This post first appeared in the CIGI blog, Wealth and International Politics.
If you have been reading The Economist, Financial Times and other financial papers, you'll notice an odd conundrum that to me, as a political economist, does not add up.
On the one hand, we are told in Western media that capital is increasingly held in the private sector's coffers. Private companies and firms are sitting on capital and not spending it. Worried that a rainy day is before them, so we are told, those in the private sector have not expanded their operations. For some policy makers who lament this state of affairs, like our Canadian Finance Minister Jim Flaherty, it is a lost opportunity to see the strong economic growth rates that will help the West get out of its slump.
The numbers are pretty staggering too. U.S. firms have $1.8 trillion in their coffers and European Union firms have $1.5 trillion.
Western policy makers, or simply governments, are told that they need to keep creating the supportive environment to make private businesses confident in their long-term prospects. But note the kicker here is that Western governments are not supposed to regulate, over-manage or dictate. Yes, governments need to remind businesses that that they are pretty, otherwise they won't go out to the prom, so to speak.
If you find this frustrating, you are not alone and let's create a club.
But, what makes this more complex to me is that on the other side of the world, in the nebulous East or emerging market economies, it is governments that have all the capital in their coffers and hoarding their own capital for the rainy day when, they believe, Western governments might just mess things up again á la 2007-2008.
In most emerging market economies, it is the state or government that is expected to be the engine of growth, but they are cautious savers and afraid of global volatility. Plus, they tend to be new at democracy or still on the path of political liberalization and they fear the demands of their own publics -- who want all the goods and services that a modern, urban society should offer them -- but are also mindful of inflation and the ills of market distortions.
And what about the rest, those not in the West and in emerging market economies? They don't have capital in their coffers, capital on the private market is generally expensive because of so much global uncertainty. So what is a country to do? The buzz phrase: public-private partnerships. Yes, donors, international financial institutions, and governments alike now talk about the need for private and government capital to create profit-making projects and services for its people. Truth is, this doesn't work in plenty of industries and sectors where the private sector can't make the profit off the back of ordinary people: think sewage systems and roads in the developing world.
So something doesn't add up to me. Our modern capitalist system has Western governments unable to tell its teenager what to do -- fluid capital can be finicky. In the emerging market economies, there is plenty of capital but they are obsessed with calibrating the pace of economic growth with political change. And the rest? Well they just wish everyone would get along and invest in helping them to meet the development challenges of the masses. Where's all the money?