Via Marginal Revolution, this pdf from Brad DeLong (33 double-spaced large-font pages) on why increased international capital flows haven't benefited the poor in poor countries
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One of the things I picked up in Spy School, partly by reading about Tunisia and partly through general absorption of ideas, is that there are different ways of managing capital flows. Or that not all capital is equal. Tunisia has done quite well by allowing in capital investment (people building factories, hotels, etc.) but has resisted IMF/IBRD efforts to make it allow in portfolio investment (external investors buying shares & bonds, putting money on deposit, etc.). The latter type of investment can be very destabilising, as it can come and go very quickly in enormous and unpredictable quantities; people do not make a snap decision to build or shut down a factory.
Yeah, I agree; portfolio investment is a completely different thing. I don't see any particular advantages in letting foreigners buy shares as such. I don't know a lot about this, and based on my small knowledge it seems like it's going to be difficult to separate the two types of investment -- if you invest in plant, you want that to be reflected in equity, so you need to be able to sell the equity to realise your gains. How did Tunisia manage to solve this? It seems like if there was a workable solution it should be used more widely.
Off the top of my head, I think they were able to attract capital investment because they had favourable trading relations with the EU; they basically became a site for the kind of cheap manufacturing you had in Ireland in the 1980s.
It is worth remembering, though, that in words I was struck by, Tunisia has an economy that almost delivers (as opposed to the completely rubbish ones of most other Arab states). While it has achieved impressive levels of growth and poverty reduction, it remains a high unemployment society.
Surely the time has come for us to expose the myth that political instability is bad per se. Political instability can be bad, but so can political stability, particularly when change is desperately needed, but it is in the interests of the First World for change not to happen. To argue in favour of political stability "because if we don't have it, capital will flow to safe havens such as the US" is really a horrifically disingenuous argument, along the lines of "we have to do what is wrong, because the bad guys won't give us any money if we do what is right".
Self-generated growth, although slow, is surely preferable to adapting your political system in return for first-world capital inflow.
That's a fair point, a great many poor countries have pretty rubbish political systems. Argument then rages over whether these are caused by their material poverty, or vice versa.
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It is worth remembering, though, that in words I was struck by, Tunisia has an economy that almost delivers (as opposed to the completely rubbish ones of most other Arab states). While it has achieved impressive levels of growth and poverty reduction, it remains a high unemployment society.
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Self-generated growth, although slow, is surely preferable to adapting your political system in return for first-world capital inflow.
PJ
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