Thursday, April 20, 2017

227. Repatriation of Profits

The repatriation of profits is often perceived as a loss for the country from whom the money is taken. The following should illustrate that this is a misconception.

If a foreign company from country C mines gold in country A - in other words it pays the workers in country A. It then exports the gold to country B and sells it in country B. It moves some money to country A to pay for the factors of production (incl. the workers) and repatriates the profits to country C - the country of origin.

Who has benefited? The answer is clear = all participants - Country A loses gold but gains foreign currency; Country B gains gold but loses foreign currency: country C gains foreign currency but loses employment opportunities since the entrepreneur took their skills elsewhere.

So, what does one say to a learner that includes the following in an assignment: "Multinationals normally repatriate the profit out of a country back into the home country, so there is no real increase in living standards"

This clearly shows a lack of understanding of a basic economic principle which is that all participants normally benefit in voluntary transactions. There are no losers. The repatriation of money does not make any country lose anything.

The terms used by some such as "Country A has been 'raped' by the foreign company" surely is a misconception since the workers have been paid, mineral rights have been paid for, taxes have been paid by money flowing into the country. In country B the gold was valued by the buyers more than the money they paid (otherwise the transaction would not have been concluded) - obviously a win-win. And Country C now have some money that will benefit the recipient country in the sense that goods and services will be purchased there (which in all likelihood be purchased from Country D!).

It seems that the "mistake" in thinking is as a result of only looking at the flow of money and not the flow of value (goods and services) that flow in the other direction. Or am I missing something somewhere? I do not think so.

C.M. Heydenrych

April 2017

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