Title: Zimbabwe
1Zimbabwe
- Economic Development
- Workshops
2What is development?
3What 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
4Types 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. - .
5Characteristics
- 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
6How 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.
7Problems 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
8Problems 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
9The 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.
10The 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.
11The 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.
12The 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
13Economic, 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
14History 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
15So how do we change things?
16Maybe 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'.
17But 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.
18Rostow?
- 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.
19Rostow
- 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.
20Fisher 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.
21Fisher 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
22Fisher 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.
23Fisher 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.
24Harrod 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
25Harrod 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
capital-output 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.
26Harrod-Domar
- Developed in 1930s
- 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.
27Lewis' 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.
28Lewiss 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.
29Neo-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
30Neo-classical
31Neo-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.
32Neo-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
33Dependency 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.
34Dependency 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.
35Dependency 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
36Dependency 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.
37Balanced and unbalanced growth
38Balanced 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
39Balanced 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
40To 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
.
41Challenges
- 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.
42Challenges
- 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?
43Challenges
- 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 long-term 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?
44Challenges
- 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.
45Domestic 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
46Population
- 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.
47Population
- 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.
48Birth 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
49Other 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.
50Migration
- 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.
51Poverty
- 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
non-existent. 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.
52Poverty 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?
53Poverty Cycle
54Government 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.
55Public 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
56International 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
57Commodity 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
58The 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.
59Other 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
60Other 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.
61Globalisation
- 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
pro-globalisation 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.
62Globalisation
- 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
63Policies 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
re-pay. - 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
64Aid 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
65Aid 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
66Domestic 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