What could be our approach to the problem ? There are those who lament the passing away of the age of liberalism, thinking that it is restrictionism in international trade that is responsible for the widening gulf between countries, that the removal of restrictionism is the way to international economic balance.
The argument has a good deal of validity in so far as the ‘world’ consists only of the countries of Western Europe. The establishment of the European Free Trade Area and the European Common Market is surely a move in the right direction. But when our world includes, as it does, the under-developed countries as well, the situation takes on a different complexion. Free trade between unequals, as we have seen, accentuates inequality instead of reducing it. It may perhaps be argued, however, that the principle of economic movement of capital and labour. And of course, whatever may be the implications of free trade in goods, movement of factors as such should be a force towards equalizing factor incomes in different countries.
If capital flows to where there is scarcity, and labour moves away from where there is abundance of it, tendencies are surely released which make for an approach towards international economic equality. There is no doubt that in some form or other this is the approach that one would recommend. But the approach is not as simple as it appears. So international economics is most important.
There are serious limitations to mobility of labour. One would surely look askance at the rigid immigration laws operating in the ridiculously sparsely populated areas such as Canada or Australia. There is a strong case for the removal of these laws. But even if these obviously silly restrictions are abolished, there are reasons for doubt as to how far the response from the over-populated areas will be adequate, and, in so far as there is migration from these areas, how far the migrants will find it possible to-get integrated into the society of their adoption. Large scale migration, such as is indicated in the context of international economic balance, may indeed create more problems than it solves; even within a country transfer of population from one region to another is by no means an easy problem. So international economics is most important.
The position of capital is also very much the same. The underdeveloped countries need capital and would surely welcome it to the extent that their absorptive capacity warrants. But resistance comes from the other side. This is on account of the risk involved in foreign investment. When you invest in your own country you are normally protected by laws and systems over which you have yourself some influence. When you invest it abroad you surrender yourself to the laws and systems belonging to strange and unfamiliar lands. This is why foreign investment has always tended to have some kind of political or military control associated with it. The history of colonialism bears ample testimony to this.
Investment, more than trade, has followed the flag. Even apart from this, historically whatever foreign investment the under-developed countries have received has found its way mainly to plantations, oil and other natural resources where profit is high; it has contributed little to the general growth of these economies, which is what is necessary for international balance. So international economics is most important.