Exactly twenty years ago, a newly-elected Israeli prime minister Binyamin Netanyahu dramatically announced to a joint session of Congress: We are deeply grateful for all we have received from the United States, for all that we have received from this

Exactly twenty years ago, a newly-elected Israeli prime minister Binyamin Netanyahu dramatically announced to a joint session of Congress:

We are deeply grateful for all we have received from the United States, for all that we have received from this chamber, from this body. But I believe there can be no greater tribute to America's long-standing economic aid to Israel than for us to be able to say: 'We are going to achieve economic independence. We are going to do it. In the next four years, we will begin the long-term process of gradually reducing the level of your generous economic assistance to Israel.' I am convinced that our economic policies will lay the foundation for total self-reliance and great economic strength.

Even though Netanyahu has been prime minister for about half of the time since that July 1996 speech, and economic aid ended in 2007, U.S. military assistance to Israel has nearly doubled and is still increasing. Indeed, Netanyahu's office just announced the dispatch of an emissary to Washington to sign "a new MoU [memorandum of understanding] between the two countries as soon as possible" to expedite an annual transfer of $3.8 billion in American funds to Israel for the next decade.

Yet, Netanyahu's goal of self-sufficiency back then was correct. (I treat economic and military aid as functionally equivalent for both involve transfers of fungible money.)

Countries with correct policies do well in the development race; those without them fare poorly.

Reams of research has established that foreign aid, which originated after World War II, has had a nearly negligible impact on economic growth. Sound policies – free markets, equitable prices, the encouragement of exports, and holding to disciplined macroeconomic rules – matter far more. Countries with correct policies do well in the development race; those without them fare poorly, regardless of how much aid is poured in.

Already in 1966, the economist Albert O. Hirschman commented that all development projects "are problem-ridden." Over his distinguished career, Peter T. Bauer showed that foreign aid (in his sardonic phrasing, "a process by which the poor in rich countries subsidize the rich in poor countries") has not only not worked but had a wide range of unfortunate effects on recipient countries.

This pattern applies no less to Israel. Joel Bainerman, an economic journalist, showed in a 1995Middle East Quarterly article, that American aid "brings short-term benefits but impairs a country's long-term competitiveness" by distorting the economy. For example, it led to the building of housing in the wrong places and caused artificially inflated consumption. It also decreased Israel's sovereignty because Jerusalem had to answer to its patron in Washington.

Happily, even if Netanyahu lost sight of his earlier understanding, others have kept it alive. Notably, as quoted in "Ex-Israeli General: US Aid Harms and Corrupts" by Barbara Opall-Rome, a remarkable former general finds that his country would be far better off – and the U.S.-Israel bond stronger – were American military donations wound down.

Maj. Gen. (Res) Gershon Hacohen says Israel's "total dependence" on U.S. aid increases its blind reliance on air power and discourages innovative thinking about ground warfare.

Maj. Gen. (Res) Gershon Hacohen, once commander of Israel's Northern Corps and now a scholar at the Begin-Sadat Center for Strategic Studies (BESA), finds that American aid "harms and corrupts" Israel and argues for reductions in that aid: "if this could be done in a calculated, well planned manner, it would restore our sovereignty, our military self-sufficiency, and our industrial capacity."

Hacohen makes the counterintuitive point that Israel's dependence on predictable long-term U.S. military aid serves U.S. interests more than Israeli interests. That's because what he calls Israel's "total dependence" on U.S. aid increases blind Israeli reliance on air power and discourages innovative thinking about ground warfare:

Israel is so addicted to advanced U.S. platforms, and the U.S. weaponry they deliver, that we've stopped thinking creatively in terms of operational concepts. For generations, we're locked into thinking about how to improve technologically; and this is not necessarily the correct thinking when dealing with constantly innovative enemies in asymmetric conflicts. ... the bitter taste of things we accomplish on our own is preferable to the sweet privileges than can imprison us.

Further, liberation from Americans' aid removes a major source of tension: "Once we are not economically dependent on them, the partnership can flourish."

Just as individuals are best off when self-reliant, so too are countries. Israel has a GDP of over $300 billion and a per capita income of about $40,000. The U.S. government will have a better ally by intelligently closing down the aid relationship.

Daniel Pipes (DanielPipes.org, @DanielPipes) is president of the Middle East Forum.