1. Objectives of macroeconomic policy Economic growth: Sustainable growth: Low and stable inflation rate: Full employment: BOP equilibrium on the current account: Redistribution of income: Fiscal balance: Increase in real GDP In poor countries economic growth is seen as a means of reducing absolute poverty The needs of the present are met without compromising the ability of future generations to meet their own Rapid economic growth problems in terms of environmental effects Limitations of external effects can only be done with global cooperation High inflation damages international competitiveness Referred to as natural rate of employment Likely to be achieved if there is economic growth Deficits are unsustainable in the long run Contributes to the instability of the while economy Most MEDCs use progressive taxes and welfare payments to distribute income from the rich to the poor An imbalance can prove to be a problem if countries are unable to sell government bonds to finance their deficits

2. AD/AS model Aggregate Demand: SRAS: LRAS: Asset prices Interest rates FDI Tax rates Expectations about the future state of the economy Decisions made by the government on its expenditure The exchange rate Changes in wage costs New legislation Changes in prices of raw materials and components Changes in taxation on firms Technological advances ( a more efficient methods of production will increase LRAS) The size of the workforce ( influenced by the natural rate of increase or decrease of the population, migration) Human capital (skills, knowledge and expertise of the the workforce gained through education and training, significant impact on LRAS) Capital stock ( if the capital stock increases relative to the workforce, productivity increase) Raw materials ( discovery of new raw materials will increase LRAS)

3. Monetary policy Refers to the use of interest rates, exchange rates and the money supply to influence the economic activity Inflation targets: Interest rate changes: Quantative easing: Uk target 2% +/- 1% ECB target max 2% Interest rates are an effective way to control inflation After the 2008 crisis, many economists believe that the CPI measure is too narrow There should be targets relating to other variable (asset prices) to prevent ‘bubbles’ occuring Higher inflation rate = higher interest rate set by the Bank of England Disadvantages: Full effect can take from 18 to 24 months to work through the economy Business costs rise Exchange rates may increase, decreasing international competitiveness Central bank buys up government and corporate bonds from commercial banks and other financial institutions Increases their deposits, giving them the ability to lend more easily to private and business customers Disadvantages: Policy likely to be ineffective if banks are risk averse Possible inflation due to increased money supply An increase in the supply of money may cause a fall in exchange rates, increasing net export and thus AD

4. Fiscal policy Refers to the use of government expenditure and taxation to influence the level of economic activity Automatic stabilisers: Discretionary fiscal policy: Disadvantages: Some forms of government expenditure and tax revenues change automatically in line with changes in GDP or the state of the economy Stabilisers (progressive taxations,, welfare payments and means-tested benefits) help reduce fluctuations caused by the trade or business cycle Refers to the deliberate changes of taxation and public expenditure designed to achieve the governments macroeconomic objectives Effective when the value of the multiplier is high and can have an immediate impact if indirect taxes are reduced Time lags Disincentive effects ( higher taxes reduce incentives to work,spend or invest) Difficult to determine the magnitude of the changes in public expenditure in advance

5. Supply-side policies Broad range of policies aimed at increasing AS by increasing competition and incentives Labour market: Product market: Capital market: Criticism of S-s policies: Reduction in trade union power (making sympathy strike illegal) Reduction in unemployment benefits ( increased incentives for unemployed workers to take jobs) Improvements in human capital (increased provision and quality of education and training designed to increase productivity) Reduction of employment protection legislation (easier to hire and fire workers, contributing to a more flexible workforce) Reduction in income tax rates (increased incentives to work, Laffer curve) Privatisation (the sale of state-owned enterprises to the private sector through issuing shares) Deregulation (when the government removes official trade barriers to competition) Contracting out (some parts of the services operated by the public sector are put our as formal offers so that the private sector can compete for business) Trade liberalisation (the removal or reduction of trade barriers and the adoption of policies which allow free capital flows between countries, increasing FDI) Promotion of new/ small businesses through tax breaks or short term loans for new businesses) Deregulation of financial markets (reduction of restrictive practices in the city or stock exchange) Reduction in corporation tax or tax allowances on investments by firms Increased inequality (the rich will work harder if paid more and the poor will work harder if paid less) Time lags (some measures may take long time to have an impact on the s-s side of the economy) The incentive effects may be over estimated ( insignificant or unparallel increase in the supply of labour or productivity) Ineffectiveness ( if AD is low, policies may have no effect) Adverse deregulation effects (increased competition may lead to undesirable effects due to excessive risk-taking)

6. Problems faced by policy makers Inaccurate information: Risks and uncertainties: BOP on the current account and retail sales are inaccurate and subject to subsequent revisions Different views of economists create problems in the revision of the impact of the policy imposed in the current state of the economy

7. Public expenditure Current expenditure: Capital expenditure: Transfer payments: Objectives of public expenditure: Day-to-day expenditure on goods and services Expenditure on long term investment projects the movement of funds for which there is no corresponding trade Provision of pubic goods Provision of goods with external benefits or where there may be asymmetric information Redistribution of income Expenditure for clean up operations

8. Public expenditure Analysis: Size and pattern: Level of GDP (with higher incomes, the demand for many government provided services rises more proportionately, as YED is elastic Size and age population distribution (increased size of population and many aging people will build up pressures on pubic services Political priorities (the Labour government emphasis on improving the quality of the health and education services) Redistribution of income ( expenditure on people in relative poverty or with disabilities has increased) Discretionary fiscal policy as a means of managing the economy Debt interest (massive increase in fiscal deficits from 2008 leading to a sharp rise in PSND resulting in higher interest payments on the national debt) Opportunity cost in expenditure in another sector Increasing expectations relating to healthcare and education are associated with increasing real incomes, thus YED is elastic The multiplier effect will increase AD and possibly in the long run AS, through expenditure on education, health or infrastructure Part of the expenditure may be used for dealing with external costs Expenditure could result in government failure, if interventions have caused a net welfare loss Resource crowding-out (due to insufficient availability of resources to the private sector) Financial crowding-out (where increased public borrowing will drive down the availability of credit to the private sector)

9. Taxation Indirect tax: Direct tax: Progressive tax: Proportional tax: Regressive tax: Tax levied on expenditure Tax levied on income or wealth One in which the proportion of income paid rises as income increases One in which the proportion of income paid remains constant as income increases One in which the proportion of income paid falls as income increases

10. Taxation Analysing the effects of taxation: The effect of a change in income taxes: The effect of a change in indirect taxes: An increase in taxes represents a leakage from the circular flow of income and has a negative multiplier effect on the GDP The incidence of tax on consumers or producers depends on the PED of the product Indirect taxes would increase prices above marginal cost, resulting in allocative efficiency Indirect taxes might be applied to products that cause external costs Indirect taxes might be inflationary due to the wage-price spiral On income distribution (a more progressive tax system would make income distribution less equitable On incentives to work (higher taxes might have significant disincentive effects, resulting in reduction of productivity and employment) On tax revenue ( if taxes are raised too much, tax revenue might actually fall as the disincentives to work are so great) On the level of economic activity (higher taxes would cause a fall in disposable income, reducing consumption and thus AD, shifting AS left due to higher disincentives) On income distribution (an increase in VAT would make income distribution less even) On incentives to work (an increase in indirect taxes may encourage people to work harder in order to maintain their living standards) On tax revenue (tax revenues will increase if PED is inelastic and demand stays the same) On the rate of inflation (increased prices for all goods and services, if trade unions demand more compensations and thus higher wages, a wage-price spiral might occur) On the level of economic activity (leakage from the circular flow of income resulting in a fall in consumption and thus AD, business costs rise causing a leftward shift in AS

11. PSNB Excessive borrowing can be inflationary as AD would be increasing Should not exceed 3% of GDP to meet criteria for entry in the euro zone Taxes as a % of GDP give an indication of the size of public sector relative to the size of the whole economy

12. PSND Should not exceed 40% of GDP to meet sustainable investment rule Should not exceed 60% of GDP to meet criteria for entry in the euro zone PSND relative to GDP provides an indication of how easily it can be serviced

13. Large national debts If the money are used to finance improvement in the infrastructure or other capital projects, then PSND is justified as the country’s productive potential would be increasing Problems: In the long run governments will be forced to cut expenditure or raise taxes in order to reduce national debt Opportunity cost for future generations, thus less money available for public services Increased public expenditure might cause crowding out to occur Danger of inflation, as injections will be rising relative to leakages

14. Globalisation An increase in trade as a proportion of world GDP An increase in the movements of financial capital between countries An increase in specialisation and devision of labour Growing importance of TNCs and FDi

15. Factors contributing to globalisation Fall in transport costs Fall in costs of communication Lowering trade barriers Collapse of communism and opening up of China TNCs have organised trade in a global scale

16. Benefits of globalisation Application of the law of comparative advantage For consumers ( wider consumer choice at a lower price) For producers (lower production costs due to offshoring and economies of scale)

17. Disadvantages of globalisation Less demanding laws and regulations in LEDCs Higher external costs Increased trade is unsustainable in terms of the environment Liberalisation of financial markets has increased global instability due to higher risk taking Global imbalances in deficits in the current account are unsustainable Deglobalisation where countries adopt protectionist policies in order to protect the domestic employment

18. Law of comparative advantage Terms of trade: Criticism: (Index of export prices/ Index of import prices) x 100 Free trade is not necessarily fair trade, because in rich countries firms with monopsony power can force producers to accept low prices Law is based on unrealistic assumptions (constant production costs, zero transport costs and no barriers to trade)

19. Protectionism Protect infant industries: Protect geriatric industries: Ensure employment protection: Prevent dumping: Correct BOP deficit: Industries that demand protection so that they can restructure and rationalise production in order to become competitive once more Without protection infant industries might not be able to compete as they have not yet established themselves and are too small to benefit from economies of scale Cheap imports might threaten domestic jobs and workers might demand that the government takes actions to limit imports Goods are exported to another country below the average cost of production A form of predatory pricing, illegal under WTO rules, because it distorts comparative advantage Restrictions on imports may help reduce imbalances in the BOP However, under a system of floating exchange rate, corrections are likely to be done automatically

20. Protectionism Restrict imports from countries whose health and safety regulations are less strict: For strategic reasons: Raise tax revenue: In retaliation: Some LEDCs might have unfair comparative advantage, as production is not under the same laws and regulations, allowing LEDCs to produce goods at a lower average cots A country may impose protectionist policies in time of war or disaster so that it is not dependent on imports Tariffs can be a significant source of revenue for LEDCs A country may introduce barriers of trade it another country has already restricted its imports

21. Types of protection/import barriers Tariffs: Quotas: Subsidies: Administrative regulations: Custom duties or taxes on imported goods Restrictions on the amount of goods that can be imported Effects: increased import prices, domestic producers should gain more business, however no tax revenue is received by the government Grants to domestic producers to artificially lower their production costs, enabling their goods to be more competitive, acts as barriers to trade Labeling, health and safety regulations, environmental standards and documentation on country of origin Increased costs for producers acting as barriers to trade

22. The case against protectionism Inefficient allocation of resources Higher prices and less choice for domestic consumers Less incentive for domestic producers to be more efficient Difficulty of removing trade barriers, due to adverse effect on domestic producers

23. WTO Aims to liberalise trade Done by providing governments with a forum for negotiating trade agreements Settlement of disputes between countries Provision of a system of trade rules Most-favored nation principle: National treatment: Effects: Where countries cannot discriminate between their trading partners Imported and locally produced goods are treated equally once imports enter the market Successful in reducing tariffs on manufactured goods Less successful in reducing barriers to trade in services Reduction in tariffs may not be very efficient due to the growth in the use of non-tariff barriers such as administrative regulations

24. Trading blocs Regional trade blocs: Free trade areas: Custom unions: Common markets: Monetary unions: Intergovernmental associations that manage and promote trade activities in specific regions of the world Trade barriers are removed between member countries, but individual members can still impose tariffs on imports from countries outside the area (NAFTA) Free trade between member states with a common external tariff on imports from countries outside the union (EU) Like custom unions but with the added dimension that factors of production can be traded freely (MERCOSUR) Custom unions that adopt a common currency (EU)

25. Trading blocs and the WTO Trade creation: Trade diversion: The removal of trade barriers increases trade and specialisation according to the law of comparative advantage Countries can now buy goods from member countries, rather than from countries outside the bloc Diversion from low-cost countries outside the bloc to higher - cost countries inside the bloc, resulting in inefficient allocation of resources as it distorts comparative advantage

26. The current account Positive item: Net exports: Income balance: Current transfers: an inflow of foreign currency in the UK Income flows in the country from non-residents minus (-) income flows out of the country from residents UKs contribution to EU CAP

27. The capital and financial account FDI Portfolio investments in shares and bonds Changes in the foreign exchange reserves Short-term capital flows (hot money)

28. Current account deficits in the UK High value of sterling Continuous economic growth Lower productivity leading to higher production costs Relocation of production “Chindia” effect: Insufficient trade balance in services to cancel out deficits in the trade balance in goods Where industrialisation in China and India has flooded foreign markets with cheap imports

29. Implications of global imbalances Positive: Negative: If deficits are easily finance by financial capital inflows, there is no cause for concern Under a system of a floating exchange rate fiscal imbalances should adjust automatically USA large fiscal deficits financed by the Chinese are not a sustainable option Exchange rate adjustments may change suddenly

30. Causes of changes in the exchange rate: (floating exchange rate) Relative inflation rates: Relative interest rates: The state of the economy: BOP on the current account: Political stability: Speculation: Higher inflation rates would cause a fall in currency values as PPP rate would fall Higher interest rates will increase the demand for the pound, increasing its value If an economy is performing well, foreign investors and speculators will have more confidence to invest and thus buy more pounds If there are persistent deficits, the supply of the currency would be high relative to its demand, making a fall more likely Flows of money associated with trade are smaller than financial capital flows In LEDCs, instability can cause a loss in confidence in the country’s currency Caused by: future state of the economy change in government or impending strikes

31. The effects of the change in the exchange rate A fall in the value of a currency would improve BOP Marshall-Lerner condition: The J-curve: The sum of PED of imports and exports must be greater than 1 (must be elastic) There could be a time lag before the full effect of the depreciation of the currency works through the whole economy

32. European Monetary Union Criteria for convergence: 5 tests for convergence: Advantages: Disadvantages: Fiscal deficits should not exceed 3% of GDP PSND should not exceed 60% of GDP Should have an inflation rate within 1.5% of the three EU countries with the lowest rate Should have an interest rate within 2% of the three EU countries with the lowest rate Exchange rates should be kept within the ‘normal’ fluctuation margins of Europe’s exchange rate mechanism Are the business cycles converging so that interest rate changes would suit the economy ? Are the economies flexible enough to cope with external shocks ? Would joining the EU: encourage FDI ? be good for financial services ? promote economic growth, stability and a long-term increase in employment ? Elimination of transaction costs (however this represents a small proportion of GDP) Price transparency (easier to compare prices, but there is still evidence of different price levels in different member countries) Easier trading conditions for firms inside the eurozone Encouragement to TNCs to invest in member countries Loss of independent monetary policy Inflation rate targets are below 2% which is more stringent than that in the UK, being less flexible and more deflationary Loss of exchange rate flexibility against other member countries that have adopted the euro Transition costs Meeting the requirements for the growth and stability pact might result in slower growth rates and higher unemployment

33. Measures of international competitiveness Relative unit labour cost: Relative productivity: Global competitiveness index: Labour costs in one country relative to another Figures are converted into a single currency and are expressed as an index Output per worker per hour worked Institutions Infrastructure Macroeconomic stability Health and primary education Higher education and training Goods market efficiency Labour market efficiency Financial market sophistication Technological readiness Market size Business sophistication Innovation

34. Factors influencing international competitiveness Real exchange rate: Wage costs: Non-wage costs: Other factors: Nominal exchange rate x (foreign PL / domestic PL) A fall in currency value increases international competitiveness Most important costs of production in many industries Higher wages are usually passed onto higher prices National insurance contributions paid by employers Health and safety regulations Environmental regulations Employment protection and anti-discriminative laws Contributions to the company pension schemes Labour productivity Education and training Human capital R n D Infrastructure Labour market flexibility

35. Measures and policies to increase competitiveness Company measures: Government imposition of S-s policies: Evaluation: Invest in capital equipment to increase productivity Improve design and quality through R n D Increase occupational mobility Macroeconomic stability Public sector reform aimed at reducing red tape Government expenditure to improve infrastructure Privatisation Incentives for investment ( tax breaks if companies use profits for investment rather than to distribute them to shareholders International agreements prevent individual countries from increasing their competitiveness by raising tariffs WTO rules prevent member countries from unilaterally imposing protectionist measures As the pound is under a floating exchange rate system and the B of E is independent, the government cannot directly engineer a depreciation of the currency, as it has no control over interest rates

36. The significance of international competitiveness A fall in international competitiveness: Deterioration in the trade in goods balances of the BOP Increased unemployment especially in industries in which exports are significant A fall in exports will have a negative multiplier effect on GDP, reducing economic growth

37. Measures of poverty Absolute poverty: Relative poverty: Composite measures of poverty: If people’s incomes fall below the minimum level to meet basic needs 1 or 2 dollars a day in PPP terms Peoples incomes fall below a certain income threshold in a particular country Measured by calculating the % of the population living below 50% of the median income Problems: highly subjective, subject to change over time, incomparable between countries HPI 1 (poorest countries): % of people not expected to reach 40 % of people who are illiterate % of children who are illiterate and the % of people with access to clean water and safe healthcare HPI 2 (developed countries): Probability at birth of not surviving to 60 Adults lacking functional literacy skills Population living below the income poverty line Rate of long-term unemployment

38. Measurements of inequality Factors influencing inequality: Lorenz curve: Education and training Wage rate Inheritance Ownership of assets Pension rights Unemployment Social benefits The tax system a measure of the degree of inequality Gini coefficient: a measure of the degree of inequality in a country Gini index = area A/ area B 0 is absolute inequality 1 is absolute equality

39. Consequences of inequality Inevitable costs associated with economic growth Constraint on growth and development because: The very poor will have no collateral and so will not be able to start their own businesses Absolute poverty may remain high in countries with higher income inequality Lower income people will have lower marginal propensity to spend or save Higher income people will spend large amounts on imports or abroad Increased crime rate

40. Constraints on growth and development Primary product dependency: Price fluctuations: Fluctuations in producers incomes and foreign exchange earnings: Difficulty in planning investment and output: Natural disasters: Protectionism in MEDCs: The Prebisch- Signer hypothesis: Savings gap: Foreign exchange gap: Capital flight: Debt: Corruption, poor governance and civil wars: Population issues: Human capital inadequacies: Poor infrastructure: PES and PED are inelastic, so there will be a significant price change if D or S change a fall in prices will cause a fall in total revenue, resulting in a fall in foreign currency earnings from exports Fluctuations in prices cause uncertainty, deterring investment Extreme weather can cause severe disruption in the production of primary goods Subsidised domestic sector

41. The Prebisch- Singer hypothesis The hypothesis: Criticism: Countries that export commodities will be able to import less and less goods for a given level of exports YED of manufactured goods is much higher than YED of primary goods If demand for manufactured goods rises, counties dependent on exports of primary goods will suffer from a fall in terms of trade Some countries have developed on the basis of primary production LEDCs that have a comparative advantage in the production of primary goods will be able to allocate resources more efficiently

42. Savings gap LEDCs have lower GDP per capita and thus hold inadequate savings to finance the investment seen as an essential to achieve economic growth Harrod Domar model: Low incomes Low savings Low investment Low capital accumulation

43. Foreign exchange gap LEDCs face shortages of foreign exchange because: Dependency on exports of primary goods Dependency on imports of capital and manufactured goods Servicing debt Capital flight

44. When individuals or companies place money in foreign banks or buy foreign shares and assets Constraint on growth as foreign investments represent a leakage from the circular flow of income and thus less tax is received

45. Debt Risky decisions to borrow money to finance investments in times of economic growth or high values of exports Increased oil prices Increased burden of debt, due to fall in currency values in LEDCs Loans taken out to finance military equipment Evaluation: The ability to finance the debt is more important than the absolute size of it

46. Corruption, poor governance and civil wars Corruption: Poor governance: Civil wars: Such issues deter foreign and domestic investments and limit possibilities to growth Use of power for personal gains Results in inefficient allocation of resources Adoption of policies that result in inefficient allocation of resources Government failure Disrupt growth and development Destruction of infrastructure, death of many people

47. Population issues In some countries the population increase is greater than the growth in GDP, thus GDP per capita is falling

48. Human capital inadequacies Poor education and training standards and low school enrollment are likely to cause slow growth rates due to lower productivity Deterrent to TNCs to invest due to higher costs associated with education and training of workers AIDS cause people to give up work, resulting in school withdrawals

49. Poor infrastructure Transport Telecommunication Water supply Energy supply Waste disposal Makes it difficult to attract investments and thus present a significant obstacle to growth Countries rich in natural resources may benefit from FDI TNCs may improve infrastructure to facilitate their business

50. Strategies to promote growth and development Aid Debt cancellation Investments in growth and development Inward/ Outward looking strategies Interventionist approaches Free market approaches Micro finance Fair trade International financial institutions NGOs

51. Aid Tied aid: Bilateral aid: Multilateral aid: Arguments for aid: Argument against aid: Aid with attached conditions Aid given directly by one country to another Aid paid to international agencies which then is distributed Reduction in absolute poverty Filling in savings gap Provision of aid for infrastructure will increase AD and thus have a multiplier effect on GDP Improving human capital through investment in education and training Aid may contribute to an increase and globalisation and trade Helps reduce world inequality May result in dependency culture Aid may not benefit those for whom is intended (corruption or military expenditure) No clear evidence that it has reduced absolute poverty or has promoted growth and development Right-wing economists believe that it distorts the market mechanism leading to inefficient allocation of resources Left-wing economists believe that donor countries aim to secure political influence Interest payment on loans aid act as an opportunity costs to LEDCs (improvements in health and education services)

52. Debt cancellation Servicing debt: HIPC, MDRI: Arguments for debt cancellation: Arguments against debt cancellation: limits the resources available for expenditure on health and education Initiatives started by the IMF and World Bank to reduce debt of heavily indebted countries to a sustainable level LEDCs will be able to import capital and consumer goods from MEDCs If funds for debt cancellation are used to purchase capital goods, there will be growth prospects In turn LEDCs will be able to buy more imports from MEDCs Reduces absolute poverty Helps reduce savings and foreign exchange gap Helps conserve the environment Debt cancellation programs take longer than aid to be agreed on Moral hazard problems, where unless conditions are attached the government may not pursue sound macroeconomic policies Corruption may channel fund to government officials rather than to the poor Shareholders of banks in MEDCs might bear some of the burden of the debt cancellation

53. Investment in growth and development Human capital: Agriculture: Manufacturing sector(Lewis model): Tourism: Can play a significant part in economic growth In LEDCs investment in primary education yields higher returns than investment in other forms of education Some countries have developed on the basis of agriculture Comparative advantage ensures a more efficient allocation of resources Dynamic context of comparative advantage is that government should invest in education, resulting in a gain in comparative advantage in other products Development requires a move away from the traditional agriculture to a more productive manufacture Key features: Criticism: Transfer of surplus labour from low productivity to a high productivity sector MP of agricultural worker is 0 as by the law of diminishing returns With MP 0, no opportunity cost in transferring labour Industrialisation is associated with investment, increasing productivity and profitabilty Increased profits and savings ration, providing extra funds for investment and promoting continuous growth Profits may not be used for reinvestment If reinvestments are made in capital equipment, no extra labour will be required Incorrect assumption of surplus labour supply and full employment in the industrial sector Disadvantages: Advantages: Attracts investment by transnational hotel chains GDP will increase as a result of the multiplier effect More job opportunities More tax paid More funds to preserve the national heritage Improvements in the infrastructure Significant increase in imports In times of recession the demand may fall significantly Seasonal employment and the jobs created may only be low skilled and low paid as TNC may bring their own staff Tourism is a subject of fashion Higher external costs as tourists demands are prioritised

54. Inward/ Outward looking strategies Inward looking strategies: Outward looking strategies: Import substitution Protectionism enables countries to diversify in a controlled way until the it has built a strong domestic base Effective in a country whose market is large enough to enable industries to benefit from economies of scale Criticism: Distorts comparative advantage resulting in inefficient allocation of resources Lack of competitiveness may lead to inefficiency Free trade Promotion of FDI Deregulation of capital markets Devaluation of exchange rates

55. Interventionist approach Government intervention in LEDCs after World War II: Problems by the end of 1970s: Inward looking strategies to protect domestic economy Low economic growth rates Resource and allocative efficiency due to the lack of the profit motive Corruption Increased deficits

56. Free market approaches: Free market analysis: Public choice theory: Characterised by: Problems: Assumption that markets are efficient and the best way to allocate resources Assumption that politicians use their power for personal interest Trade liberalisation Market liberalisation Supply-side policies Structural adjustment programs Asymmetric information Externalities Absence of property rights Investment decisions

57. Micro finance A means of providing poor families with small loans to help them engage in productive activities Key features: Criticism: Micro finance insists on repayments Interest rates are charged only to cover costs The focus is on groups whose alternative source of finance are limited to the informal sector, where interest rates would be much higher Problems with repayments, collecting methods and accounting practices Micro finance will reduce other assistance to poor people

58. Fair trade Producers are paid an above market price if labour and production standards are met Premiums are used for development programs Benefits: Criticism: Producers receive higher prices Extra money can be spent on education, health, training, clean water etc Extra money can be spent on improvement in quality Diversification in other products Disruption of market forces leads to low prices due to overproduction as a result of new entrants in the market Certification is based on normative views about labour and production A minimum price level provides on incentives to be efficient Premiums may not go to poor producers (absorbed by supermarkets) May create a dependency trap for producers

59. International Monetary Fund ( IMF ) A multilateral institution providing short-term loans for countries with BOP problems Aims to increase liquidity and stability of capital markets through a system of convertible currencies pegged to the dollar Stabilisation programs ensure loan repayments, as the IMF can impose restrictions and conditions on the macroeconomic objectives of its debtors (restrictive monetary and fiscal policies) Ensure a more balanced growth and a reduction in the world imbalances

60. The World Bank Multilateral organisation providing financing for long- term development projects Reduce poverty Promote development (FDI, international trade and capital investment) Structural adjustment programs (SAPs): Free market reforms: Set out conditions on which loans are given so that debtor countries cannot default on repayments Based on free market reforms Trade liberalisation, privatisation, deregulation, removal of subsidies) Criticism: did little to help the worlds poor failed to promote development Increased inequality Social and political chaos