JEDDAH, 30 August 2004 — Today, most people regard the considerable differences in the standard of living between many countries as unsatisfactory. Today all people who have not attained the average standard of living of the United States believe that there is something wrong with their own economic situation. Many of these countries call themselves “developing countries” and, as such, are asking for aid from the so-called developed or even overdeveloped countries.
Let me explain the reality of this situation. The standard of living is lower in the so-called developing countries because the average earnings for the same type of labor is lower in those countries than it is in some countries of Western Europe, Canada, Japan, and especially in the United States. If we try to find the reasons for this difference, we must realize that it is not due to an inferiority of the workers or other employees.
It is a fact that outside of the United States, Canada, Western Europe, and certain parts of Asia the equipment of the factories and the technological methods employed are, by and large, inferior to those within the United States. But this is not due to the ignorance of the entrepreneurs in those “undeveloped” countries. They know very well that the factories in the United States and Canada are much better equipped. They themselves know everything they must know about technology, and if they do not, they have the opportunity to learn what they must know from textbooks and technical magazines which disseminate this knowledge. The difference is the supply of capital, the quantity of capital goods available. In other words, the amount of capital invested per unit of the population is greater in the so-called advanced nations than in the developing nations.
A businessman cannot pay a worker more than the amount added by the work of this employee to the value of the product. He cannot pay him more than the customers are prepared to pay for the additional work of this individual worker. If he pays him more, he will not recover his expenditures from the customers. He incurs losses and, a businessman who suffers losses must change his methods of business, or go bankrupt.
The employers in all of these developing nations know very well that better tools would make their own enterprises more profitable. They would like to build more and better factories. The only thing that prevents them from doing it is the shortage of capital.
The greatest event in the history of the nineteenth century was the development of foreign investment.
At the beginning of the 19th century, foreign investment meant that British capitalists invested British capital in other parts of the world. They first invested it in those European countries which, from the point of view of Great Britain, were short of capital and backward in their development. It is a well-known fact that the railroads of most European countries, and also of the United States, were built with the aid of British capital. The gas companies in all the cities of Europe were also British. In the same way, British capital developed the railroads and many branches of industry in the United States.
We have to realize that, in all countries except England, foreign capital investment played a considerable part in the development of modern industries.
Foreign investment is made in the expectation that it will not be expropriated.
The situation in the world today, created by the system of expropriation of foreign capital, consists either of direct expropriation or of indirect expropriation through foreign exchange control, tax discrimination, or corrupt judicial system. This is mainly a problem of developing nations.
The other problem in the developing nations is domestic capital accumulation. There is no sufficient-domestic saving, worse yet, in the case of Saudi Arabia there is a net saving outflow to Europe and the Americas and capital investment from abroad is seriously reduced by the fact that our judicial system is inefficient. How can we, Saudis, talk about industrialization, about the necessity to develop new plants, to improve conditions, to raise the standard of living, to have higher wage rates, better means of transportation, if we are doing things that will have precisely the opposite effect? What our current policies actually accomplish is to prevent or to slow down the accumulation of domestic capital and to put obstacles in the way of foreign capital. What is lacking in order to make the developing countries as prosperous as the United States is only one thing: Capital-and, of course, the freedom to employ it under the discipline of the market and not the discipline of the government. These nations must accumulate domestic capital, and they must make it possible for foreign capital to come into their countries.
For the development of domestic saving it is necessary to mention again that domestic saving by the masses of the population presupposes a stable monetary unit. This implies the absence of any kind of inflation.
Capitalists have the tendency to move toward those countries in which there is plenty of labor available and in which labor is reasonable. And by the fact that they bring capital into these countries, they bring about a trend toward higher wage rates.
A higher standard of living also brings about a higher standard of culture and civilization.
(Abdelmenem Jamil Addas ([email protected]) is a professor of financial markets, at the College of Business Administration. He is based in Jeddah.)
