Good afternoon. Wishing you a lovely beginning of the week. On my last post, we avant previewed about writing some comments of the CAPM or Capital Asset Pricing Model rationale to estimate the cost of capital for foreign projects. We also promised to explain why the “cost of capital” is so determinant when analyzing the financial context.  Nevertheless, we will do it this week, let me please explain beforehand,  about the rationale or the reasons why developed economies wish to help the developing poorest countries.

I found an article at the Center for Global Development website. The author Owen Barder, wrote: Aid in the National Interest: When is Development Cooperation Win-Win?

I thought, to reframe Owen Barder´s information, and try to explain it in simple terms for the case of China investing in El Salvador entrepreneurial journey. It is crucial to understand the motivation of the developed economy to help a poor country. It affects the “calculation” of the cost of capital because the risks are different depending on the project, and the causes of the projects. Let´s do a parenthesis for today. I promise to explain you everything on my next publication. Today,  let´s just start with the concepts:

From the financial point of view, every developed country who wishes to invest in foreign lands is doing it for a “reason or several reasons”. Moreover, there are reasons behind the real reason.

If you wish to download the last slide in PDF, click here: Eliescalante October 2018 Causes Intl. Aid-rationale

These reasons are based on 3 main intentions or motivations:

1. Altruism (help to reduce the symptoms of poverty of the developing economy without asking for anything in return). Altruism can tackle to reduce the evident symptoms of extreme poverty. E.g. If El Salvador receives development cooperation aid to target mainly the evident symptoms of extreme poverty: such as providing the poorest of the poor with food, water, and security. This motivation is also called humanitarian aid.
2. Win-Win: In this case, the developed nation may pursue a range of aid spending and other policies to address the causes of poverty. For example: investing in projects to create legal pathway solutions for the problem of migration from developing countries; or projects to improve the effectiveness with which a developing country can collect taxes, or projects to transfer knowledge, equipment, and best practices to target the problem of lack of good transportation systems, or projects to target the lack of governance premium standards to reduce corruption. This kind of development cooperation is often not mainly about spending to reduce symptoms of poverty, but rather about strengthening the institutional structural systems to provide know-how and better government policies which directly benefit both the developed (as the giver) and the developing countries (as the receivers).
3. Economic or financial expansion only: This is the other extreme where a developed nation ignores the most important causes of poverty from the developing country. This is the case where it installs its own agenda projects for the sake of its own interest’s economic growth. In this case, the developed economy ignores the symptoms of extreme poverty or the causes of national poverty and reaps the benefits from those weaknesses for their own opportunistic profits.

Each developed economy chooses what type of relationship they wish with a developing country. Some countries decide to offer humanitarian aid (actions to alleviate the symptoms of poverty). Nevertheless, the definition of humanitarian aid is to relieve the sickness, but not to attack effectively the causes of extreme poverty. The humanitarian aid is like giving an acetaminophen pill to a cancer patient, without removing the tumor or without applying chemotherapy. In the case of altruism or humanitarian aid, any program is essentially about helping the developing economy government by providing basic essential services of security, health, food or water. Those programs are redistributing resources for the most in need. This redistribution is “zero-sum” for the developed economy. Sometimes highly corrupted countries offer altruism tied-aid in exchange for other favors (such as requesting passports for migrants from that country or forcing the government of the developing economy to buy their inputs, machines, project supplies, military equipment-weapons for example).

If the developed economy decides to provide financial aid to attack the national causes of poverty or the global causes of poverty, which affect the developing economy, then it is using a framework of win-win rationale. That is why many of the development cooperation programs coming to low-income countries tackle the structural causes of poverty and they do not offer humanitarian aid directly. The majority of humanitarian aid is managed through the United Nations organization systems.

Increasingly, developed economies from Europe or the USA, are trying to do more with less money, and they choose to cooperate to solve global collective action problems (global causes of poverty) because their approach is a “win-win” rationale. Some developed countries do their homework and try to adapt their bilateral programs to each country, but that is not the rule of thumb nowadays. The global causes of poverty are not inherently zero-sum, and so the most common approach for cooperation is usually a “win-win”.

The third motivation for cooperation (I can´t call it cooperation) is simply an economic expansion from the developed economy, where the rich country ignores the needs and wants of the developing population, and invests in projects of their own interests. These projects are usually called Foreign Direct Investments and they can create employment in the developing economy, but do not contemplate any type of programs to improve the underlying structural causes of poverty, and do not shape the poor country policies or wrong behaviors. Sometimes these investments promote “modern slavery”. These type of investments are opportunistic and don´t address the enhancement of the poor country milieu within.

Which do you think is the China motivation to establish commercial relations with El Salvador?  Altruism? Win-win? or Economic expansion only? What do you think “Amor de mi Vida”, Alejandro Guillermo Lozano Artolachipi?

To be continued… Stay tuned. Thank you.

Can Gulliver help and save the Salvadoran Lilliputians?

Source References utilized for this article: 

https://www.cgdev.org/blog/aid-national-interest-when-development-cooperation-win-win

Disclaimer: All the presentation slides shown on this blog are prepared by Eleonora Escalante MBA-MEng. Nevertheless, all the pictures or videos shown on this blog are not mine.  I do not own any of the lovely photos or images posted unless otherwise stated.

Published by eleonoraescalantestrategy

Corporate Strategy Artist, San Salvador, El Salvador View all posts by eleonoraescalantestrategy