Trade versus Aid

Intro:

- be aware that the issue is controversial

• many argue one or the other is more important in development of a country
• both equally important
• South Korea relied on trade-led growth
• Burkina Faso and other African LDCs relied primarily on aid
• Bangladesh is an example of a country which bridges the gap between the two

Trade:

- often favoured due to example set by Asian Tigers
- South Korea an example of a country implementing trade-led growth

• opening markets to international trade = rapid growth and industrialisation
• strong manufacturing sector whose production was cheap and able to expand through FDI
• able to flood export markets with cheap products whilst other countries were in recession
• attracted interest of TNCs

- aid not much of a success in South Korea

• aid from USA after Korean War
• contributed to huge amount of GDP - 18.5%, but economy still struggled
• wasn't until development of manufacturing sector that SK properly industrialised

- trade has a long-term impact on international cooperation, especially in trade blocs e.g. NAFTA and EU

• due to creation of NAFTA, Mexico became one of the largest recipients of FDI among emerging markets, receiving $156 billion
• Europe combined is able to trade more efficiently with the rest of the world and is more efficient than 28 countries competing with each other
• EU grown from much more than a means for trade, but also towards social, environmental and political cooperation
• Romania's economy has grown by 7% since the country asked to join the EU

- however, trade is much more dependent on export markets and other countries' economies

• e.g. East Asian Financial Crisis
• Asian economies started to fail in 1997
• confidence in Asian markets fell and TNCs and other investors withdrew their money
• Japanese recession in same decade meant that export markets shrank

- future competition with growing economies could hinder Asian Tiger economic growth as TNCs look towards RICs

• cheaper workforce = cheaper products = more efficient production
• NICs have to base their 2ry industry on more high quality goods to retain TNC and consumer interest
• although products, e.g. electrical goods, sell for more money they require more specialist machinery and higher skilled workforce (education up for country-?) = more expensive to make

Aid:

- can be both economically and environmentally sustainable - NGOs' influence in Burkina Faso

• 80% of country live rurally --> depend on agriculture
• desertification and increasingly frequent droughts caused crops to fail due to lack of moisture in soil
• huge number of people in poverty (>36% below poverty line)
• due to food insecurity people have little alternative for income

        'bottom-up' charity approaches, e.g. Tree Aid(!) improving food security and thus level of development

• NGO works in Sahel Region with local communities - 'pro-poor growth'
• planting trees through forestry schemes and teaching people about more sustainable agriculture and food security
• trees provide food sold to get income (Tamarind Tree - pod-like fruit sold to restaurants globally) --> children to shl etc. -->literacy rate up + skilled workers in future
• women entrepreneurs more involved in local community as leaders and having active roles regarding future of forests

- too dependent on international aid

• e.g. Tanzania and Botswana during economic crisis in 80s and 90s
• still continue to rely on aid to make up annual budget rather than independently fund economic growth
• mainly confined to LDCs with inadequate infrastructure and less skilled workers to produce more than raw materials to sell

Trade and Aid:

- Bangladesh example of a country which has been equally dependent on trade and aid - reinforces idea that the two must co-exist

• balance for each = vital for agricultural sector
• without aid helping farmers develop sustainable farming methods and introduction of fertiliser etc., agricultural workers won't get more profit from traded goods - production not efficient
• aid won't be influential if country hasn't established markets to sell produce to
• UK enabled >100,000 farmers to gain improved access to markets - strategy involves both aid and trade

- textile industry is country's main export and considerable source of income --> argued trade more important

• though low pay and poor working conditions = trade doesn't always ensure country's development has reached the individual
• external aid may be required to improve working conditions and pressurise industries to increase minimum wage
• likewise, 'top-down' aid doesn't always find its way to communities - esp. with corrupt government

Conclusion:

- both equally important

• although trade = more long-term
• aid = short-term
• factors inhibiting path to development often come from country itself - poor infrastructure and education - can be resolved with aid and allowing country to pursue export-led growth
• aid may thus be a way to initiate growth and trade to sustain it
• 'bottom-up' aid strategies more effective than 'top-down'
• similarly trade must be able to support the individual too

Global Groupings Case Study - NAFTA

History, Development and Aims:

- Set up in 1994
- Made up of USA, Canada and Mexico
- Goal was to eliminate trade barriers and provide investment between all 3 member countries
- After establishment, half the tariffs on trade between Mexico and the USA were eliminated and those remaining are being phased out over a 15-year period
- 1965 - Mexican government set up 'Border Industrialisation Programme' which created favourable export platforms for US companies - encouraged international connections
- Relative decline in USA international competitiveness was a major factor leading to the formation of NAFTA, and due to:

• rise of Japan and recovery of Europe
• multilateralism --> free trade - so USA faced competition from revitalised economies of Western Europe and Japan
• lost out on its traditional industries such as cars, consumer electronics, textiles

- Employment grew largely in service sector through the 90s, but average wages were 77% that of manufacturing industry
- Established ease of transport between Canada and Mexico, e.g. CANAMEX corridor - series of highways

Pros of being part of NAFTA:

Social -

• mix of culture
• more jobs available means better quality of life for especially Mexican citizens

Economic -

• North American employment levels up 23% since 1993 - net gain of 39.7 million jobs
• merch trade among NAFTA partners > tripled - $946.1 billion in 2008
• trade between USA-Mexico > quadrupled ($1 trillion)
• USA service employment up >10 million
• since initiation the North American economy has doubled in size
• combined GDP surpassed $17 trillion in 2008, up from $7.6 trillion in 1993
• Mexico became one of the largest recipients of FDI among emerging markets, receiving $156 billion from NAFTA partners between 1993-2008
• an extra 10 million employed in services

Environmental -

• introduced $9 million annual budget for improvement schemes and protection towards the environment
• development on decreasing toxic products

Political -

• allows countries to maintain independence
• political 'voices' louder for Canada and Mexico due to being part of the trade bloc

Cons of being part of NAFTA:

Social -

• the migration rate from Mexico to the USA doubled since NAFTA establishment

Economic -

• Mexico saw a net loss of employment under NAFTA - around 600,000 gained in manufacturing, but at least 2 million lost in agriculture
• 1/2 population can't find formal employment in Mexico
• poverty and inequality rates only decreased slightly (mainly due to increased remittances)
• Mexico's wage gap with the USA got 6x bigger
• average wages in services 71% of that in manufacturing
• manufacturing companies leave USA for Mexico due to cheaper land and workforce
• most of the profits go back to US owned companies - 'maquiladoras' are US owned assembly plants set up in Mexico which employ Mexicans but export products mostly back to USA
• 1.5 million jobs lost in manufacturing in USA

Environmental -

• US companies clearing land in Mexico for factories
• industrial processes = more pollution
• Mexico has a poor record of  enforcing environmental laws - fears that Mexico may become a dumping ground for hazardous material
• Mexico's rivers and air are already being polluted

Political -

• USA has the most political control in NAFTA
• untrustworthy policies in Mexico due to US dominance in Mexican markets

Global Groupings Case Study - EU

Development of the EU:

- The 'European Economic Community' was set up by the 'Treaty of Rome' in 1957 to achieve economic and political cooperation after WW2
- Originally made up of 6 members (Belgium, France, Germany, Italy, Luxembourg and the Netherlands) whose aim was to bring economic cooperation through a common European market free of tariffs
- Denmark, Ireland and the UK joined in 1973 benefitting from:

• trading with each other without tariffs - boosting trade and wealth
• joint control of food production - ensuring fair food distribution
• EU regional policy - transfers funds to poorer areas to improve infrastructure and create jobs

- Greece, Spain and Portugal had joined by 1987 and the 'Single European Treaty' was signed with the aim of creating a 'single market' allowing the free flow of trade across EU borders
- In 1993, what began as a purely economic union evolved into an organisation spanning policy areas, from development aid to environment, and became the 'European Union'
- The free movement of goods, services, people and money was permitted across the EU
- Further expansion in 1995 saw Austria, Finland and Sweden become members
- More recently, Croatia was accepted into the EU in July 2013 - the 28th member
- Other countries seeking permission to join are Iceland, Turkey and other east European nation, who could become part of the EU by 2020


To what extent has the EU helped to...?

- Integrate European Economies

• via the introduction of the 'euro' - helps build a single market by easing trade and travel by eliminating issues of exchange rate
• problems with euro arisen so countries e.g. UK and Denmark not accepted it
• single market enables free circulation of goods, services, capital and people within EU
• common tariff on external trade so member countries more likely to interact with each others' economies rather than outsiders'
• development of infrastructure, such as transport, helps to connect economies of eastern countries with those of the west, by facilitating transport of goods and people
• it is argued that true integration of countries can only exist with a single EU government, however this has been previously rejected - 'Treaty of Lisbon' - creation of EU president in December 2007 rejected

- Develop the economies of Europe and other countries

• EU allocated funds to support underdeveloped regions and support them to conform to EU standards
• Poland - shift from state-controlled economy --> market-orientated, infrastructure funds to improve roads and particularly links to EU neighbours such as Germany
• 'European Development Fund' directs aid from EU to developing countries - in 2008-13 it was expected to allocate >10 billion euros of aid

- Increase globalisation

• companies can trade within EU with reduced tariffs and people work abroad - freedom of movement
• societies more multi-cultural due to movement of people
• greater polarisation in world between EU and countries which do not meet EU standards or are outside Europe - so limiting globalisation

- Ensure food security in Europe

• 'Common Agricultural Policy' aim to increase production whilst ensuring high standard of living for farmers, stabilising markets and ensure reasonable prices for customers
• considerable over-production was taking place
• criticised for undercutting farmers in developing countries

- Protect the environment

• policies addressing issues such as acid rain, thinning of ozone layer, air quality, noise pollution and waste and water pollution
• reaching group aims - 20% renewable energy and cut carbon emission levels in 1990 by 2020
• forestry expansion = success 

Make Europe a more peaceful place than it was in 19th and early 20th centuries

• peace created through Europeans adopting European identity over a national one
• although only 8% of Britons identify themselves as European
• no longer credible threats of war - positive influence on possibilities of war

Advantages and Disadvantages of being in the EU:

 

Should Britain stay in the EU?

 

 

Trade Blocs

Trade Bloc - a group of countries who agree to reduce/eliminate trade barriers among members

Preferential Trade Area - lowest form of trade bloc; countries agree to lower but not eliminate trade barriers

Free Trade Area - member countries eliminate barriers between each other but maintain separate policies for external countries - e.g. NAFTA (USA, Mexico, Canada)

Customs Union - eliminate internal barriers but agree on common external barriers - e.g. Russia, Belarus, Kazakhstan

Common Market - eliminate internal barriers, common external barriers and free movement of resources among member countries - e.g. Mercosur (South American Countries)

Economic Union - all of the above and adopt uniform set of economic policies - e.g. EU (adopting 'euro')

Full Integration - e.g. USA


Positives of grouping nations (using EU and NAFTA as examples):

- EU - freedom of people to live and work within trade bloc

• economically active population has plenty more employment opportunities
• facilitates emigration to another country

- Promotion of peace between its members

• EU's initial establishment as the 'European Economic Community' formed after WW2 for cooperation
• EU - no longer any credible threats of war between members due to social, economic and political cooperation

- Increased trade opportunities due to reduction of trade barriers

• lack of tariffs = country can more efficiently import goods as less money spent overcoming trade barriers
• Economies grow as money spent on economically developing the country/raising standard of living/developing production in other industries
• NAFTA - due to almost complete reduction of trade barriers, merchandise trade > tripled since establishment until 2008 - contributing to soaring GDP growth (surpassing $17 trillion in 2008)

- Less developed areas in international groupings benefit economically

• NAFTA - Mexico's growing economy opened country up to outside investment  and has become one of the largest recipients of FDI among emerging markets ($156 billion from NAFTA partners between 1993-2008
• EU Regional Fund allocates funds distributed to support underdeveloped parts of the EU - Poland benefitted and as a result been able to shift from state-controlled economy to more market orientated
• EU - areas in UK also benefitted from funds to improve local development - South Wales, Lake District, Cornwall

- EU - agreed policies to protect the environment

• in 2007 EU agreed to use 20% renewable energy and to cut carbon emissions by 2020
• forestry expansion scheme = success - increasing 10% in west and 15% in east

            - reduced  amount of CO2 released into atmosphere
            - creating more animal habitats
            - protecting existing forests from threat of logging



Negatives of grouping nations (using EU and NAFTA as examples):

- EU - problems due to uncontrollable migration - e.g. Poland --> UK migration in 2004

• shortage of economically active people in Poland - skilled workers moved where salary was higher ('brain drain')
• social tension in destination country
• shortage of work and housing in destination country

- obligation to share resources has damaged some economic sectors

• EU - UK sharing its traditional fishing grounds with France and Spain - fishermen argue there is "too many fishermen chasing too few fish"
• countries may have shared preferences in fish --> overfishing of one species --> threatened coastal ecosystem as food chains disrupted

- membership = expensive - UK contributions to EU about £12 billion a year

- pressure on countries to adopt centralised decisions

• EU's Social Chapter - which UK opted out of as they felt that workplace regulations should be negotiated between employer and employee, without European interference
• could lead to loss of sovereignty

Over time, the trade bloc may be strengthened as countries establish successful trade links between countries and less developed areas continue to grow through regional funds and well developed trade links. However countries may become increasingly aware of the fact that many of their regulations are being controlled centrally - leading to increasing separatist movements.

Critically evaluate the case for granting debt relief to LDCs (10 marks)

Intro:
- Heavily Indebted Poor Countries scheme established to reduce debt in LDCs
- Multilateral Debt Relief Initiative launched in 2005 to grant 100% relief to 35 eligible countries
- The argument for granting debt relief is controversial:

• relieve poorest countries of financial difficulties --> can develop economically
• effect on other countries-? sceptical
• how well will it actually benefit the country-? Different areas of society-?

Debt relief largely beneficial to receiving country:

• money saved  by not paying back loans --> investing more money into healthcare --> life expectancy and infant mortality rates will improve --> country = healthier
• no debt = government can plan its expenditures better
• government in Guyana decided to promote free healthcare after debt re-structured - population's low income meant they couldn't afford private healthcare
• reduced interest payments by $60 million a year allowed Guyana to increase social spending by >25% --> now over 20% of GDP is spent on health, education, housing, water and sanitation
• now more likely to reach MDGs --> increase in spending on education means that more children will be in primary education ('achieve universal primary education')

Countries able to combat growing numbers in poverty: another MDG making progress as a result

• in response to HIPC scheme - poverty reduced in Uganda from 51% in 1992 to 35% in 2000
• although poverty starting to rise again - 38% in 2002
• suggests that impact from debt relief only short term

No guarantee that country will improve its economic management

• countries may contract further debt with the belief they will also be forgiven
• Ethiopia - debt almost back at 'pre-MDRI' levels
• Ghana - used advantage of debt reductions to take out more loans at interest rates 10x higher than leading providers

Concerns that money gained will go straight to government and not reach the poor, or money used to enhance wealth and spending ability of the rich and not trickle down to the poor

• disproved by Uganda - building better roads that benefit agricultural workers --> farmers with small incomes can bring produce directly to markets - generates more income - improves welfare of people
• pressure from MEDCs to meet criteria for MDRI force them into more stable government

Disadvantages other countries:

• system only benefits LDCs who are in debt --> encourages other LEDCs to over-spend so they get debt relief in the future
• 35 countries had their debt wiped - 'lenders' do not get their money back

Conclusion:

• more advantageous to receiving countries
• certain areas of society benefitted more than others
• agreement disadvantages other countries
• although it allows LDCs to develop country as opposed to using GDP to pay off debt --> more sustainably developed in the future

Debt Relief

Heavily Indebted Poor Countries scheme

- In 1996, the IMF and World Bank (with help from NGOs and other organisations) produced the HIPC programme
- Its aim was to ensure that no poor country faces a debt burden it cannot manage
- It provided debt relief and low interest loans to 39 eligible countries to reduce debts to manageable levels
- The countries, in return, had to meet a number of economic management and performance targets

• To decide whether countries are eligible for debt relief they must pass the “decision point” - countries have met stringent qualifications, including income thresholds.
• The countries then receive debt relief, but must achieve certain reforms and take concrete steps to reduce poverty - these are known as 'Structural Adjustment Policies' (SAPs) and include:

           - cutting public spending
           - removal of import/export barriers
           - opening up to FDI
           - removing subsidies (money to help industries given by government)
           - privatising state industries and services (water supply, healthcare and energy)

Critics argue that these are just another way for LEDCs to be controlled by OECD countries (Organisation for Economic Co-operation and Development)
Or that the Washington consensus (the economic reforms above which were advised to be undertaken as a part of an SAP) opens up countries and workers to exploitation by TNCs

The Multilateral Debt Relief Initiative

- In 2005, the G8 countries proposed to cancel the entire debt of the countries under the HIPC programme under the MDRI
Countries would be eligible for debt cancellation if they met more conditions:

• satisfactory economic performance under an IMF poverty reduction and growth facility programme
• satisfactory progress in implementing a poverty reduction strategy
• an adequate public expenditure management system, meeting minimum standards for governance and suitable use of public resources

As of January 2012, 36 countries have benefitted from full or partial debt relief
Combined, HIPC and MDRI have cancelled $95 billion worth of debt


Debt reduction positives:

• Boosting public spending - before the HIPC Initiative, countries were spening most of their GDP on debt relief and less on healthcare and education. Now, on average, spending on health, education and other social services is about 5x the amount of debt service re-payments
• Reducing debt service - for the 36 countries receiving debt relief, debt service paid has declined by about 2% of GDP between 2001-2011
• Improving public debt management - debt relief hugely improved level of debt and vulnerability to debt for countries which have completed the scheme. To completely reduce vulnerability, countries need to be aware of different borrowing policies and strengthen public  debt management

Debt Relief Case Studies: Guyana and Uganda

Guyana

Problems before debt relief:

• The low income of the population meant many couldn't afford private healthcare - due to large amounts of debt the government was unable to fund free healthcare 
• $2.1 billion of debt by the late 1980s 
• Investment in social services impossible - almost all of revenue went to servicing debt 

Solution = Guyana, Uganda and another 33 countries receiving >$117 billion of debt relief

Benefits of the debt relief:

• Freed up budget resources for government - able to plan it's expenditures better
• Guyana reduced interest payments by $60 million a year and increased social spending by >25%
• Over 20% of GDP on health, education, housing, water and sanitation - more modern and efficient education/healthcare system
• The government in Guyana decided to provide free healthcare after the country's debt was re-structured

Uganda

Problems before debt relief:

• Had to typically spend >20% of export revenues on falling debt a year - now, due to debt relief, it is around 5%
• Unable to sustainably handle debt

Solutions = Guyana, Uganda and another 33 countries receiving >$117 billion of debt relief

                = Receiving >$3.7 billion in multilateral debt relief

Benefits of debt relief:

• Able to spend more in agricultural sector
• Biggest benefit = upgrading of roads to 'all-weather' standards - farmers able to bring produce directly to markets to get more money (able to rent a small truck and bring goods to cities where they will be in higher demand) - generates more income and improve welfare of the people
• Uganda's rural transport budget has doubled over the past decade to $15.5 million a year 
• Poverty reduced from 56% in 1992 to 38% in 2002