The Hindu Business Line : Why developing countries export capital

Developing countries have earned a reputation for behaving in unexpected but virtuous ways. They were not expected to export capital to the developed economies or high-quality human capital. But they do both. The people of the developing countries have become important global assets, driven by their multiple talents and multi-tasking capabilities, says G. Ramachandran.

DEVELOPING countries export their precious savings and prodigious human talent because their private sector and their public institutions are unsure about one another. Their private institutions, often small and inconspicuous, have yet to be convinced that their governments and regulatory institutions will stand by the prudence, enterprise and thrift of households and businesses.

Their public institutions, often partially-modified remnants of their colonial and communist pasts, have yet to be convinced that the businesses and households in poor countries can grow smartly and securely without the messy crises. Their households and businesses believe that rich countries offer a more hospitable environment for their enterprise and thrift.

Their regulatory institutions appear more reliable and immune to opportunistic tinkering. But the public institutions in the developing economies do not altogether fail the reliability test. They score less than those in the developed economies because the developing economies do not have better and bigger markets. The developed economies score more because they offer better and bigger markets.

Cutely logical

It appears logical that the bigger and better markets should get a bigger and better part of the world's resources.

Developed economies earn their due rewards by making their markets bigger by smashing bottlenecks. They make their markets better by smashing inefficiencies and dysfunctional incentives that reward the `owners' of business bottlenecks. They then suck in the resources from the poor countries, after paying for the resources used. Everyone benefits from this pay-for-use arrangement. What is `cutely' constructive in this arrangement is that the prudence and enterprise of the poor countries are sucked into patently more hospitable and productive environs. Prudence and enterprise are intangibles and no one loses by shipping them to the developed economies.

The poor countries and the world as well would lose these if the rich countries do not cause the large-scale transfer of resources from the poor to the rich countries. However, the rich countries are doing no one an out-of-turn favour.

Unafraid of markets

The global market for resources establishes verifiable prices for human and physical resources, and these prices operate within the rich and the poor countries.

In the rich countries, where their public institutions and governments are unafraid of the influence of the market, the access to the global market for resources lowers costs and sustains global demand for their output at sustainable levels of income. Poor countries too have to be unafraid of the influence of the market.

Those that regard the market as an economically benefit from the pay-for-use arrangement. They create access to the global markets for their local savings and skills. Others that are intimidated by the influence of the market and the freedom of sellers and buyers to pursue economic gains forsake the benefits. This is perhaps the most critical and useful contribution of globalisation and market expansion. Without price-driven markets, the economies of poor countries would slow down and stay in low orbit.

After a few rounds of local glut, effort aimed at learning new skills and garnering new savings would be displaced by despair and sloth. Therefore, the export of capital and other resources is part of a global win-win arrangement that serves the objectives of all.

The new roles

Developing countries have earned a reputation for behaving in unexpected but virtuous ways. They were not expected to export capital to the developed economies or high-quality human capital. But they do both. They are net exporters of both to the rich countries. The latter depend on the savings and the savvy that pour forth from the poor countries.

Rich countries have, thereby, acquired the same reputation. They too behave in unexpected ways. They take from the poor their enterprise, thrift and savings. The people of the developing countries have become important global assets, driven by their multiple talents and multi-tasking capabilities. The credit for integrating these talents and capabilities duly belongs to the rich countries. They have found markets for the prudence, enterprise and thrift of the developing economies.

These markets nurture and reward wealth-creating capabilities. Bigger and better markets serve the interests of wealth creation, asset allocation, the reconfiguration and mitigation of risks, and steadier returns on investments made by households and businesses in the poor countries. Both the poor and rich countries, clearly, have been behaving in unexpected ways.

Getting familiar with their changed roles and the hidden reciprocity will do them a world of good. The reciprocity sets two new objectives. Rich countries should find more interesting ways to play the role of diligent global asset managers. Poor countries should find more interesting and sustainable ways to play the role of global wealth creators. If the developed economies and the entrepreneurial elite in the poor countries provide more leadership and market guidance in asset allocation and reconfiguration, poor countries can develop their economies with more confidence than before.

In the absence of such leadership, the principal human and financial resources of the poor economies would be devoured by local bottlenecks and inefficiencies.

Seeking quality

The flow of savings and human capital from the poor to the rich countries satisfies the broad objectives of both the public and private institutions in the poor countries. The principal fear of governments and regulatory institutions in poor countries is that a few mistakes and entrepreneurial excesses in the local economies could pull them back a few decades.

Nevertheless, when their human resources and savings can grow in a different locale under the watchful supervision of the public institutions of the rich countries, many of the mistakes and excesses could be obviated. The gains from this arrangement would yet be available to fuel the steady growth of the poor economies.

The principal desire of private businesses and households is that their governments and regulatory institutions would provide steady, speedy and unobtrusive regulation that first expands the local markets of developing economies and then keeps them unclogged.

Private businesses and households typically regard regulatory frameworks as allies if they can push their businesses and incomes a few decades farther into development. They dread unsteady, slow and obtrusive regulation because it lowers the magnitude of resources that can be absorbed locally.

Seeking size

Private businesses and households that supply the human and financial capital may hold the view that some part of their resources should come under the vigorous influence of the regulatory institutions in the developed economies. The bigger markets of the rich economies allow the voluntary participation by the developing countries when they apply their prudence, thrift and enterprise. The better and bigger markets of the rich countries expand their opportunities to earn better payoffs. The appetite for resources is directly proportional to the quality of regulation that a market is able to provide. Other social and economic conditions matter, and so does population. But after adjusting for these, the empirical inference that is most striking is that the bigger markets are the better markets, and that those that invest in creating better markets end up creating the bigger markets.

It is not surprising that the flow of savings and skills from the developing to the developed economies fits a pattern that is best described by the quality and size of markets where their savings and skills are used and traded.

Demystifying development

Developing economies may appear to be grossly under-invested and in need of vital resources. It is one thing to evaluate these economies by the resources they need. It is wholly another to evaluate them by what they do with their available resources and other endowments. Their first choice is often to seek the bigger and the better markets in the developed economies. Local savers and those that possess the right combination of enterprise and skills typically allocate a smaller part of their total endowments of resources to the local economies than what the local economies need.

Need remains paramount, but it is not of the local economies. The need that drives the flow of resources is that of the savers and the enterprising that belong to the local economies.

Developing economies that are unresponsive to the needs of local savers and the local stock of entrepreneurs will forever be hunting for capital and other resources even as they export their own. First, the appetite for local investments from local savings and the learning of skills will be suppressed in a hostile environment that offers unsteady, slow and obtrusive regulation. Second, external capital will shun such an environment and move to those that offer steady, speedy and unobtrusive regulation.

(The author is a financial analyst. Feedback may be sent to indiagrow@sify.com)