U.S. Foreign Aid Is Broken but Fixable

Former U.S. President Donald Trump’s February threat to stop all U.S. aid to foreign countries and only issue loans may be an opportunity in disguise.

In 2017, while serving as the president, Trump tried to cut U.S. spending on international affairs by more than a third. Members of the Republican Party—who then controlled both the U.S. House of Representatives and Senate—rebuffed him.

But that was then, and this is now. Out from the U.S. Congress are the likes of Sens. Johnny Isakson and Bob Corker, the latter of whom said at the time that Trump’s 2017 proposal was a nonstarter. Since then, there’s been a nearly one-third turnover in the Senate and an even bigger one in the House. Newer members in both chambers are far more skeptical of the value of these investments than their predecessors.

On March 23, President Joe Biden signed a $1.2 trillion spending bill that included a 6 percent cut to his annual funding request for U.S. foreign aid, but House Republicans wanted cuts four times that. Even Sen. Lindsey Graham, a longtime champion of foreign aid, just endorsed Trump’s debt-first proposal. If Trump wins another term in the November presidential election, U.S. foreign aid will be in trouble.

Yet the specter of a potential second Trump presidency also gives new urgency to the need to modernize the United States’ approach to foreign aid, already a relic of the post-World War II era, and usher in a version that is more fit for the times.

For nearly 25 years, successive chiefs of the U.S. Agency for International Development (USAID) have tried and failed to reform the United States’ archaic foreign aid system. This is especially true of the more than $30 billion that the United States spends every year for traditional development aid. Unlike other forms of foreign aid—such as military and humanitarian aid that helps countries respond to short-term crises, including wars or natural disasters—development assistance takes a longer view. These investments are supposed to help countries build stronger health, education, and food systems, for example, especially in parts of Africa, Latin America, and Asia.

But the open secret in Washington, D.C., is that most of this development money goes to prop up a handful of big aid contractors to fly around the world, taking 82 cents of every foreign aid dollar they make for themselves rather than investing it in local communities. The “industrial aid complex,” as current USAID chief Samantha Power calls it, pays lip service to “working itself out of a job” and “building capacity,” but it does not have the financial incentives to do either.

Because they typically lack the local context or legitimacy to succeed, the projects facilitated by these contractors are often doomed from the start. In the worst cases, their very presence distorts the economies of the countries that they’re paid to support.

USAID is presently issuing $17 billion to aid contractors to distribute medicines around the world rather than, for example, investing in local logistics providers, thus “doubling down” on a 60-year-old failed project model that “infantilizes” countries, said former senior World Bank official Olusoji Adeyi. Many of the people who got into this work did so to serve a higher mission, but they’re stuck in a broken system.

Most members of Congress have never had a strong interest to fix these issues, especially in the absence of a large grassroots movement or well-financed influence group to demand that they do. Lobbying by the aid contractors and the revolving door that they’ve created with government agencies have also stymied past reform efforts.

However, this may all be coming to a head. Faced with the prospect that U.S. foreign aid could go away, those who care about the United States’ role in the world can do better than to just say “no” and instead propose a better, more defensible model.

As Sen. Chris Coons told Power during a budget hearing in late 2022, “I am convinced that many African countries would still prefer to be close partners with the United States, but they view us as unreliable. …We have a moment where we could make that right.”

Last year, we asked hundreds of communities in the United States and around the world what a new, 21st-century approach to U.S. global development could look like. A growing body of evidence shows that broad-based economic growth does more to boost human and social development outcomes than funding one-off aid projects. Look no further than the modernized economies of Singapore, Taiwan, or South Korea for evidence of that.

Opportunities to invest this way abound. In January, China offered the Democratic Republic of the Congo a $7 billion debt-for-minerals deal, but the United States should have made a better offer: co-investing in a way that would enable Congolese entrepreneurs to own the mine, process the minerals, and sell them to the rest of the world—including the United States—with protections against slave labor and environmental degradation.

Washington should do deals like this in any number of sectors that will shape the global economy over the next decade, such as drug manufacturing, clean energy, and supply-chain logistics, as well as in commerce-enabling infrastructure such as broadband and fiber optic cable. Investing in this way can also accelerate the movement of socially responsible companies working to establish a global floor of minimum standards for sustainability and human rights.

Just as the CHIPS and Science Act—passed with bipartisan support in 2022—aims to make investments in innovation part and parcel with the way the United States grows its own economy over the next two decades, Washington should also make innovation a centerpiece of its value proposition for other nations.

For example, the United States could regularly sponsor major competitions akin to Operation Warp Speed to stimulate industry research and development in sectors where markets otherwise won’t act, such as cures for infectious diseases such as tuberculosis; diagnostic tests to detect dangerous antimicrobial-resistant bacteria; and low-cost, low-power ways to refrigerate goods or cool and heat buildings—the latter of which being an exploding need as global energy demand balloons. Washington could also safely diffuse discoveries—made via advanced research projects at United States’ agencies, universities, and national laboratories —through its network of embassies around the world and bring already-proven innovations to greater scale.

Consider technology developed in Ethiopia to convert plastic waste into building materials in place of cement, which saves both energy and the environment; technology developed in Cameroon to extend the shelf-life of the staple crop cassava from three days to 18 months, expanding food security to communities that had little before; or drone technology developed in the United States’ San Francisco Bay Area that cuts from weeks to minutes the time it takes to deliver vital blood, medicines, and vaccines to remote rural areas, already in use in countries including Rwanda, Ghana, and Japan.

The United States’ aid system is not presently set up to do this. As Power told Congress last year, “The most substantial gap right now between what countries are asking for and what we provide is in economic growth.” Leaders and thinkers as ideologically diverse as Barbadian Prime Minister Mia Mottley; Joseph Stiglitz and Dani Rodrik; Efosa Ojomo, Clayton Christensen, and Karen Dillon; Tyler Cowen; Lant Pritchett; Daniel Runde; and Mariana Mazzucato have also made similar critiques.

USAID, the nation’s biggest aid agency, is built to channel most of its funding via large grants and contracts for one-off, charity-like projects that, due to congressional earmarks, countries often don’t even want. Its tenders are also typically so complex that only the government’s biggest contractors need apply.

Meanwhile, other U.S. development agencies that were created to promote sustainable economic growth and grow private sectors receive just a tiny fraction of the overall U.S. foreign aid budget.

The U.S. Millennium Challenge Corporation can form joint corporations with partner nations to invest in results-based compacts that propel economic development, for example. The U.S. International Development Finance Corporation (DFC) can take equity positions in companies and use innovative finance tools such as first-loss guarantees to incentivize more private investments in sectors where perceived risks are high but investment is still needed.

However, both agencies also have significant constraints on how they can spend, in which countries they can operate, and regulatory disincentives to work with their much better-financed USAID cousin. No U.S. federal agency currently has the personnel, systems, budget, or incentives to champion innovation for global development in a truly meaningful way.

Modernizing the U.S. approach to global development to rebalance investments in ways that prioritize innovation, sustainable economic growth, and mutually beneficial trade, not aid or charity, would be difficult to do politically.

It would result in cries of foul from the aid industry players that have built small empires around winning USAID contracts, for example. Every earmark that constrains USAID also has a constituency that lobbied for it.

But making these shifts could engender support from both Democrats and Republicans.

First, it would result in the devolution of more funding to local actors, making for more equitable and better development. Those closest to the problems are closest to the solutions. Local groups presently receive approximately just 10 percent of U.S. foreign aid investments (and maybe even less than that).

While Power, like USAID chiefs before her, laments how little U.S. foreign aid reaches local actors, so does the conservative Heritage Foundation. Parts of its proposals for U.S. foreign aid have been criticized by many within the traditional development community, but other sections also call for aid dollars to shift away from “giant U.S.-based implementers” in favor of local organizations, and for a greater proportion of U.S. investments to go toward models that propel economic growth and innovation, especially in global health.

Second, these shifts would also make for far more cost-effective spending. Moving funding out of the Washington, D.C., Beltway to local players would represent at least a 32 percent cost savings, according to one study, and potentially much more, according to others. Deploying more capital via the DFC also means that U.S. taxpayers could even see a financial return for many of their successful foreign aid investments.

Finally, for members of Congress who are concerned whether the United States is competing effectively with China’s Belt and Road Initiative, such as House Foreign Affairs Committee Chair Michael McCaul and China select committee member Andy Barr, making this shift would also mean a categorical “yes.” It sends the wrong message to countries about the kinds of partnerships Americans want to build when the United States flies in the aid complex to perform work in place of where legitimate local market actors could, or where more innovative private sector players are primed to enter.

In sum, there is a way to partner with the rest of the world that can win over even foreign aid’s most hardened skeptics. Remember that former U.S. Rep. Ted Yoho, a member of the far-right conservative Freedom Caucus, was one of the architects of the DFC. Last month, conservative Republican Rep. Cory Mills also joined Rep. Sara Jacobs, a Democrat in the Progressive Caucus, to pass a bill out of the House Foreign Affairs Committee to make it easier for USAID to work with local partners and bypass the aid industry entirely.

Past crises have been the catalysts for enormous social progress. The Sputnik moment resulted in the United States putting a man on the moon, for example. The COVID-19 pandemic resulted in Operation Warp Speed, creating the conditions for multiple working vaccines.

Today’s looming crisis moment for foreign aid can also be the harbinger for long-overdue and transformational change. The question before us now is whether our leaders will seize this crisis moment as an opportunity to fix a broken system, rather than tinker around the edges.