Investment, Development, & Resilience

Stephen DeAngelis

June 22, 2006

Over the past few days there have a number of interesting articles that in one way or another discuss the importance of investment, development, and interdependence. The first article is from the Financial Times [“Brussels decries US protectionism,” by Wolfgang Proissl and Fidelius Schmid in Brussels and Daniel Dombey in London, 20 June 2006]. That is an amazing headline considering that America’s foreign policy for decades (including both democratic and republican administrations) has included spreading democracy and expanding free markets. For example, President Bush, in his 2002 National Security Strategy, wrote:

“The United States will use this moment of opportunity to extend the benefits of freedom across the globe. We will actively work to bring the hope of democracy, development, free markets, and free trade to every corner of the world.”


How do you get from that statement about spreading free markets and free trade to the point where the president of the European Commission, as reported by the Financial Times, has felt compelled to speak several times with President Bush “about the risk of introducing new barriers on investment because of worries about globalization or terrorism”? The short answer is Congress. Although the President approves the National Security Strategy, the laws José Manuel Barroso is worried about are passed by Congress. Of course, the President has a veto, but this president has yet to use that device.

Barroso said, “We deplore all decisions when there is – because of a security concern – the restriction of the free flow of capital . . . It’s negative for all of us. We believe it’s important to have more cross-border investment.” Barroso, of course, is correct — it is important. Globalization can only advance when there is a relatively free movement of resources, people, and capital. Congress knows that as well. As Barroso noted, “a backlash against globalization was also stoking ‘protectionist tendencies’ in the US. and elsewhere.” The Financial Times article provided a couple of examples that concern Europeans:

 

“EU officials believe the failure of Dubai Ports World’s attempt to buy US ports this year showed a willingness by Congress to block foreign investment on grounds unrelated to economic criteria. … Mr Barroso is also worried about Washington’s refusal to grant visa-free access to the US to citizens of “new” EU member states, and the Commission has struggled to meet US demands to provide details of transatlantic air passengers in a way that is compatible with EU law.”

 

Frankly, the conservatives pushing an anti-globalization agenda, don’t care what foreigners think. They should. Congress continues to support staggering deficits and that debt is being bought by foreigners in the form of bonds. In other words, those foreigners whom Congress prefers to ignore is funding the wars in Afghanistan and Iraq, the clean-up of Hurricane Katrina, etc. They are not doing this because they necessarily support the U.S. position about the war or because they are making loads of money from the deal or because they want to gain some strategic advantage over the U.S. They buy U.S. debt because they know that if the U.S. economy collapses, their economies are likely to follow.

 

Former Treasury Secretary Larry Summers has pointed out that developing countries would be better served to avoid buying U.S. Treasurys [“Advice to Invest Less in U.S. Bonds: Foreigners Can Do Better, Summers Says,” by Paul Blustein, Washington Post, 22 June 2006]. As the article reports:

 

“Lawrence H. Summers, who headed the Treasury in the last 18 months of the Clinton administration, has argued in recent speeches that developing countries in Asia, Eastern Europe, Latin America and Africa should put much of their excess funds into stocks. Too often, he contends, the central banks of those countries invest their hoards of foreign securities — now totaling several trillion dollars — in safe but low-yielding U.S. Treasurys. The return ‘will be zero’ on those Treasurys after inflation and currency changes are factored in, Summers said in a lecture last week at the Center for Global Development, a Washington think tank. Meanwhile, he said, the developing countries are passing up much more lucrative investments — ‘this, in societies where hundreds of millions of people are still desperately poor.’ In another speech, this one in Bombay a few weeks ago, he said, ‘It is striking to estimate the cost to developing countries’ of their Treasury-heavy portfolios.”

 

Asked if this wasn’t an ironic position for someone to take who used to be in charge of selling U.S. Treasurys, Summers said, “he saw no incongruity in his position, because he is not urging wholesale dumping. He said central banks around the world must keep ‘large volumes’ of their money in super-safe assets such as Treasury bills. And ‘any diversification’ into riskier investments such as stocks ‘is not likely to be rapid, in ways that would affect’ the Treasury’s ability to borrow at affordable interest rates.” There is a bigger concern for Summers, however, than who buys U.S. debt. As the article goes on to report:

 

Summers’s proposal is based on fundamental shifts in the global financial system that arose well after he left office — in particular, an immense buildup in the reserves of foreign exchange held by developing countries’ central banks. Those reserves have grown as the United States, with its burgeoning trade deficit, imports goods from abroad. The dollars Americans spend on foreign products eventually end up in the hands of central banks overseas, and the central banks invest the proceeds largely in U.S. government securities. They do so in part because they want to protect themselves against financial crises of the sort that struck Thailand, Indonesia, South Korea, Russia, Brazil and Argentina a few years ago. For a developing country, accumulating a big war chest of dollars can help discourage speculators from trying to drive down the value of its currency. But the upshot, in Summers’s view, is “the central, global financial irony of our times”: Countries that need capital to finance rapid development are shipping more money to the United States than is flowing in the opposite direction — and it is their official policies to do so.”

The paradox of these articles is that the U.S. is discouraging investment from developed countries at the same time it is selling its debt to developing countries who are desperate for investment. A point that Tom Barnett likes to make when he discusses globalization is that foreign direct investment is much more important for helping bring an underdeveloped nation out of poverty than official development assistance (foreign aid). In a recent column [“Foreign Aid Has Flaws. So What?” New York Times, 22 June 2006], Nicholas Kristof makes the point that ODA still has a place. He begins, however, by admitting that ODA has problems.

 

“Don’t tell anyone, but a dirty little secret within the foreign aid world is that aid often doesn’t work very well. Now that truth has been aired (and sometimes exaggerated) in a provocative new book by William Easterly, ‘The White Man’s Burden.’ Mr. Easterly, a former World Bank official who is now an economics professor at New York University, has tossed a hand grenade at the world’s bleeding hearts — and, worst of all, he makes some valid points. Let me say right off that stingy Republicans should not read this book. It might inflame their worst suspicions. But the rest of us should read it, because there is a growing constituency for fighting global poverty, and we need to figure out how to make that money more effective.”

Kristof’s surly comment about Republicans aside, he’s right that we need to make sure that development assistance is more effective. My involvement with the Development-in-a-Box™, standards-based approach aims for exactly that goal. Kristof continues his column by noting that helping people is difficult. More than mere altruism is required to make it effective.


“I disagree with many of Professor Easterly’s arguments, but he’s right about one central reality: helping people can be much harder than it looks. When people are chronically hungry, for example, shipping in food can actually make things worse, because the imported food lowers prices and thus discourages farmers from planting in the next season. (That’s why the United Nations, when spending aid money, tries to buy food in the region rather than import it.) … It’s well-known that the countries that have succeeded best in lifting people out of poverty (China, Singapore, Malaysia) have received minimal aid, while many that have been flooded with aid (Niger, Togo, Zambia) have ended up poorer. Thus many economists accept that aid doesn’t generally help poor countries grow, but argue that it does stimulate growth in poor countries with good governance. That was the conclusion of a study in 2000 by Craig Burnside and David Dollar. Professor Easterly repeated that study, using a larger pool of data, and — alas — found no improvement even in countries with good governance. Saddest of all, Raghuram Rajan and Arvind Subramanian of the International Monetary Fund have found that “aid inflows have systematic adverse effects on a country’s competitiveness.” One problem is that aid pushes up the local exchange rate, discouraging local manufacturing. Mr. Subramanian also argues that aid income can create the same kinds of problems as oil income — that famous ‘oil curse’ — by breeding dependency and undermining local institutions.”


Nothing new here and Kristof doesn’t try to argue that ODA can lift a nation out of poverty. Where he believes that ODA is best invested is in social programs rather than economic programs. Social services are usually the last programs developed when a country emerges from poverty and the first to disappear when a country sinks into chaos. FDI can jump-start the economy, but Kristof argues that ODA can jump-start social services:


“All these findings can be pretty shattering to a bleeding-heart American. But cheer up. Some other studies indicate that aid does improve growth (economists don’t agree about this any more than they agree about anything else). And whatever the impact on economic growth rates, aid definitely does something far more important: it saves lives. For pennies, you can vaccinate a child and save his or her life. For $5 you can buy a family a large mosquito net and save several people from malaria. For $250, you can repair a teenage girl’s fistula, a common childbirth injury, and give her a life again. The Center for Global Development, a Washington think tank, has published a terrific book, ‘Millions Saved,’ demonstrating how health projects have saved lives. Eradicating smallpox and reducing river blindness have improved the lives of more people for less money than almost any investment imaginable. So let’s not shy away from a conversation about the effectiveness of aid. The problems are real, but so are the millions of people alive today who wouldn’t be if not for aid. In the end, if we have tough conversations about foreign aid, then I believe Americans will acknowledge the challenges — and then, clear-eyed, agree to dig more deeply than ever, for that is simply the best way we have of asserting our own humanity.”


I certainly agree with the thrust of Kristof’s compassion, but I also think his column underscores the importance of pursuing a broader goal of economic development that requires public/private partnerships, foreign direct investment, and economic success built on a foundation of job creation. A column by Tom Friedman [“Latin America’s Choice,” New York Times, 21 June 2006] examines the stark differences between maintaining an economy based on exporting resources (and remaining an underdeveloped country) and building an economy based on job development (and joining the developed world).


“I would describe the big question facing Latin Americans this way: Are they going to emulate India or get addicted to China? … [Latin America] has always been better at mining its resources than mining its people.”

Friedman discusses an Indian company trying to invest in Latin America. The company, Tata Consultancy Services of Mumbai, hires “programmers, trained and directed by Indians, [who] are writing code and running the computer systems for companies all across this continent. They are backed up by Tata engineers in India, Hungary, China, Brazil, Chile, Mexico and Argentina. India now thinks Latin America is its backyard, too.” In other words, through foreign direct investment from India, jobs are being created in Latin America. Friedman says that China thinks of Latin America as its backyard as well, but for different reasons:


“China, though, is almost exclusively focused here on extracting natural resources — timber, iron, soybeans, minerals, gas, fish meal — to feed its voracious appetite and keep jobs and factories humming in China. There is nothing wrong about that. America and Spain did the same for years — and often rapaciously. Today, China’s appetite is helping to fuel a worldwide boom in commodity prices that is enabling a poor, low-industrialized country like Peru to grow at 5 percent. But countries that get addicted to selling their natural resources rarely develop their human resources and the educational institutions and innovative companies that go with that. So after the ore has been mined, the trees cut and the oil pumped, their people are actually even more behind.”

The Latin American head of Tata Consultancy Services, a Uruguayan Jew with Hungarian roots who was educated in America and lives in Peru (how’s that for globalization), laments the fact that he has 500 jobs available but no suitable candidates to fill them. He believes he could eventually create 100,000 jobs in Latin America, but that won’t happen without educational reform — something I previously blogged that the United States needs as well. Friedman concludes:


“Latin Americans may think that their big choice is between two models of Western capitalism — a European welfare state model and a hyper-competitive U.S. model. But before they divide their pie, they need to expand it — and here their most important choice is between an India example that focuses on developing human resources and a China syndrome that focuses on selling natural resources. Since countries tend to do either one or the other, here’s hoping that Latin America discovers India before it gets hooked on China.”

When I talk about a flexible framework within which the Development-in-a-Box approach operates, I talk about the need to set standards (to attract investment), educate people (to fill jobs and create a sustainable middle class), and automate processes where possible (to jump-start economic and regulatory processes). It is the blending of people, processes, and resources that will help nations emerge from poverty.