John RapleyONE OF the most commonly heard arguments for economic liberalisation is that it will open Third World societies to a massive influx of capital from the rich countries. The gist of this reasoning, known sometimes as convergence theory, is that rising labour costs in rich countries constantly prods firm managers to look for new investment opportunities in low-wage zones. But they are not attracted by closed markets. They want the freedom to re-export to the global economy and to repatriate their profits.
So, according to this reasoning, opening econ-omies attracts capital. Once attracted, the capital then feeds a virtuous cycle of demand and investment that spurs growth in the recipient country. Some neo-classical economists have conducted studies which purport to show a positive relationship between openness and growth. They like to point to success stories like Malaysia or Mauritius as good examples of what can happen to a country if it does away with protectionist measures.
During the 1990s, the Clinton administration preached a rosy future vision in which a liberalised, globalised world would see the prosperity of the rich countries draw the poor in its wake. One day, we were told, the world's economies would converge around a uniformly high-income, enabling mankind to eliminate the scourges connected to poverty. Behind the happy rhetoric, though, lies a different reality. Since the dawn of the industrial age, the gap between rich and poor countries has not narrowed. Estimates are admittedly speculative, but some have suggested that in the last two centuries, the ratio of real income per head between the world's richest and poorest countries has gone from 3:1 to 60:1. Moreover, recent trends inspire little confidence that this is about to change.
If anything, the last two decades of liberalisation have actually seen a worsening of matters.
When one notes that much of the 1990s US boom was driven by Third World capital, as the trade balances of liberalising South American economies went into deficit, this is not surprising. In recent years, economists have factored this reality into their theories. Some have fallen back on a model called conditional convergence. According to this, poor countries will only converge with rich ones if they satisfy certain conditions first, in particular high savings rates, low population growth rates, and high rates of human capital accumulation. Some theorists go even further and suggest that new technologies are permitting First World economies to maintain rates of return to capital that are sufficiently high to forestall the search for cheap labour.
If these so-called endogenous growth theorists are correct, the Third World will never catch up with the First World, and the poor countries will fall further behind. Of course, politicians cannot say this. So they continue to trumpet the possibilities of convergence if poor countries adopt the conditions pressed upon them by the international financial institutions. The interesting thing, though, is that there is evidence that when convergence did begin to take place during the last century, it was during periods when Third World countries were employing stateled development strategies. Equally, the conditions behind conditional convergence may not precede so much as follow development. Savings rates rise, population growth slows and, most importantly, investments in human capital formation in simpler terms, education go up as prosperity rises.
Equally, most foreign investment in the Third World has not chased low wages so much as profit opportunities in domestic markets. Firms are looking to sell to growing economies. So the key to attracting investment, arguably, is to make the economy grow. In short, capital attracts capital. If the Third World is to develop, therefore, it needs an injection of capital. Where will this come from? With foreign aid declining and the trade policies of the rich countries doing little to accelerate growth in poor ones, new supplies of capital for poor countries are slow to appear. This, I would suggest, is the unappealing truth behind convergence talk. As the governments of the rich countries pull up their stakes in poor ones, they know the planet's poorest citizens will suffer. Thus, to mask this evasion of responsibility, they subject us to glowing elegies about future convergence. But convergence isn't happening. Nor does it look likely to begin doing so any time soon.
John Rapley is a Senior Lecturer in the Department of Government, UWI, Mona.
