By any reasonable measure, America's international policy since World War II has to be judged a phenomenal success. That policy--which has enjoyed long and bipartisan support--may be said to have had two overarching and complementary aims: (1) the containment of Soviet communism until that menacing presence either fundamentally reformed itself or departed from the scene, and (2) construction of a worldwide system for promoting global prosperity through increased international commerce and finance. Today we live in a post-Soviet world with a dynamic global economy. International trade is burgeoning, transnational investment continues to grow, and living standards in nearly all areas of the world have dramatically improved. Not even the original architects of America's international policy might have hoped for such success from their design.

"Development assistance"--or as it was initially termed, "technical assistance"--has figured integrally in America's postwar international policy. In fact, this special form of foreign aid--dispensed expressly to hasten material advance and the escape from poverty--was actually invented early on to promote America's global design. That fateful historical linkage, however, has lent itself to much misunderstanding and misrepresentation about the role and the potential of foreign aid for achieving our international purposes.

Some time ago, proponents of spending for "development assistance" began to accustom themselves to claiming credit--or at least partial credit--for the great triumphs of postwar international economic policy. The soundness of aid spending, according to this general line of reasoning, was demonstrated by the substantial growth of the world economy (and most of its subdivisions) since "development assistance" policies were inaugurated. By implication, continued outlays on official development assistance (ODA) would promise to extend these desirable international trends into the future.

In reality, of course, the actual impact of development assistance cannot be evaluated by such an affectionate and inventive approach. We must look instead, as best we can, to the specific contributions that ODA has made to economic development in particular countries or regions of the world. When we do so, we see a much more complex and problematic pattern.

Despite dramatic overall growth and general improvements in living standards in the noncommunist world during the postwar era, there have been some troubling and persistent exceptions. Patterns of severe economic distortion have emerged in a number of low-income countries--patterns that have in fact lasted for decades, and now generations. To a striking and alarming degree, a number of what are called "developing economies" have proved curiously incapable of responding to the needs and preferences of their own consumers--or of arranging, for that matter, for their own material advance.

Increasing Deformity

By international or historical perspective, the economies of many low-income countries may be said to be structurally deformed--and to have grown more deformed, not less, as the era of colonialism has faded into the past. Their afflictions can be described succinctly: they suffer from "industrialization without prosperity" and "investment without growth."

Figures from the World Bank's latest World Development Report make the point. Take India. As we know, India is a land of great nutritional needs. But to look at the structure of the Indian economy, one would think that the country's great hunger was for steel. In fact, despite its poverty, a slightly higher share of national output today goes to industry in India than in the Netherlands. Paradoxically, by this measure India appears to be the more "industrialized" economy! This anomalous inversion is not an isolated example. By the same measure, immiserated Chad is now more "industrialized" than Hong Kong; Burkina Faso is more "industrialized" than Canada; and Zambia is more "industrialized" than Japan.

To poor people, a little bit of spending power can mean the difference between just getting by and facing dire hardship. In poorer countries, we would typically expect populations to devote a relatively high share of national output to consumption, since forgoing consumption entails far greater sacrifice near the margins of subsistence. Yet in many low-income countries, private consumption appears to have been strangely and unnaturally restricted. In Kenya, for example, the share of national output going to private consumption is lower today, according to the World Bank's numbers, than in Britain. By the same token, private consumption accounts for a smaller fraction of the economy for impoverished Congo than for Sweden--an affluent society, and one where an expansive welfare state provides consumers with many goods and services.

In low-income countries, where capital is relatively scarce, returns to investment should be relatively high. Not so, apparently, in many Third World countries--or even entire regions. If the World Bank's figures are correct, the "investment ratio"--investment as a percentage of gross domestic product (GDP)--for sub-Saharan Africa as a whole has been higher than for the United States during the 1980s and, to date, the 1990s. Yet in sub-Saharan Africa these relatively high investment ratios have coincided with pervasive and continuing economic failure. For the region as a whole, in fact, per capita growth rates in the 1980s and for the 1990s to date are thought to be negative.

How can these perverse patterns be maintained over time? What has sustained these intrinsically unsustainable practices? A key piece in the puzzle, sadly, seems to be "development assistance" funding itself. Enormous and steady flows of concessional external finance from developed countries--including the United States--have permitted not just a few Third World governments to pursue "development" policies that have been wasteful, ill-conceived, unproductive--or even so positively destructive that they could not have been sustained without outside support.

Economic Freedom

The perverse patterns of development that have distorted and disfigured many Third World economies during the postwar era raise profound and troubling questions about the relationship--not the ideal relationship, but the actual one--between development assistance and economic freedom in long-term recipient countries.

With the end of the Cold War, the idea that economic freedom might play a prominent and supportive role in self-sustaining development has become a less "controversial" and "ideological" contention than it once seemed to be. "Economic freedom" can, of course, be variously defined, but any reasonable definition refers to that interplay of institutions, laws, practices, and policies that protects the individual and his property and enhances the ability of the individual to secure the rewards generated by his own labor or enterprise. While the concept of "economic freedom" is qualitative, and necessarily subjective, it turns out that people generally know it when they see it. This helps to explain why independent studies of international economic freedom, using their own particular methodologies, all arrive at quite similar rankings for the countries of the world today.

Rule of law, including property and contract law; sound money; open markets; transparent and accountable government regulations--these are among the ingredients in the recipe for economic freedom. Since such qualities lower "transaction costs" and reduce the uncertainties facing ordinary economic agents, it should not be surprising that an identifiable relationship should link economic freedom and economic progress.

To be sure, examined closely, that relationship sometimes proves to be more complicated than one might at first think. Economic freedom, moreover, is neither necessary nor sufficient for economic growth in any given year. But when all is said and done, the fundamentals of economic freedom can be seen not only as a virtue in their own right but as broadly conducive to sustained and self-sustaining material advance.

And what of the effect of "development assistance" efforts upon economic freedom in recipient countries during the postwar era? As one might expect from surveying such a wide terrain, the record looks diverse and varied--so generalizations must be carefully qualified. At the very least, however, it is safe to say that no systematic improvements in economic freedom have been obvious in the regions where "development assistance" efforts have been most intensive and prolonged. There are reasons to believe, moreover, that "development assistance" may have stifled rather than promoted economic freedoms in more than one locale.

The Case of Sub-Saharan Africa

The terrible plight of the entire sub-Saharan region puts the problem in its sharpest relief. Over the past generation, "development assistance" spending has been decisively redirected toward the sub-Sahara. (It received about a sixth of all ODA in the mid-1960s, but was obtaining well over a third of the total by the 1990s--more than any other region of the world.) According to estimates by the Organization for Economic Cooperation and Development (OECD), ODA inflows amounted to nearly 15 percent of Sub-Saharan African GDP for the years 1992-1993. If those figures exaggerate the relative magnitude of aid, as they likely do for technical reasons, it is nevertheless true that the ratio of "development assistance" to local output is far higher for sub-Saharan Africa today than for any other major low-income region--or, for that matter, than for sub-Saharan Africa itself ten, twenty, or thirty years ago. Suffice it to say that these steady and mounting transfers in the name of "development" purchased no appreciable improvement in economic freedom for Africa's hard-pressed populations.

A recent study by the Fraser Institute makes the point. This report attempted to measure economic freedom around the world over a twenty-year period. According to its findings, apart from a handful of Middle Eastern countries, sub-Saharan Africa was the only area of the world that enjoyed no appreciable improvement in its level of economic freedom between 1975 and 1995. According to this same report, the gap between the degree of economic freedom experienced in Africa and that enjoyed in the rest of the world widened each decade. To an ever greater degree, it would thus appear, "development assistance" spending has become a vehicle for underwriting not material advance but economic failure, and for sustaining the finances of the regimes that do not offer the prospect of substantive improvements in economic liberties to their subjects.

Why should this be so? One reason, quite simply, is that economic freedom does not appear to be a high priority today for "the development community." What holds for the greater Western donor club also obtains for our own bilateral aid apparatus, the U.S. Agency for International Development (USAID). Today USAID champions a whole welter of causes and concerns--social, environmental, political, and economic--as official and explicit policy. Some of these many aims are worthy; some are fashionable; some of them are bizarrely ideological. Promoting economic freedom abroad, unfortunately, is not an objective that commands the heartfelt support of our foreign aid policy makers. When mentioned at all, it is usually included in the long litany of objectives that USAID publicly recites to appeal to its diverse and fragmented domestic constituencies.

Under the circumstances, the problematic correspondence between "development assistance" spending and the advance of economic freedom should be no surprise. But even if the principle of economic freedom enjoyed widespread and enthusiastic backing within the "development community"--and within our own aid apparatus--it would still be extraordinarily difficult to promote that objective in any reliable and regular manner through "development assistance" outlays. After all, "development assistance" funds are by definition state-to-state resource transfers. By virtually inescapable design, they therefore empower existing governments and increase the capability of the regime in power to pursue its preexisting intentions--whatever they may be. Merely assuring that its "development" outlays do not set back the cause of economic freedom in recipient locales, in fact, would be a stiff challenge for any well-financed international aid agency. It is a challenge, in any case, that none of the major institutions within the "development community" can honestly claim to meet today.

Conclusion

Even if economic freedom had no anticipated impact on prospects for material advance--even if it were a completely neutral factor in development--American policy should be encouraging its spread to the poorest and most benighted reaches of the earth. From our own values and beliefs, we know that economic freedom is a good in its own right. Like political freedom, it is something we prefer for everyone, by simple virtue of their humanity.

"Development assistance" is by no means the most reliable instrument America possesses for championing the cause of economic freedom in poor countries, and it is hardly the most important. Nearly everything that America can do to encourage the spread of economic freedom in those regions, in fact, will be done beyond the confines of our foreign assistance budget.

The prospects for economic freedom in low-income regions, for example, will depend critically upon America's global defense posture in the years ahead; if America's vital interests in the world are not secure, we can be sure that the economic interests of the weak and the vulnerable will not be, either.

America will advance the cause of economic freedom in poorer regions by maintaining a healthy, free, and unrestricted market for imports from abroad. It will do so by welcoming enterprising and determined people, intent upon improving their own lot, as new immigrants to our shores. It will do so through the great international battle of ideas that so often ensues from the correct framing and explication of American diplomatic interests. No less important, it will do so by the way we conduct ourselves in our domestic policies and arrangements within the United States--for there should never be the slightest doubt about the tremendous international influence of the American example itself.

Nicholas Eberstadt is the Henry Wendt Fellow at AEI.