Why doesn't Capital Flow from Rich to Poor Countries - Essay Example

As globalisation has made the world a much smaller place, the argument has been made that capital should begin to flow from richer countries to poorer countries as a result. This argument has been made because the relative labour costs in the poorer countries is are much less than in the richer counties and, as a result, there should be more room for investment and it should be financially rewarding for both countries. This, however, as not occurred as many theorists believed that it should because there are so many variables in the economies of the poorer countries. The only way that it would be profitable for a rich country to invest in a poor country would be on a large scale because otherwise, the risk simply is not worth the reward. Also, since there are so many immigration laws in place, it would make sense that if a rich country was to invest in a poor country, that it would use labourers from that country as well. The problem with this theory is that the workers in the poor country are only paid a wage that is relative to their own country’s economy, not to the rich country’s economy and, therefore, the impact of such investment is not as major as it should be. While these types of investments and the subsequent jobs that arise from them might allow for an individual to live a better life within his or her own country, it does not improve the living conditions of the country as a whole and, therefore, it does not lessen the desire of individuals from poor countries to migrate to those richer countries. Simply put, the rich countries only invest in poor countries when it is advantageous for them to do so and are in no way looking out for the best interests of the poor countries. There are multiple theories on how to solve this problem, but it will take the co-operation of First World governments to accomplish anything significant. The books The End of Poverty, by Jeffrey Sachs, and Confessions of an Economic Hit Man, by John Perkins, offer two differing opinions on the state of global poverty. Sachs is optimistic that if members of the United Nations were to follow his guidelines, that extreme poverty could be eliminated by 2025. This would mean that each country would have to contribute a certain amount each year for the next decade in order to ensure that this program would work. Sachs is very confident in his ability as an economist and he believes that his method would definitely work if given the proper chance. One thing that Sachs also suggests is an approach called “shock therapy” where government intervention into the economy suddenly stops and a free market is created. While there are drawbacks to this system, such as an increase in unemployment, Sachs believes that it is the best way to get an economy going again in the long term. Perkins’s book suggests that Sachs’s ideologies would not work at all because the more powerful countries, namely the United States, do not wish to see the developing countries achieve any sort of economic freedom because they use their economic power as a source of political leverage. The United States is aware that these developing countries cannot afford the loans they have taken on so they force countries to conform to their political ideals in order to maintain order in them. Perkins used to convince the leaders of these poor nations that it would be a good idea to take loans from banks in order to get the economy started, but this backfired because the countries just ended up surrounded with more debt. While Jeffrey Sachs’s ideas are good in theory, they would not work because the developed world does not actually want to end poverty. It is the greed of developed countries that prevents poverty from being eliminated, not simply the factors that Sachs lists in his book, like geography and infrastructure. The book The End of Poverty, by Jeffrey Sachs, makes a number of arguments about how to alleviate poverty in the poorest countries in the world. One of the main arguments is that if the wealthiest countries in the world would increase the amount of money they put into foreign aid for the next decade, that these poorer countries could become self-sufficient by 2025. This would obviously only happen if the money was spent properly, which is a difficult thing to ensure because there are so many variables present. The wealthy countries would have to contribute combined aid of between $135 and $195 billion for the next ten years, which may seem like a lot but it is not, according to Sachs, because it would only represent a small increase in the gross domestic product percentage of each country. Sachs is a valid source on this issue, as he has worked as an economist for various institutions and countries and is even a special advisor to the United Nations on global poverty. Extreme poverty, which is defined by Sachs as having an income of less than a dollar per day, is a significant problem, as it is responsible for countless deaths worldwide each day and is solely responsible for the extreme living conditions in many developing countries. This book uses a number of significant analyses from Sachs’s own experiences, which give the book a very legitimate feel. Also, Sachs discusses many of the causes of global poverty and gives solutions to how these problems can be fixed and why the governments of these countries should listen to his theories and implement these solutions. One of the main reasons for extreme poverty, according to Sachs, is that much of the world suffers from poor geography, poor road and rail networks, and/or poor healthcare. This makes travel to and from these locations difficult, which cuts down on the amount of trade that other countries are willing to do with that particular country. It also makes these regions unviable for tourism, which is a main source of income for many wealthy nations. This makes it very difficult to maintain any type of economic growth, as there is very little to build on. Without any immediate sources of viable income, these countries have become trapped in subsistence mode, which makes it nearly impossible for them to develop at a significant rate. All of the money that these countries do produce goes into maintaining what the people do have, rather than developing this money into something more and improving the impoverished conditions that are present. They cannot afford to invest this money into things that would allow the country to grow significantly and, therefore, the countries will never grow under these economic conditions. Sachs argues that these countries must develop their healthcare and transportation methods in order to develop because the western world would need these places to become more developed in this sense in order to make investment in them an option. Currently, the infrastructure in many developing countries is too inconvenient for those in the western countries to even consider using. This means that plants will not be set up in these regions, which means that fewer jobs are available for them. Inadequate healthcare also contributes to this, as it is not viable to invest in a region of the globe where workers are constantly sick and dying of disease. Western corporations will only invest in a region if it is seen as something that will be financially rewarding and these poor regions are generally not able to provide that to them. Sachs argues that financial aid must be invested in a manner that would improve things to the point where these countries would become financially rewarding for foreign investment. This means improving the healthcare systems and the transportation networks to the point where foreign investors will no longer be scared off by them. Once private investors begin to appreciate these regions, the money will come along with them at a greater rate. If the corporations receive a great return on their investments, a market led economic growth will occur in these regions, which will allow for these countries to begin to do more than simply subsist; they will be able to flourish under this system, according to Sachs, which is a positive situation for both developed and developing nations. Sachs’ ideology goes even further than this, as he outlines some specific methods of achieving these goals. For instance, he makes the argument that the proper use of technologies and involvements that we might see as being minor could be very influential in the fight against global poverty. One such advancement would be the use of cell phones, which would improve communications between various areas of developing nations, which would improve infrastructure. This would make the country seem much more connected and would allow for various regions of these poor nations to work together in order to improve living conditions. Another important advancement would be the use of fertilizer, which would improve the quality of the soil, making the production of healthy crops possible. This is something that people in the western world take for granted, but many of these poor countries lack the nutrients in the soil to product efficient crops. Efficient crops will lead to more food being produced and, therefore, healthier people. This will take some of the strain off of the fledging healthcare systems in impoverished nations and will also make the people in these countries work m ore efficiently. Medication is another thing that would help out greatly, as those who get sick in impoverished areas often are left to die because the proper medication is not available to them. If this money was invested in medication, it would allow people to live longer and, therefore, they would be able to accomplish more. Another idea presented by Sachs is to provide bed nets for people in order to prevent mosquito bites, which are often responsible for malaria outbreaks. This simple solution could prevent many illnesses in impoverished regions of the globe, which would make them more attractive for foreign investment. Sachs makes the point that these types of efforts have been successful in the past, as smallpox is a disease that plagued many areas of the globe for a very long time and it was eradicated through a joint effort of many wealthier countries. Sachs makes the argument that at a summit in 2002, many of the developed countries in the world proposed that they each donate 0.7 percent of their respective gross domestic products in order to help fight global poverty. Sachs ideology would require less than this amount and it would, according to him, do much more good because the money would be spent on something much more efficient. Sachs’s idea that world poverty can be eliminated is important because the international community has not yet been successful in addressing this problem and, therefore, new ideas are important because they keep the issue at the forefront of international politics. Despite all of the positive points that Sachs’s book makes, it is also important to note that his ideology does have some holes that must be addressed. One such flaw is that this ideology would require a significant amount of collusion between a number of different agencies. Since each country would be spending a very significant amount of money on this project, each country would also want to enjoy a say in where the money goes because each country will try to benefit from this investment in the future. For example, if new infrastructure is created, there will be many different corporations competing for the contracts of these projects and the governments of these countries will do their best to ensure that this money goes back into their own economic system. Also, the governments of these developing countries must agree to let the developed world help them out, which they are not always happy about doing. The United Nations would have to use the money to alleviate these problems, rather than simply handing the money over to the governments and hoping that everything goes according to plan. It is certain, however, that many countries would not enjoy given foreign nations that type of influence over their country’s finances. Most of the leaders of these countries would wish to show strong leadership qualities and take on this endeavour alone, which is an obvious recipe for disaster. Sachs’ mission statement also lack humility, as he seems to believe that his method is much better than those that were previously laid out, which makes his discussions very closed-minded. By discounting everyone else’s ideologies, Sachs is falling into the same trap that has caused other ideologies to fail in the past. People must work together to alleviate extreme poverty because it is not an issue that will go away otherwise. Also, Sachs’s method is still very unproven, which could lead to problems as those who have money invested in this will not want to take a blind leap of faith because of the negative repercussions that could arise. Another aspect that Sachs does not discuss is how much the developed countries stand to gain from this. As with anything, this will come down to money and it might not be in the best interest of the developed world to let the developing world compete with it. This means that while the developed world is putting on a front where it makes it seem like it wants to eliminate extreme poverty, it also does not want to the developing world to be on par with it. This means that the developed world will only allow the developing world to progress so far, until it begins to cut back. Also, there remains the problem of what will happen once the foreign aid stops. It is impossible to judge what will happen once the handouts stop because these countries are not used to being run in an efficient manner. It remains to be seen if these countries will digress once they are forced to subsist on their own. Sachs also does not go into how corrupt many of the government officials in these countries are. Even if the proper formula was created to rid the world of poverty, a third-party would be forced to step in and ensure that the money that the country was making was being used to further the economic growth. Presently, governments in these countries will often spend the money on themselves, while forcing the people to continue to suffer. Sachs is also guilty of stereotyping a great deal of poor countries. For example, he cited that AIDS prevention is difficult in Africa because there is much more sexual activity outside of wedlock for these people than is present in western culture. While this may or may not be true, there is little to no evidence to back it up. Also, he states that because of this frequent changing of partners, promoting condom use is less effective. This is untrue because the number of partners one has does not have any affect whatsoever on condom use. If anything, it could be used to further the use of condoms by showing the dangers of not using them. Sachs also does not recognize that culture is a very important factor in the poverty in many of these countries. For example, while Sachs does say that women in these countries are undereducated and, therefore, a hindrance to development, he does not recognize that this factors into the economic problems that occur. An educated society is very important to development, but Sachs does not factor education into his thesis enough. Sachs’s proposal, while significant, would have trouble being accepted by the majority of political leaders because of the holes that it contains. Governments will continue to spend money on attempting to rid the world of poverty but chances are, none of them will be completely successful. As long as Capitalism is the dominant worldwide economic policy, there will always be poor people in the world and the western world will work to ensure that it is not included in this problem. Sachs uses the term “shock therapy” (Sachs, 2005, p. 117) to describe a sudden liberation of currency control, withdrawal of subsidies, and instant trade liberalization inside of a country. This creates a free market economy inside of the country, which can lead to significant economic growth. Once the government stops intervening economically, the country is able to create its own market through supply and demand. This type of system has both positives and negatives, as it takes the country some time to adjust to it. At first, there are many layoffs, so the unemployment rate will rise very rapidly. This, in turn, raises crime rates and creates problems between the various classes in society. Since this all happens very quickly, the economy does not have time to gradually adjust and it forced to either adopt the new system or crash completely. This is a problem, however, because it does take time for the proper skills to be developed and for the changes that have been initiated to take effect. Since this is a western ideology, many in western society tend to take certain statues that we have for granted. Once such thing is that the majority if developed countries enjoy a certain level of diplomacy with each other, which cannot be said for the developing world. Therefore, there is always risk in showing temporary weakness for developing countries because many of them are in volatile regions of the globe. They do not have the same property laws, nor do they have the order that many developed countries enjoy. Sachs’s ideology would be similar except for it would first create conditions that would be viable for developing countries and then “shock therapy” would be used in order to help the economies of these countries grow later on. The book Confession of an Economic Hit Man, by John Perkins is an autobiographical account of the author’s work with the Nation Security Agency where he was responsible for sabotaging the economies of various developing nations. He did this by convincing the leaders of these nations to accept huge loans from the World Bank, which they had no chance of paying back because of the amount of money that was at stake. Since these nations could not afford to repay their debts, countries like the United States forced them to align with them politically, or else face severe economic sanctions that would push them even further into debt, even though “developed countries have no right to subjugate and exploit the rest of the world” (Perkins, 2004, 57).This caused these countries to basically give up any economic power that they might have previously had and it also increased the gaps between rich and poor that exist in those countries. This book paints a much different picture than Sachs’s because it shows that the developed nations use the poverty of developing nations to their advantage and, therefore, they do not wish to see these nations succeed in any manner. There are plenty of reasons for other nations, as well as the elite within these nations, to want to keep the masses down. These regions do possess a lot of money, but it is divided unevenly, which is another aspect that Sachs failed to examine. His examination of this problem contains a very scientific method of solving this problem, but it remains to be seen if it can effectively be brought into practice because there are so many factors working against equality. The Lucas Paradox examines the “higher marginal productivity of labour in rich relative to poor countries” (Razin and Sadka, 2004, P.4). In theory, this should lead to a relatively higher product of capital for the poorer countries, but this is not happening in the globalise world. Lucas’ theory is that “capital should flow from rich to poor countries so as to mitigate these differentials in marginal productivity of capital, and also of labour, assuming constant-returns-to-scale and identical technologies” (Razin and Sadka, 2004, P.4). The difference from a human-capital standpoint is that there is more money in richer countries and, therefore, the workers earn higher wages. There are also migration laws in effect to establish a quota of how many workers can migrate from a poor country to a rich country. This does not provide any pressure on the economies of the richer countries, however, because the return on the capital has been equalized between the countries because the richer countries are working with higher variables. The differences between the rich and the poor are simply too great for money to flow. The poor need the rich, but the rich do not need the poor because there is enough consumption occurring in the rich countries to make up for any shortcomings coming from the poor countries. There is also no point in making small investments in these poor countries because the risk is not worth any reward that might come along. The relative capital that is produced from investment in a poor country is not worth the risk that comes from such an investment because there is a lack of capital in these countries. Despite the fact that the labour is less expensive, there are other cost associated with it, so the only way in which is would be worth it would be on a very large scale. Also, when investment is made in poorer countries, the capital that is flowing into the poorer countries’ economies is still not relative to what the capital would be in a richer country. Therefore, the flow is not substantial enough to eventually allow for the poorer country to eventually be able to complete fairly in the global marketplace. Basically, First World countries will look out for themselves first and it is not profitable to give labourers in poorer countries the same wages that they would in their own countries. Despite the large populations and the high demand for certain items in these countries, there is simply not enough money, mostly because of mismanagement, in these countries to make these sorts of ventures financially viable and richer countries will not make extra funds available because they are only investing in poorer countries for their own financial gains. When foreign investment is made in a poor country, it is usually done with selfish intentions, which is a problem because it means that people will want to migrate to richer countries even more. Rather than helping the economies in poor countries, investors simply wish to find a cost-effective manner of furthering their own interests. Things will have to change significantly in order for developing nations to be given the same opportunities because of the negative reputations that they possess. A major issue with this is that there is evidence found in the afore mentioned books that this repression is being committed purposefully by the wealthier countries in the world, which provides another hurdle for any sort of capital flow. The richer countries are taking advantage of their relatively higher capital and labour costs in order to outsource certain jobs, while paying their workers in a foreign currency. This can lead to workers earning a relatively high wage in poorer countries, but it is still less than what a worker would be paid in the richer country. The issue here is the greed of the First World and the subsequent economic problems of the poorer countries in the world, despite the impact that globalisation has had. Bibliography Perkins, John. Confessions of an Economic Hit Man. 2004. New York: Penguin Group. Razin, Assaf and Sadka, Efraim. “Lumpy Setup Costs of Investment: The Lucas Paradox Revisited”. November, 2004. http://www.tau.ac.il/~razin/razinsadkaSetup-costlucas.pdf Sachs, Jeffrey D. The End of Poverty. 2005. New York: Penguin Group. Read More