Reference no: EM132162082

1. Capital Flows such as foreign direct investment (FDI) and foreign aid are crucial factors that supplement domestic resources for the economic development of less developed countries (LDCs). Comment on each of the following:

(i) How important is foreign aid for developing countries in relation to other sources of foreign exchange?

(ii) "FDI is more costly than beneficial to the developing countries for the development process". Discuss with reference to various countries, strategies that LDCs might adopt to make foreign investment fit their development aspirations better without destroying all incentives for foreign investment.

(iii) What are some of the important areas that foreign aid and foreign investment can be used in developing countries to assist the needs of these countries?

2. "Much of the rationale for liberalizing financial markets is based neither on a sound understanding of how these markets work nor on the potential scope for government intervention" (Joseph Stiglitz, cited in Todaro and Smith, 2011, p. 729).

(a) In the context of development priorities, what are the relative roles of central Banks, commercial banks, development banks, informal and unorganized sources of credit, and microfinance such as the Grameen Bank of Bangladesh?

(b) Discuss the seven market failures that, Stiglitz and his colleagues say, justify a strong government role in developing-country financial sectors. Do you agree with this assessment? Explain.