By Julide Sengil and Tatiana Dittus
Problem Statement
The United States donates a lower percentage of GDP to foreign aid compared to the majority of other developed nations, yet they undeniably gain from global trade. As a major exporter of services – finance, pharmaceuticals, business administration – US consumers rely on imports from the developing world. It is, therefore, in the interest of the United States to increase its share of foreign aid in order to ensure continued economic growth, maintain their status as an economic hegemon, and preserve their military and political status in the world.
Background
Foreign aid can be defined as the money, technical assistance, and commodities provided by the United States to other countries in support of common goals between these countries. Usually foreign aid goes to governments or communities in need. The three main types of foreign aid are humanitarian assistance, development assistance, and security assistance (Britannica). Humanitarian assistance typically comes after natural and manmade disasters. Development assistance is given to promote the economic, political, and social development of a country, and security assistance helps to strengthen security forces and the military for the United States’ allies.
Following the end of the second world war, the United States solidified its role as a global hegemon by enacting the Marshall Plan. In this context, a hegemon is a political state that has dominant influence or authority over others (Merriam-Webster) The Marshall Plan – also known as the European Recovery Program – was designed to provide aid to Western Europe after the devastation of WWII. Thanks, in part, to the United States’ economic aid, Europe has grown to become one of the most economically-developed regions in the world.
In many ways, the impact of the COVID-19 pandemic can be compared to that of WWII. Likewise, if the United States were to increase targeted foreign aid to countries that rely on tourism and exporting natural resources – which have been economically devastated by the COVID-19 pandemic – these countries could reach the economic levels of present-day Europe in the coming decades. The United States’ post-WWII increase in foreign aid to Europe also strengthened our political unions with many European nations. A strong, targeted increase in foreign developmental aid to countries in the natural resources and textile exporting industries as well as countries whose GDP relies heavily on the tourism industry would strengthen the United States’ political relationships with those countries.
Though the United States does grant a large amount of foreign aid each fiscal year, it is a relatively small percentage of our GDP compared to other developed countries. In fact, the United States, despite consisting of the largest economy in the world, devotes only 0.18% of the federal budget to foreign aid. Meanwhile,countries with smaller economies such as Sweden (1.02%) and the United Kingdom (0.7%) donate far larger shares of their annual budget.
When the US was still developing, it used protectionist policies to secure it’s domestic markets until it was stable enough for trade. After the United States solidified its position as global hegemon, it has engaged in what Friedrich List called “kicking away the ladder” (Chang, Gershman, 2003). By this we mean that the United States is actively encouraging developmental policies for currently developing countries that the US never would have used themselves during their own development. This type of policy can be detrimental to development.
Analysis
Foreign aid given to developing countries has had a mixed effect on development. Critics of increasing the US percentage of foreign aid often point to the economic crises in Africa and Latin America during the 1980s. However, it is also important to note that the global view on development was flawed. Across the board, the World Bank, IMF, WTO and the United States advocated for the Washington Consensus. This was a set of 10 economic principles that advocated for trade liberalization, deregulation, and privatization (Narcis, Stiglitz, 2008). While these principles are not inherently bad, these are economic principles that directly benefit competitive economies. During the 1980’s, the IMF – with US support – pushed for these reforms by attaching them as conditionalities on their loans. When developing countries tried to enact these policies, they could not compete in the global economy and subsequently they were not able to rapidly develop. When the United States donated foreign aid, it did so while supporting the principles of the Washington Consensus, therefore, it is unsurprising that foreign aid in that era was ineffectual.
In an average year, 15% of US GDP is from imports, while 12% is from exports. Currently, our biggest trading partners are China, NAFTA countries, and the EU. However, imports from developing countries still directly impact US consumers. The most abundant source of cheap goods is from lower-to-middle income countries, and trading with them provides domestic consumers with a greater variety of goods for cheaper prices. Thus it is beneficial to the US consumer to ensure that developing regions have the resources they need to continue to compete in the global economy.
For US producers, it is beneficial to advocate for foreign developmental aid since development historically leads to more competitive economies. If regions like South Asia and Sub-Saharan Africa can attain higher levels of development, the production of cheap goods can transform into specialization. That poses less of a threat to domestic producers who already have comparative advantages in the production of their goods. Beyond that, higher levels of development result in higher levels of income. At higher levels of incomes, more individuals in the developing world can afford US exports.
The US’s main export is services, if countries are at higher levels of development, they can engage in our financial/business administration/pharmaceutical industry.
Ultimately, increasing foreign developmental aid can benefit both US producers and consumers, and is thus in the interest of the US to increase its share of foreign aid.
Apart from the domestic arguments for increasing foreign aid, it is important to note that foreign developmental aid is arguably mutually beneficial. The United States does benefit from globalization, but in order for the system to succeed, developing nations cannot “backslide”. This is a phenomenon where a developing country fails to overcome political challenges and becomes an autocracy. This can happen in times of war, economic hardship, or after natural disasters. When democratic backsliding happens, regions become unstable, economies collapse, and countries isolate themselves from trade. Naturally, this negatively affects international trade, and especially countries that rely on natural resources. Ultimately, in a global system, the loss of one commodity in a supply chain negatively impacts the rest of the supply chain. For the past several years – and now exacerbated by the COVID-19 pandemic – there has been a divergence in economic development in developing regions. In other words, more countries are starting to democratically backslide. Thus it is in the interest of the US to provide more aid to ensure that these countries do not further backslide.
By providing more developmental foreign aid, the US ensures that domestic consumers and producers benefit. Foreign aid helps prevent democratic backsliding, which ensures that developing regions can continue to trade with the United States.
Additionally, given the rise of China’s economy, the US is losing its position as the economic hegemon. This uncertainty has resulted in several developing countries taking aid from China, but at the loss of some of their sovereignty. For example, following the end of a civil war, Sri Lanka turned to China for aid after facing global backlash over human rights violations. China offered development aid in the form of infrastructural assistance and the Sri Lankan government accepted. This relationship was further strengthened as the Sri Lankan government repeatedly turned to their Chinese allies whenever they needed financial assistance. After years of growing debt and failed projects, Sri Lanka had no choice but to turn over its Hambantota port and the 15,000 surrounding acres of land to China for 99 years (New York Times, 2018). This and other instances like it throughout Asia have allowed China to expand its sphere of influence. Another such instance is the Belt Road Initiative. The BRI is a massive infrastructure project undertaken by the Chinese government that stretches from East Asia to Europe. This project has increased Chinese power, and left countries indebted to China trapped under their influence. These gains illustrate how China is gaining on the United States in the race to hegemony. It is therefore in the interest of the United State’s political and military agenda to increase foreign aid to developing countries, including ones that are currently indebted to China. By doing so, the United States provides protection and ensures that the economic and political power the US holds does not lessen.
Finally, as the richest country in the world, the US donates a comparatively small share of GDP to foreign aid. As mentioned before, the United States donates just 0.18%, while countries with smaller economies donate much larger percentages of their GDP. For example, Sweden donates 1.02% of their annual budget from GDP to foreign aid expenditures. China also allocates large portions of funding to foreign aid, including expenditures for the previously mentioned Belt Road initiative. When compared to other developed European nations, the US consistently donates lower percentages of GDP, and has failed to invest in any major international infrastructure projects like China has with the BRI. Having other nations outperform the economic hegemon translates to a loss of soft power, economic power, and political power.
Solution
To combat the recent gains made by Europe and China, the United States needs to increase targeted, foreign aid. This could be accomplished if the United States stopped “kicking the ladder” and instead invested in Latin American infrastructure and increased developmental aid and cut back on military aid. Military aid has consistently been the most destabilizing(or inconsistent) form of aid. Increase aid through non-military lens for the purposes of non-conditional aid. Foreign aid has been proven to be most effective when donated in a small scale and locally privatized. This form of aid is often non-conditional, but ultimately increases soft power and encourages friendly relations.
As of 2019, nearly $1 trillion (DOD releases fiscal Year 2021 budget proposal) went to the military budget with the bulk going directly to the Department of Defense – Military. The remaining $200 billion went to a plethora of programs including “Other Defense Civil Programs”. In this paper, we do not argue for a reduction in military spending, but rather the transfer of funds. The department of defense is actively engaged in development and crisis management in several parts of the world. By redirecting these funds towards the foreign aid budget, we prevent the need for more government spending.
Furthermore, foreign developmental aid is a more amicable method of providing support and helps reduce the exacerbation of conflict that can occur with military intervention. While foreign aid historically was provided with washington consensus conditionality, that is no longer the case. Today we understand that some degree of protection is beneficial, and that investments in infrastructure, education, and health have significant impacts on development. If we can redirect some of the military budget that is funded for development purposes, we can increase our soft power and bolster international trade. Ultimately, the share of US GDP that goes towards foreign aid is lacking and increasing foreign aid funding via a redirection of existing budget spending can only be beneficial.
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