Transcript PROBLEMS OF DEVELOPING COUNTRIES

PROBLEMS OF
DEVELOPING
COUNTRIES
BOP DISEQUIlBRIA
REMINDER
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A record of all transactions with foreign
countries
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Inflows = credit (positive)
Outflows = debit (negative)
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Includes current and capital account
Current Account
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Records income and expenditure flows e.g.
from trade and profits, interest and dividends
on foreign owned assets
Capital Account
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Records international flows of financial capital
such as cross-border loans and investments
in stocks and shares
The UK
Zambia
Why is it a problem?
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Disequilibria – usually refers to a current
account deficit.
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If it is persistent then it is a problem- a
country consumes more than it produces and
has to do so by borrowing or running down
foreign currency reserves.
Imagine…
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If you went further and further into debt,
would a bank lend you money?
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NO – you will no longer be regarded as
credit-worthy
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The same happens to countries
Why a deficit in DC’s?
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Specialising in primary products (agricultural prices are
highly volatile)
Net importers of manufactured goods
If they do pursue industrialisation they come up against
the protectionism of the 1st world
Therefore they face a long run decline in their terms of
trade (Prebisch-Singer hypothesis)
The evaluation
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If GDP is not growing as fast as interest
repayments then this eats further and further
into National Income.
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Problems have been made worse by unwise
borrowing into finance projects which haven’t
proved productive.