Relationship between countries at different levels of development — common mistakes

When discussing trade, link a worsening of the terms of trade directly to the balance of payments. A fall in the ToT index means a country's export prices have fallen relative to its import prices, which, ceteris paribus, will worsen the current account position.

To achieve high marks, you must evaluate the impact of FDI. Use phrases like 'on the one hand... on the other hand...' to structure a balanced argument, considering both the short-run benefits (e.g., job creation) and long-run consequences (e.g., dependency, profit repatriation).

Avoid making sweeping generalisations about aid. Demonstrate a nuanced understanding by specifying the type of aid being discussed. For example, 'Tied bilateral aid may be less effective at promoting development than untied multilateral aid because...'

Use the concept of opportunity cost when discussing international debt. Explain that the funds used for debt servicing could have been invested in human capital or infrastructure, which would have generated a greater long-term return for the economy.

Not necessarily. While FDI can bring capital, technology, and jobs, it can also have significant drawbacks. Multinational corporations (MNCs) may repatriate profits, pay low wages, exploit weak environmental regulations, and drive local competitors out of business. The net benefit depends on the type of investment and the ability of the host government to regulate the MNC's activities and ensure benefits are shared.

No, the effectiveness of aid is highly debated. While it can fund crucial projects and services, it can also create a culture of dependency, where governments have less incentive to reform their own economies or improve tax collection. Aid can also be misused due to corruption or be 'tied', meaning it primarily benefits firms in the donor country. The impact of aid depends heavily on its type, the conditions attached, and the quality of governance in the recipient country.

This is a common misconception. While poor governance and corruption in developing countries can be contributing factors, the origins of debt are complex. Often, loans were offered aggressively by commercial banks in developed countries. Furthermore, external shocks originating in the developed world, such as rising global interest rates or falling commodity prices, can make existing debts unsustainable, creating a 'debt trap' that is beyond the borrowing country's immediate control.