Transfer Pricing

• Hard to know the productivity/profitability of branch plants because of transfer pricing, or the price one branch plant of a company pays for inputs “bought” from other parts of the company

– Often this price is above market prices, sometimes double

• Good for company as a whole (often used to avoid taxes, limits on profit repatriation, or get bigger subsidies), bad for the one local branch and its taxing government

Technology Transfer & Labor

• Most R&D is done in First World, even if fancy machines get to the Third World

– Subcontractors get some technology from company they sell from

– Some companies produce international products through licensing agreement

– Fear of piracy, copyright infringement

• While women are hired in large numbers, work is routine manufacturing or back office paper work, poor conditions

– Foreigners often used in management positions at high salary

• Those who do get trained often get promoted up the company, instead of staying locally

– Sometimes in EPZ, Chinese laborers are imported b/c they are cheaper than local labor

FDI and the State

• State has gone from regulating capital to trying to attract it

– Increasingly competition is not between states, but shifted between cities across the global

– In the past, nationalization occurred, especially in mining, or basic heavy industry

• Thought people (or state) should profit most from use of resources

• In most cases, companies were compensated for what the state took over

• Seeing it again in Latin America

– Now, increasingly see privatization, tax holidays

• Called a “race to the bottom,” as ever more extreme packages offered just to keep up

Research in Geography

• Regardless of subfield, geographers call on various techniques to carry out research

– Data collection – This is how research starts: new information is needed in order to draw conclusions

• Data collection methods includes: archival research, observation, interviews, surveys, environmental sampling, and remote sensing (which includes aerial photography and satellite imagery)

– Data analysis – Once the data is collected it is analyzed.

• Data analysis methods include statistics, model building (using mathematical formulas to predict future conditions), Geographic Information Systems Analysis (a technology that allows different layers of data to be compared on a map to look for patterns), and qualitative analysis methods (such as discourse analysis)

• At this point, it is important to understand how other scholars working on similar topics analyzed their data, so that your work enters into a conversation and advances understanding (not just stands alone)

– Once the data is analyzed, it is often written up in an article in an academic journal that is peer reviewed (meaning that other scholars familiar with the topic check the research to make sure both the data collection and analysis were done correctly)

• Depending on the type of data, it can be presented in the article as a table, a map, a formula, or a narrative (just to give a few examples)

Money

Money

• Two facts:

• International flows of money increased from $57 billion in ’74 to $920 billion in 1996 to nearly unfathomable numbers by 2008

• Does not even count inter-government lending

• This means money moves around much more frequently than in the past

• The overwhleming majority of the world’s countries run current account deficits (meaning they spend more money they than generate), meaning that their governments add debt to their financial accounts

– In the past, few First World countries ran long term deficits. Now many do.

• These lectures are about how money is managed, lent, traded, and given as aid

What started money moving?

• Petrodollars

– The spike in oil prices beginning in the 1970’s made average OPEC surpluses go from $3 to $41 billion dollars

• This money came from first and third world governments, companies, and consumers to a few countries, some with tiny populations

– OPEC governments could not spend the money fast enough, so they put it in banks (these are petrodollars)

– So much money, banks were dying to make loans to any country/institution to get it out of their vaults, even if risky because of threat of inflation

• If it sat, it lost value

Lending

• Not done on basis of need, done on perception of what return on investment will be

– Return on investment is combo of terms of loan and likelihood it will be paid back

• Creditworthiness for developing countries in the 1990’s was determined on how rigidly a country held to free market principals

• First and former-Second World countries were considered better choices, now get most of the good loans

Currencies

• Only a few currencies are accepted for international payments

– Traditionally the first choice was the currency of the strongest economy

• Pre WWII Britain, Post-WII U.S.

– At Bretton Woods, other currencies pegged at a fixed price to the Dollar, Dollar to Gold held in Fort Knox

• Dollars were theoretically exchangeable for gold by the U.S. Gov.

• This was to guarantee the whole system, which only worked if US grew enough and circulated the right amount dollars to keep it afloat

– As 1) more dollars went abroad, 2) more came into circulation, 3) trading competitors emerged and 4) U.S. was spending in Vietnam, confidence in dollars eroded

Currency (cont.)

– In 1971, Nixon unilaterally devalued the dollar vs. other currencies (one dollar buys less foreign currency) and unpegged it from gold

• Good for debtor nations (since their dollar debt was now worth less), bad for Japan and Germany (made their money expensive)

• Supposed to make U.S. exports attractive, imports more expensive (did not help much)

• It was largely a short-term domestic decision that had long term global consequences

– Carter was facing recession and inflation, so he raised the value of the dollar, Fed raised interest rates

• Inflation fell, investment came in (with high rates), but deficits got worse

– Through all this, the dollar remained the currency for international payments, a major advantage for the US

• Also because Germany and Japan (and now China) hold so many bonds (and sell so much to the US), they came to have an interest in keeping the dollar from collapsing

Currency Markets

• Since exchange rates have started floating, risk evolved in lending (due to currency swings) has skyrocketed

– This has given rise to the Offshore Financial Markets, which are beyond national regulatory authority, all electronic, and theoretically “housed” in places like Cayman Islands, Bahrain, Hong Kong, Singapore and Panama (but are usually just a small office or PO Box)

• There is at least $1 trillion worth of international currency traded privately every day

– This trading sets the value of currencies, leaving national governments largely powerless minus a big move

– Euro, after a weak start, has become one of the strongest international currencies

• Talk now of using Euros for international transactions, the price of oil, which would constrain US ability to fund debt

Stock Exchanges

• Stock markets are now open 24 hours a day somewhere in the world, with few barriers to shifting capital around

– Tokyo, Hong Kong, Frankfurt, Paris (EURONEXT), London, New York (NYSE and NASDAQ), Toronto

• Bombay (NSEI and BSE), Saudi Arabia, Shanghai all growing

– Increasingly, the trade in stock is shadowed by trades in futures and derivative markets, which essentially are bets on future prices (not investment in a company) and are huge huge parts of international finance

Back to types of Loans for Countries

• Below Market Rate – Official Development Assistance (bilateral) & IBRD loans (multilateral)

– Also grants, which do not have to be paid back

• These used to be much more significant

• Short Term Market Loans

– Export Credits (money lent short term for the borrower to buy exports from the lending country)

– IMF balance of payment loans (to get through budget squeezes)

• Long term Market Rate – some World Bank loans, bank loans, bonds

– Foreign Direct Investment in private infrastructure is increasingly important

Bilateral Foreign Aid

• One country to another

• Can be

– Finance for a project

– Provision of physical resources (food aid)

– Human Labor (Peace Corp, Development Experts, Training)

– Research done for development purposes

– Debt Forgiveness

• Most of these are payments made within the granting project

• US is largest total giver, but by % it is the Scandinavian and OPEC countries that give most

Bilateral Aid

– During Cold War, a lot of U.S. and Soviet Foreign Aid was given based on allegiance, not need

• Israel and Egypt are behind only Iraq/Afghanistan in aid

– Also aid given to countries which the aid giver has prior relationship (esp former colonies)

– A large % aid is tied aid – in that it has to be spent on products from the country that lent it

• These may not be most appropriate or cheapest products for aid taker, but it helps aid giver

– Agricultural Aid is when a government buys crops from its farmers and gives them for free to other countries

• Undermines food production in recipient country, because who can compete with free food

Appropriateness

• The story of aid has both successes & spectacular failures

– Depends on if the aid is appropriate to the environment, economic organization, and tradition of the country

• Farming technologies especially are made by firms who sell to large farms in temperate climates

• Big visible projects like dams have often been favored, even though their impacts are often limited

– Easier to do quantified cost benefit analysis on hard infrastructure than “public health”; big things look prestigious

• Local knowledge, especially in times of change, may not be superior, but it should never be ignored

– Developing world leaders often have different priorities than their poor

– However, most of the aid comes earmarked for certain activities decided by the granting country

Bank Lending and Debt Crisis

• Because of Petrodollars, banks were flush with money

– At the same time, inflation was so high compared to interest rates in the 1970’s, in real terms countries thought they were going to pay back less than they owe

• However, Carter and the Fed increased interest rate, slowed inflation

• Most governments needed loans at this time because of high oil prices

– Most loans went to Brazil, Argentina, Mexico, South Korea, Venezuela who looked most likely to pay back

Lending and Debt Crisis

• By 1982, things started to go wrong

– Loans given for development projects which never paid off as demand fell in First World

– Interest rates and the dollar rose

• This effectively doubled the indebtedness of Mexico

– Commodity prices fell

– Domestic capital fled for safer investments

• This is the Debt Crisis

– Impacted Latin America most heavily, then Asia (Africa got fewer private loans)

Consequences of Debt Crisis

• In August 1982, Mexico announced it could not pay its debts, asked for a moratorium

– In Mex., Braz., Arg. debt ranged from 50% to 103% the value of all exports

• Other countries in Latin America asked for moratoriums

– Only South Korea emerged without penalty

• However, many U.S. banks had more money out in loans to Latin America than they had assets

– This could collapse the international financial system

• Other first world governments stepped in with loans, banks renegotiated loan terms to get some money

• Brady Plan of 1989 saw countries swap ownership of land and economic activities to banks for debt forgiveness

– Aside from new regulation, banks ended up much better off than the countries they lended to (though both equally dumb)

Multilateral Lending

• After Debt Crisis, new system needed to prevent repeat

• World Bank and IMF are tied together policy wise

– World Bank is long term loans; IMF is short term budget loans and policy advise

– Money comes mostly from First World countries; votes distributed according to monetary contribution

• Both U.S. and E.U. have a defacto veto

• To get an IMF loan beyond 125% of annual quota, you had to adopt conditions…

– Reduce inflation by cutting government spending and reducing wages

• This hurts middle class government employees especially

– Devalue the currency to make exports more competitive and imports more expensive

• In import reliant countries, this really hurts consumers of all stripes

– Remove regulation on prices, trade and money

Multilateral Lending (cont.)

• World Bank consists of…

– IBRD has assets provided mostly by 1^st World Governments, an excellent credit rating, and makes a profit, so it gets private loans at cheap rates, which it passes on in the form of cheaper loans to other countries

– International Finance Corporation provides loans to privatize public companies

– International Development Association provides the cheapest loans for the poorest countries

• Money goes to specific projects

Structural Adjustment

• By 1980’s debt crisis, World Bank structural adjustment loans came with the IMF’s “conditions”

– Idea was to quickly “clear the field” so market forces (especially exports) could take over and raise all boats after a few years of austerity

– Again, hurts those most dependent on government services, small local savers, those least able to pay for imports

• By the end of the 1980’s, structural adjustment was impacting about 1.4 billion people a year

– Started in Jamaica, then East Africa, West Africa, Latin America and beyond

• After a currency/real estate speculation crisis in South East Asia (known as the East Asian Financial Crisis) many of those state driven countries encouraged to do structural adjustment

– Malaysia bucked IMF recommendations, put in currency controls, weathered the panic better

– A few years on, little S. Adjustment has stuck there

Nowadays

• Through 1990’s, early 2000’s even after structural adjustment, debt actually got worse instead of better

– Countries paying more in debt than getting in aid

– Countries shut down schools and clinics, destroyed government backed middle class, making population less able to compete in information economy

• Now

– Debt forgiveness is big

• So is paying back loans early to be rid of IMF like Brazil and Argentina to get back control of policy

– Public health instead of big visible projects

• Also local consultation is increasing

– Increasingly private aid from charities is becoming more important

• Problem is most private aid is only in one area (environment, gender, AIDS, malaria) and doesn’t have the total coverage achieved by government spending

Nowadays

• Microcredit is the big success story

– Small loans (a few hundred dollars) given by NGO’s directly to poor people (usually women)

• Interest rates much lower than village money lender

• Used to start small enterprises like egg hatcheries, craft workshops, delivery services which triple household income or to buy life-improving technologies

– The borrower gets to decide what to do, lender advises once they come to decision

• Borrowers into support groups to encourage repayment

– 90% of all loans paid back turning traditional lending thought upside down

• Founder of Grameen Bank, Muhammad Yunus, awarded Nobel Peace Prize

– Loved both by those who like free enterprise and those who like participatory development