Trade
Trade between countries is dependent on several factors, each of which can contribute to disparity. Making changes in world trade can be used as a tool to reduce the disparity between countries.
Fair trade
Case study: Bananas in the Windward Islands
See the Fair Trade website for the full PDF of this case study. The following is based entirely on that article.
The Problem
The European Union operates trade restrictions on bananas but these have been gradually reduced as they have opened up to supplies from other countries. This has eroded the protection given to the farmers from the Windward Islands. There is a surplus of bananas worldwide, resulting in lower prices. Competition between supermarkets in developed countries has also reduced the price, in some cases to below cost.
Meanwhile, the islanders are generally very poor. In Dominica, over 30% of people live below the poverty line. In St Lucia, it is 25%.
The history
Bananas have been a major export of the Windward Islands since the 1950s, when the islands became independent from the United Kingdom (the British Empire). Prior to that, sugar was the main export. Bananas grown in the Windward Islands tend to be from small, hilly, family run farms, using intensive labour and low levels of other inputs such as fertilizer. Traditionally, bananas have accounted for up to 50% of exports, but this figure has dropped from US$147m (1992) to US$45m (2009). Lower cost bananas from Latin America have been part of the cause.
The solution: Fair trade
The Windward Islands Farmers' Association (WINFA) began working with the World Fair Trade Organisation (WFTO) and shipped the first Fair Trade bananas to the UK in July 2000. There are now 47 Fair Trade Groups with 3376 members.
The benefits for the farmers include:
Benefits for the islands
Trade between countries is dependent on several factors, each of which can contribute to disparity. Making changes in world trade can be used as a tool to reduce the disparity between countries.
Fair trade
Case study: Bananas in the Windward Islands
See the Fair Trade website for the full PDF of this case study. The following is based entirely on that article.
The Problem
The European Union operates trade restrictions on bananas but these have been gradually reduced as they have opened up to supplies from other countries. This has eroded the protection given to the farmers from the Windward Islands. There is a surplus of bananas worldwide, resulting in lower prices. Competition between supermarkets in developed countries has also reduced the price, in some cases to below cost.
Meanwhile, the islanders are generally very poor. In Dominica, over 30% of people live below the poverty line. In St Lucia, it is 25%.
The history
Bananas have been a major export of the Windward Islands since the 1950s, when the islands became independent from the United Kingdom (the British Empire). Prior to that, sugar was the main export. Bananas grown in the Windward Islands tend to be from small, hilly, family run farms, using intensive labour and low levels of other inputs such as fertilizer. Traditionally, bananas have accounted for up to 50% of exports, but this figure has dropped from US$147m (1992) to US$45m (2009). Lower cost bananas from Latin America have been part of the cause.
The solution: Fair trade
The Windward Islands Farmers' Association (WINFA) began working with the World Fair Trade Organisation (WFTO) and shipped the first Fair Trade bananas to the UK in July 2000. There are now 47 Fair Trade Groups with 3376 members.
The benefits for the farmers include:
- Minimum price of US$9.13 per box of bananas
- Increase in revenue
- Medical benefit of EC$1000 per person per year for farmers and their families
- Support for purchasing farm inputs e.g. fertiliser supplied at EC$58 per 50kg, instead of EC$70 for non-Fairtrade
- Membership in Fair Trade gives farmers access to democratically-run trade organisations and improved technical services
Benefits for the islands
- Extra US$1 goes to Fair Trade to build up a cash surplus for local groups (the "Fair Trade Premium")
- 2001: US$10m (approx.) bananas sold to UK
- 2009: US$60 (approx.) bananas sold to UK
- 99% of banana production in the island now Fair Trade
- Money saved from the Fair Trade Premium spent on hurricane disaster fund to make up for losses from Hurricane Dean in August 2007, and Hurricane Tomas in October 2010
- Educational projects have been funded, e.g. EC$186500 for primary school development in St Lucia
- School buses funded in Dominica and St Vincent
Improve market access
The problem
Market access refers to the ability of a country to export to other countries. Historically this has been restricted due to protectionism - the deliberate taxation of imports and the subsidy of home industries.
Trade blocs
The world's most advanced trade bloc is the European Union. Like all trade blocs, it is an arrangement among a group of nations (in this case, European countries) to allow free trade between members, but to impose tariffs on other countries wishing to trade with them. This means that if a Spanish company wishes to see products to people in Germany, they are free to do so - but a Moroccan company would not have the same rights.
The European Union
Disparity between countries within Europe is being addressed by increasing the size of the European Union. Currently (January 2014) there are 28 member states:
The problem
Market access refers to the ability of a country to export to other countries. Historically this has been restricted due to protectionism - the deliberate taxation of imports and the subsidy of home industries.
Trade blocs
The world's most advanced trade bloc is the European Union. Like all trade blocs, it is an arrangement among a group of nations (in this case, European countries) to allow free trade between members, but to impose tariffs on other countries wishing to trade with them. This means that if a Spanish company wishes to see products to people in Germany, they are free to do so - but a Moroccan company would not have the same rights.
The European Union
Disparity between countries within Europe is being addressed by increasing the size of the European Union. Currently (January 2014) there are 28 member states:
Each of the member states as a reciprocal arrangement with all other states. The result is an increase in trade between member states, which in the long term is hoped to eradicate the large differences in GNI per capita between the east and west of Europe. For example, the GNI per capita of the following countries is notably different (all figures US$, PPP, per capita, 2012):
Germany - $41890
Finland - $38630
UK - $36880
Greece - $25460
Poland - $21170
Romania - $16310
Bulgaria - $15390
However, trade blocs are also considered unfair because they deny full access to their markets for countries who are not members.
The solution: Reduce protectionism
The European Union has taken several steps to reduce the level of protectionism. However, these are slow moving and there has been little impact on some of the poorest countries. Indeed, the opening up of the European market to more competitors has sometimes had a negative impact on LICs. For example, the changes in 1993 to the banana trade meant that the traditional exporting countries, such as those in the Windward Islands, lost out to more efficient competitors from Latin American countries.
Germany - $41890
Finland - $38630
UK - $36880
Greece - $25460
Poland - $21170
Romania - $16310
Bulgaria - $15390
However, trade blocs are also considered unfair because they deny full access to their markets for countries who are not members.
The solution: Reduce protectionism
The European Union has taken several steps to reduce the level of protectionism. However, these are slow moving and there has been little impact on some of the poorest countries. Indeed, the opening up of the European market to more competitors has sometimes had a negative impact on LICs. For example, the changes in 1993 to the banana trade meant that the traditional exporting countries, such as those in the Windward Islands, lost out to more efficient competitors from Latin American countries.
Debt
Check out the excellent website of Greenfield Geography for further information on debt and reducing disparities in general.
The problem
Many of the poorest countries are those who borrowed significant sums of money in the post-colonial era, around the 1960s and 1970s. These were usually to fund very large scale projects such as the Akasombo Dam in Ghana. Frequently these projects did not produce the economic returns that were intended. The result was that countries could not pay back the huge amounts of borrowed money. Mostly this money was loaned from HICs to LICs.
An important note about debt
Since the 2008 financial crisis, many HICs including the USA, UK, Spain, France and Italy have borrowed significant amounts of money. This means that these countries now often find themselves near the top of the table of countries who owe the most money. However, three things must be remembered.
1. The governments of the HICs owe the money to a mixture of other countries and private institutions such as banks who come from the HICs in the first place. These banks and countries are very unlikely to call in the loans. This is because countries that have lent money, such as China, depend on the HICs to give them a market for their products. If they ask for their money back, the HIC won't be able to purchase products and both countries will lose out.
2. The HICs who borrowed money usually did so to purchase institutions such as large banks that otherwise would go bust. These banks are still valuable, and in some cases are worth billions of dollars. So although the country has debt, they have valuable assets.
3. The HICs who borrowed the money may have borrowed billions of dollars, but as a percentage of their GNI it is still relatively low compared to the debt of the poorest countries. Debt must always be seen in relation to income. A person with a debt of $10,000 might be easily able to pay it back if they earn $150,000 per year, but a person who earns only $20,000 might find this debt difficult to pay. Debt is a relative concept.
Key terms
Debt - money owed to someone else
Debt burden - the amount of money owed as debt. This term is used especially for situations when the debt cannot be repaid.
Interest - an extra amount paid in addition to the original value of a loan, usually given as an annual percentage.
Debt service / debt servicing - the amount of money repaid on a loan that is made up of the interest, rather than the original loan amount
Compound interest - if the interest on a loan is not paid back in full, the remaining unpaid interest is added to the value of a loan. For example, if a person borrows $100 at 10% annual interest, the total amount owed after one year would be $110. If this was not paid off, the amount in Year 2 would be $110x10%=$121. In Year 3 it would be $121x10%=$133.10. In Year 4 it would be $133.10x10%=$146.41. In Year 5 it would be $161.05. In Year 6 it would be $177.16 and in Year 7 $194.87. In Year 8 it would be $214.36. So, it is frequently possible that within just a few years, compound interest would result in a much higher amount being owed compared to the original value of the loan.
Debt relief - the cancelling of a debt or part of a debt
Drop the debt - the slogan of a campaign to reduce the debt burden (see Make Poverty History, the Global Call to Action Against Poverty and Jubilee 2000).
The HIPC Initiative
HIPCs, or Heavily Indebted Poor Countries, are those who owe very large amounts of money in debt. The HIPC Initiative was started by the IMF and World Bank in 1996, following strong calls from the Jubilee 2000 campaign to drop the debt. 36 countries have received debt relief under the scheme. About 44 percent of the funding comes from the IMF and other multilateral institutions, and the remaining amount comes from bilateral creditors.
To qualify for help, countries must fulfil specific conditions. Details about the conditions can be found in the IMF's Factsheet on the issue. The following information is based on their factsheet:
Step 1: 'Decision Point'
At this point the country receives service relief i.e. the debt service does not need to be paid.
Step 2: 'Completion Point'
At this point, the country can get up to 100% debt relief to make their debt sustainable. Note that this was increased from 90% in 2005.
What are the benefits of receiving HIPC debt relief?
Criticisms of the HIPC
Who gets HIPC Initiative support?
The map below shows the countries that are elegible for the HIPC initiative (2013).
Check out the excellent website of Greenfield Geography for further information on debt and reducing disparities in general.
The problem
Many of the poorest countries are those who borrowed significant sums of money in the post-colonial era, around the 1960s and 1970s. These were usually to fund very large scale projects such as the Akasombo Dam in Ghana. Frequently these projects did not produce the economic returns that were intended. The result was that countries could not pay back the huge amounts of borrowed money. Mostly this money was loaned from HICs to LICs.
An important note about debt
Since the 2008 financial crisis, many HICs including the USA, UK, Spain, France and Italy have borrowed significant amounts of money. This means that these countries now often find themselves near the top of the table of countries who owe the most money. However, three things must be remembered.
1. The governments of the HICs owe the money to a mixture of other countries and private institutions such as banks who come from the HICs in the first place. These banks and countries are very unlikely to call in the loans. This is because countries that have lent money, such as China, depend on the HICs to give them a market for their products. If they ask for their money back, the HIC won't be able to purchase products and both countries will lose out.
2. The HICs who borrowed money usually did so to purchase institutions such as large banks that otherwise would go bust. These banks are still valuable, and in some cases are worth billions of dollars. So although the country has debt, they have valuable assets.
3. The HICs who borrowed the money may have borrowed billions of dollars, but as a percentage of their GNI it is still relatively low compared to the debt of the poorest countries. Debt must always be seen in relation to income. A person with a debt of $10,000 might be easily able to pay it back if they earn $150,000 per year, but a person who earns only $20,000 might find this debt difficult to pay. Debt is a relative concept.
Key terms
Debt - money owed to someone else
Debt burden - the amount of money owed as debt. This term is used especially for situations when the debt cannot be repaid.
Interest - an extra amount paid in addition to the original value of a loan, usually given as an annual percentage.
Debt service / debt servicing - the amount of money repaid on a loan that is made up of the interest, rather than the original loan amount
Compound interest - if the interest on a loan is not paid back in full, the remaining unpaid interest is added to the value of a loan. For example, if a person borrows $100 at 10% annual interest, the total amount owed after one year would be $110. If this was not paid off, the amount in Year 2 would be $110x10%=$121. In Year 3 it would be $121x10%=$133.10. In Year 4 it would be $133.10x10%=$146.41. In Year 5 it would be $161.05. In Year 6 it would be $177.16 and in Year 7 $194.87. In Year 8 it would be $214.36. So, it is frequently possible that within just a few years, compound interest would result in a much higher amount being owed compared to the original value of the loan.
Debt relief - the cancelling of a debt or part of a debt
Drop the debt - the slogan of a campaign to reduce the debt burden (see Make Poverty History, the Global Call to Action Against Poverty and Jubilee 2000).
The HIPC Initiative
HIPCs, or Heavily Indebted Poor Countries, are those who owe very large amounts of money in debt. The HIPC Initiative was started by the IMF and World Bank in 1996, following strong calls from the Jubilee 2000 campaign to drop the debt. 36 countries have received debt relief under the scheme. About 44 percent of the funding comes from the IMF and other multilateral institutions, and the remaining amount comes from bilateral creditors.
To qualify for help, countries must fulfil specific conditions. Details about the conditions can be found in the IMF's Factsheet on the issue. The following information is based on their factsheet:
Step 1: 'Decision Point'
- be in extreme debt
- have no other way to deal with the debt
- have demonstrated the ability to reform, govern and manage finances in a stable manner
- prepare a plan to ensure that poverty is being address broadly (through the whole country, not just certain individuals or groups)
At this point the country receives service relief i.e. the debt service does not need to be paid.
Step 2: 'Completion Point'
- demonstrate good governance since the Decision Point
- Implement reforms agreed at the Decision Point
- implemented its poverty plan for at least one year
At this point, the country can get up to 100% debt relief to make their debt sustainable. Note that this was increased from 90% in 2005.
What are the benefits of receiving HIPC debt relief?
- Increase social spending - By spending less of their income on debt, countries can spend more on social programmes such as healthcare, education, women's rights, and sustainable environmental policies. Remember that it is almost impossible to directly link any improvement to one single factor.
- Increase automony - By having less or no debt, countries are less likely to need to get assistance or follow the advice (or insistence) of international organisations such as the IMF and World Bank.
- No new debt - In the past, countries were forced to take further loans to pay off the debt of a previous loan. This adds significantly to the issue of debt burden and is similar to compound interest. By avoiding new debt, the economy becomes more sustainable.
Criticisms of the HIPC
- There was a slow start, with only four countries receiving debt relief by 1999, three years after the programme began
- Countries who want to participate must agree to a series of economic reforms aimed at making their financial management more stable, but these often involve cutting government support such as healthcare and welfare. These reforms are similar to Structural Adjustment Programmes (SAPs)
- The main issue with the SAPs is that they are seen as encouraging a western model of development, but this is not necessarily a path that these countries would wish to take
- Many people believe that morally these countries should all receive 100% debt cancellation. However, this would be around US$200bn and the IMF, among others, argue that this is simply unrealistic
Who gets HIPC Initiative support?
The map below shows the countries that are elegible for the HIPC initiative (2013).
Key
Countries which currently qualify for full HIPC relief - black
Countries which currently qualify for partial HIPC relief - dark shading
Countries which are eligible for HIPC relief but have not yet met the necessary conditions - light shading
Countries which currently qualify for full HIPC relief - black
Countries which currently qualify for partial HIPC relief - dark shading
Countries which are eligible for HIPC relief but have not yet met the necessary conditions - light shading
Case study of HIPC Initiative support: Zambia
Because of the difficulty of identifying any improvement in a country being due to a single programme, it is very hard to give a case study on the impact of debt relief. However, it is possible identify the changes that a country has made in terms of its debt structure. The following information is taken directly from the PDF at http://www.ijdh.org/
- Completed HIPC in 2005 and received $3.8 billion in debt relief, to be dispersed between 2005 and 2022.
- Zambia’s delays in reaching Completion Point were partially due to opposition to certain structural
- reforms (i.e. Zambia was required to privatize the Zambia National Commercial Bank despite presidential, civil society, media and parliamentary opposition).
- In 2006, Zambia was able to allocate 30% of its total budget toward social sector needs, such as recruiting personnel in education and health sectors, infrastructure development, purchase of drugs, and provision of food supplements particularly for those with HIV/AIDS.
- Zambia would have been servicing debts in amounts of $450-$650 million per year if it did not qualify for HIPC. Since completing HIPC, Zambia’s average debt service payments each year has been between $100-150 million.
For further ideas on Zambia's HIPCI progress, look at the links below:
http://policydialogue.org/publications/backgrounders/casestudies/debt_relief_and_hipc_zambia/
http://www.jubileeaustralia.org/latest-news/what-about-debt-relief-under-hipc-the-case-of-zambia
Remittances
Remittances are funds (and sometimes goods) transferred from a foreign worker to their home country.
Where do remittances occur?
Worldwide, remittances are big business. There are around 200 million expatriates - people who live in countries outside their 'home' country (in this case, defined as country of citizenship). Within the European Union, €38bn was sent back to expats original countries in 2008. Globally, in 2009 US$316bn was sent by migrants to their countries of origin. For some countries, remittances make up a large percentage of their GDP - such as Tajikistan in 2008, where the figure was 50% of GDP.
An excellent resource for further information about remittances is the IFAD website's page.
The map below shows worldwide movements of remittances along 'corridors'. These are direct movements between two countries (bilateral movements). However, they mask the myriad of other transfers that take place daily, such as between Hong Kong and the Philippines. (Click on the map to be taken to the source page.)
Remittances are funds (and sometimes goods) transferred from a foreign worker to their home country.
Where do remittances occur?
Worldwide, remittances are big business. There are around 200 million expatriates - people who live in countries outside their 'home' country (in this case, defined as country of citizenship). Within the European Union, €38bn was sent back to expats original countries in 2008. Globally, in 2009 US$316bn was sent by migrants to their countries of origin. For some countries, remittances make up a large percentage of their GDP - such as Tajikistan in 2008, where the figure was 50% of GDP.
An excellent resource for further information about remittances is the IFAD website's page.
The map below shows worldwide movements of remittances along 'corridors'. These are direct movements between two countries (bilateral movements). However, they mask the myriad of other transfers that take place daily, such as between Hong Kong and the Philippines. (Click on the map to be taken to the source page.)
The map below shows the impact of formal remittances. It's clear that only a few countries rely directly on remittances, but this shouldn't be underestimated. The map does not include informal remittances, such as money that is carried illegally across borders (usually to avoid taxes), nor the informal flow of gifts of products across international borders. (Source: http://www.migrationinformation.org/globaldata/remittances.cfm)
The benefits and problems of remittances
Remittances provide income for the country which can ensure a positive spiral of cumulative causation. This means more employment and the associated social benefits of a stronger economy. Remittances are also given straight to individuals rather than via an aid organisation or government agency, so no money is lost in administration or corruption.
A further benefit is that remittances often increase during times of crisis. Foreign workers send money home to their countries when they have been hit by a disaster, allowing fast and efficient help to get to the people who need it most.
However, remittances also cause problems. The main one is dependency, which occurs when families come to rely on the relatively high income from abroad and do not enter the local economy where wages are significantly lower and hours are long. In addition, dependency can result in an unsustainable economy because during economic recessions, remittances reduce, leaving families with lower incomes. Inflation is also an issue because prices rise due to the extra income, so those without remittance income find it harder to purchase basic goods.
Also, it is often the youngest and most able individuals who leave to work in foreign countries, leaving behind a lower skills base in the original country (i.e. a smaller and less qualified workforce).
There are also problems for the migrants themselves. They may be pressured to continue working longer than they would otherwise. The length of time they are away from their families can cause social problems. They can also lose large amounts of money through poor exchange rates and fees for sending the money abroad. Unfortunately this vulnerability may also lead to domestic and sexual abuse.
Remittances provide income for the country which can ensure a positive spiral of cumulative causation. This means more employment and the associated social benefits of a stronger economy. Remittances are also given straight to individuals rather than via an aid organisation or government agency, so no money is lost in administration or corruption.
A further benefit is that remittances often increase during times of crisis. Foreign workers send money home to their countries when they have been hit by a disaster, allowing fast and efficient help to get to the people who need it most.
However, remittances also cause problems. The main one is dependency, which occurs when families come to rely on the relatively high income from abroad and do not enter the local economy where wages are significantly lower and hours are long. In addition, dependency can result in an unsustainable economy because during economic recessions, remittances reduce, leaving families with lower incomes. Inflation is also an issue because prices rise due to the extra income, so those without remittance income find it harder to purchase basic goods.
Also, it is often the youngest and most able individuals who leave to work in foreign countries, leaving behind a lower skills base in the original country (i.e. a smaller and less qualified workforce).
There are also problems for the migrants themselves. They may be pressured to continue working longer than they would otherwise. The length of time they are away from their families can cause social problems. They can also lose large amounts of money through poor exchange rates and fees for sending the money abroad. Unfortunately this vulnerability may also lead to domestic and sexual abuse.
Case study of remittances: The Philippines, the origin country
Some background information (source)
OFWs are heroes. That's according to Proclamation 243 which was signed by the President of the Philippines in 2000 to declare it 'The Year of Overseas Filipino Workers' (often shortened to OFW).
Around 2 million Filipinos, or about 2% of the total population, were OFWs by 2008. They were roughly evenly split between males and females. Twenty percent went to Saudi Arabia; 14 percent to the Arab Emirates, Singapore, Hong Kong, Japan, Qatar, and Taiwan; 9 percent to Europe; and 8 percent to North and South America. This is where the gender divide comes - the males tend to work in construction in the Middle East, while females work in domestic positions in Asia. The OFWs who migrate to North America are generally highly skilled such as nurses (otherwise they would fail to get a visa).
Generally migrants are young, between 20 and 45. Better off families are able to invest in the fixed costs of sending family members abroad to work. (Fixed costs include airfare, visas and visits home.) It is for this reason that the wealthier families tend to derive more of their income from abroad (see Section 7 on page 6 of this PDF from the IMF for further information).
How much do OFWs contribute?
The graph below shows the remittances of the Philippines. Many of these are young women who work in the domestic sector. Hong Kong has around 140,000 temporary OFWs although by far the largest destination is the United States. (BPO stands for 'Business Process Outsourcing'. For more information, see p350 of the Oxford Course Companion (Nagle and Cooke, 2011).
The long term change doesn't reflect the increase in remittances during times of crisis.
Declining importance?
Though there is no doubt that OFWs contribute significantly, the increase in GDP in 2011 was 3.9%, compared to an increase in overseas income (which includes remittances) of just 1%. If this trend continues, remittances will decline in importance but with such large numbers of OFWs it seems highly unlikely that they will cease altogether.
Though there is no doubt that OFWs contribute significantly, the increase in GDP in 2011 was 3.9%, compared to an increase in overseas income (which includes remittances) of just 1%. If this trend continues, remittances will decline in importance but with such large numbers of OFWs it seems highly unlikely that they will cease altogether.
Case study of remittances: Hong Kong, the destination country
Hong Kong has a high profile of domestic workers, partly due to their large numbers. An interesting perspective can be seen from CNN. The Special Administrative Region also takes a firm legal stance on employment of Foreign Domestic Helpers (FDHs) with a series of criteria outlining the requirements for both the employee and employer.
Hong Kong has had a series of high profile cases about the abuse of domestic workers. Sexual abuse has occurred in 6.5% of cases. And cases of emotional and physical abuse have also been pursued in court. OFWs are often at risk due to their lack of security and support network and can be a target for criminals.
However, Hong Kong is a major destination for OFWs with almost 200,000 domestic workers from the Philippines alone. In Hong Kong, the large numbers create their own sub-culture, especially on Sundays when most have their day off and congregate in public spaces.
Hong Kong has a high profile of domestic workers, partly due to their large numbers. An interesting perspective can be seen from CNN. The Special Administrative Region also takes a firm legal stance on employment of Foreign Domestic Helpers (FDHs) with a series of criteria outlining the requirements for both the employee and employer.
Hong Kong has had a series of high profile cases about the abuse of domestic workers. Sexual abuse has occurred in 6.5% of cases. And cases of emotional and physical abuse have also been pursued in court. OFWs are often at risk due to their lack of security and support network and can be a target for criminals.
However, Hong Kong is a major destination for OFWs with almost 200,000 domestic workers from the Philippines alone. In Hong Kong, the large numbers create their own sub-culture, especially on Sundays when most have their day off and congregate in public spaces.