Economic Development and Transition Chapter 18 Section 3 Financing Development

Economic Development and Transition Objectives: Understand the role investment plays in development. Identify the purposes of foreign aid. Describe the functions of various international economic institutions.

Economic Development and Transition Section Focus: Less developed countries can obtain capital for economic development through investment, loans, and grants. Economic policy advice and technical help are also valuable aids to development.

Economic Development and Transition Building infrastructure, providing education and health care, and creating technology and industry all require large sums of money. LDCs often turn to wealthier nations for the money they need to develop their economies. Business, individuals, foreign governments, banks, and development organizations all contribute to the financing of international development.

Economic Development and Transition Investment: The creation of capital is critical to development. Where does the money come from to start developing your country? 2 methods available to a country 1. Internal financing – derived from the savings of the country’s citizens. 2. Foreign investment – investments originating from other countries.

Economic Development and Transition Internal Financing Money from personal savings accounts Banks lend money from this type of account to businesses that need money to expand their operations. This money can create new products, jobs, enable individuals to improve their standard of living. In LDCs, many of the people do not have money to save, thus this is a big problem for the country. So LDCs look to foreign investments to make up for this problem. 2 types of foreign investment

Economic Development and Transition Foreign Direct Investment (FDI): The establishment of an enterprise by a foreigner. A foreign company can build a factory in and LDC and work with an existing company in that LDC and together help each other develop their business. Multinational Corporations (MNC) usually build and run the business by themselves and contribute money to the LDC by paying taxes. MNCs are attracted to a LDC because of the cheap wages they have to pay the labor. Positive effect is that the MNC introduces new technology to the LDC, provide jobs and training, and provide opportunities for related services and industries to develop.

Economic Development and Transition There are concerns over MNCs Potential for unethical behavior The low wages that they pay the workers

Economic Development and Transition Foreign Portfolio Investment It is the entry of funds into a country when foreigners make purchases in the country’s stock and bond market. Putting money in a mutual fund – the fund takes that money and buys shares in a foreign company. That company uses the money and builds another factory, adds onto their existing factory, or make other changes to become more efficient in the production process.

Economic Development and Transition Foreign Aid: Foreign governments will sometimes give aid to LDCs by building schools, hospitals, build roads or highways, and etc to help that country. International Economic Institutions: These institutions promote development. World Bank Founded in 1940 – make loans, advice, and other resources to more than 100 LDCs.

Economic Development and Transition United Nations Development Program (UNDP) They are dedicated to the elimination of poverty through development. This is one of the largest sources of funding. International Monetary Fund (IMF) was developed to stabilize international exchange rates started in 1946 offer advice and technical assistance to LDCs gives them help in international transactions works on debt rescheduling – lengthening the time of debt repayment and forgiving or dismissing part of the loan.

Economic Development and Transition International Monetary Fund (IMF) Stabilization program – an agreement between a debtor nation and the IMF. the nation agrees to change its economic policies to provide more incentives for higher export earnings and to lower imports. By increasing exports, an LDC can earn more foreign money that can be used to pay off its debt. Sometimes these programs have a negative impact on the poor in the short term.

Economic Development and Transition REVIEW: 1. How do internal financing and foreign investment differ? 2. What is foreign direct investment? 3. What is foreign portfolio investment? 4. What are some of the ways international economic institutions help less developed countries? 5. What roles do stabilization programs play in debt rescheduling?