HL+ext+3+economic

= Examine the influence of governments, world trading organizations and financial institutions (such as the World Trade Organization, International Monetary Fund and World Bank) in the transfer of capital. =

Government Role of state in economic development and its impact on national economies There are about 170 nation-states in the world with the number still increasing as there are newly independent states joining since after 1989 (a) Major economic functions of the State (i) State as employer and owner of businesses Public sector (i.e. the state-owned enterprises) is a major employer States are owners of enterprises

(ii) State as provider State will provide public goods and services to its people that are not provided by the private sector E.g. education, public transport, healthcare, electricity

(iii) State as regulator Of flows and connections of economic activities within and across its borders Setting economic policies concerning trade, investment and industries

(b) Effectiveness of the state in economic development (in a globalised economy)

(i) Ineffective Globalisation is creating an economic space that is transnational and the states are increasingly incapable of responding to the needs of the new transnational economy. The power of state has declined as the state is facing the fiscal crisis with increasing demands on the resources (e.g. ageing population, low-income group) as their ability to meet these demands (e.g. loss of traditional manufacturing industries and associated revenues) declines.

(ii) Effective States are still important as they can help in the development of TNCs through the policies implemented They will provide the goods and services to the public that are not provided by the private sector

(c) Government Policy: Export Processing Zones (EPZs) Definition: It is a industrial zone also known as free trade zone with special incentives to attract foreign investors, in which imported materials undergo some degree of processing before being (re-) exported again. EPZs is a popular policy for the LDC governments as they are easy paths to begin industrialisation in a country

(i) Forms Of EPZs free trade zones special economic zones maquiladoras – (Mexican) factories that import materials and equipment on a duty-free and tariff-free basis for assembly or manufacturing and then re-export the assembled products.

(ii) Features Of EPZs Incentives to investors as well as type of industry Some zones have evolved from initial assembly and simple processing activities to include high-tech and science zones, logistics centres and even tourist resorts. Their physical form now includes not only enclave-type zones but also single-industry zones (e.g. the jewellery zone in Thailand or the leather zone in Turkey); single-commodity zones (like coffee in Zimbabwe); and single-factory (such as the export-oriented units in India) or single-company zones (such as in the Dominican Republic).

(iii) Reasons For The Establishment Of EPZs : Problems of indebtness and serious foreign exchange shortfalls in DCs since the 1980s The spread of new-liberal ideas in the 1990s that encouraged open economies, foreign investment and non-traditional exports The search by TNCs for cost-saving locations, particularly in terms of wage costs, in order to shift manufacturing, assembly and component production from locations in the advanced economies The feasibility of TNCs relocating manufacturing capacity to EPZs was also improved by the possibility of decentralising standardised production processes

(iv) Favourable Conditions To Make EPZs Attractive: Capital / Investment: liberalisation of capital flows and occasionally access to special financial credits Trade: eliminate customs duties on imports Tax: reduction or exemption from federal, state and local taxes Labour relations: limitations on labour legislation that apply in the rest of the country, such as the presence of trade unions and the adherence to minimum wage and working hours legislation Infrastructure: providing factory and warehousing space at subsidised rates Reduce environmental regulations such as pollution controls

(v) Criticisms Of The EPZs: Governments of the host countries would give incentives to the foreign TNCs, often at the expense of the welfare of the local people, e.g. loosening of environmental regulations Will affect the health and standard of living of the local society Governments preference of foreign TNCs over local businesses

Trading Blocs Definition: A trading bloc is an intergovernmental association that manages and promotes trade activities for a specific global region. A trading bloc allows free trade among a group of nations, who are the members but imposes tariffs (charges) on other countries who may wish to trade with them Within a trading bloc, member countries have free access to one another’s markets. Therefore, being a member of a trading bloc is important as it allows greater market access The European Union (EU) is a good example of a trading bloc which has over 470 million wealthy consumers

Regionally-Based Trading Blocs Usually trade blocs with EDCs would benefit and develop at a faster pace than those who only consist of all LDCs (e.g. SADC) Trade bloc with DCs would have the economic foundation and direction and cohesion to the policies implemented within the bloc The regional bloc that consists of only LDCs will not develop as fast because: Political tensions (esp. in Africa) All the LDCs are agriculturally-based with small GDP and are reliant on international aid and debts These countries imposed tariffs against external competition Limited trade with other members (which are the DCs)

European Union (EU) It is a supranational body with 27 member countries in Europe. It was established in 1992. It is one of the largest economic and political bodies in the world, with around 494 million people and a combined GDP of US$ 14.5 trillion in 2006. The EU is a single market with a common trade policy. It introduced a single currency, the ‘Euro’, to be adopted by 13 member countries. It has numerous institutions including the European Commission, the Council of the EU, the European Council, the European Central Bank, the European Court of Justice and the European Parliament. Citizens in the member countries can live, travel, work and invest in other member countries. The core economies are Germany and France and the peripheral countries are Portugal and Greece Nation-states are becoming less and less isolated in the days of globalisation, there is a need for nation-states to integrate themselves in the world system. Therefore more and more supranational bodies are formed in the recent decades. These organisations have become increasingly important means of achieving goals that could be blocked by international boundaries if given into the hands of the nation-states.

World trade organisation (WTO) Benefits of WTO: The system helps promote peace Disputes are handled constructively Free trade provides more choice of products and qualities Trade stimulates economic growth and increases income

Opposition to the WTO: Many LDCs are neglected by WTO Environmental groups lobbied against WTO for not protecting the environment Labour unions in the DCs opposed to WTO as their members’ jobs are threatened as manufacturing has filtered down to LDCs

The International Monetary Fund (IMF) IMF fund is provided to prevent further disruption to the international financial system that would occur through a country failing to meet its commitments to other nations E.g. a country running short of foreign currency reserves that it needs to maintain its currency exchange rate could turn to the IMF for help IMF is also able to renegotiate the terms of debt on behalf of nations in financial difficulties To prevent the situation from reoccurring, the IMF will impose conditions on the country (e.g. a ‘stabilisation programme’) Voting power in the IMF is in proportion to the size of a country’s quota E.g. USA has 17% of the total votes - means that if there were any major changes to the IMF policy, which requires 85% backing, the USA is able to block any proposed change it might not like

Criticism of IMF: Some objections were raised regarding the credibility of the IMF especially regarding discrimination of smaller and less powerful nations.