It's Time to Reform USAID

Displaced women cook in a USAID makeshift tent near Muzaffargarh, Pakistan after floods caused $7 billion in damage Photograph by Asad Zaidi/Bloomberg

Although as much as $1.7 billion might be slashed from the U.S. foreign assistance budget because of sequester cuts, little outcry has emerged. Foreign aid has never been popular: In opinion polls, it’s often the first expenditure suggested for the chopping block. Surveys suggest Americans feel a moral responsibility to help the world’s worst off, but they believe the aid bureaucracy is bloated and doesn’t work.

That, however, is a misperception. In practice, the foreign aid system, and in particular, the U.S. Agency for International Development (USAID), work very well in accomplishing what Washington politicians want them to do. But that includes a range of purposes that have little to do with helping the world’s poor.

When it comes to buying friends at the United Nations, or buying crops in the Midwest, or creating jobs around the Capital Beltway, the U.S. foreign aid system is a paragon of effectiveness. Take the goal of buying friends. Eric Werker, a Harvard Business School associate professor, and Ilyana Kuziemko, now a Columbia Business School associate professor and Harvard Ph.D., estimated in a 2006 Harvard paper that countries rotating onto the UN Security Council were likely to see their U.S. aid increase by 59 percent. The aid then fell as the countries finished their terms. In a 1999 study, Illinois State University’s T.Y. Wang found that U.S. aid successfully affects UN voting patterns on issues vital to America’s national interests.

The foreign aid budget is also a prime vehicle for pork barrel spending. The U.S. food aid program, for instance, purchases about $1 billion worth of American crops a year. It spends roughly an additional $1 billion transporting the crops overseas, in most cases using U.S.-flagged ships. A study by the Center for Economic and Policy Research looked at contracts issued by USAID for the relief effort in Haiti. It found that while only 0.02 percent of these contracts went to Haitian firms, more than 75 percent were handed to firms in Washington, D.C., Maryland, and Virginia. Washington-based contractor Chemonics, with more than 3,000 employees, received worldwide USAID program funds of nearly three-quarters of a billion dollars in 2011.

It’s perhaps unsurprising that aid designed to maximize friends, crop purchases, and U.S. contractors isn’t the most effective at supporting development. Take food aid: Economics professors Nathan Nunn of Harvard and Nancy Qian of Yale demonstrated in a 2010 paper that what determines the size of U.S. food aid shipments isn’t recipient need, but the size of the U.S. crop. And about half the funding is used on shipping. That same money could buy supplies in local markets and help farmers in developing countries. Many U.S. contractors bring years of technical experience and a real commitment to development. Yet the considerable majority of U.S. aid doesn’t appear anywhere on recipient country budget plans, suggesting the money is buying what American suppliers want to sell—not what recipients need to get.

So who’s to blame for the poor record of U.S. foreign aid as a tool of development? It’s not the fault of the long-suffering staff of U.S. aid agencies, who can deliver very effective programs if given the chance. A global initiative backed by the U.S. and other donors supported delivery of 225 million measles vaccine doses in 2011 alone—part of a campaign that has reduced measles deaths worldwide from 2.6 million in 1980 to 139,000 in 2010. The blame, instead, lies largely with members of Congress who complain that aid is wasted because it doesn’t lead to development, and then turn around and ensure hardly any assistance is designed or delivered with development as the primary goal.

There’s pressure for change. USAID Administrator Rajiv Shah is trying to fix at least two of the problems that prevent aid from working better to promote development. “This agency is no longer satisfied with writing big checks to big contractors and calling it development,” said Shah in 2011. He has followed through with reforms designed to ensure more companies in recipient countries can win some USAID contracts. The Obama administration is also considering overhauling the food aid program so it delivers cash to hungry people or local food buyers rather than shipping grain halfway around the world.

USAID’s current contractors have hired lobbyists from the Podesta Group to combat procurement reform, and an alliance of domestic agricultural groups, shipping interests, and U.S. nongovernmental organizations that implement the food aid program are also resisting change. The food aid lobby isn’t shy about defending the idea that combating malnutrition overseas should benefit American businesses at home: “Growing, manufacturing, bagging, shipping, and transporting nutritious U.S. food creates jobs and economic activity here at home, provides support for our U.S. Merchant Marine, essential to our national defense sealift capability, and sustains a robust domestic constituency for these programs not easily replicated in alternative foreign aid programs,” they note.

If all we want is friends, jobs, and crops, we already have the aid program we need. But for those who want our support to foster development and help the world’s poor, perhaps it’s time to overhaul the way we provide foreign aid. Otherwise, we’ll continue to funnel aid dollars down Beltway and Cornbelt ratholes.

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