Are Financial Flows Really Subsidies?

This article in the New York Times Magazine dated the 25^th March 2007 by Tina Rosenberg identifies some of the ways in which financial transfers occur between the low and high income countries. Among the ways through which this occurs are royalty payments for products developed in the latter countries, the movement of professionals trained by developing countries and the completely idiotic incentive structures that most developing countries impose on themselves in order to attract foreign direct investments.

Given the abrupt conclusion of the piece, this blogger wonders whether it was intended to merely catalogue the ways in which financial resources and income from investments traverse borders or whether there is an implied injustice in the fact. Still, Tina Rosenberg clearly fails to acknowledge a set of facts that should be useful. Sovereign nations reserve the right to purchase US treasury bills and the extent of that purchase is left to their judgment as the US government appears to have done. In addition, the departure of the professionals trained in low-income countries reflects the fact that they seek places to apply their skills most creatively and profitably. That these nations have failed to provide this is surely not a creation of the higher income countries. The one point on which the author could have cited a wider source of arguments is on the migration of professionals to the high-income countries. The loss that occurs from the departure of trained professionals could be substantially ameliorated by ensuring that all of them reimburse their governments for any costs that went into their training. It is highly unlikely that professionals whose services are in high demand would be compelled to work in countries that do not provide sufficient support for them to stay.

Sympathy for low-income countries aside, the royalty flows in respect of pharmaceutical and entertainment products represent the returns that firms in the higher income countries have accrued by selling the products of their research and development. The main reason why the low-income countries are not recipients of such flows is because they have not developed firms who export such products. The element of subsidy that the author alludes to is altogether incorrect and misinformed.

Finally, it is obvious that the analysis of financial flows is incomplete without consideration of the flows and back flows that enable readers to appreciate the net position.