International Economics: IB Economics

I'm not sure I approve of the tone of this article: why is Mexico a 'backdoor' to Chinese firms manufacturing furniture in Mexico? Isn't Chinese FDI into Mexico providing jobs, training, import revenues and taxes to Mexico?

I can only assume that US FDI allowing US-owned firms to manufacture overseas are going to be portrayed as a backdoor too. Imagine how many backdoors the US has into the EU - it's scarcely worth bothering with the front door. 

And if it provides US citizens with greater choice, and cheaper furniture then the only people that seem to lose out are US furniture manufacturers - of whom there are far fewer than there were - and the people who work for them.

So rather than portray the Chinese investment in Mexico as malign, why doesn't the BBC celebrate the fact that it shows the dynamism, and potential gains from trade.

This clip highlights the interdependence - an IB concept no less - of the global economy, specifically the impact of the Ukraine conflict on the Indonesian economy.

The latter imports 20% of its wheat from Ukraine, and as a result the war has had an effect on food security, food and energy prices, increasing inflation. It's also affected global capital flows, reducing the level of vital FDI too. 

This Bloomberg clip looks at the state of the Pakistani economy, highlighting the problems that the country faces, and how it has lagged behind its neighbour India. Pakistan's 36% inflation has been associated with a depreciating currency and undermined living standards, and the economy is struggling to recover from floods which affected one-third of the country.

As a result it has sought another IMF bailout, and there are questions about whether its current level of debt is sustainable: it has a low level of exports, low levels of FDI and forex. There's a real need for fiscal prudence, not least in improving tax collection in the economy.  

This IMF clip looks at remittances, and their impact on developing economies. It acknowledges the greater ease of transferring resources, and the importance of this income in boosting growth and reducing poverty in developing economies. 

It's interesting to note the size of remittances around the world: Mexico's remittances are worth more than its oil exports, Sri Lanka's are more than its tea trade, and Egypt's are more than its income from the Suez Canal. Indeed in 2022, remittances were worth more than FDI and foreign aid combined.

Just maybe, given that they've just done their Mock Examinations, my Year 13 pupils might be predisposed to revisiting why Foreign Direct Investment like this is so vital to countries like Mexico.

On the demand-side, it represents an injection into the circular flow of income, and might allow some people to break free of the poverty trap. On the supply-side, not only does it increase the Mexican economy's productive capacity,  but it might also facilitate the transfer of technology in a high-tech sector. Of course, there's an evaluative angle to both these aspects - to what extent will any factor incomes remain in Mexico, and is it the appropriate technology for Mexico, for example. 

But it's just a rich source of a real world example of why FDI is so powerful. 

Taiwanese giant., Foxconn and Indian mining company, Vedanta, has agreed a joint venture to build a semi-conductor plant in India, the third group to announce plans to build such a factory.

Not only might this help the global semi-conductor shortage, but it will also have a multiplied effect and might speed technology transfer to India, further boosting long-run growth. 

Depending on whether you are an economist or a Business Management students, you'll either see this as FDI, and be thinking about multiplier effects, the impact on the supply-side and so on or thinking about how it might suggest that reshoring might be coming back into fashion. 

Could an unintended consequence of President Biden's expressed desire to amend global corporate tax rules so as to establish a minimum level be lower levels of US investment in Ireland?

Certainly it seems likely: Ireland's current corporate tax rate of 12.5% is one of the lowest, if not the lowest in the developed world and it has attracted a lot of inward investment, particularly from the tech sector. 

This BBC article looks at how human rights intersects with economic issues. Cambodia has started to develop a successful bike building industry; however, increasing levels of concern about the authoritarian nature of the government mean that it might struggle to continue to both attract foreign investment, as a result of the 'brand' being tainted.

It highlights the importance of ethical concerns in determining trade patterns and trade relationships, and, from a Cambodian perspective it also highlights how institutions are important in fostering development.  

It seems that this 'Making America Great Again' lark isn't straightforward: whereas 18 months ago, Foxconn was announcing plans for a factory in Wisconsin to much fanfare in the White House, today it is reconsidering having concluded that "high labour costs in the US meant making advanced TV screens didn't make sense".

Another success for President Trump...

More news of freer trade - hurrah - this time it's Israel and China, unusual bedfellows perhaps. However, there's been a sizeable increase in business between the two and mutually beneficial too. 

John Naughton's piece in the Observer offers a nice economic history lesson about the rise of the Celtic Tiger, the embrace of free trade and the tax system that encouraged FDI by large MNCs, particularly in the tech sector.

He brings it up to speed, post-Brexit, but wonders about the extent to which the arrival of big tech, with a new wave of Chinese tech companies seemingly the newest kids on the block, will prove to be a good thing, and, the degree to which this money has been used to disguise a divided economy, with high levels of income inequality and serious structural problems, not least as regards the housing market and the provision of public services. For those people who think that the Republic of Ireland has it cracked - this article might prompt you to think again. 

This is an interesting little piece, which notes that the level of inward capital flows into China has slowed to the extent that "China recorded a deficit of $11.8bn (£9.6bn) in foreign investment in the three months to the end of September - the first time since records began in 1998".

In short, it's the first time in 25 years that China's investing more overseas, than foreign firms are investing in China, largely as a result of ongoing political uncertainty, slower growth in China and higher interest rates there. It's also notably that none of the businesses cited say that they're 'retreating' from China, it's just that they are reinvesting profits elsewhere. 

This Reuters clip looks at the reforms associated with President Bola Tinubu have stalled - the relaxation of foreign exchange controls has seen the naira depreciate, a widening of the official and black market exchange rate, with potentially inflationary effects, and the removal of the fuel subsidy hasn't seen fuel prices budge in the last 3 months. In short, much of the optimism associated with the new President has evaporated, with little in the way of FDI, largely because there's nervousness about being able to get dollars out of country.  

Foxconn has withdrawn from a deal to build a semi-conductor plant in India, causing some to worry about the country's technology industry. The Indian partner, Vedanta, is committed to building the factory but will now have to look for a new partner. 

No surprises here - however, the first oil deal struck with the Taliban in Afghanistan has been agreed by Chinese company the Xinjiang Central Asia Petroleum and Gas Company (CAPEIC).

One the one hand you have to hope that this is going to enhance development prospects in the country; on the other, you'd also be slightly sceptical about the extent to which the local population are going to benefit and the message sent out to the Taliban's leaders. 

My Business Management students get to see a 'fascinating' video about Lego choosing not to invest in Asia that dates back to 2018. However, it seems that they've bitten the bullet and decided to invest in Vietnam on the back of double digit growth in the region in the past two years. 

There's lots of interesting economics here: the benefits of FDI to a country such a Vietnam, moving from the multiplier effect to consider technology transfer and the extent to which the project will involve Vietnamese workers.

However, there's also an interesting point about YED: why might we be unsurprised by the fact that Lego have experienced double digit  in Vietnam - you might, if you're an IB student think about how this might relate to the Engel curve.

Total's decision to halt its work in Northern Mozambique represents a significant supply-side shock for the southern African economy, and the wider implications of uncertainty deterring further foreign investment would suggest that the future prospects for the economy aren't as optimistic as they might be. 

Those of you familiar with development economics will not be surprised by the news that yesterday's coup in Myanmar is likely to have an adverse effect upon economic growth. 

Uncertainty doesn't do anything for investment, not least FDI, and as a result, the country's development is likely to be impeded. 

This is a really interesting article offering a new perspective on Greece - with the new Greek government looking to attract inward investment and the global super-rich by offering tax incentives for people who are prepared to move to Greece and invest in the Greek economy. 

After a decade of crisis, and the associated austerity measures, does this signal a change in the tenor of policy?

Britain is promising to become a major player in investing in Africa by 2022, as part of our post-Brexit future.

Unfortunately, whilst I'd like to be unequivocally positive, I can't be. Yes, inward investment will generate a positive multiplier effect, but the size of this effect depends upon so many different factors. Additionally, the UK is going to be a minor player relative to China.

So, nice rhetoric - but in practice..?