Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Sources of External Finance • Foreign Direct Investment by MNC’s – eg. Nike building a factory in Nigeria • Aid (gov’t and non-gov’t) – eg. direct payment from the UK gov’t to Ethiopia; Red Cross sending funding and resources to vulnerable areas • Bretton Woods Institutions – World Bank or IMF giving or lending money to developing countries • Debt Relief – developed countries write off debts owed to them by very poor countries FDI – Why do MNC’s do it? • Access to cheap labour & natural resources • Cheaper taxes, infrastructure, planning constraints, etc • Grants by gov’ts • Get inside a customs union – avoid tariffs • Expand into new markets – regional focus Foreign Direct Investment – Good? • Represents > 3x the amount of aid • A crucial source of investment funds where savings is hard to encourage • Brings access to world class technology & management • Labour productivity tends to be higher – workers tend to be paid more • Has a regional multiplier effect Foreign Direct Investment – Bad? • Exploitation of job-hungry workers (incl. children) • May reduce labour market flexibility • Environmental risks may seem threatening to local population • Firms may “ring fence” – not including the local community, paying off influencial people, etc • Local firms may be put out of business • May deal with (support) repressive regimes Government Aid • May be a loan or gift • May be for short term crisis or long term growth • May have conditions attached • May serve the aider’s interests more than the aided • Has fallen 20% globally in real terms since 1990 UK Gov’t Aid • represents approx. 0.56% of GDP – target 0.7% • targets for poverty reduction, access to primary education, gender equality (difficult to assess success in reaching targets) • Bilateral aid may be used as incentive in securing commercial contracts – poorest countries may have none to offer • Liberalised trade may have more benefits • Very little given to Bretton Woods institutions – most is bilateral or through EU aid funds Bretton Woods Institutions • After WWII, allies met in Bretton Woods, New Hampshire, to set up systems to avoid the collapse in international payments and exchange rates that had occurred after WWI • 3 institutions established: - International Monetary Fund - International Bank for Reconstruction and Development (IBRD – now World Bank - World Trade Organisation • Some overlap between the institutions now International Monetary Fund • Function: to ease balance of payments problems and promote exchange rate stability (primarily concerned with monetary systems and currency) • Loans are short-term and include conditionalities and stabilisation policies (eg. tighter monetary policy; devaluation of currency) • Paves the way for structural adjustment of the economy • But, measure can often lead to decreased real output & increased unemp. in short run – appears as pain inflicted by the developed world World Bank • Function: promote long-term growth by providing loans for investment and development • May be conditional on radical supply-side reforms (eg. privatisation of state monopoly; trade liberalisation) – these reforms may have made things worse, not better, at least for some • Since late ’90’s more focus on targeted aid for poverty reduction – social rather than just economic development • Now divided into 5 separate organisations World Bank: evaluated • Long-term objectives may not be possible with debt repayment • Countries need to feel ownership of change & must be congruent with local culture • Structural adjustment conditions for reform too formulaic & rigid • Poorly run countries who don’t meet conditions are being left behind those who get World Bank help and subsequent MNC investment Over-Indebtedness – Why has it happened? Many countries have over-borrowed perhaps with unrealistic expectations of future wealth from the cash injection due to: • Domestic policy failings; debt used to finance prestige projects rather than basic infrastructure • Keeping exchange rate high to facilitate cheap imports – reduces export earnings • Corruption; Civil war • Overdependence on narrow range of exports or in sectors with poor growth rates Over-Indebtedness – Why has it happened? External Factors: • Natural disasters (disease; flooding, etc) • High value of the $ (increasing value of debt repayments) • Increased oil prices • Collapse of world commodity prices • Increased protectionism of developed world The Burden of Debt Servicing • Opportunity cost: what does the country have to give up to pay interest on loans? • The poorest countries may spend more on servicing their debt than on healthcare and education • Creates a cycle of poverty: necessary infrastructure is never created/updated so growth can never occur Debt Forgiveness • 1996: Heavily Indebted Poor Countries Initiative (HPIC) launched – 41 countries identified as having unsustainable levels of debt - $100B relief agreed at G7 summit • But, conditional (eg. no violent conflict,etc) • Scheme criticised – countries have to prove they are debt-relief worthy – biased toward conditions of the creditor Advantages of Debt Forgiveness • Frees resources for development of infrastructure & human capital • Successful growth benefits the developed world – less aid • Wealth transfer from rich to poor countries seems morally right • May increase confidence of international community & increase FDI Disadvantages of Debt Forgiveness • May run up huge debts again or reduce possibility of receiving aid • May encourage wasteful expenditure or undemocratic governments • Freed resources may be squandered • Structural constraints to growth may still exist • Consequences for lending countries who’s balance sheets contain loans to developing countries