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Issue 21/10 March 2010

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Today’s Issue Includes:


1) Microfinance: A Case Study by Brian Ellis former Chief Examiner and now Chair of Examiners for Edexcel

Evidence A GRAMEEN BANK
The only access that very poor people in remote areas have to loans is often via money lending ‘sharks’ who charge exorbitant interest. Muhammad Yunus started the Grameen Bank, which pioneered microfinance, in Bangladeshi villages. His work won the Nobel peace prize in 2006. By the end of 2008, $7.6 billion had been lent to the poor in small amounts, most often for start-up businesses.

The Grameen Bank uses ‘solidarity lending’, with borrowers organised in groups of five. The group does not guarantee loans to individuals, but oversees that everyone behaves sensibly and nobody gets into problems. If a member defaults, none of the group has access to loans in future. In practice, group members often cover defaulters’ payments with the intention of collecting repayment later. There is no legal contract with borrowers; the system is based on trust. 97% of members are women; they are both the borrowers and the owners of the bank. 98% of loans are repaid. Grameen claims that more than half of its borrowers have escaped acute poverty, with all children of school age in school, regular meals, a sanitary toilet, a rainproof house and clean water. The Bank even encourage saving by people to whom immediate survival was once the only ambition. This is real progress.

Both the Grameen Bank and foreign direct investment (FDI) in large projects have been factors contributing to significant improvements in the economic growth of Bangladesh. Estimates put the inflation adjusted change in GDP per capita between 1970 and 1990 as just from $785 to $790. The $1000p.c. level was crossed in 1998 and the estimate for 2007 was almost $1400.

The Grameen Bank approach has been an inspiration and a model for others. One more recent variant is Kiva, an online system which allows individuals round the world to contribute to microfinance loans made to poor people in many countries (Kiva.org).


Evidence B KANYAISH TAILORING AND TRAINING CENTER
Hilderh’s shop is in on a busy street just outside the town centre of Kisumu. Kisumu, Kenya’s third largest city, is set on the serene shore of Lake Victoria and offers a distinct culture from the bustling capital of Nairobi. Kisumu’s atmosphere is tranquil, sultry, and relaxed.
The shop is a tin rectangular structure with large boxy holes cut from the metal for windows. The outside is painted blue, with a black trim along the bottom. The corrugated tin roof leaves a ripple effect above the entry. A sign announces Hilderh’s business: Kanyaish Tailoring & Training Center. Hilderh is sitting behind a sewing machine. Vibrant cloth of greens, reds, blues, purples and yellows line the wall behind her. On another wall are posters of women wearing beautiful brightly patterned Kangas. The dresses and blouses are intended as model designs from which customers can choose.

This is her third loan through Kiva, and Hilderh spent the 43,000 Kenyan shillings ($575) on two second-hand sewing machines for her students, cloth and other materials for dress-making and school fees for her children. At 45 years old, Hilderh now supports her husband (who lives separately upcountry) and her three children. She credits loans through Kiva with her success: “I was not having enough money... I had too many customers and not enough material to satisfy their needs. The capital I’ve accessed through Kiva has allowed me to grow my business. Now I can say my business has grown. Now it is famous.”

Besides selling clothing, Hilderh teaches students. Seven girls sit on benches, three working on sewing machines and the others using paper bags for material as they create dresses and blouses by hand. Each girl is at least 18 years old. Most pay 12,000 KES (~$160) a year for Hilderh’s instruction and guidance. Three are orphans that Hilderh teaches and mentors for free. Hilderh says: “My youngest child was sponsored. Someone donated money to help him eat, and to pay for his needs when I couldn’t. An organization that takes street girls and boys and trains them asked if I would assist in training the girls. I train them for one year. Then they go for their test and certificate. I want to help them. I’ve received help and want to share my skills with others.” Hilderh designed the training programme herself. The girls are required to come to Hilderh’s shop five days a week from 8am – 5pm. She has already hired two of her former students as employees. Not only does she want to be able to employ more, but she also hopes to be able to train more “street girls for no fees”.

Hilderh has two other dreams. The first is for her children to complete college and to find employment. The second is to own her own home. Currently she lives with her four children in a rented home with no running water. “One day,” she says, “we won’t pay rent. We’ll have our own property.” Source: adapted from Maia Pelleg on Kiva.org


1.Using relevant examples from Evidence A, explain the meaning of ‘absolute poverty’. (6)
2. Explain the importance of access to loans for start-up businesses in low income areas. (6)
3. Assess the role of foreign direct investment by transnational companies (tncs) in countries such as Bangladesh. (12)
4. Examine the contribution of the internet to globalisation, using Kiva as one example. (10)
5. To what extent do firms such as Kanyaish Tailoring and Trading Center contribute to economic growth in developing countries such as Kenya? (16)


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2) The UK Wind Turbines Industry a Case Study by Stephen Romer. This is an abridged extract from his book “The Year in Review and Revision Guide 2009-2010

2009 saw the 40th anniversary of Woodstock, the ultimate rock festival. Also taking place in August 1969 was the British ‘Woodstock’ at the Isle of Wight. It was the apogee of the 1960s counter-culture as hundreds of thousands of hippies assembled in a field in one of the UK’s most obscure locations to hear Bob Dylan and the Band. Bliss was it in that dawn to be alive.

“Bob Dylan came to the Isle of Wight in 1969,” says a commemorative plaque on a council building near the ferry terminal at Ryde. Underneath, someone has added, “And damn-all has happened since”. But one could no longer say this in 2009 because the Isle of Wight was suddenly back at the very centre of events. A firm manufacturing wind turbines suddenly closed down its Newport, IoW operation in order to relocate overseas. 425 workers were laid off, some of whom staged a sit-in in the hope of attracting government intervention to save their jobs.

The firm, the Danish owned Vestas Wind Systems, the world’s largest manufacturer of wind turbines, abandoned the UK (and Denmark, where it terminated the employment of about 1,000 workers). Why? It decided to move to the US and China, locations in which new factories would be opened creating 5,000 new jobs. The US wind market was growing rapidly: reportedly, 8.5GW was added to US wind capacity in 2008 compared with a mere 0.5GW in the UK. Exporting turbines to the US from the IoW was expensive. It would be more profitable to produce them in the US.

In China, wind is on the march. The output of Chinese wind-produced energy is expected soon to exceed that of the US. However, although there is expansion, the Chinese authorities insist that 80% of construction of new wind facilities must come from domestic production. Thus, if Vestas was going to expand in China, it would have to manufacture turbines, blades and other capital goods on Chinese soil.

For the workers occupying Vestas’ Newport factory in the summer of 2009 (and for their trade unionist and environmentalist supporters assembled outside), it was impossible to understand why the government was not intervening. Vestas’s UK closure plan was a state of affairs which seemed to amount to a direct threat to (a) a government employment policy which was calling for the creation of ‘green jobs’ – surely the very essence of a green job would be producing turbines for wind farms, and (b) the government’s then very recently expanded White Paper on renewable energy policy which saw wind playing a key role (see chapter on the Environment). Less than a month before the Newport situation exploded, the Energy Secretary had said there would be 10,000 more wind turbines in the UK by 2020. But mere days later, Ed Miliband and his Cabinet colleagues were studiously ignoring demands that they take action on the closure of the UK’s wind turbine production facilities.

For many observers, it made no sense. And what about the green jobs potential of wind (a natural resource with which the UK is well endowed)? Other things being equal, the expansion of work in the wind industry could indeed be significant. In 2009, wind sector employment in the UK was less than 4,000 but the opportunity for growth was indicated by the corresponding figures in Germany and Spain – about 80,000 and 30,000 wind industry employees respectively. Truly, these were green job levels to aspire to. One might even go as far as to say that there should be no good reason why UK wind employment could not eventually exceed these levels.

Trade unionists complained bitterly that if Gordon Brown had had any gumption, he would, at an early stage, have stepped in and nationalised Vestas’ IoW operation in the national interest. For many observers, the real lesson of the Isle of Wight in August 2009 was that New Labour ideology was well past its sell-by date. Persisting with a neo-thatcherite obsession with free markets in the middle of the most catastrophic recession in living memory was illogical, an indication of incipient insanity. The time was long overdue for an end to New Labour’s obsequious pandering to market forces – it was time to discontinue policies based on laissez-Blair.

  1. What economic motivation led Vestas to choose to move to China and the US?
  2. What arguments could China make to justify 80% of new wind facilities coming from domestic production?
  3. What economic arguments could the UK government have given for nationalizing Vestas?
  4. What arguments could be made against such a nationalization?
  5. Is the UK taking seriously its commitment to green energy?

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