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Post No.: 0797aid


Fluffystealthkitten says:


It was a while back when I said I would round off this series on global economic development – back in Post No.: 0567 in fact, when we discussed the pros and cons of strong intellectual property laws, and the benefits and risks of exploiting a country’s natural mineral resources.


Here, we’ll focus on public and private capital flows, and labour flows, and then we’ll end with a short summary on this series…


Richer countries can and often do try to help poorer countries out in this global fluffy community, via public capital flows. Richer countries or economic blocs, for instance, may offer poorer countries across the world international trade schemes that promote privileged market access, that actively stimulate industrialisation and the formation of economic clusters and, in the long run, encourage bilateral trade opportunities.


They can also offer grants, emergency relief or low-interest rate loans in the form of foreign aid. Foreign aid means countries at the governmental level donating to other countries. There is however a lot of criticism that these mainly benefit elite interests who hold the power in a poor country (particularly corrupt leaders), thus the latest general thinking is that these countries must build the proper rules and institutions first that constrain what politicians in the receiving countries can do. Just giving aid is not enough and evidently hasn’t worked to the extent or speed hoped. (Attaching conditions to the receipt of foreign aid can produce unforeseeable consequences though, and might even exclude many of the target countries they were designed to benefit.)


Foreign aid might also disincentivise the need for a recipient country to tax its own citizens or therefore grow its own economy under its own steam. Yet without foreign aid at all, breaking out of poverty is almost impossible for some poor countries because of a chicken-and-egg situation – you need money to build a strong economy to generate the tax revenues to sustain it, but if you don’t have sufficient tax revenues upfront then you cannot get the urbanisation, connectivity and so forth going. (This type of chicken-and-egg quandary can also be present at the level of, for instance, individuals, hence social welfare is important; or neglected local communities, hence central government investment is important.)


Nations must nonetheless ultimately work towards becoming self-sufficient by collecting their own taxes to lift themselves out of poverty, and to provide for their own natural disaster defences and so forth; and their citizens must understand the need for them and their businesses to be taxed sufficiently. (This problem surfaces when the British Virgin Islands relies upon mainland United Kingdom to provide it relief in the aftermath of tropical storm disasters, as well as to provide it military defence. As a tax haven, it free-rides off mainland British taxpayers.) They shouldn’t be dependent on and expect foreign aid perpetually. Foreign aid should only be treated as a temporary measure, like out-of-work welfare for individuals. (Well some permanently physically and/or mentally disabled or infirm individuals cannot be expected to ever work but I don’t think we can regard any country as permanently unable to become self-sustaining, can we?)


Impoverished countries shouldn’t be left to fend for themselves when there is a humanitarian crisis, but there should be a clear and scheduled plan to get a nation (back) onto its own feet. It’s somewhat like the saying ‘give a person a fish and you feed them for a day; teach a person to fish and you feed them for a lifetime (well unless the international community decimates their local food chain and fish supply by contributing to global warming, or something like that, I suppose(!))’


Foreign aid obviously needs to be spent correctly to add value to a poor society, such as by supporting urbanisation, connecting the receiving countries to the global economy, incentivising pioneer investments, and subsidising the generation of public data (such as mineral mining maps).


Foreign aid is also controversial because it could be used as a way for richer countries to exploit poorer countries, whereby the latter will incur debts or conditionalities, and then the former will eventually take some control or induce reciprocation; which could also have defence implications (like the loanee country granting the loaner country a place to locate a naval base on its territory).


There are other criticisms and unintended consequences to foreign aid, especially when given with ulterior motives rather than pure altruism or humanitarian reasons. (Wealthy philanthropic private individuals bearing large donations for, say, prestigious schools may potentially create situations that carry a ‘now can you do something for me?’ implication too, like ‘give my kids an automatic place in this school once they reach the right age’. Ordinary charitable gifting, like when you and I donate to a homeless or animal shelter, doesn’t ask for anything back or set conditions apart from the money being transparently used for its stated purpose though, hence shouldn’t come with these problems of donor influence.)


Given as matched investment (‘if you invest $x then the government will put $x into the venture too, up to a limit’) – aid can incentivise reputable private firms to invest as pioneers in these countries where they’d otherwise not find it worthwhile to. This would also better align the public interests with private interests because both the public and private sector will bear some of the risks. The international community can ultimately ‘pump prime’ an economy into growth!


The real overall objective is to ultimately get private capital flows into the poor country. Foreign direct investment brings money, expertise and organisational skills. But there’s often corruption, which leads to a flow of money out from poor countries via shell companies and offshore tax havens that offer banking secrecy, which makes these corrupt investors and private companies hard to catch, and corrupt money hard to recover. Tax havens are also utilised for transfer pricing and profit shifting schemes to low or zero tax jurisdictions. This means that these private companies can ultimately deny a poor country the tax revenues it desperately needs to break out of poverty. An estimate made a couple of years ago was that Africa was losing about $200Bn a year because of these two outflows combined, which is about double of Africa’s public inflow in the form of foreign aid! If true, this would mean that when we aggregate the international public aid inflow and corruption and tax avoidance outflow – Africa is actually a capital exporting region, which is sheer lunacy(!) So once more, the rich get richer while the poor get or stay poorer.


As with capital, there are good and bad labour flows. Good labour flows benefit the individual migrants (they get work), the countries they migrate to (they get willing workers) and the countries they migrate from (when the migrants send some of their take-home pay back to their countries of origin). It’s bad if there is a ‘brain drain’ however – when these migrants get educated, especially in a relatively poorer country, but then take their skills to benefit a relatively richer country. For instance they get a public education in India, paid for by Indian taxpayers, but then they go work in the UK and pay their taxes in the UK. From the perspective of the country of India rather than the individuals who emigrate from India – even if a person sends some of their take-home pay back to India, it’s not as good as them staying in India and using their skills in India and paying their taxes in India. (Why do countries offer a publicly paid education for their children? Well information, such as via education, is a public good, and the best way of providing public goods is for governments i.e. the public sector, to do it. Primary education is also a human right, and a better educated and skilled workforce improves productivity and the economy in the long run.)


But it works out well if this emigration is only temporary because then these people will bring back some new skills they gained whilst working in the richer country, as well as money, new social networks, and perhaps a new, more entrepreneurial or modern, attitude. This means that young students studying abroad but eventually returning back home are the most beneficial to a poor country.


However, some international migration is forced, like refugees of conflicts or natural or environmental disasters. These unfortunate people really just want to live a normal life somewhere safe, but what usually happens in many places is that they’ll be pushed into refugee camps where they’ll be fed and sheltered but refused the right to work, which means that they cannot earn a living or contribute to the society they enter into. And contrary to most perceptions – the top destinations for refugees are other poor countries that are geographically neighbouring or close by but relatively more peaceful and safe than the countries that are in conflict or disaster that they’ve just left. This shouldn’t really be surprising because asylum seekers migrate not due to pull factors but push factors, and most really would rather be back in their home country as soon as possible if only it was safe for them to go back there. Forced migration is a worldwide problem and needs to be treated as such, but the international community can be accused of not doing enough to help refugees or the poor countries they mostly go to – most countries act with ‘not in my backyard’ or ‘not my problem’ attitudes. Meow.


Similarly to industrialisation and urbanisation – to tackle these external problems, we need international non-binding ‘soft laws’ or preferably legally-binding treaties (examples include World Trade Organization (WTO) rules on trade, or Organisation for Economic Co-operation and Development (OECD) policies on tackling tax base erosion and profit shifting and implementing a global minimum corporate tax rate); international institutions that update to reflect current world problems such as climate change and refugee crises; well-informed global citizens who want to tackle international problems more than merely serve their own national interests; and an authorising political leadership at the world stage.


Regarding the latter however, there is no ‘global government’. International organisations like the United Nations (UN) are really cooperative treaties between different states that maintain their own individual sovereignties. They are intergovernmental organisations rather than constitute as ‘a world government’. This is a very different structure from a (stable) domestic government, which enacts a good degree of authority and enforcement of the laws over its own territory. This therefore places more emphasis on these international institutions and informed global citizens.


…In summary, building a prosperous economy is a long and hard struggle – one needs to build a political authority that is legitimate and inclusive; build a culture or set of norms, narratives and networks that bind the population together towards one common direction; build economic scale and specialisation; and build international rules and institutions that make it easier for poor countries to succeed in those three domestic struggles.


Meow. So there are good reasons why some countries continually struggle to break out of poverty – some of it is down to how they’re governed and some of it is down to their very unfortunate circumstances.


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