sector finance especially from multinational firms.
do MNCs locate in LDCs?
protectionism / tariffs - Increases tax revenue, employment and tech.
labour - Lower costs (wages, taxes) outweigh costs (transport)
/ incentives - Lax safety regulations.
EPZs - no import / export or corporate tax, subsidises utilities and
avoidance - low corporate tax. Avoid tax on profits - transfer costs and
revenues between branches in different countries, to get situation of
Development benefits from MNCs
/ income - ‘Trickle down’ and multiplier from injection into circular
flow. Growth of supply firms eg component / material factories.
currency - Inward invest and exports = inflow capital for BoP. If goods
sold locally, can replace imports
/ tech - Firms / entrepeneurs gain skills - use in industrialisation. MNCs
bring in new equipment
Drawbacks of MNCs
distribution - MNCs lead to monopoly - gain more relative to others
- Poor safety / environment concern to increase profits. Leads to poor
publicity for firm
currency - BUT - reduced by material imports + repatriation of profits.
drain - Skilled workers hired by MNCs - don’t contibute to local economy
entrepreneurs - Monopoly power à
barriers to entry for local firms
tax revenues - low rates and tax avoidance
intensive production techniques - Means only minimal employment
Must meet two conditions:
can’t be motivated by commercial gain
on loans made: eg, lower loans / longer payback times.
lateral - joint assistance eg World Bank
lateral - Single country. Can be a loan
/ untied - Tied where conditions are placed. Eg, funding used to finance
certain projects or spend on donors exports.
reduces competition + higher costs for local firms.
be used to buy capital equipement à
inappropiately: Government buildings or put into accounts by corupt MPs
Which is best?
better - net transfer of money to LDCs
aid served interests of donor more unles it is better at encouraging
suitable development projects
to be targetted - help those who need it.
Focus on projects to meet basic needs / productivity in agriculture
rather than capital investment in industry.
Tend to work on
small-scale projects to meet local needs - water and schools
give aid by NGOs - US has 50% of aid by NGO - Due to effectiveness, but also
vote grabbing. Recognise
long-term interests of countries is for increased global trade.
and IBRD (World Bank).
The IMF (International Monetary Fund) and the World Bank
are international agencies that effectively act like banks to Governments.
The World Bank (otherwise known as the IBRD, the
International Bank for Reconstruction and Development) was set up after the
Second World War to provide aid to war torn Europe. Since then it has
provided loans to third world countries for development purposes.
The IMF however is not focused solely on aid and
development in third world countries. Their main role is to maintain a stable
economic international trading environment, especially by maintaining a
stable system of exchange rates. The IMF offers funds to countries who’s
balance of payments is in the red, (and so will be experiencing exchange
rates problems) in order to rectify their balance of payments problems.
3rd world countries seek debt relief from the 1st
world, or multi-lateral aid agencies like the World Bank, conditions are
often imposed upon the 3rd world country. These conditions are
known as ‘Structural adjustment programmes’. A structural adjustment
programme is a plan drawn up by the IMF or World Bank to bring about economic
recovery in the recipient country.
simple break down of a structural adjustment programme is as such:
IMF lends the country’s central bank money in order to maintain its foreign
currency reserves. This allows the country to go on importing and exporting.
order to obtain the foreign currency to repay debt, a third world country
must either increase its exports or lessen its imports (essentially better
its balance of payments).
government in the third world country must increase taxes and cut its
spending. This is because the majority of money owed by a third world country
is owed by that country’s government.
IMF insists on a wide range of measures to be taken. Some of those include
removing import controls, privatisation, deregulation of markets, and cutting
of subsidies like food subsidies.
adjustment programmes are not very popular in 3rd world countries,
as they do not initially seem to provide much good. Many countries experience
falls in GDP, and can see their growth rate drop immediately.
Economic development can often suffer, with reduced food subsidies
leading to higher food prices, and cuts in government spending leading to
unemployment. These same cuts in government spending can also impact upon
education, and without investment in education, long term economic growth is
likely to suffer.
there are many bad aspects to structural adjustment, supporters point out
that it works better than leaving a country be, where it could put itself in
a worse state of lower growth and lower levels of development etc.
structural adjustment may put the economy into an initial downturn, it will
often leave it in a better position for growing and expanding in the long