Canadian & World Issues

The Economic Growth in

Developing Nations

World Economy

• What sacrifices must a country make if it wants to achieve substantial economic growth?

• Resources• Cultural practices• Short term rewards• Sovereignty• Why are these sacrifices difficult ones to make for

Developing Nations?• Very worried about giving up sovereignty• Constrained by “Western Rules”• Don’t reap the rewards of developing their own

resources

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• According to Wallerstein, the Developing Nations are providing the wealthy countries with:

• A cheap labour force• Raw materials for industries• A market for manufactured goods

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• Developing Nations deal with many problems in trying to develop economic growth

• These countries move from Stage 1 of Rostow’s Theory (Traditional Society) to Stage 2 (Pre-Conditions for Take-off) by establishing a strong central government, which encourages entrepreneurs to establish businesses

• Natural resources begin to be exploited• It is after Stage 2 has been reached that future

problems will begin and the needs of the Developed Nations start to be served

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• Stage 3 begins….• “The Take-Off”

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• Stage 3 consists of:

• The development of a manufacturing industry

• Proliferation of entrepreneurs

• High rates of capital investment

• Foreign aid comes pouring in

• Why????

• Developed Nations are basically expanding their economy

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• The capital for the developing world is from the Developed countries, which means profits are returned to developed countries

• Developed Nations (like the United States) will lend money to the Developing Nations through 2 main methods

• Bi-lateral lending: direct government to government lending

• Multi-lateral lending: making contributions to aid organizations which distribute money, NGOs – like the World Bank (of which the US gives 30% of their money balance)

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• What is the World Bank?• Established in 1945 and operates out of Washington, D.C.• An international lending institution designed to integrate

developing countries into the wider world economy and to provide loans to these nations with the stated goal of reducing poverty

• The World Bank is comprised of 2 main sections:• The International Bank for Reconstruction and Development –

makes loans at market rates of interest• The International Development Association – makes loans on

considerably easier terms• The United States virtually controls the World Bank, as votes are

based on financial contributions

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• So… why would Developing Nations rather work through a multi-lateral loan arrangement rather than a bi-lateral?

• Easier to retain / maintain sovereignty – less ties attached

• With a bi-lateral loan there may be more chance of direct political/military/economic intervention

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• The Loans• Soft loan: lower interest rates, grace period before

repayment, longer amoritization periods• Hard loan: higher interest rates, instant repayment• Tied loan: money is loaned to countries, but the money

must be spent in the country that is loaning the money – a coupon, gift certificate

• Are there any circumstances that there may be outright grants of funds given to countries?

• Special relationships – military, political allies, potential for future profit

• Grant aid – technical assistance, engineers, medical, military

• Agency for International Development (AID)• Takes the sting out of foreign investment be Americans• “insurance agency” – for companies that takes some of the risk

or sting out of potential fiascos when trying to start a business in a developing nation

• Nations must also protect their domestic economy:• Tariff – a charge assessed on foreign goods (paid by the

producer) – usually put on competitive imports• Excise tax – charge put on top of the item’s price, paid by the

consumer, discourates buyng the item• Quota – limit on the number of items or amount brought into

economy

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• The United Nations also has a role in aiding Developing Nations and their economic growth

• International Trade Centre (UNCTAD/WTO)

• Focal point in the UN system for technical cooperation with developing countries in trade

• Works with developing countries and economies in transition to set up effective trade promotion programs for expanding exports and improving import operations

World Economy

• United Nations Conference on Trade and Development (UNCTAD) –

• Established in 1964

• The principal organ of the UN General Assembly dealing with trade, investment and development issues

• Main goals – maximize the trade, investment and development opportunities of developing countries

• Assist them in their efforts to integrate into the world economy on a equitable basis

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• World Trade Organization (WTO)• Global international organization dealing with the

rules of trade between nations• Established on January 1, 1995• Function include:• Administering WTO trade agreements• Forum for trade negotiations• Handling trade disputes• Monitoring national trade policies• Technical assistance and training for developing

countries

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• Problems with these organizations?• Developing Nations see them as the exclusive domain of the

Developed Nations• Why?• Decision-making authority for both organizations resides with

those countries with the greatest economic and political clout• This reality has been seen in the WTO, as there are regular

meetings with the most powerful members – the “Quad”, comprised of

• The EU, United States, Japan, Canada• The overwhelming majority of WTO members are simply

without the resources needed to even assess the implications of numerous and complex economic and trade policy issues that proliferate in the WTO

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• So, who is driving the Global Economy?

• Trans-National Corporations (Multi-National)

• Rapidly gobbling each other up, consolidating their resources and power

• More than half of the largest economies in the world are not nations – but corporations

• In 1970 there were 7000 trans-national corporations

• By 1998 the number had increased to 45,000

• By 2007 there were 65,000

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• NAFTA• Trade pact signed in 1992 that would gradually

eliminate most tariffs and other trade barriers on products and services between, Canada, the United States and Mexico

• NAFTA was ratified by the countries’ national legislatures in 1993 and went into effect on January 1, 1994

• Main provisions called for the gradual reduction of tariffs, duties and other trade barriers

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• Other provisions were designed to give U.S. and Canadian companies greater access to Mexican markets

• It drastically limits each government’s ability to regulate corporate behaviour

• Positives and negatives???