3. Economic interactions & flows

Financial flows

What is capital?

The term capital refers to financial or physical assets which can generate income, such as property or machinery. In economics capital is one of the factors of production; it is the stock of man-made resources used in the production of goods and services. The other factors of production are land, labour and enterprise. Financial flows, in the form of money, decide where and how capital is utilised.

Money is just a representation of goods or resources – try building a boat on a deserted island with just a pocket full of Euros.

For data on the relative importance of loans, debt repayments, development aid, remittances, foreign direct investment, and the repatriation of profits in the transfer of capital between the core and periphery, see the World Bank link below;

World Bank Data on financial flows

Understanding the Rostow Model and the need for capital

 

1: Loans

Money borrowed from the International Monetary Fund, World Bank or private organizations with the aim of aiding development projects. The loaned money needs to be invested wisely to get a return to service the debt. Interest repayment rates can fluctuate with the global economic markets.

Example from the BBC:

Ghana looks to build sports industry

IMF says Iraq has made good progress with its economy

2: Debt Repayment

Debt is money owed: either the original sum borrowed or interest charges levied on the original sum. Debt service is the process of repaying a loan according to an agreed schedule. High debt service payments are often blamed for reducing government revenue, and thus resources for health and education. As a result, there are increasing calls for debt relief, which is a term used to describe the process of either forgiving or reducing debts held by poor countries.

Example from the BBC:

Q&A: African debt relief

The Human Development Report 2002 from the United Nations Development Programme (UNDP) shows that, among 50 African countries, at least 29 recently spent more on debt service than on health. At present 41 countries are classified as heavily indebted poor countries (HIPCs) – 33 in Africa, four in Latin America, three in Asia and one in the Middle East. The main objective of the HIPC initiative is to reduce debt in these countries to a sustainable level, thereby releasing extra budgetary resources for poverty-reducing expenditure, including expenditure on health.

3: Development Aid

Development aid or development cooperation (also development assistance, Official Development Assistance (ODA) or foreign aid) is aid given by governments and other agencies to support the economic, environmental, social and political development of developing countries. It is distinguished from humanitarian aid by focusing on alleviating poverty in the long term, rather than a short term response. There tends to be a grant element to distinguish from a loan.

Example from the BBC:

Is development aid effective?

The largest Development Assistance Committee donors were the United States ($21.8 billion), Germany ($12.29 billion), France ($9.88 billion), United Kingdom ($9.85 billion). However, none of those met the UN target of giving at least 0.7 percent of the Gross National Income (GNI) as aid. United States (0.16% of GNI) and Japan (0.17% of GNI) were in fact giving least among the members of DAC. The only countries meeting the targets in 2007 were Norway (0.96% of GNI), Sweden (0.93% of GNI), Luxembourg (0.91% of GNI), the Netherlands and Denmark (both 0.81% of GNI). [Source]

4: Remittances

A remittance is a transfer of money by a foreign worker to his or her home country.

Filipino families divided by dependence on overseas work

Africans’ remittances outweigh Western aid

Migrant workers are suffering worst in the aftermath of the global recession. Foreign workers in developed nations are more likely to be jobless than their native-born counterparts, as the employment gap widens between the two. At the end of 2007, 12.4% of immigrants in Spain were jobless, as against 7.9% of native-born Spaniards. [Source]

5: Foreign Direct Investment

The purchase of land, equipment or buildings or the construction of new equipment or buildings by a foreign company. FDI also refers to the purchase of a controlling interest in existing operations and businesses (known as mergers and acquisitions).

China and India: The scramble for business in Africa

Gambia severs diplomatic ties with Taiwan

Xi Jinping wraps up Africa trip in Congo

Many Chinese firms employ large numbers of local workers but wages remain low. However, there is evidence that workers are learning new skills because of the availability of Chinese-funded work. Taking advantage of low labour costs, the Chinese are also building factories across Africa. Most African countries now have a growing trade deficit with China, in spite of favourable tax-free trading agreements. Ethiopian exports to China reached $132m (£63m) in 2006, a figure dwarfed by the value of Chinese imports of $432m (£206m). [Source]

6: Repatriation of Profits

The return of something, usually money or profit, to the country of its owner or its origin.

Time to Bring U.S. Corporate Profits Home

There are 63,000 transnational corporations worldwide, with 690,000 foreign affiliates. Three quarters of them are based in North America, Western Europe and Japan. Ninety-nine of the 100 largest transnational corporations are from the industrialized countries. Royal Dutch Shell’s revenues are greater than Venezuela’s Gross Domestic Product. Using this measurement, WalMart is bigger than Indonesia. General Motors is roughly the same size as Ireland, New Zealand and Hungary combined. [Source]

Exam Style Question

Compare the importance of two different transfers of capital [loans | debt repayment | development aid | remittances | foreign direct investment | repatriation of profits] between the global core and peripheries. [10 Marks]

2. Influence of governments

Aim of this lesson:

  • To examine [consider an argument or concept in a way that uncovers the assumptions and interrelationships of the issue] the influence of governments in the transfer of capital.

 

November 2010 – Largest British delegation to go to China in more than 200 years

How could such a visit influence the transfer of Capital?

David Cameron leads largest trade delegation to China in 200 years [8 November 2010]

UK government and business in push for China trade [8 November 2010]

US talks with Vietnam on trade

US and Vietnam leaders discuss trade, rights

2010 – China’s Low-value Currency

How can a government influence capital flows through currency controls?

 

Explain how the transfer of capital can be influenced by governments. [10 Marks]

Grade this essay Explain how governments can influence the transfer of Capital based on the markbands here.

 

3. WTO, IMF, World Bank

Aim of this lesson:

  • To examine [consider an argument or concept in a way that uncovers the assumptions and interrelationships of the issue] the influence of world trading organizations and financial institutions (such as the World Trade Organization, International Monetary Fund and World Bank) in the transfer of capital.

Step one

Find out who they are. Use reputable sources to find out who the WTO, IMF and World Bank are and what they do.

Step two

Screen Shot 2013-11-21 at 12.56.38

Can you pass the Twitter challenge? Using only 140 characters for each organisation, summarise their role on the world stage.

Step three

How do these ‘world trading organizations and financial institutions’ influence transfers in capital?

The WHO at 15:

The World Bank:

The IMF:

Step four:

Find and summarise one recent (2103) news article for each organisation.

Step five:

Essay plan: Explain how the transfer of capital can be influenced by world trading organizations and financial institutions.[10 marks]

Leave a Reply

Your email address will not be published. Required fields are marked *