• This is a rush transcript from "On the Record," July 21, 2010. This copy may not be in its final form and may be updated.

    GRETA VAN SUSTEREN, FOX NEWS HOST: Are you pumping billions into Pakistan in aid while rich Pakistanis live the high life and ignore their own poor? Well, unfortunately, the answer to that question is yes. The United States is giving $7.5 billion -- yes, billions of dollars -- to Pakistan for aid. Meanwhile, according to a New York Times report, most of the rich people in Pakistan do not pay any income taxes. And yes, rich people make up a large part of the government. So are you asked to do the job that rich people in Pakistan simply refuse to do?

    Former U.S. Ambassador to the U.N. John Bolton joins us live. I don't know, this one unglues me!

    JOHN BOLTON, FORMER U.S. AMBASSADOR TO THE U.N.: Well, it's unfortunately typical of the way a lot of foreign aid money is misused by the government to which it is given. The money is not itself diverted, necessarily, but money's fungible. And in this case, I think even Pakistanis recognize that the level of assistance we're giving enables them to avoid doing things like collecting taxes from people who clearly owe it. It's a distorting element and it's not one that ultimately contributes to our strategic objectives.

    VAN SUSTEREN: Here's the thing, though, that makes me so, you know, I don't know, enraged about it, is that the ones who are the rich people -- a large portion of the rich people actually are in the government.

    BOLTON: Well, this is...

    VAN SUSTEREN: And so they -- they pass their own laws to shield themselves, while we are handing out billions to do good works, like water projects and things like that.

    BOLTON: Well, this is one of the fundamental problems Pakistan has had since its inception. It's just that democracy thing is not working out well in Pakistan, and it leads to repeated military coups. They call the military the "steel skeleton" because it is the -- it is what holds the country together.

    So people look at the government. They say, These guys are making money off us. They're not paying taxes. They're living well. We're not living well. We vote for new politicians. They don't change anything. They just steal a little bit more. That is the kind of breeding ground, really, for Taliban or other radicals to take advantage of.

    VAN SUSTEREN: Well, you know, I really -- I want us to help people. And I understand the strategic value in terms of making friends by, you know, funding -- helping them with water or helping them protect themselves, and I understand our own personal security risk's at issue here. But it's just so appalling that if the rich in their own country don't give a damn about the people in their own country and essentially, it's just stealing our money and we are sort of caught between a rock and a hard place because we're good people and we have security interests.

    BOLTON: Well, there are things we can do to minimize the risk that money will be diverted or that these kinds of practices like not paying taxes will go on. We need insist more on the conditions that we attach when we give economic assistance.

    VAN SUSTEREN: But that's what -- when we were there last year with -- last October with Secretary State of Clinton, they were outraged, the Pakistanis, when we announced the $7.5 billion because we wanted to know where they were going to spend it.

    BOLTON: Right.

    VAN SUSTEREN: They were actually -- they were unglued about that! And I...

    BOLTON: You just have to bear down and keep telling them that it's part of the deal to get the money. And otherwise, you give them the money for general budget support, you're never going to find it.

    But the other thing, really, especially in the case of Pakistan, is concentrate on what suits us. That is to say, primarily military assistance. Again, money's fungible, but if we're spending the money on what we really need, then I think you've got a better chance of actually using it for our purposes.

    VAN SUSTEREN: Except for the water buys us good will and is humane, so there are all those (INAUDIBLE) All right, now, here's my other thing. This is my other (INAUDIBLE) When we were over there the other day, Pakistani legislators are facing accusations of faking their degrees. (INAUDIBLE) required at least up until 2008 to have a degree to be a member of their government and they were all buying them on line.

    BOLTON: Well, unlike our members of Congress, who fake degrees and war records and other things like that. This is...

    VAN SUSTEREN: All right, we have some plagiarism issues, too. But still! This is worse!

    BOLTON: Well, this is part of the general disillusionment with the government as a whole. The average people look at this kind of fraud and they just say, Why are we voting for these people? What do we get out of this democracy thing? And they become more subject to the claims of Taliban and others that the whole system is corrupt and needs to be overthrown.

    VAN SUSTEREN: All right, well, the chief minister of a province who's a close ally of President Zardari is quoted as saying this. A degree is a degree. Whether fake or genuine, it's a degree. It makes no difference.

    BOLTON: Yes, well...

    VAN SUSTEREN: I mean, that's a -- you know, Oh, well, it's a degree. It's a degree. So what if it's fake, it's still a degree?

    BOLTON: Well...

    VAN SUSTEREN: I mean, that's -- that's nuts!

    BOLTON: Let's go back to President Zardari, who used to be known as Mr. 10 Percent in Pakistan. But he's changed his ways. He's got a new lifestyle. Now he's known as Mr. 20 Percent.

    VAN SUSTEREN: (INAUDIBLE) you know, this is astounding! I mean, this is such an incredible problem for us, for our nation! I mean, it's, like - - you know, the enormous amount of money that we spend there and hoping to get, you know, so many (INAUDIBLE) so many things that are so important to us, and then we run into this.

    BOLTON: Well, I just -- I think you've got to restructure the assistance programs in ways that minimize the possibility of that happening. And I think there's too much pressure, really, from places in the State Department, just say, Look, move the money. It doesn't matter what it's spent on. That's a real mindset, and I think...

    VAN SUSTEREN: I think it does to the American people, though! I think the American...

    BOLTON: Exactly.

    VAN SUSTEREN: It does to the American people!

    BOLTON: I agree completely.

    VAN SUSTEREN: It's their money, and they -- they don't like that!

    BOLTON: No, it's the State Department that's the problem, not the American people.

    VAN SUSTEREN: Ambassador, thank you.

    BOLTON: Thank you.