesters in Seattle, who accused the United States and other Western countries of perpetuating a mechanism of worldwide economic imperialismnée globalism. In the view of globalization's critics, this process is just another way for rich countries like the United States, with only a fraction of the world's population, area, and natural resources, to manipulate the global money market, to control much of the world's trade, and to reserve most of the world's raw materials for its own use.

In many ways, of course, foreign aid does continue the relationship that began under an earlier, imperialist past, particularly for colonial powers like Britain, France, and Belgium. Yet many other countries, such as the Scandinavian nations and Canada, who lack an imperialist history, have also become foreign aid donors, as Olav Stokke noted in a 1996 article. An overemphasis on the imperialism of foreign aid overlooks the importance of their "humane internationalism," which he termed "an acceptance of the principle that citizens of industrial nations have moral obligations" to the outside world.

Beyond the crimes of imperialism, foreign aid has also been vilified for aiding and abetting despotic regimes that have done little for their people. Scholars such as Hunt, Thomas G. Paterson, Richard H. Immerman and many others have criticized the United States's historic penchant for supporting right-wing military dictatorships in Latin America, Southeast Asia, and the Middle East in order to inhibit the forces of "international communism." Analysts like Nicholas Eberstadt, Doug Bandow, Peter Boone and others agree that aid keeps oppressive political elites in control, but they have focused their critiques more broadly on the overall ineffectiveness of this aid in meeting its stated aims. In several African countries, governments have been so corrupt and countries so wracked by civil war that foreign aid has served only to line the pockets of dictators. While such funds have certainly helped mitigate illiteracy and disease in much of the world, their record of lifting countries out of poverty is more mixed. Many countries have been aid recipients for as many as three decades, including Chile, Egypt, India, Sudan, Turkey, and the former Yugoslavia.

Besides being often ineffective, in some cases aid has been actually damaging. Relief worker Michael Maren, a veteran of the massive Operation Restore Hope campaign in Somalia during the early 1990s, recalled that "the relief program was probably killing as many people as it was saving, and the net result was that Somali soldiers were supplementing their income by selling food," even as rebel forces were using it to further their warfare on Ethiopia. In another ironic example, the U.S.-supported World Bank gave $16 million to Sudan to fight hunger while Sudan's government was starving its own people. Foreign aid, then, has been attacked by critics for imperialistically exploiting the Third World for Western interests, distorting economies, hurting local farmers and peasants, and consolidating the grip of local elites at the expense of the average Third World resident.

Nicholas Eberstadt argues that a chief reason for the inefficacy of U.S. aid is because it has not supported policies that are congruent with American values, including "the defense of liberty" and "the promotion of justice." Instead, the United States has too often relied on a "materialistic" policy limited to financial aid to oppressive regimes, overlooking the plight of those who continue to live under them. Yet Carol Lancaster, a former deputy administrator of USAID who readily admits the failure of aid in many African countries, contended in a 2000 article that foreign aid nevertheless has been "an extremely useful tool of U.S. diplomacy." She points to progress in lowering the rate of poverty worldwide, from 28 percent in the late 1980s to 24 percent a decade later, and to the trend of rising living standards in Europe, Asia, the Middle East, and Latin America. By the end of the twentieth century, these trends had yet to affect much of Africa. Further, she argues that a new policy of foreign aid, one that emphasizes humanitarian relief, democracy, human rights, and developmentthe latter to be limited to the poorest countriesis precisely the mechanism to further an American "diplomacy of values." Such aid will bring "soft power" to the United States, enhancing "the credibility and trust that the U.S. can command in the world."

This continued emphasis on values recalls the spirit of the 1985 Live Aid concert, orchestrated by rock star Bob Geldof in response to a devastating famine in Ethiopia. This and subsequent events helped create among their numerous participants a "constituency of compassion" and a conviction that famine was a concern that the world community should respond to. At the time, however, critics dismissed this as so much sentimentalism and called for "development experts" to tackle the problem instead.

In the postCold War world both America's money and its position as the world's only superpower have made its global economic influence more significant than ever, especially in remaining areas of tension such as the Middle East and the former Yugoslavia. Peacemaking in such areas has emerged as perhaps the leading foreign policy problem facing the United States, and foreign aid remains the vehicle for most of the money that goes to these areas. In the Balkans, for instance, a promise of $500 million in U.S. aid helped end the war in Bosnia. The Israeli-Arab conflict has proved more intractable, though this seems unlikely to stem the flow of U.S. aid. Of the $3.5 billion in Foreign Military Financing (FMF) grants proposed in the 2001 budget to buy defense products and services, Israel was to receive just under $2 billion and Egypt $1.3 billion. In addition to this military aid, the State Department's Economic Support Fund also listed a $2.3 billion allocation for Israel and Egypt, with $840 million for the former and $695 million for the latter. Despite such hefty grants, Israel requested several billions more for advanced weapons systems not covered by the requested amounts.

Some critics have questioned how consistent these expenditures are with American values or with U.S. interests. As the Center for Defense Information's Rachel Stohl writes, "Selling weapons to these countries can perpetuate autocratic rule. United States programs should not contribute to the prolonging of these 'un-American' practices." Leon Hadar of the CATO Institute, moreover, argues that the United States should drop its heavy commitment to Middle East peacekeeping, making room for regional powers such as Egypt, Jordan, and Saudi Arabia to get involved instead.

In addition to providing aid to Israel and Egypt, the FMF funds have been used for detonating mines, fighting narcotics traffic, helping to dismantle nuclear weapons in Russia, and integrating Hungary, Poland, and the Czech Republic within NATO. FMF aid, indeed, was part of a sizable U.S. foreign military assistance program that amounted to $17.4 billion in 2000, including both State and Defense Department programs. The International Military Education and Training Program (IMET), for instance, provided military training in the United States for personnel from thirty countries. While the Pentagon asserted that the $50 million program inculcated its students with American values and human rights principles, one of its member institutions, the School of the Americas in Fort Benning, Georgia, came under attack beginning in the 1980s for its connection with military adventurism in Latin America. Nineteen of the twenty-six members of the El Salvadoran military implicated in the murder of six Jesuit priests in that country in 1989 were alumni of Fort Benning. Adverse attention led the school to change its name in late 1999 to the Center for Inter-American Security Cooperation.

Far larger than IMET is the Pentagon's Foreign Military Sales Program, which racked up $12.1 billion in government-subsidized sales abroad in 2000 on such items as the M1A2 tank and the F-16 aircraft. A similar but much smaller effort is the Excess Defense Articles program, which exports military surplus through sales or grants to such countries as Israel, Egypt, Turkey, Poland, and Greece. Under the Foreign Assistance Act, the U.S. president also has "drawdown authority" to use defense monies for foreign emergencies as he sees fit. In 2000, President Bill Clinton put $80 million toward such causes as peacekeeping in Sierra Leone and a program to promote democracy in Iraq.


While U.S. economic and military aid continued to grow modestly at the turn of the century, it comprised a far smaller percentage of total global assistance than was the case in the early Cold War. In the late 1940s, during the height of the Marshall Plan, the United States provided 60 percent of the globe's foreign aid; by 1993, its portion had dropped to 16 percent. But the United States has not been alone in decreasing its foreign contributions. In the 1990s, international development assistance declined by one-third in real terms, dropping from $61 billion to $52 billion between 1992 and 1998. Development assistance fell to an average of 0.24 percent of GDP in advanced countries by 1998. The most generous country was Norway, which gave away nearly 1 percent of its GNP; the United States, by contrast, donated only 0.1 percent, the smallest of all members of the Development Assistance Committee of the Organization for Economic Cooperation and Development. However, the United States did furnish the second-highest dollar figure in 1998, $8.8 billion; Japan topped the list with $10.6 billion.

Owing to such expenditures, by the mid-1990s Third World governments owed almost $2 trillion to Western loan agencies and governments. The African debt alone surpassed $230 billion. Beginning in 1996, the IMF and World Bank launched the Heavily Indebted Poor Countries Initiative (HIPC), an attempt to provide significant debt relief (up to 80 percent) based on a program of economic restructuring in the debtor nations. However, when few countries proved able to sustain the restructuring requirements, the funding institutions announced HIPC II in 1998, a bolder initiative that targeted $100 billion in debt reduction. By April 2001, $20 billion in debt had been cancelled for twenty-two countries, eighteen of which were in Africa. Over time the reductions were to bring associated total relief of $34 billion to these countries. When combined with other existing debt relief programs, reductions would amount to $55 billion, about a twothirds reduction. The millennial year also saw the launching of the international Jubilee 2000 coalition to lobby for further debt relief, using the biblical terminology of a jubilee year, based on ancient Israel's practice of forgiving debts on a fifty-year cycle. To the great enthusiasm of a crowd gathered for a Jubilee 2000 meeting in December of that year, British Chancellor Gordon Brown announced that Britain would cancel or "hold in trust" the debt payments of forty-one countries.

Debt-relief efforts were certainly expected to provide a break for poor nations. However, the fact remained that in 2000 the average person in the richest twenty countries earned thirty-seven times more annually than the typical resident of the poorest twenty nations, double the gap since 1960. Foreign aid, which USAID claims has been responsible for a great deal of the progress in lessening poverty, disease, and illiteracy, indeed may have stopped that gulf from being even wider. The reasons for a continuing gap defy easy explanation, and in general are tied both to rising growth rates in the First World, including a great expansion in private capital, as well as the continuing political, social, and economic problems of the developing world.

With the end of the Cold War's communist threat and a widening perception that foreign aid monies have been ineffective, wasted, or turned to corrupt purposes, America's foreign aid program underwent increasingly close scrutiny. As noted, humanitarian relief and child rescue emerged as the most notable new priorities in the 1990s, supplanting the development paradigm and its oftdiscredited large-scale projects. Moreover, a new ideological purpose arose to replace the old Cold War consensus. Upon entering office in January 2001, President George W. Bush cut off U.S. funding to all foreign NGOs with family planning programs that provide abortion or abortion counseling, restoring a policy that his father, George H. W. Bush, and Ronald Reagan also employed, dating back to 1984. At the same time, the longtime critic of foreign aid Jesse Helms called for channeling foreign aid funding directly to religious charities and NGOs, separate from the efforts of USAID's "cold, heartless bureaucrats," as he put it.

American economic and military aid programs, for all their shifting priorities, contested results, and popular distaste, have long outlived the span that their early adherents predicted, and at the turn of the twenty-first century it appeared likely that foreign aid would continue. One may hope that in the next half century, either owing to aid, investment, political reform, or some other set of factors, the developing world will have come much closer to reaching the results predicted by John F. Kennedy for the 1960s "decade of development."


Baldwin, David. Economic Development and American Foreign Policy, 19431962. Chicago, 1966. A valuable discussion of the political aspects of American policies of economic development.

Bandow, Doug. "Foreign Aid: Help or Hindrance." Cato Policy Analysis No. 273, 25 April 1997. A strong critique of U.S. foreign aid policies.

Ben-David, Dan, and L. Alan Winters, "Trade, Income Disparity and Poverty." World Trade Organization Special Study No. 5. 1999.

Bill, James A. The Eagle and the Lion: The Tragedy of Iranian-American Relations. New Haven, Conn., 1988. A critical look at a controversial relationship.

Boone, Peter, and Jean-Paul Faguet. "Multilateral Aid, Politics and Poverty: Past Failures and Future Challenges." In Richard Grant and Jan Nijman, eds. The Global Crisis in Foreign Aid. Syracuse, N.Y., 1998.

Bovard, James. "The World Bank and the Impoverishment of Nations." In Doug Bandow, ed. Perpetuating Poverty: The World Bank, the IMF, and the Developing World. Washington, D.C., 1994.

Brecher, Jeremy, and Tim Costello. Global Village or Global Pillage: Economic Reconstruction from the Bottom Up. Boston, 1994. The authors strongly critique globalization and argue for greater assistance to the Third World.

Eberstadt, Nicholas. Foreign Aid and American Purpose. Washington, D.C., 1988. A powerfully argued critique of foreign aid that suggests American values are missing from the foreign aid calculus.

Edkins, Jenny. Whose Hunger? Concepts of Famine, Practices of Aid. Minneapolis, 2000. A study of responses to famine, heavily influenced by postmodern theoretical approaches.

Feis, Herbert. Foreign Aid and Foreign Policy. New York, 1964. A strong defense of foreign aid reflecting the ethos of the early 1960s.

Finger, J. Michael. "The High Cost of Trade Protectionism to the Third World." In Doug Bandow, ed. Perpetuating Poverty: The World Bank, the IMF, and the Developing World. Washington, D.C., 1994.

Hancock, Graham. Lords of Poverty: The Power, Prestige, and Corruption of the International Aid Business. New York, 1989. A highly critical analysis of international aid agencies and their results.

Hogan, Michael. The Marshall Plan: America, Britain, and the Reconstruction of Western Europe, 19471952. New York, 1987. Still the most comprehensive overview of the program.

Hunt, Michael. Ideology and U.S. Foreign Policy. New Haven, Conn., 1987. A well-researched critique of the ideological roots of U.S. diplomacy.

Kamath, Shyam J. "Foreign Aid and India's Leviathan State." In Doug Bandow, ed. Perpetuating Poverty: The World Bank, the IMF, and the Developing World. Washington, D.C., 1994.

LaFeber, Walter. The American Age: United States Foreign Policy at Home and Abroad Since 1750. New York, 1989. A useful and highly readable survey.

Lancaster, Carol. Aid for Africa: So Much to Do, So Little Done. Chicago, 1999. A highly useful, comprehensible, and even-handed survey.

. "Redesigning Foreign Aid." Foreign Affairs 79 (September-October 2000): 7488.

Landes, David. The Wealth and Poverty of Nations: Why Some Are So Rich and Some So Poor. New York, 1998. An innovative study of deep-rooted causes of poverty and wealth.

Lipumba, Nguyuru. "Policy Reforms for Economic Development in Tanzania." In Stephen K. Commins, ed. Africa's Development Challenges and the World Bank: Hard Questions, Costly Choices. Boulder, Colo., 1988.

Montgomery, John D. The Politics of Foreign Aid: American Experience in Southeast Asia. New York, 1962. A supportive analysis of foreign aid, based on the author's study of the American program in Vietnam.

Mosley, Paul. Foreign Aid: Its Defense and Reform. Lexington, Ky., 1987. An optimistic analysis of foreign aid.

Nijman, Jan. "United States Foreign Aid: Crisis? What Crisis?" In Richard Grant and Jan Nijman, eds. The Global Crisis in Foreign Aid. Syracuse, 1998.

Pach, Chester J., Jr. "Military Assistance and American Foreign Policy: The Role of Congress." In Michael Barnhart, ed. Congress and United States Foreign Policy. Albany, N.Y., 1987. An important study of congressional attempts and effectiveness in influencing foreign military aid.

. Arming the Free World: The Origins of the United States Military Assistance Program, 19451950. Chapel Hill, N.C., 1991. Excellent study of the formative years of this program.

Smillie, Ian, and Henny Helmich, eds. Stakeholders: Government-NGO Partnerships for International Development. London, 1999.

Stohl, Rachel. "Middle East Remains Attractive Market for U.S. Arms." In Center for Defense Information Weekly Defense Monitor 4, no. 7 (17 February 2000).

Stokke, Olav. "Foreign Aid: What Now?" In Olav Stokke, ed. Foreign Aid Towards the Year 2000: Experiences and Challenges. London, 1996.

Streeter, Stephen M. Managing the Counterrevolution: The United States and Guatemala, 19541961. Athens, Ohio, 2000. Argues that the Eisenhower administration intervened in Guatemala to protect U.S. interests against Third World nationalism more than in response to a communist threat.

United Nations Development Programme. Human Development Report 1996. New York, 1996.

U.S. Department of State, Agency for International Development. U.S. Overseas Loans and Grants and Assistance from International Organizations. Washington, D.C., 1990.

U.S. House of Representatives, 87th Congress, 2d session. Foreign Assistance Act of 1962, Hearings Before the Committee on Foreign Affairs, on a Draft Bill to Amend Further the Foreign Assistance Act of 1961, as Amended, and for other Purposes. Washington, D.C., 1962.

See also Containment; Economic Policy and Theory; Globalization; International Monetary Fund and World Bank; Tariff Policy .


"Is a foreign aid program really necessary? Why should we not lay down this burden which our nation has now carried for some fifteen years? The answer is that there is no escaping our obligations: our moral obligations as a wise leader and good neighbor in the interdependent community of free nationsour economic obligations as the wealthiest people in a world of largely poor people and our political obligations as the single largest counter to the adversaries of freedom.

"To fail to meet those obligations now would be disastrous. For widespread poverty and chaos lead to a collapse of existing political and social structures which would inevitably invite the advance of totalitarianism into every weak and unstable area. Thus our own security would be endangered and our prosperity imperiled.

"The whole southern half of the worldLatin America, Africa, the Middle East, and Asiaare caught up in the adventures of asserting their independence and modernizing their old ways of life.

"[T]hese new nations need help for a special reason. Without exception they are under communist pressure. But the fundamental task of our foreign aid program in the 1960s is not negatively to fight communism: Its fundamental task is to help make a historical demonstration that economic growth and political democracy can develop hand in hand.

"The 1960s can beand must bethe crucial 'Decade of Development'the period when many less-developed nations make the transition into self-sustained growththe period in which an enlarged community of free, stable, and self-reliant nations can reduce world tensions and insecurity.

"We must say to the less-developed nations, if they are willing to undertake necessary internal reform and self-help that we then intend during this coming decade of development to achieve a decisive turnaround in the fate of the less-developed world, looking toward the ultimate day when foreign aid will no longer be needed."

From Public Papers of the Presidents of the United States: John F. Kennedy, 1 January to 31 December 1961 (Washington, D.C., 1964): 203206

Foreign Aid

views updated May 08 2018


FOREIGN AID. Foreign aid only emerged as a significant and institutionalized aspect of U.S. diplomacy and international relations during the Cold War. After 1945 the United States and the Soviet Union presided over expanding alliance systems and increasingly disbursed large quantities of economic as well as military aid to the developing nations of the emerging Third World. During the Cold War, the International Monetary Fund (IMF), the International Bank for Reconstruction and Development (the World Bank), and the United Nations also played growing roles in distributing foreign aid and promoting economic development. The IMF and the World Bank have been heavily financed and influenced by the United States and, prior to the end of the Cold War, the governments of the Soviet bloc generally refused to participate in those organizations. While most observers acknowledge that the disbursement of foreign aid by the United States has been driven by the interaction of politico-strategic and economic interests, the relative importance of these factors has been a subject of ongoing debate. There are also commentators who emphasize the importance of humanitarian impulses in the distribution of foreign aid.

The Truman Doctrine, the Marshall Plan, and the Point Four Program

One of the first indications of the role that foreign aid was to play in the Cold War came with the announcement of the Truman Doctrine on 12 March 1947 by President Harry S. Truman. The Truman Doctrine was a response to the growing influence of Communist parties in Greece and Turkey and included the extension of $400 million in economic and military aid to the Greek and Turkish governments. This was soon followed by the implementation of the European Recovery Plan, known as the Marshall Plan, which was launched on 6 June 1947. The Marshall Plan sought to protect Western Europe from any further worsening of the post-1945 economic and political crisis. It was driven by a concern that a destabilized Western Europe would result in a power vacuum, providing an opportunity for the Soviet Union to expand its influence westward. The United States made it clear that the Marshall Plan was aimed at preventing or containing the appearance in Europe of governments, or groupings of governments, that would threaten the security interests of the United States. Washington also insisted that it have complete information as to how the aid money was used and that it had to be used to help build "free and democratic institutions." Although the plan was initially offered to the USSR and Eastern Europe, Moscow and its client regimes rejected it.

The Marshall Plan involved the disbursement of $12.5 billion towards the reconstruction of Western Europe over a four-year period. By 1952 the Marshall Plan was a key factor in increasing industrial production to 35 percent and agricultural production to 18 percent above the levels they had been at in Western Europe before World War II. The Marshall Plan also drew attention to the benefits of foreign aid for the U.S. economy. One of the requirements of the Marshall Plan was that the bulk of the aid money be used to purchase U.S. exports, which provided an important push to the U.S. economy and bolstered trade linkages that favored U.S. manufacturers. The Organization for European Economic Cooperation (OEEC) was set up to coordinate the Marshall Plan. With the cessation of aid in the 1950s, the OEEC continued to operate as a focus of economic cooperation amongst the governments of Europe. In 1960 it changed its name to the Organization for Economic Cooperation and Development (OECD). The U.S. and Canada joined the OECD, which also began to act as a vehicle for the distribution of foreign aid from North America and Western Europe to the so-called developing nations of the Third World.

More broadly, from the outset the Marshall Plan demonstrated U.S. economic prowess, and it represented an important precedent for subsequent U.S. aid to Asia, Latin America, the Middle East, and Africa. In the late 1940s, the Truman administration became increasingly concerned about political and economic turmoil in the emerging nations of the Third World. It was hoped that an extension of U.S. foreign aid to them would help to undercut the influence of the Soviet Union and "international communism." On 20 January 1949 Truman delivered his Inaugural Address at the start of his second term as president. In it he sketched out an expanded foreign aid policy that became known as the Point Four

program (enacted as the International Development Act). Point one pledged continuing U.S. support for the United Nations. Point two emphasized U.S. support for world economic recovery, while point three reiterated the U.S. commitment to supporting "freedom-loving nations." Point four set out a U.S. commitment to providing American technical and scientific expertise and capital to "underdeveloped" nations in an effort to improve their living standards. The program started with a budget of $45 million. By early 1951, 350 technicians working under U.S. auspices were engaged in over one hundred cooperation projects in almost thirty countries. In 1953 Congress increased the budget of the Point Four program to $155 million.

Foreign Aid and the Cold War in the 1950s and 1960s

Apart from Western and Southern Europe, a major focus of Washington's foreign policy and its foreign aid strategy immediately after 1945 was northeast Asia. By the late 1940s foreign aid was important to the U.S. effort to turn Japan, South Korea, and Taiwan into capitalist bulwarks against the Soviet Union and Maoist China. After the Korean War the sustained American economic and military aid that went to South Korea and Taiwan in the 1950s and 1960s played an important role in strengthening the capabilities of their emergent national security states. Between 1945 and 1973 U.S. economic aid to South Korea was $5.5 billion, while U.S. military aid was $7 billion. The economic assistance to South Korea was more than all U.S. economic aid to sub-Saharan Africa and half the figure for all of Latin America over the same period. In the 1950s more than 80 percent of South Korean imports were financed by U.S. economic assistance.

Southeast Asia, by contrast, did not attract as much sustained attention in the early years of the Cold War. Washington also took a limited interest in South Asia. However, the United States began to change its assessment of Southeast and South Asia in the 1950s. For example, following the onset of the Korean War, it began participating in the Colombo Plan, which coordinated the disbursement of development aid to governments in those regions and the Pacific. This initiative was spearheaded by the British government and supported by other governments of the Commonwealth. While America was not involved in the immediate establishment of the Colombo Plan in 1950, much of the financing over the years came from the United States. A total of $72 billion was disbursed via the Colombo Plan between 1950 and 1983, with over 50 percent of that amount ($41.2 billion) coming from the United States.

By the end of 1950, meanwhile, the United States had already disbursed at least $133 million to the French colonial authorities in Indochina in support of their war effort. U.S. assistance went on by late 1952 to make up 40 percent of the overall cost of the French government's war in Indochina, while by the beginning of 1954 the U.S. contribution had risen to 80 percent. For the administration of Dwight D. Eisenhower and its immediate successor, the regime of Ngo Dinh Diem (1955–1963) was to be a "showcase for democracy" and the site for a definitive nation-building effort. Between the collapse of French colonial power in 1954 and the end of Eisenhower's presidency at the beginning of 1961, Washington disbursed over $2 billion worth of military and economic aid to the government of South Vietnam. As the 1960s began, the Diem regime was the fifth-highest recipient of U.S. foreign aid worldwide (and the third-highest recipient—after South Korea and Taiwan—among non-NATO countries). When President John F. Kennedy entered the White House in 1961, Saigon had already become the site of the biggest U.S. economic aid program worldwide.

Kennedy and influential advisers such as Walt Whitman Rostow—who served as chair of the Policy Planning Council in the State Department—increasingly advocated a shift in U.S. foreign policy towards taking the initiative in Asia and Latin America (and the Third World more generally) via infusions of economic and military aid as part of an increasingly ambitious set of national development and counterinsurgency programs. In a West Point address on 18 April 1963, Rostow declared that the key to winning the guerrilla war in South Vietnam was to "create at forced-draft the bone structure of a modern nation." In the early 1960s the Strategic Hamlet Program became the focus of Washington's wider aid and counterinsurgency strategy in South Vietnam. Drawing on previous French colonial initiatives and earlier efforts by the Diem regime, as well as British counterinsurgency programs in Malaya in the 1950s, the Kennedy administration encouraged and facilitated the removing of peasants from widely dispersed villages and the placing of them in concentrated settlements that could be controlled more directly by the government in Saigon. The State Department scheduled almost $90 million to be spent on the Strategic Hamlet Program for fiscal year 1963. Employing this approach the U.S. Military Assistance Command Vietnam (MACV) and the Agency for International Development (USAID) sought to undermine the National Liberation Front's ability to get intelligence, food, and other supplies as well as recruits from the population. The National Liberation Front (NLF) quickly responded by promising the peasants that following the revolution they would be allowed to return to their old villages. The NLF also intensified its military attacks on, and its recruitment activities in, the strategic hamlets.

Despite the apparent failure of the Strategic Hamlet Program by the end of 1963, subsequent efforts to resettle and control the rural population did little but rework the basic approach while excising the term "strategic hamlet" from the counterinsurgency lexicon. Meanwhile, following the overthrow and assassination of Diem and his brother, Ngo Dinh Nhu, in a military coup in late 1963, the successor programs to the Strategic Hamlet Program were increasingly overshadowed by full-scale warfare. The United States had hoped that the overthrow of the Diem regime would improve the stability of South Vietnam; however, the deterioration in the military situation following the coup paved the way for the escalation of U.S. involvement and direct military intervention by 1965. That led, in turn, to immense human, material, and environmental destruction, but failed to solve the fundamental political problems of the Saigon regime and the fragile nation-state of South Vietnam. The pervasive reliance on U.S. aid generated growing possibilities for government and private corruption. With the Tet offensive in early 1968, any idea that U.S. power could turn South Vietnam into a viable capitalist nation-state and achieve military victory against the North disappeared. With the election of Richard Nixon as U.S. president at the end of 1968, the United States began to look for ways to withdraw "with honor," placing growing emphasis on what was called the Vietnamization of the war.

As part of its wider emphasis on foreign aid, the Kennedy administration also set up the USAID in 1961 to coordinate government foreign aid initiatives. Established as a semi-autonomous body operating in the State Department, it was responsible for disbursing and administering aid in South Vietnam and around the world. Apart from South Vietnam, a large percentage of the aid this new body disbursed initially went to the Alliance for Progress, another ambitious modernizing initiative that the Kennedy administration hoped would contain the "communist threat" to Latin America following the revolution in Cuba in 1959. The Alliance for Progress began as a decade-long program of land and economic reform that was expected to cost $100 billion and was aimed at bringing about an annual growth rate for the region of at least 2.5 percent. It also sought to achieve greater productivity in the agricultural sector, eradicate illiteracy, stimulate trade diversification, generate improvements in housing and bring about a more even income distribution in the region.

However, its major, if unstated, goal was the protection of North American investments in Latin America at the same time as many of the Alliance's proposed reforms endangered those investments. Trade diversification would undermine the monopoly of primary agricultural products and mineral extraction enjoyed by a number of U.S.-based corporations. Meanwhile, land reform threatened the power of the still largely land-based ruling elites in Latin America. This contradiction was apparent in the way that Kennedy's reformism went hand in hand with Washington's ever-deepening commitment to military and police aid and counterinsurgency to defeat peasant-based rebellions in the region. There were sixteen military coups within eight years of the launch of the Alliance for Progress. By the late 1960s high rates of economic growth in many Latin American countries had been achieved. However, high growth rates exacerbated social inequality while politics, instead of becoming more democratic, moved increasingly towards authoritarianism. American support for counterrevolutionary military and political activity in Latin America grew in the 1960s in the form of U.S. military, CIA, and civilian advisers and U.S. military aid and economic and technical assistance for counterinsurgency programs.

New Directions, the New Cold War, and Foreign Aid after the Cold War, from the 1970s to the 1990s

By the Nixon era, U.S. foreign aid policy was in disarray. In the context of the U.S. defeat in Vietnam and the wider critique of U.S. foreign policy that emerged, a growing movement to reform American economic assistance programs resulted in the passage of various reformist pieces of legislation under the heading of what was called New Directions. This led briefly to an emphasis on both the basic needs of the poor and direct grassroots participation in the process of development. At the same time the Foreign Assistance Act (1961), which had been central to the Kennedy administration's approach to foreign aid, was amended significantly between 1973 and 1978 to provide for an increased focus on human rights in the disbursement of foreign aid. However, by the late 1970s influential free-market critics of New Directions were in the ascendant. Their views were consolidated during the administration of President Ronald Reagan. In the 1980s USAID's main focus was the Private Enterprise Initiative (PEI), which promoted private-sector development and encouraged market-oriented reform. Furthermore, U.S. foreign assistance policy in the 1980s, as in earlier periods, was still firmly grounded in strategic interests. The 1980s actually saw the percentage of foreign assistance going to development-related programs decline and the amount spent on security-related projects rise.

This trend was readily apparent in the approach to Central America taken by the Reagan administration. Central America was the object of more American economic and military aid during Reagan's first term than in the entire period from 1950 to 1980. For example, between 1981 and 1984 inclusive, the El Salvadoran government received $758 million in economic aid and $396 million in military aid, compared to only $6 million in military aid in 1980. El Salvador had emerged as the recipient of more U.S. aid than any other country in Latin America by the middle of Reagan's first term. In fact, during this period El Salvador (with a total population of less than 5 million by the end of the 1980s) was the third-largest U.S. aid recipient worldwide, behind only Israel and Egypt. (Reflecting the ongoing strategic significance of the Middle East, Israel and Egypt received about one-third of all U.S. foreign aid disbursed in the 1980s.) The level of foreign aid for El Salvador in the 1980s was on a scale reminiscent of the U.S. nation-building effort in South Vietnam in the 1960s, minus the direct American military intervention. By the end of the 1980s the U.S. had disbursed upwards of $3 billion in economic and military aid to El Salvador, the equivalent of about $800,000 a day for ten years.

With the end of the Cold War, the direction of U.S. foreign assistance policy again shifted. The administration of President William Jefferson Clinton introduced a range of reforms that were again (as in the 1970s) aimed at displacing security as the key focus of foreign aid as reflected in the Cold War–era Foreign Assistance Act. The Clinton administration outlined four overall goals for U.S. foreign aid in the post–Cold War era. While USAID was still expected to promote economic development via market-oriented reform and the encouragement of trade and investment, it was also enjoined to set up programs oriented towards building democratic political institutions. A greater emphasis was also placed on humanitarian assistance and sustainable development. Ultimately, however, the foreign aid bill passed by Congress in 1994 was a major compromise and for many observers appeared to reflect a continued commitment to geostrategic concerns. In the year the bill was passed, Israel and Egypt continued to receive over one-third of all U.S. foreign aid. The figure for Israel was $3 billion and for Egypt it was $2.1 billion, while the amount for sub-Saharan Africa as a whole was $800 million. Foreign aid was also directed increasingly at the former Soviet bloc, again for security reasons. For example, more than $2.2 billion of foreign aid was disbursed to Russia between 1992 and 1997 under the Freedom Support Act (FSA). Over the same period more than $2.6 billion was also disbursed to Russia via programs not covered by the FSA. The figures for the Ukraine were over $1 billion in FSA funds and $652 million in non-FSA funds, while the former Soviet republics in the Caucasus and Central Asia together received over $1.9 billion in FSA funds and $2.4 billion in non-FSA funds between 1992 and 1997 inclusive. While there have been many changes and adjustments, the disbursement of U.S. foreign aid continues to be closely connected to wider strategic and economic objectives. In the context of the "war on terrorism" initiated in 2001, and the reorientation and increase in foreign aid that has followed, this pattern appeared set to continue.


Adams, Francis. Dollar Diplomacy: United States Economic Assistance to Latin America. Aldershot, U.K.: Ashgate, 2000.

Dacy, Douglas C. Foreign Aid, War, and Economic Development: South Vietnam, 1953–1975. Cambridge, U.K.: Cambridge University Press, 1986.

Hogan, Michael J. The Marshall Plan: America, Britain, and the Reconstruction of Western Europe, 1947–1952. Cambridge, U.K.: Cambridge University Press, 1987.

Lancaster, Carol. Transforming Foreign Aid: United States Assistance in the 21st Century. Washington, D.C.: Institute for International Economics, 2000.

Latham, Michael E. Modernization As Ideology: American Social Science and "Nation Building" in the Kennedy Era. Chapel Hill: University of North Carolina Press, 2000.

LeoGrande, William M. Our Own Backyard: The United States in Central America, 1977–1992. Chapel Hill: University of North Carolina Press, 1998.

Rabe, Stephen G. The Most Dangerous Area in the World: John F. Kennedy Confronts Communist Revolution in Latin America. Chapel Hill: University of North Carolina Press, 1999.

Ruttan, Vernon W. United States Development Assistance Policy: The Domestic Politics of Foreign Economic Aid. Baltimore: Johns Hopkins University Press, 1996.

Wedel, Janine R. Collision and Collusion: The Strange Case of Western Aid to Eastern Europe, 1989–1998. New York: St. Martin's Press, 1998.

Wiegersma, Nan, and Joseph E. Medley. US Economic Development Policies Towards the Pacific Rim: Successes and Failures of US Aid. London: Macmillan, 2000.

Mark T.Berger

See alsoAfrica, Relations with ; Egypt, Relations with ; El Salvador, Relations with ; Israel, Relations with ; Korea, Relations with ; Latin America, Relations with ; Vietnam, Relations with .

Foreign Aid

views updated Jun 27 2018

Foreign Aid

What It Means

Nations, international organizations, and private groups each provide various forms of assistance, called foreign aid, to countries in need. Foreign aid commonly takes the form of money, food, military equipment, advice, or training.

Foreign aid came into being in the eighteenth century, but both the amount and global importance of such assistance increased dramatically after World War II. The main reason for the increase was the Cold War, the period between 1945 and 1991 during which the United States and the Soviet Union opposed one another and competed to influence other countries. Both the United States and the Soviet Union hoped to enlist the sympathies of other countries by providing them with assistance or by withholding assistance if they showed too much sympathy for the other side.

With the end of the Cold War foreign aid declined, but it remains an important feature of international politics. As in the Cold War, most governments still provide assistance to other governments mainly for political reasons. This does not mean that foreign aid does not benefit countries who receive it, however. It is a key part of the fight against global poverty, and it has helped to alleviate suffering in poor countries.

Nevertheless foreign aid has its critics. Some of these critics argue that the self-interest of donor countries usually wins out over the needs of poorer countries. Other critics within donor countries often believe that foreign aid is wasteful, making up a large part of their national budget while being subject to irresponsible use in recipient countries. In fact, all donor governments spend less than one percent of their national income (the amount of money generated in a country per year) on foreign aid.

When Did It Begin

The modern concept of foreign aid dates to the eighteenth century, when Prussia (present-day Germany) gave assistance to its military allies to promote its own political interests. In the nineteenth and twentieth centuries, European countries aided their colonies (foreign lands that they had claimed as their own), usually with the intent of making those colonies more economically beneficial to themselves in the long run.

After World War II several international bodies were created that would shape the giving of foreign aid over the following decades. These include the World Bank and the International Monetary Fund (IMF), which aim to facilitate economic development and the spread of capitalism in poorer countries, and the United Nations, which aims to promote international cooperation in a wide range of areas. These groups have, since their founding, distributed large amounts of aid while helping to pinpoint the needs and qualifications of recipient countries and judging whether the aid they receive is successful in achieving its aims.

While European countries such as the United Kingdom and France still spent much of their foreign aid after World War II on their colonies and former colonies, great increases in foreign aid came as a result of the Cold War between the United States and the Soviet Union. Both countries, together with their allies, used foreign aid as a way of enlisting new allies and extending their ideological influence. Countries deemed strategically necessary were the targets of both countries’ aid programs, and countries that received aid were subject to the withholding of that aid if they did not behave in the way that the donor country desired. Japan, meanwhile, was the largest donor of foreign aid in Asia. Its efforts to assist other countries at first took the form of reparations (money paid to other countries as punishment for the harm it had done them in World War II) and grew into a large program that encouraged economic development in the region.

More Detailed Information

Governments aid other governments and the people of foreign nations for a variety of reasons, most of which tend to have a political dimension. Foreign aid may be exchanged for the right to establish military bases in the recipient country or to prevent a recipient country from becoming sympathetic to a rival government. It might be used to encourage cooperation in fighting terrorism. Countries that do not have high status in international organizations might improve their standing by committing money and resources to aiding countries in need. Foreign aid is sometimes used as a way of creating a market for the donor country’s products; for instance, a donor might require a recipient to use a gift of money to purchase food produced by the donor country’s farmers.

There are also instances of foreign aid where politics and self-interest are less central. In countries plagued by famine, civil war, disease, or natural disasters, foreign aid sometimes arrives without substantial political strings attached. For example, many countries contributed foreign aid to those affected by the Indian Ocean tsunami in 2004, and efforts to combat HIV/AIDS in Africa rely heavily on aid from individual countries, international organizations, and other groups. In such cases donor governments do not obtain any obvious strategic or other advantages, but foreign aid of this kind, in addition to alleviating suffering, does tend to serve the purpose of making the donor country look good in the eyes of the world. Most of the time, however, foreign aid may serve several of the above purposes at once, so it is not always easy to determine which motives are most important to the donor country.

Foreign aid might consist of money delivered in the form of grants (sums of money for specific purposes with no requirement that they be repaid), loans, or trade arrangements that, by allowing the recipient country to sell its products in the donor country, increase wealth in the recipient country. In countries experiencing crises packages of food and clothing for private citizens might be the form that foreign aid takes. Foreign aid to a strategic partner might involve donating military equipment such as guns and vehicles. After the Soviet Union fell in 1991, Russia and the other former Soviet states received a great deal of expert assistance in the project of transitioning from communism to capitalism.

The most common kind of foreign aid is that given directly from one country to another, called bilateral aid. About one-fourth of all foreign aid, meanwhile, is distributed through international groups such as the United Nations, the World Bank, and the IMF. This is called multilateral aid. Multilateral aid is especially important in the realms of economic development and disaster relief. Those groups that provide multilateral aid refuse to furnish countries with military assistance.

There are also numerous aid groups not tied to any government, such as the Red Cross, which provides what is known as private aid. Increasingly, as well, private investment (the foreign business ventures of companies based in wealthy countries), together with payments sent by migrant workers to their distant families, has outweighed the money sent via the traditional foreign aid channels. Though these forms of wealth transfer cannot really be called foreign aid, they often function in much the same way as foreign aid does.

Recent Trends

Since World War II the United States has been the world’s largest provider of foreign aid. During the Cold War much of its foreign aid went to anticommunist countries and governments. After the Soviet Union collapsed in 1991, the focus of U.S. aid shifted. Instead of fighting communism, which no longer threatened its standing in the world, the United States has shifted to an agenda of promoting democracy and capitalism. Its efforts are aided by those of the World Bank and the IMF, both of which are committed to spreading capitalism. In their dealings with the United States as well as these international groups, developing countries are often required to enact economic and government reforms as a condition of the aid they receive.

Foreign aid, perhaps owing to the complex motives that give rise to it, is sometimes criticized. Critics speaking on behalf of the recipients of foreign aid claim that powerful countries use foreign aid as a tool for serving their own interests, and nothing more. Much foreign aid given to poor countries through the IMF and the World Bank, for example, has worsened economic conditions by forcing large amounts of debt on those countries and leaving them vulnerable to global competition. While capitalist reforms have helped wealthy countries achieve their own goals, the countries supposedly being aided have reaped few benefits.

Other critics focus more squarely on the United States, disapproving of the sometimes obvious political motives that lie behind some of the government’s aid programs. For instance, after the September 11, 2001 attacks on the World Trade Center in New York City, the United States began increasing aid to countries that agreed to help it fight terrorism, even if those countries were ruled by undemocratic governments known to violate human rights.

Additionally, some people inside the United States criticize foreign aid as wasteful and burdensome to the nation’s tax payers. These critics, knowing that the United States is the world’s largest supplier of foreign aid, assume that this means the United States spends a disproportionate amount of its income on other countries. In fact, the United States spends a smaller proportion of its national income (less than 0.2 percent) on foreign aid than most other Western countries. Even Sweden, one of the most generous of countries by this form of measurement, spends less than 0.8 percent of its national income on foreign aid.

foreign aid

views updated May 11 2018

foreign aid The transfer of state resources through loans, grants, or provision of goods, from more to less developed countries, for development or emergency relief purposes. This can be done on a bilateral basis, or through multilateral bodies such as United Nations agencies, the European Economic Community, or World Bank. From the 1970s it has increasingly been queried as a means of promoting economic growth.

About this article

foreign aid

All Sources -
Updated Aug 13 2018 About content Print Topic