Many people worry about how much money their country “gives away” to other countries through foreign aid.

Why do we throw away our money like this?

In short, it is not throwing away money.

After World War II Europe and Japan were decimated and America arose as the predominant superpower (Russia being somewhat further behind); mostly due to the war-time economic boom (building munitions and vehicles) and the fact that the only part of their landmass that was damaged was Pearl Harbor.

So, an economic layman might think, why not just sit back as the superpower and enjoy the benefits? The problem is that international trade is a necessity in the modern world. The days of mercantilism were over and America needed countries to provide cheap products and raw materials to trade.

The Marshall Plan was perhaps one of the greatest economic decisions by the White House. The amount of money “wasted” was in the tens of billions. Yet, this was not charity.

The end result of the Marshall Plan was the creation of the greatest economies in Europe and Asia: Germany and Japan, respectively. People know that products from Japan are now top or near top quality; however, people forget that products from Japan were at one time very cheap and not the greatest quality. As a country develops, it can acquire more technology and invest more in research and development and thus improve the quality of its products. This has happened with both Germany and Japan since WWII.

After the Korean War, the same situation happened. I remember reading a book about Korean history, and I can’t remember the exact numbers, but I remember the comparison of how much money was pumped into South Korea yearly, because it was shocking. The amount of money given to South Korea after the Korean war yearly was almost as much as was invested in the entire American South yearly. I was blown away by that figure, but I suppose that the American economists had the foresight to realize that this was a good investment. Accordingly, the South Korean “miracle” was created (heavy quotes because pumping that much money into such a small and, at that time, poor country and having incredible results is not exactly a miracle as much as an obvious result).

Now, there are other ways that America spends its foreign aid too. Countries such as Pakistan and Egypt receive foreign aid, but this is not an investment in their development, per se. It is an investment in their stability and cooperation with the United States (although, granted, they are not always cooperative). This foreign aid, then, is a kind of diplomacy which is necessary for a country that is the global hegemon to invest in. Also, keep in mind that this amount of foreign aid pales in comparison to the aforementioned foreign aid contributions to Japan, Germany or Korea.

Is there a reason that powerful governments don’t emphasize this point more clearly? Probably. What sounds better: your country is donating money to help another country or that your country is giving money to another country not because it cares about that country but in its own self interest to create and maintain trading partners? Of course the former sounds nicer, and it is the assumption by most people; however, it is just not true.

So, is foreign aid a waste of money? Only if you think investing in the future is a waste of money.