Anomalies of Economic Liberalization

The decade of 1990s has witnessed a marked increase in all three dimensions of international economic liberalization: trade in goods, trade in services and mobility of labor. Both political factors (e.g. rise of capitalism as the sole economic system at the global level) and technological progress (e.g. the information revolution and faster, reliable and cheaper means of transportation) have contributed in this transformation.

Basic motivation for the movement towards international economic liberalization is the age old principle of comparative advantage, generally attributed to David Ricardo. Simply, this principle implies that a country must produce and trade those goods which require the greater use of its most abundant resource(s).

Although straight forward, the principle of comparative advantage contains shades of gray truths when applied to actual economies. The movement of trade, services and capital among nations involve many intricacies of exchange rates, financial capital inflows, relative interest rates among countries and magnitude of foreign exchange reserves. Above all, the present international financial system is characterized by many anomalies and imbalances that allow developed countries enormous privileges to get the best out of every situation.

The economic geography of the world is very uneven in many terms. If we take the most general measure of economic development, namely, per capita income, the world is divided into three groups: high income, middle income and low income countries. The comparative advantage of developed countries or high income countries is in research and development and sophisticated technology, they also have comparative advantage in educational institutes which export their ideas and attract brain power from around the world. These advantages allow developed countries to remain at the vanguard of innovation and inventions.

The comparative advantage of middle income countries is highly skilled man power and proper infrastructure. These advantages allow middle income countries to attract huge inflows of financial capital and to host regional manufacturing outlets of multinationals.

While the developing countries have abundant labor force (which is only partially equipped with technical skills), cheap raw materials and huge population. These advantages make them attractive for trivial or non-technical jobs like product assembling. Also, their large populations offer a large market to the latest and cheap consumer products of multinationals.

One result of this geographically dispersed comparative advantages and the rise of scott free entrepreneurship in recent years, is the new supply chain concept of production. Therefore, the manufacturing of a modern mobile phone or computer involve all the three types of countries but returns are not equally distributed: highest returns are secured by developed countries for conceiving the product; then come the middle income countries for they have manufactured its various parts; and low income countries get the returns for assembling it.

The consumption and saving decisions of a country determine its long term level of economic development. But when viewed against economic liberalization, the consumption and saving decisions of middle and low income countries help secure the status of developed countries.

For example, let’s consider the case of a typical low income country. Suppose this country manages to secure huge amounts of foreign exchange inflows over the next several years. (It is possible if a country discovers some precious metal etc. that boosts its exports revenue). It has to make its investment and consumption plans in a way that it could put itself on a growth trajectory. Following the existing macroeconomic wisdom, it must spend on human capital. How it should do it? It has to send her brightest minds in western universities for higher education.

If the country follows that strategy it will not only lend her brightest minds cost free to developed countries for many years but also provide foreign exchange to those developed countries for next many years. These issues aside, when these people return they will not find the research institutes of the caliber they used to work in developed countries. No surprise, a proportion of them would initiate efforts to go back; a proportion become typical shirking worker and a proportion only could manage to do the routine work appropriately.

Leaving human skills aside, if our hypothetical country decides to accumulate the precious foreign exchange which could help keep its currency stable, keep inflation low and provide a better business environment. But this policy also favors developed countries. Let’s see how. The country in question has to keep her accumulated foreign reserves in some international currency. Naturally, these are the currencies of developed countries. By keeping her reserves in these currencies it provides its savings to these developed countries. So even if a low or middle income country saves, the benefit goes to developed countries. Their currencies remain strong as compared to low income countries’. It provides asset value to their currencies which is necessary to attract the savings of developing countries. Secondly, relatively high value of their currencies makes their imports cheap. It helps them in keeping inflation low; keep the interest rates from rising and thus allow cheap credit to their entrepreneurs.

Let’s suppose that our hypothetical country decides to attract foreign investment. Because that is also an objective of many other low and middle income countries so it has to provide incentives to international investors. These incentives are generally in the form of tax rebates and financial relaxations that could allow them easy and profitable operation in the host country, notwithstanding the unhappy effects on the local businesses. Moreover, by virtue of global scale of liberalization it is neither necessary nor likely that such investors produce whole of their product in one host country. Rather they go for the cheapest inputs and produce the different parts of their products in different countries. It results in the most simple of the production process to take place in low income countries. Because of the financial liberalization, the investors take all their profits with them. Thus, the low income countries do not get enough from this strategy too!

Note that middle income and developing countries are facing a dilemma. If they get high returns on their labor, and they save it, their national saving go to western countries. If they consume it, where they could? By spending on multinational food chains? Or at expensive mobiles, cars or consumer durables all of whose technology is coming from developed world. The rich of the low and middle income countries go to tourist resorts in the western countries. No wonder that a significant contribution in developed countries GDP is that of tourism.

Many economists dismissed these issues by declaring them temporary (short run phenomena) and proclaim, with authority, that these issues will be taken care of if the market mechanism is made stronger and effective. But they forget that market forces require a balancing of interests of different sectors comprising a society. This is not possible in low income countries where consumer organizations are unheard of and where government, for its own existence, has to rely on the good will of many power groups. Naturally, market forces despite of their enormous potential to allocate the resources most efficiently, will be usurped and become the tools of exploitation of the many by the few.

Many of the above mentioned factors have also contributed in the recent global financial crisis. The dissatisfaction with the present international financial system is increasing. A new international reserve currency and more satisfactory trade terms are necessary to rectify the imbalances that plague this system. This is possible only if the powerful nations accept to forgo their undue privileges as global players and think about the economic and political problems of the world with the wisdom and objectivity of a true philosopher.