Free Markets, Not Foreign Aid Will Put Central America on the Path to Prosperity

Published in Economic Liberty .

Presidential candidate Julian Castro called for a Marshall Plan for Central America during the Democratic Party debates back in June. Since then, this has become a notable talking point in discussions related to the Central American refugee crisis and U.S. immigration policy.

The original Marshall Plan consisted of considerable foreign aid directed toward European countries in the aftermath of World War II. Conventional analysis of this plan argued that it was instrumental in helping Europe recover from World War II and putting these countries back on track economically.

Using the same logic, Castro and some of his Democratic colleagues believe that injecting foreign aid into countries such as El Salvador, Honduras, and Guatemala will keep migrants from flooding the southern border.

The original Marshall Plan involved America dropping approximately $100 billion in aid to war-torn European countries. However, there is reason to believe that the aid was not the active ingredient in getting Europe back to its feet. Historian Tom Woods argues that it was the economic liberalization that took place in countries like West Germany in the post-war period that allowed them to regroup and reconstruct their economies.

Countries like Austria and Greece, who received substantial foreign aid during this period, didn’t witness growth until the Marshall Plan aid was phased out.  Pre-World War II Europe was already prosperous, so bouncing back was not very difficult thanks to the capital stock accumulated decades before.

Jessica Trisko Darden of the American Enterprise Institute makes some good points about a Marshall Plan for Central America, which would not only be costly but would also likely cause more violence. Trisko Darden’s research demonstrates that Central American governments, along with notorious criminal gangs, are largely responsible for the rampant violence in this region. Most of the aid is directed toward these governments, who have a long track record of brutality and corruption.

The case that Trisko Darden cites in El Salvador is particularly telling. From 1979 to 1992, El Salvador was mired in a civil war where the government was engaged in numerous bone-chilling crackdowns against the population. This conflict continued largely because of the military and economic aid the U.S. provided, which propped up the country’s corrupt government. In recent times, security forces were suspected of carrying out numerous extrajudicial killings. Given these factors, one has to believe that the Salvadoran government is not exactly a great source for providing stable public security infrastructure.

Under normal circumstances, i.e., without excessive foreign aid being pumped into the country, the current Salvadoran government would likely transition to a government that emphasizes more streamlined security services and economic development. But with a foreign-subsidized government in place, these kinds of reforms will never happen and Central America will remain unstable.

Other reforms like ending the drug war — which fuels many of the gang-related problems in the region — and measures that promote private security services in the region would be better alternatives. The key is that corrupt governments not be doled out money indiscriminately.

Former Congressman Ron Paul noted that foreign aid is “taking money from the poor people of a rich country and giving it to the rich people of a poor country.”

Similarly, such money can often land in the hands of subversive groups that are worse than the incumbent governments in question.

Ultimately, there is something deeper behind the chaos found in many countries throughout Latin America. Countries like Cuba and Venezuela don’t just collapse on their own. It’s because of flawed ideologies like Soviet-style communism in the former case, and gradualist socialism in the latter, that these countries find themselves in such precarious states. Throughout Latin America, there has been a strong embrace of similar ideological permutations. So, it’s no coincidence that Latin America remains stagnant.

The United States can play a proactive role in the region, but it does not need to be throwing billions of dollars at these problems. Instead, it could use diplomatic channels to promote free market ideas and provide advisors to many Central American countries that are in desperate need of institutional reforms.

It’s not as simple as handing out money indiscriminately to other countries.

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