International Economics

Developing Countries

Organizations of International Economy

What is necessary for a poorer country to get ahead?

• Economic development– The size and

sophistication of a nation’s industrial, service, technical and ag sectors

Developed Nations

• High levels of industrial and technical expertise.

• Variety of economic institutions– Banks, stock markets,

and trade networks

World Bank

• Classifies 25 nations as being “high income” or highly developed. – US– Canada– Japan– Most of Europe– 14% of the world’s

population.

Developing Nations

• Low per capita GDP• Limited resources or

inefficient use of resources

• Rapid population growth rate

• Dependency on agriculture as main form of production

World Bank Data

• 90 nations are considered “developing”

• Average income $3,000 per year

• Examples– China, Mexico, most

Eastern European countries

Least Developed Countries

• 49 countries listed as LDC

• Average income less than $900 a year.

• Weak human assets• High economic

vulnerability• Economic smallness

What do nations need to “get ahead”?

• MOST IMPORTANT!

• Capital formation!– Countries don’t get

ahead because of a lack of

• Savings

• Private investment

• Lack of existing capital

Also needed to get ahead

• Get away from “one crop” economies– Can be mining of one

item or ag speciaization.

• Population control– Need long term

investment in health, education, job training.

Also needed to get ahead

• Encourage entrepreneurship

• Adequate infrastructure

• Political stability• Social and cultural

obstacles need to be overcome

How Nations are Developing

• International Private Capital – Multinational

corporations (MNCs)• Provide jobs, money,

products, services

How Nations are Developing

• Foreign Aid– Provide economic

assistance, military assistance and emergency assistance.

Economic Assistance

• Financial and technical aid, loans and cash grants– Supply services of

specialists such as engineers, scientists, teachers, physicians.

Military Assistance

• Loans, cash payments, technical expertise and equipment for military purposes.– Make allies for

countries

Emergency Assistance

• Food, medical supplies, clothing and other goods that sustain life in times of crisis.

Why give foreign aid?

• Foreign aid encourages international trade.

• Economic and social improvements help distribute money through world economy.

• Reduce political strife

International Public Sources for Capital

• World Bank• International

Monetary Fund (IMF)• United Nations

World Bank

• 180 countries contribute money to it.

• Focuses on helping LDCs and Developing Countries– Financing projects

– Giving advice

– Eliminate poverty

The World Bank Focus

• Human Development:– Education

• Ag and Rural Development:– Irrigation / rural services

• Environmental Protection• Infrastructure

Improvement– Roads, electricity

• Governance– CONTROVERSIAL!

Complaints about the World Bank?

• Some see it as a US controlled agency that if countries don’t accept capitalism and free market reforms after the US models…

– They don’t seem to get the money!

Complaints about the World Bank

• Interest rates can be CRIPPLING for poor countries to pay back.– Are numerous

countries in Africa essentially “owned” by the World Bank?

• ODIOUS debt

Odious Debt

• The World Bank has been accused of making large loans to corrupt dictators / governments – knowing the money would be wasted.

Odious Debt

• South Africa used to have a government called APARTHEID.

• When it was overthrown the new government found they were responsible for the debts of their oppressors.– No new loans or building

projects in South Africa in the 1990s.

Should these debts be “forgiven”?

• U-2’s Bono regularly campaigns to lower the interest rate on loans or to forgive debts for the LDCs.

In defense of the World Bank

• It is one of the most highly regarded financial institutions in the world.

• Constant research and the best statistics on LDCs

• Many educational scholarships to students in LDCs.

IMF

• 184 Countries seek to create:– monetary cooperation

– Secure financial stability

– International trade

– High employment / lower poverty

International Monetary Fund

• Establish and stabilize exchange rates.

• If a country needs help – the IMF can offer loans to help stabilize the money.

Complaints about the IMF

• Often tie loans to political changes – Like free elections!

– Like energy conservation.

– Higher taxes• But is it right for the

IMF to force political decisions for another country?

United Nations

• Finances thousands of development projects in education, health, agriculture and industry.– UNICEF for

children’s health

– Red Cross for humanitarian aid

The UN has been accused of problems

• Political corruption• Too much red-tape of

bureaucracy prevents the people or money from reaching those in need.– Maybe new General

Secretary Ban (South Korea) will change things?

A New Formula to combat international poverty

• Muhammad Yunus of Bangladesh and the bank he created – Grameen Bank.– Micro-loans to

individuals.– Collateral free– Low interest rates– NEVER more than

$200 per customer.

Grameen Bank’s Philosophy

• "these millions of small people with their millions of small pursuits can add up to create the biggest development wonder."

Grameen Bank’s Philosophy

• Has helped 6.83 Million people to find some relief from poverty by starting their own businesses.– 97% of the customers

have been women.

Yunus and Grameen were noted in 2006

• The Nobel PEACE Prize

• "for their efforts to create economic and social development from below"

The Gates Foundation

• More focus on combating global poverty.– Economic micro-aid

– Population control

– Infrastructure development• Roads, water treatment,

education.

– Finding cure for malaria

– Polio inoculations

TRADE

• Trade Barriers– Tariffs: import taxes to make imports cost

more or as much as our goods.– Import quotas: fixed amount of an item that

can be imported– Embargoes – political rather than economic

reasons for keeping goods out of the country.

Why have trade barriers?

• Protectionism– Infant industries

– Job protection

– Standard of living

– Specialization

– National security

– fairness

International Trade Agreements

• NAFTA (North American Free Trade Association)– Mexico, US, Canada

– Goal is to eliminate all tariffs on goods and services between countries.

International Trade Agreements

• European Union (EU)– Most European countries.

– One currency for all countries

– Elimination of tariffs and consistent regulation of goods.

• Cheese made in Holland follows same safety protocols as cheese from Switzerland.

Strong Dollar v. Weak Dollar in Trade

• Currency exchange rates: How much does our dollar “buy”. – 2000 Strong dollar

– 1 Pound = $1.20

– 87 pounds was $104.40

Strong Dollar v. Weak Dollar

• 2007 Weak Dollar– 1 pound = $1.96

– 87 pounds = $170.52

– The same place costs $66.42 MORE a day!

– OUCH!!!

Weak Dollars in 2007

• Encourages other countries to buy American goods upping EXPORTS.

• Encourages tourism to our country.

• Discourages dollars from leaving the country.

Strong Dollars

• Encourage IMPORTS because our dollars buy more.

• Discourages exports and can hurt jobs.

• Encourages Americans to travel.