Economic interactions and flows

Syllabus link (8 hours)

Financial flows Key questions:  How important are loans, debt repayment, development aid, remittances, FDI and repatriation of profits in the transfer of capital between developed core areas and peripheries?  What is the influence of governments, world trading organisations and financial institutions (eg WTO, IMF, World Bank) in the transfer of capital?

GDP per capita 2000 Image Source: GDP per capita: An approximation of the value of goods produced per person in the country, equal to the country's GDP, divided by the total number of people in the country. How does GDP relate to global core and periphery?

Cities of global finance Tier 1: (3 cities) Tier 2: (5 cities) Tier 3: (29 cities) See how many you get right! (pg 577 Planet Geog)

International capital flows TNCs are the main source of FDI TNC’s invest to make (profit) and drive economic globalisation Flows of FDI have changed over last 20 years. No longer Core Periphery Investment flows from NIC’s such as South Korea, Taiwan, China, India and Brazil have markedly. TNCs have a substantial influence on the global ecy and world trade

FDI Involves the ownership of some or all of a business in another country or the involvement in joint venture projects in other countries.

TNCs

Global FDI was $1979 bn in GFC has changed the geography of investment ‘Transition economies’ (SE Europe & CIS) saw growth by 43% In 2008, FDI flows into developing nations = 37% and TE = 7%

Changes in trade

Task Discuss the reasons for disparities in investment and trade between MEDCs and LEDCs and the changing trend.

FDI issues Not all FDI is beneficial Read the article and list the benefits and negatives of FDIs.

Official development assistance FDI has been the most important source of net capital flows ODA is 2 nd most important source of capital flow into LEDCs Impact of the 2008 GFC on flows FDI flows worksheet

Aid Aid can be delivered to less developed countries in a number of ways. How it is delivered depends on the needs of the receiving country and the resources of the providing country (or countries).

Types of aid

Bilateral aid – aid given by one country to another country. Multilateral aid – aid provided by a number of countries or an international organisation (such as the World Bank).

Development aid Aid given to support increasing development. Can include military assistance but usually targeted at reducing long term levels of poverty and under-development. Can be ‘tied aid’ where certain conditions are placed on the receiving country in accepting the money – i.e. Investment in certain industries, voting support in international committees or military/political support.

ODA recipients

Top 10 recipients of ODA, 2006 Patterns? (continents, regions)

ODA donors Organisation for Economic Co-operation and Development

Positives and negatives of ODA

Information page Arguments for and against giving aid F emergency aid in times of disaster saves lives. A Aid can increase the dependency of LEDCs on donor countries. Sometimes aid is not a gift, but a loan, and poor countries may struggle to repay. F Aid helps livelihoods and rebuild housing after a disaster. A Aid may not reach the people who need it most. Corruption may lead to local politicians using aid for their own means or for political gain. F Provision of medical training, medicines and equipment can improve health and standards of living. A Aid can be used to put political or economic pressure on the receiving country. The country may end up owing a donor country or organisation a favour. F Aid for agriculture can help increase food production and so improve the quality and quantity of food available. A Sometimes projects do not benefit smaller farmers and projects are often large scale. F Encouraging aid investment in jobs and industrial development can create jobs and improve transport infrastructure. A Infrastructure projects may end up benefiting employers more than employees. F Aid can support countries in developing their natural resources and power supplies. A It may be a condition of the investment that the projects are run by foreign companies or that a proportion of the resources or profits will be sent abroad. F Projects that develop clean water and sanitation can lead to improved health and living standards. A Some development projects may lead to food and water costing more

Repatriation of profits The movement of capital (money) made in a foreign country back to the country of origin

Repatriation of profits Positive for TNCs and their country of origin. Eg Volkswagen Group part profits Germany The host countries in receipt of FDI may tax, but must still remain competitive Many host countries complain that large TNC’s are so powerful that the balance of benefits is distorted Repatriation of has a negative impact on a country’s BoP (balance of payments = all economic transactions for a country py) Poorest developing nations are usually worst affected

Loans and debt Countries can loan money to other countries to fund various enterprises. These could range from infrastructure to services such as medical or educational, housing to agricultural enterprises. However, historically many loans have burdened the world’s poorest countries and have often simply saddled them with long-teem debt.

HIPC initiative The HIPC (Heavily Indebted Poor Countries) initiative was established in 1996 by the IMF and World Bank. A Christian Aid newspaper ad illustrating the plight of Haiti after the 2010 e/q

Remittances Monies sent home by migrants and foreign workers. Remittances represent the largest flow of external capital into developing countries.

Remittances World Bank estimated worldwide remittances at $251 billion in 2007 This represents more than twice the level of international aid 1/3 of global remittances originate in the USA; Latin America and the Caribbean receive highest remittance per capita ($66.5 bn in 2007)

Remittances Positives: higher remittance flows are associated with lower poverty, better health and higher literacy rates. Negatives: economies and households that rely on remittances are vulnerable to global events (GFC) The working-age population may shrink A culture of dependency may ensue

The influence of governments Governments have the biggest influence on the flow of capital (money) around the world. They can set tax and tariff levels. Taxes are essentially a charge on a good or service. Governments can adjust tax levels to encourage investment in different areas of the economy (i.e. Tax breaks for dentists to encourage people to become dentists).

The influence of governments Tariffs are taxes specifically on traded items, imports and exports. Again, by adjusting tariff levels, governments can control the flow of goods in and out of their country. Provide subsidies to ailing sectors of the economy. Agricultural goods and services is the most cited example. Governments support their agricultural industries to keep food prices lower.

The influence of governments Stimulate areas of the economy as necessary. A method highlighted during the Global Financial Crisis (GFC) during the late 2000s. Governments around the world injected money into various sectors to support them during the GFC. Eg The Australian Government gave citizens a cheque to assist during this time, most of this money was spent in the retail sector on goods

Influence of major international institutions Global financial institutions can also influence the flow of capital.

WTO World Trade Organisation (WTO). The WTO is an organization dedicated to trade liberalization. The WTO also sets the rules for international trade in goods, services and knowledge (intellectual property) and assists countries with trade disputes

IMF International Monetary Fund (IMF). The IMF promotes cooperation and stability among international financial markets. The IMF facilitates growth in international trade and can issue loans to member nations in times of need.

World Bank The World Bank is an international banking organization that provides loans to developing countries for use in poverty eradication programs.

Task In pairs, select one of the following topics. Research and present a 1-2 minute oral on your topic. Audience to take notes. IMF, World Bank, WTO, OECD, HIPC (note brief history, why it was established, what it manages, its aim, its members, its current work, its benefits and negatives; successes and failures); Multilateral, bilateral (conditional or tied), emergency aid; NGO; development aid