Tuesday, April 12, 2016

Government Investment

One of the great ironies of foreign aid is that it creates poorer countries. The assumption of foreign aid is that the government of the receiving country can make an infrastructure 'investment' that will pay dividends. But as we look around the world we cannot find any examples of that happening. In fact, most of the time the foreign money is diverted into the pockets of corrupt politicians and placed in remote banks were the funds remain on account. Where the funds are not lent or used to expand bank borrowing in the deposit country, but simply left to be slowly eroded by fees or spent on luxuries from the donating countries.

Even when the funds are used for road construction or bridge building it does not help the receiving country since the contractors are either government agencies or private companies owned by politicians. In the first case the funds are not an investment since the government does not pay a dividend on the expense. An investment is an expenditure that makes a return in future years. In the case of a bridge built by a government agency the cost will be excessive since it is necessary to feed all the government leeches that will need to be nourished and the techniques used to construct the bridge will need early replacement and early maintenance. Government contractors have no motivation or incentive to be efficient or maintain high quality standards.

In the second case of a hand-picked private contractor there are still fewer incentives to be efficient or maintain high standards. The focus in this situation is to hide their crime and loot the project as early as possible. Consequently, the project team is concerned with falsifying documents and bribing regulators to file false reports.

A private investment achieves an economic push that is not possible with a donation to a government agency. On the other hand, a private investment puts money into a local bank to make more private loans and fund secondary projects that can sustain a tax-paying cash flow for bridge maintenance.