I read an article by a spokesman for an international NGO warning that the cuts in Federal Government expenditures mandated by failure by the Congressional “Supercommittee” charged with producing a balanced budget could be devastating for our foreign assistance program.  While I do not welcome any cuts to our foreign assistance program, I do believe it useful to put this program into perspective.

The only way for the less fortunate nations to catch up with the wealthy nations is via massive transfers of wealth from latter to the former.  The most instructive example of this occured in the early 1970s when the major oil producing nations seized the concessions they had granted to the major oil producing companies and raised the prices by over five fold.  This led to a handful of desert wastelands becoming “golden enclaves” and vastly increased oil revenues for Saudi Arabia and Iran, among others. 

Clearly the main route for “developing” countries to catch up with the rich lies in international trade.  Trade surpluses for the developing nations are essentially transfers of wealth to them.  The stellar performer here is China that has become the world’s second largest economy via massive inflows of funds from its trade surpluses with wealthy countries. 

To see how trade surpluses compare to foreign assistance as the main spur to economic development we can look at the US experience. Our total foreign assistance expenditure in 2010 was $34 billion in economic assistance and $14 billon in military assistance.  This compares to the $66 billion surplus gained by Mexico in its trade with the USA or $26 billion gained by Nigeria or $20 billion by Saudi Arabia or $10 billion by India or the granddaddy of them all, the $275 billion by China.  In other words the trade surplus enjoyed by these five countries in its trade with the USA amounted to over eight times our total foreign assistance program.  Of course the total trade surplus enjoyed by all the developing countries with the USA would make this difference even more dramatic. 

More importantly, this equation for the USA is replicated by most of the other wealthy countries with the total impact even more dramatic.  In sum, trade, not aid, is the key to developing countries catching up with the wealthy nations.  Thus, while I am concerned by cuts in our foreign assistance program, I am much more worried by calls for reducing our trade with developing countries, e.g. China.