Your Royal Highness,
I write as a graduate economics student at University College London to express my concern about misconceptions about financial globalization that frequently prevent policy makers from exercising reasonable economic prudence and entice them into making fatally dangerous decisions.
The distorted view of financial globalization by and large stems from an economic report entitled “The Marginal Product of Capital” published by Francesco Caselli of London School of Economics and James Freyer of Dartmouth College in August 2005. The authors purport to have collected sufficient empirical evidence of marginal product of reproducible capital being equalized across countries (Caselli and Feyrer). Such evidence would mean that each additional unit of reproducible capital obtained through the means of investment, be it in the U.S. or the Republic of Congo, would result in exactly the same increase in output ceteris paribus. It has already discouraged too many investors from investing in developing countries and caused too many controversies and heated debates among contemporary economists, forcing many of us to divert our time and energy to rearguard the defense of the neoclassical theory of economics, that has served us well for more than one hundred years, instead of devoting our resources to impart our enthusiasm for financial globalization to young minds.
Yet the evidence for the pros of financial globalization grows day by day and has never been stronger. Countries like Brazil, India, Japan, South Korea, Thailand, and any other economic actor that at some point in time chose to run a current account deficit or surplus, has reaped the benefits of financial globalization. Financial globalization has the potential to Pareto-efficiently reallocate resources between the countries in concurrence with the base principles of supply and demand and, coupled with sagacious microfinance strategies, can significantly improve lives of people in less economically developed countries, many of whom lead their existence below the poverty line.
Less economically developed countries would not have been banished from foreign investment and would have continued following their path toward economic prosperity but for the questionable evidence of equalized marginal capital promulgated by the report. Strikingly enough, it has never been subjected to the true rigors of scientific approach and skepticism. No reputable economist debates the utility of financial globalization and doubts the erroneous nature of Caselli’s and Freyer’s findings. The authors fail to pay due attention to how low their subject countries score on indexes, such as the rule of law, judicial efficiency, contract repudiation, accounting standards, and risk of expropriation. In fact, their scores on these indexes are almost twice as low compared to the average scores of more economically developed countries (Henry). If Caselli and Freyer truly fail to appreciate that such extraneous variables could skew their data, then they inevitably fall short of the standard of evidence required by modern-day economics.
Nevertheless, proponents of financial globalization are harried and stymied, hassled and bullied by well-organized, well-financed, and politically muscular groups of gullible ignoramuses. Once we were tempted to laugh this thing off, however matters have only aggravated with the onset of global financial crisis fallaciously attributed to financial globalization and the whole system being consequentially put to a shameful, disgraceful, and biased trial in organizations such as the World Bank, the International Monetary Fund, and the World Economic Forum. Needless to say, it has so far withstood the assaults having retained its usual elegance.
It may not be wise to acclaim financial globalization as the perfect economic paradigm. We are privy to its pitfalls and perils and are currently working on their abatement, if not complete elimination. However, to dispose of it as a frivolous and irrational idea, to deny the very existence of its advantages and to challenge its unconditional superiority to all of the past economic paradigms we have had the advantage to experience is analogous to disputing the theory of evolution or the heliocentric theory. I wish to reiterate that no reputable economist is at quarrel with financial globalization.
I would like to launch a more extensive research campaign in order to attempt to measure the marginal product of capital across a large sample of countries in order to pinpoint the drawbacks in Caselli’s and Freyer’s approach and to reaffirm the principles of neoclassical economics. The campaign would require adequate funding in order to collect and process great amounts of data and to redress the imbalances in national accounts of developing countries, as they are notoriously rife with significant inaccuracies. Until there is sufficient evidence available as to the efficiency of financial globalization, the policy makers are going to be playing with fire without really appreciating the consequences of their decisions to their fullest extent and potential.
Think about it, Treasurer. Be careful, banker. You are playing with dynamite, fooling around with a misunderstanding that is waiting to happen – one might even say bound to happen. Should you not take greater care when examining surmises as far-fetched and counterintuitive? Lest ye make a gross financial misprediction, should you not be going out of your way to verify the doubtful figures presented to you and lend active and enthusiastic support to the science of economics instead of yielding to superstitions and myths?
Gains from financial globalization are a fact. Beyond reasonable doubt, beyond serious doubt, beyond sane, informed, intelligent doubt, beyond doubt, gains from financial globalization are a fact. The case for financial globalization is as strong as the case for free and unregulated market or the case for a democratic society. It is the plain truth that free movement of capital can improve the economic position of billions of people around the world. That did not have to be true. It is not self-evidently, tautologically, obviously true, and there was a time when most people, even educated people, thought it was not. It did not have to be true, but it is. We know this because a rising flood of evidence supports it. Financial globalization is the economically prudent strategy of the 21st century world, and my research campaign aims to demonstrate it.
I will be very thankful to you for any support you can offer as a chancellor of University College London. I will be delighted to take an opportunity to discuss my research plan with you and urge you to be seized of the matter.
Looking forward to hearing from you,
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