While Morley’s primary concern is with the consequences of liberalization of capital markets, his observations underscore the problems of distribution and power that can be associated with efforts to attract – and retain – capital on the basis of tax concession competition.38
The tax concessions approach to inducing investment views economic growth as necessarily profit-led. To raise incomes in general, according to this concept, it is necessary to raise the income of capital first. Even if successful in generally raising incomes, the distribution of income is likely to become more unequal. It is an approach that is based on accepting and enhancing the power of capital, especially foreign capital. Profit-led growth may or may not yield more rapid growth, but it almost necessarily insures more unequal growth.
Experience of recent decades does not suggest that economic growth is most effectively enhanced by attracting foreign capital. For example, up through the 1970s, several countries in Latin America pursued their development with a heavy reliance on foreign investment, using tax policy and other means to attract that investment; Brazil and Mexico are prime examples. In East Asia at the same time, Taiwan and South Korea, while accepting foreign investment, limited and controlled that investment. The relative growth experiences of the two regions are well known. Moreover, while the differences in income distribution between the two regions are attributable to several factors, the much greater degree of equality in those East Asian countries is also worth noting.39
As the reference to the East Asian experience should indicate, foreign investment is not ‘bad.’ Whether foreign investment has ‘bad’ or ‘good’ impacts depends to a large extent on how it is attracted and controlled. Its impacts on economic growth and income distribution in recipient countries depend on several factors. Some of these factors – for example, the importance of support for training programs – are recognized in the Sachs Report. Yet any approach to foreign investment that does not consider the way it affects the distribution of income and power relations (let alone the complications of the way it affects economic growth) leads to an inadequate approach to poverty alleviation.40
38 Similar conclusions are expressed by Linda Beer and Terry Boswell (2002), who also focus on the way power relations are affected by “globalization.” They conclude (p. 51): “The research presented here indicates a shift in capital/labor relations brought about by globalization that have significantly contributed to the rise in income inequality seen throughout the world.”
39 The handling of foreign investment in this period by Taiwan and South Korea is described, respectively, by Wade (1990) and Amsden (1989).
40 I want to emphasize that the argument that foreign investment in low-income countries exacerbates income inequality, as put forth in various sources cited in this section, may be incorrect – or at least it may be correct only under circumstances that can be avoided with appropriate policy. The problem is that without consideration of the distributional issues, it is highly unlikely that a poverty alleviation program can be effective. Moreover, to the extent that FDI does exacerbate inequality, it is likely to do so all the more when it is attracted by a tax concession program.