Table of content
2. Executive summary
3. Basic principles
3.1.1 The term "development"
3.1.2 Typology of the development countries
3.2 Causes of underdevelopment
3.3 Measuring underdevelopment
3.3.1 Income and economic power
3.3.2 Human Development Index
3.3.3 Human Poverty Index
3.4 Classification of developing countries
3.4.1 The UN – classification
3.4.2 The World Bank classification
3.4.3 The DAC list
4. The System of international development co-operation
4.2 The United Nations
4.2.2 The Millennium Goals
4.3 The World Bank Group
4.3.1 Organizational structure
4.3.2 The World Bank development strategy
4.3.3 The World Bank loans
4.4 The International Monetary Fund
4.4.1 Organizational structure
4.4.2 The IMF development strategy
4.4.3 The IMF loans
4.5 The Organization of Economic Co-Operation and Development
4.6 The World Trade Organisation
4.7 The Multilateral Development Banks
4.8 The Kreditanstalt für Wiederaufbau
5. Financing of Development
5.2 International capital transfer
5.2.2 The term “capital”
5.2.3 Reasons for the shortage of capital
5.2.4 Private equity finance
220.127.116.11 Foreign direct Investment
18.104.22.168 Foreign portfolio Investment
5.2.5 Private debt finance
22.214.171.124 Bond financing
126.96.36.199 Bank loans
5.2.6 Official aid flows
5.2.7 Foreign debt
188.8.131.52 Causes of debt accumulation
184.108.40.206 The dimensions of the developing countries' foreign debt 66 220.127.116.11 Consequences for the developing countries
18.104.22.168 International measures / Methods of resolution
5.3 International trade
5.3.1 The gains from trade: Ghana and South Korea
5.3.2 International trade theory
5.3.3 The role of developing countries in global trade
5.3.4 The Fair Trade initiative
5.4 New sources of development finance
5.4.1 Currency transaction tax
5.4.2 Emission trading
5.4.3 The International Finance Facility
5.4.4 Microfinance Institutions
List of figures
Figure 1 World population, 1750 - 2050
Figure 2 Shifting prosperity
Figure 3 The geography of poverty
Figure 4 Modes of international capital transfer
Figure 5 Financial flows to developing countries from the private sector
Figure 6 Net equity flows to developing countries
Figure 7 Share of net FDI inflows to low-income and least
Figure 8 FDI outflows from developing countries
Figure 9 Equity price indexes
Figure 10 Net private debt flows to developing countries
Figure 11 Yields on debt to developing and developed countries
Figure 12 Credit quality of emerging markets
Figure 13 Bank credits to developing countries
Figure 14 Trade finance from commercial banks
Figure 15 ODA as percentage of donors' GNI
Figure 16 Sectoral distribution of ODA
Figure 17 Total external debt of developing countries
Figure 18 The developing countries' external debt - export ratio
Figure 19 Shares of regions in foreign trade
List of abbreviations
illustration not visible in this excerpt
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Ich versichere, die von mir vorgelegte Thesis selbstständig verfasst zu haben. Alle Stellen, die wörtlich oder sinngemäß aus veröffentlichten oder nicht veröffentlichten Arbeiten anderer entnommen sind, habe ich als entnommen kenntlich gemacht. Sämtliche Quellen und Hilfsmittel sind angegeben. Die Thesis hat mit gleichem bzw. in wesentlichen Teilen gleichem Inhalt noch keiner Prüfungsbehörde vorgelegen.
The recent years have been the era of globalization with enormous growth in international trade, financial flows and foreign direct investment (FDI).
Globalization intensifies interdependence between formerly separated nations, however the world seems to be more fragmented, between the rich and the poor, between the powerful and the powerless, and between supporters and opponents of the new global economy.
Current figures reveal the contradiction between those that have managed to benefit from globalization, and those that are considered to be the losers of this period: A girl born in Japan has a 50 percent chance of seeing the chance of seeing the 22nd century, while a newborn in Afghanistan has a 25 percent chance of dying before age 5. The richest five percent of the world’s people have incomes 114 times those of the poorest five, and the world’s richest one percent of people receive as much income as the poorest 57 percent.
The developing countries are currently facing two major problems: The first one is income poverty. In order to reduce the share of people living on one Dollar a day, the per capita income has to grow by 3.7 percent annually according to optimistic estimations. However, only 24 developing countries have realized these growth rates in the recent years. On the other hand, more than 127 countries with 34 percent of the world population have not grown at this rate. Many countries have suffered negative growth and the share of the poor people has increased, although the public focused increasingly on the poverty problem in the recent years, as it just happened at the “Live Aid Concert.” The second problem is infant mortality. 85 countries are on the track to reduce infant mortality to one third of the 1990 level, but they comprise less than one quarter of the world population. One the other hand, 81 percent of the countries with more than 60 percent of the world population will not be able to achieve this goal until 2015. Every day, more than 30,000 children die of preventable diseases. It is dramatic that many countries that will not achieve this goal are among the world’s poorest, i.e. the least – developed countries.
As economies became more integrated and as progresses in the fields of technology, innovation and science are being made, human quality of life should actually improve. Nevertheless, this has not happened in most countries. This reality is being reflected by the Anti – globalization protests, which are taking place in both industrial and developing countries. Although these protests take different forms and are driven by different goals, they all share the demand that global players and institutions, which are often dominated by the economically powerful nations, should increasingly consider the problems of the world’s poorest people.
The period of constant global peace and justice - the wishful thinking of humankind at all times - will only occur if the fruits of globalization are distributed more equally and if the least developed countries will catch up with the industrialized nations; methods how this goal could be achieved are pointed out in this thesis.
2 Executive summary
As most aspects related to development finance and development cooperation are being discussed in a controversial manner, as they are dependent on individual values and political attitudes, and as the scope of this subject is considerably large, it is impossible to handle all aspects in one thesis. Therefore, the purpose of this thesis is first of all to give a broad overview about the topic as a whole, including the causes of underdevelopment and the problems created by it, the most important development theories and classifications that exist in scientific literature and the policies and activities that the institutions within the system of global development cooperation follow to achieve their goals. Moreover, it is the author's goal to inform about the different methods of financing development and to update the reader about the latest trends and figures of development finance.
To make the reader acquainted with the fundamentals of this complex subject, basic terms are defined at the beginning of the thesis. Furthermore, development theories and causes of underdevelopment are outlined. Finally, different approaches of measuring underdevelopment and classifying developing countries are introduced.
The structure of the international system of development cooperation is explained in the following chapter. Institutions which are part of the system, especially their tasks and relevance within the system, are described and the institutions’ development strategies are illustrated.
The second but last chapter deals with financing of development. After giving an overview of the topic, various methods of international capital transfer are described, including private equity finance, private debt finance, official aid flows and foreign debt. Finally, the contribution of international trade to development and new sources of development finance are pointed out.
The thesis ends with a conclusion of the results presented. Besides, the author describes his opinion on the effectiveness of development cooperation and gives recommendations how to improve these efforts.
3 Basic principles
Developing countries became subject of scientific analyses at the end of the 1940’s. In 1949, the former US president Truman identified in his government declaration the majority of the world as underdeveloped areas. The Truman declaration marked the beginning of a discussion process on the situation of these countries, the causes of their underdevelopment and appropriate measures how to overcome underdevelopment. The scientific field which emerged from these activities was characterized as development economy, -sociology, -theory – and / or politics.
3.1.1 The term "development"
The Oxford Dictionary defines development as "the gradual growth of something that it becomes more advanced or stronger". As far as human development is concerned, it can generally be described as measures to improve the health, education and range of choices of human beings, primarily in the least-developed countries. While most people equate human development with economic development, the United Nations Development Programme defines human development as “creating an environment in which people can develop their full potential and lead productive, creative lives in accord with their needs and interests.”
According to this definition, development is about expanding the choices people have to lead lives that they value.
From a linguistic point of view, the term "underdevelopment" describes a state of development below a certain norm. According to this definition, development can be defined twofold, namely as development process (dynamic perspective) or as development state (static perspective). Both definitions differ in its time character: The (dynamic) development process results from the inter - temporal combination of several (static) states of development.
3.1.2 Typology of the development countries
It is almost impossible to give a generally valid definition of the term "developing country", as the characteristics of the developing countries are highly diverse. Therefore, developing countries are identified by common factors which are either measurable or based on general observations.
One of the best-known typologies is the division of the earth in Northern and Southern part (North - South conflict, North - South dialogue, etc.). However, using this geographical typology is not consistent, as "rich countries" can be found in the Southern hemisphere (e.g. Australia, South Africa) and "poor countries" are located in the Northern part of the earth (e.g. Armenia, Belarus). Thus, the North - South division is rather a political slogan than a scientific classification.
A more comprehensive typology to identify developing countries is based on economic factors, such as low per-capita income, high consumption quota, low saving - and investment quota, low capitalization, high agrarian quota and low industrial quota, insufficient development and use of natural resources, ineffective market - and credit organisation and underdeveloped infrastructure.
Apart from the economic criteria, demographic and social criteria are commonly used to determine the typology of development countries, including high population growth rates, low life expectancy due to insufficient health care and low literacy quotas resulting in a lack of qualified professionals.
3.2 Causes of underdevelopment
Scientists still disagree about the causes of underdevelopment, which results in various theses and conflicting opinions about this topic. On the one hand, this can be attributed to the different political attitudes of the various theorists, who held different factors responsible for underdevelopment, on the other hand it is the result of the fact, that it is difficult to distinguish between cause and effect of underdevelopment. The best – known and most frequently cited causes include:
- The “vicious circle of poverty”
In poor countries, where most incomes have to be spent to meet basic needs saving rates tend to be lower. In combination with the small size of poor countries’ economies, lower saving rates often result in lower domestic investment in both physical capital and human capital. But without new investment, an economy's productivity cannot be increased and incomes cannot be raised, which closes the closes the vicious circle
- Population growth
The population growth of the developing countries is much higher than the population growth of the developed countries. Many people in developing countries are convinced that only a large family is able to guarantee food and income. Therefore, families in these countries often consist of ten or more children, which explains the situation outlined in figure 1. In this case the initial plan to guarantee food supply often turns out to be the opposite - the family members can theoretically contribute to the overall food supply but due the relatively high unemployment rate not all family members are able to work. Nevertheless, they need food, which finally forces few family members to feed the whole family. If this is not possible, e.g. during a period of scarce food resources, family members, especially children, are forced to starve to death
Figure 1: World Population, 1750 – 2050
illustration not visible in this excerpt
Source: World Bank
- Soil erosion
Soil erosion as a consequence of intense agriculture is another internal factor of underdevelopment, as farmers are not able to cultivate eroded soils any more. Thus, local food production has to be replaced by imports, which increases the developing countries' dependency on the industrial countries
- Lack of food, medical supply and education
- Structural deficits
The development theory holds structural deficits within the developing countries responsible for underdevelopment. According to this theory underdevelopment is an early stage of social development and underdeveloped societies are developing into industrialized societies by modernizing their economic, cultural and political way of life according to the Western World, thus eliminating the own country's causes of underdevelopment and being able to develop. The development theory assumes, that trade and thus capital and technology transfer stimulates development. International trade creates comparative cost advantages which increases wealth of the involved parties.
- Disadvantageous climate conditions / Institutional failure
As shown in figure 3, almost half of the world’s population living on 1 USD a day is concentrated on Sub – Saharan Africa – a region which often suffers from extreme heat and periods of drought. The geography hypothesis suggests that geography, climate and ecology of a country shape its technology and the incentives of its inhabitants. Therefore, the forces of nature are considered to be the major factor of underdevelopment.
Figure 2 shows a negative correlation between urbanization in 1500 and capitalization today. Societies like the Mughals in India and the Aztecs and the Incas in America that were among the richest societies in 1500 are among the poorer countries today. This historical development does not support the geographical hypothesis, as some of areas which were highly urbanized in 1500 are located in geographically disadvantageous regions.
Figure 2: Shifting prosperity
illustration not visible in this excerpt
Acemoglu, D.: "Root causes - A historical approach to assessing the role of institutions in economic development", in Finance and Development, June 2003, Page 28
On the other hand, the institutional hypothesis blames inappropriate institutions - defined as "formal and informal rules and organizations mediating between the society at large and the people which belong to that society" - to be the main cause of underdevelopment. According to this view, some societies have good institutions that encourage investment in machinery, human capital and technology and thus these countries achieve economic prosperity.
Historical evidence seems to support the institutional hypothesis. European colonialism made Europeans the most powerful group. Therefore, they had the capability to influence institutions more than the indigenous groups. In general there were two types of colonies - colonies were the Europeans did not settle in large number and places were most of the land was empty and the environment was favourable which led to settlement in large numbers. In areas were the Europeans did not settle, resources were extracted and the population was employed in the mining or agricultural sector. Consequently, hierarchical structure served to protect the power of the elite (the Europeans themselves) and the population had little civil power. When the system of colonialism collapsed, these societies had no institutions which could create economic prosperity. On the other hand, in places where Europeans settled in large number, laws and institutions which were more sensitive to economic growth and investment were developed, which explains the economic success of countries like Australia or the United States.
- Effects of colonialism and economic dependency on the industrial countries
The dependency theory was developed in the 1960's in Latin America and is considered to be the developing countries’ counterpart to the development theory. It is based upon the assumption that underdevelopment is caused by their reliance and dependence on the developed countries in terms of their culture, politics and economy. Especially the international trade structure is considered to be the major cause of underdevelopment.
- Increasing debt
- Trade barriers imposed by the industrial countries
 Source: UNDP, “Human Development Report 2002”, Oxford University Press, Oxford, 2002, Page 13
 Source: Ibidem, Page 19
 Source: Ibidem, Page 17
 Source: Ibidem
 Compare: Hemmer, H.-R.: "Wirtschaftspobleme der Entwicklungsländer", 3.Auflage, Vahlen, München, 2002, Page 3
 Oxford Advanced Learner's Dictionary, 6th edition, Oxford University Press, Oxford, 2ooo, Page 344
 http://hdr.undp.org/hd/, as of 04.06.2005
 Compare: Wagner, M., Kaiser, W.: "Ökonomie der Entwicklungsländer", G. Fischer, Stuttgart, Jena, 1995, Page 7
 Compare: Wagner, M., Kaiser, W.: "Ökonomie der Entwicklungsländer", G. Fischer, Stuttgart, Jena, 1995, Page 4 f.
 Compare: Ibidem, Page 5
 Economic factors are described in chapter 3.3
 Compare: Harnisch, S., „Motive der Akteure III: Entwicklung", Trier, 2003 http://www.politik.uni-trier.de/mitarbeiter/harnisch/ss04/pro_9.pdf, as of 10.06.2005
 Demographic and social features are described in chapter 3.3
 Compare: Wagner, M., Kaiser, W.: "Ökonomie der Entwicklungsländer", G. Fischer, Stuttgart, Jena, 1995, Page 5 f.
 Compare: Soubbotina, T.: ”Beyond Economic Growth - An Introduction to Sustainable Development”, 2nd Edition, The World Bank, Washington 2000, Page 35 f.
 Compare: Nohlen D., "Lexikon Dritte Welt", Rowohlt Taschenbuch Verlag, Reinbek, 1998, Page 524 f.
 Compare: Acemoglu, D.: "Root causes - A historial approach to assessing the role of institutions in economic development", in Finance and Development, June 2003, Page 27, http://www.imf.org/external/pubs/ft/fandd/2003/06/pdf/acemoglu.pdf, as of 06.07.2005
 Compare: Adams, J.: "Institutions and Economic Development", Page 252, in: "Institutional Economics: Theory, Method, Policy", Kluwer Academic Publishers, Sacramento
 Compare: Acemoglu, D.: "Root causes - A historial approach to assessing the role of institutions in economic development", in Finance and Development, June 2003, Page 27, http://www.imf.org/external/pubs/ft/fandd/2003/06/pdf/acemoglu.pdf, as o 06.07.2005
 Compare: Ibidem, Page 27 ff.
 Compare: Pfaffenholz, T.: Einführung in die Entwicklungspolitik, Institut für Politikwissenschaft, Bern 2003; http://www.ipw.unibe.ch/mitarbeiter/paffenholz/folien/VL_14_11_03.ppt, as of 04.06.2005
 See chapter 5.2.7
- Quote paper
- Christian Herbst (Author), 2005, Financing for Development - Challenges of development cooperation and development finance in a globalized world, Munich, GRIN Verlag, https://www.grin.com/document/51546