Foreign Aid: Domestic Pork in a Clever Plastic Disguise
4th June 2012
Historically, most foreign aid has been tied; that is, the recipient was required to spend the money on the donor country’s exports. Relative to cash, tying raises prices and reduces choice and recipient welfare–the deadweight loss of Christmas problem.
US food aid is a classic example. US food aid tends to peak after a glut. It’s cheaper for us to give food away when we have lots and not coincidentally giving food away after a glut helps to keep prices higher, benefiting US farmers. It’s precisely when food is plenty, however, that prices are low and aid is less needed. When food is scarce, prices are high and aid is more needed but then we would rather sell our food than give it away. In addition, we typically require food aid to be transported on US ships which raises costs. Finally, the food we give away is not always best suited to the recipient’s preferences or needs.