Volume LIV, No. 1
September, 2000
Poverty Alleviation: Foreign Direct Investment
And Increased Trade Can Contribute
Stephen C. Rowntree, S.J.
In this issue philosopher Stephen Rowntree analyses foreign direct investment and increased trade as they impact the alleviation of poverty in developing nations, such as his current home, Zimbabwe. He examines the "exploitation" analysis of the current gap between rich nations and poor nations, concluding that on-going exchange is beneficial to both groups, while provisions must also be made for the negative consequences of such policies.
The arrival of the new millennium has occasioned much reflection about where we members of the human family have come from and where we are going. The gains in material wealth of the last two hundred years, and especially the last hundred have been unprecedented in human history. Yet not all have benefited. While the rich have grown richer, the poor, it seems have grown poorer, or at least more numerous. As U.N. Secretary General Kofi Annan’s report in preparation for the Millennium Assembly sadly observes, 1.2 billion people live in absolute poverty (defined as living on less than 1$ per day). And since the populations of poor countries are growing rapidly, the numbers of desperately poor are likely to increase if nothing is done. Mr. Annan is proposing to the Millennium Assembly that U.N. members commit themselves to halve by 2015 the number of absolutely poor. Secretary Annan’s Millennium Report: "We the Peoples" can be found on the U.N.’s website: www.un.org/millennium/sg/report. The International Monetary Fund (IMF) and the World Bank have also committed themselves to support poverty reduction. To see their plans you can go to their websites: www.imf.org, and www.worldbank.org, and search "poverty reduction." One might conclude that the U.N., and IMF, and the World Bank have made the preferential option for the poor that churches, especially the Catholic Church, and non-governmental organizations have been urging.
One might conclude that the U.N., and IMF, and the World Bank have made the preferential option for the poor that churches, especially the Catholic Church, and non-governmental organizations have been urging.
But what is to be done? Mr. Annan urges “deeper and faster” debt relief, and increased but “better focused” aid for development. Both are obviously needed. It is a scandal that U.S. official development assistance is such a small proportion of GNP (.12%)[i] and far from the target of .70%, and by this measure far less generous than several other countries including Canada, and Scandinavian countries.
Mr. Annan also demands in the name of “global solidarity” that “rich countries must further open their markets to poor country products.” Other voices speaking for the poor make a similar demand. The Libreville Declaration (Jan. 19, 2000) of African heads of state called “on individual countries to gradually eliminate agricultural subsidies and open their markets to African products particularly agricultural goods and textiles.”
This declaration also expressed the hope that the structural reforms made “to transform the private sector of growth…would attract…inflows of foreign direct investment.”[ii] While debt relief and increased aid are obvious steps to alleviate poverty, some would question whether increased trade and increased foreign investment have any role to play. Some might define them as part of the problem and not part of the solution. I would like to explore these doubts briefly and to reply to them.
A strategy for poverty alleviation that includes structural reforms to give private enterprise a greater role, and especially to attract foreign direct investment and to promote greater trade involves trusting that a free market approach can contribute to poverty alleviation. It is to believe the IMF/World Bank’s line that what is needed are “market-friendly” policies.
The Challenge of the “Exploitation” Analysis
If we take Marx seriously (and how can we not?), we may believe that market-friendly policies are the problem and not the solution. Market-friendly reforms are people-hostile reforms. When rich and poor meet in markets, the rich will exploit the poor. Money is power, and where power is unequal, exchanges will not be free.
The Marxist analysis implies that the rich get richer because the poor get poorer. How could exploitation not be the outcome of encounters, fostered by market friendly policies, between multinational corporations and poorer countries. What do we expect to happen when H.J. Heinz Food, with annual revenues in 1999-99 of $9.3 billion, sets up shop in Zimbabwe, whose total economic output(GNP) in 1998 was only $7.1 billion.
Powerful corporations extract surplus value (profits) from poor workers in poor countries. In rich countries, government regulations and unions may insure a lesser degree of exploitation for some workers. But corporations are for market friendly reforms that open poorer countries to investments where they can earn higher profits than in their home countries. To help the poor, shut down the IMF/World Bank. To be marginal to the global economy, even better, outside completely and not participating, means to be out of harm’s way, to be outside the exploiting grasp of multinational corporations.
The thought that underlies the exploitation analysis of globalization interprets economic relations to be such that one’s party’s gain is another’s loss. Some relations are like this. When the Boston Red Sox play the New York Yankees in baseball, one side wins and another loses (no ties in baseball). Markets are like this. Don’t we talk of competitive markets and promoting competition between firms. And while the results of Red Sox vs. Yankees games are not preordained (they really aren’t, in spite of the “curse of the Bambino”), since both are large market teams, there is not much doubt what will happen over a season when the Yankees play the Detroit, a small market team. Simply compare their total payrolls (1998), $73,800,000 to $23,300,000 million.[iii] In 1998 the Yankees won their division with a 125-50 record (.714) while the Tigers finished last with a 65-97 record (.401).
The thought is not simply that unfair competition means one side loses and another gains. Fair competition in baseball (no rules’ violations, no cheating) results in winners who win because the other side loses.
Questioning the “Exploitation” Analysis
But in economic exchange is the basic situation that one party’s gain is the result of another’s loss? Or a tie, where no one gains and no one loses? Ties would seem possible, if not common, in exchanges. Those of us trained in Aristotelian and scholastic philosophy (who included Marx, by the way, at least the Aristotle part) may indeed think this way. Those not so trained may also think this way. For according to Aristotle (and later the scholastics, including St. Thomas), an exchange is just when what is exchanged by each party is equal: I exchange $26 with Wordsworth Books for the latest World Bank World Development Report worth $26. This exchange is just. But if I pay $26 for the report when it’s worth $30, I’ve gained and the bookseller has lost. This would be an unjust, but also extremely unlikely outcome. Or the bookseller charges $26 for the report when it’s worth only $5. I’ve lost and the bookseller has gained, which is almost certain to happen, even “business as usual.”
The puzzle in this analysis lies in the absence of motive for just exchanges. Or perhaps there is no puzzle! No one ever wants an exchange to be just, only in her favor. But why then would two parties, absent fraud and coercion, ever agree to an exchange. An obvious reply is, they wouldn’t, but coercion, at least, is never absent in any market transaction. So market-friendly always equals rich-friendly and poor-hostile.
Exchange as Beneficial to Both Parties
Is there another way of thinking of exchange? What if we think of exchange in the context of specialization (as opposed to complete self-sufficiency). A completely self-sufficient individual (or family, or large group—even a nation) would have no reason to exchange. But if individuals (or groups, or nations), specialize in doing what they are good at, then they must trade to assure they have what they need to live. If, for example, one person has specialized in baking bread and another in making wine, the bread baker’s one hundredth loaf is worth more to the wine maker than her hundredth bottle of wine. And the winemaker’s hundredth bottle of wine is worth more to the bread maker than his hundredth loaf of bread. So they exchange a loaf of bread for a bottle of wine. Both gain. For before the trade the bread maker had lots of bread but no wine, and the winemaker had lots of wine, but no bread. There need not be either a winner or a loser, or a tie. Both can win in the sense of improve his or her situation from what it was prior to their exchange, bread without wine, and wine without bread.
Many readers knew this already. But many people I’m acquainted with who’ve studied a great deal of philosophy, theology, and humanities never took Economics 101.
Arguments for Free Trade and Foreign Investment
If nations specialize in producing what they do well, or less bad in, and trade those goods with others who have specialized in other products, there will, in principle, be more for each of them than if they had not specialized and traded.
On this analysis not to participate in global trade and investment flows is to lose out. Marginalization in the sense of non-participation or minimal participation is a problem. Trade needs to increase. Investment needs to increase. Marginalization needs to be overcome. Poor countries need to share in global trade and investment.
An Example of the Benefits of Foreign Direct Investment
When H.J. Heinz came to Zimbabwe (as indeed it did), they built a food processing plant that made ketchup, among other things. Zimbabwe has rich agricultural land and large, and small-scale commercial farmers ready and able to grow tomatoes and other vegetables. In building its plant Heinz employed Zimbabwean construction workers. Once finished, it employed hundreds of Zimbabweans as factory workers. Many of these newly employed workers were quite likely previously to have had no formal sector jobs since the Zimbabwean unemployment rate in recent years at best has been around 40%, and is now over %50. Heinz also employed Zimbabwean accountants, managers, and scientists. It provided its workers with state of the art tools and technologies and taught them how to use them. It did all this, to the best of my knowledge, while observing Zimbabwean labor, safety, and wage and hours laws.
The pay, by American standards, is low. But the hourly workers and their families are no longer absolutely poor as they may have been. Managerial and technical workers are developing skills and know-how that will provide them opportunities for better jobs with other companies, or, we might hope, be the basis for new home grown food processing companies (there are already several producing for the local market).
We can imagine that Heinz could export ketchup and other processed foods to European Union countries (a huge market) and to other African countries because of the quality and cost advantages of its Zimbabwe factories. Of course Heinz wants to earn profits from its Zimbabwe operations, and the more the better. But it can only earn profits at the price of improving the lot of its workers and managers, and the overall economic situation of Zimbabwe (by paying taxes, earning foreign exchange, and so forth).
Heinz’s managers and workers will be able to afford decent housing, a nutritional and varied diet, decent medical care, quality education for their children. They will pay taxes that will help the government to pay for drugs to treat A.I.D.S., malaria, and tuberculosis patients. They will also be able to watch American movies, buy country and western CD’s and tapes (Dolly Parton is a favorite in Zimbabwe), and run legal copies of Microsoft programs on their office and home computers.
Essential elements in this surely idealized (but not I hope overly so) sketch, are foreign direct investment and trade. Zimbabweans are poor and therefore cannot save much. Zimbabwe does not have the funds, therefore, for building food processing plants. Heinz and other multinational corporations do. And their investments create many positive benefits for the host country, especially its workers, which Heinz can’t avoid if it wants to earn profits in Zimbabwe. It is, indeed, for reasons such as these sketched that individual states in the USA vie so fiercely for outside investments, domestic and foreign.
Trade is a second important issue. For the scale of Heinz’s Zimbabwe food processing operations (and hence the number of workers employed and size of plant investments) depends on the size of its market. The Southern African market is relatively tiny compared to the European Union and North American markets. If it could export its Zimbabwe production to the world, it could expand it Zimbabwe operations, perhaps even greatly expanding them, creating thereby many more jobs and generating many more of the kinds of benefits sketched above.
Removing Trade Barriers
Because trade has such positive potential benefits, rich country trade barriers (tariff and others) are so damaging to poor countries. And the trade barriers remaining after the latest round of trade liberalization agreements (General Agreement on Trades and Tariffs in 1994, which created the World Trade Organization) are barriers to agricultural and textile products for which developing countries have cost advantages. The logic of this overall argument about the potential advantages for poor countries of trade implies that among the most unjust policies and structures are rich nation trade barriers to agriculture and textile imports. These are unjust policies worth demonstrating against if you’ve chosen the side of the poor.
Helping those Harmed by Freer Trade
The real world is not so simple as the one I have described, as I’m sure alert readers have noticed. I have forgotten farmers, textile workers, and food plant workers in the EU and North America. For if Zimbabwe and other developing countries have cost advantages in these products, then rich country imports will cause unemployment in the farming, textile, and food processing sectors. Consumers, on the other hand, in rich countries will benefit because they can buy food and clothes more cheaply (than before trade). These displaced workers will need to be retrained and helped to find other jobs. Other jobs are being created in US and EU export industries such as software, movies, music, financial services, which are successful exporters because of their cost advantages. As Zimbabwe sells more food products and textiles in the EU and North America, it will have more foreign exchange to spend on drugs, medical equipment, improved communications infrastructure. The overall result world wide and in the USA and EU is that many more new jobs are created than are destroyed precisely because jobs are created in the most dynamic and efficient industries. Watch which businesses and business men support protectionist measures and those who support freer trade to learn which industries have cost advantages and which do not.
In the context of discussing job gains and losses, economists typically point out that in a dynamic economy like the USA’s millions of jobs are continually being destroyed and created due to technological innovations. The effects of trade are greatly overshadowed in the U. S. A. by technological changes. However, these changes, due to technological innovation and trade (to a much lesser extent) disadvantage unskilled, less skilled, and older workers. Fairness and compassion for such workers demands that they be provided for. For some this will be retraining and help to find new jobs. Others who can’t be retrained or who can’t relocate due to age or circumstances will need income support. Theory holds that such support can be provided from the overall gains from trade and that efforts to support such workers by protectionist measures are far more costly than direct provision. Not to mention the more fundamental objection which is that they hurt poor countries trying to grow economically through trade.
Summary of the Argument for Increased Investment and Trade
I have addressed my argument from the beginning to those who have made a choice for the poor of the world. I have tried to show how the market friendly approach of the IMF and World Bank which tries to promote foreign direct investment and freer trade can contribute to poverty alleviation. Foreign direct investment, which provides jobs, skills and technology transfers, promotes trade. In generating jobs in developing countries suffering from high unemployment, it provides income to people who may have had no jobs at all. Foreign direct investment thus contributes to poverty alleviation. The overall economic activity promoted by investment and trade makes resources available for governments to provide for free education, better health care, and income insurance (“social safety net”) for those unable to work. Not infrequently governments of poor countries have tried to provide such essentials of human development, but resources have proved inadequate. Because overall taxable wealth has been inadequate to provide adequate social welfare goods, some governments have spent and borrowed well beyond their means. The results have been huge government deficits and unsustainable borrowing that have generated high and persistent inflation. High inflation has led to falling living standards (i.e. falling real incomes), which in turn have undercut governments’ capacities to provide for education, health care, and other essential social services. A vicious, downward spiral into deeper poverty develops, with consequent damage to human development needs.
The overall level of economic activity, the size of the economic pie, if you will needs to grow and to grow rapidly. Economic growth can occur without poverty alleviation. But no sustainable poverty alleviation can occur without economic growth. Fortunately the IMF and World Bank have been convinced that poverty alleviation must be a specific aim and plans developed, executed, and monitored to specifically address this problem. Market friendly policies, such as foreign direct investment and freer trade, promise to generate the greater economic wealth which in itself alleviates aggregate poverty and makes possible direct poverty relief measures.
In view of the role of greater trade in promoting economic growth in poorer countries, I plead with those who have chosen the side of the poor to resist protectionist measures of all kinds. The poor of developing countries will only be hurt by such measures. I plead also for support for the IMF and the World Bank’s efforts to help developing countries participate more in global investment and trade flows. Investment and trade are essential to alleviate poverty. I plead also for measures to cushion workers displaced from jobs by technological changes and freer trade. Without such measures, workers and their unions in their efforts to ward off their own displacement and insecurity will be tempted to support protectionist measures which will hurt the world’s poor. Such short-terms and short-sighted efforts to help some deserving workers in rich countries threaten to obstruct poverty alleviation in poor countries.
If globalization, especially increased investment and trade, grows and is managed carefully (here again the IMF and the World Bank play important roles), all can benefit. The rich can get richer, and the poor can get richer—perhaps much faster than the rich since so many poor are unemployed, underemployed, or without essential tools. Rather than the richer getting richer because the poor get poorer, the rich can get richer if the poor get richer. For poor people cannot buy the products of rich countries. And rich countries can get richer (in terms of lower cost of living) if they buy the relatively cheaper products of poor countries, thereby, however, making the poorer countries richer.
I acknowledge that this idealized sketch leaves out vital poverty alleviation concerns such as good governance in developing countries, and global and local environmental protection issue, to mention but two. [iv]. The emerging consensus the reader will discover in these sources is as I have argued that the “market-friendly” reforms, foreign direct investment and freer trade, are indeed people- friendly also. Those on the side of the poor have reason to embrace investment and trade.
Recommendations for Further Reading
In addition to the sources mentioned in the text, I would recommend the following works:
Cobb, John B., Jr. and Herman E. Daly. For the Common Good: Redirecting the Economy Toward the Community, the Environment, and Sustainable Future (Boston: Beacon Press, 1989). This work by a theologian and an economist strongly criticizes the line of analysis invoked in this paper in the name of environmental preservation.
Gray, John. False Dawn: The Delusions of Global Capitalism (London: Granta Books, 1998). Gray is a philosopher, and critic of globalism, as the title suggests.
Micklethwait, John and Adrian Wooldridge, A Future Perfect: The Essentials of Globalization (New York: Crown Business, 2000). The authors, who are Economist writers, defend globalization in the name of "modern liberty." Contains a helpful, up-to-date bibliography.
Yergin, Daniel, and Joseph Stanislaw, The Commanding Heights: The Battle Between Government and the Marketplace That Is Remaking the Modern World (New York: Simon and Schuster, 1998).
I also recommend the English weekly magazine, the Economist. It covers global economic (and political) issues in a detailed way. Its editorial policy consistently defends markets, and hence trade and globalization. Those imbued with Catholic social justice principles will likely find its libertarian editorial perspective hard to take. However, its articles, and especially its frequent in-depth surveys are carefully argued and enormously informative, and provide essential information for constructing persuasive arguments critical of pro-market and pro-business positions. Its writers are concerned about justice issues, in particular, the widening income differences between skilled and unskilled workers in advanced economies, and the persistence of widespread absolute poverty in developing countries. It also has good coverage of environmental issues.
Endnotes
[i] Economist Pocket World in Figures 1999 (New York: John Wiley and Sons. 1998), 39.
[ii] IMF Survey, 29, #2, Jan. 24, 2000, 18.
[iii] Johnny Bench, with Larry Burke, The Complete Idiot’s Guide to Baseball (New York: Alpha Books, 1999), 291.
[iv] For an overview, and an integrated approach to all the issues vital to poverty alleviation and human development I recommend the World Bank’s Development Report 1999-2000 (New York: Oxford University Press, 1999), and U.N. Secretary General Kofi Annan’s Millennium Report: We the Peoples, especially chap. 3, “Freedom from Want,” referred to above. The topic of the next World Bank Development Report for 2000-2001, due out in the Fall of 2000 will be dedicated to poverty alleviation. Drafts of the current state of the report can be viewed on the Web, but not for quotation, at WWW.worldbank.org.
ABOUT THE AUTHOR
Stephen C. Rowntree, S.J. was born in Massachusetts, but grew up in South Carolina. He entered the New Orleans Province of the Society of Jesus (Jesuits) in 1961. He earned a Ph. D. in philosophy from Fordham University. After ordination in 1975, he taught philosophy at Loyola University in New Orleans from 1976 until 1994. In 1994 he moved to Harare, Zimbabwe to join the founding faculty to help begin Arrupe College, a four year integrated philosophy, humanities and theology program for African Jesuit scholastics. Arrupe College has the rare distinction of being accredited by both the Gregorian University in Rome and the local University of Zimbabwe. He teaches a variety of courses there, including research skills and methodology, and economic and social philosophy. He considers Jesuit philosophy formation his primary specialty.
