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Broken promises and new approaches to foreign aid

Ryan Hahn's picture

G8_leaders_20070607edited_copy_4 The Financial Times on its front page today speculates (subscription required) that the G8 may be backtracking on its commitments to Africa:

Leaders of the Group of Eight rich nations are set to backtrack on their landmark pledge at the Gleneagles summit in 2005 to increase development aid to Africa to $25bn a year...In a further retreat, the G8 is set to abandon its Gleneagles promise to provide universal access to Aids treament and prevention by 2010.

For some critics of the aid establishment, this will not provoke too many tears. I wait to see how many minutes pass before William Easterly intones on this latest broken promise. It probably won't be anything too nice if it bears any relation to what Easterly had to say in this biting critique of foreign aid from 2007:

$568 billion in today’s dollars flowed into Africa over the past 42 years, yet per capita growth of the median African nation has been close to zero. The top quarter of aid recipients (heavily overlapping with Africa) received 17 percent of their GDP in aid over those 42 years, yet also had near-zero per capita growth. Successful cases of development happening due to a large inflow of aid and technical assistance have been hard to find...The cases of rapid growth currently most celebrated -- India, China, and Vietnam -- receive little aid as percent of their GDP.

Two intrepid authors step into this fray to offer a new approach to foreign aid. Perhaps since the authors hope to tap the wisdom of the market they will receive some approval from Easterly. Eric Werker, an assistant professor at Harvard Business School, and Justin Muzinich, an employee of an (unnamed) hedge fund, propose that the United States experiment with the use of tax credits to stimulate private sector investment in developing countries in an article in Policy Review. (They appear to be building on an earlier version of the proposal offered up in the New York Times in October 2007.) The proposal is two-fold and relatively straightforward - give tax credits to firms that invest in new projects in developing countries and provide tax breaks to immigrants who send remittances home. According to Werker and Muzinich:

A development tax credit thus represents a shift in the delivery of foreign aid. It is a move from handouts to empowerment, from less aid to more, and from waste to efficiency. It is what developing countries themselves recognize as the key to long-run sustainable growth. And since tax credits and pre-tax deductions can be adopted incrementally, they are a pragmatic way to introduce changes to the model of foreign assistance.

Although there are many potential pitfalls, I think it'd be useful to at least give this new approach a try - and perhaps not just in the United States.         

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