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Sunday, March 25, 2007

How poor countries subsidise rich countries

Tina Rosenberg has a nice article in New York Times today where she has the following checklist of the ways in which poor countries help rich countries:

  1. Reserves.
  2. The application of first world IPR rules, which convert the public goods of knowledge into excludable things that you can earn a toll off.
  3. Fiscal subsidies for foreign investment.
  4. The brain drain
  5. First world policies which make it difficult for the third world to export agriculture
  6. Global warming - which everyone will pay for.

In the case of reserves: India holds roughly $200 billion of reserves, all of which are invested in low-yield first-world securities. From an `insurance' perspective, what India needs is roughly $50 billion. The opportunity cost of reduced returns works out to perhaps five percentage points. Applying 5 percentage points on $150 billion is an annual cost of $7.5 billion or roughly 1% of GDP.

In the case of #3 and #4, I believe that the basic problem is the self-harming policies in the 3rd world which are hostile to investment and hostile to smart people. Once these policies are in place, fiscal subsidies for investment appear inescapable. But it would be far better to instead have a climate of policy which is supportive towards investment and towards smart people.

1 comment:

  1. I think fiscal subsidies pay for themselves, if not in tax revenues in the long term then by increased spending capacity of newly employed working in the a new factory or IT company. And rich countries provide subsidies too - poor ones have to compete.

    I think reserve and climate change, for which payment will be demanded by rich countries (and rich activists) by beating the poor countries in submission, are the key. Reserves have clearly subsidized consumption in rich countries while punishing locals with high interest rates during raising inflation periods such as now.


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