Foreign Finance

2. Foreign Finance • Foreign Finance - inflows of financial capital into a country, which appear as credits in the financial account of the BoP • Donors - countries and international organizations that extend grants and loans • Recipients – those that receive the aid

4. 1. Why is aid given? • to help people who have experienced some form of natural disaster or war • to help developing countries to achieve economic development (MDGs) • to create or strengthen political or strategic alliances • to fill the savings gap that exists in developing economies and so encourage investment • Economic motives • to fund specific development projects

5. 2. What are some concern about giving aid as a means of reducing poverty? • research suggests that there appears to be no significant correlation between the level of aid given to a developing country and the growth of GDP. • the government in power may not have the welfare of the majority of the population at heart. i.e. aid going to a small sector of the population when in many cases these are relatively wealthy city dwellers • extreme corruption – then aid money leaves the country as soon as it comes in (capital flight) • aid is sometimes given for political reasons vs. giving aid where it is most needed. The poorest people in the world actually receive less aid than people in middle-income countries • aid displaces local investment and markets

6. long-term food aid may force down domestic prices and make matters worse for domestic farmers. It would be better for farmers to have a reduction in the subsidies given to farmers in developed countries • continued dependency on aid may mean that there is little incentive to be innovative and that people develop a welfare mentality

7. Tied Aid Tied aid is not as effective as untied aid. Why? • LDC is not able to look for the least expensive goods or services as have to buy them from donor country which may be more expensive • creates no employment or extra output since no expenditure takes place there • imports may also replace domestic products further harming domestic industries • FYI – the UK made tied aid illegal in 2002

8. NGOs • Examples of NGOs: Oxfam, CARE, Greenpeace, Amnesty International, Doctors Without Borders, etc. • NGO’s provide concessional flows, but they all take the form of grants in support of development activities (there are no soft loans that must be repaid) • NGO – private organizations that pursue activities to relieve suffering, promote the interests of the poor, protect the environment, provide basic social services, or undertake community development

9. What role do NGOs play in international development? • The priority of NGOs is to promote economic development, humanitarian ideals and sustainable development. There is a strong anti-poverty orientation of activities • Provide emergency relief in cases of disasters or to provide long-term development assistance (offer expertise and advice) • plan and implement specifically targeted projects in developing countries and they act as lobbyists to try to influence public policy in areas such as poverty reduction, workers’ rights, human rights, and the environment . (the poor usually lack political voice and representation)

10. as they work directly in the field they can develop a much deeper understanding of the issues and challenges facing the poor than official aid donors may do • work directly with people in such ways: literacy programs, health education, AIDS prevention projects, agricultural extension, micro-credit schemes, immunization and vocational training • NGOs enjoy the trust of beneficiaries

11. Weaknesses of NGOs • Small size – may be too small and weak to be able to play an important role. May have meagre resources and difficulty attracting personnel • Possible loss of independence due to growing dependence on governments and aid agencies for funding • NGOs seen as arrogant and paternalistic - objectives based more on interest of donors rather than responding to local needs and problems • Challenge to state authority - (eg. Amnesty International and China)

12. What is the role of the IMF? • “The IMF is an organization of 184 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth and reduce poverty.” (Source: IMF) • Lend funds to countries that needed them but LDC would have to adopt certain policies

13. Outline the SAP imposed on LDCs by the IMF. NOTE: The new term is Poverty Reduction Strategy Papers (PRSP) • encourage trade liberalization by lifting restrictions on imports and exports • encourage exports of primary agricultural commodities, known as ‘cash crops’ • devaluing the currency • encouraging FDI • privatization of nationalised industries

14. reducing gov’t expenditure in order to ensure that gov’t budgets were balanced • charging for basic services, such as education and health • removing subsidies and price controls

15. 6. Why are these SAPs heavily criticized by many? • The heavy costs involved affected the poor and included: • reduction in gov’t-provided services, such as education & health care • increasing unemployment • a fall in real wage levels • increased prices of essential products, as gov’t subsidies removed

16. Many LDC experienced increased rates of malnutrition, declining school attendance rates and increasing infant mortality figures despite the fact that SAPs lead to long-term growth • Indebtedness still remains a problem – many argue for debt cancellation or reduction

17. Indebtedness • Debt servicing – paying off the loan – amortizing – and paying the interest

18. Anti-developmental effects of debt 1. Diversion of funds • Since the largest proportion of loans in developing countries have been taken by govt’s, large debts divert much-needed funds for roads, health care and education to debt servicing • Aid money from abroad are all too frequently used to pay off debt • Africa is estimated to spend four times more on debt servicing than on health care

19. Further debt • ‘perpetual debt mechanism’ – taking out additional debt to service old debts • the hope was that the additional debt would buy some time for exports to increase and thereby be able to service additional loans

20. Harsh domestic policies • when countries get a reputation as ‘bad borrowers’ they will find it more difficult to get loans from private sources and if they do, they will pay a higher interest rate as a risk premium • can also lead to IMF SAPs