chapter  5
25 Pages

Employment in the South

ByROLPH VAN DER HOEVEN AND MALTE LÜBKER

The current wave of globalization is characterized by widespread adoption of policies for financial openness.3 Over the past two decades, many countries have liberalized their capital accounts and almost all policy measures related to foreign direct investment (FDI) favored a more open regime (UNCTAD 2009). These measures have been adopted autonomously by some countries, and also as conditions of adjustment loans. The major expected result from financial openness was that it would allow developing countries to better utilize resources and to increase capital formation by stimulating FDI and other international capital flows such as private portfolios investment. A more open national financial system was seen as a necessary complement to the lifting of impediments to international capital flows. Capital has become more globally mobile as a result of these policy changes, especially since the mid-1990s. Worldwide gross private capital flows (the sum of the absolute values of foreign direct, portfolio, and other investment in-and outflows) have exceeded 20 percent of world GDP every year since 1998 and reached a new record of 32.3 percent of GDP in 2005 – compared to less than 10 percent of world GDP before 1990 (World Bank 2009c). Worldwide FDI flows, a sub-category of private capital flows, also rose substantially during the 1990s. They peaked at 4.9 percent of world GDP in 2000 and declined with the downturn of the early 2000s, but strongly rebound before the current global financial and economic crisis. On average, global FDI flows doubled between the 1980s and the 1990s, and again in the years from 2000 to 2007. The increase in capital flows contrasts with that of labor, whose movement is still highly restricted. The world’s approximately 86.3 million migrant workers accounted for only 3.1 percent of the economically active population in 2000.4

In spite of this substantial increase in capital flows, the expected benefits have not materialized for many countries. During the surge in foreign capital flows since the mid-1990s, actual investment into new infrastructure and productive capacity stagnated. This can in part be attributed to the fact that much FDI was spent on mergers and acquisitions, rather than on investment into new factories or equipment that would have added productive capacity.5 Gross fixed capital formation (the most commonly used measure for physical investment) averaged 21.6 percent of GDP in the 1990s and 21.0 percent in the years from 2000 to 2006 (the last year for which global estimates are available) (ibid.). Hence, it fell well short of the level reached in the 1970s and 1980s. In fact, Figure 5.1 shows an overall declining trend in capital formation since the early 1970s. It is thus not surprising that world GDP growth, too, was slower in the 1990s and the 2000s than in previous decades (see also Figure 5.2). Moreover, despite much excitement about the promise of ‘emerging markets’, cross-border capital flows are still largely a phenomenon of developed countries. In 2005, gross private capital flows equaled 37.2 percent of GDP in high-income countries, but only 12.7 percent of GDP in low-and middle-income countries (ibid.). While there was a positive balance between in-and outflows for developing countries as a group, these flows by-and-large bypassed the poorest countries since the early 1990s as middle-income countries accounted for more than 90 percent of the total (World Bank 2009a). FDI, as well, is highly concentrated among industrialized countries and a small group of middle-income countries (UNCTAD 2009). Low-income countries, to a large extent, still draw their foreign resources from official development assistance which decreased over the 1990s and only rebound in the past few years.6