Greenfieldgeography

Financial flows

Capital: Capital can take many forms but for the purpose of this section we will refer to capital as

money.

Core Areas: These are economically important and attract investment, capital and people. For the

purpose of this section we will consider MEDCs like the US, Canada, Western Europe and Japan to be

the core areas.

Periphery Areas: These areas are poorer and may experience exploitation, economic leakage and out

migration. For the purpose of this section we will consider LEDCs in Africa, Central Asia and parts of

Latin America to be the periphery.

For further details on why areas become core or periphery and a list of some of their characteristics visit:

Global core and periphery

Loans: Money that is borrowed from someone.

Debt Repayment: The paying back of money that you have borrowed.

Aid: To provide support or help. Aid can take many different forms ranging from giving money and loans

to providing technology and expertise to providing food and rescue teams.

Remittances: Money sent home to friends and family by migrants living in a different location (often

abroad).

Foreign Direct Investment (FDI): Investment made by overseas governments, businesses or individuals

in foreign enterprises.

Repatriation of Profits: TNCs operating in foreign countries will normally send any profits made back

to the TNC headquarters. This repatriation of profits is sometimes known as economic leakage.

By their very nature core areas attract capital, investment, resources and people through things like FDI,

debt repayment and repatriation of profits. However, flows of capital can also go from core ares to

peripheral areas in the forms of FDI, loans, aid and remittances. Below are a few examples of flows in

both ways.

Loans and Debt Repayment

Individuals, companies and countries often have to

borrow money in order to finance their operations.

For example most individuals will take a bank loan

(mortgage) at some point in order to buy a house.

Companies may take loans in order to buy new

equipment, build a new factory or buy supplies.

Countries may have to borrow money to fund

page 1 / 10

Greenfieldgeography

infrastructure projects, pay welfare benefits or even

to fund a war. Individuals and companies will

normally take loans with private banks e.g. HSBC or

Citigroup. Countries may also borrow money from

private banks or other financial institutions like the

IMF or issue bonds to be sold to private investors

(individuals and countries).

Bonds: These are a type debt security (similar to

loans) that countries issue when they want to raise

capital (money). Creditors will buy the bonds and

will then receive repayment plus interest off the

debtor over an agreed period. Countries with bad

credit ratings e.g. Greece have to pay higher rates of

interest in order to sell bonds to investors.

Even though debt is often associated with LEDCs,

the highest levels of debt are actually held by

MEDCs. Countries like the US, UK, France and

Germany has debt that runs into trillions of dollars.

However, because these countries also have large

GDP's they are normally able to service their debt

fairly comfortably. In the recent economic crisis

though a number of more developed countries like

Greece, Ireland and Portugal have had problems

servicing their debt and have had to have bailouts

from the EU and the IMF. They have also been

enforced to impose strict austerity measures in order

to reduce spending and debt.

Greek Bonds Rated Junk by Standard & Poors -

BBC article

Greece insists it will not default on huge debt - BBC

article

The Greek Gamble: New bailout means new EU risk

- BBC articles

Debt Service: The money needed to cover debt

repayments. Debt service is often calculated as a

ratio or proportion of income/GDP.

Bailout: Money given to a company or a country

that is at risk of failing (going bankrupt) or

defaulting on its debt.

Many LEDCs have high levels of debt. The high

levels of debt often came about from money

borrowed after their independence (borrowed from

private MEDC banks, IMF and World Bank). There

have been recent attempts to help countries with

high debt. Two schemes aimed at reducing debt are:

HIPC: The highly indebted poor countries scheme

was initiated by the IMF and World Bank in 1996.

Countries with unsustainable debt burden were give

low interest loans or debt cancellations as long as

they followed reforms like reducing corruption and

promoting democracy.

Jubilee 2000: This was an international coalition

that hoped to reduce or cancel third world debt by

2000. Its aim was to cancel $90 billion of world

debt.

For more information on origins of debt, problems

caused by debt and HIPC visit: Origin of disparities

and Reducing disparities

page 2 / 10

Greenfieldgeography

Austerity: This is a policy of deficit cutting through

reduced government spending.

Aid

Official Development Assistance (ODA): This is

the term that the Development Assistance

Committee (DAC) of the OECD has given to official

aid.

By looking at the top graph on the right it is obvious

that the US is the world's biggest giver of aid.

However, as a percentage of GNI it is not even in

the top 20 donors. The UN has made it a target of all

MEDCs to give 0.7% of their GNI as aid.

Unfortunately there are currently only five countries

that do this; Sweden, Luxembourg, Norway,

Denmark and the Netherlands.

According to the OECD the current top recipient of

ODA is Afghanistan followed by Indonesia. Some

might find it surprising that the world's second

largest economy, China is still number 4 on the list

of recipients. Japan is currently China's biggest

donor followed by the UK, France and Germany.

The reason China gets so much aid is that millions

still live in poverty and they need assistance to help

with disasters and to develop clean water and energy

supplies. However, many countries in the current

economic crisis area asking if China need this much

money and are reducing the amount of aid that they

give, especially at a time that China is giving aid

itself to so many countries in Africa and Latin

America.

David Cameron: Why we're right to ringface aid

budget - Guardian Article

Pakistan: US suspends $800 million of military aid -

BBC article

page 3 / 10

Greenfieldgeography

Egypt PM dismisses US aid threat over activists trial

- BBC article

US foreign aid benefits recipients - and donor -

Guardian article

The $2.5 billion question: Why does China get so

much aid - NCT article

UK to end direct aid to 16 countries - BBC article

UK seeks China aid partnership in Africa - BBC

article

For further information on the different types of aid

and a list of some of the advantages and

disadvantages of aid visit: Reducing disparities.

Remittances

Remittances is money sent home to friends and

family by migrants living elsewhere (often in a

foreign country). Remittances can be a very

important source of income for LEDCs. In 2007 the

World Bank estimated that remittances sent around

the world totaled over $250 billion, with most flows

going from MEDCs to LEDCs. To the right you can

see that El Salvador receives 16% of its GDP from

remittances (mostly from friends and family living

in the US) and that Tajikistan in Central Asia

receives 35% of its GDP from remittances.

Remittances can be beneficial because money goes

directly to people that need it rather than through

governments. It also means that money is spent how

people want it to be spent. However, reliance on

remittances can create dependency, they are

vulnerable to changes in exchange rates and they can

fall significantly during economic downturns.

For further information on remittances and a list of

some of the advantages and disadvantages of

remittances visit:

Migrants Feel Recession Aftermath - BBC article

Money sent home more than aid - BBC article

page 4 / 10

Greenfieldgeography

Reducing disparities.

Foreign Direct Investment (FDI)

Most countries want to attract FDI because it helps

their economy grow and creates jobs. LEDCs can

present themselves as attractive locations for FDI

because of the potential profits. Enterprises that have

been invested in, in LEDCs may present high levels

of profit because of:

Cheap labour

New markets

Low taxation

Cheap land and resources

Relaxed planning and environmental

regulations

However, despite attractions, it is still MEDCs that

receive the most FDI. LEDCs can miss out on FDI

because of:

Unstable or corrupt government

Poor transport and communication links

Poverty reducing potential market

Complicated regulations in foreign languages

Unstable currencies or economies

Some growth economies and emerging markets like

China, India and Brazil are seeing increases in FDI,

but until LEDCs are able to improve their economies

and infrastructure they will continue to lose out to

MEDCs. It must also be remembered that FDI can

cause problems and is not always advantageous.

Problems may include increased pollution, inflation,

exploitation of resources, economic leakage and

closure of local industries.

China in Africa - Friend or Foe - BBC article

China boosts foreign investment in Latin America -

BBC article

page 5 / 10

Greenfieldgeography

Foreign investment in China slows on tightening

policy - BBC article

Transnational Corporations (TNCs)

Transnational corporations are companies that

operate in more than one country. Normally they

will have their headquarters in their country of

origin and will repatriate most of their profits back

to this location. They will then often have research

and development (R&D) facilities in MEDCs where

there is skilled labour and high levels of technology.

Manufacturing plants will often be built in countries

where production costs are lowest or markets

strongest. Retail outlets will be placed in any

country that has a potential market.

The World's biggest TNCs have traditionally been

from MEDCs like the US, Japan, the UK and

Germany. However, some of the World's biggest

TNCs are now from emerging markets like China

and Brazil. In the future there are likely to be a lot

more from these countries as well as countries like

Russia, India and Indonesia. These countries are

going to see a growth in their TNCs because they

have huge domestic markets and their products will

improve in quality and recognition.

Traditionally, oil, banking and car companies have

been the biggest TNCs in the World. However, with

changing technology and improving living

standards, other TNCs like pharmaceuticals,

electronics and retail are appearing.

Countries are able to attract TNCs into their

countries in a number of ways, including:

Offering reduced business taxes

Offering cheap and skilled labour and

assisting with recruitment

Helping with acquisition of land and relaxing

planning controls.

Improving transport and communication

links

page 6 / 10

Greenfieldgeography

Offering access to domestic market

Relaxed environmental regulations

Allowing economic migrants (foreign

workers) into their country

A lot of these incentives maybe offered in Enterprise

zones established by countries. To learn about the

enterprise zone in Incheon, Korea, go to: Reducing

disparities.

ADVANTAGES OF TNCs DISADVANTAGES OF TNCs

Creates jobs for local people

Locals with jobs then spend money in their

local economy at local businesses and

therefore there is a positive multiplier effect

as extra money gets added to the local

economy.

TNCs will pay local and government taxes

and therefore increase the government

budget.

Jobs at a TNC will be in the formal

economy, so hopefully better regulated in

terms of safety, pay, etc.

Improves workers skill and education level

They introduce new technology into the

country

Infrastructure like roads and ports are often

upgraded and benefit the whole economy

Diversifies the economy, might move away

from the reliance on one industry like

farming or tourism

The country receives prestige for attracting

TNCs and investment into the country.

Many of the best paid managerial jobs go to

foreigners

Local workers often do manual jobs which

are poorly paid and often workers suffer

exploitation (long shifts, no breaks, etc.)

There will be some economic leakage as

profits from TNCs go back to their home

country

Increasingly manufacturing processes are

becoming more mechanised so less workers

are needed in factories.

One of the attractions of LEDCs is cheap

labour, but as a country develops labour

costs increase and TNCs may move to

cheaper locations.

Products produced by TNCs maybe too

expensive for locals to buy. TNCs may also

use local raw materials.

The increased demand created by TNCs may

cause local inflation.

If the government is building new roads or a

port for a TNC it probably means that they

can't spend as much money on education or

healthcare.

TNC decision makers are often foreign so

policies of TNCs may not always benefit

local people.

Trade: The exchange of goods and services.

Imports: Good and services being purchased from overseas and brought into a country.

Exports: Goods and services leaving a country to be sold overseas.

Balance of Trade: The difference in the monetary value of exports and imports over a specified period

page 7 / 10

Greenfieldgeography

(normally a year or a quarter).

Balance of Payments: This accounts for the balance of all monetary transactions between countries. This

includes goods like the balance of trade but also services and transfers of financial capital.

Trade deficit (in the red): When the value of your imports is greater than the value of your exports.

Trade Surplus (in the black): When the value of your exports is greater than the value of your imports.

Protectionism: Methods used to protect domestic industries from foreign competition. This might be

done with tariffs, quotas or subsidies.

Currency Devaluation: This means reducing the value of their currency in relation to other currencies.

This might be done by keeping interest rates low so people don't want to invest in it or flooding the

market with the currency (increasing supply)

What is the currency war about - BBC article

World Trade Organisation (WTO)

The WTO started its life as GATT (General

Agreement on Tariffs and Trade). GATT was

established in 1948. GATT involved member

countries meeting (rounds) to discuss and agree

tariffs over trade. The final round in Uruguay

(1986-94) agreed to establish its successor the WTO.

The WTO officially began life on the 1st January

1995. The WTO Is based in Geneva and now has

153 members who between them represent 97% of

total world trade. Although GATT only looked at the

trade of goods, the WTO also looks at the trade of

services and intellectual property rights. The aim of

the WTO is to:

Liberalise (free) world trade (reduce

protectionism)

Create a forum for governments to negotiate

global trade agreements

Be a place to settle trade disputes

Be a place to set and clarify trade rules.

The WTO's most recent negotiations were in Doha,

Qatar. The aim of the negotiations was to involve

LEDCs more in global trade. One of the major

sticking points in the talk was Europe's and the US's

National Governments

The aim of all national governments is either to try

and balance their budget or to get a budget surplus

(unfortunately most countries run a deficit). As well

as balancing spending and taxation governments

also need to look at the their levels of imports and

exports. Governments can increase or decrease

imports and exports in some of the following ways

National governments can try and increase flows of

global trade in a number of ways including:

Joining a trading bloc or trading organisation

Promoting free trade and ending

protectionism

Opening enterprise zones and attracting

TNCs

Devaluing their currency

They can also try and reduce flows of global trade in

some of the following ways:

Using protectionist measures (tariffs and

quotas)

page 8 / 10

Greenfieldgeography

refusal to cut farm subsidies.

Despite its work, the WTO has had some critics. It is

criticised for favouring MEDCs especially over its

agricultural subsidies, allowing counterfeiting and

breaking of copyright/patents to continue in member

countries and having no power to punish countries

who break trade rules.

http://www.wto.org/

Imposing sanctions or embargoes with other

countries

Switching to more planned economies

Increasing regulations and environmental

controls (more red tape)

Imposing ownership regulations on foreign

companies

International Monetary Fund (IMF)

The IMF like the World Bank was created at Bretton

Woods in 1944. It started with only 46 members but

has now grown to include 186. Member countries all

contribute to a pool of money which member

countries can then borrow on a temporary basis to

overcome budget deficits/imbalances. The IMF was

extremely important after WWII to help stabilise the

global economy.

The IMF has taken a leading role during the current

global economic crisis. It has sold gold reserves to

increase it pool of money and the G20 leaders have

pledged a further $500 billion to allocate to other

members suffering from budgetary problems. Even

though the IMF is currently taking a leading role in

the economic crisis, it has been heavily criticised.

Criticisms include:

The IMF have supported some undemocratic

governments that have been favourable to

European and US TNCs.

SAPs imposed on borrowing countries were

often damaging, forcing countries to sell

state assets and to cut funding to education

and health.

The IMF has forced countries to impose

strict austerity measures in order to receive

money (increased taxes and reduced

spending). Greece has had to follow very

strict austerity measures to get help from the

IMF and EU.

The main funding nations (MEDCs) have too

World Bank

The World Bank was established in Bretton Woods

in 1944 and has its headquarters in Washington DC.

The World Bank is not a traditional high street bank,

but a global one owned by its member countries

(187 countries). It has two main institutions, the

International Bank for Reconstruction and

Development and the International Development

Association. The bank has over 10,000 employees

and over 100 offices around the world. In its early

days the bank did not lend much money, but then in

the late 1960's and 1970's it started lending more

money to developing countries in order to fund

schools, hospitals, infrastructure projects, etc. In the

1980's the World Bank along with the IMF imposed

SAP (structural Adjustment programmes) on many

of its borrowers.

From the 1990's onwards the World Bank is now

more interested in helping countries achieve the

UN's Millennium Development Goals. This includes

reducing poverty, improving health and education

and ensuring sustainable growth.

The World Bank has had a number of criticisms

including:

Its imposition of policies on developing

countries (particularly the damaging SAPs)

Its assumption that LEDCs cannot develop

without outside help and knowledge

The largest contributors (MEDCs) have too

much power over policies

page 9 / 10

Greenfieldgeography

much influence over decisions.

The head of the IMF always comes from

Europe

That it often has reactionary policies rather

than preventative ones.

http://www.imf.org/

That the head of the World Bank always

comes from the US

That it focuses too much on GDP growth

rather than improvement in living standards.

Some development projects were

environmentally damaging e.g. dams causing

deforestation

Some projects involved expensive

technology which countries could not fund

themselves.

http://www.worldbank.org/

SAP (structural adjustment programme): These were sets of reforms/policies imposed by the IMF on

countries in order for them to receive loans. The policies were very strict and may have involved:

Currency devaluation

Trade liberalisation

Privatisation of state industries

Removal of price controls and subsidies

Reduced government spending

Acceptance of foreign ownership

Reducing corruption

Many of these programmes were later criticised for favoring MEDC TNCs, for governments selling off

assets cheaply and underfunding vital institutions like healthcare and education.

The diagram below shows some of the major trade flows. Although figures are not clear it is obvious that

the major flows are still between MEDCs and that most LEDCs are still unable to participate in the global

economy on a major scale.

Record Imports Widen US Trade Deficit - BBC article

US Freezes Japan Gangster Funds - BBC article

World Trade To Recover Say WTO - BBC article

Global Trade Will Shrink by 9% - BBC article

G20 leaders seal $1tn global deal - BBC article

Powered by TCPDF (www.tcpdf.org)

page 10 / 10

Financial flows