The present size of capital movements means something more than what was originally considered an obvious process of Western globalisation
The high and growing level of capital exports from the “mature” to “emerging” countries in the current year (see Insight , The flow of capital going into the Emerging Countries [2] ) is big enough to provoke some thinking on the general situation of world’s economy. The figures for private capital export have risen to a level never reached before, that is, 1041 billion dollars for the year 2011. Of this figure 574 billion dollars are Equity Investment, of which 423 are Direct Investments, and the rest 151 billion Portfolio investments. Private Creditors count for 467 billion dollars. Such a high level of capital export must be considered both from the point of view of its consequences and also of its origin. The usual, simple explanation for it is “globalisation”, a trend that started many years ago.
However, the present size of capital movements must mean something more than what was originally considered as globalisation , that is , a search for areas where labour cost would be lower than those of the “mature” countries . There is, also, a growing sensation that that this kind of globalisation is rebounding back to the rich markets of the “mature” countries. The simple mechanics may be explained as follows. Entrepreneurs who produces something that cost them , suppose ,$ 10 d, and is sold at $ 20 , would be strongly interested to delocalise their production in countries where their total cost would be $ 5. They would import back the products and sell them in their market to at a slight discount , let’s suppose at $18, with an margin of $ 13 , a 30% increase .The small cost of container transport makes it possible. However, in the course of time that production will grow in the “emerging” country , with local entrepreneurs paying not $ 5 but , say, $ 3 , who will sell in the rich market at about $ 6, being ready for even lower prices. No producer with “mature” countries’ overheads can beat that.
The original delocalised producers are therefore thrown out of the market, unless they accept selling at a loss , or to buy the competitor’s production for marketing, with lower margins. Production of labour intensive industry, where the labour force is more numerous, tends to disappear in “mature” countries and the original de-localisers are in any case in trouble. The apparel industry of Europe seems to be going through such a phase. So, obviously, globalisation reduces employment in “mature” countries. Yes, is often the answer, but the rich countries produce things that require high technology and great skills .... an objection that dies when one looks at the origin of the most sophisticated electronic gadgets.
The matter has also another aspect. This huge outflow of capital means, basically, that investment capital produced in rich countries is invested somewhere else. Investment stagnates in “mature” countries, and that has a depressing effect on employment. Companies and rich people of “mature” countries tend not invest in their countries, and the industry reduces both its labour force, and the level of innovation. The sheer size of capital exports suppose that of underinvestment must be quite common in rich countries’ economies.
The huge outflow of capital could supposedly to have two different origins. The first is probably the very resources that the Government offers at very low cost to encourage investment , which find instead higher remuneration from emerging countries’ high rate of interest , and of profit. Perhaps, this is the reason why the American industry does not take advantage of such a generous offer. This situation shows that there is no way to get out of a crisis or a stagnation by trying to facilitate private investment.
The old remedy , public investment , seems to be the only one to have some real effect on the economy , through an increase in demand. The second is delocalisation of production, the usual globalisation, which will slowly reduce the ability to compete of the “mature” countries in the global market. Both outflows have a negative effect, and produce articles like Paul Kennedy‘s “Crossing a watershed” (IHT, October 26 , 2011) which envisages an accelerating process of decadence of the West , while “the Asian nations apprehend the world’s futures”.