by David S. Waddell
Capital is a migratory species. Money moves in search of a host that will protect it, nurture it, and expand it. Early transactions relied on unlimited bartering options: You have corn, I have meat, let’s negotiate. This made transactions possible but greatly limited commercial mobility.
As societies evolved, a combustive combination of reduced political, logistic, and communication frictions liberated global trade and money migration potential. Up until the 1800s, trade between nations only accounted for 5 to 10 percent of global economic activity. This number doubled entering the 1900s and has since grown exponentially to over 60 percent today.
With 60 percent of the world’s economy border hopping, the competition for resources has become fierce. Globalization — the integration and collision of nations, cultures, and capital — defines our time and our potential for prosperity. In the following series of columns, I hope to provide some perspective on my own journey to understanding the implications and opportunities inherent.
First, let’s “follow the money.”
The United States has long held the lead in attracting global capital. Our hospitable combination of reliable property rights, advanced capital markets, national stability, and capitalist culture make us a prime destination for migratory money. Of the $1.7 trillion in total foreign direct investment last year, the U.S. welcomed $384 billion of it. However, large corporate mergers and acquisitions account for the majority of this figure, and most economists classify the value of M&A as “neutral.” The real productivity-enhancing investments fall under the banner of “greenfield” capital flows. These flows include new capital projects that create jobs and enhance productivity. Of the $713 billion in greenfield capital flows last year, only $59 billion came to the U.S. In fact, North America attracted less greenfield investment flow than any other region. Asia attracted the most with 45 percent of capital flows, while India took top honors with $63 billion in new projects. Europe acted as the lead capital provider, sending out $100 billion more than it took in. Overall, Asia, Latin America, and Africa added productive capital while Europe and the U.S. provided it. According to these net capital assessments, global economic investors prize growth over stability.
Globalization drives nations toward equilibrium. Rich countries fund poor countries in an effort to receive a return on modernization. China’s rise since 1980 has astonished observers but merely reflects the rapid and efficient capacities of the networks that span the globe. Today, the U.S. has a GDP per capita of $55,000; up three-fold from $14,000 in 1980. Over the same period, China increased its per capita GDP 40-fold from $200 to $8,000. While prosperity rose in both nations, the speed differential has clearly bred fear and resentment within the U.S. The U.S. may have adopted a foreign policy of “containment” towards China, but the capital markets demonstrate opposite intent. Unfortunately, while globalization aims to allocate resources efficiently, it does not allocate them equally. This leads to national power transfers, wealth disparity, and corrective politics. These factors act as globalization decelerators. The economic quest for equilibrium will severely stress the political status quo. That’s what makes globalization tantalizing … and terrifying.
David S. Waddell is CEO of Waddell and Associates. He has appeared in The Wall Street Journal, Forbes, and Business Week.
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