Wednesday, July 27, 2011

Intermission: "On Missing the Boat"

My last post was about the essence of globalization, this post, however, shares a lesson about the outcomes of globalization and what it might do. Collier's intermission chapter, "On Missing Boat", is descriptive of this point. Collier recognizes the outcomes of globalization have been superlative over the last 30 years, yet, the prospects of bottom billion countries breaking into the world market are not great at this point because they have fallen into the "traps". In short, the bottom billion countries have a lot of catching up to do.

First, let's present some of the outcomes of globalization from 1980 onward. Most globalization did not begin until the 1970s with improvements in technology that lowered barriers to transportation and communication. Below are the $2 poverty rates. On the y-axis is the percent of the population living on less than $2.16 per day (which is adjusted across time by inflation and across countries for purchasing power parity).   

We can see that since the 1980s there has been a large drop in this kind of poverty in countries such as China and India (which have posted massive growth numbers). Other declines have been more modest but those are also good signs. But, notice that the Sub-Saharan African countries are a flat line. There rate of poverty has not improved over nearly 30 years. Have they missed the boat to prosperity?

As mentioned earlier, this question is Collier's chief concern. What he is worried about is an idea called "Economies of Agglomeration" (EOA) (this idea was popularized by Paul Krugman, and, is the reason he won the Nobel Prize). When companies decide to make investments in other countries either to outsource or break into a new market many costs are borne on the first-mover. A company must ask whether the area they are considering as a workforce with the requisite skills, necessary transportation networks in-and-out of the country, legal systems that do not make conducting business too cumbersome, and is the necessary infrastructure such as electric and sewer in place? These are just a sample of the questions that companies must ask prior to a decision to move into an area. Once one company moves in and builds some of the infrastructure up, trains workers, and builds a trusting relationship with the government/law it reduces the cost for subsequent movers.

This notion of EOA is important because investment in the bottom billion countries does not seem attractive at the moment. Why invest in countries that have little infrastructure, little legal stability, and untrained workers? There are safer investments to be had. And, indeed, American and European investors are not the only ones of this mindset. Collier reports that there are massive amounts of "capital flight" in these countries. People within the country are "voting with their dollars" by investing money in countries not their own! Also, people who are educated and highly skilled are seeking opportunities by migrating outside of their home country. Those facts are far from a vote of confidence.

When you see how many jobs have been created and how people have lifted themselves out of poverty this makes people champions of globalization. There are some critics of globalization on different fronts (cultural, environmental, ease of operating illicit industries, etc.). These concerns have some merit but there is also tremendous hope in globalization. As Nicholas Kristof writes in "Where Sweatshops are a Dream", "The best way to help people in the poorest countries isn’t to campaign against sweatshops but to promote manufacturing there." Unfortunately, Collier's discussion of EOA, capital flight, and migration point to the fact that some countries are not likely to be successful overnight. He writes, "This all adds up to a depressing picture of what globalization is doing for the bottom billion. To get a chance to play in the global economy, you need to break free of the traps . . . Even once free of the trap, countries are liable to be stuck in a kind of limbo ---no longer falling apart, but not able to replicate the rapid growth of Asia . . ." There are some policies rich countries can enact that could help hasten this. We will talk about those in the next post on The Bottom Billion. 

No comments: