The New York Times had an interesting op-ed over the weekend that looks at problems inherent in foreign aid and encourages Congress to adopt a new approach to international develoment:
While foreign aid works in some situations, it has two huge problems. First, there is never enough money to go around. Last year, the United States provided $23 billion of development aid to foreign countries. This was more than any other donor, but it still resulted in very little for the billion people who live on less than $1 per day.
The second problem is that the money that does get distributed doesn’t always reach the people who need it. As the economist Jeffrey Sachs has noted, of every dollar given to sub-Saharan Africa, only about 40 cents is actually directed toward economic development. The rest goes to debt service, consultants and humanitarian emergencies. And after those expenses are subtracted, the remaining money is further reduced by mismanagement and corruption.
A solution to both problems would be to give tax credits to American companies that invest in qualified developing countries. [emphasis added]
Congress should provide a 39-cent tax credit for every dollar of American investment in developing countries. If Company X were to build a $100 million factory in Madagascar, its tax bill would be reduced by $39 million. The lost tax revenue would be offset by reducing direct foreign aid by the same amount.
The power of substituting tax credits for lump sums of cash is that while the cash would bring at most $39 million to Madagascar, the tax credit results in a $100 million investment. For the same cost to the federal government, Madagascar receives far more resources. And by leveraging its foreign aid dollars, the United States is better off too, for reasons from the creation of new markets to alleviating conditions that may aid terrorist recruitment.
Greg Mankiw, noted economist and blogger, calls the idea one of the least politically correct ideas he's heard, but notes that it could be a more effective approach than traditional foreign aid. And I concur.
Furthering economic integration between the developed and developing worlds fosters an environment of cooperation and ultimately benefits all the countries involved. The only addendum to the idea I would add is that companies should receive additional tax breaks for infrastructure development projects they undertake in said country such as road building, port building, and other projects that furthers access to the international market.
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