Free Flow of Capital in Developing Countries
Today, there are very few who argue against free trade, however, the idea of capital mobility to and from developing countries is a highly debated issue. Capital is the financing(money) or goods, used to produce other goods. Capital can further be split among capital debt and capital equity/finance. Equity capital or financing, is money raised by a business in exchange for a share of ownership. Ownership is achieved through shares of stock. Debt capital is represented by funds borrowed by a business that must be repaid over a period of time, usually with interest. Typically, short term debt is of less concern because if stockholders sell out, the value of the stock falls and the stockholder is hurt. The company isn’t necessarily hurt now, but will have a difficult time raising funds through future stock issues. Debt is of more concern. If short term debt isn’t renewed, than the company has to liquidate assets in order to pay. Therefore, capital mobility is the free flow of liquid investments from one country to another. Now although capital mobility could finance the world’s developing countries, increase wages, and create a more competitive world market (which is very beneficial to consumers); there are negative affects including income inequality, corruption, and bad capital control management . This paper will tackle both the good and bad aspects of capital flows in order to further analyze the theory of capital mobility.
Before continuing it is necessary to look at some of the background and purpose of capital flows. Only until around 1980, have developing countries seen this idea as positive. Before, there was the feeling that with foreign capital a...
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...s should absolutely approach with caution, because capital flows are too unstable to gamble with.
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Though the world economy as a whole has grown in recent years, a factor that is not taken into account is that the number “of the poor in the world has increased by 100 million” (Roy 3). In other words, the gap between rich and poor is widening. For India, this has startling implications. Though it is a nation that is developing in many ways, it also is a nation blessed with over one billion citizens, a population tally that continues to grow at a rapid rate. This population increase will greatly tax resources, which can create a setback in the development process. The tragedy, of course, is that the world is full of resources and wealth. In fact, Roy quotes a statistic showing that corporations, and not even just countries, represent 51 of the 100 largest economies in the world (Roy 3). For a country struggling to develop, such information is disheartening. However, there is also a more nefarious consequence of the growing disparity between rich and poor, and power and money being concentrated in the hands of multinational corporations: war is propagated in the name of resource acquisition, and corruption can reign as multinationals seek confederates in developing countries that will help companies drive through their plans, resulting in not only environmental destruction but also the subversion of democracy (Roy 3).
The over-dependent on foreign capital flows had made the Mexican economy very vulnerable to any sudden and major flux of this capital fund which was very much dependent on the investors? confidence level in the Mexican economy.
Obviously, financial establishments can endure breathtaking misfortunes notwithstanding when their risk management is top notch. They are, all things considered, in the matter of going out on a limb. At the point when risk management fails, be that as it may, it is in one of the many fundamental ways, almost every one of them exemplified in the present emergency. In some cases, the issue lies with the information or measures that risk directors depend on. At times it identifies with how they recognize and impart the risks an organization is presented to. Financial risk management is difficult to get right in the best of times.
Eichengreen, Barry. Globalizing Capital: A History of the International Monetary System. Princeton, NJ: Princeton University Press, 1996.
...M. "INTERNATIONAL CAPITAL MOBILITY IN HISTORY: PURCHASING-POWER PARITY ~ THE LONG RUN." National Bureau of Economic Research. Sept. 1996. Web. 15 Apr. 2014. .
Economists, albeit, argue for free trade, but when it comes down to the idea of untrammeled capital flow, it doesn’t seem to get unanimous support. It is a natural phenomenon that almost everything we see in nature (i.e. fluid, air, etc) travels down the concentration gradient. Same way, it had been thought that freeing international capital flow would help the countries that are struggling economically as the capital should flow down the concentration gradient; but in reality it doesn’t quite happen that way. During the 1980’s, world’s economic policy makers’ prevailing view was that “money should move freely around the globe, allowing capital to find the most profitable and productive investments, no matter what country there happen to be in.” [Wessel, Davis, 1998] Even though policy makers want to make the world a safer place for free trade in goods, services and capital, according to Rodrik “….. the idea of global capitalism is inherently impracticable. Capitalism is, and will remain, a national phenomenon.” (Rodrik)
Multinational enterprises date back to the era of merchant-adventurers, when the Dutch East India Company and the Massachusetts Bay Company traversed the world to extract resources and agricultural products from colonies (Gilpin 278-79). While contemporary multinational corporations (MNCs) do not command the armies and territories their colonial counterparts did, they are nevertheless highly influential actors in today’s increasingly globalized world.
Storey, J. (2007). Human Resources Management : A critical text (3rd ed.). London: Thomson Learning.
Woodward, D. (2001). The next crisis?: Direct and equity investment in developing countries. London: Zed Books.
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