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Third World Development: Foreign Aid or Free Trade?

Third World poverty is one of the most pressing problems of our age, condemning billions of people to lives of hardship and misery. Such poverty has led many Americans to want to help Third World peoples, both for humanitarian reasons and to increase our own trade and national security.

In response to Third World poverty, the U.S. government has provided over $321 billion in assistance since World War II. As this figure indicates, foreign aid is politically popular. Be sides its humanitarian supporters, many special interest groups lobby for foreign aid. For example, American farmers back food assistance because such programs help eliminate politically embarrassing food surpluses caused by agricultural subsidies.

While foreign aid is a political success, it is an economic and social failure. By increasing government power, destroying economic incentives, promoting unprofitable enterprises, and subsidizing misguided policies, foreign aid increases Third World poverty. In this essay we will examine two types of foreign aid: humanitarian and development assistance. We will then discuss alternatives to aid in helping the Third World, especially the policy of free trade.

Humanitarian Assistance

Humanitarian assistance—aid designed to avert immediate disaster—mainly takes the form of food aid that is allocated through Public Law 480, widely known as the Food for Peace program. Since the establishment of FFP in 1954, the United States has distributed some $34 billion worth of food to the Third World, and currently provides some $1.2 billion a year in food transfers. Although it reduces the surpluses of our government farm programs, Food for Peace has actually increased hunger abroad in the long run.

One problem with food aid is that the dumping of free food in Third World countries depresses prices for local farmers, therefore resulting in less domestic production. According to George Dunlop, chief of staff of the Senate Agricultural Committee, millions of Indians may have died of starvation because American wheat dumped in India bankrupted thousands of Indian farmers. Thousands of Guatemalan farmers were likewise hurt when food aid poured into the country after the 1976 earthquake. For these unfortunate farmers, “the price of domestic crops dropped at a time when farmers desperately needed cash to improve and repair their homes. . . .” In Bangladesh, the upper and middle classes receive free food from foreign aid programs, thus impoverishing local farmers with artificially low prices.

A second major problem with food aid is that it encourages the recipient nations to adopt pol icies that discourage production. With food aid to “cover-up” the most grievous results of their actions, Third World governments can pursue such counterproductive policies as forced collectivization and price controls on farm products. For example, Tanzanian President Nyerere was able to collectivize farms and engage in massive relocations of peasants because food aid “hid” the consequences of such actions. In many cases, such as in Bangladesh, food aid leads to the neglect of agricultural pro duction because of the belief that other nations will provide sufficient amounts of free food: