Question

According to economic theory, if a resource is scarce then it should bring a high return in its use. Capital and technology are scarce in the world and given economic theory, should flow to the place of highest return. Since capital and technology are most scarce in the developing world relative to the developed world, capital should flow from the developed world to the developing world. However, if the data is examined, capital seems to flow from the developing world to the developed world. Is this a violation of economic theory? Explain

Answer 1

No , this is not the violation of the economic theory. Every developing country needs to have the support of the developed country so that it could take assistance from it for the own developmental activities.

The developing country will need to import the various capital goods from the developing countries in order to increase their level of technology and to be self reliant . This will involve the outflow of the capital to the developed country but in turn will also improve the productivity level of developing country for the future and make it self sufficient , will reduce its imports and increase the exporting power which will then lead to the inflow of the capital into the developing country.

So the outflow of the capital from the developing country to the developed country mostly helps the developing country to increase its level of technology and emerge as a new competitor in the global market.