global interdependence

• What is the major problem for the world's poorest nations (LICs)?

  Debt

  
  

  A high proportion of their income is spent on interest payments (to the IMF, World Bank and governments in HICs).

  
  

  This limits the amount of money available to spend on infrastructure e.g. roads, schools, hospitals and developing the economy through industry and agriculture.

  
  

  Before the HIPC Initiative these countries were spending more on debt service than on health and education combined.
• What is debt?

  In this context refers to external debt (foreign debt), which is that part of the total debt in a country owed to creditors outside the country. The debtors can be the government, corporations or private households. The debt includes money owed to commercial banks, other governments, or international financial institutions such as the World Bank
• What is the debt service ratio?

  The proportion of a country's export earnings needed to meets its debt repayments.

  
  

  The ratio of debt service payments of a country to that country's export earnings.
• What are credit ratings?

  They show the ease with which a country can borrow money.

  
  

  These are reported by the four major credit rating agencies:

  - Standard and Poor's

  - Fitch

  - Moody's

  - DBRS
• What is a national deficit?

  It occurs when a government's annual spending exceeds the income that it generates through taxes and other means.
• What is a national debt?

  The accumulation of yearly deficits.

  
  

  A problems for governments with debts is that interest payments on the debt must be made, reducing the amount of money available to spend on other things.

  
  

  Debt is expressed as a percentage of GDP.

  
  

  The country which owes most money is USA and then the UK - like other HICs these countries have large assets against which they can borrow money so the debt is manageable unless there is a global financial crisis.
• What is external debt (foreign debt)?

  Part of the total debt in a country owed to creditors outside the country.
• What is unpayable debt?

  External debt when the interest on the debt is beyond the means of a country - prevents the debt from every being paid.
• What are the affects of debt?

  It affects a country's creditworthiness and therefore its overall economic vulnerability.
• What are factors that have caused the poorest countries in Africa to have a debt crisis?

  During 1970s interest rates were low - made it easy for developing countries to borrow externally for development projects - excessive lending to African governments.

  
  

  Lenders were prepared to invest in countries with poor governance, corrupt leaders and no democratic scrutiny of government borrowing and spending.

  
  

  Wars in the Middle East in the 1970s led to rising oil prices. The oil-producing countries invested in banks. In turn, the banks targeted LICs with cheap credit.

  
  

  The global recession of 1979 to 1981 caused commodity markets and prices to collapse. This hit the LICs, which were heavily dependent on the export of primary products.

  
  

  Drought between 1981 and 1984 severely affected Africa's cash crop production.

  
  

  High interest rates throughout the 1980s made it difficult for Africa to service the debts previously built up when interest rates were low.

  
  

  The US dollar decreased in value between 1985 and 1990.

  Much of Africa's debt was in currencies which appreciated against the US dollar: therefore the debts grew.

  
  

  Debts were rescheduled to provide cash flow, but on punitive terms. Protectionism in the world's markets for agricultural products make it difficult for African countries to increase exports and earn their way out of debt.

  
  

  Civil wars affected much of the continent in the 1970s.

  
  

  Population growth rates of over 2.5 per cent per year led to a growing demand for goods and services.
• What were the reasons for the deficits in Greece (at the start of the 1980s)?

  
  

  Since 1996 the deficits began to grow, particularly after Greece joined the euro currency in 2001.

  Excessive spending. Deficits financed large military expenditure, pensions and other social benefits.

  
  

  Low GDP growth rates and poor competitiveness.

  
  

  Government depts. Debt was not reduced during the years with strong economic growth, so the government could not continue running large deficits in years with low growth.

  
  

  Budget compliance. The government exceeded its spending plans.

  
  

  Accuracy of statistics. In each of the five years from 2005 to 2009, the EU statistical agency Eurostat noted a reservation about the accuracy of Greece's data.

  
  

  Tax invasion and corruption. Tax incomes have fallen below the expected level.

  
  

  Hidden borrowing. In 2010 it was revealed that various banks developed financial products which enabled the governments of Greece, Italy and many other European countries to hide their borrowing. This allowed Greece to exceed recommended limits of deficit and debt.

  
  

  In April 2010 the credit agencies downgraded the Greek economy so that private capital markets were no longer available for Greece as a source of funding.

  
  

  On 2 May 2010, the euro currency zone countries and the IMF agreed on a €110 billion bailout loan for Greece, conditional on the following points:

  - implemenation of austerity measures, to restore the fiscal balance

  - privatisation of government assets worth €50 billion, by the end of 2015

  - implementation of reforms, to improve competitiveness and growth prospects

  
  

  Because the southern European countries with debt problems are part of the euro currency zone, measures to reduce the debt have to be agreed by the EU.
• What is debt relief?

  Cancellation of debts owed by developing nations to industrialised nations or institutions such as the World Bank, in order to allow the government to shift funds toward social development.
• What are the strengths and weaknesses of debt-reduction schemes?
• What is the Heavily Indebted Poor Countries (HIPC) Initiative?

  First established in 1996 by the International Monetary Fund (IMF) and the World Bank.

  
  

  Aim - to provide a comprehensive approach to debt reduction for heavily indebted poor countries so that no poor country faced a debt burden it could not manage.

  
  

  Intended to make debt manageable for MICs and LICs.

  
  

  To qualify for assistance, countries have to pursue IMF

  and World Bank supported adjustment and reform

  programmes. In 1999, a comprehensive review of the

  Initiative allowed the fund to provide faster, deeper

  and broader debt relief and strengthened the links

  between debt relief, poverty reduction and social

  policies.

  
  

  In 2006, the Multilateral Debt Relief Initiative (MDRI) was launched to provide additional support to HIPCs to reach the Millennium Development Goals.

  
  

  In 2007, the Inter-American Development Bank also

  decided to provide debt relief to the five HIPCs in the

  western hemisphere. According to a recent World

  Bank-IMF report, debt relief provided under both

  initiatives has substantially alleviated debt burdens in

  recipient countries.
• When is a country considered eligible for HIPC Initiative assistance?

  Country should have:

  - a track record of macro-economic stability

  - prepared an interim Poverty Reduction Strategy Paper (PRSP)

  - cleared any outstanding arrears

  
  

  Completing these requirements means that the country can receive full and irrevocable reduction in debt available under the HIPC Initiative and MDRI.

  
  

  To reach completion point a country must:

  - maintain macro-economic stability under an IMF's Poverty Reduction and Growth Facility (PRGF)-supported programme

  - carry out key structural and social reforms as agreed upon at the decision point

  - implement a PRSP satisfactorily for one year
• What is the Multilateral Debt Relief Initiative MDRI)?

  Provides 100% relief on eligible debts by the IMF, the World Bank and the African Development fund (AfDF) for countries completing the HIPC Initiative process
• describe and explain different types of international aid and donors

  o relief aido development aido tied aido bilateral aido multilateral aid
• Why should HICs help MICs and LICs to develop?

  Making up for past mistakes - many problems in LICs are the result of activities by HICs e.g. Colonialism, unfair trade and globalisation.

  
  

  Security - political instability caused by poverty in LICs can threaten the HIC's raw materials and markets.

  
  

  Air helps trade - with a richer economy, an LIC can afford more imports, often from the HIC that gave the aid.
• What is relief/emergency/humanitarian aid?

  Help given to people in distress or immediate threat of death.

  
  

  Aims to relieve suffering and not to address the causes of the problem.

  
  

  Suffering caused by:

  - wars

  - natural disasters e.g. Drought, earthquakes or floods

  
  

  Involves providing vital services e.g. Food, water, shelter or medical assistance and the logistics or transport to support them.

  
  

  Does not involve armed forces protecting civilians from violence.
• What is tied aid?

  Aid that must be spent in the donor country or countries on good or services.

  
  

  Tying aid implies that the reasons for giving aid are not always altruistic.

  
  

  Two types of reasons for tying aid:

  - economic reasons: The donor country wants to increase its exports

  - political reasons: The donor country may have historical/former colonial links with a country or may wish to strengthen its geopolitical interests and cultural ties - during the conflict between communism and capitalism in the 20th century, the Soviet Union and USA each used aid to influence the internal politics of other nations.

  
  

  It may increase development project costs if the goods or services could have been found more cheaply in another country - reduces monetary value of the aid.
• Why is aid given?

  The ties of colonialism and neo-colonialism.

  
  

  Strategic considerations

  
  

  For humanitarian and economic reasons.

  
  

  Assist economic development

  
  

  Alleviate poverty
• What is aid?

  Assistance in the form of grants or loans at below

  market rates.
• Why have most LICs been keen to accept foreign aid?

  Foreign exchange gap- whereby many LICs lackthe hard currency to pay for imports such as oil andmachinery that are vital to development.

  Savings gap- where population pressures and otherdrains on expenditure prevent the accumulation ofenough capital to invest in industry and infrastructure.

  Technical gap- caused by a shortage of skills needed fordevelopment.

  Many LICS rely on a small range of export for foreign currency.

  The prices of such products are often low compared with the goods and services they need to import, and the prices for such raw materials can alsobe very volatile.
• Why do richer nations give aid?

  Most foreign aid is not in the form of a grant, nor is famine relief a major component.

  
  

  A significant proportion of foreign aid is 'tied' to the purchase of goods and services from the

  donor country and often given for use on jointly-agreed

  projects.

  
  

  The proportion of tied aid in relation to total international aid has been falling in recent

  decades.
• What are the different types of international aid?

  Official government aid- where the amount ofaid given and who it is given to is decided by the government of an individual country

  Voluntary aid- run by NGOs or charities e.g. Oxfam, ActionAid and CAFOD - NGOs collect money fromindividuals and organisations- an increasing amount of government money goes to NGOs because of their special expertise in running aid programmes efficiently.
• What are the different types of official government aid?

  Bilateral aid

  - given directly from one country to another

  - a significant proportion of bilateral aid is tied

  - covers many different categories of assistance

  
  

  Multilateral aid

  - provided by many countries

  and organised by an international body e.g UN
• What are the two types of ways aid can be supplied to poorer countries?

  Short-term emergency aid/relief aid- provided to help cope with unexpected disasters e.g. earthquakes, volcanic eruptions and tropical cyclones

  Long-term development aid- directed towards thecontinuous improvement in the quality of life in apoorer country
• describe and explain the effects of international aid on receiving countries critically evaluate these effects
• What are the benefits and problems of international aid?

  Benefits

  - all the countries that have developed into MICs from LICs have received international aid (but their development has been due to other reasons too)

  
  

  Problems

  - difficult to be precise about the contribution of international aid to development of each country

  too often aid fails to reach the very poorest people and

  when it does the benefits are frequently short lived

  - sometimes aid fails to reach the poorest people and

  when it does the benefits are frequently short lived

  - a significant proportion of foreign aid is 'tied' to the

  purchase of goods and services from the donor country and often given for use only on jointly-agreed projects

  - the use of aid on large capital-intensive projects may

  actually worsen the conditions of the poorest people

  - aid may delay the introduction of reforms e.g. the substitution of food aid for land reform

  - international aid can create a culture of dependency

  that can be difficult to break

  Aid encourages the growth of a larger than necessary

  public sector

  - aid encourages the growth of a larger than necessary

  public sector

  - the private sector is 'crowded out' by aid funds

  - aid distorts the structure of prices and incentives

  - aid is often wasted on grandiose projects of little or no benefit to the majority of the population

  - the West did not need aid to develop
• What are some issues that are more important to development than aid?

  Changing the terms of trade so that LICs get a fairer

  share of the benefits of world trade.

  
  

  Writing off the debts of the poorest countries.
• What are the two ways ODA is measured?

  1. ODA as a percentage of gross national income (GNI).

  
  

  2. Total ODA by country

  
  

  The ODA provided by the more affluent countries of the world varies widely.

  
  

  Some countries have changed from being recipients of ODA to donor countries.
• What are the impacts of aid on receivin

  g countries

  Aid reliance

  Aid can have the opposite effect from that which is intended.

  For example, in Swaziland between 2000 and 2010, up to

  two-thirds of the 1.2 million population has relied on donor

  food assistance. Between 1970 and 1990 life expectancy

  rose from 48 to 61 but by 2012 it was back to 48. The

  population has been weakened by HIV/AIDS and other HIV-

  related disease. The United Nations' World Food Programme

  supplied relief food during emergency situations and food

  directly to the government during non-emergency times. This

  led some farmers to think that they would always be supplied

  and they became dependent on the aid. The market for local

  produce is also damaged. More recently the United Nation's

  World Food Programme and other organisations have been

  moving away from food distribution towards programmes of

  encouraging self-sufcient food production.

  Recipients of donated western clothing will not buy clothing

  from local producers, putting them out of business

  
  

  Problems of tied aid

  It is cheaper to use local expertise rather than expensive overseas consultants, engineers, etc.

  In the USA the law requires food aid to be spent on buying food in the USA - so half of what is spent is used on transport - tying aid increased the cost of aid by 15-30%.

  Giving cash/cash vouchers instead of imported goods is a cheaper, more efficient way to deliver aid.

  
  

  Counterproductive conditions on aid

  The World Bank and IMF attach conditions to loans such as the elimination of state subsidies and the privatisation of services. This might mean that local people cannot afford goods such as fertilisers.

  
  

  Unfair conditions

  Subsidies are given to producers in HICs such as EU agricultural subsidies. This subsidy might be greater in value than that of the aid provided to the LIC.

  
  

  Fragmentation increases bureaucracy

  The large number of government organisations and NGOs involved leads to overlap and inefficiency as time is spent in coordinating the work of different organisations.

  Donor institutions make proposals for aid projects to recipient countries who make a plan for the use of the aid.

  
  

  Prioritising aid

  In the health sector, aid targeted at high profile disease but it may be more effective to concentrate on more general issues

  
  

  Loan repayments

  HIPC Initiative loan repayments are set too high.

  Other loans lead to further debts which the country struggles to pay off.

  Instead of using the countries earnings to improve the quality of life of the people, large amounts of money are being repaid to foreign banks.

  
  

  Corruption

  Sometimes aid does not reach those who need it.

  - money is paid out to fake bank accounts controlled by corrupt elites

  - prices are increased for transport or warehousing

  - goods are sold to the black market

  
  

  The poorest countries are not a priority

  Commercial and political interests means that middle income countries get more help than the poorest countries with small markets.

  
  

  Top-down or bottom-up?

  Debate as to how aid should be organised - argument that the top-down model does not work/being criticized so effective bottom-up strategies have been developed.

  
  

  Drain of talent

  Providing aid to health sectors in LICs and the training of medical staff is hindered by migration policies in HICs that encourage the immigration of LIC doctors and nurses.

  
  

  Hi-tech aid can be a problem

  E.g. tractors are expensive to run (imported fuel) and difficult to repair when they break down - local people may not have the necessary skills.
• What are some examples of top-down and bottom-up delivery of aid?

  Top-down delivery of aid- governments implement central programmes- governments held to account by the donors

  
  

  Bottom-up delivery of aid- directly aids individuals rather than governments- local markets are developed- implementation is developed to the local level- local people develop their creativity and entrepreneurship- local people develop the vision for projects
• Does aid help development?

  There are arguments to whether aid helps development or whether it is counterproductive.

  
  

  Some argue that the growth that has occurred has been small.

  Some argue that without aid things might has got worse.
• What are the key strands of the bottom-up approach?

  Mobilising local people for self-reliant action.

  
  

  Intervening for gender equality.

  
  

  Strengthening local democracy.
• What are similarities and differences between the top-down and bottom-up aid models?
• What are non-governmental organisation (NGOs)?

  They are better at directing aid towards sustainable development than government agencies.

  
  

  The selective nature of such aid has targeted the poorest communities using appropriate technology and involving local people in decision-making.

  
  

  They provide voluntary aid.

  
  

  Mainly charities devoted to helping people in LICs.

  
  

  Examples

  - Oxfam

  - Save the Children

  - Christian Aid

  - Live 8

  - Cafod
• demonstrate knowledge of:

  - visible and invisible imports- visible and invisible exports
• What is trade?

  The exchange of goods and services for money.

  
  

  It is the most vital element in the growth of the global economy and the development of a country's economy and subsequently social development.

  
  

  There is a relationship between volume of trade and standard of living.

  
  

  World trade now accounts for over 30% of GDP (3 times its share in 1960).

  
  

  The origin and continuing basis of global interdependence is trade.

  
  

  It balances production and consumption by moving raw materials, good and services from regions (areas) of supply to regions (areas) of demand.
• What are the causes of trade?

  Results from the uneven distribution of resources over the Earth's surface.

  
  

  Develops as a result of regional and global economic differences.

  
  

  Even countries with an abundance of resources and a wide industrial base cannot produce all of the goods and services that their populations desire.

  
  

  So they buy goods and services from other countries, providing they have the money to pay for them.