immigration reform, an alternative to foreign aid? contd.

Posted on March 25, 2010 by

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Foreign aid has been one of the most debated policies in development and in the fight to eradicate extreme poverty.  Despite the widely publicized failures of 50 years of official aid to Sub-Saharan Africa, most industrialized nations policymakers backed by a small minority of economists continue to advocate these official international aid flows to developing countries. 

Evidence collected by the OECD suggests that as the total flows of official aid increased, the standard of living in the Sub-Saharan region has deteriorated.1 The Human Development Index (HDI) is a composite statistic used as an index to rank countries by level of “human development” and separate developed , developing and underdeveloped countries. The statistic is composed from statistics for Life Expectancy, Education, and GDP collected at the national level.  According to the OECD data, the aaverage Human Development Index (HDI) in 1980 to 2007 has plunged for 31 sub-Saharan African countries.  Average GDP per capita was $1897 in 1980 and $2206 in 2007, barely any change despite trillions of dollars in official aid during that 27 year period. 

It seems that the slow development or lack thereof has been caused mainly by policymakers overwhelming desire to do something about poverty.  The growing foreign government involvement in the economics of the third world seems to have caused more market distortions, promoted the wrong incentives and resulted in a downward trend in economic activity in the poorest regions of the world.  Most development experts even in organizations such as the U.N. argue that governments need to build a climate that is conducive for doing business.  A growing private sector is essential for development.  Unfortunately even some of the most stable Sub-Saharan countries still do not attract adequate levels of Foreign Direct Investment (FDI) flows.  Among many other reasons, African governments have relied for so long on aid and debt relief that they have lost sight of the importance of a domestic private sector.  Experts and policy makers alike can continue to argue as to why official aid has not produced desirable results in the Sub-Sahara region or they can begin to look for alternatives. 

Recent studies have shown that remittances had started to play a very important role in financing for development.  Remittances are a form of private flows from skilled migrant workers to the home country.  For the year 2006, the World Bank estimated remittances at $250 billion, $338 billion in 2008 and this number grows every year2

A number of studies have shown that remittances have positive effects on households in the country of origin.  Expected remittances coupled with a relaxed immigration policy in the host country encourage households to invest more resources into higher education. 

Parents would rather allocate resources into educating children in order to increase their probability to find jobs overseas and to emigrate.  This investment in education comes at the cost of having more children.  This is often referred to as the quantity-quality tradeoff in fertility models.  The quantity-quality tradeoff in fertility models predicts that increased high skilled emigration reduces fertility and fosters human capital accumulation in the home country.3 The “remittances phenomenon” suggests that a well specified immigration policy in a rich host country that encourages high skilled migration from a poor home country ameliorates the tendency to under-invest in human capital resulting in welfare gains in the home country.

To be continued….

1 http://www.oecd.org/dataoecd/50/17/5037721.htm

2http://econ.worldbank.org/WBSITE/EXTERNAL/EXTDEC/EXTDECPROSPECTS/0,,contentMDK:21121930~menuPK:3145470~pagePK:64165401~piPK:64165026~theSitePK:476883,00.html

3 Marchiori, Pieretti and Zou. Brain Drain, Remittances and Fertility. Center for Research in Economic Analysis, University of Luxembourg. 2008

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