Transforming U.S. Foreign Aid

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Introduction

U.S. foreign assistance programs played an important part in government policy directly after World War II and through much of the Cold War. Foreign aid levels plunged in the mid-1990s but are now surging, fed in part by concerns that impoverished and failing societies could offer breeding grounds or havens for terrorists. But the U.S. foreign aid system is seen as increasingly unwieldy. Secretary of State Condoleezza Rice in early 2006 moved to reorganize the way foreign aid programs are coordinated and created a top State Department post of director of U.S. foreign assistance to improve coordination of aid strategy. Some experts applaud the effort to rationalize the foreign aid process but say the proposals are too limited. Others say the first budget proposed since the restructuring—for fiscal year 2008—still concentrates too much foreign assistance on a small group of U.S. strategic allies.

What does Secretary Rice’s foreign aid transformation involve?

Rice created the post of director of U.S. foreign assistance at the senior level of deputy secretary of state. This official serves concurrently as administrator of the U.S. Agency for International Development (USAID), the government’s primary foreign assistance entity. The framework for transforming foreign assistance calls for aligning strategic objectives (PDF) with “categories of countries that have shared characteristics or development challenges”. The budget request for fiscal year 2008, for example, plans to concentrate 51 percent of aid funding from Department of State and USAID program assistance resources in rebuilding and developing countries, such as Afghanistan. The first director of U.S. foreign assistance, Randall L. Tobias, told the Center for International and Strategic Studies in February 2007 that the newly constituted aid department is increasing funding to: “programs targeted to improving governance and democratic participation; programs mitigating diseases that threaten the human and economic capacity of countries to progress on their own; programs that expand access to and improve the quality of education; and programs that enhance economic opportunity and the skills needed to participate in the global economy.” 

The first step in the restructuring involved consolidating a fragmented budgeting and planning process and bringing together State Department and USAID offices that were sometimes involved in competing or duplicate programs. The director also coordinates U.S. government foreign assistance strategy and provides “guidance” to other U.S. entities providing foreign aid, such as the Millennium Challenge Corporation (MCC). Under the new director, the State Department and USAID will continue to be the prime sources of funding to nongovernmental organizations that dispense advice and technical assistance to support the spread of democracy worldwide. USAID is to remain an independent organization reporting directly to the secretary of state, although some development experts have expressed concern that the agency’s independence is eroding. Some are also wondering about the direction of the reorganization after the abrupt resignation of Tobias on April 27, 2007, after he was linked to an alleged prostitution service based in Washington.

What is the reason for this restructuring?

Aid experts inside and outside the government had pointed to growing fragmentation in the way foreign assistance is administered. News reports say that within her first year as secretary of state, Rice became aware of a problem in coordinating funding for democracy-related programs. Former Rep. James Kolbe (R-AZ), then-chairman of the House Subcommittee on Foreign Operations, told a briefing at CFR in February 2006 there has been a proliferation of new aid programs in the past several years without an overarching strategy: “You have pieces of foreign assistance that are everywhere now in the government, and there isn’t a very coherent direction to it.” A March 2007 report by the Government Accountability Office found seven different U.S. agencies, from USAID to the Department of Defense, spent about $3 billion on education assistance in the predominantly Muslim developing countries from 2001 to 2006. The report found “instances where agencies missed opportunities to collaborate and maximize U.S. resources” because of a lack of coordination (PDF). It also questioned whether the new director of foreign assistance had the authority to direct such agencies to work together.

Will this unify all U.S. foreign assistance under one department?

No. The initiative is aimed at aligning the range of aid activities conducted by the State Department and USAID, which account for roughly 75 percent of the foreign assistance budget. That has led a number of outside experts to suggest the move is not sweeping enough and should encompass all U.S. bodies engaged in foreign assistance. John W. Sewell, a senior scholar at the Woodrow Wilson International Center for Scholars, says the plan announced by Rice still lacks a strategic framework to guide foreign assistance activities. Sewell says the plan declines to mention the need to address poverty, and its mention of linkages to the Defense Department raises fear that foreign assistance will be further militarized.

Steven Radelet, a senior fellow at the Center for Global Development, says there is concern that the realignment brings independent USAID programs more directly under the control of the State Department, meaning that political criteria might play an even bigger role in aid distribution. Radelet says increasing aid to countries that are partners in the war on terror, for example, could make it harder to achieve results from aid, such as sustaining economic reforms. “The more we give aid that way the less focused we are on real development results,” Radelet says. But Andrew S. Natsios, director of USAID from 2001 to 2005, dismisses such concerns. “I don’t see this at all as AID absorbed into the geostrategic interests of State [Department],” Natsios told the February 2006 briefing at CFR with Kolbe. “[W]e need to use diplomacy to help the development process succeed, because the friends that we’ve had that have succeeded have frequently done it not just with AID development programs.”

What other U.S. government departments disburse foreign aid?

There are many, including the departments of agriculture, commerce, defense, homeland security, justice, labor, treasury, transportation, health and human services, and interior. Separate permanent authorizations exist for foreign aid programs such as the Peace Corps, the Inter-American Foundation, and the African Development Foundation, as well as the Overseas Private Investment Corporation.

What are some other recommendations for improving foreign assistance?

Natsios has suggested the government hold periodic reviews of all development programs in a fashion similar to the Pentagon’s Quadrennial Defense Review to try to tie together the aid accounts and programs across the federal government into a tight strategy. Sewell, of the Wilson Center, says the post of director of U.S. foreign assistance should have been elevated to the level of the president’s special representative for aid issues to ensure greater coordination of all U.S. aid efforts. Other experts say the government must start by replacing the 1961 Foreign Assistance Act, set up to govern all foreign assistance programs, but which has evolved into a system of overlapping mandates and restrictions. Some experts recommend establishing a cabinet-level agency for development, with a single budget for development and incorporating agencies such as USAID, the MCC, and the various aid programs run by other government departments. A March 2007 paper by the Center for Global Development cites a continuing imbalance in the amount of aid designated for a small group of U.S. allies and urges a better foreign aid strategy for weak and failing states. It also says the proposed fiscal year 2008 budget gives short shrift to programs that provide assistance to longterm growth and poverty reduction in poor states.

How much does the U.S. spend on foreign aid?

The annual Foreign Operations Appropriations Bill, seen as the most reliable way of assessing how much the United States spends on foreign assistance, was $20.7 billion for fiscal year 2006, the last year for which completed allocations can be measured. President Bush has asked for about $25 billion for fiscal year 2008. If approved, that would amount to a near doubling of foreign assistance since 1997. The State Department and USAID portion of the request for 2008 is $20.3 billion, an increase of $2.2 billion over fiscal year 2006.

In 2004, official development assistance (ODA) from the United States was 0.16 percent of its gross national product (GNP). ODA, grants or loans a government gives to a developing country to promote economic growth, excludes military assistance that makes up a major portion of U.S. foreign aid appropriations—from $3 billion to $6 billion annually during the past ten years, according to the Congressional Research Service.

How does U.S. aid spending compare with other nations?

Although Organization for Economic Cooperation and Development (OECD) figures from 2006 show the United States as the leading donor among the world’s top twenty-two industrial nations in terms of volume, it was near last in terms of aid as a percentage of GNP. As part of the Millennium Development Goals set out by the United Nations, many developed states have pledged to commit 0.7 percent of their GNP to official development assistance. The United States has never committed to that figure. Five European nations—Norway, Luxembourg, Denmark, Sweden, and the Netherlands—have exceeded the goal. Defenders of U.S. aid levels say the 2006 figures do not fully represent the major new projects under the MCC and the HIV/AIDS account. They also stress the high level of U.S. private sector donations not included in ODA and the role of the U.S. military, which was a critical source of relief supplies after the Indian Ocean tsunami hit at the end of 2004.

Who receives U.S. aid?

More than one hundred countries, though a small handful of them receive the largest share. Israel and Egypt have traditionally been the single-largest recipients of U.S. aid, dating back to the 1978 Camp David peace accords between the two countries. For both countries, the majority of this is military aid (PDF)—$2.4 billion in military aid is requested for Israel in 2008 and $1.3 billion for Egypt. Afghanistan and Iraq, involved in massive U.S.-led nation-building efforts, and Pakistan, an important ally in the war on terrorism, also receive huge amounts of foreign aid. Separate from the aid disbursed by the State Department, the Defense Department also has a growing role in post-conflict situations, providing billions of dollars in reconstruction aid (PDF) in places like Iraq and Afghanistan.

Will funding be cut for foreign aid?

Kolbe warns of a donor fatigue factor in Congress because of the expensive military and reconstruction efforts in Iraq and Afghanistan. But he also sees the potential for sustaining aid if it is effectively linked to national security concerns. The new MCC program has won praise for its goal of linking reforms in poor developing states to aid projects, but Congress has been increasingly critical of the slow pace of the disbursement of funds and has cut the level of funding requested by the Bush administration during the past several years. The Center for Global Development urges Congress to provide the full $3 billion requested for the next fiscal year. It says cutbacks could undermine a signal success it calls the MCC Effect, “the effect the MCC has had on creating incentives for policy reforms in candidate countries that see MCA eligibility as a good governance seal of approval and a program worth the effort to access.”

What is the criteria for providing foreign aid?

Beginning with the post-war Marshall Plan in 1948, strategic importance has long been attached to U.S. foreign assistance. In 1961, President Kennedy said the collapse of developing countries “would be disastrous to our national security, harmful to our comparative prosperity, and offensive to our conscience." Kennedy signed the Foreign Assistance Act, which established USAID. The legislation today instructs the executive branch to pursue dozens of separate goals. Among them are reducing infant mortality, controlling population growth, supporting human rights, and encouraging private investment. The Bush administration’s updated National Security Strategy released March 16, 2006 says: “Development reinforces diplomacy and defense, reducing long-term threats to our national security by helping to build stable, prosperous, and peaceful societies. Improving the way we use foreign assistance will make it more effective in strengthening responsible governments, responding to suffering and improving people’s lives.”

A USAID white paper in 2004 cited five core operational goals of U.S. foreign assistance:

• Promoting transformational development, particularly in governance, institutional capacity, and economic restructuring;
• Strengthening fragile states;
• Providing humanitarian assistance;
• Supporting U.S. strategic interests, especially in countries such as Iraq, Afghanistan, and Pakistan;
• Mitigating global and international ills, including HIV/AIDS.

Natsios, the former USAID chief, says there is a big debate in Washington at the moment about spending aid money on democracy programs and adds that non-democratic states receiving U.S. aid don’t like money earmarked for democratic development because they see it as disruptive internally.

What is the role of Congress?

No new legislation will be required to authorize the changes involved in the realignment of State Department aid structures. But experts say Congress needs to be part of any aid realignment strategy, including revisions to the Foreign Assistance Act. Some key lawmakers reacted positively to Rice’s announcement in early 2006. But in March 2007 budget hearings that marked the first occasion to scrutinize the restructuring effort, House Foreign Affairs Committee Chairman Tom Lantos (D-CA) criticized Tobias for failing to engage Congress on the aid transformation process. “We are not a potted plant watching the administration function,” said Lantos. “We are part of the decision-making process.”

Is foreign aid effective?

The record is mixed. Bilateral aid programs, through which most aid is transferred, and programs through multilateral banks have come under the most criticism. Experts say that during the Cold War, U.S. foreign aid enriched dictators like Mobutu Sese Seko of Zaire and Pakistan’s Mohammed Zia ul-Haq to secure their allegiance in battling communism, but development remained stagnant in these states. Others point to the massive aid amounts given to Egypt during the past two decades and the country’s minimal commitment to reform. But experts also cite success stories brought about by a combination of foreign aid and domestic reforms, including South Korea, Botswana, Chile, and Poland. Radelet, of the Center for Global Development, says there have been numerous global health successes linked to foreign aid, including eliminating smallpox, the near elimination of polio, and widespread childhood immunizations. Some say the greatest foreign aid success was the Green Revolution of the 1960s, in which developed countries transferred technology in agriculture to peasants and farmers in Asia, eliminating the threat of famine in many countries.

There is a growing consensus among experts that development financing cannot work without institutional change. They note that once Eastern European countries had committed to reforms in the 1990s, private investment flows dwarfed official development aid. William Easterly, a professor of economics at New York University and a former research economist at the World Bank, is critical of many current efforts to achieve poverty reduction through foreign aid packages. In a CFR.org Online Debate in December 2006, he said: “The complex poverty of low-income societies will slowly give way to prosperity the same way it happened in rich countries, through the gradual homegrown rise of political and economic freedom.”

[EDITOR’S NOTE: This is an update to a backgrounder originally published March 17, 2006 under the same title.]