International

PRIVATE CAPITAL FLOWS, DECLINING ODA AND GROWING INEQUALITY

Total FDI inflows into developed and developing countries increased by 40 per cent in 1995, to reach US$315 billion. FDI into developed countries rose by 53 per cent last year. Total FDI into developing countries rose by 15 per cent to US$100 billion. So most of the increase in FDI went to developed countries. Also, although FDI to the 48 least developed countries rose by 29 per cent in 1995, this amount was only US$1.1 billion (roughly 0.35 per cent of the world total). In addition, even though FDI to Central and Eastern Europe nearly doubled in 1995, its total was only around US$13 billion (includes US$2 billion figure for the Russian Federation). This is a minuscule figure compared to the total flows going to developing countries and to individual developing countries such as China (US$38 billion in 1995).¹⁰

FDI inflows are also highly concentrated. The smallest 100 recipient countries received only one per cent of total investment in 1995. Ten South- East Asian and Latin American countries accounted for almost 88 per cent of FDI inflows into developing countries in 1994.¹¹

Given the current concentration of FDI, it is not surprising that many developing countries--particularly African countries and LDCs--need help in attracting FDI and support in promoting private sector development.

¹⁰ UNCTAD, World Investment Report 1996, United Nations, Geneva, 1996.
¹¹ UNIDO database.

Total private capital flows (FDI plus portfolio investment) to developing countries have soared in recent years--for example, from US$44.4 billion in 1990 to US$184.2 billion in 1995. By comparison, total ODA during the same period dropped from US$56.3 billion to US$53 billion. So the facts are plain: private capital flows are quickly becoming the dominant source of finance for developing countries and with present trends in ODA will be even more so in the near future.

It is also important to note growing world inequality in terms of incomes between regions, countries and within countries associated with the globalisation process. For example, if we look at the countries within the European Union. The per capita incomes of the 10 least developed regions of the EU are less than half those of the core countries of the EU, including Denmark, Germany, the Netherlands and Northern Italy. And, if we look at the distribution of world GDP per capita, the gap between the richest 20 per cent and the poorest 20 per cent of the world's population increased from 11 to 1 in 1960 to 17 to 1 in 1989. Recent figures are likely to show an even greater degree of inequality. In this connection, the latest figures from UNDP suggest that this inequality has now more than doubled.¹²⁾

These figures confirm the unbalanced growth of the world economy, and especially that the benefits of global growth have not spread evenly to the poorest countries of the world. The important question to ask now is why should we care about growing inequality or the rapid rise and concentration of private sector financial flows? After all, these developments could be the natural consequence of market forces and the natural dynamics of growing competition.

On the contrary, there is convincing evidence that these developments are exactly the opposite. They are the negative manifestations of market impediments and uncertainties. In particular, they are due to lack of human resource development, technological capacities and innovation and awareness of the requirements of environmentally sustainable development. Because of these impediments, globalisation has inevitably led to a concentration of FDI in certain countries and growing inequality. It is therefore simply not true that the current surge in private sector development flows has obviated the need for development aid. For one thing, it has not always been the case that the private sector has paid sufficient attention to the risks associated with growing inequality of incomes and wealth.

¹² UNDP, Human Development Report 1996, Oxford University Press, Oxford, 1996.

There is now a strong argument that growing inequality of incomes and wealth is a serious threat to future global economic growth, prosperity and, of course, peace. Recent economic research argues that there are good theoretical and empirical grounds to believe that inequality is harmful to growth. Also, sharply rising inequality of incomes and wealth endangers the private sector's ability to maintain and/or improve the quality and capacity of the labour force.

Failure to reduce disparities will severely affect the social fabric of our societies, fuel economic or civil disturbances, changes of Government, migration, and even violent revolutions--or at the very least--force the adoption of harmful or costly quick-fix remedies to ward off such disruptions.

In short, accelerated globalisation, if not properly harnessed, can seriously threaten social cohesion and relationships between major interest groups, such as workers and employers, and as I shall argue later, between skilled and unskilled workers. Since much of the inequalities--especially in industrialised countries--is in terms of incomes, particularly wage inequality, it follows that employment in paid occupations is an important means in combating growing inequality and poverty. The private sector has an important role to play in providing employment as a gateway to opportunity and the reduction of poverty in the long term. But some means have to be found to make workers more employable and not so expensive to employ in terms of burdening employers with excessive pension, health and other social obligations.

As a driving force of the globalisation process, the important role of markets and the private sector has become accepted throughout the developing world as an efficient mechanism to generate wealth and raise standards of living, while at the same time providing incentives for efficiency. However, while competitive markets are efficient mechanisms for allocating resources to highest valued productive uses, they often fail to account for overall social, distributional and environmental concerns. Thus, market forces and competition are certainly necessary but not sufficient for equitable and sustainable industrial development. As Robert Kultner has said very forcefully in his important new book entitled Everything for Sale: The Virtues and Limits of Markets, “the market does not care that one man feeds filet mignon to his dog, while another man is starving on the sidewalk. The market’s distribution of income is presumed efficient, and hence just.”

It could be argued strongly that the United Nations system and UNIDO have an important role to play in reducing inequality within and between

countries and especially in devising policies to respond to the worst impacts of globalisation.

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