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Watching SIVs' Assets Decline   The Ingenuity of the Markets
Oct 22 2007 11:57AM EDT

Factories as an Alternative to Aid

The NYT on Saturday gave valuable op-ed space to hedge fund manager Justin Muzinich to roll out his big idea: cut direct US foreign aid, and use the money instead to give tax breaks to hedge funds and others who invest in developing countries.

Congress should provide a 39-cent tax credit for every dollar of American investment in developing countries. If Company X were to build a $100 million factory in Madagascar, its tax bill would be reduced by $39 million. The lost tax revenue would be offset by reducing direct foreign aid by the same amount.

Exactly how this is meant to help Madagascans living on less than $2 a day is far from obvious: the wealth generated by a big factory is not very likely to trickle down that far. But in any case the money wouldn't go to places like Madagascar, it would go to places like India and Brazil, which have more than enough FDI already.

If American companies want to build factories in developing countries, all power to them. But let's not cut our foreign aid budget every time they do.

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