Debt International Financial Institutions Western countries

Debt

International Financial Institutions. • Western countries previously dominated the Globe through colinsation (Early form of Gloablisation) • After dependence, poorer countries still depend on financial aid, credits and support from ex-colonisers (Increased economic dependency). • This has helped contribute towards the debt burden.

World Bank and IMF Original aim of both was to rebuild Europe after recession and WW 11. ¢ Belived problems solved through increased international trade (Free movement of goods and capital). ¢ World bank aims to assist countries by loans and technical assistance. ¢

IMF • Idea of expanding international trade e. g. providing borrowing facilities and easing exchange rate controls. • GATT (General agreement on Trade and Tariffs) was established to encourage free trade. • After WW 11, European countries lacked resources for reconstruction and rejected IMF and World Bank due to strict controls (But developing countries are encouraged to strictly follow the plan) e. g. keep economies open to international forces i. e. lower trade barriers.

World bank principals 1. 2. 3. 4. 5. Poorer countries need cash, so borrow from western creditors and international finance institutions. They buy technology from rich countries to remain competitive and then produce goods and services and sell back to rich nations to generate foreign exchange and pay back debts. Governments spending on social services e. g. health care and education is then cut to increase exports and make the economy more efficient. WB imposes SAPS (structural adjustment programmes) to make economies more efficient. Poorer countries should embrace the idea of a free market.

Tasks: 1. 2. Take note on the case study provided. Use the additional case studies to decide how useful the World bank projects have been. Success or Failure. (Decide on two of the three given)-PRD Page 25

SAPs 1. • • • The main theme is intervention by the WBCountries should cut back on social spending, privatise the public sector enterprises Devalue their currency which leads to an increase in exports BUT imports become more expensive. However, in Mozambique this lead to rising unemployment (50% in 1992) It caused protests in countries, civil unrest and increased unemployment mainly due to the decease in Public spending. Task: Use the Uganda case study provided, take notes and decide from the evidence how effective SAPs have been.

The debt Crisis ¢ ¢ ¢ 1960’s-MEDCS had high growth rates in their economies (Due to boom in oil prices). Money earned was invested in Western banks. Money was lent to poorer nations. 1970’s interest rates were low and inflation high therefore attractive to borrow OPEC forced oil prices higher in mid 1980’s and interest rates increased Poorer countries struggled to pay off their debts.

What happened next? ¢ ¢ MEDCs imposed tariffs on imports. E. g. Mexico in 1982 couldn’t even pat off the interest so defaulted.

Was the money used effectively? ¢ ¢ Often countries would invest in mega projects e. g. large dams which do not benefit the people. Corruption was also rife in some countries e. g. the Accra Metropolitan Authority was accused of corruption and in efficiency. When checked financial records had gone missing and money ended up in individuals accounts.

Problems of Debt Environment: Poor countries exploit natural resources to pay back debt( deforestation) etc which can lead to Global warming which also affects the rich North and also loss of biodiversity, soil erosion etc. Immigration: 100 million legal and illegal refugees due to problems some of which may end up in MEDCs.

Taxes MEDCs countries which decide to pay off debts is at the tax payers expense. Unemployment in the North Loss of exports due to poorer countries not being able to afford imports can lead to closure of factories and unemployment in the North. Drugs Illegal drug trade increases e. g. Cocaine in Columbia, Bolivia db Peru. These are sent to the North creating problems in those countries. Conflict Debt increases conflict and spending occurs in the MEDCS e. g. war in Iraq. What do you notice about all these points?

Solutions to the debt problems. 1. 2. 3. 4. Rescheduling –Different time Debt for nature swaps-ie. must preserve an area e, g, rainforest Debt sold to Transnational at a discount and the country can use the money to invest in social and economic growth. Debt forgiveness and cancellation.

AID and Dependency

Bilateral Aid is given from one country to another e. g. UK’s 4. 5 million pound aid package to Angola in June 1995 to meet rehabilitation after WW 11. Mutilateral Aid is given by organisations e. g. World bank gave a 5 million pound to Narmarda river project in Northern India. Project Aid is given by a donor to special projects e. g. road building, water supplies, health and education (Donor has some control over the use of the loan).

Problems with Aid. e. g. EU dumping food surpluses in Eastern Europe (CAP), they sent Rye to Latvia which reduced the price of local farmers produce. Quality is often poor e. g. 5 year olf wheat sent to Lithuania and sub standard meat to Albania + then the cost and space used in storage.

Motives for giving Aid Controversy surrounding tied aid i. e arrangement made between donor and recipient e. g. building a dam requires materials, specialists etc and who do you think provides this? ? It doesn’t take a rocket scientist to work it out Aid is sometimes linked to weapons e. g. Cuba from Russia former Soviet Union in 1961 -62

NGOs Ensure you have read and taken notes on the article on aid agencies and development from pages 26 -28 of your booklet. You need to cover what NGOs are, examples e. g. Oxfam and how useful this form of Aid is (i. e. this form of aid is seen as meeting the needs of the poor people; the opposite of prestigious mega projects. Make notes on ITDG (Intermediate technology group) and give examples.

World Trade

Problems with trade Trade is the exchange of goods for sale e. g. raw materials like coal, cotton, tin and bananas. However, IF there is a change in demand e. g. copper telephone wires were replaced by fibre optics then demand falls. Zambia’s national income wa greatly affected by this. Bad advice is sometimes given by WB. E. g. Coffee example. Tanzania case study-Basic economics of supply and demand

ICA (International Commodity Agreement_ Tried to stabilise prices, but attempts often collapsed e. g. International Coffee Agreement in 1989 when coffee fell from $US 1. 4 to. 70 per pound in just 4 months. Also Brazil in 1974 had a forst and fungi affected crops in Columbia and Mexico + there was a war in Angola which all decreased supply and prices increased. There many countries switched to growing more coffee (crop substitution) and supply increased and prices decreased.

Continued ¢ ¢ ¢ Fashions in food etc often change which affect demand prices which lead to fluctuations in price as well as the effect of weather and harvests e. g. Coffee, Tobacco & sugar Also factories often close down during recessions in the North which affects demand from the imports from the South and creates further poverty. Commodity substitutes also affect commodities e. g. synthetic cocoa butter, vanilla flavouring and food sweeteners.

Case Study Artificial sweetener production decreased demand for natural sugar and lead to one quarter of a million people unemployed in the Philippine island of Negros. Also affect non-agricultural commodities e. g. Tin from Bolivia which lead to more gold being mined. The impact was more people migrated to the cities (General problems of urbanisation) and more rainforest destruction.

Weather Problems with tropical storms e. g. Hurricanes affect the Caribbean which grows a lot of bananas.

Trading policies Tariffs in the west e. g. Pineapples have a 9% duty, but canned pineapples are 32% and Juice is 42%.

Fair Trade-Is it always fair? Goods produced under a 'fair trade' arrangement are sold under the brand name of the 'fair trade' organization and hence lose their local identity. The producers are forever dependent on the 'fair trade' intermediary who continues to determine unilaterally the size of the price premium. Producers who do not accept the conditions imposed by the 'fair trade' intermediary can be summarily dropped from the scheme.

Draw backs of fair trade continued The main concern of business firms who sell the same products as the 'fair trade' organizations is what makes the prices paid 'fair'. (a) In commerce, a 'fair' price is one that is based on the price consumers will pay for the goods minus all the costs and risks involved in the operation between the market-place and the producer. This is the 'market' price. A 'fair trade' price is usually higher than the market price. But why is a price higher than the market price 'fair'? What determines how much higher the socalled 'fair' price should be? Who decides? The answer to these questions depends on the way 'fair trade' goods are marketed.

(b) As a business model, the 'fair trade' movement can be portrayed as selling 'absolution' to consumers who fell guilty about how well off they are compared to the producers who supply them with certain goods, especially foods. When these consumers pay the premium price, they feel they are doing the 'right thing'. In other words, the price premium they pay is a kind of charitable contribution. The 'fair trade' intermediaries share the premium paid by consumers with the producers in a proportion that they decide. The part they keep for themselves is used to finance their own organizations and provide their employees with a first world life style.

the preferred development model Current 'best practice' to improve the livelihood of small producers involves some kind of co-operation between donors and business firms in which the producers receive business and technical training so that they meet market requirements for better quality goods and so increase their income and improve their life in whatever way they see fit. Task: Summarise the Key points from pages 137 -143