The poverty trap (cycle) and how to break it B & D Pages 343-4

Learning Objective Explain that in some countries there may be communities caught in a poverty trap (poverty cycle) where poor communities are unable to invest in physical, human and natural capital due to low or no savings; poverty is therefore transmitted from generation to generation, and there is a need for intervention to break out of the cycle.

How the poverty cycle is a trap If people can only produce enough food to survive – live at the level of subsistence – then they cannot afford the luxury of saving. This is called absolute poverty. Often this is due to low levels of food productivity. No savings is the fundamental reason why extremely poor nations are trapped in poverty. No growth can really start (or no other solutions are really sustainable) without first breaking this fundamental barrier.

Why is lack of savings the barrier? Savings is required for investment. Investment is required for increasing productivity. This leads to growth incomes. Draw the following diagram (refer to p.344): Low productivity Low incomes Low savings Low investments No increase in productivity

Four ways this cycle-trap can be broken (without foreign intervention) Reduce food consumption; save food to sell, buy more food-producing stock Improve technology (through training and equipment) (for greater food productivity) Switch to “cash crops” – grow export crops but import food sources (and thus develop trade industries as a bonus) Reclaim previously unusable land (toxic, infested, poor drainage, dense forest). Now labour productivity increases.

4.5 Foreign Direct Investment B & D 378-380

Learning Outcomes Describe the nature of foreign direct investment (FDI) and multinational corporations (MNCs). Explain the reasons why MNCs expand into economically less developed countries. Describe the characteristics of economically less developed countries that attract FDI. Evaluate the impact of foreign direct investment (FDI) for LDCs.

FDIs and MNCs Foreign Direct Investment is capital investment owned and operated by a foreign entity. It is mainly the Multi National Corporations (MNCs) that undertake Foreign Direct Investment. MNCs have production lines in different countries, and their income and profit flows are part of foreign capital flows.

Production and Growth Productivity refers to the amount of goods and services produced for each hour of a worker’s time. A nation’s standard of living is determined by the productivity of its workers.

Growth and Investment (a) Growth Rate 1960-1991 (b) Investment 1960-1991 South Korea Singapore Japan Israel Canada Brazil West Germany Mexico United Kingdom Nigeria United States India Bangladesh Chile Rwanda Growth Rate (percent) 1 2 3 4 5 6 7 South Korea Singapore Japan Israel Canada Brazil West Germany Mexico United Kingdom Nigeria United States India Bangladesh Chile Rwanda Investment (percent of GDP) 10 20 30 40 1

MNCs are attracted to LDCs for various reasons Recall our 4 factors of production: Physical capital – lacking in LDCs due to low levels of saving Technological knowledge – also lacking in LDCs due to lack of investment in Research and Development Human capital – abundant in numbers in LDCs, making cost of labour must cheaper Natural resources – more available in LDCs due to less “exploitation” that requires expensive technology Also note: MNCs like to be close to emerging markets

The pros and cons of FDI via MNC Benefits Disadvantages FDI  AD/Y  LRAS to right Multiplier process is started when I is put into local economy: Ijobsincomespending MNCs provide training and education (=human capital)  passed on to others and other areas development Contribution to tax which might be used to put into education May contribute to local development programmes Manager jobs often done by expatriates Capital-intensive production does not reduce unemployment in LDC MDCs are attracted to where the tax base the lowest The have huge power and influence on domestic government May result in widening inequalities within country overspecialised and over-dependent = vulnerable!!