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Foreign Finance Remittences And Aid Notes

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Lecture 6 - Foreign Finance, Remittances and Aid International flow of financial resources takes 3 forms:

1. Private foreign direct and portfolio investment - consisting of FDI by large corporations, foreign portfolio investment (stocks and bonds) in LDC emerging credit markets by banks and individuals.

2. Remittances of earnings by international migrants.

3. Foreign aid - from national governments, multinational donor agencies and NGOs. Foreign Direct Investment (FDI) The rise of multinational corporations has caused trade and capital flows to increase. This is a corporation that conducts and controls productive activities in more than one country. FDI is increasing in developing countries recently becoming the largest source of foreign funds flowing to developing countries. Has been increasing; $35 billion in 1962 to $630 billion in 2008. But it is volatile

• 24% drop in 2009 due to the financial crisis.

• Peak in 2000 was reduced due to slower growth and the aftermath of the 9/11 terrorist attacks.

• Low share (12% in 2010) to Africa due to concerns over debt, instability and security. Even then it often goes to oil-rich countries like Ghana, Nigeria and Egypt. PROS FOR DEVELOPMENT Fills the savings gap (between targeted investment and local saving - Harrod-Domar growth model) and the trade gap (gap between foreign-exchange needs and net export + foreign aid inflow). The Government revenues gap (between targeted tax rev and locally raised taxes) and the knowledge gap (between transfers technologies, marginal abilities and business practices) are both also filled. CONS FOR DEVELOPMENT
- Savings gap. Is reduced because MNSs lower domestic savings by crushing local firms, not reinvesting profits locally and benefitting groups with low-saving propensity. Coca-Cola 2003 found to be using much groundwater sources redirected from other local firms in India.
- Trade gap. Benefits questionable because much of the inputs and machinery are imported and profits are repatriated.
- Government revenues gap. Lower because of tax concessions, subsidies and accounting loopholes.
- Knowledge gap. MNCs dominance may inhibit formation of local skills and entrepreneurship.
- Social criticisms. MNCs exacerbate inequality and economic dualism, promote inappropriate consumption patterns, use their power to influence govs and hurt local development. 2009 Nestle reportedly bought milk from illegally seized farms from Nigeria. Seized by the Mugabe regime. Portfolio Investment Consists of foreign purchases of stocks, bonds, certificates of deposit and commercial paper of LDCs. Middle-income countries are mostly targeted, sub-Saharan Africa not so much. They raise capital for domestic firms and improve the efficiency of the financial sector by allocating funds to firms with the highest returns. But there are also cons like volatile capital flows and speculation which may destabilize the economy. Investments may be very short term which may mask structural weaknesses and portfolio investors are not concerned with development. Remittances Wage levels of high income countries are approximately 5 times the level of wages for similar occupations in developing countries - incentive for migration. Over 215 million people live outside their country of birth and remittances to developing countries are estimated to reach $372 billion in 2011. Now there are also lower costs of financial transfers and improved accounting increasing remittances. They provide an alternative way to finance investment and help overcome liquidity constraints. The impact is larger where financial markets are less developed and don't meet the credit needs of the population. To consider:

• Who migrates? And why?

• Individual characteristics affecting migration? And household characteristics.

• These affect how much money is sent back o Ability to save, strength of family links.

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