TCS Daily

The United States of Avarice?

By Tim Worstall - July 12, 2005 12:00 AM

Aren't you glad about that agreement at the G8 Summit? The one where the US will no longer be quite so mean with its foreign aid? Did you not hear the bells ring out in joy at this change of heart? The jangle of the international bureaucrats' jewelry as they did the happy dance at the thought of that much more money to administer?

You were also no doubt made aware of the whines of those who thought it should all have happened yesterday, that the US has a moral duty to ship 0.7% of its entire income overseas every year. It might even be true that such a moral duty exists, for certainly the government signed up to that aim some years ago.

I'm glad to be able to bring the good news, that the US already does spend 0.7% of GNI (the named target) on aiding the poor of the world. It's just not included in the way that the numbers are counted.

The report is from the Hudson Institute and the heart of the matter is this table:

Estimated U.S. Total Economic Engagement with Developing

Countries in 2003

                                                    $US Billions % of Total
U.S. Official Development Assistance         16.3         13
U.S. Other Country Assistance                  1.5            1
U.S. Private Assistance                           62.1         47
Foundations                                           3.3
Corporations                                           2.7
Non Profits and Volunteerism                     6.2
Universities & Colleges                             2.3
Religious Organizations                             7.5
Individual Remittances                             40.1
U.S. Private Capital Flows                        51.0         39
U.S. Total Economic Engagement             130.9       100

The part that currently gets counted is the $16.3 billion of Official Development Aid (ODA) and the US is the largest provider of such aid in the world, twice the number two, Japan. Perhaps not that much of a surprise, given that it is by a long way the largest national economy in the world (no, whatever people's desires the European Union is not a national economy). But what people have been complaining about is that this is only 0.15% of GNI when other countries give a much larger portion of a much smaller number.

Looking at the fuller numbers, as this report does, changes the picture a little. The amount that churches and non profits, for example, send is equal to the official number. There is no way that this cannot be considered as aid, as helping countries to develop. The spending by colleges is what they provide in scholarships to students from those poor countries. Education of the poor is typically bandied about as the most important thing we can do for the destitute areas of the world so this must be aid as well.

The only part of the listed private assistance that we could argue about would be individual remittances. At its crudest this is the money that Somali cab driver in NYC earned by taking you from Wall St to Central Park via Queens and Brooklyn and which he sends back to relatives in Mogadishu. But this is similarly money flowing out of the US economy to the poor in poor places and so should count as part of the aid that is paid over.

When we add all of these together we get to some 0.67% of GNI being spent upon alleviating the griefs and sorrows of the destitute in other countries.

Well, actually, not quite so fast. For there are three more things to consider. The first is that line of private capital flows. This is, in fact, the one piece of spending that does more to alleviate poverty than anything else. This might be portfolio investment but most of it is what is known as Foreign Direct Investment (FDI) and it is this that lifts the poor up by providing them with jobs, a factory to work in, machines to raise their productivity, in short, makes them rich as it did us. Those people sending their hard earned money abroad to invest in sweatshops, for example. The reason the people of Cambodia, Indonesia, Swaziland, flock to these factories is because they get twice the prevailing wage in the wider economy. If you're going to try and spend money on eradicating poverty, doubling people's real wages sounds a pretty effective way of doing that.

The second is that portion of US military spending that helps poor countries. Some of this is indirect, like the protection of the sea lanes, the general but unquantifiable benefits that come from having someone acting as a global policeman. There are more direct effects too, like the interventions in Bosnia, the garrisons in the Gulf and at Diego Garcia protecting the flow of oil. Under the rules by which aid is counted these are not to be mentioned, not included in what benefits the US provides.

The third is one that you might find more controversial and I don't mean to use this as a justification (or condemnation) of the system, just wish to make an observation. The US pays higher prices for pharmaceuticals than most other places in the world and it is those very higher prices that pay for most of the research into new such drugs. At minimum, when such drugs go off patent and begin to be manufactured by the generics companies this benefits the poor world and so the high domestic prices can be seen as a subsidy. What more often happens is that the pharma companies look to the US market to recoup their investments and are willing to sell drugs into the Third World at something closer to marginal cost, again a way of using the US consumer to subsidize the provision of health care in poor places.

So why have we had all this fuss about how little the US spends on aid if Americans do in fact spend a great deal? Ah, there is the very point. In our wonderful international system it is only what the US Government spends (and only limited classes of that) that counts. If the money is not raised at the point of a gun (which is the basis of all taxation, if you don't pay eventually someone with a gun comes after you) and filtered through the bureaucracy it doesn't get included. How much Americans send or spend is irrelevant, only what the authorities do matters.

I mean, really. What would happen if people were simply free to spend their own money in their own way? Not only would they be rich and happy themselves but it looks as if they would spend more than the official targets! We could never have that now, could we, things proceeding along nicely without a bureaucracy to administer it? Anyway, we all know private spending doesn't work, it isn't really money unless it has been processed through the system, unless the form fillers have said the magic incantation...we're from the government and we're here to help.

Good Grief! We might almost be talking about charity here, people acting both individually and collectively in a moral manner without having to be forced into it! Where would the international system be if everyone did that?

The author is a TCS contributing writer. Find more of his writing here.


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