lecture recording on 11 February 2025 at 15.16.31 PM

Announcements

• Event on Thursday

  • Flyer posted on the teacher's door.

  • There will be a film screening before class followed by a talk.

• Exam Postponement

  • Exam might move from Tuesday to Thursday next week due to remaining material on international finance.

  • Focus on monetary policy and development issues needed before the exam.

  • Expect Canvas notification regarding changes.

Financial Contagion

• Concept:

  • Financial contagion refers to crises spreading between countries due to interconnected finances.

  • Example: East Asian Financial Crisis (1997-1998) and the Global Financial Crisis, particularly the subprime mortgage crisis in the U.S.

• Hot Money:

  • Refers to capital that can move quickly across borders, often triggering crises.

• Video Resource:

  • A video on the origin of the subprime crisis will be available for self-study.

Concessional Finance

• Definition:

  • Loans provided to developing countries by government agencies or intergovernmental organizations at low-interest rates, sometimes as grants.

• Purpose:

  • To help develop infrastructure (roads, schools, hospitals) in poorer countries.

  • Critical for countries lacking access to regular loans due to perceived risk.

• World Bank:

  • Officially formed to provide long-term loans for reconstruction and development post-World War II.

International Monetary Fund (IMF)

• Difference from World Bank:

  • IMF focuses on managing international monetary relations and preventing crises via short-term loans.

• Role in Debt Crises:

  • Mediates between debtors (developing countries) and creditors, helps renegotiate loans, or offers loans under tight conditions.

• Criticism:

  • Viewed as biased towards rich countries; often imposes austerity measures as conditionality for loans.

  • Proportional voting system within the IMF gives more power to wealthier nations.

• Key Functions:

  • Mobilizes resources quickly, sets financial standards, monitors compliance.

Transnational Corporations (TNCs)

• Definition:

  • Businesses that operate in multiple countries and engage in Foreign Direct Investment (FDI).

• Role in International Finance:

  • TNCs help create jobs, boost local industries, and contribute to economic development but may also lead to job losses in home countries.

• Controversies:

  • Offshoring leads to lower employment domestically, potential exploitation of labor, and environmental concerns.

Benefits of International Finance

• Capital Access:

  • Helps developing nations secure funds necessary for building infrastructure.

• Job Creation:

  • Foreign investments often lead to local job creation due to industry development and infrastructure projects.

• Economic Growth:

  • Influx of funds can stimulate overall economic growth through increased consumer spending and local business support.

• Technology Transfer:

  • Foreign investments bring new technologies and management practices to developing economies.

Drawbacks of International Finance

• Economic Instability:

  • Over-reliance on foreign investment can lead to volatile economies, especially if global conditions change suddenly.

• Inequality:

  • Benefits of foreign investments may not be evenly distributed, creating disparities.

• Environmental and Labor Concerns:

  • Companies may exploit lax regulations in developing countries, leading to environmental degradation and poor labor practices.

Exchange Rates and International Monetary Relations

• Definition:

  • Exchange rate: the value of one currency in terms of another.

• Factors Affecting Exchange Rates:

  • Economic shocks, political stability, speculation, and central bank monetary policy.

• Implications of Fluctuations:

  • A depreciating currency makes imports more expensive, whereas appreciation makes exports costly.

Conclusion

• Overall, international finance has both positive and negative effects on global development and stability. Each concept covered is nuanced, impacting specific populations differently based on local conditions.