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The Meaning of Poverty - page 21 / 35





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Even when foreign investment does induce more rapid economic growth, its impact on the distribution of income can be negative.37  Studies that examine the relation between FDI and inequality often focus on the wage inequality that is generated by the entrance of foreign firms in low-income countries.  For example, Dirk Willem te Velde (2003, p.4-5), focusing on Latin America, concludes:

“…not all types of workers necessarily gain from FDI to the same extent.  The reasons for this include: FDI induces skill-specific technological change…and it provides more training to skilled than unskilled workers.  A review of the micro and macro evidence shows that, at a minimum, FDI is likely to perpetuate inequalities … New empirical evidence shows that FDI did not have an inequality-reducing effect in Latin America… In countries such as Bolivia and Chile, FDI may have increased wage inequality.  While this does not imply that FDI was or was not good for development and poverty reduction in these countries, it does imply that most of the gains of FDI have benefited skilled and educated workers.”

As important as the wage inequality associated with foreign investment may be, there is an additional issue involved when the investment is attracted by tax concessions.  The tax concessions approach to attracting investment places firms in a powerful bargaining position where they can play governments of different countries off against one another.  Furthermore, the type of investment that is sensitive to tax rates is often highly mobile – garment assembly is a good example – and this mobility enhances the firms’ bargaining power once the practice of competing on tax concessions has been initiated.  Examining the issue of structural reforms in Latin America and their impact on income distribution, Samuel A. Morley (2000, p. 29) writes:

“…in a world of perfect capital mobility, countries will be forced to compete in offering generous tax holidays, subsidized credits and other costly assistance as a way of attracting foreign capital. But it is not only foreign capital that is affected. The same argument is valid for domestic capital. Both government and labour will be forced to accept arrangements that are sufficiently generous to ensure that domestic entrepreneurs and holders of wealth are content to leave their money invested in their home country.  In this way, opening up the capital account shifts the balance of power in favor of the holders of capital.”

37 For a review of the issue and evidence, see Tsai (1995, p. 480) who concludes: “…two salient features emerge from our analyses. First, the partial correlation between stocks of FDI and inequality estimated by using the basic model is extremely sensitive to the inclusion of geographical dummies. This implies that the statistically significant correlation between FDI and income inequality widely obtained in earlier studies might capture more of the geographical difference in inequality than the deleterious influence of FDI. Second, to the extent that FDI does give rise to more unequal income distribution in the host LDCs, only the East/Southeast Asian LDCs appear to be the ones really harmed by the inflow of FDI during the period under consideration. We have to reiterate, however, that the above statement refers to the marginal impact only. …But, even in the marginal sense our results tend to be supportive of the arguments of dependency theorists…”

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