Grinding the poor

Grinding the poor - Grinding the poor Sep 27th 2001 From...

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Grinding the poor Sep 27th 2001 From The Economist print edition Sceptics charge that globalisation especially hurts poor workers in the developing countries. It does not FOR the most part, it seems, workers in rich countries have little to fear from globalisation, and a lot to gain. But is the same thing true for workers in poor countries? The answer is that they are even more likely than their rich-country counterparts to benefit, because they have less to lose and more to gain. Orthodox economics takes an optimistic line on integration and the developing countries. Openness to foreign trade and investment should encourage capital to flow to poor economies. In the developing world, capital is scarce, so the returns on investment there should be higher than in the industrialised countries, where the best opportunities to make money by adding capital to labour have already been used up. If poor countries lower their barriers to trade and investment, the theory goes, rich foreigners will want to send over some of their capital. If this inflow of resources arrives in the form of loans or portfolio investment, it will supplement domestic savings and loosen the financial constraint on additional investment by local companies. If it arrives in the form of new foreign-controlled operations, FDI, so much the better: this kind of capital brings technology and skills from abroad packaged along with it, with less financial risk as well. In either case, the addition to investment ought to push incomes up, partly by raising the demand for labour and partly by making labour more productive.
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This is why workers in FDI-receiving countries should be in an even better position to profit from integration than workers in FDI-sending countries. Also, with or without inflows of foreign capital, the same static and dynamic gains from trade should apply in developing countries as in rich ones. This gains-from-trade logic often arouses suspicion, because the benefits seem to come from nowhere. Surely one side or the other must lose. Not so. The benefits that a rich country gets through trade do not come at the expense of its poor-country trading partners, or vice versa. Recall that according to the theory, trade is a positive-sum game. In all these transactions, both sides—exporters and importers, borrowers and lenders, shareholders and workers—can gain. What, if anything, might spoil the simple theory and make things go awry? Plenty, say the sceptics. First, they argue, telling developing countries to grow through trade, rather than through building industries to serve domestic markets, involves a fallacy of composition. If all poor countries tried to do this simultaneously, the price of their exports would be driven down on world markets. The success of the East Asian tigers, the argument continues, owed much to the fact that so many other developing countries chose to discourage trade rather than promote it. This theory of “export pessimism” was influential with many
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This note was uploaded on 04/26/2011 for the course ECON 102 taught by Professor Soffriti during the Spring '08 term at BU.

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Grinding the poor - Grinding the poor Sep 27th 2001 From...

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