An interesting aid proposal

Written by Johan on October 24, 2007 – 2:44 pm

It is well known that foreign aid often fails to help the people it is intended to help. Corruption is a big problem, as are the incentives created when poor countries or people focus their efforts on aquiring aid rather than “real” income. While some aid projects are successful most are not, and in the end it is results — not intentions — that matter. New ideas, then, are needed.

One such idea is presented in the New York Times, by Justin Muzinich and Eric Werker. They suggest introducing a tax credit for companies that invest in the developing countries. A $100 million investment should, according to this proposal, lead to a $39 million tax reduction. The lost tax revenue would then be taken out of the aid budget. This is a very interesting idea. The company doing the investment would still use a lot of its own money, and therefore have a stake in the outcome, while the investment would help the poor country develop businesses and provide opportunities for employment, and less aid money would be wasted. It seems like a win-win, and it would be very interesting to see this tried in the United States or elsewhere.

There is one downside with this proposal, as Greg Mankiw points out. It is politically almost impossible to favour it.

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