Archives for posts with tag: capital flight

My previous post was linked (thanks !) as “a skeptical take of Open Borders”. I had blundered into the subject and I’m embarrassed to admit I wasn’t even aware of the Open Borders campaign. After checking it out, I’m just as skeptical as ever. Open Borders hopes to address the fact that people in poor countries earn massively less than people in rich countries. Supposedly the answer is for an epic migration of billions of people from the poor countries to the rich countries where they supposedly will then be “more productive” and so poverty will be eliminated.  

It’s so important that we unpick what is meant by terms such as “more productive”. Imagine someone selling street food in Dhaka Bangladesh. It’s delicious, nutritious food, produced extremely efficiently and is sold on a large scale to an appreciative market of consumers with nothing wasted. To my mind it is grossly insulting to describe that as “less productive” than working in yet another New York restaurant where insufficient custom means the food largely ends up down the sluice. Yet, in terms of how much the workers earn, it is “less productive”. It is all down to the fact that diners in New York have massively more money to spend than diners in Dhaka.

To my mind what we really need to face up to is why customers in Dhaka don’t have enough money to spend and so those running a thriving eatery in Dhaka cannot support an affluent lifestyle. That issue is basically what much of this blog is about (see here, here, here). Redirecting flows of money entails no more real disruption than the effort of clicking a computer mouse. And yet Open Borders advocates such as Michael Clements claim that it is preferable have billions of people move to where the money is rather than looking at why the money isn’t going to where the people are.

In principle I share the libertarian ideal of everyone being able to live wherever in the world they fancy. I think the way to go about realising that aim is to first address the issues that create the disparities between rich and poor countries. Once that is (even if only partially) achieved, then the vast bulk of people would no longer have any desire to migrate. A few people would because of personal reasons and for exchange of specialist expertise. However opening borders would then not be opening the floodgates to a torrent of people driven by macroeconomic forces. It is only the prospect of such a torrent that keeps the borders closed now. My total disagreement with the Open Borders campaign is that they advocate opening the borders to a torrent of migration as a first-line response to the disparities between rich and poor countries.

It could be argued that those in the rich world have little capacity to eliminate poverty in foreign countries and so have a greater chance of benefiting the lives of poor people by opening borders to immigration. That argument hinges on the idea that poverty is due to bad governance abroad and that the only answer is for the population to vote with their feet and emigrate. Firstly, I don’t think it is actually true that the rich world is a mere passive observer of poverty abroad. From what I can see, much of the blame for that poverty lies with active policies conducted by the developed world. Furthermore, over the longer term, those malign policies only benefit a minority even in the developed world. We need fair tradereform of the international monetary system away from “US dollar hegemony” towards a more equitable and less distorting system and a realignment of economic policy away from blowing asset bubbles that enrich the rich by enticing in capital flows from the poor world.

Much of the Open Borders logic seems to stem from the idea that market finance already has an inbuilt characteristic that would always lead towards an optimal solution for the world’s problems if only meddling governments were to stand aside. It’s vital that we keep our eyes open to situations where financial forces instead pull into calamitous vicious cycles. Property prices in London, New York or Tokyo would get pushed ever higher if borders were open for mass immigration. That would entice in ever more capital flight from the developing world, exacerbating the impetus for migration. I’m struck by how Michael Clemens seems fully aware of at least one side of this feedback loop as he writes that an expected consequence of epic migration to rich regions would be that “returns to capital rise in the rich region and fall in the poor region”. I’m left wondering whether Michael Clemens does not appreciate that capital flight from poor countries to rich countries does much to generate the disparities that drive the desire for migration in the first place. Perhaps he and other Open Border economists welcome such bubble blowing feedback loops. Financial sector lobbyists, and those in their thrall, aim for financial instability because the gains from expansion can be harvested whilst the losses from crashes get socialized.

It is also not clear to me that open borders would necessarily encourage a beneficial competition between countries to entice and retain their populations. It is vital to recognise that sometimes bad governments will actually seek to usher out the population. Natural resources may be exploited even from a depopulated country. The Scottish Highland Clearances are a classic example of how a country was brutally depopulated to facilitate natural resource exploitation.

related previous posts:

Demographics, migration and fiscal sustainability

Isn’t a financialized economy the goose that lays our golden eggs?

Globalization, Triffin’s dilemma and demurrage crypto currency

Rich people could benefit if everyone else were also rich

related stuff on the web:

A reply to”Direct Economic Democracy” – Paul Crider, Open Borders (added 09Aug2013)

If people could immigrate anywhere, would poverty be eliminated? -Atlantic

Economics and Emigration: Trillion-Dollar Bills on the Sidewalk -Michael A. Clemens

Open Borders

Addressing development’s black hole: Regulating capital flight

Open borders: A morality play by the 1% -macrobusiness (added 26 Feb 2014)

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I think the greatest threat to our environment is human poverty. This may seem counter-intuitive since in general each rich person consumes and pollutes far more than each poor person. It has been estimated that it would take five Earths to provide all seven billion of us with a current US lifestyle. An astonishingly low environmental impact is achieved by the poorest . On the face of it, if everyone managed to lift themselves out of poverty, increases in pollution and environmental degradation might be expected to cause an environmental calamity. However if having all seven billion of us living an affluent lifestyle poses an environmental challenge, a more serious environmental challenge is posed by having ten billion people sharing the planet even if two billion of those don’t pollute or degrade the environment much due to poverty. To my mind population growth is the crucial environmental issue and population growth comes from poverty.

Hans Rosling makes a very compelling case that the poorest two billion people are the source of global population growth. People from utterly different cultures all over the world on average have large families when child mortality rates are high and small families when they are low. Over the past few decades there has not been an explosion in the number of poor people because thankfully many poor people do manage to escape poverty. But enough remain poor to maintain a steady source of global population growth. The poorest two billion people today are just as poor as the poorest two billion a few decades ago and just as likely to see their children die and just as likely to have large families. Poor people  are the progenitors of the increased future population of better off people who eat meat, drive cars and water their lawns. If you believe that the world can only support a limited number of affluent people then the answer is to ensure that everyone is affluent.

Obviously if each of us who has the good fortune to be comfortably well off chooses to consume in a way that minimises environmental problems; then that is great. We can spend our money on say dance classes for our children rather than new hardwood flooring or whatever –reduce, reuse, recycle. Environmental concerns do also feed into politics though. Many people want the political system to steer other people towards behaviour that protects the environment.  I think it is crucial that people living in the rich world channel the politics of environmental concern towards ameliorating the extent to which the rich world impoverishes the world’s poorest. I don’t think policy makers in the rich world intentionally impoverish the world’s poorest. It comes as a by-product of efforts to ensure prosperity in the rich world or to protect special interest groups in the rich world. Agricultural tariffs and subsidies are a classic example. They lead to what otherwise would be uneconomic intensification of agriculture in the developed world so as to dump food at a loss in the poor world. There is consequent destitution of people who could otherwise be involved in commercial agriculture in the developing world both for local consumption and for export. In the 1800s the case was successfully made that repealing the English “corn laws” would benefit almost everyone with the exception of those wanting increased rents and mortgages from English farmland. I think the same arguments hold today.

In the USA in particular there is much popular support for protectionist tariffs and subsidies*. The USA is such a large country that it can cope relatively well even if global trade gets shut down. I think it is crucial that we unpick the motivation behind such protectionist views. Much of it seems to stem from the conflict between “labour” and “capital”. The owning class has the most to gain from globalization. The owning class can own whichever companies are most profitable where ever they are based. They can lend money to whoever in the world provides the highest return. Workers on the other hand lose bargaining power. Jobs become outsourced to where ever in the world has the lowest wages for a given level of competency. As I see it the answer is to ensure that everyone belongs to the owning class. Replacing all current taxes with an asset tax and paying a citizens’ dividend would have that effect. If the increased profits that came from offshoring jobs went to everyone rather than just a select owning class then much of the current resentment would evaporate.

What the world needs are advances in efficiency and technology. We need to be able to do more with less. To my mind it makes much more sense for people to be freed up to push new technologies in the developed world. A compelling case can be made that developing countries benefit from “learning by doing”. If a basic manufacturing process can be done well in a developing country then it makes sense for it to be done there, providing jobs there. Hopefully the experience gained will raise capabilities so that all of the world can be at the forefront.  People like working not simply because they want money but because they find it satisfying to create and provide, to master skills and innovate. To truly satisfy that motivation, people need to be doing work where they are really making a difference for the better. The duplication and waste that comes from trade barriers runs counter to that.

Even more than trade barriers, I think policies aimed at encouraging capital flows from the developing world to the developed world have been the overriding influence on world poverty. I’ve examined this in the previous post “Isn’t a financialized economy the goose that lays our golden eggs”. People in the UK are not callously minded towards people in the developing world. I’m sure that the decimation of the real value of the median wage across the developing world that occurred during the 1980-2000 “great moderation” period is not connected in most people’s minds  with the apparently miraculous affordability for global commodities that came in that period for those in the developed world. Ignorance is no excuse though. We need to get real and face up to the consequences of the policies we vote for. Making the UK a perfect piggy bank for capital flight from developing countries does far more damage than can be put right by some charitable donations.

It is striking that the popular sympathy for protectionism as a way to “keep jobs here” is at odds with nurturing capital flight from poorer countries as a way to gain prosperity by sleight of hand. If money were staying in poor countries, causing those countries to develop a prosperous economy of their own, then that would raise wages there. That would avoid the issue of jobs being offshored from the rich world to lower wage countries. Furthermore if the whole world were prosperous, then countries that are currently poor would become potential importers of products made by workers here.

The cost of natural resources does however increase if the whole world can afford them. If what we really want are more jobs in the rich world, then perhaps we should be more sanguine about that. There are lots of potential job opportunities in renewable energy and recycling. To my mind it makes no sense to at the same time put up trade barriers so as to “keep jobs at home” and yet entice capital flight so that we can get all the world’s natural resources and put off the day when we need to recycle and use renewables.

*As an aside, I think protectionism also is a very bad idea because it provides a compelling motivation for imperialism. In the absence of world trade, a country needs to have a large internal market and that means that countries need to be as large as possible.

see also posts:

We choose for renewable energy to make no financial sense.

Rich people could benefit if everyone else were also rich.

Globalization, Triffin’s dilemma and demurrage crypto currency.

Isn’t a financialized economy the goose that lays our golden eggs?

Related stuff on the web:

People and the planet -Royal Society

Stop blaming the poor. Its the wally yatchers who are burning the planet – George Monbiot

populationmatters.org

The mother of invention – Interfluidity

This post is an excerpt from the pdf that I started this blog off with. I’ve posted it because I hope it also makes sense as a stand alone post.

When Margaret Thatcher made her economic policy changes in the 1980s many economists predicted that the UK would be plunged into a vortex of impoverishment. In fact although the deindustrialization they predicted took place it coincided with increased prosperity by many measures. The resulting economic transformation was viewed as such a success that a broad political consensus was formed supporting those “neoliberal” economic policies. The Labour Party became New Labour and embraced financial deregulation and a transfer of taxation away from property and onto consumption. Wealth boomed for the wealthiest and everyone else was swept into greater prosperity along with them. Similar measures were taken in the USA and had similar results.

When reading recollections of those involved in the instigation of the Thatcher economic policies it is clear that the key aim and result was to shift from an economy where wage inflation out-paced asset price inflation to the opposite. The resulting benefit to those who already were wealthy before the transition is obvious. What needs to be understood however is how the country overall became richer on a wave of asset price inflation. How were we able to afford imported goods so much more easily than before? Seemingly by simply bidding up the price of pre-existing (or even purely paper) assets we were able to pay foreigners to do our manufacturing and provide us with natural resources that much of the rest of the world couldn’t afford.

The answer becomes apparent when the financial connections with the rest of the World are drawn into the picture. The UK became the piggy bank of the world. Foreigners were able to join in and further inflate the stock market, bond market and real estate bubble. Across the developing world, the immensely rich elite of those countries sought secure and lucrative ways to hold their wealth. The UK became a repository of choice for this “capital flight” from the developing world. When the UK bought imported goods, the money paid for them was returned back to the UK to bid up the value of our asset markets. In effect, trade became a flow of real goods (and migrant workers) to the UK in return for account statements. All that the UK needed to produce were electronic or paper documents.

To kick off this wave of financial inflow, interest rates were raised significantly above the (high) rate of inflation. This offered a potential bonanza to those buying UK treasury bonds especially if the consumer price inflation rate could be reduced. Limits on bank lending were relaxed and tax breaks were offered to those taking on debt. The government curbed labour union powers and disengaged from efforts to limit unemployment. This quashed wage inflation and so the inflationary impetus of credit expansion was channelled into asset price inflation.

The flip side of this flow of funds to the financialized developed economies was painfully manifested across the “developing” world. In fact, it made a mockery of the term “developing”. From the time of independence in 1960, Nigerian GDP increased 135% during the 1960s and then 283% during the 1970s. By contrast it shrank by 66% in the 1980s. The Nigerian Naira / USD exchange rate went from 0.78 in 1980 to 2.83 in 1985 to 8.94 in 1990 to 102.24 in 2000. With economies drained by capital flight, the developing world was no longer as able to afford global commodities such as oil, coffee, metal ores etc. That caused a slump in commodity prices and consequent further slumps in the economies of commodity exporters and so yet more incentive for capital flight.

Economic depression in the developing world was further fuelled by USD  denominated loans made by UK and US banks to third world governments. A sovereign government has no need for borrowing in a currency other than its own. Any public services such as school teaching, road building or construction of sewerage systems etc. could have been provided using local currency issued by the government to pay local people to do the work with taxes payable in the local currency ensuring the value of the local currency. Countries such as Nigeria had trade surpluses. That provided an ample potential immediate source of foreign currency to fund any imports for government use (such as weapons). The only role for USD denominated loans was for adding to capital flight. Meanwhile the western banks profited from the interest payments on the government debt. Political power in third world countries rested on being able to win over powerful cronies with the prospect of facilitated capital flight and so the dire arrangement became further entrenched.

Since 2000 however the developing world has in many cases resumed development. Hundreds of millions of people in the developing world have escaped poverty over the last decade. This has been applauded as evidence that neo-liberal economic policies have extended their benefits to everyone. Perhaps a more accurate view would be that a stage in the process of financialization has now been fully wrung out and so the choke hold over the developing world’s economies is slipping. In order to attract financial in-flows, the ideal monetary arrangement is to have high interest rates above the rate of consumer price inflation and an expectation that both inflation and interest rates will subsequently fall. The market price of any asset that provides a long term cash flow will tend to rise if interest rates fall. If an asset costing $10 yields $1 per year when interest rates are 10% then (very crudely) a drop in interest rates to 5% will tend to reset the asset price to $20. Bringing interest rates down from >10% to <1% provides a phenomenal impetus to asset markets as has occurred since 1980. However, once it is done, it is done and so wealth managers will start looking elsewhere.

A whole raft of other such policies also harvested a one off boost for asset prices. Curtailing labour union power, shifting taxation from property onto consumption, encouraging private pension saving and facilitating private sector credit expansion all added to the performance of asset holdings. What provides a real bonanza for asset holders is when there is a transition from an unfavourable financial climate to a favourable one. Once that transition has been fully priced in, much of the gain has already occurred -especially when asset values are elevated and so assets don’t provide much of an income stream. Once everything has been done to make an economy as hospitable as possible for global “hot money”, the market will price in that favour and then global “hot money” will look for a new home where the next price rises are going to occur.  This makes attracting capital flows an inherently one off rather than a sustainable way to achieve prosperity. Capital flows may unfold over decades and that may give the impression that they have provided a timeless prosperous equilibrium but ultimately sustainable prosperity depends on the real economy.

It is vital to appreciate that macroeconomic malign effects don’t require any malign intent on anyone’s part. En-mass, people simply endeavouring to manage their finances as best as possible can inadvertently cause massive waste and destruction whilst all the while being entirely oblivious of it. It is analogous to tragic incidents when people get crushed to death in large crowds. No one person is to blame, the crowd surges and crushes without any person in the crowd acting reprehensibly. That is not to say that there is not a responsibility to take crowd control seriously – quite the opposite. Some of the politicians and technocrats at that vanguard of neo-liberalism actually aimed to alleviate poverty. Their reasoning was that if money is pampered then it will spring forth rewards that can be dispensed to good causes. In their view, capital flight supposedly means that global money is continuously being deployed wherever it can earn the most. That is taken to mean that overall global wealth is maximised and so there is more to go round. The key mistake in this is that it conflates claims over real tangible sources of wealth with the underlying real tangible sources of wealth themselves. Whenever that mistake is made, policy makers inevitably fall into the trap of simply facilitating an expansion in the paper claims over wealth whilst losing sight of the underlying reality required to back-up those claims with the real economy. The true responsibility for policy makers is to ensure that the monetary framework is constructed so as to align with the real economy such that what is best for money becomes what is best for the real economy. If left to its own devices, the financial system will wander away from that ideal.  A financial system built by the financial system will direct resources towards expanding the financial overhead borne by the real economy.