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,
Sincerely
yours,
Evgenia
Shvetsova