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ROBERT SCHUETTINGER, Foreign Aid in Latin America - Ralph Raico, New Individualist Review [1961]

Edition used:

New Individualist Review, editor-in-chief Ralph Raico, introduction by Milton Friedman (Indianapolis: Liberty Fund, 1981).

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Foreign Aid in Latin America

ROBERT SCHUETTINGER*

THE PROBLEM OF how best to bring about economic, educational and political progress in the underdeveloped nations is certainly one of the major challenges of our time. For this reason, it is particularly discouraging that the great body of our college graduates (who mould the public opinion of this country) have been content to follow the lead of publications such as the New York Times and adopt a simplistic and essentially thoughtless attitude toward what will perhaps be remembered as the Gordian Knot of the Twentieth Century.

If you ask the average modern Liberal intellectual what sort of economic system he considers best suited to the “emerging”1 nations, nine times out of ten you will receive almost exactly the same cliche in reply: “For the advanced nations, I am all in favor of free enterprise (under adequate safeguards, of course) but I think that some form of socialism is necessary for the developing countries—at least until they develop sufficient thrust to pass the ‘take-off stage’.”2 The results of such little polls would not be especially noteworthy were it not for the fact that most of the available economic data point in precisely the opposite direction.3

It is a rather alarming commentary on the state of public discussion in America (and on our intellectual community in general) that almost all of the talking and writing done on the subject of foreign aid each year is uninformed and emotional. This, of course, is an indictment not of one party only, but of both sides of the case. The Liberals as a rule dismiss all critics of foreign aid as reactionary, anti-humanitarian and isolationist; the Conservatives, on the other hand, too often attack foreign aid as a general principle without pausing to ask what are the actual effects upon the United States and the receiving country of a particular program. In the light of this background then, I would like to discuss the operation of the Peace Corps and some other aspects of our foreign economic aid program in Latin America.

This past winter, I spent a month of my vacation touring three Latin American countries, stopping on the way to visit friends who are currently serving in the Peace Corps.4 My impression of this much-publicized organization, based on the Volunteers I have met in the United States as well as in Latin America, is that it does not attract into its ranks the very highest level of college graduates; with a few exceptions it attracts the solid, competent, intelligent, second-level type. There are good and obvious reasons why this should be so. Most really first-rate students simply can not spare two years for this kind of work; they are committed to long stretches of graduate study interrupted, in most cases, by the Armed Services. There are, however, notable exceptions. Some of the Volunteers I met will certainly be leaders in their fields; but, as in most government agencies, these are few and far between. Tocqueville’s comment that the most able Americans, as a rule, avoid public service is as true in 1963 as it was in 1830.

Most of the Volunteers I met had no strong political convictions; the great majority fitted in unobtrusively with the American consensus. The beatnik types are clearly a small minority in the Corps. The hardships of the two-month training period, I was told, weeded out the few of them who did apply. At one Peace Corps “boot camp” I visited, the training was indeed rigorous in the physical and busy-work sense; anyone who completed it had more than his share of conscientiousness and endurance. These are the two qualities the Corps is most interested in and it is for this reason that only a few Volunteers have returned to this country prematurely. On the other hand, the training program can not be said to be intellectually demanding and it is primarily for this reason that Harvard University has declined to have anything more to do with it. What is demanded is staying-power, including the capacity to sit through twelve hours a day of classes which, in many cases, are boring and trivial.

The Peace Corps now consists of over 5,000 persons and it is still growing rapidly. It is not at all surprising, therefore, that such an organization should have faults, but it is surprising that it has managed to do so effective a job with so little money under such adverse conditions and in so short a time. That it has been able to do so is largely due to the quality of the Volunteers themselves, almost all of whom do more than their jobs require. Despite a generally favorable press, however, and the support of most politicians, strong criticism of the Corps is still to be heard, most of it centering around two main points.

Some conservatives have taken pains to point out that the Peace Corps Volunteers are inadequately trained in methods of combatting Communism. Since it is highly unlikely, however, that a recent college graduate could be trained to be an effective anti-Communist agent in less than a year, it would seem that the return would not be worth the investment. Under existing circumstances all that can be reasonably expected of the Volunteers is that they be able to explain with some clarity,5 whenever it seems appropriate, why they prefer democracy6 to totalitarianism.

A complaint frequently heard from classical Liberals is that the Peace Corps, for all its good intentions, teaches young people to rely unduly upon government as a panacea. This would be a damning charge if it were true, but I don’t believe that it is. It certainly cannot be denied that all Peace Corps Volunteers are employees of the United States government; the important point, however, is that in almost all countries they have been assigned jobs which have traditionally been under government direction. Unlike other parts of the foreign aid program, the Peace Corps has caused almost no displacement of private enterprise. For instance, well over half of all Peace Corpsmen are teachers, who are, in underdeveloped countries as in the United States, largely government employees.

Nor can it fairly be said that the Peace Corps has ignored private organizations working in the same fields. Since its policy is to stimulate and advise and not to preempt it has usually sought (and usually received) the co-operation of local businesses, newspapers, labor unions, church groups and independent relief agencies as well as individuals interested in contributing something to a particular project.

In some parts of Latin America, Peace Corpsmen work alongside members of a private “peace corps” called Accion. This “rival firm” was launched by a California student who had read William James’ essay, “A Moral Equivalent for War.” In 1958, he decided to put into action the psychologist’s exhortation to the youth of the advanced nations to abandon militarism and to channel their restless energies instead into a great effort to spread civilization to the remotest parts of the earth. Two years after this idea was first revived in California, the then Senator Kennedy began talking about a “Point Four Youth Program.” A year before the campaign of 1960, however, a group of students aided by several businessmen had already put the first “peace corps” into operation.

THE PRIOR EXISTENCE of Accion, of course, was enough to raise the question of what justification there could be for a government Peace Corps if the same work could be done well by private enterprise. I would answer that the Peace Corps is probably the single most effective part of our entire economic aid network, and, since it is one of the few cases where our foreign aid funds are being spent in the right way, it serves as a valuable example. This assumes, of course, that the principle of foreign aid can itself be defended insofar as: (1) it actually improves the economic well-being of the people in the receiving country, and (2) it furthers the foreign policy aims and thereby the security of the United States. A good deal of our present foreign aid does not even fulfill the second criterion and almost none of it fulfills the first. The Peace Corps, to its credit, fulfills both.

Our foreign policy objectives have clearly been furthered by the Peace Corps primarily because every Peace Corps Volunteer is a visible demonstration of the friendship of the American people for the people of the host country. Since most people are more interested in other people than they are in machines, the propaganda value of a $75-a-month (plus expenses) Peace Corpsman is a far better investment for the United States than the equivalent value in, say, fertilizer. Also, as one Volunteer told me, a Peace Corpsman is probably the only variety of foreign aid which cannot be stolen by a politician somewhere along the line. He can, of course, be wasted, and a certain number of Volunteers are sitting around right now waiting for their assignments to emerge from some Kafka-esque local bureaucracy. But these are the exceptions and not the rule.

Economically, the Peace Corps has concentrated on spreading knowledge and education. Most economists would agree that this is the best way for governments to lay the groundwork for advance and thereby encourage economic progress.7

An additional benefit of the Peace Corps and one not foreseen by the planners in Washington is the effect upon thousands of Volunteers of seeing exactly how governments go about their announced goals of raising living standards Most Peace Corpsmen left the United States with a prejudice in favor of foreign aid and government economic planning; as a result of their experiences many are certain to revise their opinions. Indeed, the most idealistic and naive observer8 can not help but notice that corruption, inefficiency and wastefulness are the hallmarks of almost all Latin American governments; in these nations a political career is regarded simply as a means to self-enrichment (as it is still looked upon today in some parts of the United States).

EVEN IF WE set corruption and political instability aside, however, at least three major impediments to economic progress in Latin America remain: (1) the threat of nationalization of industry, (2) economic nationalism, and (3), perhaps most fundamental of all, the resistance to change which is firmly rooted in the Latin American way of life. None of these obstacles to a rising standard of living is likely to be reduced by our foreign aid program as it is presently designed. The plain truth is that Latin America (and the underdeveloped countries generally) can not expect to make real economic progress without first effecting drastic internal reforms. And these changes can only be brought about by the governments themselves; any hint of United States interference will bring outraged cries of “Yankee imperialism.” By the rules of the game we are forbidden to insist that money be allocated first for such basics as education, sanitation, vocational training, roads and water and sewage systems.9 Nor may we insist upon the necessary controls to minimize graft and guarantee competent management.

The single most important reason why capital, which is needed so badly to create new industries and jobs, has been fleeing Latin America at such an increasing rate is the threat of nationalization. In a Senate speech recently, Jacob Javits pointed out that, “Additional North American investments are losing the battle against the flow of Latin Americtn local capital, whose flight is calculated between nine and fifteen billion dollars, a great part of which is deposited in Swiss banks. I ask you to imagine the tonic effect that would result,” he went on, “if only these depositors, who have in Swiss banks the ‘fugitive’ capital of Latin America, would invest but one half of the balance of their accounts in their own countries. The same political instability and economic doubts that caused the emigration of Latin American capital, is [sic] responsible for the decline of North American direct investments in Latin America. . . . These negative tendencies are reciprocally reinforced by a vicious circle which causes greater doubts and instability—and finally violent nationalistic acts and unjust expropriations. It is evident that a great responsibility lies upon the Latin American nations for the improvement of their climate for investments.”

The extent of this hostility to private enterprise may be gauged by the fact that the Chamber of Commerce of America, meeting recently in Florida, passed a resolution specifically requesting President Kennedy and the Latin American governments concerned to allow the participation of private industry in the United States foreign aid program.10

Economists have estimated that the investments planned over a ten year period by the United States government could be brought about in only a few months if only Latin American governments would abandon their hostile attitude toward private capital, domestic and foreign. It is not too hard to imagine what a great difference this speed-up could make to millions of people now living in utter poverty; but as things stand today, these people will just have to wait.

The truth is that Latin America’s dictators11 do not care how long their people wait so long as they get full credit for any new jobs created or new industries founded. This, of course, is a major source of the economic nationalism which is one of the biggest millstones around Latin America’s neck. The ruling groups, supported by Washington, are interested primarily in creating “show-case industries”—which require large capital investments and small numbers of employees. Such industries include automobiles, petrochemicals, machine tools and other mass production items which use highly automated processes. There are several reasons why spending money on such projects actually hurts rather than helps the welfare of the people in the countries concerned. First, “show-case industries,” while satisfying the pride of the planners, divert needed capital from economically sound to economically unsound uses. Unemployment is aggravated, not helped, by this concentration on highly automated industries. By insisting on manufacturing their own automobiles at a high cost, when they could buy them at a much lower cost from the United States, the planners are making certain that their citizens will have less to spend for other products. As consumers have less money to spend, fewer imports can be bought and fewer new jobs created both at home and abroad. Our own economy is hurt by these policies just as it would be helped if our foreign aid programs could achieve their announced objectives. All this nonsense-on-stilts is simply mercantilism, the inward-looking and backward-glancing system that Adam Smith exploded in 1776.12

The planners thus refuse to acknowledge the importance of the free flow of private capital, and the ordinary citizen is denied the advantages of geographic specialization and the international division of labor. Rather than come down to earth and help their citizens concentrate on what they can do well, the dictators prefer to weave grandiose schemes which they are being encouraged to charge off to the United States taxpayer. Everyone would laugh if the United Fruit Company poured vast sums of money into growing bananas near its Boston headquarters; otherwise intelligent people, however, greet such follies as a new Diesel-engine plant in Nicaragua as “an important step forward.”13

BUT ALL OF Latin America’s economic ills cannot be blamed on Washington and her own governments; the people themselves must shoulder a good part of the responsibility. Like many North Americans, most Latin Americans distrust change. As long as they have barely enough to eat and some kind of a roof over their heads they are content to let come what may. The people for whose benefit our optimistic foreign aid plans were supposedly launched are just not much interested in progress. If anyone doubts this, he has only to look at what has happened in those countries where free land in the interior has been offered to anyone who would go out and settle it. Wherever such offers have been made there has been almost no response; the supposedly land-hungry campesinos have been too lazy and too conservative to move their families 200 miles in order to get a farm of their own. Of course, these same people will accept a piece of the neighboring hacienda if it is handed to them on a silver platter by a benevolent (and vote-conscious) government. I know of at least two instances where formerly landless peasants took over a large farm and duly harvested the crops planted by the previous owners. The next year, however, there was no crop at all; the new owners claimed that they “didn’t know what to do.” This is what “land reform,” as it is usually practiced in Latin America, means—not opening up new land to productivity but destroying formerly productive land by incompetent management. No doubt it is unfair to expect a largely uneducated population to change its way of living in a short period of time. And yet if Latin America is even to maintain its present standard of living, in the face of a rapidly rising birth rate and a declining death rate, it is essential that change does come, and soon.

Our economic aid program as now constituted, however, will not promote this change. Despite all the rhetoric about “the winds of change sweeping across a continent,” the planners in Washington are doing their best to assist the reactionaries’ struggle against change. Far from being a “liberating force,” the program is actually a support for sagging dictatorships, a buttress for a decaying feudalism, and the keystone of a revived mercantilism.

[* ] Robert Schuettinger is an Associate Editor of New Individualist Review. He is currently doing graduate work at Oxford University as an Ear-hart Fellow.

[1 ] It would be tiresome to list all of the various euphemisms tossed up in order to avoid using the Anglo-Saxon word “backward.” I have come across twelve such circumlocutions in my reading, and I invite the reader to try to top my score.

[2 ] The most widely-discussed exposition of this view is W. W. Rostow, The Stages of Economic Growth (Cambridge: Cambridge University Press, 1960). In Man, Economy and State (Princeton, N. J.: Van Nostrand, 1962), Murray N. Rothbard remarks, “Perhaps some of the popularity of this work may be due to the term ‘take-off,’ which is certainly in tune with our . . . space-minded age.”

[3 ] F. A. Hayek, in The Constitution of Liberty (Chicago: University of Chicago Press, 1960), notes (p. 367) that, “However strong a case there may exist in such countries for the government’s taking the initiative in providing examples and spending freely on spreading knowledge and education, it seems to me that the case against over-all planning and direction of all economic activity is even stronger there than in more advanced countries. I say this on both economic and cultural grounds. Only free growth is likely to enable such countries to develop a viable civilization on their own capable of making a distinct contribution to the needs of mankind.”

[4 ] This article, then, is inspired by some personal observations, but I would not want to say that it is based on them. It seems to me that man-hour for man-hour invested, more important and reliable information is to be derived from printed sources (assuming they are well-chosen, of course) than is to be derived from so-called “firsthand experience.”

[5 ] If this seems like too modest a goal, it might be helpful to recall that a man who was to serve twice as President of the United States (Dwight Eisenhower) confessed that he could not explain to Marshal Zhukov why democracy was better than Communism. It is really not as easy as it may sound at first.

[6 ] Or republicanism, if any reader has a marked preference for that word.

[7 ] See footnote 3 for F. A. Hayek’s comment on the proper role of governments in furthering education as the foundation for economic growth.

[8 ] As a matter of fact, Chester Bowles has recently returned from one of his journeys and has presented a report urging that foreign aid be decreased or denied to those countries which fail to meet minimum standards of co-operation and self-help.

[9 ] These, of course, are the areas where the Peace Corps has been concentrating its efforts. Would that the rest of our foreign aid program would profit by this example.

[10 ] This despite the fact that many Liberal writers on economics, including the last Ambassador to India, John Kenneth Galbraith, have recently said that what the underdeveloped countries need is more private enterprise, not less. See Galbraith’s new book, Economic Development in Persepective (Oxford: Oxford University Press, 1962).

[11 ] Most objective political scientists would estimate that, at the very most, three or four Latin American nations are not governed by dictators.

[12 ] Milton Friedman, in his “Foreign Aid: Means and Objectives,” (Yale Review, Summer, 1958, p. 505) cites a classic example of this sort of “planning”: “The Pharaohs raised enormous sums of capital to build the Pyramids; this was capital formation on a grand scale; it certainly did not promote economic development in the fundamental sense of contributing to a self-sustaining growth in the standard of life of the Egyptian masses. Modern Egypt has under government auspices built a steel mill; this involves capital formation; but it is a drain on the economic resources of Egypt . . . since the cost of making steel in Egypt is very much greater than the cost of buying it elsewhere; it is simply a modern equivalent of the Pyramids, except that maintenance expenses are higher.”

[13 ] As F. A. Hayek (op. cit., p. 366) points out: “Much of this endeavor . . . seems to be based on a rather naive fallacy of the post hoc ergo propter hoc variety: because historically the growth of wealth has regularly been accompanied by rapid industrialization, it is assumed that industrialization will bring about a more rapid growth of wealth. This involves a clear confusion of an intermediary effect with a cause. It is true that, as productivity per head increases as a result of more capital in tools, and even more as a result of investment in knowledge and skill, more and more of the additional output will be wanted in the form of industrial products. It is also true that a substantial increase in the production of food in those countries will require an increased supply of tools. But neither of these considerations alters the fact that if large-scale industrialization is to be the most rapid way of increasing average income, there must be an agricultural surplus available so that an industrial population can be fed.”