Here is an interesting article about something we have known about for
some time - the 'reverse flow' of what is called foreign aid.

Mary Anne

>
>www.nytimes.com/2007/03/25/magazine/25wwlnidealab.t.html?ref=magazine&pagewa
>nted=all
>
>New York Times Magazine
>March 25, 2007
>Idea Lab
>Reverse Foreign Aid
>
>By TINA ROSENBERG
>For the last 10 years, people in China have been sending me money. I also
>get money from countries in Latin America and sub-Saharan Africa ‹ really,
>from every poor country. I¹m not the only one who¹s so lucky. Everyone in a
>wealthy nation has become the beneficiary of the generous subsidies that
>poorer countries bestow upon rich ones. Here in the United States, this
>welfare program in reverse allows our government to spend wildly without
>runaway inflation, keeps many American businesses afloat and even provides
>medical care in parts of the country where doctors are scarce.
>
>Economic theory holds that money should flow downhill. The North, as rich
>countries are informally known, should want to sink its capital into the
>South ‹ the developing world, which some statisticians define as all
>countries but the 29 wealthiest. According to this model, money both does
>well and does good: investors get a higher return than they could get in
>their own mature economies, and poor countries get the capital they need to
>get richer. Increasing the transfer of capital from rich nations to poorer
>ones is often listed as one justification for economic globalization.
>
>Historically, the global balance sheet has favored poor countries. But with
>the advent of globalized markets, capital began to move in the other
>direction, and the South now exports capital to the North, at a skyrocketing
>rate. According to the United Nations, in 2006 the net transfer of capital
>from poorer countries to rich ones was $784 billion, up from $229 billion in
>2002. (In 1997, the balance was even.) Even the poorest countries, like
>those in sub-Saharan Africa, are now money exporters.
>
>How did this great reversal take place? Why did globalization begin to
>redistribute wealth upward? The answer, in large part, has to do with global
>finance. All countries hold hard-currency reserves to cover their foreign
>debts or to use in case of a natural or a financial disaster. For the past
>50 years, rich countries have steadily held reserves equivalent to about
>three months¹ worth of their total imports. As money circulates more and
>more quickly in a globalized economy, however, many countries have felt the
>need to add to their reserves, mainly to head off investor panic, which can
>strike even well-managed economies. Since 1990, the world¹s nonrich nations
>have increased their reserves, on average, from around three months¹ worth
>of imports to more than eight months¹ worth ‹ or the equivalent of about 30
>percent of their G.D.P. China and other countries maintain those reserves
>mainly in the form of supersecure U.S. Treasury bills; whenever they buy
>T-bills, they are in effect lending the United States money. This allows the
>U.S. to keep interest rates low and Washington to run up huge deficits with
>no apparent penalty.
>
>But the cost to poorer countries is very high. The benefit of T-bills, of
>course, is that they are virtually risk-free and thus help assure investors
>and achieve stability. But the problem is that T-bills earn low returns. All
>the money spent on T-bills ‹ a very substantial sum ‹ could be earning far
>better returns invested elsewhere, or could be used to pay teachers and
>build highways at home, activities that bring returns of a different type.
>Dani Rodrik, an economist at Harvard¹s Kennedy School of Government,
>estimates conservatively that maintaining reserves in excess of the
>three-month standard costs poor countries 1 percent of their economies
>annually ‹ some $110 billion every year. Joseph Stiglitz, the Columbia
>University economist, says he thinks the real cost could be double that.
>
>In his recent book, ³Making Globalization Work,² Stiglitz proposes a
>solution. Adapting an old idea of John Maynard Keynes, he proposes a sort of
>insurance pool that would provide hard currency to countries going through
>times of crisis. Money actually changes hands only if a country needs the
>reserve, and the recipient must repay what it has used.
>
>No one planned the rapid swelling of reserves. Other South-to-North
>subsidies, by contrast, have been built into the rules of globalization by
>international agreements. Consider the World Trade Organization¹s
>requirements that all member countries respect patents and copyrights ‹
>patents on medicines and industrial and other products; copyrights on, say,
>music and movies. As poorer countries enter the W.T.O., they must agree to
>pay royalties on such goods ‹ and a result is a net obligation of more than
>$40 billion annually that poorer countries owe to American and European
>corporations.
>
>There are good reasons for countries to respect intellectual property, but
>doing so is also an overwhelming burden on the poorest people in poorer
>countries. After all, the single largest beneficiary of the
>intellectual-property system is the pharmaceutical industry. But consumers
>in poorer nations do not get much in return, as they do not form a lucrative
>enough market to inspire research on cures for many of their illnesses.
>Moreover, the intellectual-property rules make it difficult for poorer
>countries to manufacture less-expensive generic drugs that poor people rely
>on. The largest cost to poor countries is not money but health, as many
>people simply will not be able to find or afford brand-name medicine.
>
>The hypercompetition for global investment has produced another important
>reverse subsidy: the tax holidays poor countries offer foreign investors. A
>company that announces it wants to make cars, televisions or pharmaceuticals
>in, say, east Asia, will then send its representatives to negotiate with
>government officials in China, Malaysia, the Philippines and elsewhere,
>holding an auction for the best deal. The savviest corporations get not only
>10-year tax holidays but also discounts on land, cheap government loans,
>below-market rates for electricity and water and government help in paying
>their workers.
>
>Rich countries know better ‹ the European Union, for example, regulates the
>incentives members can offer to attract investment. That car plant will most
>likely be built in one of the competing countries anyway ‹ the incentives
>serve only to reduce the host country¹s benefits. Since deals between
>corporations and governments are usually secret, it is hard to know how much
>investment incentives cost poorer countries ‹ certainly tens of billions of
>dollars. Whatever the cost, it is growing, as country after country has
>passed laws enabling the offer of such incentives.
>
>Human nature, not smart lobbying, is responsible for another poor-to-rich
>subsidy: the brain drain. The migration of highly educated people from poor
>nations is increasing. A small brain drain can benefit the South, as
>emigrants send money home and may return with new skills and capital. But in
>places where educated people are few and emigrants don¹t go home again, the
>brain drain devastates. In many African countries, more than 40 percent of
>college-educated people emigrate to rich countries. Malawian nurses have
>moved to Britain and other English-speaking nations en masse, and now
>two-thirds of nursing posts in Malawi¹s public health system are vacant.
>Zambia has lost three-quarters of its new physicians in recent years. Even
>in South Africa, 21 percent of graduating doctors migrate.
>
>The financial consequences for the poorer nations can be severe. A doctor
>who moves from Johannesburg to North Dakota costs the South African
>government as much as $100,000, the price of training him there. As with
>patent enforcement, a larger cost may be in health. A lack of trained people
>‹ a gap that widens daily ‹ is now the main barrier to fighting AIDS,
>malaria and other diseases in Africa.
>
>Sometimes reverse subsidies are disguised. Rich-country governments spent
>$283 billion in 2005 to support and subsidize their own agriculture, mainly
>agribusiness. Artificially cheap food exported to poor countries might seem
>like a gift ‹ but it is often a Trojan horse. Corn, rice or cotton exported
>by rich countries is so cheap that small farmers in poor countries cannot
>compete, so they stop farming. Three-quarters of the world¹s poor people are
>rural. The African peasant with an acre and a hoe is losing her livelihood,
>and the benefits go mainly to companies like Archer Daniels Midland and
>Cargill.
>
>Most costly to poor countries, they have been drafted into paying for rich
>nations¹ energy use. On a per capita basis, Americans emit more greenhouse
>gases into the atmosphere ‹ and thus create more global warming ‹ than
>anyone else. What we pay to drive a car or keep an industrial plant running
>is not the true cost of oil or coal. The real price would include the cost
>of the environmental damage that comes from burning these fuels. But even as
>we do not pay that price, other countries do. American energy use is being
>subsidized by tropical coastal nations, who appear to be global warming¹s
>first victims. Some scientists argue that Bangladesh already has more
>powerful monsoon downpours and Honduras fiercer cyclones because of global
>warming ‹ likely indicators of worse things ahead. The islands of the
>Maldives may someday be completely underwater. The costs these nations will
>pay do not appear on the global balance sheets. But they are the ultimate
>subsidy.
>
>Tina Rosenberg is a contributing writer for the magazine.

Ellen R. Shaffer, PhD, MPH, Co-Director
Center for Policy Analysis on Trade and Health (CPATH)
98 Seal Rock Drive
San Francisco, CA 94121-1437

phone: 415-933-6204
email: ershaffer@...
mobile: 415-680-4603
www.cpath.org
fax: 415-831-4091


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