The Aid Trap

The Aid Trap
David Parker

When rich nations fall into recession, their governments do what they can—but after 100 years of socialism (the entire 20th century), those governments know now not to intervene in the economy. To prevent a financial crisis, yes, they loan money to banks, but otherwise, they stay back.

Poor nations haven’t learned this. Recession or no, they always look to government.

Even when the citizens are entrepreneurial, their economies are so regulated, so manipulated by a few families who own the important businesses and resources, that they have to look to government. They have to ask for foreign aid.

They know their leaders will grab a good portion for themselves, yet they know they’ll also get something—food or employment—because otherwise they’ll riot. Their leaders won’t let that happen; there’d be no foreign aid.

The World Bank, the International Monetary Fund, sovereign wealth funds, and private investors are awash in capital, more than they know what to do with. They push poor nations into accepting foreign aid, and worse, into making huge loans.

Think of the Greek euro crisis. Foreign aid and foreign investment are the absolute sine qua non of their economic existence. And then there’s Egypt.

It’s all a trap. No one can do for others what they must do for themselves. Foreign aid, then, prevents citizens from solving their problems.

Aid could go to privately held businesses, but if they don’t exist, no foreign aid. Strapped with debt, those nations will be exploited by China, a nation that has not learned the 20th century’s greatest lesson: Don’t go socialist.

Nor has China learned the 19th century’s greatest lesson: Don’t go colonialist. Nouveau riche China, with no history of democracy, pluralism, or self-control, knows only totalitarianism. If you’re a nation receiving aid from China, know that China cares not one iota about you.

The most successful foreign aid ever, the U.S. Marshall Plan for Europe after World War II, channeled money directly to businesses, not to governments. That aid was not meant to bolster governments, infrastructure, or employment. It was understood that businesses would get the economy going, after which everything else would fall into place. Pure Adam Smith.

Marshall Plan money was loaned directly to businesses, which repaid the loans to their respective governments, which only then would spend money on infrastructure. The Marshall Plan put the horse before the cart. It was genuine foreign aid. Nations were not expected to repay.

The Marshall Plan was a development bank administered by the 1948 Economic Cooperation Administration (ECA) of the U.S. government. That program today would be a complete failure, as foreign aid today does not go directly to private businesses.

The purpose of the Marshall Plan was to bring back business, not create business. The ECA will be another 20th century central decision-making institution handing out money—progressive socialism. It will be a government agency looking first to protect its own existence rather than to insure the success of its projects. If it fails, like all government agencies, it will simply ask for more money without realizing the agency was the reason for the failure.

With vast financial power to grant or deny loans, an ECA will protect that position by extending its reach. It’s public choice theory.

The U.S. Federal Reserve is a perfect example. The Fed was designed as a lender of last resort, with clear guidelines for preventing a financial crisis; i.e., loan money to any and all credit-worthy lending institutions that put up real assets as collateral (Cf. Lombard Street, by Walter Bagehot).

The Fed today is an overreaching powerhouse that creates its own guidelines. To prevent the 2008 recession from deepening, it loaned to any institution it deemed too big to fail, without regard to credit-worthiness and without regard to the quality of underlying collateral.

As collateral, the Fed accepted complicated and fraudulent credit security agreements and worthless mortgages. Working with the U.S. Treasury, the Fed today dictates fiscal and monetary policy to the nation.

The new ECA will do the same. Like China, as soon as there is a financial crisis in the less-developed world, the ECA will distribute foreign aid to anyone it can find. With the power to grant or deny loans, like the International Monetary Fund, it will dictate foreign policy.

Yet, just as the Fed did not prevent Fannie Mae from purchasing fraudulent mortgages (to the contrary, it practically ordered Fannie Mae to purchase those subprime mortgages—the very cause of the 2008 financial crisis), so, too, will the ECA make fraudulent loans and cause financial crises around the world. Like the Fed, it will solve problems simply by offering money.

The role of the Fed and an ECA is to provide stability, which is completely counterproductive to a dynamic economy. Instability is the essence of creative destruction, the invisible hand’s self-correction process, with markets self-correcting naturally from an overexpansion of credit.

In a recession, nations must wait it out, not stimulate growth; the market is recovering from growth. You don’t offer a seven-course meal to someone who just threw up from overeating.

In 2008, the Fed threw billions of dollars into the market, which prevented a financial crisis, but it did not stimulate the economy. It flooded the engine, which is why frightened banks hoarded the money.

In a supply-side economy, producers produce only when they are confident, not because the government gave demanders money. Both price stability and the multiplier effect are meaningless in a recession. They prolong the downturn. The 2008 recession, over in 2011, lasted until 2018. The 1929 depression, over in 1933, lasted until 1941.

In a financial crisis, an ECA will act like the Fed. It will stimulate the economies of less-developed nations by throwing money at them. But those ECA loans, like Fed loans, will be hoarded. When the ECA runs out of money (because, unlike the Fed, it can’t print money), Congress, our foreign policy lender of last resort, will provide more.

But when those loans are not repaid, will Congress raise taxes or cut spending in order to provide more funds? No, it will borrow.

U.S. foreign aid helps no one. If money solved problems, there wouldn’t be problems. One thing the world doesn’t lack is money. The world has more than it can spend—$100 trillion in surplus cash, $1,000 trillion ($1 quadrillion) in derivatives. Why? Because investors can’t find viable capital projects. It is why the New York Stock Exchange is so overpriced: The whole world is competing to invest there.

It is why Greece nearly collapsed: The whole world competed to loan it more money than it could handle. With so much money chasing so few viable capital projects, pushing up asset prices and lines of credit (with most nations not dealing with their debt and unfunded liabilities), the world economy could crash.

Top-down solutions are not an answer. Market economies are a bottom-up phenomenon. They consist of individuals producing goods and services and then trading for other goods and services. A market economy is nature itself, human nature, individuals following their economic instincts.

Societies where individuals are not entrepreneurial, not producing, not saving, not working 12 hours a day, six days a week (because they just love making money), will never become Asian Tigers. They’ll be gobbled up by China.

Did the Asian Tigers become tigers because their governments funded their industries? No. The world thinks so, but that’s not the case. In Japan, the government did invest in private industries, but those industries failed. It was industries that the Japanese government did not support—auto and electronics—that saved Japan.

Plus, new companies should not begin operation on borrowed money; it’s the worst thing they can do. It’s skipping a step. Companies should start small (so that mistakes are small) and then reinvest profit back into the business. That’s how to grow a business.

One of the many serious errors of Soviet communism was that it started too large. Apple and Hewlett Packard started in their garage.

Economic growth is the solution to the world’s problems. People with money in their pockets don’t need government. Rather, governance is the source of the world’s problems. Bad governance, especially in poor nations, is the reason they have so little economic growth and the reason America’s Founding Fathers practically eliminated government.

They wrote a one-page Constitution that stated that legislators would be elected and Congress would make law (not government agencies). The Constitution also enumerated governmental power—a post office, a navy, etc.—in a very short list. That’s a model that works.
Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times.
David Parker is an investor, author, jazz musician, and educator based in San Francisco. His books, “Income and Wealth” and “A San Francisco Conservative,” examine important topics in government, history, and economics, providing a much-needed historical perspective. His writing has appeared in The Economist and The Financial Times.
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