U.S. Foreign Aid Can Help Balance the Deficit in U.S. Foreign Trade
Two years of a falling dollar did not bring American trade back into balance; economists and politicians have now begun looking beyond the decimal points of exchange rates to understand the larger dynamics of foreign trade.
Increasingly, attention shifts to the size of the market where American goods are being offered and to policies that can expand those markets for American products. The final result may be a reevaluation of American foreign-aid programs, with U.S. foreign assistance seen less as a political and military tool than as “seed money” for Third World economies trying to achieve balanced growth.
The most revealing case is Latin America. From 1950 to 1981, the developing countries of the Western Hemisphere steadily increased their imports at an average annual rate of almost 10%. At their peak, in 1981, these countries imported more than $128 billion worth of goods. The United States had by far the biggest share of this large and growing market, exporting $41 billion to our neighbors, a 33% market share and three times the 11% share of U.S. goods in the worldwide market.
In 1981 something unhappy happened: The Latin American market began to shrink. A continental recession, in part caused by the debt crisis, reversed a 30-year trend. From 1981 to 1985, imports to Latin America fell by one-third, to $80 billion. Although the United States actually increased its share of the Latin market to 38%, total exports fell 26%. American companies had increased their competitiveness but economic decline made the victory hollow.
If the developing countries of the Western Hemisphere had continued to grow at their 1950-1981 rates through the 1980s, the U.S. trade picture would be much less dismal today. Instead of exporting $31 billion to Latin America, we would have exported more than $70 billion in 1985. A change for the better of $39 billion would not solve America’s trade problem completely, but it would do much to defuse the situation. It would also save thousands of American jobs.
These figures strongly suggest that America’s trade problem has as much to do with the poverty of our trading partners as with the competitiveness of our goods. Restoring the prosperity of our Latin American neighbors through aid and credit programs should be a priority for American foreign aid programs. Unfortunately, this is far from the case.
While four of the five countries receiving the highest per capita amounts of American aid are in this hemisphere, the aid is not flowing to the most important economies. In 1985, the five largest recipients of net American aid, per capita, were the following:
Israel 29%, $922; Grenada 0.2%, $221; El Salvador 3%, $90; Costa Rica 2%, $81; Honduras 2%, $54.
By contrast, of the three most important economies in Latin America, Mexico actually paid the United States $42 million more than it received in assistance, Brazil received $2.48 per capita--and less total aid than El Salvador--and Argentina got $.45 per head.
One need not be cynical to recognize that military and political concerns influence decisions about American aid, but the right economic assistance can strengthen the American economy while improving the living standards of our neighbors. Surely economic strength is the key to the political stability and orderly evolution of Latin America; if civil wars like the one in El Salvador were to break out in Brazil and Mexico, the United States would spend billions and suffer grave political and economic consequences.
Foreign-aid programs have gone through several stages based on several premises and priorities since end of World War II, supposedly reflecting an improved understanding of the processes of economic development. In the early stages, aid donors gave money for specific large projects such as steel mills and dams. In some cases these “prestige” projects were successful; in others, they became expensive white elephants, monuments to bad planning.
Current foreign-aid strategies stress “export-led growth”--encouraging Third World countries to produce goods for markets in the developed world while restraining non-essential imports. These projects, proponents hoped, would help Third World countries earn the foreign exchange needed to expand their factories and service their burdensome debts.
During the 1980s Latin American countries adhered more and more closely to the export-led growth model. Brazil cut its imports from almost $25 billion in 1980 to $13 billion in 1985 while increasing its exports from $20 billion to $25 billion. Despite falling oil prices Mexico managed to increase its exports slightly while slashing imports from $24 billion in 1981 to $6 billion just two years later.
These trends, encouraged by the United States, have had a disastrous effect on the U.S. balance of trade and unleashed a torrent of protectionist feeling here and in the other advanced countries. The path to long-term, sustained growth for developing countries lies in a strategy of balanced growth: growth in exports balanced by growth in imports for domestic consumption.
In the export-led model of growth, the role of the advanced countries has been to open their markets to Third World producers and, in the case of the United States, to run huge balance-of-trade deficits. In a balanced-growth model the advanced countries would have to provide financial assistance--credits, currency support and debt-forgiveness--to allow the Third World countries to grow.
We are nearing the limits of the export-led growth strategy; the American economy is no longer able to support its costs. The absence of economic growth in the Third World would lead to political upheavals that would also be incalculably expensive for the United States.
A program of credits and aid that aims to promote sustainable growth in Third World economies, undertaken cooperatively by the United States and its major allies, represents the most humane and decent method of addressing the critical issues of international trade. It is also the cheapest and most practical.
