Kabir's Econ Blog

February 11, 2010

Evaluation of Growth and Development Strategies

Filed under: Uncategorized — kabir1892 @ 1:11 pm

1) IMF and World Bank

-Large-scale organisations also work in the field of development. Many of these come under the umbrella of the UN and emerged as part of the discussions held towards the end of the Second World War

Ecuador: Lasting poverty reduction requires the cooperation of various groups including, communities, civil society, government, and donor agencies.  Working with these groups, the World Bank provides technical expertise and funding for poverty-reduction programs in areas such as health, agriculture, and basic infrastructure.

2) Other international organizations

-FAO

-UNICEF

-UNESCO

-WHO

Ecuador:

FAO – Increases nutrition and standard of living by improving agricultural productivity. It also helps the rural populations with their conditions.

UNICEF – UNICEF uses its knowledge, expertise and integrity to provide children with the appropriate supplies and services they require. Through Procurement Services, governments and non-profit organizations can use and learn from UNICEF’s procurement expertise in their own efforts to help children.

UNESCO – Aim is to eliminate problems such as diseases, discrimination and poverty that stop the economy from growing

WHO – The World Health Organization was created to give worldwide guidance in the field of health, to set global standards for health, to cooperate with governments in strengthening national health programs, and to develop and transfer appropriate health technology, information and standards.

3) Private Sector Banks

-Private sector banks make loans to developing countries at commercial rates of interest. As such, these loans become part of the debt of the poorer.

Ecuador: All private banks in Ecuador were required to invest at least 5 percent of their capital and reserves in the Central Bank, and together they owned the majority of shares in the Central Bank. Headquartered in Quito, the Central Bank had sixteen branches in other cities and towns in the late 1980s.

4) Non governmental Organizations

In recent years, one of the biggest growth industries in developing economies has been that of the NGOs – the non-governmental organisations.

They work best when:

  • Allowed to tackle issues at local level
  • Encouraged to employ as many local workers as possible
  • Specialised in specific and often rural-based project work
  • Project monitoring is done very carefully
  • Relations with governments are cordial but not too friendly.

Ecuador: In the face of hardship, a lot of NGO’s have been working to help Ecuador to get by. NGOs have played an indispensable role in helping the nation’s marginalized citizenry meet their basic needs, encouraging sustainable development, and protecting the nation’s natural resources from exploitation.

5) Multination Corporations

-An MNC is a company which possesses and controls means of production or services outside the country in which it was established. Although they operate in different countries, most of such corporations are controlled from a national base from which a global system of integrated production, sales, research, marketing and finance is facilitated.

Ecuador: In the 1970’s, MNC’s flooded into Ecuador following the discovery of oil by Texaco. In 1972, a large oil pipeline was opened to transport oil from the Amazon across the Andes. Output increased in the 1970’s and the industrial sector expanded at a rate of 10.5%.

Conclusion: In terms of growth and development, Ecuador has gone through numerous phases to improve its economy. The IMF and banks have helped to reduce poverty. International organizations helped by improving the overall living standards for children and families by eliminating diseases and proving food sources. Private banks were especially big help to Ecuador since it boosted the quarter 1 profits of Ecuador by 8%. NGO’s also played a big role in helping Ecuador since it sustained the development and protected the natural resources that it has. Multinational corporations helped in the 1970’s by helping open a pipeline to transport oil throughout the nation. Overall, these small and big changes have led to the Ecuadorian economy to grow. Even though this is true, ethnic problems and unequal treatment in Ecuador have made it hard for these aids to be of much help. They have helped sustained the economy as a whole, but as individual families, it is still very hard to handle. By continuing to receive the aid that they have been receiving, Ecuador will hopefully grow as a whole in the future.

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February 3, 2010

Ecuador Growth and Development Strategies

Filed under: Uncategorized — kabir1892 @ 2:31 am

1) Harrod-Domar Growth Model

-Increased investment would, in turn, force the production possibility curve outwards and create more wealth.

The model concludes that:

  • Increasing the savings ratio, or the amount of investment or the rate of technological progress are vital for the growth process
  • Economic growth depends on the amount of labour and capital.
  • As developing countries often have an abundant supply of labour it is a lack of physical capital that holds back economic growth and development.
  • More physical capital generates economic growth.
  • Net investment leads to more capital accumulation, which generates higher output and income.
  • Higher income allows higher levels of saving.

Ecuador: At the situation Ecuador is at now, there is no need for savings since the real GDP per capita is already considered low. Due to distribution of income issues, Ecuador cannot apply the Harrod-Domar theory.

2) Structural change/dual sector:

– Two economists, Fisher and Clark, put forward the idea that an economy would have three stages of production:

  • Primary production: is concerned with the extraction of raw materials through agriculture, mining, fishing, and forestry. Low-income countries are assumed to be predominantly dominated by primary production.
  • Secondary production: concerned with industrial production through manufacturing and construction. Middle income countries are often dominated by their secondary sector.
  • Tertiary production: concerned with the provision of services such as education and tourism. In high-income countries, the tertiary sector dominates. Indeed having a large tertiary sector is seen as a sign of economic maturity in the development process.

Ecuador: It depends highly on its primary factors, such as oil. Tourism and infrastructure is also considered good, so there is not much need for the structural/dual sector.

3) Types of Aid:

  • Humanitarian – which can both be by individual country to country or via a major organisation such as one of the UN agencies. This is not a loan and is normally sent to help against a specific problem, e.g. drought.
  • Bilateral – which is given by one country to another. It is a loan, though may be subject to a long period prior to re-payment commencing, and granted as soft or below market terms.
  • Multilateral – which is when separate countries pay money into one central organisation, say the IMF, and it then determines who receives money and for what. So, multilateral aid is given via one of the large international agencies.
  • Ecuador:  For Ecuador, this solution is going to be very helpful. HIAS has helped by hiring and training local staff in ways of intervention. In 2007, the Government of the United Kingdom, with HIAS support, trained Ecuadorian policemen on human rights. In addition, HIAS works closely with a network of local institutions and grass roots. America also agreed to help Ecuador through the bilateral investment (BIT). This Treaty will assist Ecuador in its efforts to develop its economy by creating conditions more favorable for U.S. private investment, helping to attract such investment and, thus, strengthening the development of the private sector. The IMF has also extended loans for Ecuador.

    4) Export-led growth/outward oriented strategies:

    • It conforms more closely to comparative advantage – resources may be used more efficiently as the resources used in earning a unit of foreign exchange from exports will be less than those used in saving a unit of foreign exchange by replacing imports with domestic goods.
    • Increased investment – outward-oriented policies may help encourage inward investment and therefore domestic productivity.
    • Economies of scale – the increased sale of exports may help raise the domestic level of production and enable the country to gain from economies of scale.
    • Increased employment – increased production should help boost the domestic level of employment.
    • Greater equality of income distribution – increased demand for labour will help boost wages in a developing economy and this should help to make income distribution more even.
    • Increased competition – an outward-oriented strategy will expose the country to the full weight of international competition. They may struggle initially to compete, but productivity will rise much faster than if import substitution policies are followed.

    Ecuador: Export led growth is being used already as Ecuador has a large exporting sector. Ecuador is substantially dependent on its petroleum resources, which have accounted for more than half of the country’s export earnings and one-fourth of public sector revenues in recent years.

    5) Import substitution/inward oriented strategies/protectionism

    – The protection of jobs and the promotion of growth might be best served by concentrating on producing import substitutes. Countries need foreign exchange and if they can produce substitutes for imports, this will release foreign exchange.

    Ecuador: They recently imposed trade restrictions by putting tariffs on particular imports.  According to some in Ecuador, the tariffs, while slowing imports and hurting those companies that rely upon foreign goods; the tariffs have been an advantage for domestic producers.

    6) Commercial Loans:

    -Commercial loans are loans from banks and other financial organisations, usually in the developed world.

    Ecuador: The IDB (Inter-American Development Bank) provided $90 million loan to Ecuador for health care. China also gave a “massive loan” of $2 billion for a hydroelectric dam in Ecuador. This loan is yet to be agreed since there are still issues with this.

    7) Fairtrade Organizations

    – This means a price that covers their production costs and allows a surplus that they can reinvest in their business and that can sustain a ‘reasonable’ standard of living. This creates a degree of stability of prices and allows development to take place at a more measured and consistent pace.

    Ecuador: In Ecuador, the Fair Trade certification guarantees that employers pay decent wages, respect the right of their workers to join trade unions and provide good housing when relevant. The Fair Trade certification also demands the practice environmentally-friendly farming methods which reduce the use of pesticides, conserve energy and protect watersheds and wildlife. In the floral industry, 10% of the FOB price paid for the FTC roses goes to a fund for flower workers to invest in community development projects like: small businesses, scholarships for workers and their kids, health centers and loans.These funds are known as the Fair Trade Premium.

    8) Micro Credit Scheme

    -Microcredit schemes are schemes that lend small amounts to the poor in a developing country. The loans may be as low as $1, but they are directly targeted at the needs of those people and reflect the circumstances they operate in.

    Ecuador: Microfinance organizations in Ecuador offer savings and loan services to individuals and groups whom may not have access to traditional banking, the opportunity to access to capitals which can be used to invest in income generating activities. They used the microedit scheme is to provide small loans to the Ecuadorian community members, who would otherwise be unable to qualify for a loan, in order for them to start businesses and work their way out of poverty. The recipients of the loan use the money for such things as tools and materials with which they can make a living. Once income starts to be generated, the loan is paid back at a very low rate of interest.

    9) Foreign Direct Investment

    -Foreign direct investment is mainly undertaken through multinational corporations (MNCs). An MNC is a firm that has productive capacity in a number of countries. The profit and income flows that they generate are part of the foreign capital flows moving between countries.

    Ecuador: Ecuador aims to increase the role of foreign direct investment in its development not only by receiving more FDI, but also by gaining benefits of technology, employment, exports, skill and in overall competitiveness. In early 1990’s, Ecuador liberalized FDI policies. It also opened up its economy to international trade, reforming the tax and fiscal systems.

    10) Sustainable Developments

    -Sustainable development is development which will not have a detrimental effect on future generations and which involves measures to limit the use of non-renewable resources.

    • Targeting aid to projects that helped improve the environment (the provision of clean water etc.)
    • Research into environmentally friendly farming methods
    • Programmes to help reduce population growth (e.g. family planning and education)

    Ecuador: In the Ambato region, FSD partnered with organizations in order to address the environmental sustainability through education programs, awareness campaigns, and local initiatives. Volunteers work for the agriculture section by providing building workshops and technical assistance to increase productivity and ecological sustainability. Water systems is also another issue, so they plan on building and managing the effectiveness. Help is needed in these areas to ensure proper use of land and the resources that can be produced from it.

    Conclusion: After carefully researching and thinking about what the best growth and development strategies, I have concluded that foreign direct investment is the best idea. This is because the success of the growth of the economy depends on certain actions and policies of the government. Achieving social consensus by building around reforms is critical. The economic crisis brought deprivation to a large portion of the population, especially the poorest. Further improving framework for investment is another strategy since FDI changes made Ecuador favorable in comparison to Latin American countries. Improving physical infrastructure and designing policies used to increase long term benefits from FDI are also good. Finally, through foreign direct investment, implementing an investment promotion programme. The formulation and launch of an investment promotion programme should be one of Government’s priorities.

    February 1, 2010

    Ecuador Barrier to economic growth/development

    Filed under: Uncategorized — kabir1892 @ 3:41 am

    Poverty : poverty and inequality are holding back development.

    -HPI

    -Hard to reduce

    -low incomes, investment, savings, investment, production, demand, malnutrition

    Institutional and political factors:

    -ineffective taxation structure

    -lack of property rights

    -political intability

    -corruption

    -unequal distribution of income

    -formal and informal markets

    -lack of infastructure

    International trade barriers:

    -overdependence on primary products

    -the terms of trade have deteriorated over a long period of time for the developing countries

    -low income elasticity of demand for primary products

    -violently fluctuating prices of primary goods

    -increased trade between developed countries

    -consequences of an adverse terms of trade

    -consequences of a narrow range of exports

    -protectionism in international trade

    International financial barriers -indebtedness:

    -The developing world and debt (increased interest ratess, increased value, recession in the developed world, net capital)

    -solving det

    -non convertible currencies

    -capital flight (how can it be tackled?)

    Social and cultural factors:

    -religion

    -culture/tradition

    -gender issues

    Poverty:

    In 1996 there was a large inequality in income distribution. 20% of the wealthiest people earned half the nations total income. On the other hand, the bottom 20% had only 5% of the total. During 1999 when the economic crisis hit, the middle class fell below the poverty line due to currency devaluation and inflation. Statistics in 2000 show that half of the ecuadorians were below the poverty line. The poverty rate was 35%.

    The Ecuador’s constitution looked over this problem in 1998 and emphasized programs on the poor such as free health care and governments subsidies. However, public welfare spending had little impact on poverty. Public health care became free but the quality of medical services were inadequate. The design of Ecuador’s education system causes similar problems for economically disadvantaged citizens because the government subsidizes university education at the expense of elementary and secondary schools. Wealthy families can afford to send their children to the best private schools, while poorer families must settle for the variable quality of public education and disruption caused by frequent teacher strikes. Access to education is also divided along rural/urban lines, with public expenditure favoring urban schools and neglecting vocational and manual skills training.

    stats:

    HPI:

    The HPI-1 value of 7.9% for Ecuador, ranks 38th among 135 countries for which the index has been calculated.

    The HPI-1 measures severe deprivation in health by the proportion of people who are not expected to survive to age 40. Education is measured by the adult illiteracy rate. And a decent standard of living is measured by the unweighted average of people not using an improved water source and the proportion of children under age 5 who are underweight for their age.

    Institutional and political factors:

    Taxation structure: http://www.pwc.com/en_US/us/hr-international-assignment-services/assets/ecuador-folio.pdf#5

    1) Ecuador currently taxes its resident citizens and foreigners on their Ecuadorian-source income. Ecuadorian-

    source income is defined as any income derived from activities executed in Ecuador, regardless of where the

    income is received. It also includes income obtained abroad by Ecuador-resident individuals and corporations,

    whether local or foreign.

    The tax year

    2) The tax year runs from January 1st to December 31st.

    Methods of calculating tax

    3) Income taxes for individuals is levied on a progressive scale at rates which vary from 0% to 35%. For a

    schedule of the rates of tax please refer to Appendix A.

    Husband and wife

    4 )Husband and wife are required to file separate income tax returns for the income derived from employment, a

    profession or a business. Joint income or income that cannot be definitely attributed to one spouse in particular

    must be split equally and added to the spouses’ respective tax returns.

    Residence

    5) Individuals staying in Ecuador for a period longer than 6 months or with resident visas are subject to income tax

    on any earnings and are not entitled to exclusion of income for periods of temporary absence from Ecuador.

    Nonresidence

    6) Nonresidents are subject to tax on their Ecuador-source income regardless of their domicile or place of

    residence. Nonresidents residing in Ecuador for a short period of time (less than six months) are subject to a flat

    25% income tax on income received from local sources, which is withheld at source. Payments made to foreigners

    occasionally working in Ecuador, when not charged to an Ecuadorian company or local branch of a foreign entity; do not give rise to income tax.

    property rights:  A large portion of Ecuador’s economy is based on the petroleum industry. In the past, the revenues from oil exports have been more concentrated in the hands of the Spanish-dominated elite, resulting in group-based inequality.  Ecuador is also the largest exporter of bananas in the world.  In 2007 President Rafael Correa drafted a new constitution that would distribute more political power to poorer people and attempt to tacklepolitical instability.  The new left-leaning administration has rejected several trade pacts and other diplomatic ties with the United States as well as with its Colombian neighbors.

    Corruption: Since 1982, however, the international price of oil has decreased and Ecuador has suffered an economic downfall. Part of that downfall stems from the economic debt amassed by the ineptitude and corruption of Ecuador’s military leaders. The debt falls harshly on the backs of Ecuador’s most needy citizens who have to deal with a decrease in basic services such as education and health. A fin de siecle banking scandal further decimated the economy as private accounts simply vanished with the failed banks. In an effort to stabilize the economy and halt the slide of the plummeting sucre (Ecuadorian money), Ecuador decided to adopt the dollar as its the official currency in 2001.

    distribution of income:  In Ecuador, the income distribution is one of the worst in the Andean region. 80% of the income share of GDP is about 20% of the population. The government of Ecuador used 1.6 billion dollars to bail out banks since they were corrupt and mismanaged.

    Due to economic and banking crisis that occurred in Ecuador, the problems became worse in 1999. Economic activity decreased by 7-8%, causing the currency to depreciate by 195%. Per capita income in dollars increased by 32% during that year. In addition, unemployment increased from 9% to 17%, and underemployment from 49% to 55%.

    Infrastructure: Ecuador is well-served by an accessible transport system and profits from an extensive infrastructure of roads and an uncommonly efficient bus system that make travel to almost any region possible. The country has 43,197 kilometers (26,843 miles) of highways, of which 8,165 kilometers (5,074 miles) are paved. Three national airlines—Saeta, Tame, and Ecuatoriana—provide flight services within Ecuador and from the international airports in Quito and Guayaquil to select locations outside the country. Because the vast changes in altitude and terrain in Ecuador can make road travel slow and difficult, tourists and Ecuadorians alike frequently utilize in-country flights. Taxis and buses provide nonstop city transport for very reasonable fares, and a newly constructed trolley line in Quito delivers passengers to the center of the city. The trans-Ecuadorian railway, which extends for 812 kilometers (505 miles), needs renovation and is used for freight purposes.

    Besides excellent transport for commuters and travelers, its seaports equip Ecuador for international commerce. The largest is at Guayaquil, the main port for oil exports is at Esmereldas, and there are other major ports at Manta and Machala. While the extensive road infrastructure and port system contribute to productive domestic and international trade practices, productivity is hindered by aging vehicles and oil pipelines.

    International trade barriers: The export of primary goods and the import of capital and manufactured products have historically characterized Ecuador’s trade. While petroleum remains Ecuador’s most important export and economic force, an increasing diversity in export products (most notably the recent dramatic rise in the export of cut flowers; in just a few yearsEcuador has become the leading supplier of cut flowers to the United States) is reducing the historical volatility of Ecuador’s export revenues and is helping to stabilize its economy.

    The United States, European Union countries, Columbia, Chile, and Japan are Ecuador’s primary trading partners. In 1998, the United States exported USD 1.6 billion worth of goods to Ecuador, or about 30% of Ecuador’s total imports, and received nearly 40% of Ecuador’s exports, making it the country’s leading import and export partner. Colombia, Japan, Mexico, Venezuela, Spain, Germany, Brazil, and Chile together supplied approximately a 40% share of the Ecuadorian import market and likewise, were the destinations of almost 40% of Ecuador’s exports.

    Ecuador’s active membership in global trade organizations and its participation in a number of regional free trade zones confirm the nation’s trend toward liberalization and its commitment to open trade. Ecuador is a member of the World Trade Organization (“WTO”), the Andean Community, and the Latin American Integration Association (“ALADI”). In addition,Ecuador has concluded bilateral free trade agreements with Bolivia, Chile, Colombia, and Venezuela, is negotiating a trade agreement with Mexico, is engaged in trade talks with the Mercosur nations of Brazil, Argentina, Paraguay, and Uruguay, and fully supports the establishment of a free trade area for the Americas.

    Ecuador’s application of free market principals, including the lowering oftrade barriers, its participation in numerous international tradeorganizations, and a firm commitment to diversification of its economy and reform of its financial institutions, are helping to restore a favorable balance of trade and generally better the nation’s economy.

    International financial barriers: The commission recommended that

    Ecuador default on $3.9 billion in foreign commercial debts–Global
    Bonds 2012, 2015 and 2030–the result of debts restructured in 2000
    after the country’s 1999 default.

    Although Ecuador currently has the capacity to pay, dropping oil
    prices and squeezed credit markets are putting President Rafael
    Correa’s plans to boost spending on education and health care in
    jeopardy. Correa has pledged to prioritize the “social debt” over debt
    to foreign creditors.

    Commercial debt, or debt to private banks, made up 44% of Ecuador’s
    interest payments in 2007, considerably more than the 27% paid to
    multilateral institutions such as the International Monetary Fund
    (IMF). But the report also lambasted multilateral debt, saying that
    many IMF and World Bank loans were used to advance the interests of
    transnational corporations. Ecuador’s military dictatorship
    (1974-1979) was the first government to lead the country into
    indebtedness.

    The commission found that usurious interest rates were applied for
    many bonds and that past Ecuadorian governments illegally took other
    loans on. Debt restructurings consistently forced Ecuador to take on
    more foreign debt to pay outstanding debt, and often at much higher
    interest rates. The commission also charged that the U.S. Federal
    Reserve’s late 1970’s interest rate hikes constituted a “unilateral”
    increase in global rates, compounding Ecuador’s indebtedness.

    Social and cultural factors:

    Religion: Predominantly Roman Catholic. It varies according to their social class.

    Culture: Ecuador is a multicultural, multiethnic nation–state that many consider multinational. It has one of the highest representations of indigenous cultures in South America and two distinct Afro–Ecuadorian cultures.

    The elites and those in the upper–middle classes are oriented toward education, personal achievement, and the modern consumerism of Euro–North America.

    People in the upper and upper–middle classes generally identify by skin color as blanco (“white”), to distinguish themselves from those whom they regard as “below” them.

    Black people, represented by their leaders as Afro–Ecuadorians, (afroecuatorianos) , speak Spanish and range through the middle to lower classes.

    Overall, there is a large gap between the rich and the poor.

    Gender Issues:

    Women make up a considerable portion of the workforce and are particularly visible in banking and finance, university teaching and research, and NGOs. They play a prominent role in indigenous and Afro–Ecuadorian mobilizations and movements. They hold high government positions in the national and regional judicial system, the national congress, and the executive branch.

    Gender roles also vary amongst classes and ethnicities. Sometimes women are considered equal to men while there are some that are male dominant.

    Gender, class and ethnicity are all things to consider in the Ecuador society.

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