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It’s Not All Downhill from Here: The Uphill Flow of Skill-Intensive Goods and FDI from Developing Countries
August 10, 2009
We tend to think of globalization in the following way: the rich world exports financial capital, technology, sophisticated goods, and entrepreneurial and managerial skills in the form of foreign direct investment (FDI) to developing countries; the latter, in turn, export people, resources, and low-skilled goods to the rich world.
Well, it turns out that globalization no longer respects these clean distinctions. Many recent studies have examined movement of capital from developing to high-income countries, with the assumption that only flows of finance could defy our expectations. But, increasingly, even flows of of sophisticated goods and FDI are going in both directions, a phenomenon Aaditya Mattoo and I call “Criss-crossing Globalization” in our latest paper. Countries such as China are exporting sophisticated goods to OECD countries, and countries such as India, Brazil, and South Africa are exporting FDI to the rich world. Think of Indian TATA’s takeover of the UK’s Jaguar, China’s Lenovo’s acquisition of IBM, Brazil’s success exporting commercial aircraft to high-income countries, and the growing exports of skilled services from Israel and India to OECD markets, and it’s clear that something significant is happening.
We call these flows of skill-intensive goods and FDI from poor countries to rich countries “uphill flows”—uphill because they are defying the normal pattern of comparative advantage.
What are the consequences for countries that send goods and services uphill? Our preliminary work suggests that such countries experience positive economic growth as a result. If this is true, it suggests that policies that promote skill-intensive patterns of production and specialization—even if they go against natural comparative advantage—may need to be considered by developing countries.
A second consequence—and one that will perhaps play out more in the future—relates to the political economy of international trade and investment negotiations. When flows are two-way, perceived objectives of high-income and developing countries are more in sync with one another, which makes the political economy much more conducive to reaching agreement on common international rules. This could be good for all countries, developed and developing.
2 Responses to “It’s Not All Downhill from Here: The Uphill Flow of Skill-Intensive Goods and FDI from Developing Countries”
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August 12th, 2009 at 1:38 pm
Arvind – You conclude that policies that promote skill-intensive patterns of production and specialization may need to be considered… I’m wondering if this means some type of industrial policy. I’m reminded of the East Asian success in promoting skill- and technology-intensive export industries (think Japan and Korea in their take-off stages) but along with this comes all the problems associated with attempting to pick winners. Is your paper challenging the idea that governments should be neutral in their attitudes toward the composition of exports? Which policies do you have in mind? (I know, I should read the paper. But hey, I’m on vacation at an internet cafe… the paper is for next week!)
August 13th, 2009 at 1:23 pm
This is a good and difficult question and let me respond to the spirit of the question in the context of Africa. In this context, it is actually an “old” question that used to be asked about the poorer parts of Africa: should we actively promote diversification away from their natural comparative advantage which was in commodities? Industrial policy has a bad reputation and certainly in its activist variant of “ picking winners” this reputation was justified. But there are policies that go under the category of “not doing harm” to the development of such sectors. One such important policy is the exchange rate. We know, for example, that too much aid can make a country’s exchange rate uncompetitive, and thereby blunts the incentive to invest in manufacturing-based export sectors. My paper with Raghu Rajan provides evidence to this effect and diversify away from commodities. Then the question becomes how do we balance this potentially negative effect of aid with its other possible benefits. What this uphill paper suggests is that questions like this should be taken much more seriously than they usually are by donors.