Will USAID's Demise Lead to Self-Reliant Countries?

To the surprise of many, one of the Trump administration's first actions was to systematically dismantle US Agency for International Development (USAID). And by systematically I mean like the way a forklift systematically dismantles shelves in a warehouse.

With the collapse of US foreign aid, organizations around the world are scrambling to adjust. Many countries receive over 1% of their GNI from USAID. Haiti, at 1.25%, is one of them. If USAID funding is paused for a year, that could lead to significant recessions around the world.

While the end of aid would be a dark cloud over the developing world, some leaders are looking for value in the silver lining. Ghanaian President John Dramani Mahama said that the reductions in aid could lead to countries becoming more self-reliant. Indeed, one of the critiques of aid is that it is like a sling that is meant to facilitate the healing process but has been left on so long that the muscle of state capacity has begun to atrophy.

Does losing aid lead to improved state capacity? There is a lesson in Haiti's history that shines some light on this question. But there's also a reason to believe that this pause is different.

Haiti’s Response to WWII

Although modern aid is mostly a post-WWII phenomenon, Haiti found itself in a similar situation before WWII.

When the president of Ghana says that without aid maybe countries will become more self-reliant, he's invoking a debate on the connection between aid and state capacity. State capacity includes the ability to collect revenues from within your territory and the ability to provide public goods. Aid gives the state a source of revenue and public goods without having to develop capacity. Before WWII, Haiti wasn't receiving aid, but it was in another state capacity dilemma.

In the early 20th century, Haiti's government financed itself through customs revenues. This wasn't too strange--many Latin American governments used customs for the majority of their revenues. But Haiti was an anomaly in how reliant it was, as you can see in the graph below. Customs revenues create a similar problem as aid: you don't have to develop much capacity to collect them. You place a few agents at the ports, and you get your revenue. The state capacity needed for customs revenues is so low that one measure of state capacity is the share of government revenues from non-customs sources.

In 1942, Haiti experienced the customs-revenue equivalent of losing USAID. The attack on Pearl Harbor led the US to mobilize for war. This did not hurt the Haitian economy; indeed, it directed some investment to Haiti. But it diverted the government's high-revenue goods to the war efforts, which led to a revenue crisis. The economy was good, but customs revenues were lower than any point in the last decade. Could Haiti become self reliant?

After a scramble for solutions, the government settled on improving state capacity. It passed an income tax reform, adjusting tax brackets and increasing tax rates. Before the reform, income tax revenues were about 10% of all internal taxes. After the reform, the income tax became the most important source of internal revenue, comprising 50% of total internal taxes by 1948. Haiti did not abandon customs revenues, but it developed state capacity and became more robust.

Inasmuch as aid and customs are similar, the critics are probably right. Aid reduces the imperative to invest in state capacity. The end of USAID could, in the long run, lead to more self-reliant states.

But there's a key dimension in which aid and customs are not similar. And that creates a bigger concern going forward.

The Girlfriend Problem

Imagine a mother who dotes over her son. She makes his meals, washes his clothes, and cleans his room. In his early years, this is fine, because he's too young to know how to do it himself. But as the years turn into decades, the mother realizes that she is handicapping her son. His chef's special is a peanut butter and jelly sandwich. He has become too dependent on his mother.

So the mother tells her grown son that she's not going to help anymore. It's time for him to learn to support himself. Yes, it's going to be a transition. But in the long run, it will be better for him.

The plan seems to be fine, until another woman enters his life. The girlfriend. The one that's definitely not her son's type, and in fact creates a toxic relationship. But she has a defining feature: she makes the meals, washes his clothes, and cleans his room. As the relationship grows, the girlfriend starts driving a wedge between the son and mother, controlling his time and leading him to make decisions against the family's values. Soon, the son is estranged, barely making the effort to call home on Christmas.

The critics of aid who worry about the state capacity issue seem to be fine ignoring the Girlfriend Problem. Aid is not just about international development.

Look at one of America's earliest experiments in international development. During the American occupation of Haiti, the American officials decided in 1922 to shift towards a development approach. They pushed for expanded education, building infrastructure, and reducing corruption. But these weren't virtuous projects for the sake of Haitians. Americans were looking at two Girlfriends: Germany, who prior to the occupation had a large commercial stake in the country that might evolve into a strategic political advantage against America; and the Cacos, Haitian insurgents who fought against the occupation who were historically linked to the instability that instigated the occupation in the first place. America chose to stay and provide aid because it didn't want the instability to threaten its interests in the Caribbean, especially less than a decade after opening the Panama Canal.

Yes, aid likely weakens the incentives for states to develop their capacity. But that doesn't mean removing the aid will lead to a Haiti-like scramble to build that missing capacity. It's more likely to chase the country into the arms of a Girlfriend who is not aligned with American interests.

While a sudden shift in customs revenues helped Haiti find the political will to increase capacity, I think it's unlikely that this cut in foreign aid will push countries to do the same.