Discuss the importance of international aid, loans and debt relief, international remittances from economic migrants, illegal flows, such as trafficked people, counterfeit goods and narcotics in the transfer of capital between the developed core areas and the peripheries.
Core and periphery: The concept of a developed core (advanced countries) surrounded by an undeveloped periphery (developing countries). The concept can be applied at various scales – local, national, regional or global.
Capital: Cash or resources used to generate income by investing in a business or a productive venture. In the case of this topic, capital is used in the sense of financial capital that is used to generate wealth.
Remittance: Money sent back home by migrants working in a foreign country.
Loan: Money borrowed from an individual, government or organization repayable with interest over a specified period of time.
Aid: the transfer of resources at non-commercial rates by one country (donor) or organization, to another country (recipient).
Development aid: aid given by governments and other agencies to support socioeconomic programmes and policies in developing countries
Debt: Money owed by a country to another country or private creditor ( eg. World Bank, IMF, etc).
Outsourcing: The concept of taking internal company functions and paying an outside
firm to handle them
Foreign Direct Investment: A firm that owns or controls productive operations in more than one country through foreign direct investment.
1. Development Aid
These have been covered in IB1 under ‘reducing disparities in development’. In 1970, the world’s rich countries agreed to give 0.7% of their gross national income as official international development aid, annually. Since that time, billions have certainly been given each year, but rarely have the rich nations actually met their promised target. For example, the US is often the largest donor in dollar terms but ranks amongst the lowest in terms of meeting the stated 0.7% target.
Aid as key to development
- It can support better economic and social policies
- Projects that are financed by aid help to expand the needed infrastructure
- It also contributes to personnel training and builds technical expertise
- It provides resources for capital investment
- It provides humanitarian relief during times of disaster
Aid as an obstacle to development
- it may increase the dependency of a country on the donor country as a result of a bilateral agreement
- It may delay the introduction of reforms eg. Substitution of food aid for land reform
- tied aid benefits the donor country more than the recipient in economic terms
- The frequently inappropriate use of aid on large capital-intensive projects may worsen the condition of the poorest people.
- A lot of aid does not reach those who need it – the poor people in the poorest countries
- Very often, aid is spent on projects that benefit the political leaders at the expense of the citizens.
- Almost always, the money crowds out investment by the private sector and – because most governments are not good at making investment decisions
- It undermines economic development.
- Often it has bolstered corrupt regimes that would otherwise have been thrown out.
Recent trends in aid to developing countries
There has been a general decline in official aid to poor countries since the 1990s. In 1992 aid to developing countries fell by 16%. The United Nations suggests that most countries donate up to 1% of the GNP as aid to poor countries. Only Norway and Sweden reached this target. The UK provided 2 billion in aid b/n 1995 and 96, which was just 0.27% of GNP.
Criticisms of Aid
- Aid is often wasted on conditions that the recipient must use overpriced goods and services from donor countries. Most aid does not actually go to the poorest who would need it the most.
- Aid amounts are dwarfed by rich country protectionism that denies market access for poor country products while rich nations use aid as a lever to open poor country markets to their products. Large projects or massive grand strategies often fail to help the vulnerable; money can often be embezzled away.
Advantages of loans to LEDCs
- They help the country in cases of emergency.
g.: The IMF gave Iraq $741m as part of a previously agreed $3.7bn loan programme to help the country rebuild its ravaged infrastructure.
Ghana also received a loan of $600m during the recession to reduce its budget deficit and supports its currency after being hit by high food and fuel prices.
- The loans have a flexible repayment schedule.
g.: Japan’s interest rates range from 0.01% to 1.7% and can be paid over 15 to 40 years.
- Promotion of efficient use of borrowed funds, since the donor is unlikely to provide loans for projects likely to fail.
Disadvantages of loans to LEDCs
- The country must pay more than it was given.
- The country could get stuck in a vicious cycle of debt, leading to eventual bankruptcy.
- The debtor is left at the mercy of the creditor.
g.: At the 2011 Commonwealth summit, British PM David Cameron urged African countries to recognize the rights of homosexuals or expect decreases in British aid.
- Aid may not reach the people who need it most due to corruption. Local politicians may use aid for their own means or for political gain.
g.: Nigeria cannot account for $380 bn which “disappeared” from 1960 to 2006.
Advantages of loans to MEDCs
- The creditor gets back more than it gave out.
- The creditor gains economic and hence political power.
g.: British PM and aid to African countries.
- It may be the condition that projects are run by foreign companies or that a portion of the profits is returned to the creditor.
g.: Ghana Telecom took over by Vodafone.
Disadvantages of loans to MEDCs
- The creditor may be placed under the dominion of the debtor.
g.: Many countries gave out loans to Mexico after its independence. Large-scale lending to Mexico resulted in a debt crisis, with Mexico threatening to default on its loans.
- A country might not be able to pay the interest so no gain will be made from the loan.
- An increase in the number of countries in need of aid from that nation may lead to the government increasing tax rates in the country.
- When a country is in need, it might be forced to introduce a new currency into the system, causing the value of money to depreciate.
3. DEBT RELIEF
One of the major drawbacks of growth and dev’t for developing countries is the level of debt repayments on money borrowed. Before the 1970s, developing countries’ borrowing was very low. SSA for instance owed $ 3 billion in 1962. By the mid-70s and 80s, most developing countries started borrowing heavily. E.g SSA by the 1980s owed $142billion- Nigeria was the heaviest 35billion. In 1970, the world’s 60 poorest countries owed 65billion. By 2002 this had risen to 523billion. Africa’s debt alone rose from 11 billion to 295billion. 42 countries in SSA are classified as Heavily Indebted Poor Countries and 32 countries are rated as severely indebted. The most heavily indebted country is Nigeria (35b), Cote` de Ivoire (19b) and Sudan (18b). Latin America’s debt was even bigger: abt $650b.
Who are the creditors of LEDCs?
a) Africa owes more than 2/3s of its debt to foreign governments, International Monetary Fund (IMF), World Bank (WB), and African Development Bank (ADB). IMF, WB, and ADB account for about 32% of the debt, government owes 32% and private lenders eg. Commercial banks account for 26%.
Causes of debt crises in LEDCs
- High crude oil prices in 1979 leading a worldwide recession
- Sharp fall in demand for commodities as a result of the recession
- High-interest rates on loan repayment from western donor countries.
- Excessive gov’t spending on recurrent expenditure
- Low growth in industrialized countries
Attempts at solving debt crises in LEDCs
Paris Club of government creditors has approved debt relief for the poorest countries. The measures include World Bank lending at concessionary interest rates and interest-free loans by Int. Dev’t Agency up to 50yrs, Soft loan facility introduced by the World Bank, Increase in lending to poor from abt $424million in 1980 to 2.9b + 928million through ADB
Did this solve the problem?
Despite the rescheduling, the debt continues to exceed the ability of African Economies to service their debts. Debt owed to multilateral lenders continues to grow. E.g debt owed to IDA has risen from 2.58 billion in 1980 to 25.16b in 1994
Structural Adjustment Programme
SAPs were designed to enable developing countries to control their spending and increase government revenue as a measure to cut down on international borrowing.
SAPs aim at:
- Cutting gov’t expenditure
- Reducing state intervention in the economy
- Promote trade liberalization and International trade
Elements of SAPs
- Generating foreign income through diversification of the economy
- Policy reforms
- Market-driven exchange rates
- Trade liberalization
- Reducing exchange controls
- Greater use of the country’s natural resource
- Reducing the active role of the state in the public through job cuts, privatization of state-owned enterprises
The Heavily indebted poor countries (HIPC) initiative
It was launched in 1996 by IMF and WB with the aim of
- Relieving low-income countries of their debt to donor countries
- Promoting reform and sound policies for growth, human dev’t and poverty reduction.
Debt relief occurs in 2 ways:
At the decision point – when the country gets Debt service relief and Demonstrates adherence to IMF policiesDevelops a national poverty reduction agenda
The Completion Stage – The country gets debt stock relief on the approval of WB and IMF. Out of 42 countries participating in the initiative, 34 are in Sub-Saharan Africa
A report by the UN’s rural dev’t agency (IFAD), African workers send home more than US$40 billion to the region each year. However, restrictive laws and costly fees hamper the power of remittances to lift people out of poverty. Globally remittances top $300 billion per year, outstripping foreign direct investment and development assistance combined. But while transfer costs have declined significantly in Latin America and in Asia, sending money home to Africa is still expensive (about 25% of the sum). At the G8 summit in L’Aquila in 2009, world leaders recognized the dev’t impact of remittance flows and set a goal of reducing the cost of remittances by 50 % over the next 5years, by promoting a competitive environment and removing barriers. Between 30 and 40 per cent of all remittances to Africa are destined for rural areas. Most money sent home by migrants is spent on daily consumption.
But research shows linking remittances to financial services for the unbanked – savings accounts, loans and insurance – allows even the very poor to save and potentially invest in the development of their community.
6. Foreign Direct Investment
Foreign direct investment (FDI) is a measure of foreign ownership of productive assets, such as factories, mines and land. Increasing foreign investment can be used as one measure of growing economic globalization. The largest flows of foreign investment occur between the industrialized countries (North America, North West Europe and Japan). But flows to non-industrialized countries are increasing.
These maps suggest growing inflows of foreign direct investment in the 1990s. In 1970 and 1980, large parts of Africa, Latin America and Asia had zero or small inflows of foreign investment. By 1999 large parts of Asia, Africa and Latin America, as well as all of North America and large parts of Europe, have FDI inflows greater than 1% of GDP. FDI in China has been one of the major successes of the past 3 decades. Starting from less than $19 billion just 20 years ago, FDI in China has grown to over $300 billion in the first 10 years. Foreign investment can be a significant driver of development in poor nations. It provides an inflow of foreign capital and funds, in addition to an increase in the transfer of skills, technology, and job opportunities.
Many of the East Asian tigers such as China, South Korea, Malaysia, and Singapore benefited from investment abroad. This expansion of foreign investment into the global South indicates increasing global economic integration. However, much of this expansion may be due to the sale of state enterprises, known as privatization, rather than the setting up of new factories (Sutcliffe 2001: 78). And, FDI is heavily concentrated in only a few, industrializing nations. In 1997 nearly 71% of the foreign direct investment in developing countries (the global South) went to just 9 nations, and of that, over 30% was invested in China alone (Todaro, 2000: 578).
Foreign investment – for and against
- Many state enterprises have been privatized, that is, turned into privately owned corporations.
- Foreign direct investment is desirable, even essential, for economic growth and poverty reduction.
- Critics of foreign investment have suggested that it led to dependent, or restricted, development.
- Supporters have suggested that foreign investment can bring capital and technology, develop skills and linkages and increase employment and incomes.
Strategies used by TNCs to expand their global networks
Trans-National corporations (TNCs) are large organizations of businesses that have branches in different parts of the world and usually have their headquarters located in advanced countries. Examples of TNCs
Globally there are around 60000 TNCs and the top hundred own 20% of the global financial assets. They employ over 6 million people and enjoy 30% of global consumer sales. TNCs can expand their networks to other countries through Foreign Direct Investment (FDI) is a financial injection by a TNC into a country. This depends on the type of Industry the TNC wants to involve in. This could be; mining, consumer goods eg. Clothes, footwear, and food processing countries. They may also expand into new territories through mergers or may glocalise to penetrate the market. There are different investment strategies to expand TNCs.
Off-shoring –When a company moves part of its own production process such as factories and offices to a new country to reduce labour costs. May also involve setting up new offices in another territory. The advantages of Offshoring include:
- Cheap labour force
- May expose themselves to a lot of political problems
2. Joint Ventures: –This is when 2 companies are in partnership to form businesses in other countries without merging. A joint venture could be Mcdonald’s, which is owned by an Indigenous Indian company.
3. Acquisitions or mergers: –This is when international corporate mergers take place. Two firms join forces to create a single entity. Eg. Mobil and Total joined together to form Total. ELF joined the total to form the total.
4. Glocalisation:- It is when a TNC designs a product in order to meet the taste and preferences of the local population. The benefit is that it helps the local people to feel that the product is part of their culture or is theirs. The disadvantage is that not all companies can glocalise.
5. Outsourcing:- It is when a company transfers its functions to a foreign firm to handle its operations. China and India are the main destinations for out-sourcing companies. Eg. Apple has outsourced its manufacturing functions to a company in China known as Foxconn. Also, most banks such as Barclays have outsourced their call centres to India. The disadvantage of outsourcing is that TNCs may find it hard to monitor the working conditions of workers. The benefits of outsourcing are that there is cheap labour and the company doesn’t have to pay the medical expenses of the workers. This maximizes the profit of the company.
Global Production Networks (GPNs)
It’s a chain of connected suppliers of parts and materials that contribute to the manufacturing of consumer goods. This serves the need of TNCs such as Apple and Tesco For example 2,500 different suppliers provide parts to produce one BMW car from the engine to the windscreen wiper.