Financial+flows

Discuss the importance of loans, debt repayment, development aid, remittances, foreign direct investment and repatriation of profits in the transfer of capital between the developed core areas and the peripheries.

Core and periphery: The concept of a developed core (advanced countries) surrounded by an undeveloped periphery (developing countries). The concept can be applied at various scales - local, national, regional or global. Capital: Cash or resources used to generate income by investing in a business or a productive venture. In the case of this topic, capital is used in the sense of financial capital that is used to generate wealth. Remittance: Money sent back home by migrants working in a foreign country. Loan: Money borrowed from an individual, government or organization repayable with interest over a specified period of time. Aid: the transfer of resources at non-commercial rates by one country (donor) or organization, to another country (recipient). Development aid: aid given by governments and other agencies to support socioeconomic programmes and policies in developing countries Debt: Money owed by a country to another country or private creditor ( eg. World Band, IMF, etc). Outsourcing: The concept of taking internal company functions and paying an outside firm to handle them Foreign Direct Investment: A firm that owns or controls productive operations in more than one country through foreign direct investment.
 * Definitions: **


 * 1. Loans **


 * 2. Foreign Direct Investment **

Foreign direct investment (FDI) is a measure of foreign ownership of productive assets, such as factories, mines and land. Increasing foreign investment can be used as one measure of growing economic globalization.The largest flows of foreign investment occur between the industrialized countries (North America, North West Europe and Japan).But flows to non-industrialized countries are increasing.Maps below show net inflows of foreign direct investment as a percentage of gross domestic product (GDP). []

These maps suggest growing inflows of foreign direct investment in the 1990s. In 1970 and 1980, large parts of Africa, Latin America and Asia had zero or small inflows of foreign investment.By 1999 large parts of Asia, Africa and Latin America, as well as all of North America and large parts of Europe, have FDI inflows greater than 1% of GDP. FDI in China has been one of the major successes of the past 3 decades. Starting from less than $19 billion just 20 years ago, FDI in China has grown to over $300 billion in the first 10 years.Foreign investment can be a significant driver of development in poor nations. It provides an inflow of foreign capital and funds, in addition to an increase in the transfer of skills, technology, and job opportunities.

Many of the East Asian tigers such as [|China], [|South Korea], [|Malaysia], and [|Singapore] benefited from investment abroad.This expansion of foreign investment into the global South indicates increasing global economic integration. However, much of this expansion may be due to sale of state enterprises, known as privatization, rather than the setting up of new factories (Sutcliffe 2001: 78). And, FDI is heavily concentrated in only a few, industrializing nations. In 1997 nearly 71% the foreign direct investment in developing countries (the global South) went to just 9 nations, and of that over 30% was invested in China alone (Todaro, 2000: 578).

Foreign investment - for and against
 * 1) Many state enterprises have been privatized, that is, turned into privately owned corporations.
 * 2) Foreign direct investment is desirable, even essential, for economic growth and poverty reduction.
 * 3) Critics of foreign investment have suggested that it led to dependent, or restricted, development.
 * 4) Supporters have suggested that foreign investment can bring capital and technology, develop skills and linkages and increased employment and incomes.


 * 3. Development Aid **

These have been covered in IB1 under ‘reducing disparities in development’. In 1970, the world’s rich countries agreed to give 0.7% of their gross national income as official international development aid, annually.Since that time, billions have certainly been given each year, but rarely have the rich nations actually met their promised target.For example, the US is often the largest donor in dollar terms, but ranks amongst the lowest in terms of meeting the stated 0.7% target.

Criticisms of Aid
 * Aid is often wasted on conditions that the recipient must use overpriced goods and services from donor countries. Most aid does not actually go to the poorest who would need it the most.
 * Aid amounts are dwarfed by rich country protectionism that denies market access for poor country products while rich nations use aid as a lever to open poor country markets to their products. Large projects or massive grand strategies often fail to help the vulnerable; money can often be embezzled away.


 * 4. Remittances **

A report by the UN’s rural dev’t agency (IFAD), African workers send home more than US$40 billion to the region each year. However, restrictive laws and costly fees hamper the power of remittances to lift people out of poverty. Globally remittances top $300 billion per year, outstripping foreign direct investment and development assistance combined. But while transfer costs have declined significantly in Latin America and in Asia, sending money home to Africa is still expensive (about 25% of the sum). At the G8 summit in L’Aquila in 2009, world leaders recognized the dev’t impact of remittance flows and set a goal of reducing the cost of remittances by 50 % over the next 5years, by promoting a competitive environment and removing barriers. Between 30 and 40 per cent of all remittances to Africa are destined to rural areas. Most money sent home by migrants is spent on daily consumption.

But research shows linking remittances to financial services for the unbanked – savings accounts, loans and insurance – allows even the very poor to save and potentially invest in the development of their community.

Bar graphs showing Remittances received by country

The influence of governments, world trading organizations and financial institutions (such as the World Trade Organization, International Monetary Fund and World Bank) in the transfer of capital.


 * 1. The World Bank **
 * The World Bank is a vital source for technical and financial support to developing countries around the world. It was established in 1964 by 187 member countries. It is made up of two main bodies – the International Bank of Reconstruction and Dev’t and the International Dev’t Association.
 * Its head office is in Washington DC, in the US and it has offices in over 100 countries worldwide.
 * The main aim of the WB was initially to provide loans at low interest rates, but by 1968 – 1980s its focus was on providing LEDCs with interest free credits and grants for a wide range of development projects, ranging from education to agricultural reform.
 * It also increased the size of its lending and extended borrowing to many other countries and institutions.
 * It mission is to ‘fight poverty with passion and professionalism… and to help people help themselves and their environment by providing resources, sharing knowledge and building capacity and forging partnership in private and public sectors’.
 * To ensure that countries continue to enjoy the services of the WB, it has revised its services and now aims at achieving the Millennium Dev’t Goals, lending to middle income economies.

Criticism of the World Bank
 * Many scholars have argued that the policies of the WB is detrimental to the dev’t of developing countries. These scholars point out that western economic practices cannot be applied successfully in developing countries.
 * Others have also argued that WB has worsened the plight of many in the developing world. E.g the introduction of the structural adjustment programme in Ghana led to the retrenchment of many workers which resulted in severe unemployment and underemployment.
 * It also leads to the breakdown of traditional economic structures
 * Even though WB is represented by 187 countries, only a few rich countries run it.
 * The bank’s roles are contradictory – is it a political institution or a practical institution? It has been seen to be performing the first role, but it seems WB does not play the practical role of being neutral.
 * It also seems to focus so much on the growth a country’s GDP rather than on the standard of living of its citizens.


 * 2. Role of IMF in Financial flows **

Started in 1944, and governed by 187 member countries, the aim of IMF is to:
 * Secure financial stability
 * Foster international monetary co-operation
 * Facilitate international trade
 * Promote high employment
 * Sustainable economic growth
 * Reduce poverty around the world.
 * The primary responsibility of IMF is to ensure the stability of the International monetary system i.e. the system of exchange rate and international financial payments that enables countries to transact business with one another.
 * Member states can borrow from the fund and in return they are expected to abide by the terms and conditions of the bank. These terms are usually financial reforms that the borrowing country needs to abide by. E. g Greek and Irish bailout loans

Criticism of IMF Advantages
 * It is controlled by western nations. E.g. Most of it directors and MDs are either European or American. E.g. Dominique Straus Khan, Christen Laggarde etc.
 * It does not offer quick response to crises. E.g. Greek financial crisis. IMF only came when EU has done as much as it could.
 * Most of its assistance come with austerity plans most of which is to the detriment of the citizen – e.g. tax increases and cuts in social welfare benefits
 * It leads to privatization of state owned enterprises – e.g. With the introduction of SAPs.
 * They introduce policies that hurt the economy.
 * Help to stabilize the International monetary system.
 * They provide policy advice the various countries in order to help improve the various financial systems.


 * 3. Role of WTO in Financial flows **
 * 1) The WTO helps in the transfer of capital by promoting free trade between countries. This serves as a source of attraction to transnational corporations who transfer capital for investment (Foreign Direct Investment) in a given country.
 * 2) Furthermore, the WTO, by promoting trade between countries indirectly helps in the transfer of capital through the purchase and sale of goods between countries.
 * 3) It also promotes international trade indirectly by settling disputes among member countries. This helps sustain and maintain the bilateral and multilateral trade that exists between countries, hence the flow of capital.

Background on the World Trade Organization.
 * The World Trade Organization (WTO) is an international body whose purpose is to promote free trade by persuading countries to abolish import tariffs and other barriers.
 * Based in Geneva, the WTO was set up in 1995, replacing the General Agreement on Tariffs and Trade (Gatt).
 * Gatt was formed in 1948 when 23 countries signed an agreement to reduce customs tariffs.
 * Membership of the WTO now stands at 159 countries (as at July 2008). China formally joined the body in December 2001 after a 15-year battle.
 * The WTO has a much broader scope than Gatt. Whereas GATT regulated trade in merchandise goods, the WTO also covers trade in services such as telecommunications and banking, and other issues of intellectual property rights.
 * Its main role is to establish and regulate a set of rules to govern international trade.
 * It works towards trade liberalization and settles disputes related to trade between countries.

Functions:
 * Administering WTO trade agreements
 * Forum for trade negotiations
 * Handling trade disputes
 * Monitoring national trade policies
 * Technical assistance and training for developing countries
 * Cooperation with other international organizations

Criticism of WTO 4. **The role of the government in the transfer of capital.**
 * Even though the WTO is powerful, it is ineffective in compelling sovereign states to change laws and regulations. They do so by declaring these to be in violation of free trade rules.
 * WTO is run by the rich for the rich and does not give significant weight to the problems of developing countries.
 * WTO is indifferent to the impact of free trade or workers' rights, child labor, the environment and health.
 * WTO lacks democratic accountability, in that its hearings on trade disputes are closed to the public and the media.
 * Supporters of the WTO argue that it is democratic, in that its rules were written by its member states, many of whom are democracies, who also select its (WTO) leadership.
 * They also argue that, by expanding world trade, the WTO in fact helps to raise living standards around the world.
 * The creation of policies to attract foreign investment.
 * The sale of government bonds such as treasury bills.
 * They facilitate trade agreements either bilaterally(between two countries) or multilaterally (between two or more countries). The USA made an agreement with China to spend 280 billion dollars in bilateral trade.
 * The central government can also give and receive loans and grants.
 * Governments may directly transfer money via international aid programs, loans and investment. They indirectly affect financial flows through their policy making.
 * National governments also protect their economy from financial inflows and outflows through the implementation of protectionism policies such as quotas and tariffs.

//Using examples, analyze how global financial flows can be affected by the actions of governments.//
 * Sample Questions **

Sources: [] [] [|Global Forum on Remittances 2009] [] [] [] []