Regionalization and Capital Movement

It is a well-known fact and dominant theory that development, defined as a process of improvements in a population's standards of living with associated structural or institutional change, requires access to and the accumulation of capital. Of course, capital, as wealth begetting wealth, or the sum total of society's productive resources, takes diverse forms: financial, physical, natural, human, and social. At issue in the development process is the accumulated stock of capital in these diverse forms, as well as their cross-national flows—international resource flows, if you will. As for money or financial capital, the most mobile form of capital, the international transfer process (the flow of capital) occurs in the form of bank capital (loans or debt financing), portfolio investments, and foreign direct investment. These transfers make up what can be termed private capital flows. Then there are also official capital flows via the operations of bilateral and multilateral aid or donor agencies. The following table records in statistical form the volume of private and official capital flows from the North to the South. Of course, capital flows in other directions as well, and the table does not record the corresponding outflows of capital in the form of debt payments, royalty charges, repatriated profit, and corporate dividends. According to the United Nations Conference on Trade and Development's World Development Report 2003, the combined South-North outflows of capital might well exceed the inflow.

The international flow of capital is generally viewed as a catalyst and necessary condition of development. Foreign direct investment, a type of capital that is associated with the multinational corporation, is generally regarded as the “backbone of development finance.” Portfolio investment, another form of private capital flow, tends to be more short-term and is much more volatile in its international operation and movements—so much so that in its unregulated form it has been held responsible for the financial crisis that hit Asia in the summer of 1997, with a devastating effect on the real or productive economies in the region.

Another important factor in international resource transfers, or the flow of capital, is the composition of this flow. As indicated in the preceding table, some regions (e.g., sub-Saharan Africa) are more dependent on official financial resource transfers than private capital for their economic development. Elsewhere in the South, especially in Latin America, the dominant flow of capital is private and increasingly composed more of foreign direct investments and less of bank loans (debt financing) or official transfers. The reason for this, although not immediately evident from the data, has to do with the agenda of the World Bank and the International Monetary Fund in the 1980s: to push and pull Latin American governments into the “new world order” of globalized capital, deregulated markets, free trade, and private-sector-led development. The end result of these push and pull pressures was a deregulation of product, capital, and labor markets and a process of financial liberalization, as government after government in the region eliminated its restrictions on the operations of foreign direct investment. Much of this foreign direct investment was used not to induce a process of technological transformation, and thus increase productivity and economic growth, but to acquire the privatized public assets and forms put on the auction bloc in the 1990s.

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