Equity, foreign investment and international competitiveness

Abstract

Is the degree of competitiveness of countries independent of their degree of inequality? Is competitiveness only a question of microeconomic and sectoral efficiency, of the real exchange rate, or is it also a social question? So far, the specialized literature has ignored the problem of equity in the determination of countries' competitiveness. It has then been unable to provide a full explanation of the competitiveness actually observed, however. In this article, equity is incorporated into the production function and also into investors' decisions in a world of perfect mobility of capital. The predictions of the proposed theoretical system are generally consistent with the data observed in the world economy. In particular, Latin American displays the highest degree of inequality of all the regions of the world, yet its share of foreign direct investment flows is low, and so is its share of world trade (its competitiveness);. The theory presented here and the data assembled suggest that the relative levels of productivity of countries depend in a positive manner on the allocation of investments, and this allocation in turn depends, likewise in a positive manner, on the degree of equity prevailing in the countries. The competitiveness of a country therefore depends, among other factors, on its degree of economic inequality. Societies compete in the capital market, seeking to attract private investment in order to make themselves competitive in the goods market, and this is influenced, among other factors, by their current degree of equity.