5.5 Evaluation of Growth and Development Strategies

1. 5.5 Evaluation of Growth and Development Strategies INTERNATIONAL BACCALAUREATE

2. Foreign Aid • Problems with Foreign Aid • Aid is a poor substitute for trade: opening up MDC markets to LDC exports can enhance the ability of the poor to earn a living and reduce poverty • It is estimated that less than half the aid goes to poor countries, instead it is based on the military, political and business interests of the donors, a reward to those in power • There has been no significant correlation between the level of aid given to an LDC and corresponding growth of GDP • Though humanitarian/emergency aid is considered morally/ethically necessary and an important contribution at times of short-term suffering

3. Foreign Aid • Problems with Foreign Aid • The LDC government may be forced to change development policies to suit the donor's ideas: • Loans and grants may be contingent on changes in tax laws, wage and price systems, food subsidy programs, and whether the money is used for rural or urban development • These ideas may be out of touch with reality and do little to contribute to development in the country • Aid contributes in direct proportion to the increase in capital investment, but aid does not appear to have accelerated the growth rates of recipient countries • There is a lack of complementary inputs: human technical skills, administrative capacity, infrastructure, financial institutions, and political stability

4. Foreign Aid • Problems with Foreign Aid • The introduction of hard currency inflows may also lead to increases in consumption rather than just investment: • Supply bottlenecks may discourage investment in physical capital • Rising incomes for the poor may lead to increased consumption rather than increased saving • Aid may displace LDC government spending (crowding out): • There is less pressure to provide infrastructure, and necessary reforms particularly in rural areas • Resources are then free for consumption instead of investment and may be used to acquire military hardware

5. Foreign Aid • Problems with Foreign Aid • It has been persuasively argued that tied aid is not as effective as untied aid: • LDC’s are not able to look for the least expensive goods or services but has to purchase from the donor country (more expensive) • Creates no employment or extra output in the LDC, because no expenditure is taking place there (money is spent on 'foreign experts' and returns to the granting country) • Imports may also replace domestic products, which may further harm domestic industries (e.g., agricultural aid increasing supply and lowering prices) • May be politically motivated and in fact, no more than a subsidy to industries in the MDC • Tied aid has actually been made illegal in some countries (UK 2002)

6. Foreign Aid • Problems with Foreign Aid • Famine is often not a result of a lack of food but of the inability to earn enough to pay for the food: • Distributing cash instead of food can stimulate the local market: • Local traders know best how to transport supplies • They are often able to reach inaccessible places to provide food • Long term food production and employment can increase through investment • Aid weariness: some in MDCs are beginning to think that problems in their own economies are more important than problems in LDCs and flows of aid may be reduced (current recession?) • Politically, very popular in light of continuing allegations of corruption and misspent aid money

7. Foreign Aid • Problems with Foreign Aid • Some evidence that 'targeted' short-term aid can being about limited growth (at least in a specific sector) • Cut flowers in Kenya and Zambia exported to Europe • Heifer Project in Rwanda and India • HIV/AIDS health education programs in Botswana and Uganda

8. Market-led and Interventionist Strategies

9. Market-led and Interventionist Strategies

10. The Role of International Financial Institutions

11. The Role of International Financial Institutions • The International Monetary Fund (IMF): • Lent funds to developing countries that needed them, • but would only do so if the countries in question adopted certain policies The International Monetary Fund (IMF) is an organization of 186 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world.

12. The International Monetary Fund (IMF)

13. The International Monetary Fund (IMF)

14. The World Bank

15. The World Bank • World Bank: aims to promote development to some extent • Critics view some World Bank projects as being imposed upon countries, and not being requested locally • Large-scale population movements (cultural destruction?) are sometimes required for dam construction (and dams are expensive with an estimated lifespan of about 25 years) • Construction firms are often from a country that has lobbied for the World Bank loan, so loan money flows back into an MEDC

16. Private Sector Banks • Private sector banks: provide loans in exchange for interest

17. Non-governmental organizations (NGOs) • Non-governmental organization (NGO) is a legally constituted, non-governmental organization created by natural or legal persons with no participation or representation of any government. In the cases in which NGOs are funded totally or partially by governments, the NGO maintains its non-governmental status and excludes government representatives from membership in the organization.

18. Non-governmental organizations (NGOs) • NGOs vary in their methods. Some act primarily as lobbyists, while others primarily conduct programs and activities. For instance, an NGO such as Oxfam, concerned with poverty alleviation, might provide needy people with the equipment and skills to find food and clean drinking water, whereas an NGO like the FFDA helps through investigation and documentation of human rights violations and provides legal assistance to victims of human rights abuses. Others, such as Afghanistan Information Management Services, provide specialized technical products and services to support development activities implemented on the ground by other organizations.

19. Non-governmental organizations (NGOs)

20. Non-governmental organizations (NGOs) • Non Governmental Organizations, or NGOs, are private organizations that provide development assistance. The organizations are very varied and diverse. They may be religious groups, charities, groups of health care workers or agricultural scientists. They may be international NGOs such as Oxfam, Medicin San Frontiers and CARE that channel financial assistance from outside the country or they may be National NGOs which provide development assistance from within the country concerned.

21. Non-governmental organizations (NGOs) • They are often voluntary organizations that aim to work at grassroots level within individual communities focusing on specific areas of assistance such as emergency famine relief, protecting children's health, empowering women, poverty relief, environmental protection, protection of human rights and providing micro-credit. • Usually these NGOs are not politically or ideologically tied, are generally trusted and are seen by the public as targeting their funding to the poorest and most disadvantaged people within society.

22. Non-governmental organizations (NGOs) • However, some are criticized for adopting an overly patronizing stance towards the recipients of the aid without sufficiently catering for the actual needs of the local communities and only providing a perceived need. It is argued that they also responsible for encouraging a dependency culture. In the case of some charities it is also suggested that they take the pressure off national governments from having to act and engage in bilateral development assistance. Nevertheless, the number of NGOs has grown considerably during last twenty years.

23. CARE International: A Case Study of a Non Governmental Organization • CARE is a leading humanitarian organization fighting global poverty. They place special focus on working alongside poor women because, equipped with the proper resources, women have the power to help whole families and entire communities escape poverty. Women are at the heart of CARE's community-based efforts to improve basic education, prevent the spread of HIV, increase access to clean water and sanitation, expand economic opportunity and protect natural resources. CARE also delivers emergency aid to survivors of war and natural disasters, and helps people rebuild their lives.

24. Oxfam: A Case Study of a Non Governmental Organization • Oxfam International is a confederation of 14 like-minded organizations working together and with partners and allies around the world to bring about lasting change. • They work directly with communities and they seek to influence the powerful to ensure that poor people can improve their lives and livelihoods and have a say in decisions that affect them.

25. MNC/TNCs: Foreign Direct Investment • MNC/TNCs have grown for the following reasons: • They need to secure their supply lines of raw materials • The need to sell to ever larger markets where new products are fully developed and competition increases the price elasticity • Locational advantages are important: • They need to locate within restrictive trade barriers • Low wages, low taxes and high education levels are important • They like to locate near markets to reduce transport costs

26. MNC/TNCs: Foreign Direct Investment • Problems with Foreign Direct Investment • There are 35,000 MNC’s of which 50% were controlled by US, Japanese, German and Swiss investors • 50% of all industrial production was produced by 100 companies • These 100 companies control 50% of world trade • Studies have indicated that MNC/TNCs are not good at providing jobs: • Local firms are displaced by the MNC/TNC and the displaced firms often have much higher labor capital ratios • LDC govt’s may force the MNC/TNCs to operate in a highly capital intense sector of the economy such as natural resource extraction and processing requiring massive investments in sophisticated equipment and machinery: • The labor that is hired is very highly skilled • Either local labor must be given extensive training • Or skilled workers must be imported

27. MNC/TNCs: Foreign Direct Investment • Labor protection laws: introduced by the government to appease the labor sector may increase labor costs significantly leading to the substitution of K for L • MNC/TNCs may prefer to take advantage of cheaper labor by using more appropriate technology but LDC governments anxious for technology transfer insist on the latest technology being used, once again this lowers the labor capital ratio • Technology/managerial/knowledge transfer is severely limited by the country's ability to absorb and utilize the new technology: • Workers lack the technical skills • The LDC government's system of information dissemination may be non-existent • The MNC/TNC may be extremely reluctant to accommodate technology transfer for fear of losing trade secrets

28. MNC/TNCs: Foreign Direct Investment • Transfer pricing: the setting of internal prices between branches of an MNC such that goods can be exported at artificially low prices: • The MNC/TNC raises price in the next country to the market level and takes the profit there if the taxes are very low, thereby saving on income taxes • This reduces the ability of the host govt. to collect taxes and defrauds them of taxes on work done in their own country • 25% of all trade is between branches of the same MNC company • The highest value added work is done in the countries with the lowest taxes • It is a powerful tool in labor negotiations to demonstrate that the company is losing money

29. MNC/TNCs: Foreign Direct Investment • Competing LEDC govt’s may offer concessions on: • Reducing taxes while providing subsidies, and tariff or quota protection • Allowing monopoly power • Reducing environmental regulations • However, concessions are often useless: Repatriated profits are simply taxed by home governments Tax relief may lead to confiscation of MNC property if the host government changes in the future

30. MNC/TNCs: Foreign Direct Investment • Foreign enclave: the MNC/TNC can increase the inequality between the rich and the poor by developing a modern high wage sector • This sector imports luxury goods • Inappropriate goods are marketed in the LDC • It widens the rural-urban wage gap leading to increased migration • MNC/TNC supporters may influence the government to undertake projects or adopt policies which are growth rather than development oriented

31. MNC/TNCs: Foreign Direct Investment • MNC/TNC Policy • Over time, nations and institutions such as labor unions have developed laws and agreements to control or balance the excess of private companies • The problem with MNCs is that there is no global government or global union to oppose or reduce the worst excesses • To achieve their ends LDC governments may: • Impose a schedule for local value added to be increased and for greater utilization of local personnel • Impose bans on the import of used capital equipment with an insistence that only the latest technology be used • Insist on joint ventures with local firms, and ceilings on the repatriation of profits to encourage or force reinvestment of profits in the local economy

32. MNC/TNCs: Foreign Direct Investment • To achieve their ends LDC governments may: • Insist on market pricing rather than transfer pricing on intra firm transactions • Many MNC/TNCs now insist on proper tax payments right from the start: • To provide enough tax revenue for the govt. to build the infrastructure needed to service the MNC/TNC • To prevent resentment and potential nationalization which can lead to risk and uncertainty which threaten the long term viability of a project

33. International Trade & Economic Development • About 70% of trade is between MDCs, with the remaining 20% from LDCs and 10% from previously centrally planned economies: • This situation has not changed significantly for 40 years • It is the NICs and the oil exporters which are experiencing rapid growth, the remaining LDCs have seen their proportion of trade falling steadily • Benefits from Trade • Comparative advantage: the potential gains from trade resulting from economies of scale and lower consumption prices can be of great potential benefit: • Even large LDCs may have limited domestic markets due to low income • Small economies can achieve economies of scale through access to larger markets • Growth: technology transfer can occur through the importing of capital goods: this can promote the rapid spread of technology • Learn by doing: best practices in production spread rapidly through trade • Domestic monopoly power can be reduced through international competition • Importance of fostering South-South trade

34. International Trade & Economic Development • South-South Cooperation is a term historically used by policymakers and academics to describe the exchange of resources, technology, and knowledge between developing countries, also known as countries of the global South.

35. International Trade & Economic Development • Problems with Trade • Foreign enclave: with wealth and income concentrated in the hands of the rich, most imports could be luxury goods • Countries are assumed to be on their production possibility frontier when in fact most LDCs experience high unemployment and underemployment • Technology transfer may be pointless if it is labor saving in countries with high unemployment rates. What is needed is appropriate technology • Risk of permanently slower growth: specialization may lock the LDCs into low skilled, labor intense production while MDCs benefit from high tech production • Prices may not reflect opportunity cost but simply manipulation by government and firms • Taxes, subsidies and the lack of recognition of true social costs (pollution for example) can lead to serious price distortions • All countries CANNOT find an industry/natural resource to specialize and enjoy comparative advantage • Markets in MDCs are not open for exports from LDCs • Barriers to trade: LDCs may find that MDCs have already achieved economies of scale, and protect their home industries through tariffs and quotas thus effectively blocking imports from LDCs

36. International Trade & Economic Development • Problems with Trade • Many LDCs have turned to other LDCs for trade opportunities • Displacement of local production: in many LDCs the production of cheap plastic sandals can put shoe makers out of work, backward linkages to suppliers of leather, fabric, glues, polish and packaging materials lead to even more people being put out of work • Gains from trade will benefit foreign owned plants and factories and the profits repatriated to home countries • High income elasticity for manufactured goods and services means that imports rise with incomes • Price elasticity of demand for capital goods tends to be low because there are few substitutes • Devaluation of the currency can actually lead to a larger import bill

37. International Trade & Economic Development • Problems with Primary Goods Exports • Low income elasticity of demand for primary goods, the substitution of synthetic materials and the dramatic reduction in the weight and bulk of manufactured goods have all led to virtually no growth in demand • World demand: tends to be inelastic: there are no substitutes for primary goods: • World supply: intense competition amongst LDCs lowers price and total revenue • Devaluation of the currency can actually lead to lower export revenue • In farming: supply shocks due to weather and disease combined with inelastic demand means farm revenues are very unstable

38. International Trade & Economic Development • Attempts to form cartels have met with opposition from MDCs: • Cartels that do survive are weak due to cheating amongst members • Non-member increase supply and reap the benefits of the higher prices • Alternatives to cartels are buffer stock management: • When demand falls: the manager provides a price floor, buying and storing the excess supply • When demand rises: the manager sells from storage and uses the profit to pay back the costs of the buffer stocks • The costs of storage and the interest on the loans to carry the inventory are very expensive

39. International Trade & Economic Development • Supply price elasticity problems: • In mining: shifts in demand for minerals due to MDC economic cycles combined with inelastic supply means mineral revenues are very unstable • Trade protection: MDCs have increased trade protection and subsidies to their own farmers, effectively blocking imports of food goods from LDCs • Worsening terms of trade: prices of primary goods has fallen relative to the price of manufactured goods and services, lowering the gains from trade for the poorest countries which do not have the means to produce anything but raw materials • Commodity agreements: agreements between developing countries in an attempt to stabilize prices for certain commodities

40. Commodity Agreements/ Buffer Stocks • Commodity markets are characterized by instability and uncertainty. This uncertainty may arise due to • fluctuations in the market prices due to market conditions changing • changes in prices due to changes in exchange rates • changes in foreign government protectionist measures • Often producers (and sometimes consumers) of commodities will co-operate together in an attempt to introduce more stability into the markets. These agreements attempt to stabilize prices. Indeed with most primary commodities they are used to prevent prices from falling below certain levels.

41. Commodity Agreements/ Buffer Stocks • Production quota systemA production quota system is an agreement by producers to limit the amount supplied to the market place. By forming a cartel and co-operating together, the producers attempt to influence the market supply and hence the price. The individual members of the cartel are then given a quota on the amount they are able to produce. If the intention is to prevent the price falling the cartel members will be instructed to reduce their quotas.

42. Commodity Agreements/ Buffer Stocks • If the market price for the commodity was P1 and the cartel wanted to raise the market price to a target price of P2 then by reducing the quotas produced by each one of the members of the cartel the market supply curve can be shifted to the left and the market price raised.

43. Commodity Agreements/ Buffer Stocks • Buffer stock systemThis system is operated by a group of producers, known as the buffer stock authority, often with government support setting a target price or a target price band i.e. a price ceiling and price floor. If the market conditions are such that a surplus is produced, which would cause the price to fall below the target price, the buffer stock authority will agree to purchase the surplus at the intervention price. If market conditions have produced a shortage then the buffer stock authority will prevent the price from rising above the target price by selling off previously acquired stocks (assuming they exist).

44. Commodity Agreements/ Buffer Stocks • In the diagram, shifts in the supply curve between S2, S3 and S4 will only result in the price changing between the acceptable price band. If a supply shock causes the supply curve to shift to the right to S5 then the buffer stock authority will intervene and purchase the surplus Q4-Q5 thus preventing the market clearing by itself through a lowering of the equilibrium market price to P1. If the supply curve shifted to the left then the buffer stock authority would release stocks equal to Q1-Q2 on to the market thus preventing the price rising to P4.

45. Commodity Agreements/ Buffer Stocks • In the case where the surplus is bought there are number of options that can happen to the stock • It can be stored • It can be destroyed • It can be sold to other countries • It can be given as overseas assistance. • Each option has a number of costs associated with each. Storage is expensive and involves an opportunity costs of the storage facilities. Destroying surpluses especially if the surplus is a food is morally questionable in a world devastated by poverty and hunger. Selling to other countries at low prices or dumping can undermine domestic producers in the countries where the goods are sold. Giving the food as aid could, it is argued, lead to a dependency culture.