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Creative Capitalism? No Thanks, Bill

Published by PostGlobal [article link] on 2008-01-24

"Creative capitalism" was the phrase Bill Gates coined today at the World Economic Forum's annual meeting in Davos. As if the vast body of literature on economic development didn't already overflow with warm, fuzzy concepts for growth in the 135 countries of what used to be called the Third World. As if catchy but mystifying phrases such as "sustainable human development" (is there "sustainable canine development"?) didn't already clog the playbooks of povertycrats.

"We have to find a way to make the aspects of capitalism that serve wealthier people serve poorer people as well," the Microsoft founder, and one of the world's wealthiest people, said. "If we can spend the early decades of the 21st century finding approaches that meet the needs of the poor in ways that generate profits for business, we will have found a sustainable way to reduce poverty in the world."

He added: "In the coming decades, we will have astonishing new abilities to diagnose illness, heal disease, educate the world's children, create opportunities for the poor, and harness the world's brightest minds to solve our most difficult problems."

Wait a minute. Haven't we heard all this before?

Indeed, has Mr. Gates ever heard of the late James Grant, who headed Unicef, and the late Bradford Morse, the Massachusetts Republican Congressman who went on to head the United Nations Development Programme? Or Maurice Strong, the Canadian entrepreneur who founded the United Nations Environment Programme? Or, for that matter, even Mr. Gates's fellow Davos participants, former UN secretary general Kofi A. Annan of Ghana, and Professor Jeffrey Sachs of Columbia University? They all said pretty much what Mr. Gates said today, and said it more eloquently. But their eloquence hasn't exactly translated into effectiveness in alleviating the developing world's most serious problem: the growing cohort of poverty.

That poverty is crushing, even after five decades in which the wealthy industrial nations - the thirty members of the so-called rich man's club, the Paris-based Organization for Economic Cooperation and Development (OECD) - contributed $2.3 trillion in foreign aid for poverty reduction in developing countries. Today, nearly a third of the world's population of 6.6 billion is estimated to live below the poverty line: on less than the equivalent of $1 a day.

Mr. Gates is, of course, appalled by statistics such as these. He wants top corporate executives - current and former - to go and work with these people, teaching them skills that they could use to improve their lot. However, it stretches credulity to imagine the likes of Sandy Weill and Chuck Prince and Carly Fiorina and Lord John Browne rolling up their sleeves and trudging through the mud of Madagascar for the cause of spurring economic development. Foie gras, let alone hampers from Harrod's, aren't so readily available to ease the travails of traveling in the Third World - unless, of course, one brings along such delicacies in corporate jets. But then one must be prepared to share the goodies with natives, whose daily diet may typically not range beyond goat and guava.

I have been covering development issues for nearly four decades, and I'm convinced that what the developing world needs more of is not well meaning capitalists or well-intentioned multilateral bureaucrats and their periodic prescriptions for progress. What it needs is foreign direct investment that actually helps creates jobs.

And here the news is actually good, for a change - but only up to a point.

Even though official development assistance from OECD countries fell by 4.5 percent from 2005 to $104.4 billion in 2006 - the last year for which such figures are available - global foreign direct investment (FDI) grew in 2007 to a record $1.5 trillion, according to the Geneva-based United Nations Conference on Trade and Development.

To be sure, a vast majority of the FDI (more than US$1 trillion) went to the rich countries themselves. The European Union's 27 members received around $615 billion, out of $651 billion for all of Europe, or 40 percent of total global FDI. The United States received $192.9 billion, the single largest recipient of FDI in the world.

In the developing world, FDI inflows were particularly encouraging for two sets of countries. The so-called "developing countries" experienced a gain of 16 percent to $438.4 billion. Of these countries, China received by far the most FDI -- $67.3 billion, followed by Hong Kong at $54.4 billion, Brazil at $37.4 billion, Singapore at $36.9 billion, Mexico at $36.7 billion, and Egypt at $35.6 billion. India, whose economy has been growing at a fast clip - averaging 7 to 9 percent annually for the last five years - got $15.3 billion, a fall of 9.4 percent from 2006.

The second set of countries in the developing world, officially known as "transition economies," got a total of $97.6 billion in FDI last year, an increase of 40.8 percent over 2006. The bulk of that money went to the Russian Federation: nearly $49 billion, a 70.3 percent gain over 2006.

Now why is FDI important, and how does it expedite economic growth in poor countries in ways that traditional ODA (foreign aid) or multilateral assistance doesn't?

Listen to Anil Kumar, an economist with the Federal Reserve Bank of Dallas, who recently completed a report on the subject:

"The gap between the world's rich and poor countries largely comes down to the financial and physical assets that create wealth. Developed economies possess more of this capital than developing ones, and what they have usually incorporates more advanced technologies. The implication is clear: A key aspect of economic advancement lies in poorer nations' capacity to acquire more capital and scale the technological ladder. Emerging economies undertake some capital formation on their own, but in this era of globalization, they increasingly rely on foreign capital."

Foreign capital comes in three ways: portfolio equity investment; portfolio debt investment; and FDI. Of these categories, the first two are considered most volatile. Developing countries seek FDI because with foreign capital often comes foreign know-how and the "best practices" of foreign investing companies, particularly companies that establish joint ventures in recipient countries. In China, for example - where FDI in 1990 was a puny $3.5 billion and rose to $67.3 billion in 2007 - local industries have benefited through FDI so much that manufacturing has prospered as an export-oriented sector.

India's experience is a tad different - and herein lies a tale of misdirected FDI. While Indian officials such as Commerce and Industry Minister Kamal Nath - whose new book, "India's Century," was recently published by McGraw-Hill - like to point out that FDI increased from a mere $236 million in 1990 to where it is now, the fact remains that foreign investors haven't ventured into the country's vast hinterland, where 70 percent of India's 1.2 billion people live.

So while it's the fashion to tout India's growing middle class - estimated at 300 million - whose purchasing power is growing thanks to the FDI that has helped develop local markets, what India truly needs is more FDI in manufacturing units that are situated in rural areas.

That means more investment in strengthening the infrastructure, which is appalling. It means more FDI for telecommunications and ports.

It means, most of all, "creative FDI." There we go again - another mantra for the development industry.

Pranay Gupte,
Senior Writer and Global-Affairs Columnist

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