Free Business Dissertations - The Failure Of The Privatization Programmes Made Fdis Intensifies Their
The failure of the privatization programmes made FDIs intensifies their investments in resource extraction and make LDCs more depended on exporting very few raw materials.
B- financial deregulation:
B:1The impact of exchange rate devaluation on the economies of the LDCs:
The World Bank and the IMF have suggested many Least Developing Countries to devalue their currencies in order to increase exports and encourage foreign investments to invest in their countries.
Many least developing countries depended on over-valued foreign exchange regimes, which has reduced substantially the amount of exports and discouraged farmers from planting more fertile lands.
The over-valued exchange rate regime has worked as an additional tax on farmers.
The reform has not yet yielded a substantial economic growth in least developing countries because of the limited supply capabilities in those countries.
Most of least developing countries depend on exporting few agricultural products; the devaluation of the foreign exchange rate will not increase the exports of these products in the short-term because of the limited labour, capital, land and technology.
Increasing the exportation of these products in the long-term requires increasing productivity, capital investments and education.
B:2The impact of interest rates increases on the economies of LDCs:
Most banks in the least developing countries were advised by the IMF to increase real interest rates in order to increase savings and be able to mobilise savings.
The increase in real interest rates forced many small businesses to go bankrupt.
The bankruptcy of many small businesses was catastrophic for the economies of LDCs because small businesses employ many people and provide the vast majority of the services and products that these societies need.
The small businesses, those that were able to survive the increase in real interest rates, lost the chance for expansion because of the expensive credit.
This discouraged many FDIs from coming to LDCs (Least Developed Countries) because foreign investments does not work in isolation but they need to work with a network of other domestic projects in order to create a value for the foreign investment and the related projects.
For example, in 1990s, Jamaica deregulated the financial sector; the central bank had a free hand in setting interest rates in order to control inflation.
Commercial loan rates increased to 60%, this has led to the bankruptcies of many small businesses and made the country more depending on imports, the increasing importance of imports caused balance of payments crisis and led to the collapse of the financial sector altogether, Blackman, C (2002).
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