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Zimbabwe Economic Development Workshops What is development? GDP GNP HDI Others What does the HDI measure? Waste control and pollution Poor water supplies High real population growth Living standards Civil liberties The status of women Access to education Types of economies Second World Country - this mainly referred to those countries of the former eastern block and meant that were poor but had some basic facilities. Third World Country - many of these are located in the 'southern section' of the globe. They are more commonly known as Developing Countries (DC's) and have within them a number of different types of economy. . Characteristics a) The very poorest, where people live on less than $500 a year and have access to very few of the features we see in our lives. (b) Middle-income countries, which though still poor by our standards, do have pockets of considerable economic growth within them. At the top end of this category are nations such as South Korea and Singapore. Some prefer to call these Newly Industrialised Countries (NIC's). Within this group are many of the Tiger Economies of the Far East How are things changing? The 'second world' economies noted above are now mostly in transition. That is they are changing from being command economies into using the more liberal, free market ideals seen in the high-income economies. As such they are: Introducing market forces via demand and supply factors to determine prices De-regulating markets Privatising industries Removing protective barriers Seeking orders outside their old trading circles Joining the European Union. Problems facing developing countries The major problems faced by developing economies are: (a) That they have rapid population growth. This means that their age pyramid tends to be 'bottom heavy' and this put pressure on education and employment. (b) They lack physical capital structures, so they have inadequate supplies of communication facilities, roads, rail, ports, radio and TV sets and less well-irrigated land Problems continued.. (d) The high population growth mentioned above puts enormous strain on facilities and in many of these countries people's life styles are actually getting worse. The 'dependency rates' are getting larger as those in work become responsible for more who are not directly contributing to the economy. (e) Again high population growth places enormous burdens on the health facilities and infant deaths remain very high in most of these countries. (e) With some many people living in these countries trying to find a job is difficult. This leads to high unemployment and also underemployment. Which is when people have a job, saying selling you single cigarettes but they do not constitute a real form of employment as the 'West' see it The developing world The majority of those living in the poorest nations still live on or near the land. A visit to any of these countries will show just how resourceful people can be when finding places to grow food! Slowly, some are moving more into the secondary or manufacturing sectors of how we divide economies. This allows them to add more value and so have some central funds to spend on hospitals, schools etc. The developing world In only the most 'advanced' of the poorest countries does a meaningful services sector exist. Some of these have allowed themselves to be used as 'off-shore' banking facilities for funds from rich nations. Many have banks, insurance companies etc but they are in their infancy, or are sometimes branches of well-known western companies. Some do support a small quaternary sector and Internet cafes are becoming a common sight in even the poorest of nations. But the hardware and software is all imported and that costs large amounts of foreign exchange. The 'digital divide' is a pressing problem and is not improved by problems of electricity supply. Foreign Trade also shows us some of the essentials of being a developing economy. Many of the poorest countries exist on selling low-valued primary products, such as coffee and tea. They keep little of the real value and have to accept the prices we in the developed economies want to pay. They do produce some manufactures but they too tend to be low in value. The developing world Most developing countries depend on a formal economy for their wealth creation but outside this formal area exists an enormous informal sector. People survive by growing, buying and selling a huge variety of goods and services. Revenues are not declared and are not taxed. Government sees only a small amount of what it is due and therefore cannot afford to spend on the essentials of life. The difference between rural and urban life is clear to anyone who visits one of these countries. The urban areas tend to suffer from overcrowding, poor sanitation and unemployment/underemployment. Inadequate education and health services are a feature of the lives of many urban dwellers. However, huge differences do exist and air conditioning, satellite dishes and other signs of wealth e.g. four wheel drive vehicles clearly differentiate the rich from the poor. The developing world In rural areas the contrasts between the rich and the poor are normally less obvious. They exist but in less stark ways. Education remains a privilege and health facilities remain poor. But they can grow food and live a life closer to that of their culture and for many this is more rewarding. The traditional economy still supports the majority in most of these countries. Food, clothing, cooking ware and other essentials are what most contribute towards. However, some more modern industries do play an important role in the fabric of the economy. Transport is one and this employs quite large numbers. Power generation, communications and financial services are also growing in importance. So too are manufacturing industries that add value to local produce or products Economic, social and political issues Culture is a strong influence on economics. It creeps into how people see their role in an economy and just where, for example, women fit into the world of business. In some countries women remain firmly the providers of food for men folk and the main carers of children. Even the role and ownership of money differs from one country to another. Politics is certainly an important factor is deciding who does what within an economy. Democracy does not have a one-sized, single model fits all. Civil rights differ and this impacts on how well people can use their natural talents. Dictatorships exist in some countries and one party states are quite common. Military regimes frequently appear and then the right to vote and change a government is suspended History is important The colonial history is also important. The British tended to want colonies to break-even, or even make a profit. The French and Belgians exercised different forms of control and the former still does to this day. They ways in which government, the role of the state in the economy and the direction of economic development took during colonial days still affect these countries today. For many the immediate post-colonial days were spent trying to follow a more Socialist form of economics. Five year plans and big centrally controlled investments were the ways in which development would be achieved. However, few of these were successful and the collapse in commodity prices and the rise in oil prices left many of these nations in serious debt problems. When this occurred the World Bank had to be called in and they imposed a strict regime of dismantled price controls, a drastic reduction in the printing of money and various other implications of the Structural Adjustment Programmes. Now, many of these countries are embarking on programmes of de-regulation and privatisation So how do we change things? Maybe free trade? Free trade International trade is based on specialisation at a national level. Countries exchange goods with others and pay for imports from the revenues received from exporting. To work effectively, this system relies on few, if any, barriers existing to interfere with 'free trade'. But nothing is static Transport costs and tariffs will change the relative prices of goods and may therefore 'blur' the impact of comparative advantage. Exchange rates do not always relate exactly to what comparative advantage theory suggests as they have many other determinants - this may also negate the theory. Imperfect competition may lead to prices being different to opportunity cost ratios. Imperfect competition may also lead to the exploitation of economies of scale which may adjust to what comparative advantage theory suggests should happen. Comparative advantage theory is a static theory and does not take account of some of the more dynamic elements determining world trade. In particular, the factor of production capital is not a natural resource, and so may come outside the scope of the theory. Rostow? One of the most regarded models of economic growth and therefore development potential is known by its founders name Walt Rostow. He considered that all economies pass through FIVE phases. These are as follows: The traditional phase - where barter is common and most work on or about the land. Pre-take-off - where a self-sustaining growth potential is close and savings are rising at a rate of 15-20% of national income Take-off - the economy is recording continuous periods of economic growth Drive for maturity - the economy is genuinely moving from the developing to the developed form Mass consumption - the majority of citizens enjoy a high materials standard of living. Rostow Rostow placed considerable importance on the role of savings and how these in turn produce investment. The savings could be both domestic and foreign and would therefore collectively drive the economy into a period of growth and maturity. By by-passing any problems with domestic savings (the savings gap) the world economy would be both helping the poorer nations and itself, as total demand would increase. Some now argue that savings and investment alone are not enough to promote real economic growth. They suggest that (a) the direction and purpose of investment has to be carefully selected and monitored and that (b) domestic sums have to be encouraged to remain 'at home'. Too often 'capital flight' leads to savings being deposited in other, more lucrative overseas markets. Fisher and Clark Primary production is concerned with the extraction of raw materials through agriculture, mining, fishing, and forestry. Low-income countries are assumed to be predominantly dominated by primary production. Secondary production concerned with industrial production through manufacturing and construction. Middle-income countries are often dominated by their secondary sector. Tertiary production concerned with the provision of services such as education and tourism. In high-income countries the tertiary sector dominates. Indeed having a large tertiary sector is seen as a sign of economic maturity in the development process. Fisher and Clark Countries are assumed to first pass through the primary production stage then the secondary stage and finally the tertiary stage. As economies develop and incomes rise then the demand for agricultural goods will increase but due to their low income elasticity of demand at a proportionally lower rate than income Fisher and Clark However, the demand for manufactured goods will have a higher income elasticity of demand. So as incomes grow further the demand for these goods will grow at a proportionately higher rate. Hence the secondary industry will grow. As incomes continue to grow then people will start to consume more services as these have an even higher income elasticity of demand. Thus the tertiary sector will then grow and develop. However, this may be misleading. Fisher and Clark Some LDC's may have a large tertiary sector due to a large tourist industry without having developed a secondary industry. Economists argue that this could be somewhat risky. If the economic base is dominated by an economic activity such as tourism that has a high-income elasticity of demand then a recession in the consuming nations will have a disproportionately large impact on the export earnings. A fall income will bring about a proportionately greater reduction in demand for the service and this will have severe impact on the economy. If it does not have a primary or secondary production to fall back on then borrowing and debt might be the only prospect. Harrod Domar The model suggests that the economy's rate of growth depends on: The level of saving The productivity of investment i.e. the capital output ratio Harrod – Domar – how does it work? For example, if $15 worth of capital equipment produces each $1 of annual output, a capital-output ratio of 15 to 1 exists. A 5 to 1 capitaloutput ratio indicates that only $5 of capital is required to produce each $1 of output annually. The model concludes that: Economic growth depends on the amount of labour and capital. As DC's often have an abundant supply of labour it is a lack of physical capital that holds back economic growth and development. More physical capital generates economic growth. Net investment leads to more capital accumulation, which generates higher output and income. Higher income allows higher levels of saving. Harrod-Domar Developed in 1930’s Economic growth and economic development are not the same. Economic growth is a necessary but not sufficient condition for development Practically it is difficult to stimulate the level of domestic savings particularly in the case of developing countries where incomes are low. Borrowing from overseas to fill the gap caused by insufficient savings causes debt repayment problems later. The law of diminishing returns would suggest that as investment increases the productivity of the capital will diminish and the capital to output ratio will therefore rise. Lewis' model productivity was central to development of an economy. This was best achieved by encouraging migration of workers from the less productive sectors of the economy, for example agriculture, which is traditional and into the newer industries of manufacturing and tertiary. The latter would be more productive and so accumulate greater wealth. In turn this would generate greater funds for government through taxation and this would enable them to spend on the essentials of development. Savings would be encouraged, as rates of return would increase. Lewis felt that the marginal productivity of a rural worker was low. Lewis’s model - problems The idea that the productivity of labour in rural areas is almost zero may be true for certain times of the year however during planting and harvesting the need for labour is critical to the needs of the village. The assumption of a constant demand for labour from the industrial sector is questionable. Increasing technology may be labour saving reducing the need for labour. In addition if the industry concerned declines again the demand for labour will fall. The idea of trickle down has been criticised. Will higher incomes earned in the industrial sector be saved? If the entrepreneurs and labour spend their new found gains rather than save it, funds for investment and growth will not be made available. The rural urban migration has for many LDCs been far larger that the industrial sector can provide jobs for. Urban poverty has replaced rural poverty. Neo-classical growth model Increase in the labour quantity (population growth) Improvements in the quality of labour through training and education Increase in capital (through higher savings and investment) Improvements in technology Neo-classical Neo-classical Neo classical economists advocate the following strategies should be encouraged: Competitive free markets Privatisation of state owned industries A move from closed (no trade) to open (trading) economies Opening up the domestic economy through encouraging free trade (i.e. abolish tariffs and quotas) and foreign direct investment. Neo-classical - criticisms These policies will stimulate investment, higher output and income and hence higher savings. This model makes a number of unrealistic assumptions and ignores a number of crucial issues: The assumption is that the creation of a free market and a private enterprise culture is possible and desirable. The existence of market failure such as externalities associated with economic growth are ignored The problem of uneven distribution of income is ignored Dependency theory Underdevelopment is seen as the result of unequal relationships between rich developed capitalist countries and poor developing ones. In the past colonialism embodied the inequality between the colonial powers and their colonies. As the colonies became independent the inequalities did not disappear. Powerful developed countries such as the US, Europe and Japan dominate dependent powerless developing economies via the capitalist system and that continues to perpetuate power and resources inequalities. Dependency Theory Dominant countries have such a technological and industrial advantage that they can ensure the global economic system works in their own self-interest. Organisations such as the World Bank, the IMF and the WTO have agendas that benefit the firms, and consumers of primarily the rich world. Freeing up world trade, one of the main aims of the WTO, benefits the wealthy nations that are most involved in world trade. Creating a level playing field for all countries assumes that all countries have the necessary equipment to be able to play. For the worlds' poor this is often not the case. Dependency Theory In this model the responsibility for lack of development within developing economies rests with the rich nations. Those who support the dependency theory argue that only substantial reform of the world capitalist system and a redistribution of assets will 'free' developing economies from poverty cycles and enable development to occur. Measures that the rich nations could take would include the elimination of world debt and the introduction of global taxes such as the Tobin Tax. This tax on foreign exchange transactions, named after its proponent, the American Economist, James Tobin, would generate large revenues that could be used to pay off debt or fund development projects. Gordon Brown has suggested something similar and the Jubilee movement has put forward that debt should be cancelled and not re-scheduled Dependency Theory..but Power is not easily redistributed, as countries that possess it are unlikely to surrender it. It may be that it is not the governments of the rich nations hold the power but large multinational enterprises that are reluctant to see the world's resources being reallocated in favour of the developing economies. The redistribution of assets globally will result in slower rates of growth in the rich economies and this might be politically unpopular. Balanced and unbalanced growth Balanced and unbalanced growth Allocation of resources All of us have recently become aware of the real cost of resource usage. We now need to be conscious of externalities. How will the developing world control air pollution, or the risk of deforestation? Will they simply become the dumping ground for rich nation's waste? Another problem in balancing growth might be soil erosion and degradation. They also need to be aware of water scarcity, pollution and waste disposal. All of these challenges face us in the developed world but those experiencing the challenges of economic develop have to 'balance' their desire to grow against the possible problems that might arise. The reduction in their biodiversity might also need to be addressed, as will atmospheric changes. Do they: Balanced and unbalanced growth Ban or impose strict rules and controls Extend property rights and force private enterprise to pay more to the problems they cause Impose taxes on pollution and other externalities Subsidise non-pollution methods of production Award permits to pollute To achieve these we will have to.. . Land ownership and reform Involving the local communities in their own development Engaging the poor and making them feel that some opportunities will come their way Pricing in ways that include the real costs of development Challenges Productivity How will they increase the quality of their inputs and control the real costs of what they hope will be genuine increases in output. It's quality as well as quantity. Should the balance be towards export-led growth or import substitution? Human capital development What comes first teacher training, or schools in which the teachers can work, or should they await the arrival of students? Not an easy problem to resolve. What of technical, adult and higher education? Where do they fit into the demand for precious resources? Financial systems These too are essential but like all systems they can be abused. Do you force domestic savings to stay national? Do you monitor investment flows to make certain they are going to what you want them to? This is an area of development riddled with problems. Challenges Price distortions What will be the short-term negative affects of the removal of price caps and subsidies as against the benefits for the economy in the long term? Openness of markets Can government do without customs revenues and so allow in goods that are needed? In return can exports be allowed into developed markets, or will the big players, such as the EU continue to block goods from developing countries? Access to technology Should domestic companies be encouraged to use technology, say be tax relief or subsidies? Maybe overseas investment could be encouraged by allowing tax write-offs if they bring technology with them? Challenges Access to technology Should domestic companies be encouraged to use technology, say be tax relief or subsidies? Maybe overseas investment could be encouraged by allowing tax write-offs if they bring technology with them? Agricultural reform Surely one target must be self - sufficiency in basic food requirements? This will take short-term resource allocation but what will be the longterm benefits? Intervention in markets This works for some economies and not others. Should government use public funds to subsidise some industries and not others? What exactly are 'essential' industries? Challenges Culture Will development simply ride over thousands of years of history and evolution? Or, will another 'balance' have to be sort? Too fast a pace of change can have serious consequences. Likewise, the adjustment of women to their new roles and challenges needs to be carefully explained and introduced. Achieving a balanced and sustainable growth record is difficult but the target is to develop via ways that do not endanger the quality of life of those who follow. Domestic Problems Fight off the power of multi-nationals and still keep access to the lucrative markets that the companies come from Maintain a biodiversity and balance of nature as pressures increase for the profits contained in their natural resource exploitation. Allow the economy to develop within the terms of sustainable development Another important factor is factor endowment and the ability to exploit these. Some of the countries on 'Southern Africa' have huge reserves of the most valuable resources in the world. But how do they develop them so as to benefit as many of their population as possible? Will they import expensive expatriate technology or will they train their own workforce Population Population Population will be an important part of the development The net population increase figure (births - deaths + migration) will be an important factor. In some developing economies population growth is still around 4% per annum. In the short run this will put pressure on education and employment but eventually social provision for the elderly will have to be financed. Population growth also impacts on the: Supply of food - though little starvation exists in the developing world malnutrition (see chart 1 below) is a major problem in many countries. It adds to the size of infant mortality. Environment - food pressure puts pressure on land and takes valuable resources away from other sectors. Intensive methods require inputs that might damage the environment. GM crops are thought by some to be a major reducer of poverty whilst for others they threaten our very survival. Population Age has already been touched on but we need to consider the dependency ratio again. Those no longer working will require a larger proportion of national income than they currently need. This will be fuelled in the developing world by the problems of: (a) Inadequate education systems (b) The need to keep children away from school to work on the land (c) A lack of adequate jobs for those who have received a more formal education. The lack of jobs leads to crime and increasing drug abuse. Birth rate Government and the birth rate - development implies better health, education etc and a fast growing population make this more difficult. So, should government try to influence the size of families? China tried this with its one child policy. Some of the problems associated with this form of population manipulation are not attractive. Whatever the government decides to do one fact is agreed upon by most, namely, that as an economy develops so the number of conceptions per female declines Other factors Education - health care and family planning can feature in government-sponsored programmes. As mentioned earlier fiscal (tax) incentives can be used to promote fewer children. The role of women in society - if women can earn some money - say by a female only micro loan and then save this in a women-only bank then they can gain some financial independence. This seems to be a successful way of reducing family sizes. Migration Migration - the pull of cities continues to cause large numbers to move to urban areas. Some argue that agricultural workers have low productivity and that they should be encouraged to move to cities and the higher productivity jobs to be found there. However, they create little, if anything if all they drift into is unemployment, poverty and crime. Many of those who migrate to the cities do so on the expectation that eventually they will earn more than in the rural areas. Perhaps it might be best if some government funding went to the rural areas, so making life in those regions more closely resemble what the rural dwellers perceive urban life to be? This would take both money and time, as schools, hospitals, roads etc would be needed to offer a similar lifestyle to that which the urban liver supposedly has access to. Poverty Poverty is a grinding fact of life. You receive little education, hope or access to any of the normal features of our lives. What value can be added to these people? They may be intelligent and gifted individuals but they will receive little, if any education. Health care will be nonexistent. The inequalities apparent within their economy will breed resentment. This can lead to hatred, ethic violence, corruption and the undermining of the democratic process. Those thinking of investing in such an economy will probably decide not to. If you earn little, say just a few dollars a day what chance do you have of saving any money, or owning a bank account? The acquiring of capital is basically impossible and that precludes you from passing wealth to your direct descendants. Poverty cycle This poverty can be very difficult to reduce as many economies struggle to develop. They often find themselves in what is known as the poverty cycle. This can be seen as a spiral that prevents them from developing. To develop, we know that they need to invest. Investment needs funding and this requires savings. However, if they have low income levels, then they have low savings levels. This means a lack of funds for investment, which in turn leads to lower incomes. It is in essence a downward spiral of cumulative causation. Low incomes means low investment levels which means even lower incomes. They need to break the cycle to develop, but how? Poverty Cycle Government Failure This can arise as the result of: inadequate information - government seldom possess full and accurate information. So, it makes decisions on inadequate detail and mistakes arise. Conflicting objectives - all decisions have an opportunity cost and any elected government normally wants to satisfy those who voted for it. This might be to the detriment of those who did not. Administrative costs - sometimes the cost of correcting a market failure actually outweigh the benefits. Market distortion - by intervening to correct one market failure a government might create another. It in turn might be worse than the original they first attacked. In the UK the minimum wage continues to attract such criticism. Public Choice Theory Public choice theory, which is now popular in developed economies, suggests that politicians will not always attempt to maximise economic welfare. They will try to maximise their popularity by the laws and decisions they make. In pure economics these may not be the best ways of spending our money. Decisions might be influenced by: Local interests Trying to include minority interests Conflicting personal interests Short-termism Regulatory capture International Problems Developing economies mainly trade in primary exports. The money raised from their sale pays for manufactured imports. Diversification has been a slow process and again it has a strong geographic bias. The Far Eastern economies have been able to move up through the categories of exports to command increased market shares of low and medium technology goods. Alas, for many of their poorer African cousins the reliance on low-valued primary exports has not fallen by a significant amount in the sources of foreign exchange earnings One major problem facing a number of developing economies is the volatility of the commodity markets. For over 30 years the prices of commodities, both hard and soft varieties, have been falling in real terms Many of the exported commodities are relatively inelastic in the short run and once the crop has begun its development there is little else to do but accept whatever the world price is at the time of harvest. Without unreliable flows of earnings it is difficult to put aside monies for investment in diversification Commodity Market problems Overproduction, which puts pressure on that country to accept whatever price they can get Failure to get all producers to join the 'club' Storage of some commodities is difficult and expensive, so fluctuations cannot be evened out Floor prices are too high and encourage overproduction. This then requires precious revenues to buy and so the investment funds begin to disappear Terms of Trade deteriorate The developing world and debt Increased interest rates Increased value of the dollar, so they had to sell more exports in order to pay back debt valued in dollars The recession in the developed world meant that they imported less from developing economies. A long-term decline started in the real value of most commodities Net capital inflows reduced dramatically Many of the developing countries experiencing net outflows of money, in that they actually paid more to the developed economies than they received from them. So, the poorest nations were sending a substantial part of their income to the richer countries (the poor aiding the rich!). Their total debt increased 25 fold during the two decades of the 1980s and 90s. Their debt-export ratio rose and they had to earn more money from the sale of exports just to pay their debts. Their debt to GDP ratio rose and so a larger proportion of their national income was owed in debt. Their debt-service ratio rose. This shows the percentage of export revenue that has to be used to repay debt plus interest. This need not be a problem if exports are rising faster in real terms, but they were not. Other problems They can attempt to expand GDP faster than their debt ratio. This is quite easy to write but difficult to achieve in reality. The richer nations could write-off debts. Supporters of this action argue that, once released from a burden they cannot afford to pay, developing economies would import more and so boost developed world trade. Such imports could raise living standards and allow for more investment. Opponents, and the US is amongst these, point to irresponsible borrowing being promoted if old debt is wiped off. The Highly Indebted Poor countries initiative of the EU and others has borne some fruit but, in reality, many of the debts cancelled would never have been repaid. Most countries attempt to re-schedule debt, or seek a moratorium while they adjust to the increased sums needed to be allocated to debt. Structural adjustment programmes can be accepted as part of an IMF loan to clear debts. This scheme tends to impose heavy costs on economies Other problems Non-convertible currencies These mainly apply to developing countries whose exchange rates are fixed (usually against the dollar), rather than floating, and whose currencies are not therefore freely convertible through the financial markets. As the fixed rate is usually one that would be greater than the free market equilibrium rate, the exchange rates have tended to be overvalued. This may act as a barrier to development as it makes exports more expensive, causing yet another problem for exporters of primary commodities, while at the same time making imports cheaper. Usually a pre-condition of the IMF when it gives loans to heavily indebted developing countries is that they devalue their currencies and allow them to float Capital flight Capital flight is an aspect of the debt crisis of developing countries. Indebted countries have often borrowed more money to simply finance their debts but, rather than being used to repay these debts, much of this money has been put on deposit in foreign banks by firms and individuals, or has been put into stocks and shares and property. Capital flight occurs when firms or individuals speculate on the prospect of earning a higher return abroad. This will particularly occur when there is: Fear of devaluation / a belief that the exchange rate is overvalued High rates of inflation A low real rate of interest A need to 'launder' money abroad A poor domestic investment prospect. Globalisation Employment - those who see globalisation as a 'success' point to the increase in employment worldwide. Between 1980 and 1994 the world workforce grew by over 630 million workers. The proglobalisation lobby also point to the increase in life expectancy in such countries as South Korea, which only 30 years ago recorded infant mortality rates close to those of the worst now being posted in parts of Africa. Poverty - the thing now is to transform more and more countries into dynamic parts of this expansive economy.' Capital - this is one area where the globalisation process has been seen to produce problems as well as perceived advantages. In the 1980s came the Latin American crisis, then that of Mexico and as the century drew to a conclusion the Asian capital outflow caused severe problems. What now seems to happen is that short-term capital follows move with alarming speed from one high return location to another. These sudden rushes either in or out of one market cause serious problems for the domestic banking system and the exchange rate, property prices and other asset values. Debts - the scale of this problem has enormous potential for disaster amongst some of the poorest nations. When we consider debts it is clear that there is a need for tighter supervision of: Capital flows, especially those short term flows, such as hedge funds and derivatives, that can move at alarming speed from one economy to another. The provision of international liquidity, so as currency crises can be reacted to quickly and in sufficient volumes to stop the erosion in a certain currencies value. Globalisation The ability of the IMF to act as international lender of last resort. Indeed, the future might be best served by the creation of a Global Central Bank. A more orderly way of settling rescue packages. Ways need to be found to involve private investors as early as possible, else they can gain from the movements of currency values that accompany a sharp fall in just one currency. Who decides what is to happen? In the opinion of some this remains the domain of the rich countries. Membership of G7 and G8 needs to be broadened. This has already started with the formation of GX, to which China, India, Brazil, Russia, South Korea and South Africa have been added to the original G7 membershipp Policies to promote development Aid Humanitarian - which can both be by individual country to country or via a major organisation such as one of the UN agencies. This is NOT a loan and is normally sent to help against a specific problem e.g. drought. Bi-lateral - which is given by one country to another. It is a loan, though may be subject to a long period prior to re-payment commencing and granted of soft, or below market terms. The largest recipient of UK bilateral aid is India. Multi-lateral - which is when separate countries pay money into one central organisation, say the IMF and it then determines who receives money and for what. Once again this is a loan and has to repay. Some grants are made and they might be directed at technical services, or scholarships for some students to study in a particular country. Aid might also be trade related, in that the monies will only be made available if the receiving country agrees to buy goods or services from the donor nation. Successful aid should be an attempt to: Overcome the low savings ratios recorded in developing economies. Most poor people consume the vast majority of what they earn. Help reduce foreign exchange outflows, so allowing the domestic government to use such monies to build the necessary infrastructure for development. Reduce the dependency of private investment, which may not arrive or will only be found at a high price to the country seeking such funding Aid should Successful aid should also: Improve the living standards of the poorest people in the receiving country. This is not always possible, as government is normally based in the capital, which is by definition an urban centre. Like all political regimes those in developing countries serve those who elected them to office and power. Those who did not tend to receive little. If this persists it can be a cause of unrest and even coups and military takeovers. Move with the times and accept that what was fashionable several years may no longer be. Local opinion and knowledge is increasingly used when deciding on what to invest in and why. Not simply provide cheap food, except in an emergency, as this undermines the domestic agricultural sector. In some countries a once self-sufficient farming sector has lost part of its domestic market to food aid and now the country imports part of its staple food crop. Allow choice to be exercised by the receiving country. A problem with tied aid is that it reduces choice and the developing economy may not be getting the best deal Aid works best when.. They work best when: Allowed to tackle issues at local level Encouraged to employ as many local workers as possible Specialise in specific and often rural-based project work Project monitoring is done very carefully Relations with government are cordial but not too friendly However Structural Adjustment Programmes. These are part of any 'rescue package' a developing country may ask for. Normally, they require the receiver to accept that: They cut, or even drop all subsidies and price controls, even on basic foodstuffs They cut public expenditure They reduce the quantity of money in circulation They reduce those employed in the public sector They quickly reduce domestic inflation They open up home markets They privatise essential utilities such as gas, water and electricity, as well as other industries Domestic Policies Sectoral change Industrialisation Population Macro stabilisation Conclusion The developing world faces many problems as it attempts to increase the amount of economic welfare available to its citizens. The main difficulties are: Being able to exploit their resources Being able to specialise and gain through comparative advantage Being able to keep more value added within their own economy Having fair access to developed markets