latifundia-minifundia structures, and rural landlessness, which have characterized rural life in much of the world, have generated pervasive inequality and poverty (whether defined in absolute or relative terms). At the same time, the political power of large land holders has limited change: preventing social programs, blocking land reform, controlling water, and limiting the advances in productivity.35
IV.D. Attracting Investment in the Context of ‘Globalization’
A focus on growth without consideration of income distribution and power relations is also evident in the Sachs Report’s advocacy of tax concessions as a means to attract investment generally and foreign investment in particular. As the Report points out, existing evidence does suggest that tax concessions, when coupled with appropriate complementary policies in, for example, infrastructure expansion and training, do attract foreign investment. The connection between foreign investment and economic growth, however, is more complex than the Report suggests, and foreign investment’s impact on income distribution, and hence poverty reduction, is, at the least, a controversial issue.36
The poverty trap argument of the Report is essentially a supply-side argument, explaining the lack of investment in low-income countries as a result of an insufficient supply of capital. This reasoning – a reasoning shared by many policy makers and economists – leads to the proposition that the growth will be enhanced by foreign investment. To the extent, however, that growth is limited on the demand side – that is, by investment opportunities – foreign investment may have the effect of displacing domestic-source funds. An illustration of this phenomenon is provided by Mexico, where in 1980 the stock of foreign direct investment (FDI) was only 3.6 percent of GDP; it rose to 8.5 percent in 1990, 16.7 percent in 2000, and 26.5 percent in 2003. (UNCTAD, 2004, p. 405) However, throughout these years of rising FDI gross investment in relation to GDP was smaller than it had been in the 1970s and in the early 1980s (Mattar et al, 2002), and economic growth was relatively slow (even after the financial crisis of 1994). While the Mexican situation may not be typical, at the very least the impact of FDI on economic growth is a good deal more varied and complex than the Report suggests. (See, for example, de Mello, 1997.)
35 On this last point – that large land holders tend to limit advances in productivity – see, for example, de Janvry (1981) and Griffin et al (2002) discussed below. Also, Khan (1972), in examining the possibilities for Bangladesh, explains how, even in a situation where land holdings are extremely small and large land owners are those with perhaps 30 acres of land, land reform can contribute to greater productivity as well as greater equality and poverty reduction.
36 The Sachs Report cites Mutti (2003) to support its argument in favor of tax concessions. The Report counterpoises its advocacy of tax concessions with the general advice of the IMF and World Bank that governments should avoid tax concessions as a means to attract investment. It seems that the main concern of the IMF and the Bank is not the distributional impacts of tax concessions, but their implications for reducing the tax base in low-income countries and their ‘market distorting’ impact.