The Returns on Foreign Aid Investment

The Returns on Foreign Aid Investment

By Pooja Bhatia

Staff belonging to the International Committee of the Red Cross and Libyan Red Crescent unload foodstuffs and other goods at a warehouse in the town of Swaoh, near the Libyan city of Sirte, October 4, 2011. The supplies are meant to be distributed to displaced civilians.


How much does the U.S. spend on aid? It’s a lot less than you think.

Pooja Bhatia

Pooja Bhatia

Pooja Bhatia is an OZY editor and writer. She has written for The Wall Street Journal, The New York Times and the Economist, and was once the mango-eating champion of Port-au-Prince.

Back in 2010, pollsters asked Americans how much foreign aid their country gives. The median answer was 25 percent of GDP — and it was deemed way too high. Respondents thought the U.S. should give 10 percent, like a tithe.

That survey demonstrated two things: Americans’ overestimation of their generosity and their ignorance about foreign aid. It turns out that the amount the U.S. spends on foreign aid is nowhere near the ideal 10 percent: It’s fifty times smaller at 0.2 percent. In absolute terms, that’s $30 billion — more than any other country donates. But it’s still a pittance compared to Americans’ perceptions, what they say their country should donate, and the 0.7 percent of national income that rich countries have been aspiring to donate since 1970. Americans spend about the same amount on their lawns, according to humanitarian organization Oxfam, and much more on their pets. The U.S. spends 20 times more on its military, or $600 billion per year.

To be sure, aid is hard to understand. Its processes are bureaucratic, and outcomes are obscure. Its factotums speak an obscurantist language known as Aidspeak, and the entire endeavor — dealing as it does with sickness and health, poor people and needy children — is glossed with sentiment. 

Perhaps that’s why another myth exists: that foreign assistance is purely humanitarian. “The biggest mistake people make when trying to understand aid is to assume it’s used strictly for the purpose of raising incomes or reducing poverty,” says Harvard Business School professor Eric Werker, who studies aid flows. Even academics goof that one up, he adds.

Instead, a welter of motivations underlies foreign aid, some of them conflicting. They include “straight humanitarian aid,” but there is also aid alongside military operations (think Iraq or Afghanistan), aid that creates markets for U.S. firms, aid that provides markets for American farmers and aid for diplomatic reasons. It’s all very realpolitik, sometimes baldly so.


Werker co-authored a study entitled How Much Is a Seat on the Security Council Worth? Foreign Aid and Bribery at the United Nations. It showed that the foreign aid a country receives increases by 59 percent when it temporarily rotates onto the Security Council — even more during key diplomatic events. The implication: The United States uses aid to grease the wheels of diplomacy.

So, it shouldn’t be surprising that the largest beneficiaries of U.S. aid are not the poorest countries. They’re the ones we’re looking to protect or win over — Israel ($3.1 billion), Afghanistan ($2.2 billion), Egypt ($1.6 billion) and Pakistan ($1.2 billion). The vast majority of this money doesn’t go to vaccinate kids or shelter refugees. Instead, it’s for “peace and security” or delivered under the rubric of “overseas contingency operations.” The latter includes the military-civilian transition in Iraq and counterinsurgency operations in Pakistan and Afghanistan.

The vast proportion of this money doesn’t go to vaccinate kids or shelter refugees. Instead, it’s for peace and security.

If a big motivation underlying foreign assistance is national self-interest, it’s fair to ask whether foreign aid delivers benefits for donors. Not surprisingly, aid donors say it does. “Foreign aid is a small investment that yields big returns for our nation,” argues CARE, a nongovernmental humanitarian organization. The theory is that a better-off world means more stability and a stronger domestic economy. 

In a way, this is true. In 2010, some 90 percent of USAID funds bypassed governments and citizens in recipient countries. The aid monies were filtered through contractors and agencies based in donor countries, meaning very little reached its supposed beneficiaries. (USAID chief Raj Shah is trying to up the proportion that lands in recipient nations to 30 percent by 2015 — still a modest goal in the grand scheme.)

Others argue that “humanitarian aid can favorably change public opinion toward the U.S. and other donor countries.” But the evidence is mixed. A 2010 Tufts study of a “hearts and minds” campaign in Kenya found that aid recipients were more suspicious than grateful. And reasonably enough: “‘Why does the most powerful country in the world come all the way here to repair — not even build — a public latrine? Do they think we are stupid?’” one Kenyan religious leader asked.

Indeed, it’s far from clear that “return on investment” is even the right concept for measuring aid’s effectiveness. Reducing poverty takes decades of investment in education, health and infrastructure, and it’s difficult to separate the effect of aid from other factors. South Korea, for instance, benefited from massive amounts of aid when it was a poor country in the 1950s, but hindsighters are more likely to credit the country’s focus on education and trade policies for its success. “Aid played a role in Korea’s success, but it didn’t cause it,” says Gregory Adams, who works on aid reform at Oxfam America.

Aid doesn’t cause development. It’s a tool. People develop themselves.

Like others who work in humanitarian aid and development, Adams cringes at the idea that donors should think about foreign assistance as an investment with returns. “Aid doesn’t cause development. It’s a tool. People develop themselves,” he says. What aid should do, he adds, is strengthen the relationship between states and their citizens, so that poor countries and the people in them are more empowered to change their lives.

And that’s not easy to measure. “It’s a lot easier to count stuff, whether bed nets or boreholes,” Adams says. “But ultimately reducing poverty is not about delivering stuff. It’s about politics and power.” 

Pooja Bhatia

Pooja Bhatia

Pooja Bhatia is an OZY editor and writer. She has written for The Wall Street Journal, The New York Times and the Economist, and was once the mango-eating champion of Port-au-Prince.