Rethinking foreign aid to India

Originally published in Business Standard

Recently, an MP from the United Kingdom complained that while UK was giving India aid worth £1 billion, the country decided to build a statue worth £330 million. The concern was seemingly about whether aid financed by taxpayer money was really reaching the poor. Relatedly, migration programs are an alternate form of development assistance that the world has underutilized. They are proven to be remarkably effective at poverty reduction and cost nothing to the taxpayer of the donor country.

As of 2015-16, the total foreign aid received by India was Rs. 7719.65 crores. The largest governmental donors to India were the European Union, Germany and Japan who gave India a total aid assistance of Rs. 130 crores.

As India has grown and gotten richer it has turned into a net giver of foreign aid. This has been accompanied by governments like the US and UK slowly weaning their official aid assistance to India. The UK for example, officially stopped all aid to India in 2015.

However, India is still quite poor by global standards as I had shown in my previous piece. Hence there is still a lot of value that can be generated by official development partnerships between India and OECD countries like the US, UK, Germany and Japan, especially when done in the form of temporary work programs.

According to economist Michael Clemens, such agreements can be an extremely powerful tool to increase the incomes of low-skilled workers. A World Bank study evaluated a seasonal migration program for nationals of Tonga and Vanuatu to go and work as fruit-pickers in New Zealand. Workers’ incomes were higher by a factor of 10 after participating in the program. The program was said to be “one of the most effective development interventions evaluated till date”. In fact, it was so good that the benefits that accrued to some 5000 workers of Tonga and Vanuatu were close to half of the annual bilateral aid from New Zealand to those countries.

The essence of why migration programs are so effective is that there are massive differences in productivity between rich and poor countries. Clemens et al. (2016) estimate that even after taking into account price differences, education of workers, and other demographic characteristics, an Indian worker earns about 8 times more in the US than in India for doing the same job.

The good news for India is that such a form of development partnership is already underway. Manish Kumar, the MD and CEO of National Skill Development Corporation of India posted a heartwarming video on social media where youths trained in India were seen to be greeting officials in Japanese. These youth were sent to Japan to work in the automotive industry and on farms as part of the Technical Industry Training Program (TITP). As part of this bilateral program, India intends to send about 3 lakh workers to Japan for a period of 3-5 years in sectors like agriculture, construction, textile, automobiles, and others. The workers are given sector specific training and are familiarized to Japanese language and culture in Indian accredited institutes.

There are multiple benefits to temporary work programs as a form of development assistance. First, for the migrant workers themselves, the benefits are phenomenally huge especially when compared to what aid programs can do when the money is spent domestically. In a post aptly titled “The least you can do for global poverty is better than the best you can do”, Lant Pritchett estimates that allowing a low skilled Indian worker to work in the US will lead to an annual gain in income that is 57 times that of the gain in income through one of the best domestic anti-poverty programs evaluated till date.

Second, for the worker receiving country, the program itself costs close to nothing as it just involves persons from the sender country to come and work at market wages. The workers can help fill labor shortages by doing jobs that the natives are not willing to do, leading to an increase in productivity that can benefit the entire economy including expansion of opportunities for natives.

Third, for the sending country, the remittances sent by workers stimulate the local economy.

A temporary work program is well recognized as a win-win-win situation for the sender country, receiver country and the migrants themselves. Both the Indian government and the development community should push for such beneficial partnerships as a complement to traditional aid assistance.

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