Thursday, May 18, 2006

Infrastructure and industry

"Immigration is the greatest anti-poverty program ever devised. The American dream is a reality for many immigrants who not only increase their own living standards but who also send billions of dollars of their money back to their families in their home countries—a form of truly effective foreign aid."


Can we please start making a difference between foreign aid and humanitarian aid? The purpose of foreign aid is to improve the overall economic situation in the receiving country, long term. The money immigrants send back gets spent on food, clothing and medication, not on establishing infrastructure and industry. That's not foreign aid, that's charity.

The fact that each next generation does the same thing - emigrate to support their families at home - is the glaring proof that it doesn't work as foreign aid. As humanitarian aid, it does, but the reason why masses of people leave a country to find work is because there is no work in the home country, and there is no work because there is no infrastructure.

The kid of a Mexican burger cook will not use the money to go to university. Not because he won't want to, of course. But because there's no education to be had, in a Mexican town, for what a burger cook can spare, that would allow the kid to get a job at an investment bank.

To drag an economy out of a ditch, you need industry, and to get industry, you need infrastructure. The purpose of foreign aid is to stabilize the regime, and the proper usage of the money is to build a road network, power plants, establish a qualified labour force, etc. You get this rather large lump of cash and you go out shopping for infrastructure, making big up-front investments to end up with a situation where industry would be attracted to the cheap and qualified labour. Once you have proper facilities within your country that pump money into the economy, you are on your way.

Money sent back by immigrants goes into the lower wrungs of the service sector - food and healthcare. A service economy is called post-industrial for a reason: it comes about as the result of a successful industry initiating a self-sustaining reaction. When you have high local demand for skilled craftsmen, that demand will create the facilities for supply, i.e. good local education. In a healthy industrial nation with easy access to world-class education, it is easy for the son of a factory worker to end up in an investment bank.

But Flasher, I live in [random Third World country], and I see parents spending inordinate amounts of income on kids' educations!

So how come after generations of immigrants sending money back to their families, the population is still predominantly impoverished with no chance of improvement? The desire and effort of going to school are commendable, but if there are no good trade schools, industrial corporations will not want to establish factories there, and if there are no factories to take in graduates, there won't be any good trade schools. It's a vicious circle that can only be broken by dumping huge amounts of up-front investment into creating the infrastructure for industry out of nothing.

I live in a country where what I describe happened, and was successful. Estonia has a great economy, to a large extent because of the inordinate amounts of US (early-mid 90s) and EU (more recently) cash being trebuched in our general direction.

Foreign aid, as opposed to humanitarian aid, is given with restrictions. See the example of US foreign aid carrying the rider that it can only be spent at US companies. A great example of this working beautifully is Israel. In this way foreign aid serves two purposes - helping out another country (and thus creating a market both now and in the future), as well as dumping cash into one's local economy without causing mad inflation.

There is a known way for a rich country to spend money on making a poor country rich. This is not charity, as it is in the best interests of the rich country - not just politically but economically. But humanitarian aid, even in the efficient form of migrant workers sending money back to their families, ain't it.

2 comments:

Anonymous said...

1) Money is money. It's liquid. It's silly to say that remittances don't get spent on infrastructure. Does the family spend only on consummables? How the hell did the produce get to market? Did the seller pay taxes and/or bribes? Money is money.

2) Proving that foreign aid doesn't work because "generations continue to emigrate" is bunk. Countries that two, three generation ago had large immigration to the US (like Italy, Ireland, and Jewish Russia), today have none. Foreign aid may be ineffectual, but it's not for that reason.

3) The whole "industry before services" seems Marxist. I mean classical Marxism/Hegelian, ie, historical prescriptivism. First this happens, then this happens. As if services were a higher form of commerce.

4) Remittances aren't huminatarian aid any more than buying yourself a checkin sandwich for lunch is humanitarian. It's the whole of the labor.

Flasher T said...

1) The money gets put into the most basic bits of infrastructure that ensure survival, but not development.

2) Those countries don't have a stable history of emigrants sending back money (particularly Soviet refugees who in fact couldn't). Ireland's economic miracle is the direct result of the government and the EU spending like mad on infrastructure.

3) Marxism was a logical, reasonable theory based on assumptions that dated very quickly. Just because it gave the world the Soviet monster, it doesn't make sense to discount the theory wholesale - some elements do apply to a developing country.

4) Remittances don't get spent on development.

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