Paper by Brad Delong:
international capital mobility over the past two decades (a) has expanded much more rapidly than almost anybody had predicted, but (b) has expanded in the wrong direction—the poor have not been borrowing from the rich to finance their investment and industrialization, instead the rich have on net been borrowing from the poor to finance their own consumption.
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The big story is that the large net flow of capital from the rich to the poor countries of the world seeking high profits from reducing disequilibria between the wages and the relative productivity of labor has simply not happened. Instead, the principal thing that happened was an enormous flow of capital from the periphery to the poor…
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The attraction is that the core—especially the United States—offers a form of protection for capital against unanticipated political disturbances. Since 1990 global investors have valued the American provided political risk insurance that they can obtain by placing their money in the United States more than U.S.-based companies have liked the idea of producing abroad in places where the wages of labor are lower.
I first saw this in Greenspan’s book. He mentioned that poor countries tend to have higher savings rates, but did not pose political instability as a cause.
If you are Tanzania or Mali or even Bangladesh, it takes 4 percent of GDP devoted to national savings and domestic prices to produce a 1 percent real investment share of GDP when real investment is measured at standard international prices. This implies an extraordinarily tilting of relative price structures against the poor countries of this world: it requires enormous domestic savings efforts to get even tolerable amounts of real capital to use for development.
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It also points out a defect in the thesis that one reason that poor countries are poor is that their citizens or their leaders or their governments have by and large chosen to consume rather than to save. That is simply not the case: savings rates on a national level have little or no partial correlation with prosperity. It is relative price structures, and thus real investment shares of GDP as measured in international dollars, that have this high correlation.
This I don’t really understand. Do they mean that savings in developing countries have the effect of depressing the exchange rate, leading to a slower increase in real terms?
Especially relevant for my friends looking to work in Dubai and Abu Dhabi:
DeLong and Summers (1991) found that the post-World War II crosscountry dataset contained an extraordinarily strong correlation between growth and private investment in machinery and equipment. Public investment by state-owned monopolies did not do it. Investment in structures did not do it. The correlation was very strong in OECD-class and middle income economies.
HT: Marginal Revolution
