China World
Why Capital Flows Uphill
Keyu Jin
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LONDON – At first, it seems difficult to grasp: global capital is flowing from poor to rich countries. Emerging-market countries run current-account surpluses, while advanced economies have deficits. One would expect fast-growing, capital-scarce (and young) developing countries to be importing capital from the rest of world to finance consumption and investment. So, why are they sending capital to richer countries, instead?
China is a case in point. With its current-account surplus averaging 5.5% of GDP in 2000-2008, China has become one of the world’s largest lenders. Despite its rapid growth and promising investment opportunities, the country has persistently been sending a significant portion of its savings overseas.
And China is not alone. Other emerging markets – including Brazil, Russia, India, Mexico, Argentina, Thailand, Indonesia, Malaysia, and the Middle Eastern oil exporters – have all increased their current-account surpluses significantly since the early 1990’s. Collectively, capital-scarce developing countries are lending to capital-abundant advanced economies.
Many observers believe that these global imbalances reflect developing economies’ financial integration, coupled with underdevelopment of domestic financial markets. According to this view, these countries’ demand for assets cannot be met – in terms of both quantity and quality – at home, so they deploy part of their savings to countries like the US, which can offer a more diverse array of quality assets.
While plausible, this argument suggests that, as financial markets improve over time in developing countries, the global imbalances are bound to shrink. But such a reversal is nowhere in sight. Why?
A crucial dimension of globalization has been trade liberalization. For China, foreign trade as a percentage of GDP soared from 25% in 1989 to 66% in 2006, largely owing to its admission to the World Trade Organization in 2001.
Most of what China and other developing countries produce and export are labor-intensive goods such as textiles and apparel. This has allowed advanced economies, in turn, to produce and export more capital-intensive, higher-value-added products. Globalization of trade enabled countries to tap the efficiency gains that specialization in their sectors of comparative advantage has brought about.
With a slight mental stretch, one can imagine that what a country produces and trades may affect its savings and investment decisions. An economy in which the main productive activity is berry picking, for example, has little need for investment and capital accumulation. Its laborers earn wages, consume, and save part of that income. Since the production process requires little capital, there is no demand for domestic investment – and thus no savings vehicles. Instead, the only way to save is by purchasing capital abroad – in economies with capital-intensive production and demand for investment. This economy will always export its savings.
That may be an extreme example, but it illustrates a more general point about how merchandise trade can influence financial flows. Countries that produce and export more labor-intensive goods – perhaps owing to increased trade openness, or faster labor-force and productivity growth, all of which are true of China – may experience a rise in saving, but a less-than-equivalent increase in demand for capital.
Rich countries, by contrast, are able to export more capital-intensive goods, and thus have a greater need for investment. So they may be importing more capital – resulting in a greater current-account deficit – simply because they are producing more capital-intensive goods.
With developing countries – in particular, China, India, and the ex-Soviet bloc – bringing almost 1.5 billion workers into the world economy since the early 1990’s, it is not difficult to understand the potential impact of this effect. After all, much of this labor force was absorbed by labor-intensive industries that eventually churned out products exported to the rest of the world. Indeed, that massive addition of labor helped to drive down the relative price of labor-intensive goods, which fell by roughly 15% between 1989 and 2008.
As developing countries increased their labor-intensive production and exports, their current-account surpluses rose – by almost 3.6 percentage points, on average, between 1989-1993 and 2002-2006. China’s current-account surplus increased by almost 11 percentage points over the same period, India’s by 2.5 percentage points, and Russia’s by seven percentage points. These countries, as well as other large surplus economies, such as Brazil, Saudi Arabia, and Iran, all experienced a simultaneous increase in the labor content of exports.
This pattern contrasts with that of the United States and many other advanced countries, which have experienced a deterioration of their current-account balances as their production and exports have become more capital-intensive.
Many might doubt the view that China is exporting more labor-intensive goods, rather than upgrading its exports on the capital- and skill-intensity ladder. But trade data suggest the opposite, perhaps because China’s accession to the WTO led to tariff reductions that released more labor-intensive production.
In fact, trade data may underestimate the true extent of China’s labor intensity and overstate the capital and skill intensity of China’s exports. China has witnessed rapid growth in the processing trade: assembling intermediate inputs – imported from countries like the US and Japan – that have high capital and skill content. So, while the exports of these final goods may count towards China’s own capital and skill content, the country’s real role was only in the labor-intensive process of assembly.
A country’s production structure may very well determine how much capital it supplies and how much it needs. So the fact that capital may flow towards rich countries that produce and export more capital-intensive goods should not be so puzzling, after all.
Keyu Jin is Lecturer in Economics at the London School of Economics.
Copyright: Project Syndicate, 2012.
www.project-syndicate.org
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kirkomrik 11:23 22 Feb 12
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gamesmith94134 02:33 23 Feb 12
Gamesmith94134: Seizing Sustainable Development
In seizing the sustainable development, we must have a foundation of value and equity we can depend on. As a strategist on financial, I see the coming year prior 2015, the southern hemisphere is great destiny on the long and short term goal. Since the European Union is in turmoil and uncertainty with indecisiveness to return to its sovereignty rule, and ECB is taking a paternal rule on the political and financial system over the European developed nations; I see the dyke is not holding and must pay its prices politically and socially that its populace would not continue to owe more debts without consequences. Recent financial pipeline is flowing to “The South” after the emerging market nations withdrew their funds from the European Market and reinvested in the African Nations and South America. This trend will last till 2015 or till the ECB or FED would reconsider to alter the 1% short-term and 1.9% over the ten year longer-term bonds. I can see more of the emerging market nations are shifting their investment to The South to develop light industries and cooperate to secure the native resources from agribusiness to mining. Now, all it need is the system to ensure the fruitful result afterward, and technical transfer to these regions can give equity and value to the land and its people, and restore the political system in a sound and solid state to protect the investment and stop corruption.
It seems that it is your post on the African Union now, Mr. Zuma, to hold the African nations responsible in making it works. Since the developed nations are not humble by their childish play with their Euros and dollars, it is your moment to stand up and be counted, and I doubt if the BRIC can ignore the strength of the Johannesburg and Dubai in handling the Foreign or Currencies Exchanges if the present status quo in developing nations is not sustainable.
In my estimate 7% growth in the present investment in Africa may not be foolproof, but the success rate is much depended on its labels, ‘made in Africa’ or ‘imported from Africa’. In addition, sovereignty is another significant point to its power structure and union; then, it would demand a lot of efforts of the African nations to sort themselves out to sustain unity and cooperation to fill out the shortage of food and resources order to the world in 2020. Technology transfer and science are available to apply; only if you can open its land through the transparency and efficiency, and free of corruption and dependency. I can see grains are packed in sacks; clothing comes in packages that go into the cargo ships arriving to the world.
“Made in Africa” and “imported from Africa” is not a dream; all it needs is the union of African Nations. With the supply line of the financial and human capitals to Africa or South America, your bargains on technology transfer and tactical advancement, it was time God given in his balancing act of inequality and inequity to the world. This is a sustainable development in the southern hemisphere; and this is the moment of “The South”.
What is your plan now to seize the sustainable development in South Africa? Perhaps, it depends on your selfless diplomatic skills on the Unity and transparency to show the world how they may see ‘The South”.
May the Buddha bless you?
gamesmith94134 09:12 26 Jan 12
Gamesmith94134: Why Capital Flows Uphill
One would expect fast-growing, capital-scarce (and young) developing countries to be importing capital from the rest of world to finance consumption and investment. So, why are they sending capital to richer countries, instead?
“Collectively, capital-scarce developing countries are lending to capital-abundant advanced economies.” was true to a point based on the monetary policy and development of the past decade, if you are looking to Japan if you would consider it as the capital-abundant advanced economy; it may not be true since the earthquakes and the high exchange rate at its 100 to 77 today, the flow reversed itself and it is what is happening to EU.
Perhaps, if we take another point of view on the inflow and outflow on the developed and EM nations, we must include the value and goal that monitor the flows in the currencies. If your focus is China, I must remind you of the value of the Chinese currency, Remimbi and most assets and resources rose as well; and it is running in an inflationary mode. Since the 80s, the inflow of foreign capital to China, it activated the human capital to produce and export its labor-intensive goods. It is the double charge of the monetary and human capital results in relatively value creation that their assets grew based on the quality change in the labors and industries. Then, the goal to gain will peak at the balance of payment at the market, or domestically inwardly from the assets it created. As the market saturated or a bubble is bloomed, the inflow of cash capital may not be efficient when inflation imbued and inequality after the rise on the labor tipped off its economy. Then, the outflow is resulted after the surpluses rose or follow where the profitability is, or apt to create another bubble at will, like the DJ rose from 7000 to 13000 today. If there is no inflation as 6.5% in China, the flow in China will continue to match the human capital building its assets to yield production or profitability. Perhaps, it is why EU is suffering the cash flow problem as it is now after its productivity fell 0.25% with its asset deflated since production or profitability is no longer sustainable.
Perhaps, when we follow where the money is; there is always consider the appropriate redistribution on value on the capital; how profitable is the investment or at a goal that balances itself with payments or profits from value after the productivity with its input of cash and human capital, or its goal of the transaction is simply buying an asset in exchange of capitals.
Again, focus on the value and goal of the transaction where the cash capital flows; and do not undermined the human capitals as the labor intensified product that give life to assets that grows. On the other hand the goal of the flow must comply with profitability or security of the cash flow must be identified if such transaction affects the values domestically or inwardly; also the environment entraps the flow to a direction as the EU with its debt crisis too or bloom in the housing to China or US. It is often complicated with the affirmable hold to the lowest interest rate for 2014 by the FED or ECB. It may not be your goal, but it may apply too.
May the Buddha bless you?