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FDIs and International Debt (Attractive points of ELDCs (High population,…
FDIs and International Debt
Attractive points of ELDCs
Bypass trade barriers by moving into country
Little government intervention
Weak environmental protection
High population
Because of high birth rate
Low labour costs
Foreign debt
level of
external debt
, paid in foreign currency
Consequences
Debt traps
Opportunity costs
Less money for merit goods and capital goods
Lower private investments
Lower economic growth
Solutions
Debt cancellation
1996: HIPC cancels portion of debt of highly indebted countries
Debt rescheduling
IMF lending and stabilisation policies
Austerity measures
Force increase in interest rates
FDI
Advantages
FDIs
More domestic jobs
Disadvantages
Less tax revenue due to
Tax benefits
Transfer payments
Net inflow of funds is smaller
Detrimental to current account
Less domestic jobs
Domestic firms may not be able to compete with MNCs