The Last Thing The Soviets Need Is A Foreign Aid Package

Western Europe, the U.S., and Japan should not cave in to pressure to provide economic assistance to the Soviet Union and countries in Eastern Europe. Also, they should stop making loans and grants to other countries, too, aside from those for humanitarian purposes.

Economic aid gives governments breathing room to postpone the crises-such as occurred in Argentina, Mexico, and the communist countries-that force reluctant governments to take unpopular remedial measures. Thus foreign grants delay privatization programs, reduction of subsidies, cuts of import barriers, and cutbacks in other excessive and misguided controls that are largely responsible for bad economic performance.

A Soviet aid package would go to the central government, or to the governments of the Russian and other republics, not to the fledgling private sector and would-be entrepreneurs. Economic aid is usually channeled through other governments because it is far easier to negotiate with them than to help companies and families directly.

SHORT-TERM FIX. Since too much government is typically the problem, not the solution, economic aid is counterproductive. Governments use it as a short-term fix to keep economic pressure on longer. This prolongs problems and does little to solve long-term woes. Any country that institutes significant reforms and creates a healthy economic environment will have scant trouble attracting loans and investments from Western companies and banks.

Some economists recommend that grants and loans to the Soviet Union be tied to reductions in their spending on nuclear and conventional weapons. But the country's dismal economic performance is already forcing large military cutbacks. In spite of any such link to arms cuts, if aid from abroad reduces the economic pressure to reform, spending on arms could be greater than would have occurred without the assistance.

The harmful effects of economic aid are not confined to formerly communist countries, as can be seen from the experiences of Egypt and Israel, the two biggest recipients of assistance from the U.S. during the 1980s. Egypt is a miserably poor country that has taken only a few steps to throw off the socialist shackles imposed by Gamal Abdel Nasser during the 1950s and 1960s. It continues to have a huge and corrupt government sector, enormous subsidies of food and other goods, a weak private sector, and subsidized, state-run companies that are sheltered from competition with better products made elsewhere.

Although Israel grew very well until the 1970s, since then it has been bogged down with unemployment, much slower growth, and periods of hyperinflation. Relative to the size of its economy, Israel probably has the largest public sector in the free world, with government-run companies dominating many industries, extensive wage controls, and restraints on foreign competition. Israel would have gone much further toward reducing the government's stranglehold were it not for continued generous economic assistance from the West, especially the U.S. Some Israelis have been so exasperated that they are calling for greatly reduced dependence on foreign aid.

ROADS AND BRIDGES. The stories are similar for India, Pakistan, and the African countries that have enjoyed-if that is the word-easy access to Western largess. Their bad economic performance also is traceable to large subsidies to favored interest groups and too many controls over the private sector.

The U.S. alone provides more than $1.5 billion of aid annually through such international organizations as the African Development Fund, the International Development Assn., and the World Bank. These agencies usually lend or give money to governments, not to the private sector. Obviously, some grants and loans from countries and international organizations have been spent on socially useful infrastructure, such as roads, bridges, airports, and sewage systems. But these account for a small share of all assistance. And since spending on infrastructure is only a minor part of the budgets of recipient countries, they could easily spend more without foreign help if they had the will to do so.

Economic assistance is supposed to do for Eastern Europe and the Soviet Union what the Marshall Plan did for Western Europe after World War II. But the problems then were very different. Europe was prostrate from the war and needed time to restore the basically private enterprise systems of the prewar era. What Eastern Europe needs is just the opposite: constant pressure for a radical shift away from government control and toward freer markets. Just as the Marshall Plan helped restore the old system to Western Europe, similar assistance to the East would help maintain the excessive government direction and management of their economies.

The truth that a child's initiative is weakened when parental help is too readily available applies to economies as well. They are more likely to prosper when they are forced to put their own houses in order and have to bear the economic burden of the transition toward productive market economies.

Before it's here, it's on the Bloomberg Terminal.