Economic Interactions and Flows Flashcards
loans
- a transfer of money or skills that requires repayment over a set time*
- Often are given with ‘strings attached’
- Structural adjustment programs
- In order to get the loan, countries must agree to the following terms
- free trade measures that open their markets to foreign competition
- cuts on spending and public services (pension, education, health)
- privatisation of public companies
case study: Japan and loans
Japan’s loan policy can be divided into bilateral aid, in which assistance is given directly to a developing country, and multilateral aid, which is provided through international organizations. Japanese loans are given with an interest rate that varies from 0.01% for the least developed countries to 1.7% for upper-middle-income countries, with a repayment period of between 15 and 40 years.
Types of loan provided by Japan
Project loans — to finance projects such as roads, power plants, irrigation, water supply and sewerage facilities.
Engineering services (E/S) loans — to finance the survey and planning stages of a project (a feasibility study).
Financial intermediary loans (two-step loans) — to promote small-and medium-scale enterprises in manufacturing and agriculture; known as two-step loans because there are two or more steps before the end-beneficiaries receive the funds.
Structural adjustment loans (SALs) — to improve economic policies and implement structural adjustment for overall economies.
Commodity loans — to support the balance of payments and economic stability of recipient countries; often used to import commodities such as industrial or agricultural machinery and raw materials, fertilizer and pesticides.
Sector program loans (SPLs) — to support development policies in prioritized sectors of developing countries. Local currency (counterpart) funds are utilized for public investments for sector-specific improvements.
Most Japanese aid is offered to countries in Asia, although some is offered elsewhere. Good examples of projects include the following.
- Small-scale irrigation management in eastern Indonesia. Eastern Indonesia has a long dry season and low annual rainfall. As a result, agricultural productivity is low and the region is the poorest in Indonesia. Loans have been provided to develop irrigation, extend farming technology and introduce agricultural water management, thereby increasing productivity and reducing poverty.
- Mass rapid transport system in Delhi. This project aims to improve the infrastructure for economic growth by helping construct a subway line, and elevated and surface railroads. The system is expected to carry 2.26 million passengers a day, and will reduce traffic congestion and improve air quality.
- Integrated reforestation in Tunisia. Much of Tunisia is semi-arid. Forest cover has been reduced by natural disasters and overlogging. A loan has been given to support forest maintenance, replanting, and constructing water and soil conservation facilities including reservoirs.
how can debt accumulate
- the legacy of colonialism — the transfer of debts to the newly independent country (e.g. Indonesia in 1949 from the Netherlands) and Haiti in 1804 from France
- large sums of money were loaded to develop infrastructure and import substitution industries. (large-scale lending to Mexico resulted in a debt crisis).
- inappropriate lending and spending (e.g. in the 1960s & 1970s)
- excessive interest charges imposed by creditors
- the oil crisis of 1973, which caused poor countries to borrow heavily
- high levels of military spending
- political corruption
debt repayment
Debt can be expressed in terms of debt to GDO ratio or foreign debt to exports ratio.
Some countries have so much debt that they have to take out loans to pay off the interest on the debt
This takes away money that could be used to improve education, infrastructure, health services etc.
- Jubilee Debt Campaign
remittances
not all the cash goes to the most needy; most migrants need some funds and education to get away, so their families are often slightly richer than average
The UN’s 2009 Human Development Report calls for the freer movement of labour. By crossing a border, most migrants find a richer, longer, healthier and better-educated life than they would otherwise have had. The report also makes the case that migrants send home useful values as well as cash.
patterns in aid and debt relief?
No.
Donor nations’ wealth increased through the 1905 until 2008. Levels of aid should have increased too. However during the 1905 levels of aid actually fell, although they rose again after 2000. Some of the increase in aid in recent years has been due to debt write-off. Aid for the poorest countries remained relatively steady during this period. Thus, in relative terms aid to the poorest countries has declined. In 2009, despite the global financial crisis, levels of aid increased slightly.
FDI
- mostly coming from MEDCs, though share of LEDCs is rising
Official development assistance (ODA)
- aid given by governments and other agencies*
- increasing over time
profit repatriation
To return foreign-earned profits or finial assets back to the company’s home country. (“remittances” for TNCs)
- Profits are normally repatriated to protect against expropriation (state taking property), or to take advantage of currency fluctuation.
- too much may be considered leakage
Host countries will offer tax incentives for TNC’s to locate in the hopes that the company will put money back into the local economy.
- China is the global business hub today and is ranked very high on the FDI targets list. This is because China has slowly and successfully liberalized its economy and laws to suit FDI needs. It is possible legally to repatriate up 90% of annual profits from China, provided certain norms are fulfilled, such as setting up local offices in China and creating a reserve account of at least 10% of total net profit.
- Although India is attractive, it is lagging behind with economic liberalization and reforms. Nevertheless, it allows free repatriation of profits once all local and central tax liabilities are met.
- A situation, good balanced benefits for host country and investing company, is desired, though many host countries complain that large TNCs are so powerful that the balance of benefits is invariably distorted in their favour - LEAKAGE.
role of World Trade Organisation (WTO), the successor of GATT
Deals with the rules of trade between nations at a global or near-global level. WTO has 153 members, representing more than 97% of total world trade.
The WTO is an organization for liberalising trade, a forum for governments to negotiate trade agreements, a place for settling trade disputes, a system of trade rules.
The General Agreement on Tariffs and Trade (GATT) provided the rules for the system, and was replaced by WTO, which, unlike the loosely organised GATT, was set up as a permanent organisation with far greater powers to arbitrate (reach an authoritative judgment or settlement) trade disputes.
Whereas GATT had mainly dealt with trade in goods, the WTO and its agreements now cover trade in services, and in traded inventions, creations and designs (intellectual property). The agreements provide the legal ground rules for international commerce, which aim to help trade flow as freely as possible. Nevertheless, trade relations often involve conflicting interests.
Success/Failure: The Doha Round was to be an ambitious effort to make globalisation more inclusive and help the world’s poor, particularly by slashing barriers and subsidies in farming. The negotiations have been highly contentious and by late 2010 agreement had not been reached.
In principle, every nation has an equal vote in the WTO, though in practice, the rich world shuts the poor out from key negotiations.
International Monetary Fund (IMF)
Provides assistance and loans which focus on helping a country meet all of its foreign obligations. Its objective is to stabilise international exchange rates and facilitate development. The IMF’s influence in the global economy steadily increased as it accumulated more members.
- often leads to structural adjustment programs (SAP’s)
- it’s not about money but about situations that help a country; promote privatisation and FDI.
Role: oversee global financial systems following the economic policies of its member countries
- in particular those with an impact on the exchange rates and the balance of payments
- IMF is able to renegotiate the terms of debt on behalf of nations in financial difficulties.
- Implement SAPs when funding countries
Success:
+ 1989 - IMF gives tied loans to Jordan
- reduction of public debts
- reduction of the budget deficits
- controlling of inflation
- tax reforms
- credit policy reforms
- investment incentives
- privatisation and easier trade policies
+ IMF sold some of its gold reserves to deal with the 2008 global financial crisis.
Criticism
- supported military dictatorships (supported Mobutu) and are unconcerned about democracy, human rights and labour rights
- Argentina Crisis: 1998-2001 (even if a country follows exactly what the IMF tells a country to do, things don’t necessarily have to get better but instead (hyper)inflation can occur)
- One of the main SAP conditions placed on troubled countries is that the governments sell up as much of their national assets as they can, normally to western corporations at a big discount.
- The IMF sometimes advocates “austerity programs”, increasing taxes even when an economy is weak, in order to generate government revenue.
- The IMF’s response to a crisis is often delayed, and it tends to react to them (or even create them) rather than prevent them.
- The IMF is for the most part controlled by major western nations (European or USA).
World Bank
Initially provided loans for reconstruction projects after WWII.
Role: To assist in the funding of reconstruction in the countries decimated by war, while IMF would ensure that the process would take place in a stable economic climate.
- offers developmental assistance to middle-income and low-income countries.
- gives loans and offering advice and training in both the private and public sectors
- loans are provided to fund projects for economic development and poverty reduction
- to countries with very low per capita income loans are interest free and allow long repayment periods
- ODA loans (official development assistance) promote efficient use of borrowed funds, since they require repayment and the donor is unlikely to provide loans for projects likely to fail. Also, they place a relatively small financial burden on the donor government as they are paid back over time.
- Each program is customised to the specific countries in question; based on countries priorities, determines the level and composition of assistance needed.
Criticism:
- run by a small number of rich countries
- the bank has dual roles that are contradictory: that of a political organization and that of a practical organization. As a political organization the bank must meet the demands of donor and borrowing governments. As a practical organization, it most be neutral, specializing in development aid, technical assistance and loans.
- focuses too much on the growth of GDP and not enough on living standards
- Also, (probably) it lends money to wrong projects and corruption and isn’t careful enough
trade deficit
you get less than you give
market protection
policies (tariffs, regulations) that protect a country’s industries against competition from cheaper imports
labour flows patterns
- Relative to capital, labour is subject to more optical restrictions and barriers.
- Skilled labour earns higher economic returns where it is abundant. This explains the clustering of talented people in recites in wealthy countries.
- most international migration takes place within world regional “neighbourhoods”, particularly between developing countries
- Movements of capital and labor are driven by the benefits of agglomeration; multiplier effect.
During the mercantile period, from 1500 to 1800, most people moving around the world were Europeans. During the industrial period that followed, sometimes called the first period of economic globalisation, an estimated 48 million emigrants, between 10 and 20% of the population, left Europe. A long period of autarky and economic nationalism began in 1910. Unprecedented restrictions were placed on trade, investment and immigration, stifling the international movement of capital and labour.
The post-industrial period of migration began in the 1960s, characterized by new forms, no longer dominated by flows out of Europe. Today, about 200 million people in all countries are foreign born, roughly 3% of the world population.
Poor and middle-income countries now send the most emigrants, led by Bangladesh, China, Egypt, India and Mexico. Italy, Germany, and the UK rank near the top, each accounting for 3-4 million emigrants.
Despite the benefits of labour mobility, facilitating legal flows of people has been slow.
