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1、Week 7, Foreign Finance and Development Aid(Chapters 13&14, TM) 1. Understanding Balance of Payments General considerations: -Balance of Payments (BOP) Current Account -Surplus and Deficit Capital Account -Surplus and Deficit A Schematic Balance of Payments Account Exports of goods and services A Im
2、ports of goods and services B Investment income C Debt service payments D Net remittances and transfers E Total current account balance (A-B+C-D+fj F Direct private investment G Foreign loans (private and public), minus amortization H Increase in foreign assets of the domestic banking system l Resid
3、ent capital outflow ! Total capital account balance (G+H-/-/) K Increase (or decrease) in cash reserve account L Errors and omissions (L- F - K) M Source: Adapted from John Williamson and Donald R. Lessard, Cnpital Flight: The Problem (md Polici/ Responses (Washington, D.C.: Institute for Internatio
4、nal Economics, 1987), tab. 1. Credits and Debits in the Balance of Payments Account Positive Effects (Credits) 1, Any sale of goods or services abroad (export) l Any earning on an investment in a foreign country l Any receipt of foreign money Any gift or aid from a foreign country i Any foreign sale
5、 of stocks or bonds Negative Effects (Debits) 1, Any purchase of goods and services abroad (import) 2, Any investment in a foreign country l Any payment to foreign country 4, Any gift or aid given abroad 5. Any purchase of stocks or bonds from abroad Sour; Jnm T/hMfiCi Second Edition, by )ohn Charle
6、s JHJI et aL Copyright 1991 by Lexington Btioki, Reprinted nilh perrtiission, 2. Accumulation of Debt and Emergence of the Debt Crisis During the 1980s, the developing world experienced a substantial deterioration in both current and capital account balances Before and After the 1980s Debt Crisis fo
7、r Developing Countries, 1978-1990 (billions of dollars) Year Current Account Capital Account Net Financial Transfers Sara; International Monetary Fund, World Ecotwmic Outlook, 1988 and 1992 (Washington, D.C.: International Monetary Fund, 1988, 1992); United Nations Development Program, Human DeiIopm
8、ent Refxnt, 1992 (New York: Oxford University Press, 1992), lab. 43. Origins of the 1980s Debt Crisis -OPEC oil price increase -Increased borrowing -Excess of imports -Lagging exports Four basic components of typical IMF stabilization program: -Liberalization of foreign exchange and imports control
9、-Devaluation of the official exchange rate -Stringent domestic anti-inflation program -Opening up of the economy to international commerce Such policies can be politically unpopular because they hurt the lower- and middle-income groups 2. The Global Financial Crisis and the Developing Countries Econ
10、omic impacts on developing countries -Economic growth -Exports -Foreign investment inflows -Developing-country stock markets -Aid -Worker remittances -Poverty -Health and education 3. International Flow of Financial Resources(Chapter 14, TM) 3.1. Sources of the international flow of financial resour
11、ces Three sources of the international flow of financial resources: -Private direct and portfolio investment Foreign direct investment by large multinational corporations Foreign portfolio investment (e.g., stocks, bonds and notes) by private institutions(bank, mutual funds, corporations) and indivi
12、duals -Remittances of earnings by international migrants -Public and private development assistance (foreign aid) Individual national government and multinational donor agencies Private nongovernmental organizations(NGOs) 3.2. Foreign Direct Investment The growth of private foreign direct investment
13、(FDI)in the developing world has been extremely rapid, though volatile -Volatile from global economic environments(global financial crisis) across countries and regions Source: World Investment Prospects Survey 2009-2011, Figure 1. FDI inflows, global and by group of economies, 1980-2008, p. 10, bas
14、ed on statistics at www.unctad.org/fdi and UNCTAD estimates. Reprinted with permission from the United Nations Conference on Trade and Development (UNCTAD). -In recent years, FDI has become the largest source of foreign funds flowing to developing countries -As South-South trade plays a growing role
15、, direct South-South investment has increased recently FDI Inflows, 1980-2008 Net Capital Flows to Developing Countries,2000-2009 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Year Direct investment Private portfolio flows Other private capital flows - Official developmental assistance Source: F
16、rom United Nations Conference on Trade and Development (UNCTAD), World Investment Report 2009, Chapter 1, p. 5. Reprinted with permission from the United Nations. Note: Drawn from IMF data which includes new EU member states from eastern Europe but excludes the now high-income South Korea and Singap
17、ore. 3.3. Arguments on Foreign Private Investment Traditional arguments in support of private investment (Pros): Filling gaps -A way of filling in gaps between the domestically available supplies of savings, foreign exchange, government revenue, and human capital skills and the desired level of thes
18、e resources necessary to achieve growth and development targets Fill the savings-investment gap Fill the gap between targeted foreign-exchange requirements and those derived from net export earnings plus net public foreign aid Fill the gap between targeted governmental tax revenues and locally raise
19、d taxes Fill the gap in management, entrepreneurship, technological skills Traditional arguments against private foreign investment (Cons): Widening gaps -May lower domestic savings and investment rates by substituting for private savings and by crowding out investment of local firms -May widen the
20、foreign exchange gap in the long run due to substantial importation of intermediate goods and capital goods as well as the overseas repatriation of profits -Contributions to government revenue may be far lower due to liberal tax concessions, the practice of transfer- pricing, excessive investment al
21、lowances, etc. -May inhibit development by stifling the growth of indigenous entrepreneurship due to MNCs dominance of local markets Need to reconcile the positions of Pros and Cons 3.4. Remittances While growth of remittances must be an important source of international flow of financial resources
22、due to big wage differences across countries, there are concerns that out-migration can hamper development through brain drains and often uneven flow of remittances -Much higher wage levels in high-income economies than those in developing countries incentive for migration -Loss of skilled workers t
23、hrough “brain drain” in developing countries -Amount of remittances substantially depend on the global economic environments) e.g. financial crises) -Migration is not always voluntary, but may result from human trafficking Imperfect information about working conditions Exploitation and abuses Size o
24、f recorded remittances is growing due to; -Rising number of migrants -Advances in financial intermediation, reducing the costs of remitting funds to families -15 (b) Middle-income economies Year Net aid received Remittances received - Foreign direct investment net inflows - Net exports of goods and
25、services 990-2008 ou 门 tries, 1 1990 1995 2000 2005 2008 income economies Year Source: International Bank for Reconstruction and Development/The World Bank, World Development Indicators. Copyright 2010 The World Bank. Reprinted with permission. 4. Foreign aid 4.1. Definition and Trend Foreign aid ca
26、n be defined as any flow of capital to a developing country meeting the following two criteria: -Objective should be non-commercial from the donors point of view -Should be characterized by concessional terms; interest rates and repayment period for borrowed capital should be softer than commercial
27、terms Official development assistance(ODA) , which includes bilateral grants, concessional loans, and technical assistance as well as multilateral flow has grown over past 50 years in money terms, but in terms of percentage of donor countries GNI it declined until early 2000s, then is gradually risi
28、ng since 2005 ion, 2008 Official Development Assistance (ODA) by Reg Region ODA Per Capita (U.S. $) GNI Per Capita (U.S. $) Middle East and North Africa 73 3,237 Sub-Saharan Africa 49 1,077 Latin America and the Caribbean 16 6,768 East Asia and the Pacific 5 2,644 South Asia 8 963 Europe and Central
29、 Asia 19 7,350 Source of data: World Bank World Daelopment Indicators, 20W (Washington D.C.: World Bank, 2010), tabs. 1.1 and 6.16. Official Development Assistance from Major Donor Countries, 1 2008 ,2002, and 4.2. Motivations for foreign aid Political motivations -Important for many large aid-grant
30、ing nations (U.S., Japan, Great Britain, France, etc.), especially for the U.S. Marshall plan: reconstructing Western European economies to contain the international spread of communism Political, economic and military support for friendly or geographically strategic developing countries Aid focus h
31、as shifted across regions, reflecting changes in donor countries strategic, political, security, and economic interests Economic motivations: -Within the broad context of political and strategic priorities, foreign aid programs of the developing countries have a strong economic rationale Foreign exc
32、hange constraints (two gap model) Growth and savings Technical assistance Absorptive capacity Self interest A New View of Foreign Aid -Dissatisfaction among donors and recipients may create the possibility for new aid arrangements -Future aid is likely to be linked to market reforms and institutiona
33、l capacitybuilding 4.3. Aid by NGOs One of the fastest-growing and significant forces in the field of development assistance -Under $ 1 billion in 1970 over $23 billion in 2008 Variety of groups working for diverse areas -Religious groups, private foundations and charities, research organizations, e
34、tc.( e.g. Save the Children, CARE, Oxffam, Doctors without Borders, World Vision, etc.) -Work directly on grassroots rural development projects -Provide relief efforts for starving or displaced peoples Advantages -Less constrained by political imperatives -Better avoid the suspicion and cynicism ( n
35、ot insincere or short -lived ) 4.4. Effects of Aid Arguments for and against aid (Economic traditionalists) -Aid promotes growth and structural transformation (Critics) -Retard growth by substituting domestic savings and investment by exacerbating balance of payment deficits as a result of rising debt repayment obligations( loans) and linking of aid to donor-country exports -widen the gap; between the rich and the poor urban and rural sectors modern and traditional sectors -create corruptions as well as other social and mentality problems the issue of aid effectiveness