As Western economies struggle with rising debt and unemployment, their approach to development and cooperation with low-income countries and emerging markets has taken a twist. It is becoming more clear that sustainable development should not be based on external wealth or redistribution, but must instead be generated at home. Foreign investment and remittances have long been identified as a crucial source of revenue for poor populations in countries like Mali or Cape Verde. Entire villages have been built out of remittances in Mali, for instance, mainly from immigrants to France. However, this does not mean that these countries are being helped to develop sustainably.
Preparing a new thatched roof in Mali. Photo by Jean-Marc Desfilhes on flickr (CC BY-NC-SA 2.0) For most African countries, the positive ability to attract capital is often negated by lenient fiscal policies towards foreign investors that strip countries of public revenues to build up their economies. This trend seems was still on the rise worldwide in 2007 according to an OECD report “Tax Effects on Foreign Direct Investments”. A report by Matthew Martin and Nils Bhinda from Development Finance International shows that in Tanzania, for instance, the influx of private capital from global mining companies increased the volume of gold and diamonds sales. However, this failed to produce the expected social benefits, such as increased government revenues or public investment in social infrastructure. In fact, various tax exemptions and fiscal incentives ended up costing Tanzania $140 million USD from 2005-2008. Remittances: Money at what cost? Remittances from abroad to Mali amounted %3.7 of the countries GDP for the year 2005-2006, and according to some estimates remittances significantly decreased the number of poor in Mali and also reduced inequality. Cape Verde is another nation that has seemingly benefited from emigration as the country with the highest per capita remittances of any African country. With remittances amounting to 8% of the country’s GDP, it has even overcome the challenge of establishing banking institutions for the poor on its many islands thanks to financial capital from migrants in Portugal, Brazil and the USA. Because of such statistics, many international development institutions have attempted to design development policies based on remittance flows, by trying to convert this “subsistence” money into capital for infrastructure. There are some caveats to consider though. Despite the growth of remittance flows, one should keep in mind that the very concept of remittances originates from a major outcome of global poverty: economic migration. Those who choose to leave their country are often exposed to risks and dangers during the transition (illegal border transfer, human traffickers, social and cultural isolation). Moreover, remittances from migrants are highly dependent on the economic growth of the host countries. When unemployment in host countries rises, it frequently affects the type of labor available to most immigrants, putting both them and families back home at further risk of precariousness. Finally, the peer-to-peer nature of remittances is both a blessing and a curse. As Hein de Haas writes in an article for Third World Quarterlyin 2005:
The much-celebrated micro-level at which remittances are transferred is not only their strength, but also their main weakness, since this also implies that individual migrants are generally not able to remove general development constraints.
Because of the lack of incentives for locally-produced added value, it appears that remittances based on value created abroad can never be the sole base of a sustainable development strategy for low income countries. Good measures for sustainable development There are some measures that can be implemented to support foreign direct investment and remittances towards a more sustainable world. First, transparency and accountability. With respect to foreign investments, governments should offer proper projections of the benefits for public finance, or projects should not be allowed to take place. Financial policies should encourage a permanent check and balance system for both private and public flows with an obligation of transparency for the source of the revenues and their further use. Transparency, in the form of regular and mandatory publications to civil society should be mandatory. Low income countries often resort to the setting up Industrial Free Zones(IZF) to spur industrialization and create jobs in strategic locations with mineral resources. The creation of these zones have often led to economic and social instability through a constant race to lower costs, geographical mobility and low-quality production. Therefore if a government chooses to implement an IZF, it should also plan for a rapid conversion of labor and production capacity to evolve with markets. This concept is all the more important because so far there has been no concerted effort to integrate local products of low income countries and services in global trade. Inter-regional trade should remain the main goal because it provides geographical proximity and reduces vulnerability to the whims of highly mobile multinational companies. With respect to migration and remittances, a drawback of global inequality is the tendency of qualified students from low income countries to remain in richer countries to pursue careers, a phenomenon also known as the “brain drain“. As the recession takes its toll on employment in Western countries, a “reverse brain drain” effect has emerged for Nigeria, Ghana, Morocco and other countries where there are competitive salaries and working conditions. It would make sense for policymakers worldwide to start to embrace a simple idiom to ensure sustainable development: the creation of wealth through added value and redistribution must start at home. Policies based on short term incentives, social inequities or external wealth injection might spur growth temporarily, but it is doubtful that they will sustain poverty reduction in the long run. This blog first appeared on the OECD Global Forum on Development 2013 site, here. The OECD Global Forum would like to hear your opinions on the major themes.
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