ECON/IB 356—Economic Development and International Geography
Respond to the following questions in a thorough and clear fashion in a Word document. Please be sure to proofread your responses before submitting the document. Utilize examples from the readings, slides, in-class presentations, and notes. A good essay offers an argument that is supported by evidence and references to arguments put forth by scholars and journalists we examined, not merely unsubstantiated platitudes and generalizations. Authors would be named and newly-acquired terminology employed in an excellent essay.
- Data demonstrate that many developing countries experience both a domestic savings gap and a foreign exchange gap when it comes to securing adequate financial capital to make real investments in physical capital. Various positions claim that these gaps require foreign aid (both from official and non-governmental sources); others claim foreign direct investment and trade are needed. Argue a position about which approach is most effective, being sure to support your position. (30 points)
The most effective approach that developing countries can use to decrease both their domestic savings gap and foreign exchange gap is embracing foreign direct investment and trade. Developing countries such as those in Africa suffer from unfavorable balance of payment since the total value of goods and services that they export is far less than what they import from developed countries. Therefore, these countries can use direct foreign investment and trade to boost their balance of payments. This is because trade can lead to increase in goods and services that developing countries export every year. More trade increase in trade can be facilitated in terms of developing countries exporting finished goods rather than raw materials. Exporting finished goods will increase the total amount of money that the countries get from their exports. For example, developing countries like, Ethiopia, Uganda and Kenya export raw coffee that fetches low prices in the international market. If these countries start processing their coffee, they will increase their total exports without necessarily increasing the acreage under coffee. These countries latter import the processed coffee that means that even though the countries grow coffee it economically more beneficial to those that process and sell processed coffee. Thus in order for the developing countries to reduce both domestic saving gap and the foreign exchange gap, the developing countries need to export more of processed goods and not as raw materials, which in currently happening. When the trade between the developing countries and developed countries is increased then the developing countries will be able to earn more money, which will serve in reducing the balance of payment. Trade will also ensure that developing countries do not borrow to facilitate development of certain sectors in their economies since they will have the money from trade. Foreign direct investment is also another approach that can be used in reducing domestic saving gap and foreign exchange gap (Economics, 2016). When people, companies and other countries invest directly in developing countries in projects such as building factories, mining industry, in agriculture sector, in education among others they will offer jobs to the citizens living in these countries. Moreover, the government will save money that it would have used to invest in these projects and the money can be used for other purposes. For example, companies like Tullow Oil have invested in East Africa in exploring oil (Tullow, 2016). It has saved governments of Kenya, Tanzania, and Uganda a lot of money, which they would have invested in exploring oil. The governments therefore can thus use that money for other projects such as constructing roads and schools. Other companies have invested in industries and therefor are helping developing countries in increasing their exports as well as creating employment and reducing the domestic saving gap. Developing countries are also trying to attract foreign direct investment through offering tax holidays for up to 10 years. Foreign direct investment also facilitates transfer of technology and skills to developing countries, which helps in improving the economy and thus reducing the domestic savings gap as well as the foreign exchange gap. The money that the developing countries could have used in research and development in terms of technology and training human capital is then used for other purposes such as building and improving the new infrastructure in the countries.
- Describing first what it is, explain why microfinance is an attractive approach to raising people with little income out of poverty and why it is limited in doing so.
Microfinance refers to a type of banking that is provided to low income earners or to those who are unemployed who will otherwise not have access to loans or other types of financials services.
Microfinance is important in raising poor people from poverty because of the given reasons:
- It is easily accessible to people. One does not need documents to get a loan unlike in banks, which require documents and guarantors.
- The interest charged is lower than that offered by banks making the money repaid less. This enables the poor people to start growing economically.
- Helps in improving standards of living for people. Some people whom receiving microfinance assistance are able to set up a business that earn them a frequent income.
- It is also useful in creating employment in the informal sector leading to increase in nation’s GDP
- Microfinance is also sustainable. Since the money given out is in small amount then it is easy to sustain. Those who repay the loan are given more money and the amount increases with each loan repaid on time.
Limitations ECON/IB 356—Economic Development and International Geography
In its bid to save people from poverty, microfinance has the following limitations:
- The interest are also not the best since most charge microfinance loans are given at approximately 20% which makes these microcredit loans expensive (Fajury, 2010).
- These loans are mainly used by females in the society. Microcredit has been useful among women since they repay the loans more than males. Therefore transforming the entire community is very hard which limits the effectiveness of microfinance.
- Explain why some developing countries faced a “debt crisis” and what actions have been taken to respond to that crisis.
Some developing countries faced debt crisis because of the following reasons:
Slow economic growth witnessed in the 1970s and 1980s. This slow economic growth led to debt crisis, as developing countries were not able to fund their own projects, which forced them to borrow money. Moreover, the money that was borrowed did not stimulate the economy enough and they continued to import more and export less goods and services. The countries were eventually unable to serve their debts leading to debt crisis (Minescu, 2011).
Another cause of debt crisis was the oil crisis of 1973. During this period, the price of oil rose steadily and steeply. This compelled developing countries to borrow money in order to import oil. Some developing countries were unable to pay the loans resulting to debt crisis.
Unrealistic lending by banks was another reason for debt crisis. Banks believed that government could not default in loan repayment. This made banks to lend large sums of money to nations, which they were unable to repay resulting to debt crisis. Additionally, the money that had been borrowed was not used for development purposes but it was pocketed by officials in these countries (Minescu, 2011).
The following steps have been taken in order to rectify the debt crisis ECON/IB 356—Economic Development and International Geography
Banks should be keenly regulated to ensure that they are not negligent when lending money. Banks should be more alert to avoid lending money to countries with a poor credit rating. The amount of loans given to any nation should be of such an amount that it can be able to repay.
Privatization is another option that developing countries have used since the debt crisis. The public sector was huge and this led to huge borrowings. Many companies and parastatals have been privatized in order to allow smooth running of these organizations. There have been a reduction in government spending and expansion of capital markets in these economies, which have been helpful in encouraging economic growth.
The fight against corruption has also been increased. The governments in many developing countries have set up an anticorruption organization, which prosecutes state officials who have been caught in corruption cases. Punishing such people has been effective in reducing corruption in among government officials as well as in promoting good management of public resources.
ECON/IB 356—Economic Development and International Geography
Economics, E. (2016). Development and Growth Constraints – Savings Gaps | tutor2u Economics. tutor2u. Retrieved 14 December 2016, from http://www.tutor2u.net/economics/reference/development-and-growth-constraints-savings-gaps
Fajury, l. (2010). Failures in microfinance: lessons learned.
Minescu, A. (2011). The Debt Crisis – Causes and Implications. Economic Sciences Series, LXIII(2), 95-104.
Tullow, T. (2016). Open graph title. Tullowoil.com. Retrieved 14 December 2016, from http://www.tullowoil.com/operations/east-africa/kenya