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There are many different definitions of development.
GNP example – Toyota plant in Kentucky – value of US employees would be US, parts produced, factory, goes to Japanese GNP. Examples – US executive temporarily working in London. Whereas GDP – all would get counted.
GDP = GNP + net payments made to other countries for services of factors of production (labor, capital, etc.).
For a typical developing country, GDP is larger because lost of FDI produced goods.
Typically an LDC has GDP>GNP
If over/too may guest workers, could make imbalance where GNP is closer to GDP.
Earnings of guest workers (who are not permanent residents of the country in which they work) may diminish this imbalance for some LDCs.
For the majority of the population in areas such as: nutrition, health, education, sanitation, housing, employment opportunities.
i. Subsistence farming (peasant farm)
ii. Household work.
i. Being kept quiet, possibly to avoid taxes. Example: smuggling to evade taxes (market activity is going on – transportation, etc.)
- Land redistribution – not really feasible
- Family planning and infrastructure
- Health care
- Floating currency – overvalued exchange rates hurt rural/urban consumers
- Transfer payment – equitable
- Food stamps/health care linked (ie Jamaica)
- Micro-credit/group based lending (NGOs supply money)
- Education leading to better family planning.
- FDI – factories
- Women’s rights
- Social security
Both have $5 per capita income. Per capita without income inequality statistics is not very useful. It is another reason to be skeptical of per capita income.
Let Y1 = group one, Y2 = group two, etc. g1 = growth rate for group one, g2 = growth rate for group two, etc.
GDP = Y1 + Y2 +Y3 + Y4 + Y5
GDP growth rate is weighted = w1g1 + w2g2 + w3g3 + w4g4 + w5g5
Where wi is the weight or importance attached to group I
w1 = Y1/GDP; w2 = Y2/GDP, etc fractions are called income share
ie. the income share of each group serves as the weight attached to its income growth rate.
The weight for rich is much higher. Thus a much higher weight is attached to the experience of the rich than to the experience of the poor.
Example: if richest 20% receive 50% of income and poorest 20% receive 5% of income, then the weight w1 for the rich = .5 while the weight of poor w5 = .05
So, the experience of the rich counts ten times as much as the experience of the poor.
Example = consider a country with GDP = $100
Where the top half receives $80 or 80% and the bottom half receives $20 or 20%
a. Rich get income increase of 10% and poor get no income increase, then GDP growth rate is $8/100 or 8%
b. Poor get income increase of 10% and rich get no income increase, then GDP growth rate is $2/100 or 2%
This is the trap when using growth rate - % tells you nothing – one has to know how the numbers are derived.
Alternatives to GDP growth rate (there is no regular reporting using these alternatives):
b. Give equal weights to each group (when measuring GDP)
c. Use poverty weights – give greater weight to experience of poor than to experience of the rich. Thus, you could calculate adjusted GDP growth rate – w1ag1 + w2ag2….where adjusted weights are selected by (a) or (b). This requires very specific data on income by group, would take effort to collect data and effort to calculate them.
- The purchasing power parity (PPP) exchange rate would be ideal (exists hypothetically and not in market). PPP exchange – the buying power of the money – find exchange rate that shows equal buying power in both countries. However, buying habits are different in each country. The calculation of PPP exchange rate is arbitrary (different ways of calculating are possible) because it depends in which items are selected and on the weight’s assigned to them). The World Bank does PPP exchange rates.
- The observed (market) exchange rate differs from the PPP exchange rate for many reasons, including:
i) Financial capital flows caused by interest rate differentials, currency speculation, etc.
ii) Currency market intervention by Central Banks
i. Life expectancy at age one
ii. Infant mortality
The rating for the first two indicators is calculated by: country performance – lower limit/upper limit – lower limit * 100
Where: Lower limit = worst performance on sample and Upper limit = best performance on sample.
Literacy was already expresses as %.
The PQLI for country = average of its three indicator ratings.
Complaint – may not like the variables or giving equal weight to each variable.
i. Adjusted (deals with income distribution) real (adjusted for inflation) per capita GDP
ii. Life expectancy at birth
iii. Adult literacy and school enrollment combined to measure education
Life expectancy at birth (arbitrary numbers)
Real per capita GDP (arbitrary numbers)
Adjusted real per capita GDP
- income inequality
- not enough money for schooling
- demand side – reduce barriers for businesses, create incentives, put money back into schooling
- supply side – schooling for poor, in order to increase production/GDP later
- current strategies focused on safety nets, not growth, no growth = no money = no safety nets
lending away from infrastructure which is imperative to growth which leads to development
- accuracy of world poverty counts – discrepancy - process – surveys – national versus household (data collection)
- poor in government participation
PRSP core elements
- public action and weigh effect of policy
- World Bank and IMF monetary help
IMF Country Relationship
- government spending – education, infrastructure, health, government has greater fiscal responsibility, keep expenditures in limit
- combined efforts – more efficient and accurate
- PSIA – poverty social impact analysis
- poor disproportionately effected
- work program or Bangladesh’s food for education
2. Not covered – skipped
3. Preliminary Remarks:
a. LDCs share certain common features but also exhibit substantial diversity.
b. LDCs are not internally homogenous (all the same) as often have advanced sectors and progressive enclaves.
c. LDCs are often in rapid change rather than stagnant – conditions are dynamic not static.
4. Differences Among LDCs
a. Level of development
b. Size of country – area or population
a. Area – implications for transportation and communication networks, for natural resource endowments (oil, diamonds – bigger the country better the chance of having), for regionalism (bigger countries – Brazil)
b. Population – implications for size of internal market (tiny country – forced into exporting in order to find a market) for human resource endowments
c. History – especially colonial legacy (best off with English and worst off with Portuguese or Belgian) and time since independence.
d. Raw materials and natural resources
a. Energy – crude oil and gas
b. Minerals – copper, bauxite, iron ore
c. Climate – rainfall and length of growing season (very important for agriculture)
d. Soil fertility – more productive agriculture
e. Hydroelectric potential
e. Human resources
a. Size of labor force
b. Education and training, knowledge and skills – human capital
f. Ethnic, religious, racial, tribal, linguistic composition and divisions
g. Role of government in economy relative to size of private sector versus public sector (government), how much government planning and guidance of the economy in these.
5. Common Features Among LDCs
a. Low per capita income
b. Malnutrition – different aspects – calories versus nutrients
c. Poor health – disease
d. Poor education – illiteracy
e. Inadequate sanitation facilities and access to clean drinking water
f. High infant mortality and low life expectancy
g. Poor housing
b. Inequality – highly unequal distribution of income and wealth.
c. Low labor productivity – lack of complementary inputs – eg physical capital, technology, land
d. Demographic composition
a. High birth rate
b. High population growth rate
c. Dependency burden (high) – has to do with working age people versus everyone else – the age profile of the people – working people support both the young and the old. = young + old (<15 and >64)/working age population (16-64)
e. Unemployment and underemployment
f. Importance of agriculture as a principle economic activity – high % of GDP and labor force in agriculture.
g. Exports – reliance on primary commodity exports (agricultural or mining)
h. Dual economy – coexisting buy non-interacting traditional and modern sectors. Traditional = labor intensive, low tech. Modern = capital intensive, high tech
i. Urban slums
j. Poor transportation network and communications infrastructure
k. Dependence on outside economic and political forces – lack of control over destiny (their fate is not in their own hands): technology, foreign debt, world market prices, etc.
l. Relatively small political elite – concentration of political power: large landowners, military, traditional leaders
m. Environmental problems: pollution, soil erosion, deforestation
n. Lack of institutional prerequisites for markets:
a. Property rights and contracts enforced impartially by legal system
b. Stable currency
c. Credit allocation by economic (business) criteria – not political or personal criteria
Video – Sustainable Development Conference (Johannesburg) on CBC following a Canadian representative.
- Lack of commitment
- Stuck in processes
- Parallel events were forty minutes drive away
- Did not include human rights nor indigenous people
1. IMF origins
a. July 1944
44 countries sign the Articles of Agreement at United Nations (at time this was the US allies – not the UN that we know today) Monetary and Finance Conference in Bretton Woods, New Hampshire to create foundations of the international monetary system after second world war.
b. IMF was created as a result in December 1945.
c. 184 members as of Fall 2002.
d. IMF objectives include:
i. Promoting international cooperation on international monetary system by providing a forum for consultation – collaboration.
ii. Facilitate international trade.
iii. Fostering exchange rate stability.
iv. Lending international reserves.
2. IMF Structure/Organization
a. Board of Governors – has one governor from each member – usually the Minister of Finance or the Head of the Central Bank – meets once or twice a year (they do not run everyday events).
b. Executive Board – meets several times each week – in permanent session. There are 24 members:
i. Eight are appointed – US, Japan, Germany, UK, China, Russia, France, and Saudi Arabia.
ii. Sixteen are elected by groups of countries to two-year terms.
3. Managing Director – in charge of staff. He chairs Executive Board – selected by Executive Board to five year term. Unwritten agreement – Americans always President of the World Bank and Managing Directors are Europeans.
3. SDR – special drawing rights – called so because when you borrow from IMF it is known as “drawing” – it is a way of paying debt.
SDR valuation basket (as of 11/27/01):
1 SDR = .426 Euro 29.7%
21.0 Yen 13.4%
.0984 Pound 11.0%
.577 Dollar 45.8%
SDR created by IMF and allocated to its members.
SDRs serve as an international reserve asset for use in payments among Central Banks and international financial institutions. Sometimes referred to as “paper gold.”
4. IMF gets/obtains its resources from membership fees that are called “quota subscriptions.”
Total SDRs are approximately 212 billion, which is obtained by:
- membership fees
- and what is available to lend
Members pay when they join and then pay additional amounts when quotas are raised.
a. Each member is assigned a quota when it joins –determined by the size of its economy, international trade, etc. Level of international reserves.
b. Quotas are revised at least every five years under General Review of Quotas to reflect changed conditions.
c. Special quota adjustments are always possible.
d. When a country joins the IMF, the new member contributes an amount equal to the quota to the IMF:
i. 75% can be paid in own currency
ii. 25% is paid in an international reserve asset
e. Votes of members equals 250 + 1 per SDR 100,000 of quota. Major decisions, such as accepting new members, raising quotas, SDR allocations requires 85% majority vote. The US has 17.11% of votes.
f. IMF loans are regarded as a certificate of creditworthiness by private sector lenders (kind of like the Good Housekeeping Seal of Approval). So are more important than indicated by amounts involved as they are key to obtaining private sector loans.
g. “Conditionality” refers to the policy requirements imposed by the IMF in order to get its loads. Conditionality is controversial because:
i. It infringes on national sovereignty
ii. It causes hardship for the poor and so is anti-development.
Conditionals are specified in “Structural Adjustment programs (SAPs).
Domestic (internal economy) – economic policy conditions may include:
1. Fiscal policy measures to reduce public sector borrowing; ie to reduce government budget deficit.
a. Cut government spending on social programs; education and health.
b. Cut government spending on environmental programs.
c. Cut government spending on subsidies for basic goods and services.
d. Raise prices of basic goods and services provided by state owned enterprises (SOEs) – electricity and bus service.
e. Increase “user fees” for basic goods and services – textbook fees. Ironically, user fees may fail to generate additional government revenues because poor cannot afford to pay fees.
2. Privatize state owned enterprises.
3. Monetary policy measures to:
a. Reduce credit and money stock growth rates (anti-inflation policy).
b. Raise interest rates.
4. Eliminate price controls (hurts poor).
5. Shift agriculture to growing “cash crops” for export rather than food crops for domestic consumption – leads to hunger.
International Economic policy conditions may include:
6. Reduce import restrictions and trade barriers, such as tariffs, to increase access to LDC markets for multinational corporations (MNCs).
7. Currency devaluation (to promote exports) – this is very inflationary.
8. Encourage and promote foreign direct investment (FDI) – establish a climate conducive to FDI.
a. Reduce restrictions on foreign ownerships.
b. Offer tax break for FDI.
c. Exemptions from or lax enforcement of: labor standards and environmental regulations.
d. Promote labor market “flexibility” – reduce or eliminate mandatory severance pay and other job security measures.
e. Eliminate currency exchange controls.
8. Why are these measures required by IMF?
a. Reallocate government funds to debt repayment.
b. To earn hard currency from exports for debt repayment.
c. Ideology – promote private sector at expense of public sector.
9. How do SAPs obstruct development?
a. Higher prices and therefore reduced access for the poor to basic goods and services: food, education, health care, clean drinking water. Examples: child immunizations, textbook fees, prenatal care, medicine, basic foods.
b. Increased unemployment from public sector job cuts.
c. Reduced food production and increased dependence on food imports.
d. More difficult for LDC businesses to compete with MNCs.
e. Control over LDC economy shifts to MNCs.
f. Environmental degradation from:
i. Relaxed environmental restrictions on mining and logging to earn hard currency from exports.
ii. Reduced government spending on pollution control.
World Bank – purpose is to promote development (lends to governments).
1. International Bank for Reconstruction and Development (IBRD) – makes loans – and the International Development Association (IDA) – provides concessional loans known as credit funded by donors.
2. IBDR history:
a. Established pursuant to Bretton Woods to promote economic growth by lending to finance projects which help increase output and productivity.
b. At first IBDR focus was post-second world war reconstruction of Europe after which attention turned to assisting LDC development.
3. IBRD sources of funds are:
a. Membership fees
b. Retained earnings from operations
c. Borrowing on global financial capital markets through bond issues (extremely safe investements).
4. IBRD charges interest rates for its loans which reflects its borrowing costs and other expenses.
5. Due to its top credit rating – because it is backed by its member governments, the IBRD:
a. Has access to world financial markets
b. Pays relatively low interest rate to borrow
Thus, LDCs gains an advantage when they borrow from IBRD instead of from a commercial bank or by directly using bonds.
6. IDA history:
a. Established 1960 to provide credits to poorest countries on concessional terms.
b. IDA obtains its resources from donors through periodic “replenishment”
c. IDA credits (loans) are for 50 years with a 10 year grace period and no interest charges.
a. At first IBRD (1960s) – focus was on large scale infrastructure projects in transportation and energy sectors – road construction and hydroelectric dams. This lending focus came under criticism for not lowering poverty and damaging environment.
b. The emphasis was changed (1970s) to smaller scale projects attempting to directly target poor, especially in agriculture and rural development – irrigation. The “basic needs” approach focus was on education, health care, clean water, etc.
c. In response to debt crises (1982) – World Bank switched lending to support of structural adjustment programs in collaboration with IMF. World Bank loans were “hijacked” to supplement IMF loans. Lost decade in development – 1982-1992.
d. Possibly the Poverty Reduction Strategy Paper approach is going to work – lead to a refocus on poverty reduction – too soon to evaluate results of this approach.
8. International Finance Corporation (IFC) is a World Bank affiliate established in 1956 and designed to lend to private enterprise. IFC shares World Bank staff but it is legally and financially separate. IFC reflected Cold War ideology, creation of IFC was necessary to placate conservative political focus in the US.
Regional Development Banks – these are regional versions of IBRD.
1. Inter-American Development Bank (IDB) founded in 1959 by organization of American States (OAS), 46 members, headquartered in Washington DC, lends to Latin America and Caribbean.
2. Asian Development Bank founded in 1964, 59 members, Manila.
3. African Development Bank founded in 1964, 77 members, Abidjan, Ivory Coast.
United Nations Agencies:
1. A number of UN organizations are important in development.
2. United Nations Conference on Trade and Development (UNCTAD) created in 1964 to promote trade and development. Consists of a series of international conferences at which issues concerning LDCs are discussed. Raul Prebisch – “Father of UNCTAD” – was secretary general of UNCTAD until 1969. He worked with Hans Singer.
3. United Nations Development Program (UNDP) – promotes development projects in areas such as nutrition, health care, education, agriculture, transportation, etc. Annual publication – The Human Development Report; developed human development index (HDI).
4. UN International Children’s Emergency Fund (UNICEF) – now known as International Children’s Fund – founded at first session of the General Assembly in 1946 to provide nutrition and education and health care to children in LDCs.
5. Two UN organizations to address Food and Hunger issues:
a. FAO – Food & Agriculture Organization – headquartered in Rome – goal is to increase food production. Conducts research to raise farm yields and educate farmers.
b. World Food Program – provides food aid to refugees, victims of famine, etc.
6. World Health Organization (WHO) – founded in 1948.
World Trade Organization (WTO):
1. WTO began operations January 1995 as successor to GATT (General Agreement on Tariff and Trade) which was established in 1948. GATT was supposed to be interim until the WTO was established. WTO promotes trade by:
a. Reducing tariffs and other trade barriers
b. Sponsoring multilateral trade agreements/negotiations
c. Mediating trade disputes
2. Issues such as:
a. Agricultural export subsidies – French wheat farming
b. Government procurement policies – who is hired for huge government projects – national firms only…
c. Intellectual property rights – patents, copyrights, trademarks – reduce pirating and counterfeiting
d. Access to developed country markets for LDC – textiles
e. Drug patents – AIDS drugs, etc.
The Anti-Globalization Movement
- The anti-globalization movement is a loose political alliance of at least three communities that share a critical view of globalization. These include labor unions, environmental groups, and human rights organizations.
1. Globalization is supported by an economic model that is based on premises that are not accepted as valid by the anti-globalization forces:
a. Belief in the efficiency of markets – “market fundamentalism”
b. Belief in the efficiency of the private sector producers
c. Belief in the mutual benefits of international trade
2. Globalization is seen by its opponents as:
i. Transnational corporations (TNCs)
ii. Private sector financial institutions in North
iii. Corrupt LDC officials
i. Poor of South
ii. DC workers
iii. The environment
3. Opposition to the IMF’s “Structural Adjustment Programs” (SAPs) that are required of LDCs in return for loans and debt relief.
4. World Bank (WB) criticized for loans supporting environmentally destructive projects such as:
b. Natural Resource Extraction – logging, strip mining
c. Power plants (air pollution, global warming)
5. WTO and “Free” Trade opposed by:
a. Union/Organized labor:
i. Corporations use threat of relocation to suppress wages in DCs
ii. DC jobs are lost when corporations relocate
iii. TNCs evade national labor standards by shifting production
b. Environmentalists: TNCs circumvent national environmental regulations by shifting production.
6. Human Rights”
a. IMF/WB loans to repressive regimes assist their violations of human rights – lending policies ignore human rights record of borrow (should have a human rights criteria applied before making loans). Dams – forcibly relocate people.
b. Certain projects financially supported by WB loans entail human rights violations – forced resettlements for dams.
7. Demands of the anti-globalization include:
a. Transparency – open meetings to the media and the public
b. Cancel LDC debt – justification is that:
i. Banks lent irresponsibly (banks made error in loaning out in the first place)
ii. “Odious Debt” accumulated by undemocratic governments no longer in power (banks made loans to repressive regimes – in essence supporting them).
iii. Debt crises precipitated by factors beyond the control of LDCs such as:
i. Falling prices of export commodities – cocoa and coffee prices fell)
ii. Increased oil price
iii. Increased interest rates in DCs
c. Eliminate SAPs
d. Bring human rights considerations into the lending criteria
e. End funding of environmentally destructive projects
1. Foreign Aid – official development assistance (ODA) – transfer of real resources from DCs to LDCs. Includes:
b. Soft loans – loans on easy or “concessional” terms which include:
i. Below market interest rates
ii. Grace period until repayment begins
iii. Long maturity
iv. Repayment in local currency (not normal – but sometimes done)
c. Technical assistance (human capital – nursing)
d. In-kind assistance – food, tents, vaccines, etc. – a good is provided
Military aid is not counted as ODA.
2. ODA can be:
a. Bilateral – one country to another country – US Agency for International Development (AID).
b. Multilateral – an international group or organization – International Development Association (IDA)
3. To measure ODA must convert soft loans into their “grant equivalent” = amount of loan minus present value of the future payments of principal and interest (there is leeway because have to choose discount rate). This measures the extent of concessionality involved.
4. Aid tying refers to attaching conditions to the aid which must be observed by the recipient which restrict use of aid.
a. Aid tying by source: aid must be used to purchase goods and services from donor, this reduces value of aid by increasing prices paid by LDC, but this may be useful in obtaining political support for aid in donor country.
b. Aid tying by project: aid must be used for a specific purpose or specific project, this reduces value f aid by preventing its use where it is most needed. Eg – if aid is used for a highly visible project with donor’s name on it. But this may increase value of the aid by preventing it from being wasted – eg used to build a statue of the dictator or from being stolen by corrupt officials.
5. Motives for donating aid:
a. Political motives:
i. Provide support to friendly regimes
ii. Ideological – promote anti-communism, democracy, capitalism, etc.
iii. An instrument of foreign policy – to coax parties into a peace agreement – South Africa, Northern Ireland
b. Economic motives
i. Facilitate overseas investment and access to raw materials by providing necessary infrastructure – build railroad to the mine.
ii. Increase donor exports
i. Food aid in case of famine
ii. Disaster relief – earthquakes
iii. Refuge assistance
6. ODA augments domestic savings and thus permits increased investment but there is a controversy about whether ODA adds to or instead replaces domestic saving.
7. ODA provides foreign currency and thus permits increased imports unless the foreign currency is used for capital flight.
8. Two gap models were designed to explore the benefits to development offered by contributions of foreign capital – they provide a theoretical basis for ODA.
a. Basic macroeconomics indicates that investment is constrained by the availability of savings as:
Sp + (T – G) + F = I
Sp = private sector savings
T = taxes
G = government
T – G could be budget surplus or deficit
F = foreign financial inflow
I = investment
Sp + (T – G) is domestic saving
and imports are constrained by the availability of foreign currency as:
M = F + X
M = imports
F = foreign money inflow
X = exports
b. So there are two gaps:
i. One gap is between the availability of savings and the amount of investment which would be required by a maximum development effort Sp + (T-G) + F = I ie investment opportunities exceed the available savings
ii. One gap is between available foreign currency and the amount of imports eg capital goods, intermediate goods – which would be required by a maximum development effort M = F+X
c. A gap is “binding” if it’s interfering with development – if it’s a bottleneck preventing faster growth – either or both of the gaps may be binding at any time.
d. Aid helps free both gaps by augmenting F. Thus aid permits increased investment and increased imports.
9. Critics of food aid argue it:
a. Increase dependence
b. Does not reach truly hungry
c. Decrease local food production by reducing food prices received by local farmers by increasing food supply. To avoid this problem, aid agencies can try to buy food from local farmers at a relatively high price, add sufficient foreign food to the locally produced food, and provide it free or at a low price to the consumers.
S produced = supply of locally produced food
S total = total food supply = locally produced food + donated food
Q1 = quantity of locally produced food before food aid = total food supply before food aid
Q2 = quantity of locally produced food with food aid
Q3 = total supply with food aid
Q3 > Q1 which is good
But Q2 < Q1 which is bad
10. Problems with corruption may be minimized by using NGOs
1. Foreign loans are part of foreign financial capital inflow which fills two gaps by:
a. Augmenting domestic savings so permits higher investment
b. Augmenting exports earnings of foreign currency so permits higher imports
2. Debt terminology
a. Amount of loan = principal
b. Repayment of principal + interest = debt service
c. No “c”
d. Loan commitment (an agreement) versus loan disbursement (when payment is actually made)
e. Net borrowing = disbursement – repayment of principal
f. Basic transfer = net borrowing – interest or it can = disbursement – debt service
3. Foreign loans may be:
a. Private sector – commercial bank
b. Public sector or official (governmental)
i. Bilateral – one country makes a loan to another country
ii. Multilateral – international financial institutions such as the IMF or WB (more likely to get debt relief here).
4. Terms of debt include:
a. Maturity = duration of loan
b. Grace period
c. Interest rate
d. Origination fees
5. Debt indicators which are used to measure debt burden by expressing debt or debt service on a relative basis (that indicates paying capability of a country). eg Debt service/exports or debt/GDP (not as useful)
6. First LDC debt crisis involved Latin America and began with Mexico in July 1982. Second LDC debt crisis involved east and southeast Asia and began with Thailand in 1997.
7. Origins of first LDC debt crisis are found in 1973 OPEC oil price increase which created both supply and demand for international loans.
a. Supply: recycling of OPEC petrodollars through multinational banks.
b. Demand: LDC oil importers needed loans to finance oil imports (Mexico wanted to industrialize, their oil reserves justified banks making loans).
8. Other contributing factors on the supply side:
a. Evolution of variable interest rate loans which transferred the risk from lender to borrower.
b. Syndication (evolution of ) which permitted participation of smaller banks in international loans.
c. Competition among banks with secrecy and lack of coordination – obscured magnitude of the growing LDC foreign debt.
d. Source of foreign loans shifted to much larger proportion from commercial banks at market terms and much smaller proportion from official sources on concessional terms. This tended to lead to higher interest rates and shorter maturities.
e. Vulnerability to savings in exchange rate of US $ as foreign loans denominated in $ frequently (almost always)
9. Other factors contributing (on demand side): LDCs often misused proceeds from foreign loans for non-productive purposes, such as:
a. military spending
b. luxury consumer good imports
c. financial capital flight caused by:
a. political uncertainty
b. currency speculation about potential devaluation
d. poor economic prospects
10. Result was amount of LDC foreign debt grew substantially which created potential for a debt crisis.
11. The precipitating (trigger) factors were linked to the1979 oil price increase following the Iranian Revolution, which caused:
a. Higher LDC oil import bills (less money to pay debt service with)
b. High DC inflation rates leads to high DC interest rates leads to DC recession (US recession 80 and 82) leads to reduced DC import demand
a. High interest rates leads to increased debt service in variable interest rate loans
b. Reduced import demand leads to decreased LDC export quantities decreased LDC export prices so – reduced export earnings
12. Negative impact on development resulted from the substantial decreased LDC imports
a. Decreased GDP (recession from supply side) as LDCs decreased imports of raw materials and spare parts and intermediate goods necessary for production
b. Decreased imports of capital goods which reduce technology and productivity, growth rate
c. Decreased imports of food
13. To the extent that government LDC debt is involved, the debt crisis caused government budget deficits – these in turn led to austerity measures with cuts in government spending for health, education, etc. To meet debt service obligations, LDC governments had to drastically cut back social programs with devastating results for development.
14. Initial response by banks to LDC debt crisis (purely looking at big banks, not LDCs) was aimed at avoiding mass LDC defaults and the resulting damage to banks balance sheets and possible bankruptcies by:
a. Loan rescheduling (short term solution) preferred solution – ie renegotiate terms of loan to extend maturity ie lengthen payback period.
b. Loan refinancing (short term solution) ie new loans make with proceeds used to repay old loans.
There were not long-term solutions – only stop gap emergency measures. Banks charged late payment penalties and substantial fees for this. Missed interest payments were often capitalized (added on to outstanding principal). These added substantially to the total foreign debt.
15. A market response in the intermediate term: a secondary response (market) evolved in which LDC debt traded at discount to book value – this allowed banks that wanted to – to remove problem LDC loans from their balance sheets but they had to absorb substantial losses to do so.
16. Options which were not used to a significant extent:
a. Unilateral repudiation of debt service obligations eg Peru limited debt service to a specified % of export earnings.
b. Debt forgiveness by creditors.
17. Paris club = forum of official creditors which negotiated with LDCs. London Club = private sector creditors.
18. Debt swaps later emerged as an option:
a. Debt for equity swaps – LDC debt is converted into equity ownership stake – firm which wants to make direct investment in LDC buys LDC debt from commercial banks at discount in secondary market and exchanges it for ownership stake in SOE being partially privatized. Argentina examples:
i. In 1990, Argentina’s stated owned telephone company was split into two companies – one for the north and one for the south of the country. 60% ownership stake in each was sold by auction.
- A consortium led by the Spanish Telephone Company and Citicorp won the southern operations for $114 million and $2.7 billion in retired debt.
- A consortium including Italian and French telephone companies and JP Morgan won the northern operation for $100 million and $2.3 billion in retired debt.
ii. In 1990 Argentina’s SOE airline was 85% sold to a group led by Iberia of Spain for $260 million and $2.01 billion in retired debt.
b. Debt for Nature Swaps: ecological NGO buys LDC debt at discount from commercial banks in secondary market and exchanges it for environmental preservation commitment by LDC government. eg Conservation International in 1987 paid $100,000 for $650,000 of Bolivian debt to Citicorp and traded it for promise to protect 3.7 million acres around the Beni Biosphere Reserve and to spend the local currency equivalent of $250,000 to manage the reserve. These are limited by the financial resources of the ecology NGOs.
19. Brady Bonds – named after Nicolas Brady – he was a US Treasury Secretary. Banks exchange LDC loan for a reduced amount of Brady Bonds – repayment of principal of Brady Bonds in guaranteed eg by zero coupon Treasury Bonds (these bonds stay in Washington DC) but payment of interest is not guaranteed – banks must record a loss on their balance sheets when the exchange occurs.
20. End of first LDC debt crisis marked by the signing, in 1992 by Argentina and Brazil, of Brady Agreements with commercial banks.
1. Economic development emerged as a field of study after WWII as a result of several factors:
a. Success of Marshall Plan – US assisted West Europeans efforts to rebuild and recover from devastation – the misconception was that development was similar to reconstruction (idea was – provide financing and development would follow).
b. Cold War rivalry of US and USSR gave a strategic importance to LDCs – they became a focus of interest and US – USSR engaged in competition for their allegiance.
c. Achievement of independence by former colonies – birth of countries seeking development under national leaders.
Skipped 2 and 3.
4. Historical Model of Origins of Underdevelopment is dependency theory:
a. Underdevelopment does not equal traditional or original state. Underdevelopment does not equal earlier stage of current DCs. Famous article called Development of Underdevelopment.
b. Focus is on unequal power relations between center and periphery or metropoles and satellites. Dependence and Dominance characterized relations.
d. Dependency theory was primarily applied to analysis of Latin America but examples can be found elsewhere:
a. De-industrialization of India by British (Asia)
b. Slave trade (Africa)
c. Destruction of Incas and Aztecs by Spanish (Latin America)
a. Greatest underdevelopment is found in areas which had strongest ties in the past to capitalists and DCs.
b. Satellites should achieve greatest development when ties to center are weakest. eg WWI, WWII, Great Depression – all times when centers are weakest (self occupied) and satellites have greatest chance.
5. Empirical/Descriptive Studies of Historical Development.
a. Simon Kuznets (economic historian) at Harvard – won Nobel Prize. Kuznet’s analysis identified six characteristics of what he called “modern economic growth” (MEG)
a. Increased growth rates of per capita output and population.
b. Relatively high rate of growth of Total Factor Productivity = output per unit of a composite of all outputs (an increase in growth)
c. Structural change of economy including:
i. A shift from agriculture to non-agriculture and later a shift from industrial activity to services.
ii. Substantial increase in average size of productive units
iii. Shift in labor force from rural areas and agricultural sector to urban areas and manufacturing.
d. A transformation of institutions and attitudes and ideologies.
e. International economic outreach (beginnings of globalization) – seeking export markets and raw material sources in other countries – made possible by technological progress in transportation and communication.
f. Limited spread of MEG
Meg began with Industrial Revolution in England in second have of the 18th century and spread to France and the US in the first half of the 19th century. Belgium also at beginning. Japan began MEG after 1867 – as first non-western MEG. Russia began MEG after 1917 as first non-capitalist MEG.
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