Economic Interactions and Flows
Financial Flows – IB Statements
1. How important are loans, debt payment, development aid, remittances, foreign direct investment and repatriation of profits in the transfer of capital between the developed core areas and the peripheries? 2. What is the influence of the governments, world trading organizations and financial institutions (such as the World Trade Organization, International Monetary Fund and World Bank) in the transfer of capital? Key Terms
Investment: expenditure on a project in the expectation of financial (or social) terms Official Development Assistance (ODA): aid given by governments and other agencies to support the economic, social and political development of developing countries Profit Repatriation: returning foreign earned profits or financial assets back to the company’s home country Debt: money owed by a country to another country, to private creditors (e.g. commercial banks) or to international agencies such as the World Bank or IMF Free Trade: a hypothetical situation whereby producers have free and unhindered access to markets everywhere Loan: money borrowed that is usually repaid with interest
Remittance: a transfer of money by a foreign worker to his/her home country Protectionism: the institution of policies (tariffs, quotas, regulations) that protect a country’s industries against competition from cheaper imports Terms of Trade: the price of a country’s exports relative to the price of its imports, and the changes that take place over time Trade Deficit: when the value of a country’s exports is less than the value of its imports Why can international capital flows be highly beneficial to the global economy? Flows of money and investment from the developed core areas to the periphery of the world economy allow investors in the capital rich core to earn higher rates of return than they typically would. It also allows works in the resource rich periphery access to the fixed and working capital they need to increase their productivity and wages In the past the movement of capital has been from MEDCs to LEDCs. This scenario has been changing in the last two decades with the development of more globalised markets. The developing world now exports capital to the developed world. In 1997 the balance was even. According to the United Nations in 2002 there was a net flow to the developed world of $229 billion and in 2006, this increased dramatically to $784 billion. What is the reason for this?
One major reason is that many countries wanted to increase their hard currency reserves. Hard currency reserves are important to cover foreign debts and to use in case of emergencies. Since 1990 the world’s developing countries have increased their reserves from about three months worth of imports to about eight months. A main driving force for this is the increasing uncertainty in the global economy. China, for example, holds a vast majority of their reserves in US Treasury Bills (T-Bills). Basically through this process developing countries are lending the USA money. This has allowed them to maintain low interest rates however it has also caused them accumulate large deficits. T-Bills are considered to be very secure however the negative aspect is that the interest earned is very low. The USA owes more money to the rest of the world than any other country in the world. UK and France are also in the same position however they have more assets. Transnational corporations and foreign direct investment: Major TNCs and FDI flows Investment involves expenditure on a project in the expectation of financial returns. TNC (Transnational Corporations) are the main source of FDI (Foreign Direct Investment). TNCs invest to make profits and are the driving force behind economic globalization. They are capitalist enterprises that organize the production of goods and services in more than one country. The rules regulating the movement of goods and investment have been relaxed in recent...
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