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Dependence on Foreign Investment and Economic Growth in the Third World

Published online by Cambridge University Press:  13 June 2011

Robert W. Jackman
Robert W. Jackman
Affiliation:
Michigan State University
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Abstract

Estimates of the extent to which Third World countries have experienced slower rates of growth than those in the industrialized West since i960 indicate a weak relation between initial wealth and subsequent economic growth that follows an inverted U-shape pattern: while the lowest growth rates are found among the poorest countries of the Third World, the highest growth rates are found not in the industrialized West, but in the wealthiest Third World countries. Drawing on contending arguments associated with modernization and dependency perspectives, the relationship between foreign investment and growth within the Third World is examined. Results undermine the idea that foreign investment inhibits growth, suggesting instead that flows of foreign investment may facilitate growth, especially among the initially wealthier countries of the Third World.

Type
Research Article
Information
World Politics , Volume 34 , Issue 2 , January 1982 , pp. 175 - 196
Copyright
Copyright © Trustees of Princeton University 1982

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References

1 See, e.g., Myrdal, Gunnar, Rich Lands and Poor (New York: Harper & Row, 1957)Google Scholar, and Portes, Alejandro, “On the Sociology of National Development: Theories and Issues,” American Journal of Sociology, Vol. 82 (July 1976), 55–85.CrossRefGoogle Scholar

2 A term coined by Merton, Robert K., “The Matthew Effect in Science,” Science, Vol. 159 (January 1968), 56–63.CrossRefGoogle Scholar

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5 This distinction is, of course, common in the recent literature. However, it is important to recognize that the labels are quite broad, since there is considerable heterogeneity of views within the dependency and (especially) the modernization approaches. Indeed, apart from this distinction (which itself only reflects a tendency), there is little that unifies the studies typically labeled as examples of the modernization perspective.

6 For example, see Chase-Dunn (fn. 4, 1975); Bornschier, Volker, Chase-Dunn, Christopher, and Rubinson, Richard, “Cross-national Evidence of the Effects of Foreign Investment and Aid on Economic Growth and Inequality: A Survey of Findings and a Reanalysis,” American Journal of Sociology, Vol. 84 (November 1978), 651–83CrossRefGoogle Scholar; and Snyder, David and Kick, Edward L., “Structural Position in the World System and Economic Growth, 1955–1970: A Multiple-Network Analysis of Transnational Interactions,” American Journal of Sociology, Vol. 84 (March 1979), 1096–1126.CrossRefGoogle Scholar

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8 See, for example, Bauer, Peter T. and Yamey, Basil S., The Economics of Underdeveloped Countries (Chicago: University of Chicago Press, 1957)Google Scholar, chap. 10.

9 Stoneman, Colin, “Foreign Capital and Economic Growth,” World Development, in (January 1975), 11–26.CrossRefGoogle Scholar

10 Chase-Dunn (fn. 4, 1975), 720.

11 Bornschier and others (fn. 6), 652.

12 Snyder and Kick (fn. 6), 1123. However, the analyses underlying this conclusion are not especially robust: see Jackman, , “A Note on the Measurement of Growth Rates in Cross-national Research,” American Journal of Sociology, Vol. 86 (November 1980), 604–17, at 607–11.CrossRefGoogle Scholar

13 Most of this literature is listed in Bornschier and others (fn. 6).

14 However, many of these studies also draw on Wallerstein's world-system analysis, which, paralleling Frank's work (fn. 7), does imply such an outcome: see Wallerstein, Immanuel, The Modern World System (New York: Academic Press, 1974).Google Scholar Nor is the view of dependency in the studies cited above unique to those analyses. A similar interpretation is clear, for example, in case studies which indicate that dependency has fostered growth and which then interpret this pattern as undermining or substantially modifying the world-system/dependency perspective: see, among others, Barrett, Richard and Whyte, Martin K., “Dependency Theory and Taiwan: A Deviant Case Analysis,” American Journal of Sociology, Vol. 87 (forthcoming)Google Scholar, and Milkman, Ruth, “Contradictions of Semi-Peripheral Development: The South African Case,” in Goldfrank, Walter L., ed., The World System of Capitalism: Past and Present (Beverly Hills, Calif.: Sage, 1979), 261–84.Google Scholar For more general criticisms of the world-system/dependency approach, see, for example, Gourevitch, Peter, “The International System and Regime Formation,” Comparative Politics, x (April 1978), 419–38CrossRefGoogle Scholar; Smith (fn. 3); and Zolberg, Aristide R., “Origins of the Modern World System: A Missing Link,” World Politics, XXXIII (January 1981), 253–81.CrossRefGoogle Scholar

15 Snyder and Kick (fn. 6), 1097.

16 Chase-Dunn (fn. 4, 1975).

17 Bornschier and others (fn. 6), 671–77.

18 See, among others, Coale, Ansley J. and Hoover, Edgar M., Population Growth and Economic Development in Low-Income Countries (Princeton: Princeton University Press, 1958)Google Scholar; Bairoch, Paul, The Economic Development of the Third World Since 1900, trans, by Postan, Cynthia (Berkeley: University of California Press, 1975)Google Scholar, chap. 1; and Robinson, Joan, Aspects of Development and Underdevelopment (Cambridge: Cambridge University Press, 1979), 7–10.Google Scholar

19 Chenery, Hollis and Syrquin, Moises, Patterns of Development, 1950–1970 (New York: Oxford University Press, 1975)Google Scholar, chap. 4. This is not to imply that any scale effects due to population size can be achieved through very high rates of fertility. The two factors are quite distinct. Indeed, a disproportionately young, nonproductive population is more likely to strain existing resources than to allow for economies of scale.

20 Among the factors I have not included, one of the more interesting may be agricultural productivity (see, for example, Bairoch [fn. 18], chap. 2). Unfortunately, this omission must stand here since appropriate data are unavailable.

21 Rare exceptions include Kaufman, Robert R., Geller, Daniel S., and Chernotsky, Harry I., “A Preliminary Test of the Theory of Dependency,” Comparative Politics, VII (April 1975), 303–30CrossRefGoogle Scholar, at 307–08, and Ray, James L. and Webster, Thomas, “Dependency and Economic Growth in Latin America,” International Studies Quarterly, XXII (September 1978), 409–34, at 411.CrossRefGoogle Scholar

22 Marx, Karl and Engels, Frederick, The Communist Manifesto (New York: Path finder Press, 1970), 20.Google Scholar

23 Lenin, V. I., Imperialism: The Highest Form of Capitalism (Peking: Foreign Language Press, 1965).Google Scholar

24 Frank (fn. 7); Bodenheimer, Susanne J., “Dependency and Imperialism: The Roots of Latin American Underdevelopment,” Politics and Society, II (May 1971) 327–57.CrossRefGoogle Scholar

25 Portes (fn. I), 75. For similar arguments, see Cardoso, Fernando H., “The Consumption of Dependency Theory in the United States,” Latin American Research Review, XII (Spring 1977), 7–24Google Scholar; Weisskopf, Thomas E., “Dependence as an Explanation of Underdevelopment: A Critique,” mimeo (Center for Research on Economic Development, University of Michigan, 1977)Google Scholar; and Valenzuela and Valenzuela (fn. 4), 536.

26 Cardoso, Fernando H. and Faletto, Enzo, Dependency and Development in Latin America, trans. by Urguidi, Marjory M. (Berkeley: University of California Press, 1978)Google Scholar, xxiii; emphasis added. See also Stallings, Barbara, Economic Dependency in Africa and Latin America (Beverly Hills, Calif.: Sage, 1972), 35–44.Google Scholar

27 Along with the quantitative studies of the impact of dependence on growth mentioned earlier, there has been a growing number of studies of the effects of dependence on inequality within countries: for example, Chase-Dunn (fn. 4, 1975); Born-schier and others (fn. 6); Bornschier, Volker and Ballmer-Cao, Thanh-Huyen, “Income Inequality. A Cross-national Study,” American Sociological Review, XLIV (June 1979), 487–506CrossRefGoogle Scholar; and Evans, Peter B. and Timberlake, Michael, “Dependence, Inequality, and the Growth of the Tertiary: A Comparative Analysis of Less-Developed Countries,” American Sociological Review, XLV (August 1980), 531–52.CrossRefGoogle Scholar With few exceptions, these analyses have provided support for the dependence-inequality relationship. Evans and Timberlake go as far as to suggest that this relationship is therefore “one of the most robust quantitative, aggregate findings available” (p. 532). There is an interesting paradox here. On the one hand, the quantitative literature says that dependence retards growth, while on the other hand it maintains (often in the same study) that dependence increases inequality. If Cardoso and Faletto (among others) are correct, these two patterns are contradictory. They are also contradictory if we take seriously the view advanced some time ago by Olson that rapid economic growth inherently exacerbates social inequality and is therefore politically destabilizing; see Olson, Mancur, “Rapid Economic Growth as a Destabilizing Force,” Journal of Economic History, XXIII (December 1963), 529–52.CrossRefGoogle Scholar

28 Portes (fn. I), 59.

29 The former figures appear in World Bank, World Development Report, 1980 (Washington, D.C.: World Bank, 1980)Google Scholar, table 1; the latter are in World Bank, World Tables, 1971 (Washington, D.C.: World Bank, 1971).Google Scholar

30 These three countries are identified in World Bank, World Tables, The Second Edition, 1980 (Baltimore: The Johns Hopkins University Press, 1980), 470–71.Google Scholar Note, however, that the same pattern is obtained when both sets of countries are included in the analysis, and whether or not Kuwait is included (Kuwait is an outlier here, with an extremely high initial per capita GNP coupled with a negative growth rate of −2.3%).

31 Chenery and Syrquin (fn. 19).

32 There is, of course, considerable collinearity between logGNP per capita and its square. This, however, is not a problem in the present analysis, for two reasons. First, despite the collinearity, the t-ratios are high. Second, an alternative estimation procedure that reduces the collinearity gives the same results. Specifically, instead of estimating (where X = logGNP per capita):

We subtract the mean of X from X and then estimate:

This procedure removes the collinearity for the purposes of estimation while generating the same curve, since For discussion on centering X around its mean (or some other constant) to reduce collinearity in polynomial regression, see Ralph A. Bradley and Sushil S. Srivastava, “Correlation in Polynomial Regression,” The American Statistician, XXXIII (February 1979), 11–14. I would like to thank Kenneth Bollen for drawing this procedure and reference to my attention.

33 World Bank (fn. 30), 470–71.

34 Compare Bairoch (fn. 18), 210.

35 The 1960 to 1974 figures are from World Bank, World Bank Atlas, 1976 (Washington, D.C.: World Bank, 1976).Google Scholar

36 Snyder and Kick (fn. 6).

37 World Bank (fn. 30), 470–71.

38 World Bank (fn. 29, 1980), table 5. Here and elsewhere, I employ the most recent estimates available, since the World Bank and other agencies are continuously revising their estimates for earlier as well as for more recent years. Typically, these revisions are minor.

39 World Bank, World Tables, 1976 (Baltimore: The Johns Hopkins University Press, 1976)Google Scholar, Series I.

40 For example, Bornschier and others (fn. 6), and Evans and Timberlake (fn. 27).

41 OECD, Stock of Private Direct Investment by DAC Countries in Developing Countries, End 1967 (Paris: OECD, Development Assistance Directorate, 1972).Google Scholar

42 Bornschier, Volker and Heintz, Peter, Compendium of Data for World-System Analysis (Zurich: Bulletin of the Sociological Institute, University of Zurich, 1979),Google Scholar table 3.2.1.

43 The latter data are from World Bank (fn. 30), Series I.

44 See Barclay, George W., Techniques of Population Analysis (New York: John Wiley, 1958), 28–33Google Scholar; arRl Taylor, Charles L. and Hudson, Michael C., World Handbook of Political and Social Indicators, 2d ed. (New Haven: Yale University Press, 1972), 286.Google Scholar

45 Data are from World Bank (fn. 39), Series I.

46 The 1977 figures are from World Bank, World Development Report, 1979 (New York: Oxford University Press, 1979)Google Scholar, table 18; those for 1960 are from World Bank (fn. 29, 1980), table 18.

47 For example, Chase-Dunn (fn. 4, 1975); Stoneman (fn. 9); Bornschier and others (fn. 6).

48 Unlike some other recent models (e.g., Bornschier and others, fn. 6), mine does not include initial per capita GNP as an explanatory variable in equation (1). Since the model is estimated below for two groups of countries defined in terms of their initial per capita GNP, the inclusion of this variable on the right-hand side of equation (1) would have served only to control twice for the same variable.

49 Stoneman (fn. 9); Bornschier and others (fn. 6).

50 Chenery and Syrquin (fn. 19), chap. 4.

51 Some of the earlier studies also suffer from problems of heteroscedasticity, on which see Jackman (fn. 12). That is not an issue in the present analysis. Note also that Bornschier and others (fn. 6) employ a different deflator for the stock of foreign investment (the geometric mean of energy consumption and population size). However, my own checks indicate that this does not account for the differences between my results and theirs.

52 Bauer and Yamey (fn. 8), 143.