[Congressional Record Volume 140, Number 71 (Thursday, June 9, 1994)]
[Extensions of Remarks]
[Page E]
From the Congressional Record Online through the Government Printing Office [www.gpo.gov]


[Congressional Record: June 9, 1994]
From the Congressional Record Online via GPO Access [wais.access.gpo.gov]

 
                   NEW DIRECTION FOR U.S. ASSISTANCE

                                 ______


                          HON. LEE H. HAMILTON

                               of indiana

                    in the house of representatives

                        Wednesday, June 8, 1994

  Mr. HAMILTON. Mr. Speaker, the May 7 issue of The Economist included 
an editorial and an article on foreign assistance, both of which 
accurately identify some of the inadequacies in current assistance 
policies and programs and the new directions which are being pursued. 
The article notes that:
  The opportunities denied to poor countries by trade barriers are 
worth approximately twice the annual flow of official development 
assistance.
  The richest 40 percent of the developing world gets about twice as 
much per head in aid as the poorest 40 percent.
  Only a small fraction of assistance meets the basic needs of the 
poorest; the World Bank calculates that, of all aid going to low-income 
countries in 1988, 2 percent went for primary health care and 1 percent 
for population programs.
  In the effort to redirect foreign assistance, the article points to 
two donors--AID and the World Bank--that are ``unusual in their 
openness and in the rigor with which they try to evaluate what they 
do.'' It further notes that Brian Atwood, the Administrator of AID, is 
seeking to reduce the number of objectives for U.S. economic assistance 
from the current 33 to 4--a reform first advocated by the Committee on 
Foreign Affairs in 1989 and which we hope soon to enact into law.
  The editorial and the article correctly points to sectors and 
mechanisms which should be emphasized in a reformed aid program: 
primary education and primary health care, especially for women; 
population programs; improved donor coordination; better evaluation in 
order to learn from past mistakes, and nongovernmental organizations as 
the best mechanism for handling small projects and to identify 
grassroots needs.
  These are all reforms which Brian Atwood is introducing at AID and 
which the Committee on Foreign Affairs is advocating in its efforts to 
rewrite the Foreign Assistance Act of 1961.
  For those interested in foreign assistance, the article is reprinted 
below.

                   [From the Economist, May 7, 1994]

                       The Kindness of Strangers

       Anybody who tried to see the case for aid by looking merely 
     at the way it is allotted would quickly give up in despair. 
     The richest 40% of the developing world gets about twice as 
     much per head as the poorest 40%. Big military spenders get 
     about twice as much per head as do the less belligerent. El 
     Salvador gets five times as much aid as Bangladesh, even 
     though Bangladesh has 24 times as many people and is five 
     times poorer than El Salvador.
       Since 1960, about $1.4 trillion (in 1988 dollars) has been 
     transferred in aid from rich countries to poor ones. Yet 
     relatively little is known about what that process has 
     achieved. Has it relieved poverty? Has it stimulated growth 
     in the recipient countries? Has it helped the countries which 
     give it? Such questions become more pressing as donor 
     governments try harder to curb public spending. This year, 
     two of the biggest players in the international aid business 
     are looking afresh at their aims and priorities.
       Brian Atwood, appointed by the Clinton administration to 
     run America's Agency for International Development (AID), 
     inherited an organization encumbered over the years with 33 
     official goals by a Congress that loved using aid money to 
     buy third-world adherence to its pet ideas. Now, faced with a 
     sharp budget cut, Mr. Atwood is trying to pare down to just 
     four goals: building democracy, protecting the environment, 
     fostering sustainable economic development and encouraging 
     population control. Not, however, anything as basic as the 
     relief of poverty.
       A few blocks away from Mr. Atwood's Washington office, the 
     World Bank is going through a similar exercise, Set up in 
     1946, the Bank has become the most powerful of all the 
     multilateral development organizations. But a critical 
     internal report recently accused the Bank of caring more 
     about pushing out loans than about monitoring how well the 
     money was spent. Now the Bank hopes to improve the quality of 
     its lending. It is also wondering about its future. Some of 
     its past borrowers in East Asia are now rich enough to turn 
     lenders themselves. More should follow. The Bank is trying to 
     move into new areas, such as cleaning up the environment and 
     setting up social-welfare systems. But some people wonder how 
     long it will really be needed.
       AID and the World Bank are unusual (although their critics 
     rarely admit as much) in their openness and in the rigour 
     with which they try to evaluate what they do. But other 
     donors will also have to think about which kinds of aid to 
     abandon as their budgets stop expanding. In the 1980s the 
     official development assistance (ODA)\1\ disbursed by members 
     of the OECD's Development Assistance Committee (DAC)--21 rich 
     countries plus the European Commission--increased by about a 
     quarter in real terms; but between 1991 and 1992, the DAC's 
     disbursements rose by just 0.5%. Development Initiatives, an 
     independent British ginger group, believers ``the end of an 
     era'' may have come; it reckons that aid budgets around the 
     world are ceasing to grow at all. Almost the only exception 
     is Japan, which provides a fifth of DAC aid and plans a 
     substantial increase over the next five years.
---------------------------------------------------------------------------
     \1\Defined as aid administered with the promotion of economic 
     development and welfare as the main objective; concessional 
     in character; and with a grant element of at least 25%.
---------------------------------------------------------------------------
       Most multilateral donors, such as the UN agencies, also 
     have budgets frozen. A rare exception is the European 
     Development Fund, the aid arm of the European Union, which is 
     taking a rapidly rising share of member-states' aid budgets. 
     The EDF's secrecy and its mediocre reputation with recipient 
     countries make some bilateral donors unhappy. ``British 
     officials are concerned about having to devote increasing 
     quantities of their aid, which they regard as successful, to 
     the European programme,'' reports Robert Cassen, a British 
     aid expert.


                       needed: a case for giving

       Some developing countries--mainly the faster-growing ones 
     perceived as ``emerging markets''--have found the 
     international capital markets to be increasingly willing 
     supplies of finance (see chart on next page). But demands for 
     ODA are still appearing in new forms and from new sources. 
     Astute third-world countries are giving old projects a green 
     tinge to profit from fashionable enthusiasm for the 
     environment. The countries of Eastern Europe and the former 
     Soviet Union are competing with the third world for help. And 
     the proportion of aid spent on relieving disasters has soared 
     from 2% five years ago to around 7% today.
       But with the clamour for more money goes increasing 
     uncertainty about what aid is for and what it has achieved. 
     The naive taxpayer might imagine that aid's main purpose was 
     to relieve poverty. Yet only relatively small amounts of ODA 
     go to the poorest of countries or to projects that benefit 
     mainly the poorest of people. A study of America's aid 
     programme conducted by the Overseas Development Council 
     (ODC), a Washington, DC, think-tank, found that more than 
     $250 per person went to relatively high-income countries, but 
     less than $1 per person to very low-income countries. Mahbub 
     ul Haq of the United Nations Development Programme (UNDP), a 
     fierce critic of aid's failure to reach the poorest, points 
     out what the ten countries that are home to two-thirds of the 
     world's poorest people receive only one-third of world aid.


                          not helping the poor

       Within poor countries, too, aid is rarely concentrated on 
     the services that benefit the poorest. The World Bank reckons 
     that, of all the aid going to low-income countries in 1988, a 
     mere 2% went on primary health care and 1% on population 
     programmes. Even the aid that is spent on health and 
     education tends to go to services that benefit 
     disproportionately the better-off. Aid for health care goes 
     disproportionately to hospitals (in 1988-89, for instance, 
     33% of Japan's bilateral aid for health went on building 
     hospitals); aid for education, to universities. In sub-
     Saharan Africa in the 1980s, only $1 of ODA went on each 
     primary pupil; $11 on each secondary pupil; and $575 on each 
     university student.
       Such spending patterns often reflect the priorities of the 
     recipient governments. Some donors have tried to persuade 
     governments to distribute aid differently. They have had 
     mixed success--not surprisingly, for their own motives in 
     aid-giving often override the goal of poverty relief.
       One such motive, powerful even since the end of the cold 
     war, is the pursuit of national security. Most governments 
     are coy about the role that national security plays in their 
     aid budgets, but the biggest donor of all, the United States, 
     is blatant: roughly a quarter of its $21 billion foreign-aid 
     budget takes the form of military assistance, and roughly a 
     quarter of the total budget goes to Israel and Egypt alone. 
     ``The United States has spent a lot less money on development 
     than on advancing political and military goals,'' says John 
     Sewell of the ODC. This year, America's aid budget protects 
     the shares of Israel and Egypt. America also sees aid to 
     Eastern Europe and to the countries of the former Soviet 
     Union primarily in strategic terms.
       ``National security'' is also now being used as an argument 
     for giving more weight to all sorts of other goals in the 
     drawing-up of aid budgets. Environmentalists claim that some 
     types of environmental damage, such as global warming and the 
     thinning of the ozone layer, may be worsened by poor-country 
     growth, and they argue that rich-country aid donors should in 
     their own interests take special care to minimize such risks. 
     Others say aid should be used to parry the threats to rich 
     countries posed by the trade in illegal drugs, by population 
     growth and by third-world poverty.
       If the goal of national security can conflict with that of 
     poverty relief, then the commercial interests of aid donors 
     can do so even more. Japan's approach has at least the merit 
     of simplicity: its development assistance goes mainly to 
     countries that are most likely to become its future 
     customers. All DAC countries tie, some aid--the average is 
     about a quarter--to the purchase of their own goods and 
     services. One problem with trying is that it forces countries 
     to pay over the odds for imports: on average, some estimates 
     suggest, recipients pay 15% more than prevailing prices. 
     Another is that it often distorts development priorities. It 
     is easier to tie aid to a large item of capital spending, 
     such as a dam, road or hospital, than to a small rural 
     project that may do more good. Not surprisingly, trying is 
     especially common in transport, power generation and 
     telecommunications projects.
       Aid recorded as tied has been falling as a proportion of 
     bilateral ODA, according to the OECD, which monitors the 
     practice. That may be partly because of the rise in spending 
     on disaster relief. It may also reflect an international 
     agreement on guidelines for tied aid. But governments are 
     clever at finding ways to use aid to promote exports. It has, 
     for example, taken two official investigations to uncover 
     some of the links between British aid to Malaysia and British 
     arms sales to that country.
       Some kinds of ODA are given in the sure knowledge that the 
     money will be spent mainly in the donor country, but without 
     explicit tying. One example is technical assistance. Of the 
     $12 billion or so which goes each year to buy advice, 
     training and project design, over 90% is spent on foreign 
     consultants. Half of all technical assistance goes to 
     Africa--which, observes UNDP's Mr. Haq, ``has perhaps 
     received more bad advice per capita than any other 
     continent''. Most thoughtful people in the aid business 
     regard technical assistance as one of the least effective 
     ways to foster development.
       Stung by the claims of their aid lobbies that too little 
     help goes to the poor, some governments are trying to steer 
     more money through voluntary bodies, such as charities and 
     church groups. Such bodies, known in the trade as non-
     governmental organisations of NGOs, have proliferated at 
     astonishing speed in both the rich and poor worlds. The OECD 
     counted 2,542 NGOs in its 24 member countries in 1990, 
     compared with 1,603 in 1980. The growth in the south may have 
     been faster still. Roger Riddell, of the Overseas Development 
     Institute in London, who has made a special study of NGOs and 
     development, talks of a ``veritable explosion'' in their 
     numbers; he mentions 25,000 grassroots organisations in the 
     Indian state of Tamil Nadu alone. The public and private 
     money dispensed by NGOs amounted to 13% of total net ODA 
     flows in 1990, and the share has been creeping up.
       NGOs may be better than central governments at handling 
     small projects and more sensitive to what local people really 
     need. But even NGOs, according to Mr. Riddell, usually fail 
     to help the very poorest. ``If government and official aid 
     programmes fail to reach the bottom 20% of income groups, 
     most NGO interventions probably miss the bottom 5-10%,'' he 
     guesses. And, as more aid is channelled through NGOs, some 
     groups may find it harder to retain the element of local 
     participation which is their most obvious strength. More 
     searching questions might be asked about whether they are 
     efficiently run, or achieve their purported goals: a study of 
     projects supported by the Ford Foundation in Africa in the 
     late 1980s found ``very few successes to talk about, 
     especially in terms of post-intervention sustainability''.


                         and what about growth?

       When the modern panoply of official aid institutions grew 
     up after the second world war, the intention was not to 
     relieve poverty as such but to promote economic growth in 
     poor countries. Aid was seen as a transitional device to help 
     countries reach a point from which their economies would take 
     off of their own accord. Its use was to remove shortages of 
     capital and foreign exchange, boosting investment to a point 
     at which growth could become self-sustaining.
       In their baldest form, such views sit oddly beside the fact 
     that, in many of the countries that have received the most 
     aid and have the highest levels of capital investment, growth 
     has been negligible. For at least 47 countries, aid 
     represented more than 5% of GNP in 1988. Many of those 
     countries were in sub-Saharan Africa, where GDP per head has 
     been virtually flat for a quarter of a century. Yet, as David 
     Lindauer and Michael Roemer of the Harvard Institute for 
     International Development point out in a recent study, some 
     of them were investing a share of GDP almost as large as that 
     of much faster growing South-East Asian countries: Cameroon, 
     Cote d'Ivoire, Kenya, Tanzania and Zambia all invested at 
     least 20% of GDP, a figure comparable with that for Indonesia 
     or Thailand.
       Such rough comparisons may prove little, but they draw 
     attention to an awkward point, Some third-world countries 
     have enjoyed fast economic growth with relatively little aid 
     per head. In particular, some Asian success stores, such as 
     China and Vietnam, had little or no aid at a time when donors 
     were pouring money into Africa (although China is now the 
     World Bank's largest single customer). If some countries can 
     achieve economic growth with little aid, while other 
     countries which get a great deal of aid do not grow at all, 
     what if anything is aid good for?
       One way to try to answer that question is to review the 
     experience of individual countries and aid projects. In the 
     late 1980s there were two valiant attempts to do just this: 
     one conducted by a team led by Mr. Cassen, the other on a 
     more modest scale by Mr. Riddell. Mr. Cassen's team argued 
     that ``the majority of aid is successful in terms of its own 
     objectives'', but added that ``a significant proportion does 
     not succeed.'' Aid had worked badly in Africa; better in 
     South Asia. Where aid did not work, the reason was sometimes 
     that donors failed to learn from their mistakes or the 
     mistakes of other donors; and sometimes that a recipient 
     country failed to make the most of what was offered to it.
       As for the impact of aid on economic growth, Mr. Cassen 
     concluded cautiously that one could not say that aid failed 
     to help. In some countries, indeed, he found evidence that it 
     did increase growth. Mr. Riddell was similarly tentative. 
     Aid, he concluded, ``can assist in the alleviation of 
     poverty, directly and indirectly'' and ``the available 
     evidence * * * fails to convince that, as a general rule, 
     alternative strategies which exclude aid lead in theory or 
     have led in practice to more rapid improvements in the living 
     standards of the poor than have been achieved with aid.''
       These are hardly ringing endorsements. But these 
     evaluations of individual aid programs and projects are more 
     positive in their findings than attempts to establish broader 
     links between aid and growth, which have usually failed 
     entirely. Plenty of economists have picked holes in the 
     original idea that aid would boost investment: why should it, 
     some ask, when governments may simply use income from aid as 
     an excuse to spend tax revenues in other, less productive 
     ways?
       Other economists, such as Howard White of the Institute of 
     Social Studies at The Hague, who has reviewed many of the 
     economic studies of the effects of aid on growth, point to 
     the difficulties of generalising. Given the various transfers 
     that count as ``aid'', the many conditions that donors 
     attach, the differing importance of aid in national economies 
     and the complexity of economic growth, there are simply too 
     many variables to say much that is useful.


                       third-world dutch disease

       Since the start of the 1980s, many donors have come to 
     believe that the quality of a country's economic management 
     will do most to determine whether aid will do some good. Aid 
     in the 1980s was frequently used, especially by the World 
     Bank, as a prod to encourage countries to begin ``structural 
     adjustment'' programmes. In some cases, the economic 
     performance of these countries did improve--Ghana is one of 
     the Bank's favourite examples. In other cases, it did not. A 
     review by the IMF of 19 low-income countries which had 
     undergone structural adjustment found that their current-
     account deficits averaged 12.3% of GDP before adjustment and 
     16.8% in the most recent year; and that their external debt 
     had grown from 451 percent of exports to 482 percent.
       Why was this? Were countries encouraged to adopt the wrong 
     policies? Did they ignore the advice they were given? Or did 
     the aid itself do some damage? Stefan de Vylder, a Swedish 
     economist, argued for the last of these explanations at a 
     conference in Stockholm in March. He argued that large 
     volumes of aid (such as those associated with structural 
     adjustment programmes) could damage an economy's 
     international competitiveness; and countries where export 
     performance was especially bad tended to be ``rewarded'' with 
     low-interest loans and grants.
       The damage to competitiveness, Mr. de Vylder believes, is a 
     version of ``Dutch disease''. This was the term coined in the 
     1970s to describe how Holland's exports of natural gas 
     boosted its real exchange rate and thereby harmed its export 
     competitiveness. Mr. White thinks something similar happened 
     in Sri Lanka between 1974 and 1988, when a sharp increase in 
     aid contributed to a divergence between the nominal and real 
     exchange rates; this hurt the growth of the country's 
     manufactured exports
       Mr. de Vylder also worries about the tendency of aid to 
     compensate for failure rather than to reward success. 
     Bilateral donors have increasingly found that much of the aid 
     they give to some countries goes towards paying back money 
     unwisely lent by international financial institutions, Take 
     Zambia as an example. Between 1974 and 1987, Zambia had 
     entered into seven stand-by or structural agreements with the 
     IMF--one every two years. Each was broken by the Zambian 
     government. When, in 1987, Mr. de Vylder visited Zambia to 
     assess the latest bout of economic disaster, he asked a 
     minister how seriously the government was worried at being 
     lambasted by every aid donor. ``Concerned?'' mused the 
     minister, seeming somewhat surprised. Then: ``Oh, no. They 
     always come back.'' The minister was right, says Mr. de 
     Vylder. Shortly afterwards, the international financial 
     institutions were again knocking on the door, asking for a 
     new agreement.
       It is easy, with aid, to find examples of individual 
     projects that do some good. Most of those who criticise aid 
     argue that if the quality were better--if donors tried harder 
     to learn from each other's mistakes, if they were less keen 
     to reap commercial gain, if they concentrated harder on 
     meeting basic human needs--then there would be far fewer 
     failures. All that is true; but--other things being equal--
     there would also be much less aid. Will poor countries do 
     worse, over the next 30 years, if rich countries decline to 
     give or lend them another $1.4 trillion? At that price, the 
     answer should be ``Yes''. Given the way that aid works at 
     present, it is only ``Maybe''.

                          ____________________