DEVELOPMENT
CHILD-BEARING/mortality rate,etc
EMERGING MARKETS POVERTY LINE
ECONOMIC ACTIVITY RATE THE CONCEPT OF HUMAN DEVELOPMENT
EDUCATION/School life expectancy HUMAN DEVELOPMENT INDEX
GROSS DOMESTIC PRODUCT HUMAN POVERTY INDEX
HOUSING GENDER-RELATED DEVELOPMENT INDEX
HUMAN SETTLEMENTS/POPULATION INCOME POVERTY
LEAST DEVELOPED COUNTRIES
LITERACY/ILLITERACY THE 20:20 INITIATIVE
POPULATION GROUP OF 77
PURCHASING POWER PARITY (PPP$)
REFUGEES
TRANSFER PRICING/Balance of Payments
UNEMPLOYED GROW-GAP UNEMPLOYMENT
WATER SUPPLY AND SANITATION
YOUTH AND ELDERLY POPULATION
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1.- UNEMPLOYED (international definition) TOP OF PAGE
The International Conference of Labour Statisticians adopted
the following definition of the unemployed as an international
recommendation in 1982:
All persons who during the reference period were:
(1) "without work", that is, were not in paid employment or
self-employment as specified by the international definition
of employment;
(2) "currently available for work", that is, were available for
paid employment or self-employment during the reference period;
or
(3) "seeking work", that is, had taken specific steps in a
specified recent period to seek paid employment or
self-employment.
However, many persons without work--women more than men--do not
take active steps to "seek work" if they believe none is
available. In rural areas, employment opportunities may be
particularly limited, especially for women and outside seasonal
harvesting periods. Also in rural areas and among women in many
countries, persons not working do not have easy access to formal
channels for seeking employment and women often face social and
cultural barriers when looking for a job. In such circumstances
the "seeking work" criterion should be relaxed, though this is
not often done in national surveys.
In developing countries, the number of workers covered by
unemployment insurance or other assistance is limited. Under
these conditions very few people can afford to be unemployed
for any period of time. The majority of the population must be
engaged at all times in some economic activity, however
inadequate it may be. So, although they may also be seeking
other or additional work, they will not be counted as unemployed.
Women, who more often than men are engaged in activities within
the household, grow food in the family plot or work as seasonal
agricultural workers, are economically active and should be
counted as "employed" according to the standard definition of
economic activity. But their situation in terms of income, use
of skills and productivity might be closer to unemployment than
to employment.
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2.- POPULATION (technical notes) TOP OF PAGE
Estimates and projections of the total population and population
by age and sex are prepared by the Population Division of the
United Nations Secretariat and revised every two years in order
to incorporate new data. In general, these population figures
are estimates of persons resident in the country or area at
mid-year. They are usually based on population census data
adjusted to the specified year, taking account of birth, death
and international migration rates as determined from population
surveys and registers and other national sources as available.
Short-term residents and visitors in the country or area for
less than one year are usually excluded.
Sex ratio is calculated as number of males per 100 females.
The approach used in estimating rates of population change is
one of continuous growth which considers that population grows
exponentially. The average annual percentage change in
population is an average for the period 1995-2000.
----------------------------------------------------------------------
3.- GROSS DOMESTIC PRODUCT (technical notes) TOP OF PAGE
Gross domestic product (GDP) per capita in US dollars is
calculated by the Statistics Division of the United Nations
Secretariat primarily from official national accounts statistics
in national currencies provided by national statistical services.
GDP is the total unduplicated output of economic goods and
services produced within a country as measured in monetary terms
according to the United Nations System of National Accounts (SNA).
The series shown here are based on the statistical concepts and
methods recommended in the 1968 "System of National Accounts"(United
Nations publication, Series F, No. 2, Rev. 3). GDP as defined in
the 1968 SNA includes subsistence production produced by
households for their own use, valued at current local prices for
comparable commodities.
For the conversion of national accounts data to US dollars,
current market exchange rates are used where no currency exchange
rate controls are in effect. Where multiple exchange rates are
used in countries, the official rate for business and investment
transactions or the market rate is usually used. In a few
countries where international transactions are limited, indicative
estimates of the exchange rate made by the United Nations
Secretariat for operational purposes are used for the conversion.
For international comparison, currency exchange rates applied to
national accounts aggregates provide an important but highly
approximate measure of national economic output and may differ
substantially from comparisons based on actual purchasing power.
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4.- ECONOMIC ACTIVITY RATE (technical notes) TOP OF PAGE
Adult economic activity rate refers to the percentage
population aged 15 and over which is economically
active. Data are compiled by the International Labour Office from
population census and labour force sample survey data collected by
national statistical services and provided to ILO and the
Statistics Division of the United Nations Secretariat in
publications and questionnaires. These data are published in the
Year Book of Labour Statistics (Geneva, ILO) and the "Demographic
Yearbook" (United Nations publication).
The statistical concept of economically active population
used here is that recommended by the International Conference of
Labour Statisticians in 1982 and is designed to be consistent with
the concept of economic production in the System of National
Accounts. It defines as economically active all employed and
unemployed persons, including those seeking work for the first
time. It covers employers operating unincorporated enterprises,
persons working on their own account, employees, unpaid family
workers, members of producers cooperatives and members of the
armed forces. In the internationally recommended definition,
production of primary products such as foodstuffs for own
consumption and certain other non-monetary activites are
considered economic activity and persons engaged in such
production are to be considered economically active. In principle,
any such work for as little as one hour a week is taken to define
a person as economically active.
Specific elements of the standard concepts may differ
substantially from country to country, such as the choice of
time-reference period and the determination of minimum hours of
work and unpaid family work, including production for own
consumption. These differences may result in particular in the
undercounting of women who are economically active.
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5.- LITERACY/ILLITERACY (Technical notes) TOP OF PAGE
The United Nations Educational, Scientific
and Cultural Organization recommends defining an illiterate person
as someone who can not, with understanding, both read and write a short,
simple statement on his or her everyday life. A person who can only
read but not write, or can write but not read is considered to be
illiterate. A person who can only write figures, his or her name or
a memorized ritual phrase is also not considered literate.
This definition of literacy is widely used in national
population censuses and surveys but its interpretation and
application may vary to some extent among countries, depending on
national, social and cultural circumstances. Furthermore, this
concept of literacy includes persons who, though familiar with
the basics of reading and writing, might still be considered
functionally illiterate.
Literacy is a good measure of educational
achievement in developing regions. For young people in developing
regions, literacy may be a better measure of education than
enrolment since it usually reflects a minimal level of
successfully completed schooling.
For many countries or areas, illiteracy rates are not
available from UNESCO for one or more of the following reasons:
(a) illiteracy is believed to have been reduced to minimal levels
through several decades of universal primary education,
(b) it has not been possible to establish revised estimates following
recent mass literacy campaigns,
(c) not even a minimal database is available
for making rough estimates,
or
(d) countries have preferred that no estimate be published.
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6.- EDUCATION (technical notes) TOP OF PAGE
The expected number of years of schooling, or school life
expectancy (SLE), is defined as the total number of years of schooling
which a child can expect to receive in the future, assuming that the
probability of his or her being enrolled in school at any particular
future age is equal to the current enrolment ratio at that age.
Caution should be exercised when utilizing this indicator in
international comparisons. For example, a year or grade completed in
one country is not necessarily the same in terms of educational content
or quality as a year or grade completed in another country. Moreover,
it should be noted that SLE does not necessarily coincide with the
expected number of grades completed, because of the possibility of
repeating grades.
Thus, school life expectancy represents the expected number
of years of schooling that will be completed, including years spent
repeating one or more grades. It is a synthetic summary indicator of
the overall pattern of enrolment ratios at one particular point in time,
and has no predictive value except in so far as it is believed that
enrolment patterns will remain unchanged into the future.
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7.- CHILD-BEARING (technical notes) TOP OF PAGE
Total fertility rate refers to the average number of
children that would be born to each woman if the fertility
patterns of a given period were to stay unchanged; in other
words, it estimates the total number of children a typical girl
will eventually bear if her child-bearing follows the current
fertility patterns and she lives through her entire child-bearing
years. Total fertility rate is estimated by the Population Division
of the United Nations Secretariat using the latest available
demographic data from countries and given as five-year averages.
Maternal mortality ratio is defined as the number of
maternal deaths divided by the number of live births for a given
year and expressed per 100,000 live births. Maternal deaths are
defined as those caused by deliveries and complications of
pregnancy, child-birth and the puerperium. However, the exact
definition varies from source to source and is not always clear
in the original, particularly as regards the inclusion of
abortion-related deaths.
Furthermore, the World Health Organization observes that most maternal
deaths go unregistered in areas where maternal mortality rates are
highest. To address this information gap, WHO and the United Nations
Children's Fund recently developed new estimates of maternal mortality
using a dual strategy. This involved using available data wherever
possible, adjusted to account for the common problems of under-reporting
and misclassification of maternal deaths, and developing a simple
model to predict values for countries with no reliable national
data. The estimates derived from this approach are considered to
be more reliable than earlier ones and are the ones shown here.
Contraceptive use among currently married women aged 15-44
have been compiled by the Population Division of the United
Nations Secretariat from the results of national surveys
associated with the Demographic and Health Surveys, the Maternal
and Child Health Surveys and numerous other national surveys, and
published in World Population Monitoring, 1997
(ESA/P/WP.132, 20 December 1996).
Both overall contraceptive prevalence (that is, percentage
using contraception regardless of method) and prevalence of
modern methods are shown. The group modern methods refers to
clinic and supply methods, and includes highly effective methods
widely developed and adopted for contraceptive practice over the
past few decades. These are the methods most often offered by
family planning programmes. Specifically, they include male and
female sterilization, IUDs, the pill, injectible hormonal
contraceptives, condoms and female barrier methods (diaphragm,
cervical cap, spermicidal foams, creams, jellies and sponges).
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8.- HOUSING (technical notes) TOP OF PAGE
The main data sources for housing statistics are national
population and housing censuses. Internationally recommended concepts
and definitions for collecting these statistics are published
in the Principles and Recommendations for Population and Housing
Censuses (United Nations publication, Sales No. E.80.XVII.8) and given
below.
It should be noted that countries sometimes deviate significantly from
these recommended concepts and definitions. Departures from these
definitions, when furnished by the reporting country, are footnoted
in the tables.
The average number of persons per room was obtained by
dividing the total population in occupied housing units by the total
number of rooms as reported by countries. If the total number
of occupants, i.e., total population occupying housing units, was not
available, the total population figure was used in the numerator.
A room is defined as a space in a housing unit or other
living quarters enclosed by walls reaching from the floor to the ceiling
or roof covering, or at least to a height of 2 meters, of a size
large enough to hold a bed for an adult, that is, at least 4 square
meters. Rooms, therefore, may include bedrooms, dining rooms, living
rooms, studies, habitable attics, servants' rooms, kitchens,
rooms used for professional or business purposes and other separate
spaces used or intended for dwelling purposes, so long as they meet
the criteria of walls and floor space. Passageways, verandas, lobbies,
bathrooms and toilet rooms are not expected to be counted as rooms,
even if they meet the criteria.
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9.- WATER SUPPLY AND SANITATION (technical notes) TOP OF PAGE
Statistics on access to safe water supply and sanitation in developing
countries for urban and rural areas are compiled by the
World Health Organization from data reported by national authorities.
The definition of what constitutes "access" to safe water has
been determined by the reporting countries, thereby limiting
comparability.
Of the 84 countries reporting in the most recent round of data
collection, 54 provided a definition of access to safe drinking water.
Walking distance or time from household to water source was the
principal criterion, particularly in rural areas.
Water quantity was included in the definition for rural areas by
38 countries, with the acceptable quantity ranging from 15-20 litres
per person per day (lpd) in one case to 50 lpd or more in three cases.
Thirty-one countries set a minimum for urban access, with the average
value being 50 lpd.
For sanitation, countries in general regard excreta disposal
facilities which break the faecal-human transmission route as
"adequate".
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10.- HUMAN SETTLEMENTS (technical notes) TOP OF PAGE
Estimates and projections of urban and rural populations are
made by the Population Division of the United Nations Secretariat and
published every two years. These estimates and projections are based on
national census or survey data that have been evaluated and, whenever
necessary, adjusted for deficiencies and inconsistencies.
Urban-rural classification of population in internationally published
statistics follows the national census definition, which differs from
one country or area to another. National definitions are usually based
on criteria that may include any of the following: size of population
in a locality, population density, distance between built-up areas,
predominant type of economic activity, legal or administrative boundaries
and urban characteristics such as specific services and facilities.
The approach used in estimating rates of population change is one of
continuous growth which considers that population grows exponentially.
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11.- YOUTH AND ELDERLY POPULATION (technical notes) TOP OF PAGE
Estimates and projections of the total population and population by
age and sex are prepared by the Population Division of the United
Nations Secretariat and revised every two years in order to incorporate
new data.
In general, these population figures are estimates of persons
resident in the country or area at mid-year. They are usually based on
population census data adjusted to the specified year, taking account of
birth, death and international migration rates as determined from
population surveys and registers and other national sources as available.
Short-term residents and visitors in the country or area for less than
one year are usually excluded.
The percentages of population under age 15 and of population of each
sex aged 60 or over are calculated by the Statistics Division of the
United Nations Secretariat from the estimates of population by sex and
age prepared by the Population Division. Men per 100 women aged
60 or over are calculated by the Statistics Division of the United
Nations Secretariat from the population estimates given.
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12.- PURCHASING POWER PARITY (PPP$) TOP OF PAGE
The purchasing power of a country's currency: the number of units of
that currency required to purchase the same representative basket of
goods and services (or a similar basket of goods and services) that
a US dollar (the reference currency) would buy in the United States.
Purchasing power parity could also be expressed in other national
currencies or in Special Drawing Rights (SDRs).
From the above definition is clear that purchasing power parity is
a concept that can not be utilized for analysing international
trade, relative international position of national economies or
modelling effects of international trade in domestic economies.
For doing that, the exchange rate system is still more accurate.
PPP$ is of limited use for economic analysis, restricted only to
comparing standard of living.
The system of purchasing power parities has been developed by the
United Nations International Comparison Programme (ICP) to make
more accurate international comparisons of GDP and its components
than those based on official exchange rates, which can be subject
to considerable fluctuation.
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13.- REFUGEES TOP OF PAGE
According to the United Nations Convention Relating to the Status of
Refugees and its 1967 Protocol, refugees are persons who -owing to
a well-founded fear of being persecuted for reasons of race, religion,
nationality, membership in a particular social group or political
opinion- are outside their country of nationality and are unable or,
owing to such fear, unwilling to avail themselves of the protection
of that country; or who, not having a nationality and being outside
the country of their former habitual residence, are unable or, owing
to such fear, unwilling to return to it.
According to United Nations High Commisioner for Refugees (UNHCR),
refugees also include selected groups of internally displaced persons,
returnees and others of concern to or assisted by the UNHCR.
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14.- POVERY LINE TOP OF PAGE
Based on the concept of an absolute poverty line, expressed in
monetary terms: the income or expenditure level below which a minimum,
nutritionally adequate diet plus essential non-food requirements are
not affordable.
National estimates that rely on a relative poverty line (such as a
share of food in total expenditures) are excluded, as are those that
rely on a poverty line defined exclusivily in relation to another
variable (such as the minimum wage) rather than the satisfaction of
the food and non-food needs at a minimally acceptable level.
Poverty estimates are based on data from an actual household budget,
income or expenditure survey. Exceptions include some African and
small islands countries or territories for which otherwise virtually
no observations would have been available.
------------
POVERTY LINES FOR INTERNATIONAL COMPARISON. A poverty line set at
$1 (1985 PPP$) a day a person is used by the World Bank for
international comparison. This poverty line is based on consumption.
A poverty line of $2 (PPP$) a day is suggested for Latin America and
the Caribbean. For Eastern Europe and the CIS countries, a poverty
line of $4 (1990 PPP$) has been used. For comparison among industrial
countries, a poverty line corresponding to the US poverty line of
$14.40 (1985 PPP$) a day per peson has been used.
NATIONAL POVERTY LINES. Developing countries that have set national
poverty lines have generally used the food poverty method. These
lines indicate the insufficiency of economic resources to meet basic
minimum needs in food.
There are three approaches to measuring food poverty:
COST-OF-BASIC-NEEDS METHOD. This approach sets the poverty line
at the cost of a basic diet for the main age, gender and activity
groups, plus a few essential non-food items. A survey then establishes
the proportion of people living in households with consumption ( or
sometimes income ) below this line. The basic diet may consist of the
least expensive foods needed to meet basic nutritional requirements,
the typical adult diet in the lowest consumption quintile or the
investigator's notion of a minimal but decent diet. The choice of
both the food and the non-food components included is necessarily
arbitrary.
FOOD ENERGY METHOD. This method focuses on the consumption
expenditure at which a person's typical food energy intake is just
sufficient to meet a predetermined food energy requirement. Dietary
energy intake, as the dependent variable, is regressed against
household consumption per adult equivalent. The poverty line is then
set at the level of total consumption per person at which the
statistical expectation of dietary energy intake exactly meets
average dietary energy requirements. The problem with this method is
the "caviar caveat": groups that choose a costly bundle of foods are
rewarded with a higher poverty line than that for more frugal eaters.
FOOD SHARE METHOD. This method derives the cost of a consumption
plan to acquire just sufficient nutrients. If the cost of basic
nutrients is a third of total consumption, the poverty line is fixed
at three times that cost.
All three approaches are sensitive to the price level used to
determine the cost of the bundle. And all three concentrate mainly
on calories or dietary energy, because protein deficiency due to
inadequate economic resources is perceived to be rare in most
societies.
In industrial countries too national poverty lines are used to
measure relative poverty. The European Commission has suggested
a poverty line for these countries of half the median adjusted
disposable personal income.
(Human Development Report 1997, UNDP, 1997)
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15.- THE CONCEPT OF HUMAN DEVELOPMENT TOP OF PAGE
The process of widening people's choices and the level of well-being
they achieve are at the core of the notion of human development as
conceptualized by the United Nations Development Programme (UNDP).
Such choices are neither finite nor static. But regardless of the
level of development, the three essential choices for people are
to lead a long and healthy life,
to acquire knowledge, and
to have access to the resources needed for a decent
standard of living.
Human development does not end there, however. Other choices, highly
valued by many people, range from political, economic and social
freedom to opportunities for being creative and productive and
enjoying self-respect and guaranteed human rights.
Income clearly is only one option that people would like to have,
though an important one. But it is not the sum total of their lives.
Income is also a means, with human development the end.
(Human Development Report 1997, UNDP, 1997)
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16.- HUMAN DEVELOPMENT INDEX TOP OF PAGE
The human development index (as utilized in the Human Development
Reports) measures the average achievements in a country in three
basic dimensions of human development -longevity, knowledge and a
decent standard of living. A composite index, the HDI thus contains
three variables: life expectancy, educational attainment (adult
literacy and combined primary, secondary and terciary enrolment) and
real GDP per capita (in PPP$).
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17.- HUMAN POVERTY INDEX TOP OF PAGE
The human poverty index measures deprivation in basic human
development in the same dimensions as the Human Development Index.
The variables used are the percentage of people expected to die
before age 40, the percentage of adults who are illiterate, and
overall economic provisioning in terms of the percentage of people
without access to health services and safe water and the percentage
of underweight children under five.
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18.- GENDER-RELATED DEVELOPMENT INDEX TOP OF PAGE
The gender-related development index measures achievements in the
same dimensions and variables as the HDI does, but takes account of
inequality in achievement between women and men. The greater the
gender disparity inbasic human development, the lower a country's
GDI compared with its HDI. The GDI is simply the HDI discounted,
or adjusted downwards, for gender inequality.
(from HUMAN DEVELOPMENT REPORT 1997)
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19.- INCOME POVERTY TOP OF PAGE
(From HUMAN DEVELOPMENT REPORT 1997, pp. 32-33):
Amenable to econometric analysis and statistical exercises, the
measurement of income poverty has dominated the literature. Those
measuring income poverty have focused more on its incidence than on
its depth and severity. The incidence of income poverty is usually
measured by a headcount index, which represents the percentage of
people below the chosen poverty line.
Often, an international poverty line is chosen to compare the
incidence of poverty across borders. The World Bank uses a poverty
line of $1 (1985 PPP$) a day per person to compare poverty in most
od the developing world (For an explanation of the $1-a-day poverty
line see POVERTY LINE in this glossary).
...In industrial countries national poverty lines are sometimes
set at 50% of the median disposable income of individuals. Setting
national poverty lines at different levels can produce quite varied
results, a constraint that any discussion of income poverty trends
should recognize.
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20.- THE 20:20 INITIATIVE TOP OF PAGE
The 20:20 Initiative, first proposed in HUMAN DEVELOPMENT REPORT 1992,
was endorsed by the World Summit for Social Development in 1995. It
lays down guidelines to mobilize the resources required to achieve
access to basic social services for all. The idea is that governments
should allocate about 20% of their budgets -and donors 20% of their
aid budgets- to basic social services, sufficient for universal
coverage.
In April 1996, at the invitation of Norway and the Netherlands,
representatives of 40 governments gathered in Oslo -along with NGOs,
UN agencies and the Bretton Woods institutions- to discuss
implementation of the 20:20 Initiative. Options were explored for
establishing agreements between governments and donors to enhance
the funding of basic social services.
The resulting Oslo Consensus encouraged support and agreed on a
common definition of basic social services to include "basic education,
primary health care, including reproductive health and population
programmes, nutrition programmes and safe drinking water and
sanitation, as well as the institutional capacity for delivering those
services."
What has happened since? Partial data suggest that 13% of national
budgets and 10% of donor funding are being allocated to basic services.
But there is evidence of a gradual increase in recent years. Within
the framework of the OECD Development Assistance Committee, donor
governments are discussing ways to improve the monitoring of bilateral
assistance for basic services.
(from Human Development Report 1997, Box 6.5, page 113)
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21.- EMERGING MARKETS TOP OF THE PAGE
Summary from Stephen Fidler, "FT Guide to Emerging Markets", Financial
Times, September 8, 1997:
Emerging markets are places where financial institutions and
transnational corporations "see profitable opportunities for
investment or especulation in what used to be called the Third World.
There are several reasons why those markets became so popular en the
1990s. "One is that the attitude of developing country governments
has...become much more receptive to foreign capital. Exchange controls,
restrictions on dividend and interest remittances and rules
discriminating against foreign investors have been abolished in
many countries"...Also, "development in the industrialised countries
have encouraged the trend. One is the ageing of the baby boom
generation, now saving frantically for retirement. This has built
up a big pool of capital particularly in the US. Some of this has
spilled into the emerging markets"..."there is a lot of money in the
world's financial system, thanks mainly to efforts by the central
banks in Japan and Germany to get their economies moving. Some of
that liquidity is finding its way too to the emerging markets".
It is assumed that even when emerging markets are based on poor
countries, the returns to foreign capital will be higher than in
the industrialised countries' markets. "The theory is that emerging
markets pffer higher returns than those in the mature markets of
the industrialised world"..."because these economies are expected
to enjoy higher rates of economic growth, and because as countries
grow, the value of their stock markets tend to grow even faster".
The following figures illustrate the above: the average annual
return from 1990 to 1997 in Latin America has been 20.3 per cent,
while in the US market it was only 13 per cent.
-----------------------------------------------------------------
Note by R. Rojas: from the above is clear that this speculative
investments are making possible a further outflow of capital from
poor countries to rich countries. This outflow could very
well in the future became unsustainable, creating conditions for
new financial catastrophes in less developing societies
-----------------------------------------------------------------
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22.-GROW-GAP UNEMPLOYMENT TOP OF PAGE
Long-run demand-deficient unemployment. The growth in the productive
capacity of the economy through time is insufficient to provide jobs
for all those who wish to work. The production techniques adopted
are 'too capital-intensive' and this is therefore one form of
'technological unemployment'.
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23.-GROUP OF 77 TOP OF PAGE
This is a coalition of over 100 predominantly developing countries,
originally formed by 77 countries at the United Nations Conference
on Trade and Development (UNCTAD) in 1964 to express and further
their collective interests regarding the institutional development
of the world economic system.
The group has played an important role in international trade and
tariff negotiations, especially those regarding international
commodity agreements. In addition, the group has proposed a number
of general policies which aim to re-structure the international
monetary system, accelerate the transfer of technology and economic
aid and extend national sovereignty over natural resources so as
to redistribute wealth in favour of developing countries.
Their achievements have been very limited.
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24 TRANSFER PRICING TOP OF PAGE
Transfer pricing refers to the pricing of goods and services
that pass between either a parent company and its subsidiaries or the
subsidiaries themselves. Because transfer pricing are set by the
corporate family when dealing with each other, the prices may not
reflect market prices. Often a market price for a particular good or
service may not even exist. As a result, a TNC may use transfer
pricing to minimize taxes or to overcome foreign exchange controls
that prohibit the repatriation of funds.
Because tax rates are different between nations, a parent company
exporting goods and services to a subsidiary in a high-tax nation
(compared to the taxes charged in the home country) could set a high
transfer price. This has the effect of decreasing the profits of the
foreign subsidiary and lowering taxes in the host country. In the same
manner, if the subsidiary is located in a low-tax nation, A TNC could
minimize taxes by charging a low transfer price. However, if import
tariffs are present, the TNC will consider both taxes and tariffs in
formulating the transfer pricing policy because a high transfer price
means a high value for the goods and services sold. Similarly, a low
transfer price means a low value for the goods and services sold.
Because import tariffs are imposed on the declared value of imports,
this leads to a higher or lower tariff cost depending on the case, a
TNC should measure the tax benefit of a higher or lower transfer price
against the resulting higher or lower tariff cost. A high transfer
price will be charged if the savings on the host country's taxes are
greater than the additional tariff costs. A low transfer price will
be used if the savings on tariffs are greater than the additional
taxes.
Foreign exchange controls prevent repatriation of funds by TNCs.
To circumvent such controls, a TNC can charge high transfer prices
to its subsidiaries, thus repatriating profits from those host
countries that impose foreign exchange controls.
Other circumstances in which a TNC may use transfer pricing to
minimize its costs occur when taxes are imposed on dividens or when
a host country's currency is rapidly depreciating. Because dividend
taxes, in essence, tax the TNC's profit twice, the firm can transfer
funds using a high transfer price instead of repatriating dividends.
If a host country's currency is rapidly depreciating, the TNC can
protect itself by adopting a high transfer pricing policy. This allows
the TNC to exchange the depreciating currency for stronger currencies,
thus minimizing the exchange losses that may result from the weaker
currency. ( See P. Asheghian, "International Economics", West
Publishing Company, USA, 1995, ch. 17 )
TRANSFER PRICING.- On a theoretical level there are a number of
factors which could influence the behaviour of prices in international
transactions. An important one is ownership. Transnational
corporations may use their superiorinformation on world markets and
possible market power to use transfer pricing practices designed to
maximize global profits or minimize the risk and uncertainty inherent
in foreign operations. The evidence from empirical studies,although
subject to substantial criticism, has generally supported the
conclusion that transnational corporations often engage in transfer
pricing to their advantage ( Vaitsos, C., "Inter-country income
distribution and transnational enterprises", Oxford, Clarendon Press,
1974, and, United Nations Conference on Trade and Development,
"Dominant positions of market power of transnational corporations: use
of the transfer pricing mechanism", United Nations, New York, 1978)
(In United Nations, 1985, page 33:)
The table below is an example of the impact of transfer pricing on
balance of payments:
IMPACT OF THE 115 LARGEST TRANSNATIONAL CORPORATIONS ON BRAZIL'S
BALANCE OF PAYMENTS, 1974
(Millions of dollars) Top of Page
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Share of
Brazil Transnational TNCs in
Account total corporations category(%)
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Trade:
Exports 7,951 838 11
Imports 12,635 2,999 24
Balance -4,684 -2,162 46
Service:
Interest -637 -85 13
Profit and Dividend -248 -125 50
Other -1,578 -- --
Total -2,463 -251 10
Current transactions
balance -7,147 -2,413 34
Capital:
Net investment 887 45 5
Loans 7,370 614 9
Amortization -1,940 -63 3
Other -82 -- --
Total 6,235 596 10
Surplus or deficit -938 -1,817 194
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Source: United Nations Centre on Transnational Corporations,
"Transnational Corporations and International Trade: Selected
Issues", United Nations, New York, 1985, p. 17.
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PRESSURES ON BALANCE OF PAYMENTS (IN INDUSTRIAL COUNTRIES)
Transfer pricing is a established activity by TNCs, which is achieved
through intra-firm trade. The purpose is to avoid taxation on profits
by the host country. This practice which has been massively researched
for the case of FDI in developing societies, is normally detected when
affiliates of foreign firms tend to import more than what they export,
creating a negative pressure on current account.
An excellent example is the data for United States in Table 6.
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TABLE 6.- EMPLOYMENT AND FOREIGN TRADE OF US TRANSNATIONAL CORPORATIONS
AND US AFFILIATES OF FOREIGN TRASNATIONAL CORPORATIONS
1986-90
US TNCs Affiliates of foreign firms
All Ind. Manufacturing All ind. Manufacturing
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Employment (thousands of workers)
1986 17,831.8 10,431.0 2,937.9 1,411.6
1987 17,985.8 10,195.9 3,224.3 1,542.6
1988 17,737.6 9,819.9 3,844.2 1,828.6
1989 18,721.0 10,138.4 4,511.5 2,138.6
1990 18,549.9 9,843.8 4,734.5 2,220.7
EXPORTS (millions of dollars)
1986 162,292 123,046 49,560 12,805
1987 169,239 136,854 48,091 15,487
1988 202,632 164,151 69,541 25,192
1989 223,352 179,885 86,316 31,873
1990 229,427 192,902 92,308 36,069
IMPORTS (millions of dollars)
1986 139,978 77,892 125,732 20,617
1987 156,748 86,616 143,537 24,546
1988 170,804 104,981 155,533 32,762
1989 181,095 110,425 171,847 40,871
1990 199,969 119,707 182,936 47,171
______________________________________________________________________
source: E. M. Graham and P. R. Krugman, "Foreign Direct Investment in
the United States", Institute
for International Economics,
January 1995.
______________________________________________________________________
Graham and Krugman (1995) comment on the above : "the data reveal a
significant behavioral difference: the affiliates of foreign firms
do show an apparent tendency to export somewhat less and import
significantly more than US firms -indeed, about twice as much".
And they add: "According to the table, in 1990 the typical foreign
manufacturing multinational imported approximately $21,000 worth of
materials per worker versus only $12,000 per worker for domestically
owned firms. In 1990 there were approximately 2.2 million US residents
working for foreign-owned manufacturers. This comparison suggests that
if these firms had remained domestically owned, imports in 1990 at any
given exchange rate would have been approximately $20 billion lower".
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25 LEAST DEVELOPED COUNTRIES TOP OF PAGE
LEAST DEVELOPED COUNTRIES A group of developing countries that was
established by the United Nations General Assembly. Most of these countries
suffer from one or more of the following constraints: a Gross National
Product per capita of around US$ 300 or less ( in 1994 ), landlocked
location, remote insularity, desertification and exposure to natural
disasters. List of Least Developed Countries in 1994:
Afghanistan, Bangladesh, Benin, Bhutan, Botswana, Burkina Faso, Burundi,
Cambodia, Cape Verde, Central African Rep., Chad, Comoros, Djibouti,
Equatorial Guinea, Ethiopia, Gambia, Guinea, Guinea-Bissau, Haiti,
Lao People's Dem. Rep., Lesotho, Liberia, Madagascar, Malawi, Maldives,
Mali, Mauritania, Mozambique, Myanmar, Nepal, Niger, Rwanda, Samoa,
Sao Tome and Principe, Sierra Leone, Solomon Islands, Somalia, Sudan,
Tanzania, Togo, Uganda, Vanuatu, Yemen, Zaire, Zambia.-45 countries
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26 TOP OF PAGE
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