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This site is for you to learn, to master and to develop confidence in writing essay for A level Economics. Hi there, you desperate kids, I understand the struggles and pain. Yup, I feel you. Hope this site can provide some soothing balm.

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Wong Wai Leong,

Economics teacher

International aid

(Also known as foreign aid)

What is foreign aid?

Developing countries may receive foreign aid from the public (official) bilateral and multilateral development assistance, and private (unofficial) assistance from NGOs (Non-governmental organisation). These funds are categorised as foreign aid.

In essence, foreign aid need to satisfy two criteria:

should be non-commercial in nature from the donor perspective;
concessional terms, lower interest rate and less stringent repayment period for borrowed capital

Why donor give?

Foreign aid to developing countries are rarely given based on altruistic moral desire to assist the less fortunate. Sad, but true, base on historical evidence. Generally, these aids are based on political and economic self-interest of the donor countries.

Growing role of NGO

Private NGOs are the fastest growing and most significant forces in foreign aid. These voluntary organisations, mostly initiative of local grassroot movement, are concern with various issues and challenges; emergency relief, alleviating poverty, protecting the environment, increasing food production, promoting women’s rights, protecting child’s care and providing rural credit to small farmers and local businesses. NGOs build roads, houses, hospitals, and schools.

They are often funded or organised by religious groups, private foundations and charities, research organisation and federations of dedicated doctors, nurses, engineers, agricultural scientists, and economists (Yes, economists are good people, mostly.). Some familiar names are Save the Children, CARE, Oxfam, Planned Parenthood, World Vision, the World Wildlife Fund, Habitat for Humanity, the Food Foundation, Christian Aid, Project HOPE, and Doctors Without Borders.

Great value of NGOs are due to the lack of political imperatives and motivated largely by humanitarian ideals. By working directly with local people’s organisation, NGOs are able to avoid suspicion and cynicism from the poor people that they serve.

Effects of aid

The good

promote growth and structural transformation in developing countries

The ugly

the aid does not promote growth, but instead retard it by substituting for, rather than supplementing, domestic savings and investment
they exacerbate developing countries’ balance of payment deficits due to rising debt repayment obligations and linking aid to purchase from donor country
focusing too much on the modern sector result in increasing gap in living standards between the rich and the poor
critics also claimed that aid has generally been a failure due to corrupt bureaucrats who siphon off the money to their personal off-shore account
receiving countries ended up becoming more dependent to donor countries as these foreign aid comes with ‘strings attached’, conditions like designating the specific machine to purchase.

External debts

What is external debt? Money owed to foreign nations. These debts can either be private debt or public debt. Private debt is good as they are used to finance investment projects and create economic activities. Public debt, meanwhile, may be a problem as they are often use to finance budget deficit.

Causes of debt

Budget deficit. When government expenditure exceeds revenue. This expenditure generally rise during economic recession cause by sudden demand collapse, like war, famine, flood, epidemic, or a supply-side shock, like a sharp increase in oil prices. One way to finance budget deficit is through foreign borrowings.
Populism. Some governments/politicians may want to gain public support by giving out generous subsidies for food, fuel, transport, education, housing and medical expenditure. If revenue is weak or falling, this can have serious consequences to the government’s fiscal position. Populist leaders are irresponsible and the costs to the economy will be many times worse when government spend money that they cannot afford.
Oil exporting country experiencing a sudden rise in oil price and then a sharp fall. During high oil prices, the government earn high revenue from oil royalty. they will be tempted to spend these on subsidies and financial assistance to their voters. However, when price of oil falls, they find themselves unable to cut subsidies and will need to resort to borrowing to continue their program.
Animal spirit. High confidence of investors. They use loan to finance their projects.
Large investment in infra-structure project.

Consequences of debt

In general, debt is good for the economy when they are channel into investment and infra-structure projects that increases the capital stock of an economy. These borrowings are essential to make up for the savings-investment gap of the domestic economy. However, too much external debt can have damaging effect to the economy.

Debt level is usually measure as a percentage of GDP. It is usually regarded as a problem to the economy if debt level is more than 100% of the GDP.

High commitment in debt repayment and servicing (interest payment). This will reduce the ability of the government to spend on capital goods in future as most tax revenue will be directed towards repayment of debt first.
External debt is usually denominated in the lender’s currency. (The US, being the world reserve currency, is the exception.) Hence, a depreciation in the borrower country’s exchange rate will increase the real value of the external debt. This will further burden the borrower’s economy.
High external debt level can lead to downgrading of a country’s credit score by rating agencies. Lower ratings means higher interest rate for borrowings in future. This may also affect confidence of foreign investors. Governments are concern and took measure to avoid any downgrade.

World Bank and IMF: Bretton Woods institutions

Both IMF and the World Bank were global economic institutions that were established in 1944. At the end of WW2, with the defeat of the Axis alliance (Germany, Japan, Italy) was certain, the US started planning on positioning themselves for post WW2. The victors, led by the US, were preparing for the next great power conflict, one based on ideology- communism versus capitalism. These institutions were meant to provide financial support, promote trade between nations and offer other forms of economic assistance to help them to develop. The idea was much like the China’s BRI (Belt-Road Initiative) that was rolled out a decade ago. Poor nations that stays poor may turn to communism.

World Bank

Main roles of the World banks include:

investing in people– health and education in particular
investing in social development, focusing on poverty reduction through inclusion, governance and social development
strengthening the government ability to deliver quality services, efficiently and transparently
supporting and encouraging private business development

The World Bank received severe criticism as a tool of the US to control and exploit smaller nations. Loans provided by the World Bank comes with specific conditions. The elements of free markets and structural reform are forced upon these economies, often to causing greater social distress and weaker government support for the low income group.

IMF – International Monetary Fund

Founded in 1944, the IMF is the central monetary institutions. Their roles include:

Prevent economic/financial crisis by promoting sound macroeconomic policy. Focus are on a stable exchange rate, trade balance, avoiding competitive devaluation and orderly correction of Balance of Payment disequilibrium
Provide loans to countries that experience financial crisis. This occur when countries do not have sufficient foreign exchange reserve to pay for imports and international borrowings. IMF loans will come with ‘strings attached’, like strict monetary policy (high interest rate), strict fiscal policy (cut spending and subsidies), market reform (allowing full foreign ownership).

The conditions attached to IMF loans is often regarded as ‘strong medicine’ that are necessary to discipline the market, get rid of inefficient firms, and prevent further depreciation of the exchange rate. Countries receiving these loans often felt that the cure is worse than the disease. These conditions are based on the Washington Consensus, a policy of the US to exert control and hegemony over other nations.

Both the IMF and World Bank were global institutions that was developed and played a crucial role in establishing the rule-based order. The rules are critical in promoting trade and economic growth of the world. Though it has done much to establish the ground rules for international trade, they were also fiercely criticise for serving only the interest of the US corporate. Michael Perkins’ book – Confession of an Economic Hitman was a bestsellers as he outlined how the American corporate, oil and the World Bank worked hand in glove to exploit nations with oil.

With the rapid economic growth of China, Russia, South Africa, Brazil, Saudi Arabia, and countries in the South East Asia, the world is moving from a uni-polar world (US centric) to a multi-polar world, where there is no clear leader. The emergence of this multi-polar world encounter severe obstructions and push-backs by the US and the western nations in general. They uses economic sanctions and trade war to suppress the rise of the multi-polar world.

The multi-polar world is strong and developed their own institutions. This include the Asian Development Bank (ADB) and Asian Infra-structure and Investment Band (AIIB) to provide loans to developing countries without the conditions like the World Bank. BRICS is also a global institutions that further cement the multi-polar world and dethrone the US Dollar as the world reserve currency.

MNCs – potential essay question topics for 2024/5

In the new 2023-25 syllabus, an additional unit 11 was introduced. And when new units are added, we can be pretty sure that it’s important and certainly a hot candidate for essay questions material. (Otherwise, why would the examiner board made so much fuss about it?)

Multinational companies (MNCs) is one of them. The focus is on…

What is MNC? Definition
- MNCs are large corporations that have business activities in more than one country. They have a headquarter based in the home country, and a branch (or branches) based in a host country.
- MNCs that you are likely to be familiar with are Starbucks, Uniqlo, BYD, Ikea, Shell, Apple Computers, Nestle, etc.
What do they do?
- Their activities are highly diverse. Most set up operations in hosts countries with the purpose of penetrating into new markets. Ikea, for example, have branches in 22 countries (as of 2024), and three in Malaysia alone.
- They may want to relocate to be countries that can easily access precious raw material in abundance and lower cost. Tesla set up a Giga Factory in Shanghai to manufacture their cars. They can take advantage of the comprehensive supply eco-system and the large market in China.
- MNC may want to bypass tariff barriers by setting up their production plant in another country. Chinese firms encounter high and rising tariff barriers in the US due to the on-going and increasingly hot trade war between US and China. This encourage many Chinese firms to set up their operations in Mexico in order to avoid the tariff barrier. Mexico exports to the US have no tariff as the countries are members of the USMCA (US Mexico Canada Agreement – Free Trade Zone). They can trade with one another without tariff or quota.
- MNC may relocate their production to a country that has substantial external economies of scale. Auto manufacturers from Japan, South Korea and Europe, for example, relocate their production to Rayong, Thailand, as this place has many the suppliers for auto parts.
- Some firms have specific assets that the host country do not have. Disneyland, for instance, provide a unique entertainment theme park experience that have high demand by children all over the world. Going overseas and establishing theme parks in other countries enable the firm to expand and reap higher profits.
Consequences of their actions
- The actions of MNCs brought serious economic and social impacts, both good and bad, to host countries. The impact is particularly felt in developing nations.
- THE GOOD
- MNCs create jobs. Who doesn’t want jobs? Duh.
- Training of local workers. Workers in host countries got the opportunity and exposure to learn new technology, management technique and other various ‘trade secrets’ from foreign firms. This human capital development is essential for the future economic development of the host countries. When Tesla was invited by the Chinese government to set up their factory in China, the Chinese EV cars were a joke. In a couple of years, the local EVs developed and surpassed Tesla.
- Create greater competition for domestic firms. With the arrival of foreign firms in the domestic market, local firms need to buck up, increase their efficiency and innovation, and learn fast. Failure to do so will be fatal for the local firms (literally). In the long run, the local firms (those that survived la) the competition from MNCs become more competitive and may even enable them to move into foreign markets.
- Greater economic growth, more addition to capital stocks (investment) and likely greater exports (reducing CAD)t. These are some general benefits of MNCs activities to the host countries.
- THE BAD…
- Externality. As developing countries needed badly FDI (foreign direct investment) from MNCs, they often roll out the red carpet to MNCs who wishes to avoid tight environmental regulations in their home countries. Thus, many MNCs shift their ‘dirty’ (polluting) industry to developing countries. Lynas, an Australian mining firm, transports their rare earth to be process thousands of miles from the mines to Gebeng, Kuantan. Is it because of the radioactive waste that the aussies do not wish to have in their own backyard?
- Exploitations of local workers. Sweatshops, as they are called, are factories of MNCs in developing countries that employ child labour, provide very low wages for workers working in horrible and inhumane conditions (bad lighting, lack of ventilation, safety hazards, cramp workspace, long hours).
- Some MNCs do not create jobs in the host countries. They take advantage of the low/zero tax incentive of the local government, but used very high technology that need only a handful of workers. And these are specialists that they brought from their home country. This high technology is not appropriate for the economic environment of the host countries. This MNCs benefit the domestic economy very little.
- Tax evasion. MNCs are able to use transfer pricing in their accounting practices and set up their headquarters in zero-tax laces (the Bahamas, Cayman Island, Dubai, etc.), to avoid paying taxes to the host countries.
Evaluation…
- Do MNCs activities bring more good or harm to developing countries?
- It depends… yeah right, everyone knows it depends. Question is – ON WHAT?? :p
- So far, history has shown mix results.
- Many developing countries do benefited from MNCs activities. MNCs activities have spurred their economic growth, enhance competitiveness and learnt/adopt new technologies.
- However, there are also many instances of exploitations of domestic workers, degradation of the environment and depletion of resources in the hosts countries by MNCs.
- It depends much on the strengths of the institutions in the host countries. If they are strong and competent, then can ensure that MNCs activities benefit the domestic economy and be able to protect the people from being exploited.

Developing countries (A2 w16)

(a) Explain what is most in need of development in a developing economy. [12]

(b) Discuss how easy it is to compare the standard of living between developing and developed countries. [13]

Developmental economics and living standards (A2 w17)

‘The measurement of living standards is problematic. It is never certain that people in one country are better off than those in another. The classification of countries into developing and developed is, therefore, never clear.’

Do you agree with this argument? [25]

Living standards indicators (A2 w19)

‘The Human Development Index (HDI) is a more useful indicator of changes in living standards than changes in Gross Domestic Product (GDP) but it still does not provide an entirely accurate assessment of whether living standards have improved over a given time period.’

Critically evaluate this statement. [25]

Developmental economics (A2 s20)

(a) ‘Developing countries have low levels of productivity and a high dependency ratio.’

Explain the meaning of these two characteristics and consider whether they are linked. [12]

(b) Assess the view that foreign direct investment remains the key to economic growth in developing countries. [13]

Fiscal policy and Keynesian economics (A2 w18)

Recession in some economies has caused high unemployment. At the same time high levels of national debt and substantial budget deficits have been experienced.

This means that governments can no longer use Keynesian demand management policies to solve the problem of unemployment.

To what extent do you agree with this conclusion? [25]