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Rethinking US Foreign Aid

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Trans-Pacific View | Economy

Rethinking US Foreign Aid

USAID was based on a flawed development theory from its inception. It’s past time to address that foundational mistake.

Rethinking US Foreign Aid
Credit: USDA Photo by Lance Cheung

Within seven weeks of his inauguration, U.S. President John F. Kennedy established the Alliance for Progress, a modest $20 million program to spur economic development in Latin America. The Alliance reflected Kennedy’s worry that the Soviets were luring countries into alignment with Moscow throughout the Western Hemisphere. Inspired by Puerto Rico’s Operation Bootstrap, Kennedy recognized the potential, localized pursuit of economic growth as a model the United States should encourage.

Thus, to great fanfare, in 1961, the U.S. created the Agency for International Development (USAID). Reflecting the 1950s progressives’ catechism, the agency was designed to spur economic growth in developing countries. At the time, however, expert guidance was limited. Few economists paid much interest to anything that would be recognized as development theory. Joseph Schumpeter’s work on entrepreneurship and the self-renewal of economies and Friedrich Hayek’s work proposing that economies are largely self-organizing were both taking shape, but argued that central planning inevitably suppressed growth – a conclusion at odds with USAID’s mission.  

Walter Rostow, an academic economist who enjoyed enthusiastic sponsorship from Kennedy, had smartly anticipated the moment. In 1958, Rostow retreated to Cambridge University to write the book that would make him the architect of Washington’s foreign assistance strategy. Published in 1960, Rostow’s “The Stages of Economic Growth: A Non-Communist Manifesto” proposed that successful economies go through a linear five-step process. Similar to many first books in developing fields, Rostow’s theory was entirely conjectural – describing a process that he believed was not only historic, but also was repeatable in all developing economies. 

Kennedy’s eagerness to start USAID stemmed from his worry about losing the Cold War, and Rostow believed his economic model would thwart Soviet expansion in Latin and South America. Thus “The Stages of Economic Growth,” became USAID’s bible, and its five steps were the agency’s cookbook. 

Rostow argued that every modern economy passed from traditional agriculture and barter, to the preconditions for, to use his famous phrase, the “take off” stage. This is the hinge moment when a developing country has mastered its resources such that it could become a modern industrial economy. Once industrialism becomes predominant, economies seek “maturity,” a phase that referred to diversification. Finally, Rostow described his fifth stage as “high mass consumption.”  

Rostow’s theory was immediately translated into the working doctrine for USAID. That was a foundational mistake, and the impacts have reverberated over the last half century of U.S. foreign policy. 

Centered on an economic narrative that revolved around industrial achievement, Rostow’s influence caused the United States to misread the future, where technological advances would remodel the global economy. Instead, Rostow saw the Cold War as being won or lost based on whether a given state’s citizen-consumers were satisfied with goods made within their country. He failed to recognize the critical importance of trade and deregulation to allow growth.  

In no small measure, USAID’s decades-long failure as an agency is rooted in Rostow’s flawed vision. Looking at USAID’s record, there is no evidence the agency has ever created a new self-sustaining economy, revitalized a stalled economy, or rehabilitated an economy in the aftermath of international conflict or natural disasters. Indeed, USAID has compiled a record that does more to call into question the theory of international aid than support it. As William Easterly, a professor of economics at New York University, put it, “Let’s not kid ourselves that spending more money on foreign aid accomplishes anything by itself.”

Today, however, concern over the effective use of donated assistance to developing countries may no longer be relevant. USAID now appears to be more a public relations tool for the White House, providing advocacy on a spectrum of issues that have little bearing on economic expansion in the developing world. Cultural priorities such as climate change, abortion, universal vaccination, and diversity inclusion and equity triumph over economic growth. These topics du jour among the world’s political elite are redefining the United Nations.

Now in the midst of two unanticipated wars, the lack of U.S. leadership on strategic aid over the past six decades has suddenly become a critical aspect confronting the next decade. Merely giving more money to USAID contractors whose focus is prolonging their own roles in distributing aid to countries in need is not the answer. 

There is a need for financial support in a lengthening list of countries under great stress, yet multinational promises of public support have fallen short in almost every case, further strengthening skepticism about the entire aid enterprise. For example, as 2023 came to a close, donor promises of support for Afghanistan totaling $3.2 billion had fallen short by 85 percent. Similarly, of the $875 million required to fund shelter, food and medicine for Rohingya refugees, only 25 percent has been dispersed. Only 30 percent of promised aid for Yemen has been collected. And despite headlines regarding the United States’ ongoing support for Ukraine’s rebuilding, precious little in the way of redevelopment monies have been realized.

We have reached an inflection point in Washington’s approach to assisting countries in dire need of new market-based economies. Years of USAID soft power giving must come to an end. The United States should not be perceived as the kindly piggy bank that sustains would-be allies on an undefined journey, one awash in “good, but untested ideas,” that might lead to something resembling Rostow’s “take off” moment. Instead, the formula that must characterize U.S. policy is encapsulated in the idea of “expeditionary economics,” a thesis developed as to how the United States could successfully extract itself from the Iraqi theater.  

Fundamental to this thesis is reliance on indigenous entrepreneurship: a belief that the local population is capable of creating new businesses. If these businesses meet real market needs in the recovering country, they can collectively spark a sizable economic movement, i.e., a new economy.  This vision is anchored in the belief, developed in Austrian economic theory, that all economies are essentially self-organizing. This perspective was enforced by economist Joseph Schumpeter, who believed that entrepreneurs exist in every economic moment, and will inevitably emerge and go to work identifying market demands for goods and services appropriate to market conditions at that particular moment.

For U.S. development policy to be refashioned and to emerge as a successful spur to growing economies, the United States must give up any notion that central planning by governments will accelerate the emergence of new economies. Instead, the U.S. must allow for grassroots economies to emerge. A potential catalyst to success is to widen the number of interested parties to include U.S. corporate actors to partner with local actors to create community-based and community-needed startups.

Imagine an American energy company partnered with a local nonprofit to provide clean energy in Micronesia that not only preserves local resources but supports a sustainable economy. Or empowering more small businesses and women-owned businesses in Sub-Saharan Africa through virtual African Growth and Opportunity Act classes. 

No longer should ingrained bureaucratic hurdles, dated canonical ideas, and entrenched NGO global webs hinder the private sectors’ ability to step in, transform, and address unmet needs. Smart investment, local partnerships, and flexibility is the future of U.S. aid – and the only path forward.

Guest Author

Carl Schramm

Carl Schramm is a professor at Syracuse University, a fellow at the Johns Hopkins Institute for Applied Economics, Global Health, and the Study of Business Enterprise, and a board member of Frontier Allies.

Guest Author

Amy K. Mitchell

Amy K. Mitchell, a former senior government official at the Departments of State and Defense, is a founding partner at Kilo Alpha Strategies and is on the advisory board of Frontier Allies.