Transcript Zimbabwe 2009

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