SOC 300 Sociology of Developing Countries Week 2 Discussion 1

  

“International Finance” Please respond to the following:Based on the lecture and Webtext materials, address the following:The IMF and World Bank are the world’s two leading lending institutions, but much of their monetary assistance disappears once it enters the banking systems of developing countries. Cite concrete evidence that supports the assertion that much assistance to developing countries is simply stolen by officials. Determine other main factors that account for the misuse of these funds.
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International Finance
Topics
• Aid and corruption; and
• Loans and interest
Aid and Corruption
• Many countries unable to finance their own
development, so here is where aid is especially
helpful in filling the gap
• a large part of aid coming as debt relief, not new
flows
• Humanitarian assistance providing relief for
emergency situations, but does not usually
contribute to financing long-term development
Aid and Corruption (continued)
• Differences between the
World Bank and IMF in
lending assistance
• Nigeria and authoritarian
rule by armed forces giving
way to civilian oligarchs
• Country still retains a culture
of underdevelopment,
corruption and lack of public
accountability
Aid and Corruption (continued)
• Revenues, foreign currency and rents
• Rents are economic gains undistributed to
those who produce them, or channeled
back into investments that benefit public
• Rent-seekers are those who benefit most
from this imbalance
• Politicians reaching lucrative compromises
through corrupt practices
Aid and Corruption (continued)
• Egypt’s military elites among wealthiest in
world
• As long as it is highly respected institution,
it will be able to go on skimming tens of
millions of dollars off defense budget
• Without well-trained, honest bureaucracy
in place to oversee economy, government
officials will treat banking and foreign trade
systems as personal accounts
Loans and Interest
• America’s sub-prime mortgage meltdown of
2008
• Interest rates rise, housing prices fall, defaults
and foreclosures follow quickly
• forced developing countries to have to pay off
their debts to the US and other debtor countries
• Referred to as the lost decade
Loans and Interest (continued)
• By 2009, global output and trade
contracted, reducing poor countries’
access to debt markets and loans
• Since 2008 crisis, many indebted poor
countries not established impressive
record of reducing debt or poverty and
remain poor candidates for further loans
• Some countries monetizing their debt
Loans and Interest (continued)
• In 2008, foreign reserve holdings falling in the
central banks of developing countries
• External debt burdens of developing
countries now at nearly unsustainable levels
• In 2008, drying up of private capital
investment meant that not one country in
Africa able to offer a bond issue
Loans and Interest (continued)
• World Bank returning to its original mandate of facilitating capital
investment through project financing, instead of trying to remedy
policy and institutional shortcomings would be better
• IMF and World Bank considered by many developing nations to
legacies of Cold War
• Growth must emerge primarily from domestic savings and
investment
Loans and Interest (continued)
• Developing countries with no industrial
enterprises in place to absorb money flowing in
from foreign speculators then suffer from
inflation that hurts their export markets
• Some transferring foreign reserves out of own
banking systems and into low-yielding U.S.
Treasury securities
• Rise of microcredit services
Loans and Interest (continued)
• Remittances from migrants
• Three challenges of
– Stabilization
– Protecting long-term growth
– Protecting socially vulnerable
Check Your Understanding
Summary
• Aid and corruption; and
• Loans and interest

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