AGEC 340 – International Economic Development

Course slides for week 15 (April 20 & 22)

Capital flows, migration and aid*

• Our last week of new material!

• Reminder: final lit review due Fri. Apr 23 at 5 pm • Remember to save and upload without your name

(First page should have only the title and date)• Keep a version with your name and this course’s name

for your files (e.g. to use as a writing sample)

* If you are following the textbook, this is chapter 19.

So far, we have focused on choices within a country.How might international relationships matter?

• Remember, the highest national income usually comes from– free international trade (limit tariffs, quotas, etc.), but– active domestic policies (taxes, subsidies & regulations) to offset

externalities and market failures

• So a country’s own government can help it grow– …but what can one country do to help another?

so far we’ve seen R&D for new technology WTO and other treaties to facilitate free trade

this week: capital flows, migration, foreign aid

First, capital flows:big, growing… and very unstable

Source: Reprinted from IMF (2007), Finance and Development 44(1).

Even the direction of capital flows is hard to predict: for the past decade, it has increasingly flowed out of poorer countries, into the U.S.

Source: Reprinted from IMF (2007), Finance and Development 44(1).

The poorest countries have repaid or been forgiven much of their past debt

For low-income countries, governments’ foreign aid is very important

The role of foreign aid: more detail, updated

Foreign aid and private flows to developing countries from all donor countries (2006 US$ b.)

2000 2001 2002 2003 2004 2005 2006 2007

Official Development Assistance (ODA) 78.3 81.8 87.9 91.4 96.3 123.2 119.8 108.0 Technical Cooperation 16.6 18.1 19.7 21.3 20.3 22.0 23.0 13.5 Food Aid 2.3 2.3 2.9 4.1 3.3 3.8 3.3 Debt Relief Grants 3.1 3.8 7.5 9.8 7.3 25.5 20.2 8.9 Other 56.3 57.7 57.9 56.2 65.4 72.0 73.3 Private grants 8.9 9.3 10.8 11.6 12.1 15.4 14.8 Private investment 118.4 68.3 8.9 57.6 82.5 188.2 200.7 Direct foreign investment 105.5 91.8 46.5 58.8 83.7 106.3 135.2 Portfolio private investment 13 (24) (38) (1) (1) 82 65 Note: GNI of Donor Countries 31,369 31,884 32,090 32,935 34,345 35,775 37,246 36,968

Source: OECD (2008), extracted on 2008/04/13 20:39 from http://stats.oecd.org.

More detail on aid from the United States

Foreign aid and private flows to developing countries from the United States (2006 US$ b.)

2000 2001 2002 2003 2004 2005 2006 2007

Official Development Assistance (ODA) 11.6 13.0 14.9 17.9 21.0 28.8 23.5 21.2 Technical Cooperation 5.0 6.0 7.5 8.4 7.8 9.1 9.3 Food Aid 1.2 0.9 1.6 2.7 2.3 2.3 2.0 Debt Relief Grants 0.0 0.0 0.5 2.6 0.2 4.3 1.7 0.1 Other 5.3 6.0 5.3 4.1 10.8 13.1 10.5 Private grants 4.7 5.2 6.4 6.9 7.2 8.9 9.0 Private investment 21.5 27.6 14.5 15.7 21.7 20.4 36.6 Direct foreign investment (9.1) (2.7) (8.7) (0.2) (14.8) 60.1 25.7 Portfolio private investment 4.7 5.2 6.4 6.9 7.2 8.9 9.0 Note: GNI of the United States 11,573 11,564 11,737 12,030 12,413 12,749 13,260 13,490

Source: OECD (2008), extracted on 2008/04/13 20:39 from http://stats.oecd.org.

To put this in context, with data from 2007…How much do we give?

• How much did the US give?

– total amount≈ $21 billion/year ≈ $70 per US citizen

– as a percent of total national income≈ 0.16% (1/8 of a cent of every dollar)

– as a percent of government expenditure≈ 0.79% (less than a cent of every dollar)

To put this in context, with data from 2007… How much do we give?

• How much did the US give? … & the world?

United States All Indust. Countries – total amount

≈ $21 billion/year ≈ $70 per US citizen

– as a percent of total national income≈ 0.16%

– as a percent of government expenditure≈ 0.79%

To put this in context, with data from 2007… How much do we give?

• How much did the US give? … & the world?

United States All Indust. Countries – total amount

≈ $21 billion/year $108 b./year≈ $70 per US citizen

– as a percent of total national income≈ 0.16%

– as a percent of government expenditure≈ 0.79%

To put this in context, with data from 2007… How much do we give?

• How much did the US give? … & the world?

United States All Indust. Countries – total amount

≈ $21 billion/year $108 b./year≈ $70 per US citizen ≈ $114 / citizen

– as a percent of total national income≈ 0.16%

– as a percent of government expenditure≈ 0.79%

To put this in context, with data from 2007… How much do we give?

• How much did the US give? … & the world?

United States All Indust. Countries – total amount

≈ $21 billion/year $108 b./year≈ $70 per US citizen ≈ $114 / citizen

– as a percent of total national income≈ 0.16% ≈ 0.30%

– as a percent of government expenditure≈ 0.79%

To put this in context, with data from 2007… How much do we give?

• How much did the US give? … & the world?

United States All Indust. Countries – total amount

≈ $21 billion/year $108 b./year≈ $70 per US citizen ≈ $114 / citizen

– as a percent of total national income≈ 0.16% ≈ 0.30%

– as a percent of government expenditure≈ 0.79% ≈ 0.80%

Which countries receive most U.S. foreign aid, and why?

should we give more?

• Why do we give? –make the world safer–make the world more prosperous–make the world more friendly

Can trade and investment replace foreign aid?

• Not really, because:– It’s very unstable– and provides different things:

Private firms’ investment provides commercial goods & services;

Government’s foreign aid provides public goods (better government policies, health, education, and economic growth) .

• Governments’ foreign aid can be a complement to private investment & trade, as aid supports growth which makes it profitable for firms to expand investment & trade

What about migration?

Source: Reprinted from Migration Policy Institute, Washington DC (www.migrationpolicy.org).

Migration is transforming our lives!

Source: Reprinted from Migration Policy Institute, Washington DC (www.migrationpolicy.org).

The current wave of migration is a blast from the past…

Source: Reprinted from Migration Policy Institute, Washington DC (www.migrationpolicy.org).

my ancestors

all arrived in

the 1880s

…but of course today’s migrants come from different regions

Source: Reprinted from Migration Policy Institute, Washington DC (www.migrationpolicy.org).

The demand for migration is stronger than ever

Source: Reprinted from L. Pritchett, “Let Their People Come: Breaking the Gridlock on Global Labor Mobility.” Washington: Center For Global Development, 2006

Migration is especially important at low skill levels

Source: Reprinted from L. Pritchett, “Let Their People Come: Breaking the Gridlock on Global Labor Mobility.” Washington: Center For Global Development, 2006

Migrant’s remittances are huge and stable

-25

25

75

125

175

225

275

325

375

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007e

US$ billions

Recorded Remittances

FDI

Private debt and portfolio equity

Official Development Assistance

Sources: Global Economic Prospects 2006: Economic Implications of Remittances and Migration (World Bank), World Development Indicators 2007, and Global Development Finance 2007.

Remittances and capital flows to developing countries

:

Reprinted from World Bank data, online at http://go.worldbank.org/QOWEWD6TA0

Migration varies by region: Comparing Indiana to the US as a whole...

Source: Reprinted from Uris Baldos, Tani Lee, Delphine Simon and Brigitte Waldorf , “Immigrants in Indiana: Where They Live, Who They Are, and What They Do.” Purdue Agricultural Economics Report, February 2009.

Migration varies by region: Comparing counties within Indiana…

Source: Reprinted from Uris Baldos, Tani Lee, Delphine Simon and Brigitte Waldorf , “Immigrants in Indiana: Where They Live, Who They Are, and What They Do.” Purdue Agricultural Economics Report, February 2009.

Migration varies by region: Where do Indiana’s immigrants come from?

Source: Reprinted from Uris Baldos, Tani Lee, Delphine Simon and Brigitte Waldorf , “Immigrants in Indiana: Where They Live, Who They Are, and What They Do.” Purdue Agricultural Economics Report, February 2009.

Migration varies by age and sex: Who are Indiana’s immigrants?

Source: Reprinted from Uris Baldos, Tani Lee, Delphine Simon and Brigitte Waldorf , “Immigrants in Indiana: Where They Live, Who They Are, and What They Do.” Purdue Agricultural Economics Report, February 2009.

Figure 4. Immigrants in Indiana by Age and Sex in 2000 and 2006

Migration varies by education level: Immigrants tend to have either very low or very high education

Source: Calculated from Uris Baldos, Tani Lee, Delphine Simon and Brigitte Waldorf , “Immigrants in Indiana: Where They Live, Who They Are, and What They Do.” Purdue Agricultural Economics Report, February 2009.

32.2

13.9 18.210

39.464.8

21.5

58.3

28.421.3

60.2

31.7

0

10

20

30

40

50

60

70

80

90

100

Immigrants Native Born Immigrants Native Born

Indiana Tippecanoe County

Bachelor’s, Graduate or Professional Degree

High School or Some College

Less than High School

How else do we in the US affect world development?

US Trade Policy and Trade Agreements

• Does the US have free trade?Average import tariff rates by

regionUnited States JapanEurope

1970 11.6 10.8 9.41980 6.3 6.0 6.41990 3.4 4.2 4.82000 3.9 3.2 4.2

==> tariff rates have fallen in the US as in other rich countries, but...

Tariffs vary widely by type of product

Reprinted from Anita Regmi et al., Market Access for High-Value Foods. USDA/ERS AER840, Feb. 2005 (49 pp).

Higher protection against more processed goodsis called “tariff escalation”

Reprinted from Anita Regmi et al., Market Access for High-Value Foods. USDA/ERS AER840, Feb. 2005 (49 pp).

In summary…what set of government policies

would be most economically efficient?

• freer trade (and investment, and migration?)• using government to invest in public goods

– to do what the private sector can’t do,

offsetting externalities & market failures, and

thereby make the economy more effective