NY Times Should Know Better

The New York Times published an alarming op-ed on Saturday, October 20. “A Global Tax Cut,” by Justin Muzinich and Eric Werker, proposes the federal government offer tax credits to U.S. companies that will invest in “qualified developing countries.” Not a bad idea, perhaps, but Muzinich and Werker pitch this as an alternative to official development assistance (ODA). They briefly discuss the main problem with ODA: very little gets to the people who need it the most. Right after they pitch the tax cuts they claim the following:

     A similar program that focuses on domestic poverty has been a resounding success. In 2000, Congress created a program giving businesses that invest in poor communities within the United States a tax credit equal to 39 percent of the cost of the investment. The theory was that poverty and joblessness in poor communities could be ended only by developing local businesses, not by an aid check. Seven years later, so many businesses want to invest in poor areas that only a quarter of the companies that applied for tax credits in 2006 received them.

I had to reread this paragraph many times. The first sentence – “a similar program that focuses on domestic poverty has been a resounding success” – alerts us right away the authors traffic in different realities than you and I. I know of a program called the New Market Tax Credit that provides a tax credit up to 39 cents on the dollar to businesses that invest in poor U.S. communities, but I don't know anyone who would describe it as a resounding success. I guess it all depends on how you define success. I don’t know what constitutes success for Muzinich and Werker. They don't say.

Maybe I’m being naive but shouldn’t we judge an anti-poverty program successful if it is reducing poverty. In August, the Census Bureau reported that poverty was reduced by a mere 0.3 percent. If you think about this decade so far, 2000-2006, anybody whose reading Census data knows poverty was still 1.0 percent higher in ‘06 than in ’00.

I tried to give the authors the benefit of the doubt, so I decided to look at trends in some of the most persistently poor parts of the country. “Persistent poverty” is officially occurring in communities where poverty rates of more than 20 percent have existed since the 1960s. If tax credits to businesses are helping to reduce poverty there, then maybe we can forgive the program for not having an effect on the national poverty rate. However, I could find no data to suggest persistent poverty has declined since 2000.

The people I trust to be looking for evidence of this resounding success can’t find it either. The Center for Rural Affairs, for example, does some of the most cogent analysis on rural development. I bring them up because the worst poverty in the United States is generally found in rural areas, where it is still possible to find homes without flush toilets or other basic services we take for granted in more populous regions. Fewer people reside in rural America, but if you want to bring development to places that really need it, parts of rural America would be it.  Nine of every ten persistently poor counties are rural.

Alas, if rural development is occurring it seems to be doing so by stealth. Recently I traveled throughout the Deep South and the Rio Grande Valley, some of the poorest rural areas of the country, talking with many people in these communities, and no one was celebrating the resounding success of new business investment. Most tell me businesses are fleeing. Not surprising, really. “Since 2002, nearly every federal program that funds economic development and asset-building in rural communities has been cut, some by as much as 60 percent,” says the Center for Rural Affairs.

I guess what unsettles me the most is that no one at the Times bothered to do a fact check to verify whether there was any credibility to what Muzinich and Werker had said. It’s more than an oversight because the whole argument for replacing ODA with tax credits is predicated on a patently false claim. Few people who are concerned about the plight of the poor in the developing world would take this argument seriously, but a lot of others might, by virtue of it appearing in the Times, thus giving Muzinich and Werker a big boost of credibility they do not deserve. The Times damages its own credibility by publishing this piece. More importantly, it does harm to all of us who watch nervously each year as Congress decides what to do with ODA.

Comments

[Charles Uphaus]

According to a recent study by the Hudson Institute, of total U.S. private investment roughly 4 percent goes to sub-Saharan Africa. There are sound reasons for this, and it's hard to conceive of a tax break that would enduce private firms to do so. At least in the U.S., private firms have the assurance that they won't be subject to arbitrary expropriation or dis-functional legal and judicial systems. The only way to overcome this reluctance is to foster and support an institutional climate favorable to investment.

The authors also reveal a profound misunderstanding of foreign development aid. They don't seem to consider support for education or physical infrastructure or public health as investments. Instead, they confuse development assistance with humanitarian assistance, on which one would not expect an economic return.

[Eric]

I think you have done a nice job of pointing out exactly where the authors of this op/ed piece go wrong. I don't want to pile on too much, but it is worth pointing out that I don't think this proposal makes a whole lot of sense as a strategy to reduce poverty in developing countries either.

First, it isn't clear to me that tax breaks will make companies any more willing to invest in developing country markets; nor will it necessarily makes those companies more successful. The business environment in many low and lower-middle income countries is quite challenging. Tax breaks aren't going to solve institutional and infrastructural barriers that make operating a profitable business in a developing country so difficult.

Second, while there is evidence that foreign direct investment can have a positive impact on economic growth, there is no guarantee that this growth will lead to poverty reduction. Part of the rational for offering these tax breaks is that it will help reduce poverty. But, as you point out, a good deal of poverty here in the United States is rural. This is even more true in the developing world. If a company invests in a capital city, it might provide local job opportunities, but whether these jobs create new wealth - especially spillover wealth in rural areas - is unclear and even unlikely. It may be that those people in developing countries already most capable of taking advantage of business and employment opportunities will capture the benefits of international investment when they are not coupled with smart, targeted development programs.

I think the idea of encouraging FDI is important and helpful, but you are right that it can't be a replacement for good development assistance. It hasn't worked here in the US, and there is even less evidence that it will work in the developing world.