Why Don’t We Redistribute to Poor Countries?

This is a long overdue post to counter the claim from those who oppose domestic redistribution that it is somehow nationalistic – that if we truly care about the poor, we should redistribute to poor countries, not our comparatively rich countrymen.

From a purely aesthetic perspective, the reason people vote for domestic redistribution is because that is the poverty they are most aware of, and where they can easily see the effects of redistribution. This is due to both availability bias and a general lack of capacity to process the amount of poverty in the world. Launching tirades against voters because of this is, therefore, akin to mocking people for behaving like real people rather than rational economic people.

However, this isn’t the main problem. Redistributing large amounts to developing countries is undesirable for two other reasons.

The first is a laffer-curve style argument: if we were to collect as much as possible in the short term and redistribute it, our economy would be heavily taxed and we wouldn’t even be spending it on public services. In other words, we’d bankrupt the public sector and the economy would grind to a halt, eliminating our capacity for long term redistribution. The long term aid maximising amount of redistribution is probably fairly low as  % of GDP, given that taxes cannot be so excessively high as to slow down growth, and enough of the tax revenue needs to be spent in the domestic economy to keep it going. Add political limitations to this and you’re looking at a level of redistribution not dissimilar to what we have now.

Secondly, and most importantly, is the false equivalence between domestic and international redistribution. This is best phrased as follows:

Economic growth is the cure for absolute poverty.

Redistribution is the cure for relative poverty.

The second statement is almost true by definition, whilst the first is clearly borne out by the facts (and I suspect, would not be opposed by those I am disagreeing with here). After all, is there a single example of a poor country developing due to aid? Sure, individual acts of redistribution may extend some lives in the short term, but in many cases it simply destroys industries and reduces the country’s capacity for development in the long term.

Similarly, there is not an example of a country that has grown its way out of relative poverty – the U.S. is the largest economy in the world, yet inequality is rife. Meanwhile, many Northern/Central European countries – though they do very well on growth too, incidentally – are effectively absent of relative poverty.

Now, we can discuss whether domestic redistribution is desirable or not, and whether relative poverty is ‘actually’ a problem or was just made up by Stalin, but for now, defending inequality on the grounds that people in developing countries are even poorer will not suffice.

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  1. #1 by Lee on February 1, 2012 - 2:51 pm

    Your laffer curve argument is way off. Total foreign aid is about $100bn a year (less than 1% of GDP). We could easily double that. $100bn per year divided by about 1 bn rich country residents = $100 each per year. Which is, incidentally, around the same size as the global poverty gap. We (Europeans, Americans, OECD) could eliminate extreme global poverty immediately for just $100 a year each. There is plenty of evidence that aid can cut poverty. (None of which means I oppose domestic redistribution, but I think it is fair to say that international redistribution is higher priority. Very few people can’t afford to feed their children in Britain.

    • #2 by Unlearningecon on February 1, 2012 - 3:08 pm

      Is there evidence? Where? Seems to me that aid has helped barely any countries – the only ones that are enjoying sustained increases in living standards right now are doing so through growth.

      I don’t oppose any international redistribution (Medicine and food being of particular importance), but I don’t think that redistributing across nations without a corresponding increase in production in the recipient nations is sustainable.

      • #3 by Lee on February 1, 2012 - 3:24 pm

        You have to be careful to distinguish between countries and people. I’m not saying that aid makes countries develop or grow, but it certainly can improve the lives of poor individuals. e.g.

        http://www.cgdev.org/section/initiatives/_archive/millionssaved/

        http://www.oxfamblogs.org/fp2p/?p=2547

        Finally, what exactly is unsustainable about $100 a year? Could you really not afford $100 a year for the rest of your life?

      • #4 by Unlearningecon on February 1, 2012 - 3:50 pm

        I wouldn’t be against a further $100 a year – as I said, I’m not arguing completely against international redistribution. What I am arguing is that if we redistributed what we do domestically internationally it would saturate developing economies and be a terrible idea over the long term (and perhaps the short term too as it might play havoc with currency fluctuations/inflation).

      • #5 by Lee on February 1, 2012 - 3:53 pm

        I’m not sure anyone is really advocating transfers on that scale (although, at a push, I probably would) – how do you know about those long-term-general-equilibrium-laffer-curve-type effects anyway huh? *cough* mainstream neoclassical economics *cough*

      • #6 by Unlearningecon on February 1, 2012 - 4:06 pm

        Well RWers often make arguments to the effect that they would prefer international redistribution to domestic, though of course they simply disapprove of any redistribution at all.

        If you read my ‘straw man’ post you’ll find that I don’t reject many of the broad points neoclassicism makes and neither do I reject a lot of the qualitative stuff. My main problem is the models and framing. I actually plan to do a more in depth post on what economics gets right in the near future.

  2. #7 by SR819 on February 3, 2012 - 12:48 pm

    I hear what you’re saying but in my opinion we should greatly expand international aid to help developing countries. Yes, the aid should be better targeted, and even if aid doesn’t help economic “growth”, if there are positive effects in terms of improved education, access to medicines, clean water etc, then it’s definitely worth it.

    Developed countries are sceptical about free trade with developing countries, because of the effect of destroying domestic industries and undercutting of the wages of the working classes, leading to a “race to the bottom”. IMHO rich countries can assist both domestic and international redistribution by employing significant trade protectionism to protect domestic industry, which will help retain high skilled jobs in rich countries. Moreover, by taxing companies that outsource jobs, there is enough opportunity to use the funds to deliver significantly increased amounts of aid and developmental assistance to developing countries.

    • #8 by Unlearningecon on February 3, 2012 - 5:19 pm

      Not much to disagree with here, although note that in practical terms aid is often misdirected and corrupted.

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