If every government agency were to follow the example of the Agency for International Development (AID), the federal budget would be both smaller and more wisely spent.

AID recently published a candid report on the effectiveness of its efforts to alleviate Third World poverty. Its conclusion: After 27 years and tens of billions of dollars, foreign aid has essentially been a failure.The report recommends no specific reforms; AID boss Alan Woods calls it an "intellectual base" for further discussion. But it makes several points unmistakably clear.

First, the most important condition for progress toward decent health and living standards is economic growth. Without sustained growth, no country can enjoy long-term improvements in life expectancy or literacy rates - no matter how many quick fixes it gets from aid programs.

Second, growth is "largely the result of individual nations making the right policy choices." Though a nation's growth can be affected by forces such as natural disasters, in the long run its domestic economic policies are decisive. Singapore, South Korea and Taiwan, all formerly poor, have respected market forces and private-property rights - and are now prospering. Most African and Latin American countries have not - and remain impoverished.

Third, AID's programs have "not always succeeded in fostering growth-oriented policies." As a result, "only a handful" of the nations receiving U.S. aid "has ever graduated from dependent status." Instead, AID has turned into "an open-ended maintenance program . . . something never envisioned by the pioneers of development policy."

As a government agency, AID tends to channel aid to the governments of recipient countries rather than to the private sector. Intentionally or not, it helps enlarge the former at the expense of the latter - reinforcing the state-owned monopolies, high taxes, impenetrable regulations, price controls and recurring confiscations that make it a nightmare to do business in so much of the Third World.

The purpose of foreign aid should not be to make the donor feel good, but to put the recipient on a path to self-sustaining growth. If AID cannot be reformed to embody that goal, it should be abolished.