For rich, foreign aid is a tool of persuasion

A study finds countries like the US and Japan reward nations that support them at the UN with generous 'aid'

Foreign aid often is likened to charity. A rich nation gives money to poor countries with the goal of meeting humanitarian needs and speeding economic development - at least in theory.

In reality, when the United States, Japan, or European nations give aid, they generally have important political and security motivations.

"The direction of foreign aid is dictated as much by political and strategic considerations as by the economic needs and policy performance of the recipients," notes a study by economists Alberto Alesina of Harvard University and David Dollar of the World Bank.

A major example is foreign aid to Israel and Egypt, the latter as reward for reaching a peace deal with Israel in 1979. Aid to the two nations has for many years amounted to about one-third of America's total foreign aid. "Israel shouldn't need aid," says foreign-aid expert John Sewell. "It's a rich country."

But for domestic political reasons, plus the fact that Israel stands out as the only US-friendly democracy in the region, the US helps Israel out financially in its violent and costly struggle with the Palestinians. This spring, in the supplemental bill covering the cost of war with Iraq, Congress voted to give Israel an extra $1 billion in military assistance and $9 billion in new loan guarantees. That's on top of the annual $2.7 billion already granted Israel.

In the 1980s, during the cold war, the four top recipients of American foreign aid in Africa were Somalia, Sudan, Zaire (now Congo), and Liberia. To a large degree the money was meant to bolster noncommunist regimes - no matter how awful - in the competition with the Soviet Union for world influence.

Under the late President Mobutu Sese Seko, Zaire got nine loans from the World Bank - with US approval - despite an abysmal economic record. "All of that money was wasted in a development sense," says Mr. Sewell, of the Smithsonian Institution. Some of it fattened the pocketbooks of grim tyrants.

With the end of the cold war a decade ago, idealists hoped that bilateral aid would be directed more for genuine development and humanitarian purposes.

The Bush administration's plan to spend $15 billion over five years in the fight against AIDS overseas may reflect "a greater willingness to devote American assistance dollars to matters of economic development," suggests Tamara Wittes, an analyst at the US Institute for Peace in Washington, D.C . "It may produce positive political benefits down the road in Africa. But it is really a humanitarian gesture."

"I hope the world has changed," says Mr. Dollar, whose study covered 25 years of aid ending in 1995. "But politics is still going to be in play."

That was shown this winter as the US and Britain scrambled unsuccessfully to find enough supporters in the United Nations Security Council to pass a second resolution backing an invasion of Iraq. The US offered Turkey as much as $6 billion in foreign aid if it allowed allied troops to move into Iraq through its territory. Turkey may still get some aid for not moving its troops into the Kirkuk oil field.

US aid to Pakistan, cut off in 1998 when Pakistan exploded an atomic bomb, was renewed when the country became a US ally in the fight against terrorism and Al Qaeda. In the case of North Korea, the US and South Korea are struggling with a predicament: Should they provide food aid to help ward off hunger in the North on a humanitarian basis or hold up help to engage or punish Pyongyang for its pursuit of nuclear weapons?

Other political factors affect aid levels. The Alesina-Dollar paper finds that "friends" of the US or Japan that vote "correctly" at the UN have been rewarded substantially with extra foreign aid. An alternative but less favored explanation is that donors simply "buy" political support in the UN from developing countries, the authors note.

Another factor influencing aid is colonial status. A nondemocratic former colony gets about twice as much aid from its former colonizer as a democratic noncolony nation; former colonies closed to trade get more than open noncolonies. This is especially true of French aid.

The report found that Nordic countries do better in responding to the "correct" incentives for aid, namely low income levels, good governmental institutions, and openness to trade and foreign investment.

In general, though, the pattern of giving foreign aid across developing nations "provides evidence as to why [aid] is not more effective at promoting growth and poverty reduction," it says.

In the case of Israel, a key question today is whether President Bush will use foreign aid as leverage in seeking peace in the Middle East. "To what extent will the administration try to tie it to implementation of the road map?" asks Scott Lasensky, an analyst at the Council on Foreign Relations in New York. "He will have an opportunity to do so."

Israel may be specially vulnerable to economic pressure today. The costs of the intifada and suicide bombers - hitting tourism, shrinking the supply of relatively cheap Palestinian labor, keeping military reservists from their civilian jobs - have pushed Israel's economy into recession. Unemployment exceeds 10 percent.

The new $1 billion in military assistance became Israel's 30 days after Mr. Bush signed the supplemental bill. Because Israel can spend $263 million of that sum on purchases from its own defense firms, the aid amounts to support of Israel's defense industry.

But the $9 billion in loan guarantees - spread over three years - has conditions attached. These, in theory, could be used to pressure Israel to make concessions. One condition allows Bush to reduce the size of the loan guarantee by the amount Israel's government spends expanding settlements in the West Bank or Gaza.

"The president has an authority to stop the loan guarantee if we do not comply," notes Boaz Raday, economic minister of the Israeli Embassy in Washington.

If Bush uses the road map and economic leverage to win a settlement of the Israeli-Palestinian conflict, he will go down in history as a peacemaker. But with reelection looming, one source says he does not expect Bush to stick to a tough stand for long.