Econ Test 3 (8,9,14-16)
Poor countries found themselves in a "debt-induced poverty trap." Explain in what ways there was a growing recognition that debt was strangling these countries future ability to grow. What was the first solution tried and why did it not work?
There was an accumulation of large debt burdens as a result of internal and external dynamics. Governments were encouraged to extend their expenditures beyond their revenues. The expansion of the civil service and the creation of too many unproductive state-owned enterprises, combined with the excessive consumption expenditures of some authoritarian rules, generated a large appetite for foreign capital. Official creditors sometimes collaborated in this dynamic, providing loans because the borrowers were important political allies rather than because the projects, they proposed represented a wise use of foreign funds.
What kind of labor standards are pushed by anti-globalization forces? What do the defenders of globalization say about such proposals?
- Core labor standards o Freedom of associations o Right to collective bargaining o Abolition of forced labor o Prevention of discrimination in employment o Minimum age of employment o Maximum working hours o Minimum wages o Health and safety conditions - Pro-globalization forces believe such standards can push developing countries back into poverty. The core standards encourage restricted trade on countries who do not abide by the laws, this does not encourage globalization. Certain standards can be deemed "protectionist" which further discourages globalization. Pro-globalization forces believe labor conditions in the developing world will naturally improve without governmental involvement; as productivity and efficiency increases, so do standards, as does income. DEFENDERS ARGUE THAT STANDARDS WILL PUSH PEOPLE IN DEVELOPING COUNTRIES BACK INTO POVERTY.
The economic pain during the struggles led to 3 reasons reforms became palatable. Explain.
1. The economic crisis had altered interest group politics Consensus the old order had failed, and reform was necessary 2) US initiated Brady plan offering negotiating some debt forgiveness A larger share of the gains from reforms would accrue to domestic groups 3) Governments began to look to the East Asian model Growth strategy needed to be outward oriented 1. ECONOMISTS ALTERED INTEREST GROUP POLITICS-REFORM NECESSARY 2. BRADY PLAN: INCLUDED SOME DEBT FORGIVENESS MORE GAINS GO TO DOMESTIC GROUPS 3. EAST ASIAN MODEL-EXPORT ORIENTED
Define Multinational Corporations (MNC) and explain why they are important (and controversial).
A Multinational Corporation (MNC) is a company that controls and manages production in more than one country. The Home country is where the headquarters are set in place and this is where the functions of the MNC are based and the place that determines what its characteristics and processes are. Some MNC's stay within their headquarters for tax, tariff or financial burden purposes. MNC's are controversial because MNC's have larger budgets than the countries in which they operate; the GDP of many countries is lower than the sales revenue of some of the world's largest MNCs.
What is a sovereign wealth fund? Why is it important? Why do you think it is included in this chapter about MNCs?
A sovereign wealth fund are government owned funds that is a nation's excess capital put together into various financial asset investments, rather than retaining this capital in a central bank or injecting it back into the economy. One reason why it is important is because it is considered a method of accruing profit for the benefit of the domestic economy and its consumers. The primary role of a sovereign wealth fund is to stabilize the economy through diversification and generate wealth for future generations. Normally, sovereign wealth funds are not supported because of the large dominance they create within the global economy. I think it is included in this chapter to show us that there are other options out there that can be just as affective and powerful as MNCs, just on a different scale.
Discuss definition(s) of "sweatshop." Use Table 16.1 to argue they are a problem.
According to Sweatshop Watch, the definition of sweatshop is an, ""extreme exploitation, including the absence of a living wage of benefits, poor working conditions and arbitrary discipline." Table 16.1 supports the concept that low-income countries are exploited, given the fractional amounts of US$ compensated to workers in this region. 16.1 shows that labor scarce countries receive more compensation, suggesting workers receive higher income than workers in labor abundant countries. This suggests that sweatshops are a problem as they do not allow an equal distribution of income between developing and advanced economies.
At the beginning of the chapter, Oatley outlines the clash between the anti-globalization forces and the pro-globalization forces. Explain.
Anti-globalization • Widening global income inequality • Contributing to degradation of natural environment • Prioritizes corporate and commercial interests Pro-globalization • Solution to income inequality and poverty, not cause • Providing jobs where they would not exist otherwise - despite conditions - Number in poverty, decreased
Summarize the discussion of the 2 sides of this debate as Oatley concludes this section.
Both pro and anti-globalization forces want working standards to improve. The methods which should be implemented is where the debate is by each side; the stance taken reflects underlying beliefs about market benefits and the ability of governments to effectively regulate markets which are difficult to control.
Explain the concern developing countries have about foreign dominance by MNCs. Do they block MNC investments? Why or why not?
Developing countries had concerns about the foreign dominance by MNCs because of foreign corporations controlling key sectors of an economy. Their sectors and revenues were controlled by MNCs. The critical sectors that developing countries raised political and economic concerns of developing countries. Regulations were implemented; developing countries sought to manage access to their economy, ensuring benefits are provided. Some developing countries blocked FDI in specific sectors; MNCs were not able to own public utilities, iron, steel, retail, insurance or banking firms. Where these were already in existence, the firm was nationalized, and the government took control. SOME CONCERNS CAN COME UP WHEN RELATED TO DEVELOPING COUNTRIES AND THE FOREIGN DOMINANCE BY MNC SUCH AS: -FOREIGN CORPORATION CONTROLLING KEY SECTIONS OF AN ECONOMY -COMMODITY EXPORTING DEVELOPING COUNTRIES FACING MNC CONTROLLING 50% OF A SECTOR -POLITICAL CONCERNS WHEN THE DEVELOPING COUNTRY WAS A FORMER COLONY -ECONOMIC CONCERNS DUE TO ISI STRATEGIES IT SEEMED INCONGRUENT TO ACHIEVE POLITICAL INDEPENDENCE FROM COLONIAL POWERS AND YET STRUGGLE UNDER THE DOMINANCE OF THE COLONIAL POWER'S FIRMS. IF MNC WERE ALLOWED TO CONTROL EXPORT EARNINGS, GOV WOULD BE ANBLE TO USE THESE RESOURCES TO PROMOTE THEIR DEVELOPMENT OBJECTIVES
The flow of private foreign capital flows in and out in waves, potentially causing economic crises. Avoiding foreign capital could prevent this problem, but instead developing countries seek it out. Why?
Developing countries seek it out, because of the ability to use foreign savings to finance economic growth and development. When we look at the equation, S + (T - G) = I + CA, private savings is often low in developing economies and it is hard to save when many are at subsistence levels of income. DEVELOPING COUNTRIES CONTINUE TO DRAW ON FOREIGN CAPITAL BECAUSE OF POTENTIALLY LARGE BENEFITS THAT ACCOMPANY ITS APPARENT DANGGERS. THESE BENEFITS ARISE FROM THE ABILITY TO DRAW ON FOREIGN SAVINGS TO FINANCE ECONOMIC GROWTH
Discuss the growth in lending by commercial banks to developing country governments (and government owned businesses and development banks) and how debt problems emerged.
Developing countries sought investment, at the same time commercial banks had excess capital supply and sought borrowers in the 1970s. Commercial banks began to lend to state-owned organizations and financial organizations in developing countries. Even though foreign debt encouraged growth, it rapidly accumulated and set unstable foundations and forecast worrying trends. Debt service concerns emerge here as debt grows faster than the ability to repay, or service, the debt. The debt service capacity is a country's ability to repay principal and interest amounts required by loan terms; how much is needed to pay relative to export earnings. As a country increases foreign debt, it must expand its exports to service the debt. COMMERCIAL BANKS EARNED DIRECTLY TO GOVERNMENTS, STATE OWNED ENTERPRISES AND THE GOVERNMENT OWNED DEVELOPMENT BANKS.
Why do developing countries that are hosting MNCs want to regulate them? What are the competing interests that make it difficult?
Developing countries that are hosting MNCs want to regulate them because there are many economic benefits in doing so. After World War II, developing countries see MNCs with great fear due to many reasons. Some of these include connections between MNCs and former colonial powers, reputation of discrimination against local workers and the enforcement of alien cultural values. Many newly independent developing countries had freed themselves from colonial powers and were therefore unsettled from hosting MNCs. Newly developing countries aimed to establish political and economic autonomy and take control of foreign investments and investment policies. ALLOWING FOREIGN CORP TO CONTROL CRITICAL SECTORS RAISED POLITICAL AND ECONOMIC CONCERNS (FOREIGN OWNERSHIP OF CRITICAL NATURAL RESOURCE INDUSTRIES COMPROMISED HARD-WON NATIONAL AUTONOMY). IF MNCS WERE ALLOWED TO CONTROL EXPORT EARNINGS, GOV WOULD BE UNABLE TO USE THESE RESOURCES TO PROMOTE DEVELOPMENT. IF MNCS WERE ALLOWED TO ENTER LOCAL ECONOMY, THERE WOULD BE NO NECESSARY RELATIONSHIP BETWEEN INVESTMENTS MADE AND GOVERNMENT GOALS
Average per capita gains in income have risen dramatically from $667 in 1820 to $5,709 in 1998 (measured in 1990 dollars). Use Figure 16.1 to argue why the gains have not been evenly shared. Is this the right way to examine this issue?
Figure 16.1 displays the ratios in terms of richestpoorest over time. These ratios relate to the rise in average per capita gains in income. The figure basically shows that as gains in income go up, this is majority shared with the richest establishments/countries, not those who are developing. This is not the right way to examine the issue, but if one is to look at this time period in other data ratios and factors, the facts would give a better understanding to examine the issue. THE RATIO IS BASED ON THE AVERAGE OF INCOME OF THE WORLD'S RICHEST ECONOMY TO THE AVERAGE INCOME IN THE WORLD'S POOREST ECONOMY OVER THE LAST 200 YEARS. THIS IS NOT THE RIGHT WAY TO MEASURE GLOBAL DISTRIBUTION OF INCOME
What does the Gini coefficient show about global income inequality (figure 16.2)?
Figure 16.2 shows how the inequality of income has increased since the 1820's and the steep line between the years 1820-1920 is in line with the growth of the MNC's and globalization. After 1929, the line plateaus and starts to decrease at a slower rate due to the stabilization of globalization and the start of the redistribution of income. The Gini coefficient shows the represents complete equality of income, each person has the same income, 1 implies complete inequality of income, one person has all the income and nobody else has any. As the scale goes up, the more unequal distribution becomes. The Gini coefficient ranks the concentration of global income, on a scale of 0 to 1
How does Figure 16.3 give insights into why global income inequality has been declining in recent decades? What has been the impact of economic growth on poverty? What does Oatley conclude?
Figure 16.3 gives insight that income inequality has gone down in recent years due to the decrease in the income in "richest" countries and increase in income in "poorest" countries. There have been fluctuations in the absolute number of people living in poverty, the rate at which it has decreased in recent decades is "unprecedented". Oatley concludes that globalization contributes towards growth rates and reducing poverty. GROWTH RATE OF POOREST AND RICHEST COUNTRIES -1960-80: RICHERS COUNTRIES GREW FASTER 1980-97: POORER COUNTRIES GREW FASTER POORER COUNTRIES CONTINUE CATCHING UP TO INCOMES IN RICHER COUNTRIES GLOBAL INCOME INEQUALITY DECREASES
What were the results of the HIPC debt initiative? Did it satisfy the debt critics?
HIPC debt initiative played a crucial role in the management of debt burdens. However, the results showed that by 2004, total HIPC debt fell from $80B to $28B. Annual debt service fell from $4.9B to $2.6B. This did not satisfy the debt critics since due to growing movements for 100% debt forgiveness and the North-South were worried that debt was the new way to control these countries. G8 discussed 100% debt forgiveness in October 2004 and for it to include IMF, World Bank and African Development Funds as well.
But MNC makes decisions to maximize its profits globally, not necessarily focused locally. Discuss MNC practices that can erode benefits to the host countries.
In extreme cases, MNCs might crowd out the K markets. If an MNC borrows money locally it can crowd out domestic investment. MNC's may repatriate its earnings to its home country. If the money stayed in the host county it could be reinvested. MNC's may charge licensing fees or royalties for any technology that is transferred. Transfer pricing may result in a local affiliate paying higher than market pricing and selling at lower than market
Discuss how foreign aid changed and grew from the 1950s to the 1960s.
In the 1950s, foreign aid and FDI main source of foreign K. To begin with, US was the only resource for foreign aid and was quite limited. World Bank resisted concessional lending terms and kept interest rates at close to market, which led to not a lot of FPI or foreign aid. In the late 1950s, World Bank created International Development Association, which started concessional loans. Regional banks modeled off this were also created like Asian Development Bank and InterAmerican Development Bank. By end of 1960s multilateral aid twice as large as private K flows
By 1985, economic conditions were not improving so the initial diagnosis is questioned. Discuss the new reforms required.
Initially, the failure to diagnose the causes of the crisis allowed for new reforms such as Structural adjustment, a belief that the current economic structures were not capable of sufficient export expansion. These reforms sought to reshape indebted economies by reducing government involvement and increasing market control. Substantial market liberalization was encouraged by these reforms - Trade liberalization - Liberalization of FDI - Privatization of state-owned enterprises - Broader deregulation to promote economic competition SAME; BY 1985, ECONOMIC CONDITIONS WERE NOT IMPROVING SO INITIAL DIAGNOSIS WAS QUESTIONED. NEVERTHELESS COUNTRIES COULD REPAY DEBTS BUT STABILIZATION NOT SUFFICED IT NEEDED NEW REFORMS - Trade liberalization - Liberalization of FDI - Privatization of state-owned enterprises - Broader deregulation to promote economic competition
Over-borrowing left the Latin American developing economies vulnerable to international shocks. Discuss the 3 shocks that hit in 1979-80. What was the response to the shocks? When did the crisis officially start?
Latin America was vulnerable to international shocks - and they got 3 of them in 1979 to early 1980s: (1) US raised interest rates to fight inflation at home. Not only does that cause K to shift to US, but it also caused 2/3 of Latin American debt to be variable interest (2) Recession in developed economies hurt balance of trade and (3) In 1979, Latin America saw another oil price rise. Their response to these shocks was more borrowing! Debt and debt service ratios rose. By 1982, debt service ratio was almost 50% for all of Latin America. The official start of the crisis was August of 1982, when Mexico announced it could not make scheduled debt payment to the United States.
Define locational advantages and market imperfections.
Locational advantage is the ability of an individual, company, or economy to conduct an activity better than another for reasons related to location. It comes from 3 sources: Needing access to large source of natural resources, needing access to a large market, and Efficiency oriented investment (allocating different stages of production to the place with an abundance of the needed resource). MARKET IMPERFECTION RISE WHEN A PRICE MECHANISM FAILS TO PROMOTE A WELFARE IMPROVING TRANSACTION. Market imperfection comes from 3 sources: Intangible assets lead to horizontal integration. Production requires a transfer of knowledge, technology, information that is proprietary. Specific assets lead to vertical integration. An asset required in the production process
Using the concepts defined above, what makes a firm grow into an MNC? Is it when it gets to a certain size?
MNCs are firms who have responded to certain characteristics of their market/industry; often it is the result of responding to locational advantage and market imperfection. If locational advantage coexists with a market imperfection, we expect an MNC to emerge as it internalizes transactions across borders.
And as we move forward through the 1960s and 1970s, we see 2 reasons the demand for international capital markets grew. Explain.
Reasons Demand from international K markets grew 1. Higher oil prices meant higher imports for many developing countries and thus more borrowing a. 3 options: Reduce other imports, expand exports or borrow from foreign lenders b. But cutting imports often not possible because of ISI c. And ISI had often led to weakened exporting sectors 2. ISI resulted in governments responsible for 33%+ of domestic Investments a. Resulted in widening budget deficits; growing foreign debt GOVERNMENT NEEDED TO FINANCE DEFICITS WHICH GENERATED DEMAND FOR FOREIGN CAPITAL. COMMERCIAL BANKS LOOKING FOR PLACES TO LEND AND DEVELOPING COUNTRIES GOVERNMENTS LOOKING FOR ADDITIOANL FUNDS FOUND EACH OTHER BECAUSE OF THIS FOREIGN DEBT FUELED ECONOMIC GROWTH
As we move forward through the 1960s and 1970s, we see 4 reasons the supply from international capital markets grew. Explain.
Reasons Supply from the international K markets grew: 1. Decolonization movement led the World Bank in 1960s to increase concessional lending 2. US saw a movement growing for a UN-created development loan system a. US wanted to preempt that with the World Bank because they had more influence over the World Bank 3. US' anti-communist stance meant funneling money to preempt Communism 4. Petrodollar recycling
Discuss some benefits MNCs bring to the host country.
Some benefits MNCs bring to the host country include Increase in K in a host country, brings technology and managerial expertise and MNCs can provide access to marketing networks
Explain the regulatory regimes that have been used to deal with MNCs in developing countries such as local control and performance requirements.
Some regulatory regimes that had been used to deal with MNCs in developing countries include that governments required local operations to be majority owned by local shareholders, whereas MNC's would be owning 100%. The governments put a limit on the amount of profits which MNCs could repatriate and limited the amount payable to parent firms for technology transfers. These measures were intended to prevent revenues generated within host country, allowing local re-investment of profits. Performance requirements were applied to local operations, promoting specific economic objectives. Promotions of backward linkages had a requirement that a percentage of inputs must be purchased from domestic suppliers. Promotion of export industries said that operations have to export a specific percentage of outputs.
Explain the 2 stages of the HIPC debt initiative. And what were the results? Did it satisfy the debt critics?
Stage 1 was for 3 years or less and involved Developing a Poverty Reduction Strategy Paper detailing-changes in macroeconomic, social and structural policies to encourage growth and reduce poverty and how resources freed up from debt payments will be used to. At the end of stage 1 would be the decision point where IMF and WB evaluate need for and level of debt forgiveness. Stage 2 was for an indeterminate time. In this stage, IMF and World Bank evaluate continued progress and will deem Completion Point. The results showed that by 2004, total HIPC debt fell from $80B to $28B. Annual debt service fell from $4.9B to $2.6B. This did not satisfy the debt critics since due to growing movements for 100% debt forgiveness and the North-South were worried that debt was the new way to control these countries. G8 discussed 100% debt forgiveness in October 2004 and for it to include IMF, World Bank and African Development Fund.
Explain why Table 16.1 is the wrong way to look at it by using Table 16.2. How do pro globalization forces argue that sweatshops have been a source of improvements in poor countries?
Table 16.1 is the wrong way to look at it because it only shows the compensation from MNCs to each level of income country. If we compare it to16.2, this table directly compares compensation from MNCs with compensation from local firms. Pro globalization forces argue sweatshops operated by MNCs are a source of improvement in poor/developing countries, as they provide higher incomes to workers than local firms, in essence redistributing income by paying closer to high-income countries standard wage. COMPARING INTERNATIONAL WAGE IS INCORRECT. COMPARE PAY ADJUSTED FOR PRODUCTIVITY ACROSS COUNTRIES. COMPARE PAY OF FOREIGN WORKERS TO HIS OTHER ALTERNATIVE IN HIS COUNTRY. TABLE 16.2 FOREIGN MNCS PAY BETTER THAN LOCAL FIRMS. SAME GOES FOR COMPARING OTHER WORKING CONDITIONS WHAT MAY BE INTOLERABLE CONDITIONS TO RICH COUNTRIES MAY BE THE BEST OPPORTUNITY THEY HAVE TO PULL THEMSELVES OUT OF POVERTY
What are the 4 historic legal principles of the Calvo Doctrine? And how have they been challenged over the years?
The 4 historic legal principles of the Calvo doctrine are: Foreign investments are private property to be treated at least as favorably as domestic private property Governments have a right to expropriate foreign investment but only for a public purpose Expropriation requires compensation of full value Foreign investors have the right to appeal to their home country to intervene in any dispute These have been challenged over the years by capital importing countries, particularly after WW1. THE CHALLENGES BEGAN IN THE 19TH CENTURY WITH CALVO DOCTRINE WITH THE RIGHT OF HOME COUNTRY TO INTERVENE. THEN IT INTESIFIED IN EARLY 20TH CENTURY WITH RUSSIA REVOLUTION CHALLENGING PRIVATE PROPERTY. LATIN AMERICAN COUNTRIES EXPANDING THE DEFINITION OF PUBLIC PURPOSE WHEN THE ITO FAILED BECAUSE IT INCLUDED RULES TO PROTECT FOREIGN INVESTMENTS AND AS OF TODAY THE BATTLE CONTUNUED UNSETTLING RESULTS.
Eventually they realized there was a need for multilateral debt forgiveness. Explain the design of the HIPC debt initiative September 1996.
The HIPC debt initiative in September 1996 was designed for partial debt forgiveness to make debt burden sustainable. It estimated the typical country would see debt cut by 66% and debt-service ratio by 50%. The design involved a "high degree" of conditionality and was designed to alleviate the debt burdens of the poor countries to sustainable levels. These levels included meeting certain criteria, making structural macroeconomic adjustments, having social policy reforms such as education, health, poverty programs. In return of all these levels, countries would get some debt forgiveness from the multilateral institutions like the IMF and the World Bank
The IMF required the countries that wanted help to make adjustments to achieve Macroeconomic Stabilization. What did they have to do? What help did they get? And how was all of this based on an initial incorrect diagnosis?
The IMF required commercial banks to pledge loans to the same countries; sharing the burden in order to prevent freeriding. Small banks are encouraged to make more private loans. This allows for increased spending. Creditor governments provided loans and rescheduled existing debt, to offset liquidity shortages. The IMF and commercial banks provided loans via concerted lending. In 1983, $28.8bn provided to indebted governments by IMF/banks. The debt crisis was wrongly diagnosed as a short-term liquidity problem as creditors believed high interest rates and falling export earnings had raised debt service above the capacity to repay; short term remedies were applied due to initial diagnosis. -BALANCE BUDGETS AND DEVALUE CURRENCY -IMF AND WORLD BANK PROVIDED 29B AND AGREE TO MACROECONOMIC STABILIZATION; EXISTING DEBTS RESCHEDULED (GRACE PERIOD AND EXTENDED MATURITY) -INITIAL DIAGNOSIS: SHORT TERM LIQUIDITY (WRONG) HIGH INTERESTS, FALLING EXPORTS; ASSUMPTION: BOTH WOULD IMPROVE AS WORLD ECONOMY IMPROVED, COUNTRIES WOULD REPAY -EXPORTS INCREASED BY SMALL AMOUNTS
Explain the next plan, Multilateral Debt Relief Initiative.
The Multilateral Debt Relief Initiative (MDRI) was adopted by the IMF in late 2005. This plan puts a debt relief proposal initially advanced by the G-8 in June 2005 into action, which called for the cancellation of 100% of the claims of three multilateral institutions--the IMF, the International Development Association (IDA) of the World Bank, and the African Development Fund (AfDF)--on countries that have reached, or will eventually reach, the completion point under the enhanced Initiative for Heavily Indebted Poor Countries (HIPC Initiative).
Discuss what the attitude of the advanced industrialized economies has been towards regulating MNCs. Also discuss any exceptions.
The advanced industrialized economies have had a conflicting attitude towards regulating MNC's, and they are more open to Foreign direct investments and less open to regulating MNC activity in developing countries. On the other hand, Japan and France had required that there would be government approval for FDI. Every advanced country has industries that are protected from FDI or foreign investments. For example, in America, some industries that are protected from foreign ownership or investment are radio, television, and defense. Despite these protections, advanced countries are open to FDI if they can control the terms and conditions around investments. THE ADVANCED INDUSTRIALIZED COUNTRY HAS BEEN MORE OPEN TO FDI AND LESS RESTRICTIVE OF MNS ACTIVITIES COMPARED TO DEVELOPING COUNTRIES. THE EXCEPTIONS ARE THAT THERE CANNOT BE FDI IN INDUSTRIES THAT ARE CONSIDERED CRITICAL. EXAMPLE: IN US, FOREIGN FORMS CANNOT OWN: RADIO, TV BROADCASTING, DOMESTIC AIRLINE PROHIBITED FROM PARTICIPATING IN DEFENSE RELATED INDUSTRIES.
How did the attitude of developing countries towards regulating MNCs change by the 1980s?
The attitudes of developing countries towards regulating MNCs changed in the 1980s because many developing countries began to loosen the FDI by opening sectors originally closed to FDI, for example telecoms and natural resources. All of the foreign ownership restrictions were removed, and those on repatriation of profit were revised and reduced. Liberalization was supported by the results of restrictive regimes, and a shift in development strategies. Although there was an increase in openness to Foreign direct investments, there was still some conflict towards MNCs, due to past experience. As a result, there are regulations in place to protect domestic markets from MNC activity. Regardless of the level of FDI, developing countries continue to occasionally doubt the long-term effectiveness of MNCs. IN 80S, MANY DEVELOPING COUNTRIES BEGAN TO LIBERALIZE FDI BY OPENING SECTORS WHICH ARE CLOSED BEFORE. TELECOM AND NATURAL RESOURCES AOD FOREIGN OWNERSHIP ESTVICTION WERE REMOVED MEANWHILE THE REPATRIATION OF PROFIT WAS REVISED AND REDUCED. ALTHOUGH WE HAVE MORE OPENESS TO FDI. THERE ARE SOME HESITATIONS TOWARDS MNSC DUE TO PAST EXPERIENCE. THEREFORE, SOME REULATIONS IN PLACE TO PROTECT DOMESTIC MARKET FROM MNC ACTIVITY. REGARDLESS OF LEVEL OF FDIM DEVELOPING COUNTRIES CONTINUE TO DOUBT THE LONG TERM EFFECTIVNESS OF MNC.
Why did the indebted countries bear most of the cost? They could have defaulted and left the creditors with most of the cost. Use free riding to explain.
The commercial banks that made loans to governments with debt were supported by the debtors' ability to rely upon the IMF; Loans from IMF and World Bank were contingent upon structural adjustment programs. The adjustment costs of the debt regime were pushed onto heavily indebted economies. Creditors maintained power over debtors, due to their ability to prevent free riders and ability to maintain common front pushing costs back onto debtor governments. Each creditor had incentives to free ride on the contributions of other coalition members.
What are 3 reasons Advanced Industrialized Countries are less restrictive than Developing Countries?
The first reason is that Developing countries are more vulnerable to foreign domination. The second reason is that Countries that serves as the home to MNC's tend to be more open to hosting foreign owned MNC's. The third reason is that Attempts to regulate MNC activity were most likely in countries where governments played a large role in directing the economy.
In broad terms, K is accessed in 1 of 2 ways. Explain
The first way K can be assessed is Foreign Aid. In this way, the largest share ($119B) is Bilateral Aid-Money granted by one government to another. IMF, WTO, IRBD, World Bank are institutions established to support foreign aid to developing countries. This is often done in the effort to support the broader global economy. It is more stable than private capital, as it is supported by a solid foundation of developed countries with stable economies and excessive reserves. Thee second way is Private K flow. Figure 14.3 shows private K > Foreign aid in most places, but private flows are very sensitive to risks (political, default, etc). Private foreign capital investment is independently injected or removed from an economy. It is less stable, or reliable on a year to year basis. K IS ACCESSED IN 1 0F 2 WAYS: *FOREIGN AID: -LARGEST SHARE IN BILATERAL AID -MULTILATERAL AID FROM THE WORLD BANK AND OTHERS -US WAS THE LARGEST DONER AT NEARLY 30B *PRIVATE K FLOWS -PRIVATE INDIVIDUALS AND BUSINESSES -BANK LOANS, STOCK, OR BOND PURCHASE -MNC INVESTMENTS
Thus the indebted countries have to adopt the structural adjustments but that means getting it through their political systems. Discuss the struggles and responses when they could not pass it.
The reforms made caused the costs to be imposed on domestic interest groups, which led to distributive conflict that delayed stabilization. This distributive conflict was all about which group would bear the increasing costs to balance the budget. The Governments then decided where to cut costs and how to implement taxes. These decisions caused a larger conflict amongst veto players: Public sector employees would suffer if budget cuts stopped their wage increases and cut government employees jobs. Interest groups blocked cuts in government expenditure as they were unwilling to accept the reduction in income implied by fiscal austerity. High inflation occurred across Latin America due to an inability to reduce government expenditure.
What is the race to the bottom theory? What kinds of standards does it apply to? Is it true?
The theory states that companies will find a way to locate such locations that can provide lower labor, environmental and other regulatory standards to save money. This theory says that the result higher standard countries will drop their standards or lose out on companies moving abroad. The theory mostly links to labor as many firms keep wages low, protecting profit margins, while still providing a quality item. Retailers are blamed for using wages and benefits in their "race to the bottom." Firms have responded to this by relocating their production firms overseas to countries with lower labor standards, wages and benefits, or will seek suppliers in these markets. The cost of domestic roles, such as in-store operations, will continue to increase with law adjustments, however the majority of operations take place in regions with lower costs.
Explain the 3 steps of the boom and bust cycle from capital flows that have affected developing countries.
The three key steps of the boom and bust cycle which have impacted developing countries are over borrowing, crisis, and adjustment. Wanting to tap into the K to stimulate growth turns into overborrowing and is a result of borrowing too much foreign capital to finance investment which cannot be paid back within its time limit. As debt accumulates and default looms, capital flight begins and the countries face crisis occurs, which is a result of failing loans and/or overborrowing foreign capital. Governments must make adjustments; often turn to the IMF and/or the World Bank for help who require economic reforms. Adjustments occur after crisis peak, and is the responding regulations, and investments, or withdrawals of foreign investment to redevelop the economy. THREE STEPS OF BOOM AND BUST CYCLE -OVERBORROWING: DEVELOPING COUNTRIES WANTED FOREIGN CAPITAL TO STIMULATE GROWTH LED TO OVERBORROWING -CRISIS: DEBT ACCUMALATED, DEFAULT LOOMED, CAPITAL FLIGHT BEGAN AND FINANCIAL CRISIS ENSUED -ADJUSTMENT: GOVERNMENT NEEDED TO MAKE ADJUSTMENTS. APPROACHED IMF AND WORLD BANK FOR HELP ECONOMIC REFORM
Why are there no comprehensive international rules governing the activities of MNCs? What are the 2 sides in the conflict?
There are no comprehensive international rules governing the activities of MNCs because of the conflict between K-exporting advanced industrialized countries and the K-importing developing countries. K-exporters want the rules to limit regulations of MNC while K-importers want the rules to give them the right to control MNCs. THE REASON FOR NO COMPREHENSIVE RULES IS BECAUSE OF THE CONFLICT BETWEEN THE CAPITAL EXPORTING ADVANCED INDUSTRIALIZED COUNTRIES AND THE CAPITAL IMPORTING DEVELOPING COUNTRIES THE CAPITAL EXPORTERS WANT RULES THAT LIMIT REGULATIONS OF MNCS AND THE CAPITAL IMPORTERS WANT RULES THAT GIVE THEM THE RIGHT TO CONTROL MNCS.
There are gains for both the host country and the MNC if a deal is made. How the gains will be distributed is something that can be negotiated. How does the bargaining process work out when it is a natural-resource industry?
When referring to a natural resource industry, at first, the bargaining power favors the MNC as a priority. Therefore, it is a challenge for those countries who wish to establish a monopoly over any natural resource. This allows MNCs to opt where to invest, but it also suggests that MNCs will bear all risks associated in investments since it does not have the control over the capital, processes, and technology required to extract and refine natural resources. MNCs can exploit this usage of power to capture the larger share of the gains acquired through investment.
How does the bargaining process work out when it is a low-skilled labor-intensive industry?
When referring to the low skilled labor-intensive industry, the bargaining process works out differently, because MNC's have a bigger bargaining power than host countries in low skilled, labor intensive industries. MNCs have the authority to decide where they want to establish host countries since no host country has the power to have a monopoly on low-skilled labor. Investments in low-skilled manufacturing is usually a small amount of fixed capital, which can be easily removed from host country. Manufacturing investments are not held hostage as hosts do not gain power as a result of investment, unlike natural resource investments.
Discuss the history of MNCs. Historically, where are they headquartered? Where are they invested? How has that changed over time?
o MNC's were first established as an integral part of the British Empire. Towards the end of the 19th Century, America started investing abroad, and by the 1920's, it was overtaking as the largest source of foreign direct investment (FDI). MNC's are concentrated in advanced industrial countries, yet increasingly in developing countries. An MNC is invested in each country in which it operates. The amount at which each of the three largest FDI providers (US, EU, JP) invest in each region has changed over time; since the late 1980s, investment in development countries has doubled, from 1/4 of global FDI to 1/2. The number of MNC's has increased rapidly post-war and in conjunction with globalization. Within 40 years the number of MNCs has increased eleven-fold. 92/100 world's largest are based in USA, Europe and Japan (2008). Western Europe and the USA have received a higher share of FDI inflows throughout history; this number fluctuates; however, they remain dominant.
