Still not enough aid - International Issues - United States proposes Millennium Challenge Account for foreign aid - Statistical Data Included

Challenge, July-August, 2002 by Isaac Shapiro, David Weiner

IN MARCH 2002, THE BUSH ADMINISTRATION ANNOUNCED a major change in U.S. foreign aid policy, proposing to create a "Millennium Challenge Account," into which would be directed $10 billion in additional aid over the three-year period from 2004 through 2006. This short article first examines how the resulting levels of aid would compare with historic levels. The second part of the article lays out some of the policy questions and implications raised by the president's proposal, many details of which will only be settled through the legislative process.

This article builds on an earlier analysis by our two organizations (the Center on Budget and Policy Priorities and the Center for Global Development), which found that, under the budget for 2003 that the administration had proposed in February, the share of the economy dedicated to foreign economic aid would be at its second-lowest level in the post-World War II era, and the share of government spending dedicated to foreign economic aid would tie for its lowest level in this period. (1)

President Bush's Millennium Challenge Account proposal would result in the sharpest increase in aid spending in decades. This proposal, and the president's strong accompanying speech underscoring the importance of foreign economic aid, represents a potential turning point in the aid debate.

Yet the proposed increase for the Millennium Account would not begin to take effect until 2004, and would not take full effect until 2006, thereby requiring several years of congressional assent and continued presidential support. (2) Furthermore, the resulting level of spending on foreign economic aid would rise to only 0.13 percent of the gross domestic product (GDP) in 2006, still below-and, compared with most years, well below-the share of GDP the United States contributed in any year from 1946 to 1995. The United States would continue to contribute a far smaller portion of its economy to aid than nearly every other donor country In addition, the share of the budget that the United States would devote to aid would still be lower than in almost any year from the end of World War II through the mid-1990s.

Size of Increase and Comparison with Previous Levels

The definition of foreign economic aid used here includes two major budget categories: International Development and Humanitarian Assistance and the Economic Support Fund. As explained in the appendix, if this approach errs, it does so on the side of being too expansive a definition of foreign economic aid to poor countries.

The administration is proposing to create the new Millennium Challenge Account through increases in foreign economic aid totaling $10 billion over the three years starting in 2004. This analysis assumes that for the years 2004, 2005, and 2006, the administration would add $1.67 billion, $3.34 billion, and $5 billion, respectively, to what it has already proposed to spend in those years--an assumption that appears consistent with statements by Treasury Secretary Paul O'Neill. (It is unclear whether the administration is proposing a $5 billion increase for 2006 relative to what it proposes to spend for 2003 or what it previously proposed to spend for 2006. By assuming the latter, this analysis may err on the side of projecting a somewhat larger increase than the administration may actually intend.)

The administration's proposed increases would require congressional approval in each of the next three years. If approved by Congress, this proposal, once it had been fully phased in, would represent a sizable increase in foreign economic aid spending, to a total of $16 billion in 2006. Aid would jump by 38 percent over the 2003 level, after adjusting for the effects of inflation. (The Bush administration has said its plan would increase aid by 50 percent, from $10 billion currently to $15 billion in 2006. The administration claims a larger percentage increase both because it does not take into account the effects of inflation and because it uses a lower figure for current aid. The lower base means that any dollar increase in spending yields a relatively larger increase in percentage terms.)

Relative to the size of the economy and the budget, however, foreign economic aid would still be below its share in nearly every year between the end of World War II and the mid-1990s.

Aid as a Share of the Economy

Under the president's proposal, foreign economic aid spending would constitute 0.13 percent of the economy (or GDP) in 2006, an increase from its current level of 0.11 percent but still below its share of the economy in every year from the end of World War II through 1995. As a share of the economy, aid would be far below its average of 0.20 percent during the 1980s and even further below its average during the latter half of the 1940s, as well as the 1950s, 1960s, and 1970s.

Aid as a share of GDP is the yardstick that is typically used for international comparisons. If the United States devotes 0.13 percent of its economy to aid in 2006, this share would still be much lower than the share of the economy--.31 percent--now contributed to development assistance by the typical or median donor country. (3) The U.S. share would rise to the current level of Italy, but in all likelihood the other twenty donor countries would still contribute a larger share of their economies to aid than the United States would. (Even though European countries already contribute a much larger share of their economies to aid than the United States does, the European Union recently pledged to increase its average aid level significantly over the next few years.)