The Impact Of Capital Imports On The Structure Of Developing Countries

The essay examines the influence of capital imports on the structure of a developing economy. A significant and persistent capital import will result in a relatively low foreign exchange rate. Consequently, the share of internationally tradable goods and services in national product tends to be low. This will be reflected in a higher share of services and in a smaller share of agriculture and manufacturing in national product and in the labour force of an import surplus economy as compared with a balancing economy with the same internal resources. International comparisons show larger differences in productivity for tradable goods and services than for non‐tradable goods and services. Considerable gains can, therefore, be obtained in low‐productivity countries by enlarging the production of non‐tradables and by limiting the production of tradables to those with a high comparative advantage. Thus, the average capital/product ratio tends to be smaller and average product per employed person larger, when there are significant and persistent import surpluses as compared with a situation in which international accounts are balanced. This, together with the larger investments made possible by capital imports, will increase the growth rate. But the import surplus economy becomes structurally dependent on capital imports. To be able to balance its international accounts it must adjust its structures, i.e. increase the share of tradable goods and services in national product so that it can replace import surplus by larger exports and by import substitutes and increase domestic savings. To achieve this a deliberate government policy is necessary.