Development Aid & Immigration

Question 1

What is foreign aid?

Answer 1

International transfer of goods, services, or capital from a country or international aid agency to a recipient country or its population

Question 2

Types aid foreign aid and donors

Answer 2

Types of aid
- Humanitarian and disaster relief
- Economic aid
- Military support
- Healthcare programs
Types of donors
- Public aid (Official Development Assistance) - bilateral or multilateral
- Private (NGOs, charities)

Question 3

Reasons for giving aid

Answer 3

Altruistic/Ethical:
- Compensation for past exploitation
- Counter global inequality
- Relieve disasters
- Encourage good governance/human rights/ democracy (conditional aid)
Economic/Self-interest:
- Develop or expand markets for a giving country’s goods and services (eg. tied aid)
Political/Strategic:
- Buy influence for security reasons

Question 4

Reasons for taking aid

Answer 4

• Helps fund beneficial economic programs, disaster relief, better health care
• But also
  – Can benefit corrupt elites (eg. food for oil program in Iraq)
  – Can allow leaders to ignore what their populations want

Question 5

The fiscal bargain (aid)

Answer 5

• All leaders rely on revenue to govern
• In most societies their citizens hold wealth
• If leaders want revenue they must bargain with citizens and agree upon a “fiscal contract”
• In exchange for taxation, the leader provides political rights and public goods
• As demand for revenue increases, leaders must extend political rights or find other ways extract revenue
  – Need for taxes -> leads to democracy

Question 6

How aid flows being a non-tax revenue affects countries

Answer 6

• Provides leaders an incentive to ignore tax-payers’ demands
• Provide resources to buy off political supporters with “private goods” or “public goods”
  – Works best if the group propping up government = small “selectorate”
• Foreign aid, remittances, oil rents

Question 7

Expectations for aid flows, altruistic donors and recipients

Answer 7

• Aid flows to poorest countries
• Aid flows to countries with better democracy/human rights records
• (Maybe) Aid flows to former colonies to make up for past exploitation

Question 8

Expectations for aid flows, economic self-interest of donors

Answer 8

• Aid flows between countries with more trade flows
• Aid flows to countries with biggest potential consumer markets
• Aid is largely “tied”

Question 9

Expectations of aid flows, political/strategic

Answer 9

• Aid flows to strategic and military allies
• Aid flows to autocratic and corrupt governments (more likely to make strategic concessions in exchange)
• (Maybe) Aid flows to former colonies to maintain useful political ties

Question 10

Alesina and Dollar, aid flows

Answer 10

• An inefficient, economically closed, mismanaged, non-democratic former colony, politically friendly to its former colonizer, receives more foreign aid than another country with similar level of poverty, a superior policy stance, but without a past as a colony
  – However, at the margin countries seem to reward democratization
• Nordic countries are more altruistic, give to countries with:
  – Low income levels
  – Good institutions and economic openness
• France gives largely to former colonies in political alliances, not sensitive to income or democracy
• US giving dominated by security interests in the Middle East

Question 11

How strategy and political alliances matter in aid, examples

Answer 11

• Foreign aid dropped off dramatically after Cold War
• Temporary members of UNSC get more aid during their terms

Question 12

Could aid work? Yes

Answer 12

Jeffrey Sachs:
- Economic development aid can help countries escape the “poverty trap”
Bill Gates:
- Aid related to healthcare has been instrumental in eradicating smallpox and fighting HIV/AIDS, tuberculosis, malaria, etc

Question 13

Could aid work? No

Answer 13

William Easterly:
- Too much aid goes to corrupt autocrats + Principal-Agent problems
Dambisa Moyo:
- Aid = free money that makes political leaders worse

Question 14

Two economic models on immigration

Answer 14

• Immigration’s effect on wages (factor model)
• Fiscal model of competition for public goods

Question 15

The factor model with immigration

Answer 15

• People in the Netherlands want to consume some goods that are intensive in low-skilled labor
• Netherlands is scarce in low-skilled labor
• Without trade of immigration, T-shirt producers compete for the few low-skilled workers
  – Wages for low-skilled workers are high
• How can t-shirt producers lower costs?
  – Import t-shirts from more low-skilled labor abundant countries (free trade, maybe FDI)
  – Import more low-skilled workers into the Dutch economy (immigration)

Question 16

What does it mean that trade and immigration can be substitutes?

Answer 16

• You can either trade with countries that have different labor endowments
• or You can become more abundant in the type of labor you are scarce in through Immigration
• In countries that are scarce in low-skilled labor, both lead to lower wages for low-skilled workers and both increase the income of capital owners
  What does this mean? In low skilled labor-scarce countries
• Low-skilled workers should oppose immigration by low-skilled workers, especially when trade is restricted
• Capital owners should lobby for more immigration when trade is restricted
• Trade and immigration should be political substitutes in labor-scarce countries

Question 17

Criticisms of factor model for immigration

Answer 17

• Doesn’t help us understand the EU case with free flows of trade and labor
• The bias against low-skilled immigrants should be strongest among low-skilled workers
  – Survey experiments do not find this

Question 18

Fiscal competition and immigration

Answer 18

• immigration can affect locals’ economic conditions beyond wages:
  – Taxes and fiscal transfers
• Immigrants that work pay taxes, but they also make use of government-funded services: schools for their children, child benefits, the healthcare system, subsidized housing

Question 19

Competition over the fiscal “pie” (immigration)

Answer 19

If immigrants are net contributors, the government can:
- Increase the pie - more people get more government services
- Keep the pie’s original size - other net contributors have to pay less tax
If immigrants are net consumers, the government can:
- Increase the pie - recipients get same amount of services, but more tax to fund it
- Keep the pie’s original size - recipients each get a smaller slice of the pie

Question 20

What does the fiscal “pie” tell us about preferences on immigration

Answer 20

Locals should prefer immigrants who are net contributors to those who consumer more government services
- High-wage over low-wage
- High-skill over low-skill
- Those without dependents over those with dependents
Empirical evidence is inconclusive about whether people fear higher taxes or fewer government services

Question 21

Criticisms of the fiscal competition model on immigration

Answer 21

• In the long-run, most immigrants add to the economy through labor, consumption, etc.
• For aging societies, net benefit of adding young workers is very high
• Fiscal competition cannot explain why states were closed to immigration before welfare states were created
• The model assumes, that more public services are funded through tax hikes today (vs governments can borrow now, pay later)

Question 22

Cultural / Sociopsychological explanations of opinions on immigration

Answer 22

• Survey evidence on economic factors shaping voters’ opinions on immigration is, at best, inconclusive
• The following are strong predictors of public opposition to immigration
  – Preference for cultural homogeneity
  – Overestimating number of immigrants
  —> Positively correlated with perception of “symbolic threat” and perceived negative economic impact of immigrants on the country as a whole
  – In experiments: culturally threatening cues
  – “Ethnocentrism” - generalized negative attitudes towards “out-groups”
  – Anti-immigrant elite and media rhetoric

Question 23

Automation and technology effects

Answer 23

• Many of the lost jobs blamed on foreign competition are due to technological change
  – Research indicates 80% of manufacturing jobs lost are due to technology
• Manufacturing has risen in the US and EU if measured by total output and not employment