The fact that the developing and emerging countries exported nearly as much capital as the USA imported is a surprising aspect of globalization....

The fact that the developing and emerging countries exported nearly as much capital as the USA imported is a surprising aspect of globalization. A rich country like America, which is well endowed with capital, should have exported capital to the less developed part of the world, not vice versa. First, the emerging and developing countries should be able to offer a higher rate of return to capital, as capital is scarce there and wages are correspondingly low. Second, it would make sense for these countries to have tried to smooth consumption over time by borrowing abroad against their anticipated higher future incomes. However, both arguments fail to explain what happened. Measured against the predictions of economic theory, capital flowed in the wrong direction. It was as if the Rhine was flowing from the North Sea to Switzerland.

The puzzle can, however, be explained to a large extent by petrodollars recycling from the oil exporting countries, which are included in the group of developing and emerging countries. Because oil exporters have only limited possibilities to invest their sales revenue at home and also do not wish to consume everything immediately, they have to export large parts of this revenue as capital to other countries. The aggregate net capital exports of all major oil exporting countries, including Russia, Saudi Arabia, and Norway, in the four years under consideration, was 33 per cent of total net capital exports of $516 billion per year.

Aside from the petrodollars, the main explanation is that on both sides of the table non-market forces were at work. Thus, the Chinese central bank would not allow the exchange rate of the yuan to vary freely against the dollar, but instead manipulated it in such a way that its own currency was always undervalued, leading to high export surpluses of goods and services and thus also of capital. And the citizens of the USA established a good life for themselves by borrowing heavily against their real estate; the prices were inflated artificially by deficiencies in the US legal system, as will be explained in this book. Evidently, both practices were a perfect match. They fed on and reinforced each other.

In addition to the USA, Spain and the UK also stood out as big capital importers, absorbing 9 per cent and 5 per cent of world capital exports, respectively. Both countries, like the USA, experienced a housing boom accompanied by a strong economic boom that attracted substantial capital resources from all over the world.

In addition to the developing and emerging countries, Japan and Germany were also big capital exporters. Together with China these latter two countries contributed more capital than the USA needed. The huge capital exports of Germany and Japan were due to their extremely low internal investment rates. Little of their domestic savings was invested at home, the lion’s share went abroad as capital exports. In the OECD statistics both countries have been competing for years with Switzerland for the lowest net investment rate among the thirty industrialized countries. Germany, at a net investment rate of 3.2 per cent in 2005-7, stood below Japan, at 3.7 per cent, and Switzerland, at 4.7 per cent, occupying the very end of the international comparative range. In these three years, Germany had on average aggregate annual savings of 220 billion euros, of which it used only 65 billion euros for domestic net investment, sending 155 billion euros ($201 billion) abroad.

 

Fuente: Casino Capitalism. Hans-Werner Sinn. Oxford University Press. UK. 2010.

 

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