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Lessons on Foreign Aid and Economic Development pp 245–273Cite as

Palgrave Macmillan

Remittances and FDI As Privately Provided International Aid

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Abstract

This chapter discusses the role of personal remittances and Foreign Direct Investment (FDI) as forms of international private aid. We argue that remittances and FDIs are not only the most prevalent forms of private aid, but also the most effective forms at improving standards of living, market complexity, and the institutional prospects in poor nations. Globalization has increased the flow of remittances and FDI from developed to developing economies. The increased flow of funds across borders has led to the emergence of alternative payment technologies and microfinance institutions. These private, decentralized initiatives are better suited to address the specific needs of local communities than foreign aid and other top-down, state-led measures.

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Fig. 12.1
Fig. 12.2
Fig. 12.3

Notes

  1. 1.

    North (1994, 359) similarly notes that neoclassical growth theorists largely failed to predict the demise of their own development planning initiatives because they “ignored the incentive structure embodied in institutions.”

  2. 2.

    As Mises argued 40 years earlier, entrepreneurship is a universal aspect of human action that can be found in all societies. He (1949 [1996], 251–252) explained:

    In any real and living economy, every actor is always an entrepreneur and speculator … Economics, in speaking of entrepreneurs, has in view not men, but a definite function. This function is not [a] feature of a particular special group or class of men; it is inherent in every action and burdens every actor.

  3. 3.

    As Boettke and Coyne (2009, 138) argue:

    In general, institutions shape entrepreneurial opportunities which have real effects on the ability of the economic system to realize the gains from social cooperation under the division of labor. Where institutions produce a net benefit to productive opportunities (e.g., arbitrage and innovation) entrepreneurs will exploit those opportunities resulting in the creation of wealth. Likewise, when there is a relatively high benefit to engaging in unproductive activities (e.g., rent-seeking and crime), entrepreneurs will take advantage of those opportunities.

  4. 4.

    Coyne (2013) contrasts the “constrained view” of what policymakers can achieve given the economic reality of scarcity and limited knowledge and the political economy reality of perverse incentives and unintended consequences with the “unconstrained view” of foreign aid advocates like Paul Collier and Jeffrey Sachs. This constrained view is aptly summarized by Hayek’s (1988) quote: “The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design.”

  5. 5.

    The International Monetary Fund’s (IMF) Balance of Payment Manual (BPM6 2013).

  6. 6.

    Brownbridge and Harvey (1998, 1) summarized their findings on post-colonial era banking in Africa: “Government interventions … in the post-independence period, were at best ineffective; at worst, they had very damaging consequences for banks, and for the whole economy.” They further concluded that “the countries which had experienced the most extensive government interventions suffered the worst damage” (ibid., 203).

  7. 7.

    Chandy, Dervis, and Rocker (2012, 13) argued that Kenya’s approach of “allowing regulation to follow innovation” through the “limited regulation of M-PESA’s network of agents” was absolutely critical to its success. As Donovan (2012, 65) concluded, “Kenya’s initial success with mobile money” stemmed from “a virtual absence of regulations.” Ndemo (2017, 356) likewise observed that “M-PESA is a classic case where innovation preceded policy.”

  8. 8.

    According to the strategy statement at the Financial Services for the Poor webpage: “For DFS to realize its full potential, policymakers and business leaders will need to invest in the right payment infrastructure, regulatory standards, and customer activation strategies to ensure continued progress toward the promise of financial inclusion.”

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  1. Ursinus College, Collegeville, PA, USA

    Olga Nicoara & Scott A. Burns

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  1. Olga Nicoara
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Correspondence to Olga Nicoara .

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  1. University of Wisconsin-La Crosse, La Crosse, WI, USA

    Nabamita Dutta

  2. Mississippi State University, Mississippi, MS, USA

    Claudia R. Williamson

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Nicoara, O., Burns, S.A. (2019). Remittances and FDI As Privately Provided International Aid. In: Dutta, N., Williamson, C.R. (eds) Lessons on Foreign Aid and Economic Development. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-030-22121-8_12

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