Open economy or closed economy? I say productive economy!!!

After reading Latin America's Great Economic Divide by Raymond Colitt in Bloomberg Businessweek I got the feeling he´s missing something important. The whole article is based in Latin American examples to support that an open economy will grow faster as long as they give a safe environment for investors. Definitely using foreign investments to promote economic growth has been used before as a developing strategy. The results are good sometimes, and bad in others depending on whether the government managed this push in economic development and the extra currencies to build strong a foundation for its own economy that doesn´t depend on external sources. At the end, the value of an economy lies in how much "added value" can you create, which depends on your productivity, and in how much people want what you produce. Nothing more than supply and demand.

Yet, why people praise so much open economies, and disregard the closed ones? Furthermore, why open economies show better indicators? An open economy brings foreign capitals in two ways, by exporting and by foreign direct investment. The first one means that whatever you´re producing is demanded abroad, so your economy can benefit from the extra currency which will go into your own economy hopefully transforming into capital that would build up your productivity. Foreign investment is more direct as outsiders use their resources to build capital directly (either investing in promising companies or establishing their own), in this way productivity is increased quicker so growth comes faster. Politicians love this because they need giving results in a short time to gain political capital. However unless productivity is somehow internalized in the local economy (and the local people!) the growth relies in outsiders that can leave anytime to a more promising country.

Even worse, if the government supports too much foreigners as a way to attract them to invest, a disparity is created among society building up inequality. This goes against the basic function of a government of protecting its people. Even if this can work for a short time, it is not sustainable so in the long run it will never work.

So, when opening an economy, it is important to be careful to not to institutionalize inequality by settling permanent policies that affect local people to attract foreign investment. On the contrary, in any policy for economic development there should be a goal to increase productivity locally so that the benefits are owned by the local people.