A Politically Incorrect Alternative to Foreign Aid

The New York Times has raised an interesting proposal to mend the inefficient foreign aid given out by American taxpayers.

“Congress should provide a 39-cent tax credit for every dollar of American investment in developing countries. If Company X were to build a $100 million factory in Madagascar, its tax bill would be reduced by $39 million....Using tax credits instead of traditional foreign aid also means that the money will be spent more prudently. Because for-profit companies are focused on the bottom line, they will be more protective than government agencies of the money they invest in developing countries.”

As in the case of minimum wage, simply setting up a level of aid that poor country will receive may not help best allocate resources. Poor management and rampant corruption may cause local governments to squander the money long before it could be used to reduce poverty. The tax credit, however, could help solve the problem by transferring the responsibility to multinational companies, who are expert on how to turn a feasibility study into a profit-making enterprise.

But what if we take into consideration the political impact of the new policy? What will happen, in the ongoing tit-for-tat presidential race, if a candidate jumps to endorse the idea?

For sure, he won’t be hailed as an innovator. Instead, opponents would quickly dub his proposal another plot to outsource American jobs to third-world sweatshops tax credit.