Question

According to Oatley, developing countries draw heavily on foreign capital because:

Options:

a) Foreign capital is a way for developing countries to overcome a shortage of domestic savings to increase investment and thereby raise per capita incomes.

b) Domestic capitalists tend to be politically powerful in developing countries, and the attraction of foreign capital increases the returns that can be earned by domestic capitalists.

c) Developing countries are relatively capital abundant.

d) Developing countries tend to be authoritarian, and these authoritarian governments benefit from capital inflows even though investment has no positive effect on per capita incomes.

e) Relying heavily on foreign capital to finance investment is the best way to avoid a debt crisis.

Answer 1

Developing countries heavily rely on foreign capital to bridge the gap caused by a lack of domestic savings, enabling increased investment and higher per capita incomes. Foreign capital is essential, often bringing expertise and technology that aid in economic development.

Step-by-step explanation:

Developing countries draw heavily on foreign capital primarily because foreign capital is a means to overcome a shortage of domestic savings, which enables them to increase investment and, subsequently, raise per capita incomes. Option (a) offers the correct reason for this phenomenon.

The ability of developing countries to self-generate sufficient investment capital is often limited, creating a gap that can be partially filled through foreign aid and international investment. Nevertheless, this foreign capital alone is not always sufficient for comprehensive capital accumulation, which is essential for investments in both physical and human capital.

These inflows are particularly important because they often bring not just the necessary financial resources, but also management expertise, technological know-how, and opportunities for training, which can contribute to economic growth and development.

While foreign aid and investment can have significant benefits, it is a controversial issue whether they always lead to economic growth. What is clear, however, is that low-income countries actively seek foreign investment to aid in developing their economies and to potentially achieve rapid economic growth.