Globalisation: A Wise Investment in the World ; A New Approach Is Needed by Multinational Companies in Their Dealings with Developing Countries, Says Philip Thornton
Thornton, Philip, The Independent (London, England)
In the wake of the Asian crash of 1997 and the near-collapse of the global financial system following the Russian debt default in 1998, the argument against international capital flows looked as good as won. But it turned out that these were just blips in the phenomenal growth of international investment since the end of the Bretton Woods agreement in the Seventies.
Figures from the Institute of International Finance show that private capital flows dropped in the wake of the double whammy of Asia and Russia to pounds 143.3bn in 1999 from 1997's pounds 267.3bn. But it forecasts flows of pounds 187.9bn by the end of this year and pounds 212.1bn for 2001 - not up to the level of 1997 but back on an upward trend. The key beneficiary has been Asia, which has turned a capital outflow of pounds 1.3bn in 1997 to a forecast pounds 76.1bn next year.
But the continued confidence of investors in overseas investment masks a wholesale change in the attitudes surrounding this issue. The violent protests witnessed in Seattle, London, Washington and Prague over the last two years indicate the strength of hostility among some sections of the public.
Before weighing up the pros and cons of overseas investment, one must draw a key distinction between foreign direct investment (FDI) by multinationals and speculative portfolio investment.
Although both arise from the decision of countries to open up their capital markets, they are very different in nature. Speculative investment is effectively large institutions betting against the stock markets or currencies of other countries. As Barry Coates, director of the World Development Movement (WDM), puts it: "Speculative investment has no role to play in sustainable development."
But the arguments on direct investment - where companies take a long- term stake in their investment - are more evenly balanced. According to the World Bank, the benefits of open capital markets are "indisputable". They offer wider sources of investment, better economic policies, and a multilateral trading system.
Figures from the International Monetary Fund show global trade has been the driving force behind economic growth over the last 50 years, growing by 6.8 per cent a year - double the rate of growth in output.
Although much of the rage against the machine of globalisation is driven by a knee-jerk hatred of big business, there is a solid intellectual argument against the existing international financial argument. Some argue there is an inherent instability within the system which encourages extreme volatility in capital flows, a bubble in asset prices - especially equities - in the host country and upward pressure on the exchange rate.
In the Asian crisis for instance, pressure from immense capital flows forced governments to float their currencies, triggering a vicious spiral. As the currency plunged, interest rates went up, leaving firms unable to service their debts. This forced massive cuts in investment and spending that, in turn, plunged the region into recession, in turn raising the spectre of a wave of bankruptcies and mass unemployment. …