Idea Lab: Reverse Foreign Aid
By TINA ROSENBERG
The New York Times, March 25, 2007
For the last 10 years, people in China have been sending me money. I also get money from countries in Latin America and sub-Saharan Africa — really, from every poor country. I’m not the only one who’s so lucky. Everyone in a wealthy nation has become the beneficiary of the generous subsidies that poorer countries bestow upon rich ones. Here in the United States, this welfare program in reverse allows our government to spend wildly without runaway inflation, keeps many American businesses afloat and even provides medical care in parts of the country where doctors are scarce.
Economic theory holds that money should flow downhill. The North, as rich countries are informally known, should want to sink its capital into the South — the developing world, which some statisticians define as all countries but the 29 wealthiest. According to this model, money both does well and does good: investors get a higher return than they could get in their own mature economies, and poor countries get the capital they need to get richer. Increasing the transfer of capital from rich nations to poorer ones is often listed as one justification for economic globalization.
Historically, the global balance sheet has favored poor countries. But with the advent of globalized markets, capital began to move in the other direction, and the South now exports capital to the North, at a skyrocketing rate. According to the United Nations, in 2006 the net transfer of capital from poorer countries to rich ones was $784 billion, up from $229 billion in 2002. (In 1997, the balance was even.) Even the poorest countries, like those in sub-Saharan Africa, are now money exporters.
How did this great reversal take place? Why did globalization begin to redistribute wealth upward? The answer, in large part, has to do with global finance. All countries hold hard-currency reserves to cover their foreign debts or to use in case of a natural or a financial disaster. For the past 50 years, rich countries have steadily held reserves equivalent to about three months’ worth of their total imports. As money circulates more and more quickly in a globalized economy, however, many countries have felt the need to add to their reserves, mainly to head off investor panic, which can strike even well-managed economies. Since 1990, the world’s nonrich nations have increased their reserves, on average, from around three months’ worth of imports to more than eight months’ worth — or the equivalent of about 30 percent of their G.D.P. China and other countries maintain those reserves mainly in the form of supersecure U.S. Treasury bills; whenever they buy T-bills, they are in effect lending the United States money. This allows the U.S. to keep interest rates low and Washington to run up huge deficits with no apparent penalty.
But the cost to poorer countries is very high. The benefit of T-bills, of course, is that they are virtually risk-free and thus help assure investors and achieve stability. But the problem is that T-bills earn low returns. All the money spent on T-bills — a very substantial sum — could be earning far better returns invested elsewhere, or could be used to pay teachers and build highways at home, activities that bring returns of a different type. Dani Rodrik, an economist at Harvard’s Kennedy School of Government, estimates conservatively that maintaining reserves in excess of the three-month standard costs poor countries 1 percent of their economies annually — some $110 billion every year. Joseph Stiglitz, the Columbia University economist, says he thinks the real cost could be double that.
In his recent book, “Making Globalization Work,” Stiglitz proposes a solution. Adapting an old idea of John Maynard Keynes, he proposes a sort of insurance pool that would provide hard currency to countries going through times of crisis. Money actually changes hands only if a country needs the reserve, and the recipient must repay what it has used.
No one planned the rapid swelling of reserves. Other South-to-North subsidies, by contrast, have been built into the rules of globalization by international agreements. Consider the World Trade Organization’s requirements that all member countries respect patents and copyrights — patents on medicines and industrial and other products; copyrights on, say, music and movies. As poorer countries enter the W.T.O., they must agree to pay royalties on such goods — and a result is a net obligation of more than $40 billion annually that poorer countries owe to American and European corporations.
There are good reasons for countries to respect intellectual property, but doing so is also an overwhelming burden on the poorest people in poorer countries. After all, the single largest beneficiary of the intellectual-property system is the pharmaceutical industry. But consumers in poorer nations do not get much in return, as they do not form a lucrative enough market to inspire research on cures for many of their illnesses. Moreover, the intellectual-property rules make it difficult for poorer countries to manufacture less-expensive generic drugs that poor people rely on. The largest cost to poor countries is not money but health, as many people simply will not be able to find or afford brand-name medicine.
The hypercompetition for global investment has produced another important reverse subsidy: the tax holidays poor countries offer foreign investors. A company that announces it wants to make cars, televisions or pharmaceuticals in, say, east Asia, will then send its representatives to negotiate with government officials in China, Malaysia, the Philippines and elsewhere, holding an auction for the best deal. The savviest corporations get not only 10-year tax holidays but also discounts on land, cheap government loans, below-market rates for electricity and water and government help in paying their workers.
Rich countries know better — the European Union, for example, regulates the incentives members can offer to attract investment. That car plant will most likely be built in one of the competing countries anyway — the incentives serve only to reduce the host country’s benefits. Since deals between corporations and governments are usually secret, it is hard to know how much investment incentives cost poorer countries — certainly tens of billions of dollars. Whatever the cost, it is growing, as country after country has passed laws enabling the offer of such incentives.
Human nature, not smart lobbying, is responsible for another poor-to-rich subsidy: the brain drain. The migration of highly educated people from poor nations is increasing. A small brain drain can benefit the South, as emigrants send money home and may return with new skills and capital. But in places where educated people are few and emigrants don’t go home again, the brain drain devastates. In many African countries, more than 40 percent of college-educated people emigrate to rich countries. Malawian nurses have moved to Britain and other English-speaking nations en masse, and now two-thirds of nursing posts in Malawi’s public health system are vacant. Zambia has lost three-quarters of its new physicians in recent years. Even in South Africa, 21 percent of graduating doctors migrate.
The financial consequences for the poorer nations can be severe. A doctor who moves from Johannesburg to North Dakota costs the South African government as much as $100,000, the price of training him there. As with patent enforcement, a larger cost may be in health. A lack of trained people — a gap that widens daily — is now the main barrier to fighting AIDS, malaria and other diseases in Africa.
Sometimes reverse subsidies are disguised. Rich-country governments spent $283 billion in 2005 to support and subsidize their own agriculture, mainly agribusiness. Artificially cheap food exported to poor countries might seem like a gift — but it is often a Trojan horse. Corn, rice or cotton exported by rich countries is so cheap that small farmers in poor countries cannot compete, so they stop farming. Three-quarters of the world’s poor people are rural. The African peasant with an acre and a hoe is losing her livelihood, and the benefits go mainly to companies like Archer Daniels Midland and Cargill.
Most costly to poor countries, they have been drafted into paying for rich nations’ energy use. On a per capita basis, Americans emit more greenhouse gases into the atmosphere — and thus create more global warming — than anyone else. What we pay to drive a car or keep an industrial plant running is not the true cost of oil or coal. The real price would include the cost of the environmental damage that comes from burning these fuels. But even as we do not pay that price, other countries do. American energy use is being subsidized by tropical coastal nations, who appear to be global warming’s first victims. Some scientists argue that Bangladesh already has more powerful monsoon downpours and Honduras fiercer cyclones because of global warming — likely indicators of worse things ahead. The islands of the Maldives may someday be completely underwater. The costs these nations will pay do not appear on the global balance sheets. But they are the ultimate subsidy.
Tina Rosenberg is a contributing writer for the magazine.