Data Response: Foreign Aid (4.6)

Link to Article: Asian countries fear drop in aid funding from Japan

Question 1 -Distinguish between foreign aid and foreign direct investment

Foreign aid refers to aid given to either in a humanitarian, bilateral, or multilateral way. It is different from a foreign direct investment in that foreign aid typically comes directly from a country’s government with aims to ultimately help a foreign country in some way. Foreign direct investment can come from private businesses and companies.

Question 2 – Explain why the earthquake and tsunami in Japan is likely to affect Japan’s capacity to donate foreign aid.

Because of the earthquake and tsunami, Japan has to focus on its domestic recovery, and because the severity of these disasters is so magnificent, money typically sent to foreign countries as aid potentially would be used for domestic aid. Therefore, Japan’s capacity to donate foreign aid will be hindered significantly.

Question 3 – Explain how reductions in Japanese foreign aid might affect the economic development of the recipient nations.

The article discusses how a reduction in foreign aid could slowdown industrial activity, a decrease in demand and a shrinkage of job opportunities. Also plans for aid could be cancelled suddenly and this could hinder these countries receiving aid by simply not having the aid for whatever plan they hoped to initiate.

Question 4 – Evaluate the arguments for and against foreign aid.

Main reasons for foreign aid is for economic development: “supplementing the lack of domestic resources”, “enabling infrastructure changes to be made to the economy”, “contributing to the take-off phase in sustained economic growth”. This aid ultimately helps economies to grow and therefore is viewed as positive.

There are also political reasons of foreign aid being used as a way to maintain power. Finally, for moral reasons of helping countries and people in need, foreign aid is seen as positive.

On the other hand, there are arguments against foreign aid. Foreign aid is said to distort markets, to crowd out private investment, to create a dependency on foreign aid, and to cause corruption. These arguments against foreign aid are highly significant in considering foreign aid as foreign aid can easily negatively impact a country in the long run.

Data Response – Economic Development (4.2)

Namibia: Economic Recovery Not Up to Speed

By Jo-Maré Duddy, 23 June 2011

The Bank of Namibia (BoN) might lower its economic growth expectations as the country’s export industries continue to suffer under global uncertainties such as the debt crisis, persisting unemployment and the turmoil in North Africa and the Middle East.

“Namibia’s recovery is not consolidating firmly,” BoN Governor Ipumbu Shiimi said yesterday, adding that the bank is busy revising its current forecast of gross domestic product growth of 4,1 per cent for 2011.

The new figure will be announced shortly, he said.

The Monetary Policy Committee (MPC) of the central bank to keep the repo rate unchanged at six per cent for the fifth time in a row. The decision was made to give “the economy some breathing space”, Shiimi said.

He said domestic economic indicators pointed downwards for much of the first half of the year. “The weakest performance was recorded in the primary industry, where the mining sector performed poorly in terms of production and exports, followed by the agricultural sector,” Shiimi said.

Manufacturing and construction fared better, allowing the secondary industry to show a positive growth. However, this was “too marginal to positively affect overall growth,” the Governor said.

“Dismal outturn” in the wholesale and retail sector weigh down the tertiary industry, he said. Linked to this, was the slowdown in private sector credit extension.

According to Shiimi, households are still struggling to recover and paying off the high debt levels.

On the inflation front, Shiimi said price pressures continue to build up, but “remain in the tolerable levels”.

He said the BoN stands ready to adjust its monetary policy in the interest of price stability if conditions demand so.

LINK TO ARTICLE

Copyright © 2011 The Namibian. All rights reserved. Distributed by AllAfrica Global Media (allAfrica.com). To contact the copyright holder directly for corrections — or for permission to republish or make other authorized use of this material, click here.

After reading this article, I had some data from the CIA World Factbook:

Source: the Namibia pages of the CIA World Fact Book

Labor force – by occupation:

agriculture: 16.3%
industry: 22.4%
services: 61.3%
note: statistics are for the formal sector only; about half of Namibia’s people are unemployed while about two-thirds live in rural areas; roughly two-thirds of rural dwellers rely on subsistence agriculture (2008 est.)

Unemployment rate:

51.2% (2008 est.)
country comparison to the world: 193
36.7% (2004 est.)

Population below poverty line:

55.8%
note: the UNDP’s 2005 Human Development Report indicated that 34.9% of the population live on $1 per day and 55.8% live on $2 per day (2005 est.)

QUESTIONS:

Question 1

According to the article economic growth in Namibia in Southern Africa is slowing down. Describe how economic growth is measured.

Economic growth is best measured by changes in real GDP as it gives insight into a country’s real level of output over time. The article, highlights certain industries – mining, agriculture, manufacturing, and construction – and comments on its output over time. By looking at key industries within an economy, a country’s general level or growth of its economy can be understood.

Question 2

Although the Central Bank of Namibia may adjust its growth forecast downwards the rate of economic growth in Namibia may still be positive. To what extent does this indicate that welfare of it population is improving?

Economic growth is measured in terms of real GDP, which is separated from economic development. Economic development looks at the welfare of all people of a country. Simply because there is a increase in real GDP does not necessarily mean the country’s people’s lives are improving. Therefore, a positive rate of economic growth, to a small extent, indicates that the welfare of its population is improving. It is necessary to look at other factors much different than real GDP.

Question 3

Namibia is heavily dependent on the production and export of primary products. Analyse the possible effects of a slowing of growth in the primary industry and agricultural sectors of the economy.

Due to its dependency on the production and export of primary products, a slowing growth in primary products and agricultural sectors of the economy would have significant impact on the real GDP of a country’s economy; however, does not necessarily impact the welfare of the people.

Question 4

Evaluate alternative measures of development that the government of Namibia could target to measure improvements in the welfare of its citizens.

The government of Namibia could target alternative measures such as life expectancy, literacy, population density, number of hospitals, among other measures. When evaluating these alternative measures, it potentially can give a much accurate illustration of the current welfare of its citizen as it gives insight to health, education, life situation, and other indicators of its citizens welfare. Merely looking at real GDP, as discussed earlier, can give a false indication of the economic development (measure of people’s welfare) as an increase in real GDP does not necessarily indicate an increase in quality of life.
Although, these alternatives measures potentially are more accurate, there are possible limitations of this data being subjective and thus incongruent when comparing two countries’ economic development. Furthermore, collecting enough data to accurately measure economic development would take a great deal of time as welfare cannot be easily measured.

Data Response: Developmental Economics FDI (4.5)

In response to an article on the development of mobile phones in Africa. Click Here for the article.

Question 1

Explain how improving infrastructure, like establishing mobile phone networks, can help to improve the rate of economic growth.

Improving infrastructure, as suggested in the article, helps to increase foreign direct investment and GDP. Foreign direct investment is defined as “an investment abroad, usually where the company being invested in is controlled by the foreign corporation.” This investment in infrastructure helps increase the rate of growth as “investment in telecoms generates a growth dividend because the spread of telecoms reduces costs of interaction, expands market boundaries and enormously expands information flows.” According to the article, Professor Leonard Waverman’s past studies have shown that in OECD countries, the investment in telecom infrastructure was responsible for one-third of output growth from 1970 to 1990.

Question 2

Explain how improved mobile phone networks in developing countries in Africa can contribute to reductions in levels of poverty.

People in Africa already are suffering in poverty and although at the moment, many still cannot afford mobile phones, the article suggests that if mobile phones are more affordable for more people, the ease of communication through calling or texting someone can significantly help to decrease other costs and help improve the quality of life of Africans. The article gave an example of doctors rural areas calling doctors in suburban areas for medical advice. This demonstrates how a mobile phone can transfer knowledge much faster and thus help the general populations of Africa. Furthermore, an increase in the Telecom industry would mean an increase in efficiency of other businesses and such that goes on domestically. The use of mobile communication should help these smaller, domestic businesses to take off or develop even further.

Question 3

Discuss the advantages and disadvantages of foreign direct investment for developing countries.

There are many advantages of foreign direct investment for developing countries such as benefiting from the knowledge and technology that these investments bring into these developing countries. This article discusses the foreign investment in developing infrastructure in Africa, which helps aide development in all other parts of the African economy.

There are some disadvantages, however, that have equal weight in this controversial debate over the true effect of FDI on developing countries. Some argue that FDIs are ways for developed countries to feed off of and exploit developing countries of their natural resources. An article I read compared FDIs to the colonialism of Africa; Much like how European colonies exploited and raped Africa of its people and resources, foreign countries are doing the same through FDIs in a sneaky form.

International Economics Key Review Notes

DEFINITIONS

• Free trade is international trade free from any restrictions like tariffs, quotas or other protections.
• Exchange rate is the price of one currency in terms of another currency.
  • Fixed- the value of the currency against other currencies remains the same. It’s maintained by gv by intervening in the foreign exchange market using foreign exchange reserves to buy and sell the currency.
  • Floating- the exchange rate is determined by demand and supply in the foreign exchange market only.
  • Managed – Currencies are allowed to fluctuate in a narrow band in the short run, and allowed to be realigned in the long run.
• Currency movements
  • In floating- appreciation and depreciation
  • In fixed- revaluation and devaluation
• Balance of payments- a record of all flows of money in and out of a country, current + capital account.
  • Must equal zero.
• Balance of trade- the difference between the value of exports and imports.
  • trade surplus – greater value of goods and services exported than imported
  • trade deficit – greater value of goods and services imported than exported
• Capital account- movement of funds and loans for investment to abroad: sales of assets to foreigners and purchases of assets located abroad.
• Current account- the exports and imports of goods and services between countries and overseas, and net transfers: transfers of money.
  • Deficit- when there are more imports than exports
  • Surplus- when there are more exports than imports
• Absolute Advantage – The ability to produce a particular good with fewer resources than another country
• Comparative Advantage – The ability to produce a particular good at a lower opportunity cost than another country
• Visible Trade
  • Imports and exports of goods (surplus or deficit)
• Invisible Trade
  • Imports and exports of Services (surplus or deficit)
    • Tourism
• Foreign exchange market – where currencies are bought and sold
• Protectionism – an economic policy of restraining trade- saves the domestic industries
  • tariffs (taxes on imported goods), quotas (limit on quantity of goods that can be imported), and government regulations
• Bonds: An IOU from the government
  • Government says it will owe you an x amount of money
    • Bond yields carry interest, and at the end you get how much you bought it for + yield. Yield depends on the demand. Yield is generally greater on longer term bonds.

DIAGRAMS

• J curve- (Marshall Lerner)

Explanation of J – Curve: With time, an economy’s exchange rate against a foreign currency depreciates and appreciates. Cash outflows suggest, an economy depreciating it’s currency and having other currencies buy their products, as a result, the economy who is depreciating reaches a point in which they begin to appreciate again because they are selling more than they are buying, a thus a upward shift in the curve. This is all under the assumption and applicable only under the Marshal-Learner conditions that state each economy are trading inelastic goods, which are goods that are not sensitive to price change.

CURRENCY APP/DEP
Increased supply of yen (from japan) – appreciating dollar
Decreasing supply of yen (from japan) – depreciating dollar
Decreased demand for yen (from US) – depreciating yen
Increased demand for yen (from US) - appreciating yen
Interest rates increase- more investment from foreigners – currency appreciates
Interest rates decrease- less investment from foreigners – currency depreciates
Income levels increase- higher imports demand – currency depreciates
Income levels decrease- lower imports demand - currency appreciates
Inflation increase- lower exports demand – currency depreciates
Inflation decrease- higher exports demand – currency appreciates
Other factors- government intervention & speculators

Developmental Economics Triple A Questions

The following questions were answered in collaboration with Sonny, Will, Paolo, and Paul. (Their blogs are linked to their names.)

Question 1 Explain the importance of human capital in contributing to economic development.

Human capital is the stock of competencies, knowledge and personality attributes embodied in the ability to perform labor so as to produce economic value.
Human capital is vitally important for an organization’s success (Crook et al., 2011); human capital increases through education and experience

Statistical indicator used for human capital = HDI (Human Development Index)

• Combination of Life Expectancy Index, Education Index, Income Index

Life expectancy reveals insight into the general health of the country.
Education reveals education standards as well as literacy of the country.

Human Capital = developed through standard of living, health, and education.
HDI is indicator of positive correlation between human capital formation and economic development. If HDI increases, there is higher rate of human capital formation in response to higher standard of education and health. Similarly, if HDI increases, per capita income of the nation also increases.

• Implicitly, HDI reveals that higher the human capital formation due to good standard of health and education, higher is the per capita income of the nation

Question 2 Explain the difference between economic growth and economic development.  FOR A MORE SPECIFIC AND SOPHISTICATED EXPLANATION CLICK HERE

Economic growth occurs when there is an increase in production potential. It is best measured by a country’s real level of output over time; in other words, an increase in real gross domestic product (real GDP) [real GDP is....GDP adjusted for inflation]

WHERE AS…

Economic development occurs when there is improvement in the lives of all people in a country. Improvement of the following:

1. living standards
   1. greater availability of goods and services
   2. greater ability to purchase goods and services
2. promotion of –
   1. self-esteem
   2. respect
   3. dignity
   4. freedom of choice and thought

ECONOMIC GROWTH MAY OCCUR IN TERMS OF AN INCREASE IN REAL OUTPUT OR REAL GDP, BUT IT DOES NOT INDICATE AN IMPROVEMENT IN THE LIVES OF ALL PEOPLE IN A COUNTRY. (THIS MEANS ITS ANGRY)
Question 3 Discuss the view that the achievement of higher economic growth rates should be the priority of developing economies.

Biggest problems that all developing economies have

• Poor level of education & health care
• Poor politics & corruption → Investors feel insecure to invest
• Income inequality
• Unemployment → social problems

Pros of higher economic growth

• Decrease in level of unemployment
• Better standard of living for majority

Cons of higher economic growth

• High inflation → High interest rate → Less productivity → Balance of payment deficit
• Inequality of wealth and income distribution

Question 4 Explain what is meant by sustainable development.

In terms of sustainability, it refers to the ability for the environment to survive without changing resources. Therefore, any resources used must be able to be reused and must not have any detrimental effects on to the environment.

Aim:

• improve recycling
• alternative power
• maintaining biodiversity
• admitting to being wrong, if wrong, and accepting any repercussions that entail any act against the environment.

Methods:

1. extending property rights: giving the society the ability to protect the environment
2. pollution tax: taxing those who pollute that cause detrimental problems to the environment
3. polluting permits: allowing for rations and the ability to pollute a certain amount. Also a limit to how much one can pollute.
4. traffic control: imposing plans to eradicate the pollution of cars

Therefore sustainable development is the ability to sustain development and also protecting the environment at the same time.
Question 5 Explain how extending property rights and land ownership can help bring about more sustainable development.

Extending property rights / land ownership: Allowing people to own, and therefore be responsible, for the land on which they live or operate a business.

By allowing people to be in control of their own land without support from the governing body, producers must be able to supply their products in a way that ensures the continuity of their property. Property in this sense is commonly thought of as the land the producer operates on, but can also include the local body of water, air, flora and fauna and natural resources, as well. In this sense sustainability can be observed by housing development, agriculture, resource mining and goods production. By allowing people to be in control of the way they produce they are forced to practice sustainable, or else be ousted from the competitive market.

Possible alternatives: Governments can also look to subsidize producers who excel in sustainable practice in order to encourage the longevity of sustainable development. Additionally governments can provide capital for those working towards becoming sustainable in order to facilitate a quicker transition.

Question 6 Discuss the view that economic growth will inevitably conflict with sustainable development.

• Inequality of income – growth rarely delivers its benefits evenly. It often rewards the strong, but gives little to the economically weak. This will widen the income distribution in the economy. In developing economies, income distribution is frequently unequal and many of the benefits of growth may go to the better-off in society and flow overseas in the form of increased profit for multinational corporations.
• Pollution (and other negative externalities) – the drive for increased output tends to put more and more pressure on the environment and the result will often be increased pollution and resource degradation. This may be water or air pollution, but growth also creates significantly increased noise pollution. Deforestation and environmental degradation are likely to result from growth. This is particularly true in developing countries as they tend to have little legal protection of the environment.
• Loss of non-renewable resources – the more we want to produce, the more resources we need to do that. The faster we use these resources, the less time they will last.
• Loss of land – increased output puts further pressure on the available land. This may gradually erode the available countryside. In many developing economies there will also be additional problems resulting from the movement of people from country to urban areas.
• Lifestyle changes – the push for growth has in many areas put a great deal of pressure on individuals. This may have costs in terms of family and community life in many economies.

The President’s Dilemma Reflection

After FINALLY completing this long and demanding group presentation project, I can probably say that this project served well in preparing for my exams next week. During the process it was difficult to work successfully as a group, but I feel that we were able to pull it all together in the end. Sometimes when doing collaborative projects, the work ends up on one or two peoples’ table and it is completely unfair and stressful for those few people. Fortunately, this time, when our group divided up the work and planned things with the group, each of the members held up their end and were very helpful in making this project successful.

I took on the challenge of being one of the presenters for our group. I really only decided to take this on because no one else really wanted to step up. The deadline was approaching fast and we had not come to any conclusion or made any slides for our final powerpoint presentation so I thought stepping would help to finalize our presentation. Unfortunately, it added a great deal of stress and work on my part that I felt like I couldn’t function normally. We had a practice presentation on Wednesday and I can happily say that it was a disaster. That practice showed to me and my group what we were doing wrong; it showed us what exactly we needed to do for our final presentation on Friday.

The final presentation of Friday went surprisingly quite well. We finished our powerpoint that day and we were still able to present with confidence. There were a few small errors that triggered questions from the panel, but I thought that we as a group were able to respond in an appropriate manner. I am so grateful that I survived this experience and I really hope that this experience pays off.

Joe B. – The Unemployment Issue

We received a memo from a woman named Maria Bautista and she presented us with an issue about people who have lost their jobs and are struggling because of it. This economic crisis has been terribly difficult for people like Joe and so our task is to devise a policy that will help people like Joe.

Before diving into solutions we laid out the facts:

• - people are unemployed
• - 52% of employed workers are concerned about losing their jobs
• - people cannot pay their mortages
• - cannot add to national debt
• - policy should benefit everyone; should not harm other

To counter this issue, we brainstormed a few ideas but never really came to a concensus as to which policy would potentially work.

We first thought to have the government make more investments. This would logically shift the aggregate demand curve up which means a smaller unemployment gap. However, thought the unemployment gap is smaller, the overall price level also shifts upward, thus increasing inflation. Rising prices is also an issue we are trying to address and so increasing investments is not a viable option.

We then thought to decrease interest rates to help ease the price people like Joe have to pay for mortages, but then this doesn’t help his unemployment situation and furthermore, the current national debt. We therefore concluded that lowering interest rates would not be a viable solution.

At this current stage, we have not come up with a solution that sounds like it could potentially work. Every option brainstormed so far has so underlying consequence that is unacceptable.

Silver Cougars of America

We received a new memo today about the “Silver Cougars of America” who are basically the older generation of US citizens. Angela Soracco represents this group and sent us a memo concerning the issues affecting them. The main issue at hand is the rapidly increasing prices and their potential impact on the relatively fixed incomes. Inflation is affecting them and Soracco stresses the critical importance of rising prices.

In response to this issue, there are a number of possibilities:

• Open Market Operations –> buy and sell government securities to commercial banks and general public
• Reserve Ratio –> decrease or increase money reserves in banks to increase or decrease circulation
• Discount Rate (interest rate) –> increase to decrease money supply / decrease to increase money supply

The three options listed above are three possibilities that each have drawbacks and limitations in addressing the issue of the Silver Cougars of America.

If we use Open Market Operations and sell government securities to slow down the economy and spending, this will increase the unemployment gap, which may directly affect the Silver Cougars. This option does not seem to be viable to this issue.

When considering the use of Reserves, the US does not (has not in the past) typically use this to help the economy. Like Open Market Operations, changing the reserves ratio will have the same outcome of increasing the unemployment gap, therefore, this option is not viable.

The final option of changing interest rates, initially, does not seem like a viable option as increasing interest rates will negatively impact the Silver Cougars. However, we discussed in class the option of doing the opposite: decrease the interest rates instead to help stimulate the economy. This will increase inflation, which is what Angela Soracco is concerned about; however, by changing fiscal policies, we can allocate some money for transfer payments for the Silver Cougars to compensate for this inflation. In this way, decreasing interest rates is a viable option. The only potential issue is increasing deficit and thus the debt, which is something we cannot allow.

DILEMMA

We started a project in our IB HL Economics class and the projects aim is to provide us students with a real world example where we can think like economists and apply the economics we learned to this issue at hand.

The issue at hand is that an oil shock and a significant rise in oil prices caused an economic crisis. We, as the Council of Economic Advisors, have to create a policy to  fix the issue at hand while promoting the President’s reputation and not adding to the national debt.

The information (specifically the statistics) given to us from the first memo includes the following:

1. High rate of inflation (9% annually) – people are concerned about being able to afford basic necessities, while businesses are contracting
2. Dramatic slowing of economic growth in the past two quarter – real GDP has dropped by 13%
3. High level of unemployment (12.5%) affecting all sectors of the economy – middle managers are now losing jobs at increasing rates and homelessness is rising rapidly in urban areas

We later received a National Statistics for a select number of years. Our task with this data is to determine whether the President is over reacting or not, and figure out what key piece of data is missing.

Below outlines the observations I have of the data provided:

• Nominal and real GDP has increased and has been increasing over the years
• the change in both nominal and real GDP is a positive value in 2010
• The discount rate (interest rate) has fallen significantly to 0.75% in 2010
• The consumer price index is at 202.4
• Rate of inflation has increased since 2006 to 2.7% (this is not significantly high however)
• Unemployment rate has doubled since 2006 (equivalent to 9.2%)
• Public Debt has significantly increased to 14,000 billion dollars.

Economic Freedom Rates vs Unemployment Rates

Table 1: Economic Freedom Rate and Unemployment Rates

When analyzing the data there seems to be a general trend between the two, that as economic freedom increases (meaning having more freedom in an economy) the unemployment rate is lower. There are some exceptions, however, for instance, Singapore has a lower unemployment rate in comparison to Hong Kong, which has more economic freedom.