Greenfieldgeography
Financial flows
Capital: Capital can take many forms but for the purpose of this section we will refer to capital as
money.
Core Areas: These are economically important and attract investment, capital and people. For the
purpose of this section we will consider MEDCs like the US, Canada, Western Europe and Japan to be
the core areas.
Periphery Areas: These areas are poorer and may experience exploitation, economic leakage and out
migration. For the purpose of this section we will consider LEDCs in Africa, Central Asia and parts of
Latin America to be the periphery.
For further details on why areas become core or periphery and a list of some of their characteristics visit:
Global core and periphery
Loans: Money that is borrowed from someone.
Debt Repayment: The paying back of money that you have borrowed.
Aid: To provide support or help. Aid can take many different forms ranging from giving money and loans
to providing technology and expertise to providing food and rescue teams.
Remittances: Money sent home to friends and family by migrants living in a different location (often
abroad).
Foreign Direct Investment (FDI): Investment made by overseas governments, businesses or individuals
in foreign enterprises.
Repatriation of Profits: TNCs operating in foreign countries will normally send any profits made back
to the TNC headquarters. This repatriation of profits is sometimes known as economic leakage.
By their very nature core areas attract capital, investment, resources and people through things like FDI,
debt repayment and repatriation of profits. However, flows of capital can also go from core ares to
peripheral areas in the forms of FDI, loans, aid and remittances. Below are a few examples of flows in
both ways.
Loans and Debt Repayment
Individuals, companies and countries often have to
borrow money in order to finance their operations.
For example most individuals will take a bank loan
(mortgage) at some point in order to buy a house.
Companies may take loans in order to buy new
equipment, build a new factory or buy supplies.
Countries may have to borrow money to fund
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infrastructure projects, pay welfare benefits or even
to fund a war. Individuals and companies will
normally take loans with private banks e.g. HSBC or
Citigroup. Countries may also borrow money from
private banks or other financial institutions like the
IMF or issue bonds to be sold to private investors
(individuals and countries).
Bonds: These are a type debt security (similar to
loans) that countries issue when they want to raise
capital (money). Creditors will buy the bonds and
will then receive repayment plus interest off the
debtor over an agreed period. Countries with bad
credit ratings e.g. Greece have to pay higher rates of
interest in order to sell bonds to investors.
Even though debt is often associated with LEDCs,
the highest levels of debt are actually held by
MEDCs. Countries like the US, UK, France and
Germany has debt that runs into trillions of dollars.
However, because these countries also have large
GDP's they are normally able to service their debt
fairly comfortably. In the recent economic crisis
though a number of more developed countries like
Greece, Ireland and Portugal have had problems
servicing their debt and have had to have bailouts
from the EU and the IMF. They have also been
enforced to impose strict austerity measures in order
to reduce spending and debt.
Greek Bonds Rated Junk by Standard & Poors -
BBC article
Greece insists it will not default on huge debt - BBC
article
The Greek Gamble: New bailout means new EU risk
- BBC articles
Debt Service: The money needed to cover debt
repayments. Debt service is often calculated as a
ratio or proportion of income/GDP.
Bailout: Money given to a company or a country
that is at risk of failing (going bankrupt) or
defaulting on its debt.
Many LEDCs have high levels of debt. The high
levels of debt often came about from money
borrowed after their independence (borrowed from
private MEDC banks, IMF and World Bank). There
have been recent attempts to help countries with
high debt. Two schemes aimed at reducing debt are:
HIPC: The highly indebted poor countries scheme
was initiated by the IMF and World Bank in 1996.
Countries with unsustainable debt burden were give
low interest loans or debt cancellations as long as
they followed reforms like reducing corruption and
promoting democracy.
Jubilee 2000: This was an international coalition
that hoped to reduce or cancel third world debt by
2000. Its aim was to cancel $90 billion of world
debt.
For more information on origins of debt, problems
caused by debt and HIPC visit: Origin of disparities
and Reducing disparities
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Austerity: This is a policy of deficit cutting through
reduced government spending.
Aid
Official Development Assistance (ODA): This is
the term that the Development Assistance
Committee (DAC) of the OECD has given to official
aid.
By looking at the top graph on the right it is obvious
that the US is the world's biggest giver of aid.
However, as a percentage of GNI it is not even in
the top 20 donors. The UN has made it a target of all
MEDCs to give 0.7% of their GNI as aid.
Unfortunately there are currently only five countries
that do this; Sweden, Luxembourg, Norway,
Denmark and the Netherlands.
According to the OECD the current top recipient of
ODA is Afghanistan followed by Indonesia. Some
might find it surprising that the world's second
largest economy, China is still number 4 on the list
of recipients. Japan is currently China's biggest
donor followed by the UK, France and Germany.
The reason China gets so much aid is that millions
still live in poverty and they need assistance to help
with disasters and to develop clean water and energy
supplies. However, many countries in the current
economic crisis area asking if China need this much
money and are reducing the amount of aid that they
give, especially at a time that China is giving aid
itself to so many countries in Africa and Latin
America.
David Cameron: Why we're right to ringface aid
budget - Guardian Article
Pakistan: US suspends $800 million of military aid -
BBC article
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Greenfieldgeography
Egypt PM dismisses US aid threat over activists trial
- BBC article
US foreign aid benefits recipients - and donor -
Guardian article
The $2.5 billion question: Why does China get so
much aid - NCT article
UK to end direct aid to 16 countries - BBC article
UK seeks China aid partnership in Africa - BBC
article
For further information on the different types of aid
and a list of some of the advantages and
disadvantages of aid visit: Reducing disparities.
Remittances
Remittances is money sent home to friends and
family by migrants living elsewhere (often in a
foreign country). Remittances can be a very
important source of income for LEDCs. In 2007 the
World Bank estimated that remittances sent around
the world totaled over $250 billion, with most flows
going from MEDCs to LEDCs. To the right you can
see that El Salvador receives 16% of its GDP from
remittances (mostly from friends and family living
in the US) and that Tajikistan in Central Asia
receives 35% of its GDP from remittances.
Remittances can be beneficial because money goes
directly to people that need it rather than through
governments. It also means that money is spent how
people want it to be spent. However, reliance on
remittances can create dependency, they are
vulnerable to changes in exchange rates and they can
fall significantly during economic downturns.
For further information on remittances and a list of
some of the advantages and disadvantages of
remittances visit:
Migrants Feel Recession Aftermath - BBC article
Money sent home more than aid - BBC article
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Greenfieldgeography
Reducing disparities.
Foreign Direct Investment (FDI)
Most countries want to attract FDI because it helps
their economy grow and creates jobs. LEDCs can
present themselves as attractive locations for FDI
because of the potential profits. Enterprises that have
been invested in, in LEDCs may present high levels
of profit because of:
Cheap labour
New markets
Low taxation
Cheap land and resources
Relaxed planning and environmental
regulations
However, despite attractions, it is still MEDCs that
receive the most FDI. LEDCs can miss out on FDI
because of:
Unstable or corrupt government
Poor transport and communication links
Poverty reducing potential market
Complicated regulations in foreign languages
Unstable currencies or economies
Some growth economies and emerging markets like
China, India and Brazil are seeing increases in FDI,
but until LEDCs are able to improve their economies
and infrastructure they will continue to lose out to
MEDCs. It must also be remembered that FDI can
cause problems and is not always advantageous.
Problems may include increased pollution, inflation,
exploitation of resources, economic leakage and
closure of local industries.
China in Africa - Friend or Foe - BBC article
China boosts foreign investment in Latin America -
BBC article
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Greenfieldgeography
Foreign investment in China slows on tightening
policy - BBC article
Transnational Corporations (TNCs)
Transnational corporations are companies that
operate in more than one country. Normally they
will have their headquarters in their country of
origin and will repatriate most of their profits back
to this location. They will then often have research
and development (R&D) facilities in MEDCs where
there is skilled labour and high levels of technology.
Manufacturing plants will often be built in countries
where production costs are lowest or markets
strongest. Retail outlets will be placed in any
country that has a potential market.
The World's biggest TNCs have traditionally been
from MEDCs like the US, Japan, the UK and
Germany. However, some of the World's biggest
TNCs are now from emerging markets like China
and Brazil. In the future there are likely to be a lot
more from these countries as well as countries like
Russia, India and Indonesia. These countries are
going to see a growth in their TNCs because they
have huge domestic markets and their products will
improve in quality and recognition.
Traditionally, oil, banking and car companies have
been the biggest TNCs in the World. However, with
changing technology and improving living
standards, other TNCs like pharmaceuticals,
electronics and retail are appearing.
Countries are able to attract TNCs into their
countries in a number of ways, including:
Offering reduced business taxes
Offering cheap and skilled labour and
assisting with recruitment
Helping with acquisition of land and relaxing
planning controls.
Improving transport and communication
links
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Offering access to domestic market
Relaxed environmental regulations
Allowing economic migrants (foreign
workers) into their country
A lot of these incentives maybe offered in Enterprise
zones established by countries. To learn about the
enterprise zone in Incheon, Korea, go to: Reducing
disparities.
ADVANTAGES OF TNCs DISADVANTAGES OF TNCs
Creates jobs for local people
Locals with jobs then spend money in their
local economy at local businesses and
therefore there is a positive multiplier effect
as extra money gets added to the local
economy.
TNCs will pay local and government taxes
and therefore increase the government
budget.
Jobs at a TNC will be in the formal
economy, so hopefully better regulated in
terms of safety, pay, etc.
Improves workers skill and education level
They introduce new technology into the
country
Infrastructure like roads and ports are often
upgraded and benefit the whole economy
Diversifies the economy, might move away
from the reliance on one industry like
farming or tourism
The country receives prestige for attracting
TNCs and investment into the country.
Many of the best paid managerial jobs go to
foreigners
Local workers often do manual jobs which
are poorly paid and often workers suffer
exploitation (long shifts, no breaks, etc.)
There will be some economic leakage as
profits from TNCs go back to their home
country
Increasingly manufacturing processes are
becoming more mechanised so less workers
are needed in factories.
One of the attractions of LEDCs is cheap
labour, but as a country develops labour
costs increase and TNCs may move to
cheaper locations.
Products produced by TNCs maybe too
expensive for locals to buy. TNCs may also
use local raw materials.
The increased demand created by TNCs may
cause local inflation.
If the government is building new roads or a
port for a TNC it probably means that they
can't spend as much money on education or
healthcare.
TNC decision makers are often foreign so
policies of TNCs may not always benefit
local people.
Trade: The exchange of goods and services.
Imports: Good and services being purchased from overseas and brought into a country.
Exports: Goods and services leaving a country to be sold overseas.
Balance of Trade: The difference in the monetary value of exports and imports over a specified period
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Greenfieldgeography
(normally a year or a quarter).
Balance of Payments: This accounts for the balance of all monetary transactions between countries. This
includes goods like the balance of trade but also services and transfers of financial capital.
Trade deficit (in the red): When the value of your imports is greater than the value of your exports.
Trade Surplus (in the black): When the value of your exports is greater than the value of your imports.
Protectionism: Methods used to protect domestic industries from foreign competition. This might be
done with tariffs, quotas or subsidies.
Currency Devaluation: This means reducing the value of their currency in relation to other currencies.
This might be done by keeping interest rates low so people don't want to invest in it or flooding the
market with the currency (increasing supply)
What is the currency war about - BBC article
World Trade Organisation (WTO)
The WTO started its life as GATT (General
Agreement on Tariffs and Trade). GATT was
established in 1948. GATT involved member
countries meeting (rounds) to discuss and agree
tariffs over trade. The final round in Uruguay
(1986-94) agreed to establish its successor the WTO.
The WTO officially began life on the 1st January
1995. The WTO Is based in Geneva and now has
153 members who between them represent 97% of
total world trade. Although GATT only looked at the
trade of goods, the WTO also looks at the trade of
services and intellectual property rights. The aim of
the WTO is to:
Liberalise (free) world trade (reduce
protectionism)
Create a forum for governments to negotiate
global trade agreements
Be a place to settle trade disputes
Be a place to set and clarify trade rules.
The WTO's most recent negotiations were in Doha,
Qatar. The aim of the negotiations was to involve
LEDCs more in global trade. One of the major
sticking points in the talk was Europe's and the US's
National Governments
The aim of all national governments is either to try
and balance their budget or to get a budget surplus
(unfortunately most countries run a deficit). As well
as balancing spending and taxation governments
also need to look at the their levels of imports and
exports. Governments can increase or decrease
imports and exports in some of the following ways
National governments can try and increase flows of
global trade in a number of ways including:
Joining a trading bloc or trading organisation
Promoting free trade and ending
protectionism
Opening enterprise zones and attracting
TNCs
Devaluing their currency
They can also try and reduce flows of global trade in
some of the following ways:
Using protectionist measures (tariffs and
quotas)
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refusal to cut farm subsidies.
Despite its work, the WTO has had some critics. It is
criticised for favouring MEDCs especially over its
agricultural subsidies, allowing counterfeiting and
breaking of copyright/patents to continue in member
countries and having no power to punish countries
who break trade rules.
http://www.wto.org/
Imposing sanctions or embargoes with other
countries
Switching to more planned economies
Increasing regulations and environmental
controls (more red tape)
Imposing ownership regulations on foreign
companies
International Monetary Fund (IMF)
The IMF like the World Bank was created at Bretton
Woods in 1944. It started with only 46 members but
has now grown to include 186. Member countries all
contribute to a pool of money which member
countries can then borrow on a temporary basis to
overcome budget deficits/imbalances. The IMF was
extremely important after WWII to help stabilise the
global economy.
The IMF has taken a leading role during the current
global economic crisis. It has sold gold reserves to
increase it pool of money and the G20 leaders have
pledged a further $500 billion to allocate to other
members suffering from budgetary problems. Even
though the IMF is currently taking a leading role in
the economic crisis, it has been heavily criticised.
Criticisms include:
The IMF have supported some undemocratic
governments that have been favourable to
European and US TNCs.
SAPs imposed on borrowing countries were
often damaging, forcing countries to sell
state assets and to cut funding to education
and health.
The IMF has forced countries to impose
strict austerity measures in order to receive
money (increased taxes and reduced
spending). Greece has had to follow very
strict austerity measures to get help from the
IMF and EU.
The main funding nations (MEDCs) have too
World Bank
The World Bank was established in Bretton Woods
in 1944 and has its headquarters in Washington DC.
The World Bank is not a traditional high street bank,
but a global one owned by its member countries
(187 countries). It has two main institutions, the
International Bank for Reconstruction and
Development and the International Development
Association. The bank has over 10,000 employees
and over 100 offices around the world. In its early
days the bank did not lend much money, but then in
the late 1960's and 1970's it started lending more
money to developing countries in order to fund
schools, hospitals, infrastructure projects, etc. In the
1980's the World Bank along with the IMF imposed
SAP (structural Adjustment programmes) on many
of its borrowers.
From the 1990's onwards the World Bank is now
more interested in helping countries achieve the
UN's Millennium Development Goals. This includes
reducing poverty, improving health and education
and ensuring sustainable growth.
The World Bank has had a number of criticisms
including:
Its imposition of policies on developing
countries (particularly the damaging SAPs)
Its assumption that LEDCs cannot develop
without outside help and knowledge
The largest contributors (MEDCs) have too
much power over policies
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much influence over decisions.
The head of the IMF always comes from
Europe
That it often has reactionary policies rather
than preventative ones.
http://www.imf.org/
That the head of the World Bank always
comes from the US
That it focuses too much on GDP growth
rather than improvement in living standards.
Some development projects were
environmentally damaging e.g. dams causing
deforestation
Some projects involved expensive
technology which countries could not fund
themselves.
http://www.worldbank.org/
SAP (structural adjustment programme): These were sets of reforms/policies imposed by the IMF on
countries in order for them to receive loans. The policies were very strict and may have involved:
Currency devaluation
Trade liberalisation
Privatisation of state industries
Removal of price controls and subsidies
Reduced government spending
Acceptance of foreign ownership
Reducing corruption
Many of these programmes were later criticised for favoring MEDC TNCs, for governments selling off
assets cheaply and underfunding vital institutions like healthcare and education.
The diagram below shows some of the major trade flows. Although figures are not clear it is obvious that
the major flows are still between MEDCs and that most LEDCs are still unable to participate in the global
economy on a major scale.
Record Imports Widen US Trade Deficit - BBC article
US Freezes Japan Gangster Funds - BBC article
World Trade To Recover Say WTO - BBC article
Global Trade Will Shrink by 9% - BBC article
G20 leaders seal $1tn global deal - BBC article
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Financial flows