Globalisation

Abstract

The crisis in East Asia has tempered the loud enthusiasm of many economists, magazines and multilateral institutions for unbridled international flows of capital. Since its start some prominent economists and financiers have expressed doubts that market mechanisms, left to themselves, necessarily end with a desirable outcome. Perhaps this is the first step to questioning whether free flows of capital between countries are desirable at all. Oddly enough, despite all that has been written in textbooks and journals extolling international capital flows and all the romanticisation of ‘globalisation’ in television advertisements, there appears to be no systematic examination of the gains and losses to be expected from them. One reason may be that economic theory, as it stands now, is ill suited to carrying out such an examination. International economic theory has two strands, the one to explain how trade in finished products and raw materials is determined by comparative advantages and the other, using quite separate assumptions, to explain the balance of payments. In the former it is assumed that capital flows are negligible, in the latter they do little more than accommodate trade imbalances. Neither address the question of what determines capital movements or what their effects might be. Another reason may be that the success of certain East Asian economies over the last two decades was to a great extent the result of or at least made possible by foreign direct investment (FGI). Seeing how few successes there had been in economic development over the last half century, economists, especially development economists, were not inclined to be critical. The owners and managers of capital had even less motive to ask questions; it was, after all, their freedom of action that was being enlarged. It is also they who have the most influence over the media and, consequently, over the public’s views. Such dissent as has been expressed has come mainly from labour movements and left wing circles, whose influence over the media and policy is not great, though the distinction between the effects of trade and those of capital flows is rarely made. A number of basic questions can be asked about capital flows. To the most basic one, what are their determinants, there is as yet no satisfactory answer. It is a matter of observation that the simple formula so often put forward, sound macroeconomic policies, is neither necessary nor The Lahore Journal of Economics, Vol.3, No.1 22 sufficient, though such policies are sure to be helpful. The next question is, from whom and to whom does capital flow? It makes a great difference whether one speaks in net or gross terms. Developing countries are most concerned with net flows and the net sources of capital are a few European countries and Japan. By far the largest net absorber of capital is the US, although it is one of the biggest sources in gross terms. Of what remains, China has been absorbing about a third and some ten other countries almost all the rest. What are the gains and losses for different countries and social groups? If the conditions are right, FDI and long term loans bring jobs and income to the recipient country. But it seems logical to suppose that they must then have the opposite effect in the source country. FDI, in particular, by creating productive capacity and jobs in the host country implies investment, and therefore jobs and income foregone in the source country. The high rates of unemployment in Europe are more likely to be the effects of capital outflows than the stringency of the Maastricht targets. Portfolio capital seems to offer no benefit to the recipient country compatible with prudent macroeconomic management, if it is regarded as severing the link between savings and investment, as advised by the World Bank, that is imprudent management. Can capital movements be controlled? Despite all that has been said and written to prove that they cannot, controlling them is not difficult and many countries apply their controls quite effectively. It is true that some capital escapes and that corruption can render controls ineffective, but that is true of most laws.