Wednesday, October 1, 2008

What are the Opportunity Cost of 700 Billion Dollars? Aid to Developing Countries Instead of Wall Street.

I have not commented much on the bailout proposal, because I don’t completely understand what is going on (actually this sentiment is quite common among my colleagues). But a good question anytime someone spends money is what where the opportunity costs, or what could the money have been spent on instead?

Over at the Oxfam Blog, Duncan Green, suggests that the 700 billion dollars could be spent on developing countries. The 700 billion is about twice what the poorest 49 countries international debt is. He also suggests it is 5 times the cost of achieving the Millennium Development Goals, which include food, schooling, and basic health care for all.

This makes me think of my class yesterday, we were discussing Paul Collier’s book The Bottom Billion. In the book he discusses his previous research that shows that international aid experiences diminishing returns, that is the first bit of aid helps a lot but each additional bit of aid does not help as much. Collier research showed that once aid reached 16% of GDP additional aid had not impact on GDP growth.

I’m not sure if there is currently the capacity and infrastructure to distribute 700 billion dollars in foreign aid. But a comparison of the numbers is always worthwhile.

h/t to Chriss Blattman
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Who Am I? said...

Just a hi and a comment. I enjoy reading your blog.

One thing about the opportunity cost here is the 700 billion is virtual money. It doesn't exist yet, until taxpayers fund it or loans from foreign countries back it, so it isn't as if it CAN be spent elsewhere, even if we see another good cause that deserves it.

The vengeance comments are intriguing and I have to admit, sometimes I feel that way, too. Haven't we heard the same kinds of comments from people criticizing those who live in flood/tornado/hurricane zones? That we all should not have to pay higher insurance rates because people want to live in areas that are known to be hazardous? But more than that, sometimes we need to bite the bullet short term and that sometimes hurts for a while.

Seth Gitter said...

Hi who,

true the 700 is virtual money, although with the other bailouts including its been more in terms of money and promises put up.

Thanks for reading, I notice you had me on your RSS blog feed, thanks for the link.

lizvster said...

$700 Billion Virtual or not; why would we use it in "Developing" Countries? Are you nuts? When is the good 'ol US of A going to take care of their own? When we can take care of us FIRST; we can help others.