Developing Countries Essay -- International Political Economy, Debt

Developing countries are closely linked to debt. This is because developing countries needs to allocate more funds to resolve debt crises. Debt can create a negative effect to the host country’s economy and the social condition of a country. This issue of indebtedness is usually solved using domestic capital. Since developing countries have low income, therefore they have low level of savings. The savings are insufficient to repay debt. Thus the government resolves the issue by imposing higher tax. But this will lead to inflationary tax, which is a burden to the further generation. Therefore, the government resorts to foreign borrowings. Domestic borrowings and foreign borrowings have further increased the total debt accumulated by the nation leading them to poverty. To resolve the debt issue, foreign direct investment plays an important role as a source of fund and also in acquiring skills and knowledge. But the inflows of foreign direct investment depend on location advantage. There are various channels that determine the location advantage such as human capital development channel, financial development channel and environmental condition channel. According to Wilhelms and Stanley (1998), foreign direct investment movements are derived from the both financial transaction and non-financial transaction such as changes in price, foreign exchange and others. Figure 12 shows the foreign direct investment theory and its determinants in emerging economics. According to the foreign direct investment theory, socio culture is the oldest institution, complex and most diffused factor that influence the inflow of foreign direct investment. It is most difficult and time consuming to change. The degree to which a society is recepti... ...ivariate regression models were used to further probe the nature of the relationships between income, talent, and other factors. The adjusted R-squared values for these models are (0.57) and (0.65) respectively, suggesting a reasonably positive and robust relationship. These findings support the human capital growth by Lucas (1988), Simon (1998) and Geetha (2002). This was also supported by Eaton and Eckstein (1997) and Black and Henderson (1999) that workers are more productive when they locate around others with high levels of human capital. In addition, Romer (1990) also claims the importance of knowledge and human capital in generating economic growth through economic geography. Romer (1990) stressed that what is important for growth is integration not into an economy with a large number of people but rather into one with a large amount of human capital.