The Privatization of Foreign Aid: Reassessing National Largesse

Carol C Adelman. Foreign Affairs. Volume 82, Issue 6. November/December 2003.

Foreign aid has returned to the center of U.S. foreign policy. In the decade after World War II, U.S. government dollars helped rebuild Europe and Asia and contain Soviet influence. In the decade after the collapse of the Soviet Union, aid helped newly democratic states recover from the miseries of communism. Today, a third wave of foreign aid is starting to foster development and democracy, particularly in the Middle East, and to stem the onset of pandemics in the developing world.

But even as Washington reemphasizes the importance of aid, critics, from journalists and academics to former presidents, ritually blast the United States for being stingy. President George W. Bush’s pledge to increase aid 50 percent by 2006—the biggest boost since the Marshall Plan was launched in 1948—and new legislation devoting an additional $15 billion to fight aids, tuberculosis, and malaria have done little to stave off such attacks. Critics—noting that the United States, despite giving the greatest absolute amount, comes in last among industrialized nations in terms of aid as a percentage of national income—have tagged it the most miserly of nations.

What such criticism fails to take into account is the new landscape of foreign aid. Current measures of a nation’s largesse only count funds doled out by the government, thus ignoring the primary way in which Americans help others abroad: through the private sector. In the last decade, U.S. government aid has been far outstripped by private donations—from foundations, private voluntary organizations (PVOS), corporations, universities, religious groups, and individuals giving directly to needy family members abroad. There is no comprehensive measure of how much Americans donate overseas, but a conservative estimate, based on surveys and voluntary reporting, puts annual private giving around $35 billion. Even this low-ball figure is more than three and a half times the amount of official development assistance (ODA) given out in a year by the U.S. government. In the third wave of foreign aid, it is private money that is making the difference.

The ODA Fallacy

The claim of American stinginess results from the common misperception that ODA, dubbed the “donor performance measure,” is the true, and only, measure of generosity abroad. In 1958, the World Council of Churches called on developed nations to devote one percent of national income to international development. The Organization for Economic Cooperation and Development (OECD) later adopted a target of 0.7 percent and now publishes an annual report ranking donors in terms of ODA as a percentage of GNP.

Since the ranking began, however, the only countries that have ever managed to achieve the “0.7 percent solution” are Denmark, Luxembourg, Norway, and the Netherlands. And like many such targets, this one bears no relation to the quality or impact of a donor’s aid. The OECD has finally admitted not only that the chances of meeting the 0.7 percent goal are virtually nil, but also that developing countries could not absorb that much official aid anyway.

Gauging national generosity solely by government giving ignores new economic realities. Until a decade ago, most international resources flowing into developing countries came from governments. But in 1992, foreign direct investment and financial markets took off in emerging economies. For the first time, developing countries were attracting the kind of private capital that creates and sustains development. As financial flows went private, so did foreign assistance. While ODA stagnated, private giving skyrocketed.

Europeans and the Japanese continue to give primarily through their governments, but the OECD’s outdated measure fails to take into account how Americans now give abroad. In 2000, the last year for which comparative figures are available, U.S. ODA totaled $9.9 billion. This figure includes the budgets of the U.S. Agency for International Development (USAID) and the Peace Corps, contributions to the World Bank, and some State and Defense Department humanitarian assistance. Together, these programs account for just over one-sixth of total U.S. assistance—public and private—to developing countries. Private giving makes up more than 60 percent. The remainder—$12.7 billion in 2000—is government aid that, although not within ODA guidelines, is still foreign assistance. This includes aid to Israel, Russia, the Central Asian Republics, and central and eastern European nations and support for the National Endowment for Democracy and international organizations such as the International Monetary Fund.

Private foreign assistance still includes the proverbial food relief shipments and missionary health clinics in rural villages, but its scope has grown considerably in the last decade. Its components now range from $100 million vaccination campaigns to support for small indigenous foundations wherein community members allot grant money to local causes. Immigrants in Maryland can use the Internet to send groceries and medicines to needy relatives in El Salvador or Vietnam. Although the total value of these types of private aid is much bigger than ODA, data on such giving are much weaker. The international development community knows little about where these private funds are spent or how well they work. But in order to grasp the new environment for assistance abroad, and in order to adapt U.S. government assistance in the crucial third wave of foreign aid, it is critical first and foremost to understand this private dimension.

“Perpetual Endeavor to Do Good”

With government assistance no longer the biggest game in town, foreign aid now involves more actors in diverse, complex partnerships. In the 1830s, Alexis de Tocqueville noted the unique strength of the United States’ mediating institutions and the contribution they make to society, independent of government. These institutions are the principal actors in the third wave of foreign aid.

Between 1990 and 2000, the number of U.S. foundations grew from 32,000 to 56,000. At the same time, more and more of them established international giving programs, which account for 11 percent of total grants. (Although there is little comparative data on European foundations, it is clear that they give considerably less than those in the United States, despite having grown dramatically in the past 30 years.) That decade also saw the emergence of “megadonors,” such as the Bill and Melinda Gates Foundation, the David and Lucille Packard Foundation, and the UN Foundation, with backing from Ted Turner. As a result, international giving by U.S. foundations nearly quadrupled between 1990 and 2000. It now totals some $3 billion, almost double what the “most generous” governments—Denmark, Norway, and Sweden—each give yearly in ODA. Many large foundations have sought especially to foster local philanthropy in developing countries, aiming to increase accountability and the effectiveness of aid dollars by funding independent community foundations. This kind of support exports the American tradition of private giving, allowing countries not only to develop economically but also to begin meeting development needs on their own.

American PVOS—such as the Red Cross, Catholic Relief Services, and the YMCA—have also continued a strong tradition of international aid. They give almost $7 billion a year in foreign assistance, including volunteer time, thereby heeding Cotton Mather’s call for “a perpetual endeavor to do good in the world.” Since early relief efforts in Greece in the 1840s and in famine-racked Ireland, PVOS have delivered financial assistance and fostered political pluralism, volunteerism, and compassion.

Corporate charitable giving abroad, once disallowed by U.S. courts, amounted to at least $2.8 billion in 2000—a figure that is surely low, since corporate giving is difficult to track. U.S. businesses give cash and noncash grants, encourage employee volunteer programs, and conduct cause-related marketing, such as that generated by the alliance between Starbucks and care. The most important force in this regard is the pharmaceutical industry, followed by telecommunications and computer firms. In fact, drug donations by pharmaceutical companies in 2002 were valued at $800 million—almost twice the World Health Organization’s budget for that year.

Least documented among U.S. private donors abroad are religious organizations. A low estimate of their annual contribution to foreign aid is $3.4 billion—a figure that includes neither collections taken in individual churches nor the value of church volunteers’ time. Nearly three-quarters of U.S. congregations consider international activities among their top priorities, and they fund and staff a wide array of programs in health, literacy, agriculture, and vocational training.

U.S. universities, meanwhile, give more in scholarships to students from developing countries than Australia, Norway, or Spain gives annually in ODA. Over the last 20 years, such funding has increased dramatically, from less than $100 million to $1.3 billion. In 1955, there were just 34,000 foreign students enrolled in higher education in the United States; by 2001, there were more than 500,000.

Finally, and most dramatically, comes what the Financial Times has called “the diaspora that fuels development”: remittance payments from immigrant workers to their homelands. Despite the fact that global remittances to developing countries roughly equal total ODA, development circles have long overlooked this category of aid. Remittances receive far less attention than official aid, trade, and investment but have an equal or greater impact on the quality of life in developing countries. The United States alone accounted for $18 billion in remittance payments to the developing world in 2000, and this figure will surely grow as efficient on-line services replace costly money transfer services and immigrant communities organize “hometown associations” to plan fundraisers and development projects. Worldwide, remittances to developing countries have more than doubled—increasing from $21 billion to $50 billion (excluding numbers for Russia)—over the past decade. Latin America received the greatest share ($14.5 billion), followed by India ($11.5 billion), the Middle East ($10.4 billion), and eastern Europe ($6.2 billion). Every year, the amount sent to Latin America exceeds the region’s total annual financing from multilateral development agencies. In six Latin American countries, remittances represent more than ten percent of GDP; in Mexico, they are the third-largest source of foreign exchange.

Although we need more and better information on the impact of remittances in the developing world, clearly such massive private giving—worth almost twice U.S. ODA—is changing the nature of development. Some economists argue that remittances tend to go toward consumption, rather than savings and investment; others counter that they nonetheless stimulate the supply chain and have a strong multiplier effect. But while questions abound, no one doubts that individual remittance payments, which carry little or no overhead, efficiently meet basic human needs in developing countries. Poverty is lower among households that have members who have emigrated, and surveys show that a substantial portion of remittances funds roads, clinics, water pumps, schools, and other development projects.

Teach Them to Fish

All in all, the United States is most generous. In addition to giving more foreign aid, in absolute terms, than any other country, it has long provided the most foreign direct investment to the developing world and generated the bulk of the world’s research and development, spurring long-lasting economic development and saving lives through better food and medication. The United States also contributes the most militarily, guaranteeing the security necessary for growth and democracy. The big point—that the totality of U.S. foreign assistance far exceeds U.S. ODA—corrects the criticism that the United States is stingy in giving abroad.

The third wave of foreign aid must both reflect and take advantage of these new realities. With ODA making up less than 20 percent of total U.S. foreign aid, the U.S. government must expand its vision and its accounting methods to embrace the full spectrum of foreign assistance, from foundations and churches to corporations and immigrant associations. Private aid passes the crucial “market test” by raising private dollars and volunteer time. Government aid programs should work more closely with the private sector, partnering with donors to expand successful efforts.

Washington will always have an important role in providing humanitarian aid and security assistance and furthering economic and political development. But the future demands a new approach that brings private giving into the government’s strategic planning. The best development programs succeed by building lasting institutions and the conditions for prosperity: rule of law, transparency, and property rights. This task is best accomplished by creating peer-to-peer relationships with Americans who have run businesses, managed hospitals, and treated patients. Such was the vision of David Rockefeller, who, in a 1963 speech to the International Management Association, called for a corps of retired business executives to lend their skills overseas. This vision was realized in the International Executive Service Corps, whose volunteers continue to provide invaluable aid to businesses in developing countries.

U.S. government aid should also foster local philanthropy in recipient nations. Official aid programs have often moved away from this model by working with large consulting firms and contractors, many of which rely on U.S. government contracts and do not want to work themselves out of a job. Nevertheless, herein lies a unique niche for U.S. foreign aid. USAID could pay for philanthropy experts to work with governments abroad setting up tax structures and other frameworks for private giving. U.S. corporations could help companies overseas establish giving and volunteer programs. The U.S. government could help fund programs showing foreign organizations how private boards function and fundraise. Regardless of the type or amount of foreign aid, outside involvement cannot replace local will, honesty, and efficiency. Governments abroad must want to create the conditions for democracy, growth, and investment. Conditioning aid on reforms—as President Bush’s Millennium Challenge Account would—is the right approach.

Foundations, churches, universities, hospitals, corporations, business associations, volunteer groups, and hard-working immigrants are delivering more than just money to developing countries. They are delivering the values of freedom, democracy, entrepreneurship, and volunteerism. In this diverse yet connected world, the U.S. government must shed its “donor” mentality and become a true partner, enabling others to reduce human suffering and create lasting institutions to carry on that work.