FINANCING DEVELOPMENT

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FINANCING DEVELOPMENT

• 184 countries are working to foster global
  monetary cooperation, secure financial stability,
  facilitate international trade, promote high
  employment and sustainable economic growth, and
  reduce poverty.

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LDCs get there funds from two major sources

• They get loans from Banks and International
  Organizations

• They receive investment from International
  Corporations

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• LDCs borrow this money with hopes of improving
  their infrastructure
• Hydro Electric Dams, Improve Transmission of
  Electricity, Create Flood Protection, Improve
  Water Supply, etc..

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Within this framework there are two major lenders

• The World Bank
• Controlled by the MDC
• The IMF
• Controlled by the 7 wealthiest nations
• Great Britain, France, USA, Germany, Canada,
  Italy, and Japan

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The World Bank IMF

• Together these two institutions lend 50 billion
  dollars per year
• The total outstanding debt as of 1996 is 2.1
  trillion dollars
• This is increasing at a rate of 1 trillion per
  decade

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What are the goals of the lenders?

• To create the infrastructure to entice foreign
  business
• To create the conditions for domestic business to
  expand
• To have the new infrastructure create the climate
  for a strong tax base
• Allowing government to improve living conditions
  for citizens
• Allow them to pay back their loans

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Global Connections- Text

• Turn to Page 214 in your text book
• Where do we see investment that is like that of
  the motorcycle shop owner?
• What are the conditions that the owner takes on
  this debt?
• Does the owner control all of the factors that
  influence his situation?
• What can the owner do in order to survive?

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THE PROBLEMS

• Southern countries are forced to go to these
  international institutions and accept whatever
  conditions are demanded of them. None of the
  countries has emerged from their debt problems
  indeed most countries now have much higher levels
  of debt than when they first accepted IMF/World
  Bank "assistance."

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The new infrastructure projects are often
expensive and fail

• In Mali a water pump was designed by the French
  to create broader and more efficient access to
  the water of the Niger River
• Used solar energy
• Functioned for only one month
• Cost 1 million dollars
• Another option of two diesel pumps would have
  done the same job using existing technology for
  6000

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Over half of the African projects have been
deemed as failures by the lending institutions.

• Why?

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Many countries become crippled by Interest

• Brazil, Mexico, Argentina are among many that
  cannot repay their debts
• Many African countries have debt to GDP ratios
  over 25

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Global Connections - Text

• Turn to Page 215
• Read the skit titled The Burden of International
  Debt

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Global Connections Figure 14-4

• While South America and Asia May have similar or
  worse debt ratios to Africa, what are there major
  differences?
• What agencies are creating the debt in Latin
  America?
• What is going to be the global consequence of the
  current distribution of wealth?

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Many countries become crippled by Interest

• What happens to these countries that cannot pay
  their debts?
• Financial Institutions refuse to make new or
  continue investment
• Conventional banking will not lend to the poorest
  of the poor, since they dont have collateral
• Needed infrastructure is not in place, stability
  falls, tax base is eroded and private investment
  is removed from the country

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Structural Adjustment Programs

• A requirement of MDCs when lending to LDCs to
  ensure they will be able to repay their debts
• Often done in exchange of cancelling or
  refinancing debts
• This is a reality of Western/Capitalist lending
  practices

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• They are economic policies on economic trade that
  include
• Reduction of government spending services to
  the citizens
• Sale of Public utilities - often the
  infrastructure they sought out
• Charge citizens for various services
• Raising taxes

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Case Study

• Mozambique An IMF Success Story?

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Mozambique

• Population 19.5 million (UN, 2005)
• Capital Maputo
• Area 812,379 sq km (313,661 sq miles)
• Major religions Indiginous beliefs, Islam,
  Christianity
• Life expectancy 41 years (men), 43 years (women)
  (UN)
• Monetary unit 1 metical (plural meticais) 100
  centavos
• GNI per capita US 310 (World Bank, 2006)

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Who do they trade with?

• Mozambique's main trading partners are South
  Africa, the European Union, Japan, and Zimbabwe.

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What are they trading?

• Mozambique's exports are primarily agricultural
  commodities, especially food products.
• more than two fifths of GDP
• Transportation equipment, machinery, mineral
  products, and foodstuffs constitute the major
  imported products.
• manufacturing sector is small 19 of the GDP

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The IMF in Mozambique

• IMF stabilization has been squeezing Mozambique
  too hard, preventing essential reconstruction and
  encouraging inefficiency and corruption.
• Adjustment has benefited only the better off in
  Maputo the poor and those outside the capital
  have lost out, as income gaps widen.
• Institutions work in the interests of
  trans-national capital and against domestic
  capital.

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Effects of Outside Involvement

• The IMF had prohibited Mozambique from spending
  aid which was actually an offer to rebuild
  schools, roads and health posts and to restart
  the economy.
• Aid spending is limited in two ways
• deficit targets must be met before grants can be
  made available
• The Fund does not allow for deficits so often
  times the grants are diminished to eliminate the
  deficit
• requirement for an increase in "international
  reserves" - in effect, dollars in the bank
• The government was forced to keep Foreign
  currency in the bank to protect its own
• This limits the amount of investment possible

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Distribution of the Success

• the IMF stranglehold only tackles part of the
  problem
• There is danger of class and regional
  differences, which are only widening
• In an unrestricted free market, resources
  normally flow to the richest people and the most
  developed areas.
• This has concentrated development in Maputo, at
  the expense of the north and rural areas
• IMF projects including an iron and steel plant, a
  huge aluminium smelter, Mozambique's largest
  tourist development, an export processing zone,
  and a new toll road - are concentrated in "Maputo
  corridor" linking Maputo to South Africa

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Maputo Corridor
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Problems for Local Firms

• World Bank bidding procedures make it very
  difficult for Mozambican firms to bid - they
  cannot get credit due to IMF credit ceilings
• An aspect of conventional banking
• Local firms cannot hire requisite skilled staff
  because the international agencies pay more
• Therefore foreign contractors win the tenders for
  the toll road and for World Bank funded road
  rehabilitation
• An Indian company won the contract for school
  text books

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Domestic Growth?

• Domestic business is at a disadvantage due to
  their lack of capital
• The IMF imposed particularly harsh credit limits,
  which meant banks could give so few loans that
  the simply gave the easiest ones
• no loans for rural trade
• few loans for the productive sector
• which needed longer term loans and not just
  90-day trade credit

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5 Years After War

• Mozambican business people also had their
  factories, shops, farms and lorries destroyed in
  the war. In some cases they still owed loans on
  that equipment.
• South African business people were able to move
  in because they could get loans in South Africa
• Many destroyed rural roads and bridges have not
  been repaired.
• Due to World Bank policy on road repair stresses
  main roads used by foreign businesses
• Minor and Rural roads are left behind

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Privatization

• Privatization has also been present
• the biggest state companies go to trans-national
  corporations
• Cement to the Portuguese
• Beer to South Africa
• All major privatizations have involved
  Mozambicans only as junior partners of foreign
  firms.
• And the Maputo corridor is dominated by South
  African firms protecting their own interests

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Conclusion Success?

• The IMF and the World Bank to an extent have been
  effective
• Increased fiscal responsibility
• Improved Infrastructure Maputo Corridor
• Foreign investment
• Portuguese, South African, and European
• Improved Living standards of the urban class
• Those who qualify for credit, although few, have
  some success repaying those loans

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OR Not a Success?

• There is a lack of visible reconstruction in many
  areas.
• rural areas are thus trapped in a vicious circle
  lack of roads leads to lack of market
  opportunities which leads to lack of cash and in
  turn inability to buy consumer goods resulting in
  reluctance on the part of the rural population to
  produce agricultural surplus and thus economic
  stagnation
• Demobilized soldiers who have returned to the
  countryside, often with their guns, are
  increasingly dissatisfied