In an essay forwarded to this list, Richard Douthwaite paints a potentially disastrous picture of the modern world. He argues that, because of the free movement of capital, investment has moved from the industrial world to poor countries where returns are highest and taxes are lowest. This has enabled the depression of wages in the industrial world, and has encouraged the production of surplus commodities that the global market cannot clear. Given that incomes have fallen for the large bulk of the population, governments are hard pressed to raise the tax revenues needed to continue to operate effective social programs.
Douthwaite argues that it is not only industrialized nations that are finding current global conditions difficult. Poorer countries are competing for capital from the rich world. As Douthwaite describes it, the governments of such countries are doing everything in their power to promote exports and attract capital, including deliberately keeping wages from rising and keeping taxes very low. But because all poorer countries are doing it, it turns out to be something of a zero-sum game.
This is the world of the downward spiral: overproduction of commodities; falling effective demand; increasingly incapable governments; eventually, widespread misery and chaos. It all fits well with Y2K. But let’s poke at it a little and see how real it is.
A first matter that might be questioned is how serious a role international capital flows play in all of this. As I have pointed out in previous postings, economic activity, including saving and investing, is still overwhelmingly domestic. And when one looks at statistics on national savings and investment, one finds that many poorer countries generate most if not all of their capital. Capital imports comprise a relatively minor component of gross domestic investment. In 1995, China reportedly saved 42% of its GDP; Malaysia 37%; and Thailand 36%. In the latter two cases, gross domestic investment exceeded savings, but only by a few percentage points. Moreover, capital inflows probably reflected that fact that these economies were booming, not that they were especially cheap places for investment. In the case of the Asian tigers, the main problem with capital was not its inflow, but its rapid outflow once growth stagnated. Growth did not, as Douthwaite appears to imply, stagnate because of a lack of effective demand, but because, in the euphoria of the boom, bad investments were made. And it was not only foreign capital that bailed out. Domestic capital also did so.
A point that Douthwaite appears to ignore is that there are many different kinds of capital flows. There are, for example, long-term flows that relate to infrastructure of the kind that the World Bank has helped to develop. There are flows that relate to the exploitation of natural resources such as Nigerian and Indonesian oil. There are flows which take advantage of cheap labour to produce commodities for the rich world, such as Nike shoes. And there are speculative flows. Each of these vary greatly in the time required to decide whether a certain investment should be made, the time needed to make that investment, and the time required to withdraw from the investment if things do not go well. Trading in paper or currency is almost instantaneous, while an investment decision on a massive work such as the Itaipu Dam on the Brazilian-Paraguayan border must take several years and perhaps decades.
The point is that each of these various kinds of investments needs to be treated differently when the stability or humanity of the economic world is at issue. It would seem that the most disruptive type of capital flow is currency speculation. If the concern is disruption, this type of flow must be the focus. The most exploitative forms are, probably, natural resource and commodity production related investments. If the concern is exploitation of the poor world by the rich, these should be the focus. Solutions to some of the problems that capital flows create have been proposed; for example, the Tobin tax in the case of currency speculation. And there is the Universal Declaration of Human Rights which says everything that is needed about exploitation, but which has been virtually ignored for the past fifty years.
I would also take some issue with Douthwaite’s points about why wages are falling. In Canada wages have been stagnant since the late 1970s. A reason often cited is that the growth of productivity began to slow at about that time. Prior to about 1975, both productivity and wages grew rapidly. Why the stagnation since? In my opinion, the least likely reasons are the export of capital or free trade, and one likely reason is that all of the work required to rebuild a war-devastated world had come to an end. Europe had not only been rebuilt, it had become a modernized competitor in world markets.
While I disagree with Douthwaite’s reasons for needing it, I do not in general disagree with the kind of world he thinks we need. Indeed, we need a less wasteful world, one that husbands non-renewable resources and makes far greater use of renewables — a more sustainable world. But I do not believe in the efficacy of making, to quote Douthwaite, "a dash towards sustainability". Something as cumbersome as the economic world is probably not capable of dashing. If it tried, the result might be either falling over or hitting a wall.
Ed Weick
