RE:Musings On Foreign Aid

Monday, July 13, 2009

Response to Professor Utomi's article -Musings On Foreign Aid

When discussing about foreign aids and foreign direct investment from developed nations to semi developed and underdeveloped countries, it is necessary that we understand some key terms which are frequently used in international trade and globalization forums. The examples of these key terms are Pareto efficiency, Kaldor-Hicks compensation, mobility of labor, transfer of technology, and agglomeration. The understanding of the key terms would let us interpret the actions and policies the advanced countries implement towards less industrialized countries such as African and South American countries.

Pareto efficiency is a concept developed by Vilfredo Federico, an Italian economist. He advocated for a situation where by everyone benefits from international trade without anyone bearing the burdens of international trade. Vilfredo argued that international trade is good only if international trade will make everyone involved better off, and it makes no one else worse off after the trade. However, this is not technically possible. This is the reason why developed countries subscribe to Kaldor-Hicks compensation principle after the First World War.

Kaldor-Hicks compensation principle states that compensation should come from those countries that were made better off as result of international trade to those that were made worse off due to exploitation of international trade. This simply means that countries that benefited from international trade should compensate the countries that bear the burdens of international trade. The developed countries understand that free and international trade result to unbalanced economic efficiency and unequal income distribution within and outside the boundaries of the countries. This is reason advanced country (economy and military world power) established World Bank, IMF, Red Cross, UNICEF, FIFA and other international organization to compensate the burden bore by less developed countries and developing countries as a result of international trade. For example, the exportation of commodity products is the major source of revenue of most Africa countries. The commodities are normally in their raw nature. Because Africans lack technology expertise, Africans cannot play games with the raw materials they have in their own possession. The advanced countries buy these raw materials, and they can perform what it called “Product Differentiation” and branding after transforming the raw materials to finished goods. The cost of differentiating and branding these commodities to finished or process products changes the value of these commodities astronomically. This accounts for the reasons why we would always be indebted to advanced countries. We would always accrue foreign debts even if our debts were forgiven in every 25 years interval. Most African countries are exporters of commodities (primary goods) and consumers of high technology goods (manufactured goods).

The mobility of labor which is also called “Brain Drain” syndrome could be classified under Kaldor-Hicks compensation principle. This is because as result of the robust development in advanced countries. The advanced countries are in need of experienced doctors, university professor, soccer players and the rest to help them in building and maintaining their exploding economies. Most professionals immigrated to advanced countries because these developed nations were willing to pay higher wages and salaries for their services. The advanced countries expect the immigrants to take advantage of the favorable exchange rate by remitting funds to their home countries. International trade and globalization is centered on free movement of labor, capital, and technology with one country to other without barriers. The $4 billion Nigerians in the Diaspora remit home annually is typical example of a form of compensation to Nigeria for her loss in international trade. On a reflection note, most of these Nigeria professionals studied or acquired their foundational education in Nigeria at free of cost or cheaper cost. They do not have students’ loans they need to pay. It has never come to their minds to set up endowment funds for the primary schools, high schools or universities they attended while they are in Nigeria. I understand we cannot coerce anyone to remit money or contribute to any endowment funds, but I think Nigerians in the diasporas have the moral responsibilities to do the right thing. I know few people that are giving back to Nigeria in their own little way.

The key strategies to the economy growth in India can be tie to technology transfer, agglomeration, and Foreign Direct Investment (FDI). The transfer of technology expertise from developed countries to underdevelopment is very important for the economic growth and development of any country in this 21st century. The first phase of what took place in India was technology transfer which is also called “Reversed Brain Drain or Brain Gain” syndrome. They India policies makers westernized most of India strategic sectors. There was reforms health sector, aviation sector, education sector and others sectors. This gave way for agglomeration. The agglomeration led to Foreign Direct Investment in India. The kind of agglomerations we have in Nigeria is computer village (Nigeria’s Silicon Valley) and Alaba market. I do not think that no sensible investor would invest in computer village and Alaba market (the pirates’ den)

In summary, the financial institutions in Nigeria should invest in retailing sector of the economy in order to sustain growth model in country. The retailing industry is a sector that has not be tapped into. If the banks can finance the construction Wal-Mart, Home Depot, Lowes type of franchise in Nigeria, the retailing industries can be quoted on Nigeria Stock Exchange and capital can be raise by issues shares to the general public. In case the private sector cannot do this on their own, I will suggest that the creation of a joint venture which would involve both government and private partnership.

There is no doubt that foreign aids are good for Nigeria and Africa as a whole, but we have to be creative enough so that we can attract foreign investment across the globe into our economy. We can only achieve this when the government provides necessary superstructures and infrastructures to aid economic growth and development. A country with stable economy and good governance is a potential destination for Wall Street investors’ and emerging economies’ destination.

God bless Federal Republic of Nigeria.
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