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 and aid comes foreign control, especially foreign equity ( but since the Asian crisis, the possible problems from short term debt are more widely recognized ). However, foreign control is not the developing idea behind the theory. The lifting of capital controls was designed to encourage the world’s rich countries to aid and finance the world’s poorer countries. This would be a good deal for developing countries and the world. In theory, poor countries have little capital and higher rent, creating a trade deficit. Capital inflow could give these developing countries the money they need to import technology and specialized equipment in order to get their own economies booming. Capital flows ought to seek higher rent, creating a capital inflow that would spur growth, technology, and development. People would learn by doing using modern machinery; and corruption would be reduced. Productivity and production would increase and wages would rise as access to machinery rose - and income would be more evenly distributed.
Now, reality has shown that this theory doesn’t always hold and there are those who strongly appose it. J. Bradford Delong, although previously an advocate, argues that capital mobility is...