Economic Development: Theory and Policy Applications

By Fidelis Ezeala-Harrison | Go to book overview

15
International Finance and Economic Development

This chapter examines the role of international finance and monetary issues in economic development, including the acquisition and accumulation of financial resources, and the international debt crisis. Countries ordinarily acquire financial resources through sales of exported goods and services, or through transfers from others sources in the form of loans, grants, credits, or other forms of diverse payments. International debt is incurred through borrowing, as countries obtain credits from lenders in order to finance (balance-of-payments) deficits that they occur over the course of their development programs.

In the course of economic development of every country, international financial flows occupy a central position. As a country engages in international trade and trades its exports in the international market, it receives foreign exchange payments which it may then either spend immediately to acquire additional resources (capital, raw materials, or finished consumer goods), or save as foreign exchange reserves for future use. At any given time period, a country that spends more than it earns in terms of foreign exchange will have to finance such a deficit by borrowing from foreign sources or generating more goods and services in exports. Where this recourse becomes impossible, the country ends up taking foreign loans, thereby entering into foreign debt.

The nature of international capital flows and its role in economic development changed drastically during the twentieth century. As Nurkse ( 1953) stated, quite unlike the preceding period of the nineteenth century, the twentieth century witnessed a situation in which international capital flows did not contribute to economic growth in the LDCs. This represents a radical departure from the situation that neoclassical thinkers had presumed - namely, an international economic order in which openness and free trade characterized world trade, allowing capital to flow freely into areas of highest yield. Indeed, the evidence appears to generally support the structuralist view that capital flows have rather been vehicles for exploitation of the (periphery) LDCs by the (core) industrialized developed countries.

The controversy over whether international financial flows constitute a boost or a hindrance to economic growth for present-day LDCs has raged on even

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