In a rare example of bipartisan activity this election year, Republican Presidential candidate Gov. Mitt Romney spoke recently at the Clinton Global Initiative gala, a fundraiser for the former President's efforts to bring together global leaders to solve the world's toughest problems.
The Republican challenger delivered an important message for economic development. U.S. foreign aid, he said, should be linked to efforts to promote free enterprise in the developing world. This is a shift from President Obama's approach, which has been to increase the amount of money that the U.S. provides to traditional assistance programs, such as AIDS relief and education. Governor Romney's proposal makes a lot of sense.
The Republican candidate made three key points:
1. U.S. foreign aid must encourage economic freedom.
2. It must be conditional on the willingness of recipient countries to develop rule of law and to protect property rights.
3. It must be designed to leverage private sector resources.
Encouraging economic freedom is the best way to spur economic growth in the developing world, thereby improving the lives of those living there and enhancing America's national interest. A 2011 study entitled “On the Relevance of Freedom and Entitlement in Development: New Empirical Evidence (1975 to 2007)” by Jean-Pierre Chauffour, the lead economist in the international trade department of the World Bank, shows that economic freedom does more to enhance economic development than the provision of entitlements, such as health care, education or housing.
Tying U.S. foreign-aid policies to recipients' efforts to develop rule of law and property rights also makes sense. A legal system based on rule of law enhances economic freedom by helping protect people's property from government appropriation and by helping ensure that contracts between private citizens are enforced fairly. If the U.S. seeks to promote economic growth in developing countries, and rule of law and property rights are central to the economic freedom that drives economic expansion, then it follows that the U.S. should link its foreign aid to the willingness of developing countries to establish institutions that support economic freedom.
The U.S. needs to leverage private-sector resources to gain maximum impact from its foreign aid. The amount of foreign aid that the U.S., or any other country, gives is too meager to make much of a difference on its own. According to economists Rachel Bahn and Sarah Lane of USAID's Office of Economic Growth, there is nearly $8 of foreign investment for every $1 of foreign aid.
To grow prosperous, poor countries need more trade, foreign investment and local businesses activity. Unlinked to nongovernmental initiatives, the benefits of foreign-aid dissipate quickly.
Therefore, to put countries on the road to prosperity, government funds should be used to prime the pump for private-sector efforts. As Gov. Romney said, “A temporary aid package can jolt an economy. . . . But it can't sustain an economy . . . because at some point, the money runs out. But an assistance program that helps unleash free enterprise creates enduring prosperity."
The Republic challenger's argument makes sense. Our leaders should encourage economic growth in developing countries by linking foreign aid to policies that encourage free enterprise, and leverage the interests of the private sector. Such an approach would benefit citizens of both the U.S. and the developing world.
The self-evident nature of Gov. Romney's message made me wonder this: Was he reminding us once again that our government should encourage economic growth by putting in place policies that support free enterprise and leverage the interests of the private sector, whether at home or abroad?
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The author is an Entrepreneur contributor. The opinions expressed are those of the writer.
Scott Shane is the A. Malachi Mixon III professor of entrepreneurial studies at Case Western Reserve University. His books include Illusions of Entrepreneurship: The Costly Myths That Entrepreneurs, Investors, and Policy Makers Live by (Yale University Press, 2008) and Finding Fertile Ground: Identifying Extraordinary Opportunities for New Businesses (Pearson Prentice Hall, 2005).