4.  A Global Balance Sheet
 

We are now in a position to summarize the international flows of capital and labour, and the factor payments associated with those flows, and to attempt to construct a global balance sheet. We divide the world into four groups of countries. As previously explained, the Group A countries are the 31 countries with a real per capita GDP of $10,000 or more. The lowest income countries, Group C, are the 51 developing countries with a real per capita GDP of $1500 or less. In between we have the Group B countries, which we divide in two. Group B1 consists of 31 countries with a real per capita income between $10,000 and $4,000 while Group B2 consists of 44 countries with a real per capita income between $4,000 and $1,500. The 15 republics of the former Soviet Union are excluded from our calculations because of lack of data. All of them, however, would have fallen into Group B.

The population of the "world" and real GDP in 1990 (measured in purchasing power parity terms) are indicated in Table 4.1. The total population is 4.9 billion and real GDP is $23,538 billion. At one extreme, the Group A countries account for 16.5 per cent of the total population yet receive 62.1 per cent of total real income. At the other extreme, the Group C countries account for 32.3 per cent of the total population yet receive only 6.6 per cent of total real income. The Group B countries fall in the middle.

Note: The total population and GDP figures exclude the 15 republics of the former Soviet Union.

The distribution of Official Development Assistance

Official Development Assistance (ODA) is distributed over a large number of countries, including a few in Group A, and hence is not well focused on reducing global poverty or providing a global safety net. In Table 4.2 we present data on the allocation of ODA in 1990. The poorest countries, Group C, received only 44.2 per cent of all foreign aid; the remaining 55.8 per cent was allocated to less poor countries, mostly countries in Group B2. In other words, if the aid allocated to countries in Groups A, B1 and B2 were reallocated to Group C, it would be possible to more than double the amount of aid to the poorest countries and thereby make a significant contribution to alleviating the most severe cases of hardship.

In the aid allocation scheme presented in section 1, Group A countries constituted those liable for payment of the progressive international income tax on their current GDP. The Group B countries would neither be liable for payment of the tax nor be eligible for grants under our negative income tax proposal. Finally, only Group C countries would be eligible for international grants under the negative income tax scheme. The implicit assumption is that the Group A countries are in a position both to finance a domestic safety net for their own people and to contribute a modest fraction of their income to a global safety net. The Group B countries, it is implicitly assumed, are sufficiently well off that they can provide a domestic safety net for their people but not so prosperous that they can be asked to contribute to the financing of a global safety net. In the case of the Group C countries, it is assumed that some of their domestic resources can and should be used to provide a domestic safety net, but because of the low average level of income, substantial international grants should be made available to augment domestic resources.

Even under the present system the Group C countries receive more aid per head and as a proportion of their GDP than do the Group B countries. The poorest countries, Group C, received a weighted average of $12.65 per head in 1990, whereas the Group B2 countries received slightly less, namely, $10.49 per head. The most prosperous of the developing countries, Group B1, received about half as much as the Group C countries, namely, $6.14 per head. Thus, at this high level of aggregation, there is, as one would hope, an inverse association between per capita income and allocations of foreign aid. The same relationship is evident when one expresses ODA as a percentage of real GDP. Thus the Group C countries received an allocation equivalent to 1.3 per cent of their real GDP while the allocations to Groups B2 and B1 were 0.48 and 0.12 per cent of their real GDPs, respectively. Under our proposals described in section 1, all ODA would be channelled to Group C and had this been done in 1990, foreign aid would have been equivalent to 3.6 per cent of the real GDP of the Group C countries.

The data in Table 4.2 obscure the fact that within the Group B countries ODA is highly concentrated. Within Group B1, two countries (Malaysia and Turkey) accounted for 46 per cent of all the aid received by the group. Similarly, within Group B2, four countries (the Philippines, Indonesia, Egypt and Pakistan) accounted for 48 per cent of all the aid. Although on average there is an inverse relationship between aid and per capita income, there are many departures from this relationship. For instance, India (a Group C country), with a real income per capita of $1072, was allocated only $1.82 of aid per capita; Egypt (Group B2), with a real GDP per capita of $1588, received nearly a hundred times as much aid per head, namely, $106.52; and Israel (Group A), with a real GDP per capita of $10,840, received 162 times as much aid per head as India, viz., $294.85.

Despite these anomalies it remains true that ODA, on balance, helps to reduce inequality in the distribution of world income among countries. The extent of redistribution, however, is very modest. Perhaps this would not matter much if other capital flows were strongly equalizing, but in fact they are strongly disequalizing and hence if poor countries are to receive a reasonable share of the world's resources, greater efforts will be needed to direct ODA away from the Group A and B countries and toward the Group C countries.

Technical assistance

It is widely believed, with justification, that the level of human development is lower in the Group C than in the Group B countries, and hence the group C countries have a relatively greater need for technical assistance. One would hope that this would be reflected in the allocation of technical cooperation grants but, unfortunately, it is not. The Group B1 countries received 13.3 per cent of the technical cooperation grants in 1990, the Group B2 countries received 48.7 per cent and the Group C countries 38 per cent. 39  That is, the less poor developing countries received 62 per cent of the grants allocated to technical assistance.

Technical assistance grants are of course a part of ODA. What is astonishing about the allocation of technical assistance is that it is even less equitably distributed than ODA as a whole. Ignoring foreign aid received by Group A countries and thus considering only the aid allocated to the developing countries, it transpires that the Group C countries received 45.7 per cent of ODA in 1990. That is considerably more than the 38 per cent of technical assistance grants channelled to them. The priorities revealed by these figures cannot be justified. Both equity (in terms of the allocation of grants) and efficiency (in terms of promoting human development) are ill served by current technical assistance programmes. Indeed, in section 5 below we suggest that the time has come for a fundamental reconsideration of conventional technical cooperation programmes and perhaps for their abolition.
 

Flows of foreign direct investment

In 1990 the net inflow of foreign direct investment (FDI) into developing countries was $22.5 billion or about half as much as ODA. Moreover, FDI was highly concentrated among the richer of the developing countries and very little was attracted to the poorest countries. As can be seen in Table 4.3, the Group B1 countries accounted for just over 59 per cent of the total, the countries in Group B2 accounted for nearly 36 per cent and the Group C countries for less than 5 per cent. In per capita terms, the Group B1 countries received 32 times as much foreign investment as the Group C countries, i.e., $22.03 as compared to $0.70.

Foreign investment, like aid, tends to be concentrated among a small number of countries. In 1990, for instance, 69 per cent of all FDI was located in just seven countries: Portugal, Malaysia, Mexico, Argentina, Thailand, China and Indonesia. None of these countries belong to Group C. Even within the Group C countries, foreign investment is highly concentrated: in 1990, Nigeria accounted for 53 per cent of all foreign investment in that Group. Total FDI increased in 1991 and again in 1992, but the tendency toward a high degree of concentration persisted. In 1992, for example, the World Bank estimates that 10 countries--the seven mentioned above plus Brazil, South Korea and Venezuela--accounted for 72 per cent of the total.40

The flows of FDI to the developing countries are small in comparison to the flows within the rich countries. The gross inflow of foreign investment in the Group A countries in 1990 was $173 billion, or nearly eight times as much as the amount received by the Group B and C countries combined. Among the Group A countries, the United States and the United Kingdom were large investors abroad, yet both were large net recipients of FDI. Indeed, the net inflow of foreign investment in the U.S. and U.K. in 1990 was $27.35 billion, or 121 per cent of the FDI received by all developing countries41 . Spain alone received $10.9 billion of net foreign investment, an amount equivalent to 48 per cent of the FDI received by developing countries.

Source: World Bank, World Tables 1992, Washington, 1992 and World Bank, World Tables 1993, Washington, 1993.

The share of developing countries in global foreign direct investment is small (about 22-23 per cent) and within that share, as we have seen, the flows are concentrated among a few countries. Foreign direct investment, in other words, is of little significance to the majority of developing countries. Moreover, those countries that do attract FDI must expect an outflow of profit remittances to follow the initial inflow of capital. The net flow of resources (FDI minus profit remittances) typically is negative in the developing countries. This was clearly the case between 1965 and 1980. There were departures from the norm during the 1980s, when the net resource flows were approximately zero until 1987 and then became positive. These positive resource flows, however, are about to become negative again because of the recent rapid increase in profit repatriation. Thus in terms of net flows of external finance, FDI usually makes a negative contribution.

Much recent foreign investment in developing countries has not been used to create new enterprises but to purchase existing ones. This is particularly true in Latin America where foreign investment has taken the form of purchases of state enterprises that have been privatized. In Mexico, for example, state enterprises with a market value of $22 billion were sold between 1988 and 1992. There were also large privatization programmes in Argentina and Venezuela. Foreign participation in the privatization of state enterprises is a once-for-all activity which might lead to increased efficiency in the use of domestic resources, but it will not lead to a continuing inflow of capital, although it will lead subsequently to a continuing outflow of profits.

Furthermore, the data in Table 4.4 suggest that the outflow of profits is relatively greater in the Group C countries than in the Group B ones. If the net transfer is defined narrowly as net FDI inflows minus profit remittances, then the Group C countries enjoyed a net transfer of only $277 million in 1990. (See row 3 of Table 4.4.) This represented only 3.2 per cent of the net resource transfer from FDI received by developing countries. That is, the Group B countries received nearly 97 per cent of the net resources transfer arising from foreign direct investment. The poorest countries were out of the loop.

The narrow definition of a net transfer includes the reinvestment of profits by foreign enterprises. It can be argued that reinvested profits should be excluded since they do not represent an injection of new external finance but simply a use by foreigners of resources generated domestically. Thus under the broad definition of the net resource transfer both repatriated and reinvested profits are subtracted from the capital inflow. The net resource transfer using this broad definition is reported in row 5 of Table 4.4 and this transfer is expressed as a percentage of real GDP in row 6.

Sources: World Bank, World Tables 1992, Washington, 1992 and World Bank, World Tables 1993, Washington 1993.

Net transfers, broadly defined, are of negligible importance. In the Group B1 countries they amount to one-tenth of one per cent of real GDP; in the Group C countries they amount to one-hundredth of one per cent of real GDP. Foreign direct investment, evidently, is not a mechanism for equalizing physical capital among all countries. Most FDI consists of one Group A country investing in another. Within the developing countries, FDI is concentrated among a very few countries, most of them in Group B. The Group C countries receive very little FDI. Moreover, as we have seen, the net transfer of resources, however defined, is exceedingly small and in many countries it is negative. There is virtually no prospect that this pattern will change: FDI responds to market signals, not to need, and markets clearly indicate that the return on foreign investment in general is higher in developed than in developing countries.
 

Portfolio investment

Portfolio investments in developing countries, both equities and bonds, have increased dramatically in recent years. The World Bank estimates that portfolio investment more than doubled between 1990 and 1991, reaching more than $20 billion, and then increased again in 1992 to about $34 billion. 42  The data, however, are fragmentary and unreliable and it would be unwise to project continued rapid growth over the long term. Indeed portfolio investment in developing countries is likely to be highly volatile and, like FDI, concentrated among a few countries.

In our benchmark year of 1990 only the countries in Group B1 received a net inflow of portfolio investment. The total for the Group B1 countries in that year was $9.2 billion. Venezuela however received $13.6 billion and hence the remaining Group B1 countries experienced an outflow of portfolio investment of $4.4 billion. Mexico, for example, had an outflow of $5.4 billion and Argentina an outflow of $1.6 billion. 43  The Group B2 countries experienced an outflow of $0.4 billion in 1990 and the Group C countries an outflow of $0.2 billion. In the case of the Group C countries, however, the outflow was concentrated entirely in one country, Nigeria, the rest reported neither gains nor losses of portfolio investment.

Investments in the equity markets of developing countries have been stimulated by attractive stock offerings in some of the higher income Latin American countries and by the opening up of stock markets in several other developing countries, primarily in Asia. Foreign portfolio investment in Latin America in 1991, almost exclusively in Group B1 countries, accounted for 74 per cent of the flow of equity investments in developing countries.44  Much of this "foreign" investment appears to have been flight capital returning home to take advantage of the sale of public enterprises under privatization programmes. As privatization runs its course, equity investments in Latin America can be expected to decline, as actually occurred between 1991 and 1992. 45

On the other hand, there does appear to be room for stock markets in developing countries to expand. In 1991 the total stock market capitalization in developing countries was only about 6 per cent of that of the industrialized countries. Five markets accounted for about half of this, namely, the markets in Brazil, Mexico, South Korea, Taiwan and India. Only India is a Group C country and hence India is exceptional among the really poor countries.

The bond market in developing countries, after declining to insignificance during the 1970s when petrodollars were recycled by the commercial banking system, has now begun to revive. Foreign investment in bonds in Latin America, the largest regional market, rose from $2.7 billion in 1990 to an estimated $11.7 billion in 1992. 46  In common with other forms of private foreign capital, bond investments have been concentrated among a very small number of countries which have good international credit ratings. Eight countries in 1991 (Argentina, Brazil, Chile, Mexico, Venezuela, Hong Kong, Turkey and Hungary) accounted for 72 per cent of the international bonds issued by developing countries. All eight belong to Group B1. Only one Group C country, India, floated an international bond issue. 47

In order to attract foreign capital, the developing countries have had to offer high rates of interest and short maturities. One likely consequence of this is that the net resource flow will become negative rather quickly. In addition, resource flows are likely to be volatile. The reason for this is that the equity and bond markets in developing countries are thin and investments in them are risky. Prices are subject to sharp fluctuations in response to speculative sales and purchases and to changes in a country's creditworthiness. Foreigners as well as domestic investors are likely in effect to treat their investments in equities and bonds as short term assets and to withdraw from the market whenever short term prospects deteriorate. 48  The result of all this is that the financial markets are likely to be relatively unstable.
 

Long term lending to developing countries

By 1990 the debt crisis was under control in the sense that there was no longer a threat to the solvency of the international commercial banks. The heavily indebted developing countries however continued to carry a heavy burden and debt servicing continued to result in a negative net transfer of resources. Default for the largest debtor countries, a distinct possibility when the crisis erupted in 1982, no longer was likely and international efforts by the end of the decade were directed to rescheduling the debts (the Baker Plan) or to providing some degree of debt reduction (the Brady Plan) to some countries, mostly in Group B1.

The governments of many debtor countries assumed responsibility for servicing all foreign debts, both private and public, and hence in effect they nationalized private liabilities and transferred that part of the debt service burden that properly belonged to the private sector entirely to taxpayers. Bilateral and multilateral agencies, in contrast, were slow to respond by offering relief on the servicing of official debt. Under the "Toronto terms" of 1988 and the "enhanced Toronto terms" of 1991 some debt forgiveness occurred, mostly for Group C countries in Africa, but the amount of relief offered was not sufficient to alter the development prospects of the countries concerned. Cancellation of a substantial part of their debt would seem to be the only realistic solution if a resumption of growth in the relevant Group C countries is the objective. In Côte d' Ivoire, for instance, the ratio of debt to GNP in 1991 was 207 per cent; in Tanzania it was 187 per cent; in Mauritania, 165 per cent; in Sierra Leone, 142 per cent. 49

Table 4.5 contains data for 1990 on the flow of long term lending to developing countries, on both commercial and concessional terms, plus the reverse flow of interest payments. Loans are expressed in net terms, i.e., disbursements minus repayment of principal. Concessional loans (provided they contain a grant element of at least 25 per cent) are of course part of official development assistance and hence were covered in the sub-section that dealt with ODA. It is instructive to note here, however, that even when concessional loans are included with commercial loans, the net resource transfer to developing countries is either negative (in the case of countries in Group B1) or only marginally positive (Group B2 and Group C countries). (See row 3 of Table 4.5.) In terms of real GDP, the contribution of long term borrowing net of repayments of principal and interest is negligible or negative.

Source: World Bank, World Debt Tables 1992-1993, Washington, D.C. 1993, Vol. II.

The bottom half of the table contains data on long term loans made on commercial terms. When concessional lending is removed from the total, all three country groups experienced a negative net transfer of resources. The Group B1 countries had heavy interest payments to make--reflecting the massive borrowing during the 1970s--and as a result they experienced a negative resource transfer of $20.8 billion, equivalent to 0.65 per cent of their real GDP. The Group B2 countries also experienced a negative net transfer of resources equal to $2.7 billion or 0.06 per cent of their real GDP. Were it not for China, which had a large positive transfer of $2.6 billion, the overall picture for the Group B2 countries would have been much worse.

The Group C countries have traditionally been dependent on concessional loans and in 1990 the net resource transfer through concessional lending was $5.9 billion. This was largely offset however by a negative resource transfer of $4.8 billion as a result of commercial borrowings. This negative transfer was equivalent to 0.40 per cent of real GDP. India, for example, had net commercial loans of $1.4 billion but paid interest of $2.9 billion; the net resource transfer was thus a negative $1.5 billion. Nigeria's borrowing in 1990 was actually negative (0.6 billion), i.e., repayment of principal exceeded new loans. On top of this it had interest payments of $1.8 billion, and hence its resource transfer was a negative $2.4 billion.

It is clear from all of this that commercial lending to developing countries is unlikely to make a significant contribution to human development, especially in the Group C countries. In all three groups, net lending is small, interest payments are large and the net resource transfer is negative. Unless one believes that foreign borrowing enables countries to invest in projects with exceptionally high rates of return that otherwise would not be possible--and the evidence from the debt crisis contradicts this assumption--it is more likely that long term borrowing will result in a transfer of resources from poor countries to rich and periodically cause major economic disruptions in the debtor countries.
 

Summary of long term capital flows

In earlier sub-sections we examined separately three components of long term flows of capital that are largely market-driven, namely, foreign direct investment, long term loans and portfolio investment. 50  We took into account reverse flows of interest payments, profit remittances, repayment of principal and reinvestment of profits in order to estimate the net transfer of resources as part of a global balance sheet. Our purpose here is to bring all of this information together to produce an overall estimate of resource flows associated with long term movements of capital across international boundaries.

The data for 1990 are assembled in Table 4.6. Rows 1 and 2 of the table are straightforward. Row 3, "other long term capital", although a residual, includes recorded portfolio investment as well as, in principle, other recorded flows of capital. It is a large negative figure in all three country groups. Row 4 is the sum of all net flows of long term capital to developing countries, i.e., direct investment, commercial and non-commercial lending and portfolio investment. The figures are positive for all three country groups but smallest for Group C, the poorest countries.

Row 5 contains the data for factor payments other than labour. That is, it includes payments for the services of physical and natural capital, notably, profits, interest, dividends, rents and royalties.51  In all three groups of countries these service payments are large and negative, indicating that there is a large outflow of investment income from the developing to the developed countries. The net resource transfer, i.e., the net inflow of capital minus service payments on capital, is reported in row 6. It is negative in all three groups of countries and declines in absolute amount as one moves from the less poor to the poorest countries. That is, there was in 1990 a negative resource transfer of $36 billion in the Group B1 countries, $6 billion in the Group B2 countries and $4.8 billion in the Group C countries.

Source: World Bank,World Tables 1993, Baltimore: Johns Hopkins University Press, 1993.

The significance of these resource transfers can perhaps best be understood if they are expressed as a percentage of real GDP. This is what is done in row 7 of the table. There it will be seen that the outflow of resources associated with movements of long term capital was equivalent to 1.12 per cent of the real GDP of the Group B1 countries; in the Group B2 countries it was much lower, viz., 0.14 per cent and it rose to 0.31 per cent in the Group C countries.

A negative resource transfer does not imply that the market for long term capital is impoverishing the developing countries. If commercial transactions are entered into voluntarily, if prices accurately reflect social opportunity costs and if the capital inflows are used wisely -- three big ifs -- then there is a presumption that both parties benefit. But even in such cases a negative resource transfer does indicate that current inflows of capital are more than offset by an outflow of service payments on previous capital. This net outflow reduces the resources available for current expenditure, including expenditure on investment in physical and human capital, and hence lowers the potential rate of growth and the standard of living in future. A positive resource transfer, in contrast, increases the level of current expenditure and raises the potential rate of growth. Seen in this light, net resource transfers are one measure of the distribution of current gains from international transactions. The negative transfers from the developing countries indicate that they enjoy the smaller share of the benefits from global capital movements and given that they are much poorer than the Group A countries, negative transfers from the Group B and C countries accentuate global inequalities in the distribution of income. These market forces, in other words, are part of the mechanism for the international transmission of inequality.
 

Capital flight

Capital flight from developing countries constitutes an outflow of resources that otherwise could be used to finance investment and human development and promote faster economic growth. It offsets positive inflows of capital (foreign aid, commercial loans, foreign direct investment) and helps to perpetuate underdevelopment. World Bank calculations indicate that capital flight increased sharply beginning in 1977 and reached a peak in 1988. Since then it has declined somewhat but, as we shall see, substantial outflows continued in 1990. Indeed by the end of 1990 the cumulative total of flight capital from developing countries was approximately $700 billion, equivalent to more than half the size of the external debt of developing countries. 52  In effect, roughly half of the foreign borrowing by developing countries was transformed into an outward movement of private capital by citizens of the indebted countries.

Seen from a global perspective, the problem of capital flight was particularly large in Latin America. One conservative estimate covering the years 1973 to 1985 indicates that the loss of capital in 18 Latin American countries was $151 billion. In Argentina and Mexico, for example, the stock of flight capital in 1987 was equal to more than 70 per cent of their external debt. 53  But the problem was not limited to Latin America and, seen from the perspective of the impact on individual countries, capital flight was equally large in parts of Africa and Asia. For instance, at the end of 1990 the stock of flight capital was equivalent to about 80 per cent of the GDP of sub-Saharan Africa and about 95 per cent of the GDP of the countries of North Africa and the Middle East. 54  Many of these are among the poorest countries in the world and suffer from an acute shortage of capital and yet they regularly transfer a portion of their national savings abroad.

Our estimates of capital flight in 1990 indicate that the problem remains serious, particularly in the Group C countries. Our calculations are based on essentially the same methodology used by the World Bank. That is, capital flight is estimated as a residual from the balance of payments statistics. Specifically, we measure capital flight as the positive difference between the sources of external finance (foreign direct investment and external borrowing) and the uses of this finance (to cover the current account deficit and finance an increase in reserves). 55  If the uses exceed the sources of finance, then this is interpreted as evidence that flight capital is flowing back into the country; if sources exceed uses, flight capital is leaving the country.

This method implies a rather broad measure of capital flight, including both recorded and unrecorded flows, and hence our measure of capital flight overlaps to some extent with our earlier calculations of recorded portfolio investment. In order to avoid double counting, capital flight is not included in our balance sheet estimates. It should be recognized, however, that our calculations of capital flight almost certainly underestimate the correct total since our method of estimation does not permit us to include capital flight resulting from overinvoicing imports and underinvoicing exports, in practice a major source of capital outflows. On the other hand, some worker remittances (discussed below) probably are not fully recorded in the current account of the balance of payments and thus appear in the residual as movements of capital: an unrecorded inflow of workers remittances would result in an understatement of capital flight. Thus our estimates represent only rough orders of magnitude of capital flight. The results however appear to be broadly consistent with the estimates of recorded capital flows and we believe they represent the reality of capital movements in the global economy. The results are presented in Table 4.7.

Note: a minus sign indicates an outflow of flight capital; a plus sign indicates an inflow of repatriated capital.

The richest developing countries (Group B1) experienced a flight of capital in 1990 of approximately $11.2 billion. This outflow was equivalent to 0.35 per cent of their real GDP. Not all countries, of course, suffered from capital flight: there were large outflows in Argentina, Brazil, Hungary and Poland and significant inflows of repatriated capital in Chile, Malaysia, Portugal and Mexico. In the Group B2 countries the pattern was far from uniform, with many countries having large inflows and others equally large outflows, but for the group as a whole there was a small net inflow of about $0.6 billion. Repatriated capital was 0.02 per cent of their real GDP. The largest net inflow in the Group B2 countries was in Thailand, followed by Egypt and Botswana (part of which, we suspect, should have been recorded as workers remittances). There were significant outflows of capital in Algeria, the Philippines and Pakistan.

The largest occurrence of capital flight was in the Group C countries, i.e., in the poorest of the developing countries. In 1990 the outflow was approximately $18.9 billion or 1.22 per cent of their real GDP. That is, capital flight was of a similar magnitude as the inflow of official development assistance (1.3 per cent of GDP) that year. Moreover, capital flight appears to have affected almost all of the countries in Group C and hence was a fairly general phenomenon. Some of the hardest hit countries in the group were Angola, India, Bangladesh, Nigeria, Côte d'Ivoire, Senegal and the Sudan.

Again, as with recorded flows of capital, flight capital responds to market forces. Capital flight should not be viewed as an aberration -- a reflection of political instability, risk of nationalization, inappropriate macroeconomic policies -- but as a normal feature of the world economy. Unfortunately this feature operates to the disadvantage of developing countries, and particularly to the disadvantage of the poorest developing countries, but this is a fact of global economic life and not a random occurrence that can be disregarded.
 

Migration and worker remittances

As we have seen, international flows of capital are biased against developing countries in general and largely bypass the poorest countries, those in Group C. The net transfer of resources actually is negative. This raises the question whether flows of income arising from the operation of the international labour market offset or reinforce the income flows originating in capital markets. To answer this question let us examine the flow of worker remittances from the rich (Group A) countries to the developing countries (Groups B and C). As before, we use 1990 as the benchmark year.

There are three components to worker remittances: (i) "labour income" classified under net factor services in balance of payments accounts, (ii) "worker remittances" listed under unrequited private transfers in the balance of payments accounts and (iii) "migrant transfers" also listed under unrequited private transfers. "Labour income" consists of income earned by migrants working abroad for less than one year. That is, it is income sent home by workers who are regarded as temporary migrants. "Worker remittances" consist of income earned by migrants who have been abroad for more than one year. Such workers are more likely to be permanent immigrants. "Migrant transfers" correspond to the value of goods sent home by migrants and to changes in financial assets resulting from migration. Each component can be either a credit or a debit item in the balance of payments accounts. Many developing countries both receive migrants from other countries and export migrant labour abroad. Hence some countries are net recipients of remittances from abroad whereas others are net payers.

In Table 4.7 we present data on workers remittances in developing countries for 1990. Row 1 of the table contains the gross receipts for each of the three groups of countries. Groups B2 and B1 have much larger receipts than the Group C countries. Total receipts for the three groups of countries were about $35.4 billion or well above the $22.5 billion they received in the form of direct foreign investment. In row 2 we report the payments by each group of countries. Payments by the Group B1 and C countries were quite large and equivalent to 26.8 and 31.6 per cent, respectively, of the gross receipts of workers remittances.

The net receipts are reported in row 3. Net receipts in the Group B1 countries were $11.2 billion. Four countries, however, accounted for 105 per cent of the total, the rest on balance paying out more than they received in remittances. The four countries are Portugal, Greece, Turkey (which benefit from their association with the European community) and Mexico (which benefits from proximity to the United States). The Group B2 countries received somewhat more than the Group B1 countries, namely, $15.6 billion. Once again, however, net receipts were concentrated among a small number of countries: Morocco, Egypt, Pakistan, Yemen and the Philippines accounted for 76 per cent of the total.

Source:International Monetary Fund, Balance of Payments Statistics Yearbook 1992, Washington, D.C., 1992.

The poorest countries, Group C, received only $2.6 billion of remittances net of payments. This was equivalent to only 0.17 per cent of the real GDP of the Group (row 4) or less than half the amount received by the Group B1 (0.35 per cent) and B2 countries (0.37 per cent). In the case of the Group C countries, India and Bangladesh accounted for 105 per cent of total workers remittances, implying that other members of the group paid out more than they received. Angola and Côte d' Ivoire were the countries with the largest negative net receipts of workers remittances in Group C. The small inflow of remittances into the Group C countries as a whole did not compensate for the negative resource transfer arising from capital market transactions, shown in Table 4.6 to be equivalent to 0.31 per cent of their real GDP. This underlines the point that the Group C countries are on the margin of the global economy and have a strong case for special attention in the form of grants of foreign aid.

Seen from a world perspective, the total value of workers remittances in the global economy did rise very rapidly in the 1980s, increasing from $43.3 billion in 1980 to $65.6 billion in 1989. 56  The higher income developing countries (Greece, Portugal, Mexico) and some developed countries (Spain, Italy) were the largest recipients. Indeed at the end of the decade Spain and Italy alone were net recipients of $2.9 billion of remittances or more than all 51 Group C countries combined.

Much international migration consists of workers moving from one developing country to another, and hence many remittance flows circulate within the developing countries themselves with no net transfer from rich countries. There are estimated to be about 80 million migrants of various sorts in the world. Roughly 35 million of these are migrants within sub-Saharan Africa. That is, sub-Saharan Africa, which accounts for only 10 per cent of the world's population, contains within itself well over 40 per cent of the world's migrant population. The Côte d' Ivoire, for example, receives large numbers of migrants from Burkina Faso, Mali and Guinea. Large numbers of refugees from Mozambique and Ethiopia end up as migrants in Malawi, Zambia and Zimbabwe. Refugees from the Sudan become migrants in Ethiopia, and so on.

Despite the modest net transfer that occurs at present, workers remittances potentially could become a significant vehicle for alleviating global poverty and a more liberal international labour market could help to improve the allocation of resources throughout the world. Greater efficiency, reduced poverty and a more equitable distribution of income could go hand in hand. For this to occur, however, restrictions on immigration in the industrialized countries would have to be reduced. Liberal capital markets and liberal commodity markets are not substitutes for liberal labour markets and the removal of barriers to the migration of labour should become a high priority in the years ahead.
 

The export of human capital

At present the international labour market is characterized by a pronounced asymmetry. The migration of professional, managerial, technical and highly skilled labour encounters relatively few barriers whereas the migration of low-skilled workers, as we have seen, encounters numerous impediments. This asymmetry, paradoxically, damages the developing countries twice. First, barriers to the migration of low-skilled workers deprive developing countries of worker remittances. Second, the emigration of highly skilled workers -- sometimes called brain drain -- deprives developing countries of part of their stock of human capital. The question we consider here is the quantitative significance of the loss.

Unfortunately it is not possible to produce precise estimates of the losses suffered by developing countries as a result of brain drain. We can however obtain a sense of possible orders of magnitude by examining the immigration statistics of just one developed country, namely, the United States. The Immigration and Naturalization Service of the United States classifies immigrants by major occupational groups. As a proxy for the number of immigrants with a tertiary education we add the totals of two of the occupational groups, viz., "professional, specialty and technical occupations" and "executive, administrative and managerial occupations".

In 1990 alone there were 86,748 persons who migrated from the developing countries to the United States in these two categories. 57  The largest number (41,934) came from the Group B2 countries followed by the Group B1 (29,248) and Group C countries (15,566). This importation of human capital cost the United States nothing. How much did it cost the developing countries?

Let us assume, first, that tax financed subsidies of the primary and secondary education of migrants can be ignored. In countries where only a minority receive primary and secondary education this assumption clearly is false, but where primary and secondary education are widespread, it is reasonable to suppose that a family's tax payments to finance education are roughly offset by the educational subsidies received by the family's children. There is thus no net cost to the taxpayer. Second, we assume that the average highly skilled migrant has received four years of tertiary education in his country of origin. A few will have received fewer years of post-secondary education and some will have received more, but an average of four seems reasonable. Third, for purposes of illustration let us assume that all the migrants were educated in publicly financed institutions; none attended private colleges, universities or professional schools.

Under these assumptions the minimum cost to the country of emigration is the number of highly skilled migrants per year (HSM) times the long run marginal cost of providing one year of tertiary education (MC) times 4 (the average number of years of study per migrant):

Cost(min) = (4MC)HSM.

We assume for the purposes of calculation that MC can be approximated by the average recurrent cost of tertiary education. That is, we ignore the fixed costs of tertiary education (which biases our estimates of MC downwards) as well as tuition and user fees (which biases our estimates of the net cost to taxpayers upwards). We hope these biases roughly offset each other.

Note that the above formula produces a conservative estimate of the cost of brain drain, since it ignores the future benefits the rest of the population in the sending country would have received had the migrant chosen to remain at home. Note, too, that the formula understates the "savings" to the receiving country, since the marginal cost of providing tertiary education in a developed country is much higher than in a developing country. Finally, note that the net benefits to the receiving country are much higher than the minimum cost to the sending country. These net benefits consist of the "savings" in tertiary education expenditure (i.e., the cost of human capital formation) plus the discounted value of the contribution of migrants to national output and income (after deducting the remuneration of the migrants). These net benefits represent the maximum amount a developed country could pay in compensation without becoming worse off.

UNESCO compiles data on the average recurrent cost of tertiary education. The data for 1989-90 cover 28 developing countries which are broadly representative of our three groups. 58  The average annual recurrent cost per student in these 28 countries was $1850. This can be compared with the recurrent cost in the United States of $4352. That is, the recurrent cost per student in developing countries is only 43 per cent as high as in the United States. Assuming a little unrealistically that the quality of education across countries is comparable, the United States saves $17,408 (= 4 _ $4352) on each highly skilled migrant it imports.

In Table 4.9 we present two estimates of the minimum cost to developing countries of the export of human capital to the United States in 1990. The "basic estimate" in the Table is derived by applying the formula Cost(min) = (4MC)HSM to the data. Using this estimate it appears that the minimum cost was about $642 million.

In preparing the "adjusted estimate" we assume (i) that only 80 per cent of the highly skilled migrants attended publicly financed institutions of higher education and (ii) that tuition charges and other user fees covered 10 per cent of recurrent costs. The adjusted formula then becomes Cost(min) = 4(0.9MC)(0.8HSM). The adjusted estimates indicate that the cost of brain drain to the Group B1 countries was nearly $156 million; the minimum cost to the Group B2 countries of exporting human capital to the United States was more than $223 million, while the cost to the Group C countries was about $83 million. Hence in 1990 the total cost to developing countries of the migration of highly skilled labour to the United States was roughly $462 million.

Expressing the adjusted minimum cost as a percentage of real GDP, the figures seem rather small. Exports of human capital to the United States cost the Group B1 countries about 0.0049 per cent of their real GDP, whereas in the Group B2 and C countries the cost was slightly higher, namely, 0.0054 per cent. Had it been possible to include all of the Group A countries in our calculations, the total cost to developing countries would have been much higher, perhaps well over $1 billion a year. The loss to the poorest countries, those in Group C, which have only a thin layer of highly skilled labour, must have been particularly severe. Indeed it is probable that the loss to the Group C countries resulting from the emigration of highly skilled workers to Group A countries would have exceeded the value of the net inflow of long term loans. This, it will be recalled, was only about 0.01 per cent of their real GDP in 1990. Thus the flows of human capital worldwide exhibit a pattern broadly similar to the flows of finance capital. The developed countries exert a strong pull on all resources -- low skilled labour, human capital, finance capital -- and this tends to result in cumulative movements in output and income, polarization of opportunities and the perpetuation of global inequalities. Corrective measures are needed at a number of points, as we have emphasized throughout, and this in turn requires a new institutional framework for development cooperation.

39  The figures in the text are calculated from data published in World Bank, World Debt Tables 1992-93, Washington, D.C., 1992, Vol. II.

40  World Bank, World Debt Tables 1992-93, Washington, D.C. 1992, Vol. I, p. 21.

41  Data on net flows of FDI can be found in World Bank, World Tables 1992, Baltimore: Johns Hopkins University Press, 1992 and World Tables 1993, Baltimore: Johns Hopkins University Press, 1993. Data on the (gross) inflow of FDI in developed countries can be found in International Monetary Fund, Balance of Payments Statistics Yearbook 1992, Washington, 1992.

42  World Bank, Global Economic Prospects and the Developing Countries 1993, Washington, D.C., 1993, p. 35.

43  International Monetary Fund, Balance of Payments Statistics Yearbook 1992, Washington, D.C., 1992.

44  World Bank, World Debt Tables 1992-1993, loc. cit., p. 22.

45  World Bank, Global Economic Prospects and the Developing Countries 1993, loc. cit. , p. 36.

46  Ibid.

47  See International Monetary Fund, Private Market Financing for Developing Countries, Washington, D.C., December 1992, p. 23.

48  United Nations, World Economic Survey 1993, New York, 1993, p. 111.

49  World Bank, World Debt Tables 1992-1993, loc. cit., pp. 134-5.

50  The reader should recall that long term lending includes loans made on concessional terms. These loans respond not to market forces but reflect political decisions taken by aid agencies.

51  Row 5 also includes interest payments on short term debt and hence our estimate of the net resource transfer from developing to developed countries (row 6) is slightly overstated.

52  World Bank, Global Economic Prospects and the Developing Countries 1993, Washington, D.C., 1993, p. 24.

53  Manuel Pator, Jr., "Capital Flight from Latin America," World Development, Vol. 18, No. 1, January 1990, pp. 1 and 3.

54  World Bank, Global Economic Prospects and the Developing Countries 1993, loc. cit. , p. 24.

55  External borrowing in 1990 is estimated as the net change in external debt between 1989 and 1990, with account taken of debt reduction, private unguaranteed debt flows and the depreciation of the U.S. dollar in 1990. The change in reserves takes into account the stock of gold held by the monetary authorities and foreign assets held by commercial banks. In order to maintain consistency we relied as much as possible on statistics from the World Bank, World Debt Tables 1992-93, Washington, D.C., 1992. Where necessary we incorporated statistics from the International Monetary Fund, Balance of Payments Statistics Yearbook 1992, Washington, D.C., 1992.

56  Sharon Stanton Russell and Michael S. Teiltelbaum, International Migration and International Trade, World Bank Discussion Paper No. 160, World Bank, Washington, D.C., 1992.

57  Statistical Yearbook of the Immigration and Naturalization Service 1990, United States Department of Justice, Washington, D.C., 1990.

58  UNESCO, Statistical Yearbook 1992, UNESCO: Paris, 1992.