National film industries sometime get submerged under the dominant threat of globalisation. France has been consistent in exhibiting national film practices. Eminent filmmakers like Jean-Luc Godard and François Truffaut established styles of film making which to this date remains influential. These specific film practices have been vividly discussed in this research. The ultimate target is to investigate whether French Cinema fits into the model of a national cinema, transnational cinema or global cinema. There have been quite contradictory view points among researchers and film critics in regard to the status of French cinema. Some argued supporting the French film industry to have retained its national ideologies even while venturing into the global film space. Others have specifically pointed to the Cannes Film Festival, denoting it as a transnational industry.
Theoretical research methods have been used to answer the main research question. Each of the methods specifically helped in scrutinising French cinema from aspects necessary to determine its status. Case studies include studying La Nouvelle Vague as a national movement. Using the Cannes Film Festival as a second case study helps in finding out where French cinema stands as a transnational cinema. Textual analysis using the role of stars has been preferred. It helps analyse how stars in France are perceived both nationally and globally. Global press reviews, US box office ratings of the last decade, economic grants and revenues by the French government have been used to formulate the investigation. The findings satisfactorily leaned towards French Cinema being a national cinema. Though French films has drawn diverse audience and commercial profits worldwide, the film industry can also be regarded as a deliberate effort by the government of France, in order to practice cultural diplomacy and promote idea of nationhood.
Keywords: French cinema; National and Transnational cinema; Globalisation; Hollywood
Sincere thanks to Mr. Simon Popple- my supervisor, this research would have been impossible without his guidance. Thanks to Dr. Robin Brown (Postgraduate tutor), Dr. Chris Paterson (course director MA International Journalism) and Dr. Paul Taylor (Personal tutor).
TABLE OF CONTENTS
Background and scope of research
2.0 FRENCH CINEMA AS A NATIONAL CINEMA
Cinema de banlieue
Examples of national cinema around the globe
Genres of French Cinema
History and Film practices of French Cinema
Case Study I- La Nouvelle Vague as a national movement 1950-1960
Postmodern French Cinema
3.0 FRENCH CINEMA AS A TRANSNATIONAL CINEMA
Case Study II- The Cannes Film Festival
4.0 FRENCH CINEMA AS A GLOBAL CINEMA
La Nouvelle Vague going global
Stars of French Cinema
Comparison to Bollywood and Hollywood
5.1 Conclusion 35
5.2 Scope for further research 37
Appendix 1 United States’ Box Office Ratings
Appendix 2 Box Office Collection
BAFTA- The British Academy of Film and Television Arts
CHC- The Classical Hollywood Cinema
CNC - The Centre National de la Cinématographie
Eurp- European Int’l
First- First Look
Focus- Focus Features
FL- Fine Line
Fox- 20th Century Fox
FoxS- Fox Searchlight
GATT- The General Agreement on Tariffs and Trade
Gold.- Samuel Goldwyn
MBox- Music Box Films
Mira. - Miramax
OrionC- Orion Classics
ParC- Paramount Classics
PicH- Picture House
Ratt.- Roadside Attractions
Relbig.- Reliance Big Pictures
Rog.- Rogue Pictures
SPC- Sony Pictures Classics
USA- USA Films
Wein.- Weinstein Company
W/DD- Weinstein/ Dragon Dynasty
WIP- Warner Independent
UTV- UTV Communications
£- Great Britain Pound
$- US Dollar
1.1 Background and scope of research
This research aims to study the status of French Cinema, whether it is a national cinema, transnational cinema, or a global cinema. France has often been typecast as the birth place of cinema. Film historians often referred to the Lumière brothers’ L'Arrivée d'un train en gare de La Ciotat (1895), as the birth platform of the medium of cinema. It has been a long journey for French master pieces since then, unveiling its national legacies from Jean Vigo’s Zéro de conduite (1933) to Jacques Audiard’s Un prophète (2009).
With reference to national cinema, this research often discusses the achievements and contributions of the French New Wave directors like Jean-Luc Godard, François Truffaut, Claude Chabrol. These directors’ practice of several film making techniques (Godard’s use of jump cuts for instance), which contributed a great extent to the formation of the identity of nationhood which France flaunts even to this day. The concept of auteur theory has also been given immense prominence, as a way to address whether such an explicit practice suited to a niche industry like France, or is it more logical for such theories to flourish in a culture and economy like Hollywood?
Next, it moves to address whether French cinema can be called a transnational cinema. The government of France assisted with grants and revenues for the film industry to flourish amongst international pressures. The French government implemented plans and proposals in order to sustain its national film industry and also implemented ways to popularise it in the international market. The Cannes Film Festival has been symbolised as a significant factor for determining how French cinema influences countries abroad in regard to its image as a film industry. It is also a reflection of how it pursues overseas business. The Cannes Film Festival can also be regarded as a form of cultural diplomacy which the French government assists, to hold a firm and regular place on the world cinema platform.
Then this research focuses on how French cinema fits into the concept of global cinema; did its methods of film production and distribution have an impact upon the world cinema or the worldwide audience in any way, so as to label it as a global cinema? Here, French cinema has been compared to Hollywood and Bollywood. Some of the most successful commercial ventures of both Hollywood and Bollywood have been referred to while making comparisons. Quite often overseas profit margins have been discussed, to comprehend where world cinema stands today economically and how French cinema is coping with such demands. We often point to the charts that outline the major victory which French cinema made in the last decade. It points to where it stands when compared to the major international or global film markets.
Research methodologies have been limited to theoretical investigations. Case studies using La Nouvelle Vague as a national practice and The Cannes Film Festival as a transnational venture have been conducted. Textual analysis focuses on the star system of the French film industry. It helped in figuring out how the notion of stardom has influenced its image and standing. Jean-Paul Belmondo is a popular face which represents the French stardom. We also discuss how some of the individual stars are credited with stabilising and popularising French cinema worldwide. Gérard Depardieu is one of those important names, whose contribution towards the industry has been immense.
Reviewing US box office ratings of the last decade presents a clear idea of where French cinema stands globally. It helps in comprehending all the three fields of this research, i.e. national, transnational and global comparisons.
We also take into account of how French cinema has been represented by the media worldwide. It helps analyse what stand the media is taking while addressing French cinema. It also helps in comprehending how popular French films are abroad and how influential is a French movie release at the international box office. Charts give a clearer reference of figures in answering the research questions.
Equally important have been reviewing how the French government contributed in enhancing film making practices. How efficient are the subsidies in strengthening the film industry. How important the film industry to the countries overall economy is and in what ways does it promote France worldwide can be answered by revisiting the stance which the French government has been taking since the days of La Nouvelle Vague.
Analysing each of three research aims in respective chapters, it finally sums up the research and lays out any betterment of the study if a further research is conducted.
Before discussing the intricacies of French cinema, a brief account of history would help connecting facts better. The history of French cinema dates back to the nineteenth century when the Lumière brothers, staged the first performance in Paris on December 28, 1895. Their film cinematograph was watched by the public at the Grand Café in Paris. L’Arrive d’un train en gare de La Ciotat (1895), “is said to have made the unprepared audiences scatter in alarm as the locomotive seemed to approach them” (Robinson 1994 cited in Austin 1996:2). Georges Méliès’ incorporated the use of Mise-en-scène, where visuals depict artful narration. The concept of auteur theory has been applied to films from this period. Méliès’ control over his entire film, in terms of staging, camera movements, editing makes him the first auteur in French cinema. Some of his most talked about films include Cendrillon (1899), Barbe-Bleue (1902). Entrepreneurs Charles Pathé and Leon Gaumont established studios in Paris and ultimately commercialised the French film industry. Such was its impact, that the majority of films distributed all over the world in between 1908 to 1910 were French films (Billiard 1994:56). This gave rise to the idea of France as a domain which could successfully venture and influence the international film market.
1.2 Research Aims:
Aims and objectives of research-
- 1.Assessing whether French cinema is a national cinema by applying models drawn from Croft’s definition of national cinema. La Nouvelle Vague or French New Wave is being used as a case study.
- 2.Assessing whether French cinema is a transnational cinema, by using The Cannes film festival as a case study.
- 3.Assessing whether French cinema is a global cinema by critically comparing it with models of global penetration such as Bollywood and Hollywood.
Research questions and hypothesis-
Main research question: (i) What is the status of French Cinema- national, transnational or global?
- 2.French cinema considers theories laid by Cahiers du Cinéma critics and auteurs as pivotal. Major successes of the industry are credited to the auteurs who are said to have shaped contemporary French films. They have modified the industry theoretically as well as with practice based innovations.
- 3.French cinema could not exhibit the dominant image of commercialisation among the audience, as much as Bollywood and Hollywood.
The major limitation to this research is the lack of quantitative investigation. Due to economic constraints, research could not be conducted outside West Yorkshire. This county is too narrow a sample to represent an authoritative view of French cinema’s global or nationalistic stance. French cinema is too individualistic an area to be quantitatively measured here. Moreover, comparison to Bollywood and Hollywood would not have yielded any effective result in Yorkshire, considering the hypothesis that French cinema audience loyalty is segmented. Any sample selection or questionnaire would have given a partial view in favour of Bollywood and Hollywood.
Interview with modern languages student, academicians, critics were not possible. The major part of this research has been conducted during spring and summer. Universities were closed and students were on holiday. Hence, the overall methodology has been limited to theoretical analysis. US box office ratings have been reviewed only for the last ten years, hence French cinema’s commercial and global success or failure have been judged being more dependent on the results of the last decade.
1.3 Literature Review
Rapid globalisation has transformed the perception of cinematic success. Research is being conducted to examine French films standing amongst contemporary competition. Jeffe Menne at the Vanderbilt University questioned French cinema’s transnational standing. He mentioned how Neupert’s A History of the French New Wave Cinema (2002), depicts auteuristic impact as a national symbolic practice. As Menne pointed out, “Jean-Luc Godard’s À bout de souffle (1960), we see antagonism between the apparatus of the nation-state and the appeals of national culture” (Menne 2007:70). This viewpoint has been targeted in this research as one of the strong points of France exhibiting its film industry as a national industry.
Considering French cinema as a national cinema, Vincendeau, while reviewing the fiftieth anniversary of La Nouvelle Vague, has also typecast it as a national movement. French cinema has a personal, individualistic vision. Vincendeau commented on French cinema to be consisting of two groups “one around the Cahiers du cinéma (François Truffaut, Jean-Luc Godard, Claude Chabrol, Eric Rohmer, and Jacques Rivette), the other the “Left Bank” film makers Alain Resnais, Agnès Varda, and Chris Marker” (Vincendeau 2010:135). La Nouvelle Vague has covered a certain threshold level to coronet itself as a national cinema. Several political and cultural issues which form the theme of the film, distinguishes itself as a national model. French cinema has given several such examples. In numerous films it brought out national dilemmas on screen. “The micropolitics of perception exemplified in Godard’s cinema counters the ideology of the visible at work in Western forms of representation by restoring the materiality and physicality and the sense of duration to acts of (technological) perception” (Rio 2005:63). “The New Wave cinema was shaped by forces as abstract as the growth of film criticism that stressed mise-en-scene over thematic and as concrete as technological innovations in motion-picture cameras and sound recorders” (Neupert 2002:3).
It was in the period when French New Wave flourished that the practice of authorship also gained prominence. Analysing these practices is significant as they shaped French film making, which in turn affected its worldwide status. Writers of the Cahiers du Cinéma have always talked about ‘la politique des auteurs’. The subjects got interconnected to an extent that Sarris suggested on abbreviating ‘la politique des auteurs’ as the auteur theory (Sarris 1962). He also stated “Ultimately, the auteur theory is not so much a theory as an attitude, a table of values that converts film history into directorial biography” (Sarris 1968:30). Rohmer asserted in the work of art, it is the auteur that remains predominant (Rohmer 1956). In review of John Huston’s Red Badge of Courage (1951), Bazin has most strongly distinguished between a director and an auteur. He commented on Hutson’s creations devoid of any personal style. He has always limited himself to be a metteur en scène, while Hitchcock is a true auteur. Research on the concept of authorship led to several contradictory viewpoints. “Auteur theory cannot simply be applied indiscriminately. Nor does an auteur analysis exhaust what can be said about any single film. It does no more than provide one way of decoding a film, by specifying what its mechanics are at one level. There are other kinds of code that could be proposed and whether they are of any value or not will have to be settled by reference to the text, to the films in question” (Ibid, p.168). “Auteurs are out of time. The theory which makes them sacred makes no inroad on vulgar history, has no concepts for the social or the collective, or the national. The primary act of auteur criticism is one of the dissociation- the auteur out of time and history and society is also freed from any productive process, be it in Los Angeles or Paris” (Rohdie 1971 cited in Grant 2008:83). Kline points out, “Films such as Les Godelureaux now strike us as frivolous, while others, such as Le Tigre aim la chair fraiche, seem too blatantly commercial to merit their “auteur” a place in the cinematic pantheon that honors Chabrol’s contemporaries Godard, Truffaut, Rohmer, Resnais, and Malle” (Kline 1992:87).
Concerning national identity, there have been controversies over the remake of Louis Feuillade’s Les Vampires (1915), to which several researchers responded, “In a film about the status of France’s national cinema in the 1990s, why make Feuillade’s crime serial stand for the quintessential French film of the silent era?” (Shea 2009:121). Hudson associates the remake with “a larger project of reasserting national patrimony” (Hudson 2006:220). In reference to transnationalisation, French cinema has been typecast by French directors themselves to have plagiarised American cinema. Pepe Lo Moko has been accused of duplicating American traits. On the contrary, Jean Renoir; Robert Bresson, Jean Cocteau, Jacques Becker, Abel Gance, Max Ophuls, Jacques Tati, Roger Leenhardt are auteurs who are known to write their film giving an authors touch which is devoid of any American influence.
In regard to foreign film trading of France, Bakker mentioned the internationally associated film producer of France Les Films Albatros business tactics, “Given the small potential market for its films, Albatros had to find an intricate balance between producing at low cost and delivering films with at least threshold ticket-selling capacity. It did so by differentiating its films, entering film distribution in France, coproducing internationally, and cooperating with Pathé and Gaumont, the two largest French film companies. While its larger European rivals were obsessed with operational effectiveness vis-à-vis Hollywood, Albatros, by adopting a distinct strategic position, hardly had to pay attention to operational effectiveness at all. It was making a differentiated product for needs unserved by Hollywood” (Bakker 2004:45). Some researchers pointed to the co-production’s, which served as an opportunity for financial boom. “For the French producers the cooperation with the DEFA studios was, then, first and foremost an economic opportunity. The postwar years of 1945–59 were a boom period for the French movie industry, yet producers faced strong competition from the dynamic blockbusters of the American majors” (Silberman 2006:22).
The concept of how French cinema relates to global cinema gets a bit complex, as we try to focus on the cultural and economic diversifications. Global cinema is mainly dominated by the United States; hence Smith referred to the film Sabrina (1954), where an intricate antagonism in between US and the French film industry could be emphasised. “French-American film relations after all began over a patent dispute. This quarrel may partially account for the persistent and historical antagonism the French have toward the U.S. film industry. The plot of Sabrina alludes to these cultural/economic antagonisms, as it revolves on American takeovers, on doing whatever it takes to secure a deal and a market. The film reflexively suggests Hollywood’s own historical “dealings” with the French film industry and invites speculation on how these disputes intersect with and inform postwar international exchanges” (Smith 2002:32).
As simple as it might seem that Hollywood is the ultimatum when it comes to ruling the world of cinema, the equation changes completely if we look at what Smith added further “Green Card (1990), Forget Paris (1995), the remake of Sabrina (1995), French Kiss (1995), and An American Werewolf in Paris (1997), that are set in France, that are remakes of French films (Green Card)”. “The Hollywood film French Kiss can be read as a response to the GATT quotas, as a way to appease those wanting less Hollywood and more local productions. The film is literally set and was shot in Paris and the French countryside (utilising on-location French production units)” (Smith 2002:48). Equally significant is how researchers take the dominant role of the global industry of Bollywood in world cinema. In regard to Bollywood, Ganti said, being a dominant media institution within India, Bollywood plays a significant role in defining dichotomies like traditional-modern, global-local, Western-Eastern, and categories such as culture, nation, and Indian (Ganti 2000).
This research would take all the above statements into account to finally conclude which of them actually represent French cinema. The investigation gets complicated as the global comparison comes into the scenario, as Hollywood is too big an industry to be measured against the French film industry. Transnationalisation and globalisation for French cinema might overlap; hence both the concepts have been put into separate chapters to rigorously assess its individual implication. In the chapter assessing French cinema as a national cinema, it is essential to lay down the particulars of French cinema-the Avant-garde movements encompassing impressionism, surrealism, and poetic realism. Gradually the focus shifts to postmodern French cinema which represents modern practices and how theories stated by auteurs influence present day film making. It is equally important to refer whether countries abroad, specifically took French film advances as a form of cultural diplomacy or whether film critics views French cinema or French film festivals to be a diplomatic effort on the part of the government. It would then specifically categorise French cinema as a national cinema. Aspects of global cinema constitutes the industries of Hollywood and Bollywood and French cinema have been compared to them, to assess whether its practices fits into the category of global cinema.
Check below the complete PDF Dissertation sample.
The monetary systems are dynamic, and so is that of the United States of America. It has been a dynamic one with various changes being done on the traditional monetary systems. New systems are in place and as such, the economy of America runs on different systems from the other countries of the globe. With the introduction of currency in the world, the USA has used and changed the value of their currency with the help of various institutions such as the Federal Reserve system for a variety of reasons (The Federal Reserve, 2013). Various presidents wanted to achieve various goals by changing the operations in the economy through changes in the currency. As such, the trade with other countries has taken several different forms as a result of the changes introduced at various times in the history of America. This paper explores these developments as well as the various institutions and their impacts on the USD. It also looks at the various forms of money and the changes in value of the dollar. Various policies that changed the face and the value of the United States dollar from the time it was backed by gold or other valuable metals up to now that the dollar is just in the form of paper money will be explored. The reasons behind these changes and whether they were genuine or nor, if they have benefited the country or they have ruined its economy are facts that will be discussed in this paper.
HISTORY OF US DOLLAR
The United States dollar is official the currency of America as well as its overseas provinces or territories. The dollar is subdivided into cents where one hundred cents that are equal to one dollar. It is among the hard currencies of the world and is commonly used in several countries as the medium of foreign exchange. The dollar is also an official currency in some other countries, on the globe such as the British Virgin Islands. Its history date more than two hundred years ago from the instance it was introduced by the Spanish national in America at that time. Its name comes from the Spanish dollar (Aiton, 1999). The American dollar has since been valued using various valuable items, precious metals being the most common in the early days. The most common precious metals were gold and silver. The dollar coins were minted from these metals and were designated to be a legal tender. A copper alloy dollar was named Sacagawea dollar while the silver dollar was called the American silver Eagle. The dollar coins ranged from one cent to fifty dollars.
The administration of President George Washington paid much attention to the monetary issues of the state, and most of the changes began from there. He was backed by the then secretary of the treasury Alexander Hamilton. He proposed the coinage act in 1792 that was passed by the congress. It sought to establish the dollar to be a unit of account. Gold rose in the 19th century in relation to silver and so, all gold coins were removed from commerce as well as their melting. Another coinage act was passed in 1834 whereby the ratio of silver to gold in the dollar was altered from 15:1 to 16:1. As such, the new dollar was backed by 1.50 grams of gold from the earlier one of 1.60 grams. Its the first devaluation of the dollar as the value of gold was reduced by 6 %. The silver and gold were still useful in commerce (Nussbaum, 2000).
The value of silver coins was again reduced in 1853 with the effect of placing the country on the gold standard effectively. Foreign coins like the Spanish dollar were still in use until 1857. The dollar became the sole currency in 1863, and it has remained as such even today. Bland-Alison act was enacted in 1878 providing for a freer coinage silver. The government was to buy from $ 2 million to $ 4 million worth of bullion of silver every month at the prices prevailing in the market and coin it into silver coins. This was seen as a subsidy to the politically influential producers of silver. Large silver deposits were discovered in western United States during the late 19th century, and it created political controversy. The increase of silver led to the reduction of silver coinage and some of the organisations wanted to retain the bimetallic standard in an attempt to inflate the dollar. The inflation of the dollar was aimed at helping the farmers to repay their loans and debts more easily. On the contrary, the eastern banking and other commercial interests were for sound money thus a switch to the gold standard. The controversy did not bar the diminishing of the status of silver as it went through several legislations from 1873 to 1900. Gold standard was finally adopted formally. The gold standard underwent several modifications, but it survived (Nussbaum, 2000).
THE GOLD STANDARD AND SILVER STANDARD
The gold standard was adopted formally in 1900 when the gold standard act was enacted in March 14, 1900. Thus, gold and silver became the legal tender coinage of the United States. The guaranteed dollar was convertible to 1.5 grams of gold. America suspended twice the gold standard during the World War 1. In one instance, it was suspended fully and the second one it was suspended for foreign exchange. US companies at the time had huge debts payable to Europe and the European entities began to liquidate the American debts in gold. The resultant was the exchange rate of the dollar to the British pound hiked to reach the level of $ 6.75 that was above the parity of the gold that was ($ 4.8665). There was then large gold outflows that led to the closure of the gold standard in 1914 by the New York stock exchange (Nussbaum, 2000). The nationally chartered banks got instructions from the treasury department to issue emergency currency in an attempt to save the exchange value for the dollar. The Federal Reserve, that was newly created organised funds that would assure debts to foreign creditors. The efforts were successful and notes called Aldrich-Vreeland was created. The notes were retired later in November and the gold standard restored.
The United States could retain their gold standards during the war as they remained neutral. Other countries had abandoned it. It had no restrictions to import or export gold. When America joined the war, the president, Wilson, banned gold export and, therefore, the gold standard was suspended for foreign exchange. The countries returned to the gold standard after the war although in an altered form. It was again abandoned during the great depression as any other currency had done. The Federal Reserve did raise the interest rates in a bid to protect the gold standard of the United States dollar. This worsened the pressures of the domestic economy (Aiton, 1999). People started hoarding gold coins after the bank runs were more pronounced in the early 1933. Hence, there was distrust for banks as well as distrust for paper money that worsened deflation and consequently depletion of the gold reserves.
The congress passed and implemented many acts concerning the issue of the gold standard starting as early as 1993in order to fight deflation that had become severe. The gold standard was suspended except for the foreign exchange. The suspension revoked the gold as the legal tender for the universal debts. Private ownership was banned for considerably big amounts of gold coins. For the purpose of foreign exchange, the dollar that was set at $ 20.67 per ounce was lifted thus allowing the dollar to float freely, that is, in the foreign markets. There was no set value of gold. The value was, however, restored later as the concerns to control the prices of gold in the private market were abandoned. As such, the gold price started to ascend and so did the price of oil as well as other commodities rose. The commodity prices became more volatile and so, the oil-gold exchange rate remained the same in the 1990s. There was fear that a specie gold based economy would emerge that would be separate from the central banking. This would threaten to collapse the dollar. To avoid it, trading underwent several changes.
The use of the silver standard as a legal tender intensified in the late 1870s whereby silver certificates were printed and issued as part of the circulation of the paper currency. The issuance was as a result of the agitation by the US citizens who were not happy with the fourth coinage act (Highfill, 1992). The silver certificates were used together with the dollar notes that were gold based. The certificates were redeemable in terms of silver dollar coins, but they later could be redeemed for raw silver bullion. They were issued in three major denominations; $ 1, $ 5, as well as $ 10 notes. An act called Agricultural Adjustment Act was passed. It had a clause that allowed pumping of silver into the market in order to replace gold.
Use of silver denominations was, however, delayed until 1974 partly due to the problem in the requisitioning of the necessary silver. There was a state of misunderstanding as well as un-cooperation between the secretary of state and the secretary to the treasury. Hamilton, who was the secretary to the treasury, was accused of non-cooperation in the determination of the requisitions as a result of personal problems. The mint engraver of the time was Robert Scot, who minted the first silver coins, as well as the flowing hair of the dollar. It is suspected that Robert Scot used the eagle design of Engraver Joseph Wright that was the 1972 quarter dollar coin (Highfill, 1992). The silver dollar coins were minted using the copper and silver alloys with a diameter of 39 to 40 millimetres.
A new design for the silver coin called the New Draped Bust came into existence in 1795, and it went through into the 1800s. No one knew exactly the reasons for the change in design, but speculations have it that there must have some political situation must have been the cause. It is speculated that the design was intended to show a notion to the Spanish king that some reforms in the coinage had taken place, just as what happened to the Spanish 8-reelers or the milled dollar coins that had changed, that is, from a pillars and hemispheres. The silver dollar could not compete with the Spanish milled dollars because of lower weight, and it was more impure as compared to the Spanish dollar. The discovery of more silver deposits, as mentioned earlier, led to a corresponding decrease in the minting of the silver dollars until around 1802 when the quantities of silver started to reduce (Highfill, 1992).
The dollar became an international currency during the World War 2 when the economies of Asia and Europe were harmed by the war while that of America was not. As a result, the European governments used all their gold reserves and thus; they had to borrow to pay America for the war materials. This helped America to accumulate large gold reserves that gave America a significant economic, as well as political power after the war. Bretton Woods Agreement was signed to codify the dominance of the dollar. As the allies wanted to create an international monetary system that would sustain the global economy as well as prevent economic malaise after the war, the dollar was accepted as an international legal tender for the allies (Highfill, 1992).
THE PAPER MONEY
Paper money came into use in the United States of America in the period between 1862 and 1971 when it was introduced as a legal tender. The paper money was in the form of currency notes, and they were issued for a longer period that any other currency used in the United States of America. The money was popularly known as "greenbacks", and they replaced others that were given the name demand notes. The issuance of the US notes came to an end in January 1971, and they existed as the valid currency notes but were rarely in circulation. Both the federal notes, as well as the United States notes, were part of the national currency in the United States of America. They came to be used as a legal tender after the recall of all gold in 1933, and both are in circulation in the same way. The only difference between them is that the Federal Reserve notes are usually backed by debt purchased by the reserve (Marotta, 2014). The United States note represents a bill of credit. The paper money is not backed by any concrete commodity as was earlier where the dollar was backed by gold. It is called fiat money that derives its value from the constitution or the government law. The government only declares it as a legal tender or the accepted form of payments.
FEDERAL RESERVE SYSTEM
The Federal Reserve plays roles the central bank of the United States of America. It came to existence on 1993 December 23rd when the Federal Reserve act came into force in response to the financial panics especially the severe panic of 1907. The roles and duties have changed with time as they have expanded, and the structure evolved. The great depression was the major factor that led to the changes in the system. The congress identified three core objectives of the United States monetary policy in the Federal Reserve act (Johnson, 2001). They were stable prices, maximum employment and moderate (long term) interest rates. Stable prices, as well as the maximum employment, are sometimes called the reserve's dual mandate. The functions the federal reserve have expanded to include conducting monetary policy, maintenance of the of the stability of America's financial system, regulating as well as supervising banking institutions and providing financial services to the government, depository institutions as well as foreign official institutions. It also conducts research of the economy as well as releasing publications that include the Beige Book.
The structure of the Federal Reserve System's constitutes the board of governors appointed by the president, (or Federal Reserve Board). It also comprises of The Federal open market committee (FOMC), regional Federal Reserve Banks (twelve in number) located in major cities throughout the country, several private banks as well as various advisory councils. FOMC is responsible for setting monetary policies. It is composed of all the seven board of governors and the twelve regional banks. Only five of the regional bank's heads vote at any one time. The reserve also has private elements as well as public components. The aim for both of the components is to enable the bank to serve both the private banks and the general public. It is, thus, a unique feature of the Federal Reserve that is different from any other central bank in the world. It is also a unique feature that the currency is created by an outside entity, that is, the department of the treasury. It is autonomous in the sense that the monetary policies it puts in place do not have to be approved by anybody, not even the president. The funding received is not approved by the congress.
The system derives its authority from statutes enacted by the congress and is subject to oversight by the congress. The board of governors among them the chairperson and vice chairperson is appointed the president and approved by the senate. The board members receive salaries as set by the federal government. The national banks are obliged to hold stocks with the Federal Reserve Bank in the regions they operate that entitles them to choose some members of the board of the regional reserve bank. The annual profits are handed over to the government after 6% statutory dividends are paid out to the member banks' capital investment. An account surplus is maintained as well.
Functions of the Federal Reserve
The functions of the federal systems are as follows:
- ØAddressing the issue of banking panics
- ØThe Federal Reserve plays the role of central bank of the United States of America
- ØBalancing between the government and the private interests
- ØRegulate and supervise banking institutions
- ØProtect consumer credit rights
- ØManaging money supply through the monetary policy to achieve stable prices, maximum employment as well as moderate long term rates of interests.
- ØMaintaining the financial system stability
- ØOffering financial services to the government, depository institutions as well as foreign official institutions. This is aimed to facilitate regional exchange of payments and also to respond to the local liquidity needs.
- ØEnabling the standing of the United States in the world economy (The Federal Reserve System, 20133).
In addressing the problem of bank panics, the banks hold stocks in the Federal Reserve. These stocks are currency amounts as well as deposits in other banks. The stocks are fractional amounts, and they must equal to the liabilities of the bank to customers. Factional reserve banking is the name given to this process. The result of the fractional reserve banking is that the banks invest most of the funds they receive as deposits. There are occasions that the banks may require the help of other banks to continue operating especially when the customers withdraw their savings. This is called a bank run. Bank runs result to various problems, both economic and social. One of the responsibilities of the Federal Reserve is to prevent the occurrence o the bank runs and thus, acts as the lender of the last resort.
The Federal Reserve has the function of checking clearing systems. It was given this function after some banks had refused to clear the checks from other banks. The congress wanted to eliminate the financial crisis that loomed in the country as the one that occurred in 1907 and caused financial panics. The payments in that period were disrupted as the banks as well as the clearinghouses refused to clear checks from other banks. The system could, therefore, provide an elastic currency as well as equitable and efficient system of check collection.
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The implementation of Customer Relationship Management (CRM) systems and associated factors of UK based companies.
Aim of the chapter
The aim of this chapter is to have an idea on what the CRM systems and how they are used in the UK. This chapter will also explore how the Vodafone Company implements the system and what benefits it gets from the use of the systems. The chapter will also highlight the limitations to the research on the implementation of the CRM system by the company.
The Customer relations management (CRM) comprises the processes used by a company in tracking and organizing contacts with its current customers and the prospective ones. There is CRM software which is used to enter and store information about customers and their interactions and these can be accessed by employees who are in different departments of the company. The goals of CRM are to improve the services which are provided to customers and to use their contact information for the targeted marketing.
Generally CRM refers to an approach which is software-based used in handling customer relationships but most vendors of CRM software stresses that it requires a holistic approach for CRM effort to be successful. CRM initiatives mostly fail because its implementation only focused on software installation, without giving out the context, understood and support so that the employees can learn and take advantage of the information systems. Implementation of CRM can be done without investing mostly in software although software is usually necessary to explore the benefits of CRM strategy.
Main reason to choose this subject area for research is to help and boon the organizations who wants to implement CRM systems, System Analyst, Technologist, IT consultants who are dealing with the system implementation and anybody who wants to gain knowledge of CRM system implementation for making decision at the right time, moderate the confusion of selecting the appropriate strategies for implementation success and to know the causes of CRM system implementation failure. The introduction of CRM system is a noble idea in an organization; however, introducing these CRM systems is likely to be faced with certain challenges both internal and external.
The choice to this study is therefore based on the fact that introducing CRM system is like introducing a change to the organization and thus numerous factors being affected. The selection of the topic is meant to create an awareness of the validity of the current available CRM systems (Dyche 2001, p. 90). This will help the system developers and software to identify the shortcoming with the existing ones, so that they can improve or formulate new CRM systems and application software that are much appealing to the clients in carrying out CRM functions.
Aims of the dissertation
To study and investigated how customer relation management systems are implemented in the UK companies. This study is targeted to finds out what are the primary systems available for the UK companies that would help them carry out the various functions in their operations. Through this the study will also establish the challenges that the organizations might face in the use of the various applications software at there disposal and then establish the gaps left which technology based companies have not filled for customers needs.
In this study, would like to discuss the problems makes organizations not to implement CRM systems. Additionally, the study aims at determining the way the implementation of CRM systems in an organization affect factors linked to employees’ well being recruitment and motivation; and how the organization structure determines the CRM systems need.
The main objectives for this study are:
Studying and learning the Strategic CRM system implementation.
Here the research will include the academic literature, enterprise publication different organizational data and information for CRM system implementation which has been published by the organization or specialists), CRM system implementation case studies and resources which will explore and explain the significance of strategic system implementation.
To investigate how CRM applications are developed in UK firms. A lots of facts and issues are in the system implementation and among them the major impact is higher rate of project failure and its impact the growth of the organization. The investigation will highlight the different organizational management issues like top level management co-operation in the system implementation and their knowledge and skill, their time schedule for system implementation and affect and accepting on their and employees work and organizational change environment etc.
To study the problem customers faces in implementing the CRM applications. It is mainly the customer’s satisfaction that are they accepting new system, is it too complicated to use and the organizational change is acceptable, are the new system is improve their satisfaction.
Critically analyzing and investigating the task, responsibilities and role of Information and Technological resources and people resources in system implementation project because these resources are critical for system implementation planning and success.
To establish the way organization structure affect the usage of CRM systems and applications.
Experimenting, testing and evaluating the hypothesis. Propose and designing the hypothesis based on the analyzed information and testing it for the expected result and calculating the risk.
To investigate how CRM systems are compatible with employees knowledge and skills.
To suggest and recommend ways of mitigating and solving the problems posed by the systems and applications.
Vodafone is a mobile network operated in Britain and its headquarters are situated in Newbury, Berkshire in UK. Vodafone is the largest mobile operator and communication network in world with a market value of more that $75 billion. The company operates in more than 25 countries in the world and has also partnered with other networks in more than 42 countries.
The company derived its name Vodafone from the Voice Data fone to reflect the major work of the company which is to deliver data and voice services of the mobile phones.
Vodafone is the second largest mobile telecom group in the world behind the China mobile with approximate of 303 million customers across the globe. The China mobile has more customers than the Vodafone but has less turnover and market capitalization than the Vodafone. Vodafone owns 45% of Verizon Wireless, the largest mobile operator in the United States based on the number of customers the company has.
Vodafone CRM overview
Despite of customers dealing with different company’s employees and different entities, they perceive the business as a single entity. In Vodafone, the CRM is a combination of different policies, strategies and processes that are used by the company to track the customers’ information and unify the customers’ interaction with the company. This is a new means and technology that is used to attract more customers that are more profitable to the business and on the other hand, it forms tighter bonds with the current customers.
There are different aspects in the CRM that relate to each other. These aspects include:
The front office operation (FOO) - These includes the meeting with customers face to face, on phone conversations, through emails and other online services.
Back office operation- the deals with activities that are linked to the front office. Primary activities that take place in back office operation that affects the customer most are the marketing, settling down payments and product development and production.
Business relationship- this category helps both the front and back offices in carrying out their duties smoothly with the outside environments. They deal with issues of company partner, distributors and other company network.
CRM analysis- analysis data of customer relation is important for the future plans in the marketing of the company or its products. This may give the marketing department an insight of success or failure of its activities. So, the analysis of CRM is process that helps the company to makes judgment of activities and set a blueprint for the future marketing campaigns.
Customer relation is a paramount activity in creating an environment that enhances the business growth and expansion both in the customer numbers and sales return. Despite the fact that customer relation is very vital tool in the company operation, most companies find it challenging in carrying out duties concerned with customer relations. Today’s business environment is very competitive, and this call for invention of techniques through which customer relation activities may be well coordinated to make the best close relationship with the customers. Through the several aspects concern with customer relations, most business can revive and have a large market share (Freeland 2002, p. 390). Companies may achieve through restructuring of the organizations or changing the method of operations. In either way, the main issue should be directed towards gaining the most from the available opportunity of untapped market and customers.
Each and every day, there are new industries which are coming into being each with different area of specialization. However, it is evident that the era of monopolies is long gone and business is becoming more competitive. This means that every organization must be in a position to align its resources to ensure that it harness available opportunities to rise up to the market competition. This has promoted adoption of various ways of going over competitors (Gronroos 2000, p. 200).
One of the most important factors that have been adopted by different organization is creating a positive image to their customers. Business management since the second half of twentieth century has recognized that a customer is the most important asset that the organization holds. Market place has changed drastically such that huge capital investment may be systematically brought down by lack of appeal to customers. Customers can determine the success or failure of the organization.
Customer relations do not only help the organization to rise above its competitors but it also helps the organization to create good relationship with its employees. Research has documented that an organization which takes care of the welfare of its employees is more likely to succeed that an organization that does not take care of the welfare of its employees (Kotler 2002, p. 39). Employee satisfaction creates a competitive edge for the organization which most organizations competing in the same line of business may find difficult to replicate (Gulycz et al., 2002, p. 37). Therefore, it is important that the organization lays its focus not only on its customers but also on employees.
It is evident that customer relations in most organizations are taken as a one man affair (Whittle 2003, p. 46). This implies that most organization entrust this noble role with customer relations department and in some organization public relations department. However, customer relations start right from within the organization before it goes to the outside environment. This means that organization must first train its entire staff on the basics of customer relations to ensure that they understand the importance of customer relations.
Traditionally, most firms have employed a number of strategies to attract new customers and retain the already existing ones. However, the various methods which have been invented in the past time had numerous shortcoming in the managing the entire customer relation systems. Therefore, the main challenge with customer relations management has been maintenance of comprehensive data systems that would permit proper coordination in communication between the customers and their affiliated companies.
As the customer management issues became much complex and sophisticated, technology has switched on to mitigate the problem of management (Ryals 2003, p. 112). This is has led to emerging of a number of systems and their accessories that has changed the traditional way of operation and management in many companies. Currently, there are numerous CRM systems which have been invented and developed to achieve various purposes within an organization.
The various CRM systems and accessories available for which a company can opt to adopt include the consumer relationship systems, collaborative systems, campaign management, sales intelligence and analytical CRM as well as operational CRM (Mangen and Thompson 2002, p. 19). The above systems form core areas through which companies can make an impact to the customers.
Managing customer relations
Customer relations do not only involve treating customers well while in the business premise or when in contact with staff but it goes deeper than that. Customer relations involve keeping constant communication with the clients to ensure that their concerns are well addressed (Moore 1999, p. 41). The first important thing in customer relations is to ensure that each and every customer is treated as equal since they have a part to play in the success of an organization (MacVittie 2003, p. 62).
Every customer counts in the success of an organization (Day and Hubbard, 2003, p. 23). This means that all customers should be treated in an equal manner to ensure that they feel as a part of the organization. For example, if we take an example of a shopping mall where customers pay through queuing method, there should no preference given to some customers while others are discriminated. Customers should be taken as stakeholders in the organization.
One of the most important factors in managing customer relations is to ensure that the organization attracts and retains customers. It is easy to acquire customers than it is to maintain them (Peppers and Rogers 2000, p. 73). The main reason being that customers usually evaluate after purchase of goods and services and therefore make post purchase decision which determine if they will come back to the organization or not (Porter 1998, p. 60). Therefore the main aim of any customer relations should be to ensure that the business is able to attract a constant flow of customers and at the same time maintain them. This is a difficult task to accomplish that does not only involve customer relations department but the whole organization.
Customer’s relations play a vital role in the success of a business organization. Since 1980s, there has been a great shift in organization management and organizations are paying more attention to their customers (Paul 2000, p. 60). The increase competition in the market has forced most organization to come up with effective ways to manage the relationship between the organization and their customers. Management remains one of the most vital ways to manage customer relations in any organization.
One of the most important roles of management is to ensure effective planning. Planning entails understanding where the business is currently, and where it wants to be in the future and thereby laying strong foundation to reach there (Levy and Powell 2000, p. 65). In laying down this plan, customers are important. The management must be in a position to forecast the number of customers they expect in the future and understand how these customers will play a crucial role in the growth of the organization to achieve set goals and objectives.
The initial planning phase is followed by another important function of directing the organization to achieve its set goals and objectives. Although literature has exposed directing as a mere relationship between organization staff and management, it goes deeper to include customers (Pine 1997, p. 248). Customers are part and parcel of the organization and therefore they also need to be motivated through effective services and consideration of their input to ensure that they contribute to the performance of the organization.
Therefore management is put in a better position to manage the operation of the organization. This position also puts management in a better position to determine the course that customer relations will take. Management should be in a position to involve all staff personnel in the organization to ensure effective staff management (Verhoef and Langerak 2002, p. 29). This ensures that customer relations are not taken as a one man duty but an obligation of each and every member in the organization.
Customer relations management to a company includes an array of activities. Companies are said to have effective customer relations management if they have efficiency in contacting both directly and indirectly with existing customers and prospective customers. Getting into contact with indirectly customers involves the liaising with people or groups of people/ companies referred to as call centers. Call centers are very much influential to business success as they offer opportunities of luring and connecting individual’s business to new customers.
This indicates that call centers forms a major part in customer relations management as without them, chance of expanding the company markets are diminished. Customer relations management thus aims at creating a seamless connection with potential people who can link potentials customers to the business. Moreover, the efforts that company deposits in customer relationships largely would aid the company maintain customers from exiting and joining the competitor companies. Customer leaving the company is far much detrimental in terms of company expansion (Guimaraes 2000, p. 120).
Development of CRM
Historically, businesses have always referred to customers as the prince of their business. However, this was used in words rather than in practical part, and therefore customers continued to suffer and bear the bad gestures from the businesses owners. Although royalty to customers for the past decades or centuries has been core in business operations, customers have suffered in the services delivery from their sellers in one way or the other (Paul, 1996, 52).
Until the last decade of the past century, many companies have rarely devoted themselves in serving the customers with dignity. Long customer queues that involved standing for long time and lack of concern in answering the customer question are some of the appalling behavior that composed the business environment (Dutta and Evrard 1999, p. 239). Perhaps the low level of technology together with other related factors had great contributions to this unsatisfying service delivery. Customers had to bear the callous condition on traveling long distances as well as the challenges of dissatisfying services due to uncompetitive business environment that prevailed.
In the last years of 1990s saw the birth of two concepts which transformed the business world. The technology invention on computer network and the abolishment of certain regulatory or the birth of the deregulatory concepts were two primary contributors that have translated the long theoretical saying of customer as a prince to reality (Edwards, 2007). The embracing of the modern internet technology and the adoption of the deregulatory idea were the forces that set platforms that made companies to take consumer needs and requirements with much consideration.
In cooperation of the two forces, numerous barriers to customer services enjoyment and satisfactions were eliminated or reduced by opening an environment of business competition (Bates et al., 2003, p. 16). The competitive environment has since then continued to be more intense with every day new ways intended to deliver the most unique customer services being brought to the customers’ disposal.
The on-line marketing and shopping is now the most robust way of reaching customers. This implies that the tradition methods which concentrated customer services in brick premises are no longer viable means in most parts of the worlds (Paul H 1997, p. 23). The adoption of the internet technology has now made customers to access their need at their comforts at home, which means those individuals still advocating to make customers princes by raising tower would compete well in the rising business competitive environment.
Through the advancement of the internet technology, information is no longer limited to customers instead this has exploded and is now seen by most of the clients as a nuisance. Actually, customers can access products and services, compares the features and prices of the commodities without limitations. During the inception of the internet and related services, many companies emphasized on the management of other factors other than customers that affected cash, revenue and profit margin (Cragg and Zinatelli 1995, p. 5).
This ideology was brought to an end by the development of the new technologies in the internet marketing and purchasing (Bligh and Douglas, 2004, p. 50). The invention of CRM applications were the initial stages that transformed many enterprises from the traditional focus and turned them to the customer needs. There was a big service reforms in many companies. These applications were seen to offer better support to the enterprises and then the customer services drastically improved.
The CRM application is a combination of a powerful suit of the high-end tools that will have business marketing, sales and the customer satisfaction. Using the CRM that is a user friendly solution, Vodafone is able to perform various duties of the business that are very crucial and helps in developing the company’s businesses. These functions include:
Storing of data securely
Improvement of the employees performances
Cutting the cost of doing business
Automation of key functions of the company
Coordinating the sale and marketing
And maximization of the customer satisfaction
The CRM software helps in maintaining the customer database without much effort. Through this software, the company is able to record individual customer preference and this enables in having a one on one services. On the other hand, this helps in promoting customers satisfaction and increase loyalty to the company. In turn, this helps in retention of the customer.
Feature-rich CRM software application
The On-premise CRM application are the CRM software meant for large companies that prefer an in-house solutions that are only meant to run on the company’s network. These help the businesses to purchase a product from the company with just one time payment (Gartner, Inc, 2008). Even though is one time payment software, it requires an extensive deployment, customizing software as well as maintenance and separate hardware.
Web-hosted CRM applications are the CRM that are meant for small and medium enterprises that are unable to buy the high cost in-house CRM software. The Web-hosted application is delivered via internet from the provider’s server without incurring expenses on maintenances, software and hardware. In compensation of these, the company pays a monthly fee to the provider to access the feature-rich solutions for their businesses needs (Arussy 2005, p. 151).
Improving customer Relations and improving business interactions through CRM application.
The CRM applications are equipped with interactive tools that help in managing and controlling the overall business needs through remote locations. The software is easy to use and helps in interacting with business function areas. The use of CRM applications helps in studying the market trends and also in identifying the potential market for the company which are very important in increasing the business ROI. Through this software on the other hand, the company is able to allocate work to different employees and other workers, manage its sales and marketing tactics, as well as receiving and obtaining feedbacks from the customers and other stake holders (Rigby et al., 2002, p. 76).
CRM on demand
The CRM on demand is managing the customer relationship through the web-hosted solutions that are easily accessed from anywhere in the world no matter the time. This suit helps the Vodafone Company to have a better integration with the business resources, management and sharing the activities depending on the need (Binggeli et al., 2002). The software also help in saving space and time, for instance, one can login and interact with members using the CRM on-demand that will automatically invite the selected member.
The on-demand is relatively low cost CRM solutions that are delivered on the internet. There is no software or hardware to run the system. There are several benefits that are received by the company through the use of CRM on demand.
The data can easily be accessed or stored in a secure database
It also help in managing the business on real time saving time and space
It helps in integration of business processes
Helps in accessing the up to date customer data which in turn helps in understanding individual preference
Its easy to customize and meet the business needs
This also helps in improving business marketing strategies and also improves the customer relationship.
The on-demand CRM have become a preference of small and medium enterprises in UK. This is because it’s easy to use and is also low priced compared to other management ways. They are designed to give the business an integration of business processes and resources in real time.
The open source CRM
The open source CRM means a high-end CRM application that was found on the principles of open source for development and production. The open source CRM is a new concept compared to others and most businesses in the UK and adopting the technology at a fast rate. The open source CRM is getting famous among the small and medium organizations because its regarded cheaper and fully integrated and is easy to use and manage all business customer relations (Child et al., 1995, p. 26). The Open source CRM is mostly hosted and is mostly developed by the company through the Open-source software license. Being free to access, the software gained popularity and on the other hand, they are developed to fit the individual business requirements. The software is easier to develop and can also be made according to the organization’s given specifications
Components of CRM and Implementation model (Chen and Popovich, 2003, page 676)
A number of reasons are commonly expended concerning the use of CRM systems, software and applications. In UK, most of the firms express adopting CRM systems and their related support tools (software and applications) for three main reasons which entail the customer service improvement, marketing and sales. Depending on the three areas, the companies aim at reducing the increasing high cost which is incurred through use of physical direct sales method.
The development of CRM systems in the UK has over the past few years been much rapid due to firms’ realization of the increasing costs on the employment of the direct sales techniques. Apart from this, the UK firms believe that CRM systems are means through which they can increase their global competition as most of the companies have gone to the global markets. This means that CRM applications and systems are in high demand for those companies which are operating in the foreign markets as means that may better monitors and keep the companies updated on the global markets developments.
Information and data very paramount for the success of businesses and this is mostly articulated with CRM systems acting as storage of database (Ebner et al., 2002). Information on sales, marketing activities and services that are offered to the customers are relevant information that is needed by the firms. This acts as reference systems that help the firms to develop marketing plans that are feasible by integrating the appropriate marketing mix.
Although there are several anticipated benefit that the firms believe and realize through implementation of CRM system, equally there are enormous disadvantages which are associated to the systems use. Large number of the UK firms lacks the marketing planning (Goff et al., 1998, p. 19). Marketing plan establishes the weak points of the company’s customer needs and needs right from the product development to the distributions that make the company to close links with clients. Consequently, the blurred planning systems form barriers to establishment of priorities of the organizations.
In most cases, UK companies have automated their system as a way simplifying complex processes. However, as mentioned earlier, companies in the UK are much varied and therefore each individual organization has different needs. Due to the uniqueness of the different businesses, development of universal application that can be used effectively and satisfied customers’ needs has yet not been developed. This means that most of the organizations have not been to acquires suitable software that support wide range of customer relation needs.
As result, most businesses are still grappling with development of robust technique that can be used in deciding critical customer related issues. Retail firms and medium companies are much affected by the low financial availability. Sale force automation software is among the most challenging and most the CRM systems are viewed as being unfriendly to the organizations (Andersen 2001, p. 110). As versions of applications and supporting software changes, this calls for the organizations to update their original. Generally, introduction of new software and applications requires both in-depth technical knowledge and skills that are necessary for the upgrading of the systems. Lack of adequate knowledge and skills thus form a great obstacle for most organizations.
The CRM implementation has several impacts on different business functions that include the sales, financials, IT and marketing. This would require the involvement of technology thus bringing in a conclusive decision in the process to enable a proper business function.
Most CRM project failures are associated with quality of the data and availability. For example, if the company employs CRM strategy in the tracking of the funds circulation in the company, tracking individual customer, it has to be reflected in the company’s business process.
Due to Vodafone being a large company with different departments that require the CRM implementations, a proper planning is very vital for a smooth roll out and running of the system. The planning will require a technical and the technology available in the system in use. This will help in determining the required efforts in the data integration.
The implementation will require a better understanding of the needs of the involved parties. Human support will also be as important especially when management and representing the project. The company always needs to have an effective tool that helps identifying the human as well as technical factors that will include preparing a checklist to help in identifying errors and problems at an early stage.
Importance of CRM
The CRM is a very important tool for the business today. More than 50% of the UK retailing businesses have at least implemented on CRM system on their business while more than 40% expects to apply the use of CRM in the near future. Most of the already using the CRM application got impressive results and they have got a positive results through the use of the system (Malthouse et al., 2005, p. 25). Its seen by most businesses as the use of the CRM as a way of propelling a business to higher heights. The CRM helps in understanding the customers better thus giving a way to provide satisfying services and attraction of more customers boosting the business profits. On the other hand, the company is able to keep the customers records, tract the marketing tactics and tracking the customers’ contacts (Calin 2003, p. 88; Becchetti and Trovato 2002, p. 19).
Web is one of the most important tools in the implementation of the CRM strategy. Its one of the best ways of gathering customers’ information, In most cases, this is done through asking for some information in order to get some discounts as well as receiving updates on unique sales or events. Email is often used as it’s the cheapest compared to other ways of notifying the customers on anything concerning the business.
The UK retailers showed higher interest in the CRM with the increase of the vendors. Every year, the retailers increase the expenditure on CRM compared to the past year (Bland, 2003, p. 38). In this regard, it’s evident that the CRM is growing and spreading among the business in the country. Initially, the CRM was only used by big companies even without knowing where they would be lead by the CRM project though they had believe that it would lead them into a better position.
The implementation of the CRM can be sometime daunting as it requires so many implementations in different parts of the business. The first thing is defining the aspired goals, though not easy, it helps in creating a road map to follow to avoid drifts after the implementation of the software.
Registering the site gives the company a unique stand
The research method is the way the data was collected, the purpose of this data and the strategy that was used.
The research process
According to Malhotra (1996 p 96) the research design is a structure by which the research is carried. It gives a road map to collect data and analyze the research study. The research design also gives the specifications of the data to be collected, where the data will be got from and the procedure that will be used to collect it. There are different ways to collect data depending on the field being researched on though they are all interrelated in one way or another. At the end of each research, there must be a problem to be addressed giving a way to find a collect solution.
The purpose of the research
The research can be used three purposes that include, explanatory, exploratory and descriptive.
The descriptive research occurs when there is a plenty of information within a given research area and the only needed thing is to study the current events that are occurring and describe them. The aim of this is to give a detailed literature of the problem and mostly seeks to answer as to why, when, what or where and how the event or a phenomenon occurred. It actually seeks to give more descriptive information concerning a person of an event in a certain situation. The accuracy is a necessity and very much recommended in this research as it would give a detailed information after exploration of the research problem.
The exploratory study seeks to find what is happening. The exploration seeks to give a better understanding as to what is happening or the research problem. The main advantage of this is that it accepts changes and can be changed at any time though it must have a direction.
The exploratory research seeks to establish the relationship between the valuables. The aim of this is to study the research problem and establish the relationship with other valuables. According to Zikmund(2000), the research must relate with the research problem.
The research philosophy which can also be interpreted as what one thinks on developing of his knowledge affects the overall methodology including the approach and the method of data collection. Understanding of research philosophy is helpful in clarifying the appropriate research design to be used and how it can be adjusted to fit the research that is being carried out.
The Research begins with an understanding of theories and models which fundamental to the researched problem. The access to relevant information helps the researcher in acquiring specific knowledge that is significant to the research. In the epistemological considerations, there are three philosophical approaches to research that include positivism, interpretivism and realism. On the other hand ontological assumptions constitute philosophical approaches objectivism and constructionism.
In epistemological assumption events are independent of anyone. This means that the truth about the events can be obtained through a scientific method or hypothetic-deductive method. On the other hand, Positivists argue that data can be collected by someone not included in the research or an observer. An interpretivist on the other hand emphasizes on understanding the human behavior and is regarded as complementary epistemology to positivists.
Positivists identify some valuables which have either direct or indirect relationship with the research for the research purpose. Constructivist’s approach is more suited in mass surveillance since they are inherently complex. This complexity is mostly witnessed in surveillance environment, where managing people and processes are complicated by the nature of research. In addition the relationship between the surveyor and the surveyed is mostly strained owing to the mentioned reasons. This means that a constructivist approach, in instances where the research cannot be detached from its original settings is better suited.
Constructivists’ ontology and epistemology differs from positivists, in the sense that the former emphases on the socially agreed understanding. The researcher does not contradict from the dominion of research, and the underlying epistemology, in views and understandings of the involved matter. The constructivists or interpretivists believe that data can be collected by the observers involving the actual researched setting. This involvement in the actual research setting is imperative in this research since data collected from the participants would largely be influenced by their feelings and perceptions.
To be better prepared for the situation, involvement of the researcher with the participants as well as the research setting is required. Understanding the subjective meanings to further explore what causes certain behavior or why people act in a certain way is based on constructivist approach or social constructivism. This is one of the most important and equally interesting facets of this research as understanding how the employees interpret the various work environment factors will result to interesting insights into the topic being researched.
Reality operates independent of human factors, and objects that are external to or independent of the individuals will affect the way they distinguish the world is the belief fundamental to realism. Thus we can see a similarity of practicality and positivism in the underlying ontological assumptions. Realism also advocates for understanding of the subjective reality, and socially constructed meanings.
Though research philosophies differ from each other, there is a need for the researchers to adopt a mixed approach. They need to have a great caution not to have contradicting results, as if he has used both the qualitative and quantitative methods.
Positivists’ approach isolate respondents from their social context for this research it is important to view the respondent’s as per their context, to have a better understanding of their perceptions. Complex structured design of the research mostly used by positivists restricts findings to a small extent. A possible weakness of the positivist model is that it is not very useful in understanding the processes or significance people attach to actions.
In this particular research, in order to understand the way CRM system are being used by the UK companies and what benefits they get through the use of them what concerned parties view this. In order to better understand and appreciate such factors requires a close association with the work environment, and witness the surveyors in their work place setting. Also, the social constructivists approach, and the complementary qualitative method are suitable in this research because of their ability to understand people’s meanings and adjust to new issues and understandings as they emerge.
Research ethics is an important part of research. Respect for other people, sincerity and academic veracity, makes a responsible research work. To consider the ethical responsibility of the research concerns only avoiding plagiarism and a bias free writing would only be a superficial one. Any researcher, who is committed to producing a morally responsible research, must address the issues of informed consent of the participants, confidentiality, and reciprocity.
Researcher is more sympathetic to the participants’ feelings in a qualitative research which means ethical issues are clearly addressed. An ethically responsible research must ensure that the respondents do not have to face any difficulties as a result of their participation in research. This is a crucial consideration in this research because of the sensitive nature of the research. Avoiding questions such as name of the respondent, their designation etc has assured the respondents that they would not be identified on the basis of the research. When researching a controversial or sensitive topic, anonymity is essential.
The research strategy
Research strategy is a general orientation of the research. This refers to the procedure that is followed in collecting data and analyzing the data. This procedure is also called research technique. There are three basic techniques that include the semi structured like conversations, individual interviews and focus groups. Fully structured techniques include structured interviews and structured questionnaires. Additional techniques include field experiment and observation.
A case study strategy mainly focuses on real life events, it is important because the goal of our study is to understand to the use of CRM systems in the UK companies. Also, case studies are less time consuming and provide an analytical study hence a case study approach has been adopted in this research. In this research we intend to study in order to understand the use of CRM systems in the UK companies.
Positivist approach assumes overlapping meanings with the term quantitative, while substitute terms for the interpretivist paradigm can be qualitative. This means that epistemological orientation in a quantitative research strategy has to be positivism, taking an ontological course of objectivism. On the other hand epistemological orientation in a qualitative approach has to be interpretivism, while ontological point of reference is usually constructionism.
Qualitative research is soft and subjective which means it tries to take into account individual’s understandings and feelings. Qualitative research is flexible, and based on the case study method. Qualitative research assumes a grounded theory, and involves investigative orientation. The deductive approach to research advocates an emphasis on scientific principles.
A deductive research starts with a hypothesis, which draws its basics from the researcher’s prior knowledge and understanding of the topic of study. The inductive approach emphasizes on understanding the socially constructed meanings with little need for generalization. Based on the research findings, the researcher tries to find the theory on which findings are based.
Qualitative research lacks reliability, but it provides an opportunity to get into contact with people involved in the study. This helps the researcher to have a better understanding of the findings. Reliability of a research is an important attribute of the research as it raises confidence in the study. This means that a research approach that combines the two approaches would provide an in depth and reliable study. Qualitative method gives the research the advantages of the method, as well as the advantage of triangulation.
Qualitative method is used for data collection in case study research method, though qualitative method will predominate. The process of data collection and analysis takes place at the same time. It is interesting in case study research method, particularization rather than generalisability is predominant
Reliability, validity of research
In any research, reliability, validity and replication are important considerations and these are as important as the choice of methodology. Consistency and purity of a measure are attributes of reliability and on the other hand repeatability or stability is also an important aspect of reliability. Reliability is given higher importance in any form of research. Credibility, dependability of data sources, consistency and impartiality comprise the quality attribute of a qualitative research. These four constructs are similar to the constructs reliability, replicability and validity which are measures of qualitative research.
If the participants of the research are affected by observation, reliability and validity are affected. That was why questionnaires and interviews do not in work settings but away from work settings.
It is difficult to achieve external reliability in qualitative research because the settings change, and hence it is difficult to replicate the entire study in the same setting as when researched previously. External validity is concerned with generalisability of the results beyond the research setting.
Validity of research is also very important, if the research is not valid, all effort that was taken in doing the research would be futile. Any research which is not reliable is not valid. Concurrent validity concerns the question of whether the responses are honest, and predictive validity is concerned with forecasting. Validity of research is the degree to which the findings accurately represent the reality. Validity also is concerned with the extent to which the findings are original. Face validity assess if the constructs used by the researcher actually represent what they should. A number of hypothetical constructs could be used in the research, and the extent to which the chosen construct is coherent with the findings is construct validity.
Qualitative research lends itself generalisability or external validity through use of numbers to represent the understandings based on the findings. Qualitative research lays much emphasis on understanding events according to the perspectives of the people being researched. Also understanding the context of the study is also important in qualitative research.
Case study method
Different types of case study methods are explanatory, descriptive, illustrative and experimental. The four stages in a case study method are finding out the current situation, collecting information about the background to the present situation, gathering more specific data to test alternative hypotheses, and about important factors in the present situation, and putting forward recommendations for remedial action
Case study method refers to an event in the real life context. In this research, such a method which gives importance to the context of the work place is suitable because of the topic being researched is thought to be influenced by the context of the setting. Various techniques such as pattern matching, explanation building, time series analysis etc could be used to analyse the case study evidence, but importantly, analysing the evidence obtained through case study method is the difficult aspect of case studies.
Analysis of data leads to information, from which inferences can be made, and recommendations can be arrived at. A high quality analysis uses all the analytic strategies exhaustively, addresses all rival interpretations, addresses the most important aspect of the case study, and the researcher displays use of own prior, expert knowledge. Case study method is useful only for generating hypotheses, not testing it.
Also case study method lacks statistical reliability, and generalisability. But since the world of business is complex, the research could be probably suitable only for the particular situation, and generalisability need not be a cause of concern. In this research, data will be predominantly the responses of the participants which is qualitative, and according to Patton, qualitative research produces large quantities of data to provide an in-depth study.
Triangulation is collecting data by employing two or more methods so as to avoid researcher bias and improve validity. Triangulation of data collection, provides with different ways of looking at the same phenomenon, and thus is helpful in consistent analysis of reliable data. Also, interestingly, if the different methods employed result in different data and should not be regarded as being inconsistent, but would interest the researcher to further delve deeper into the issue. Triangulation improves the quality of the results obtained. Triangulation also ensures that data is obtained through different sources, but does not assure validity or reliability of the data. Thus triangulation only provides a deeper understanding; it does not guarantee validity.
The accuracy as well as credibility of the research can be enhanced through triangulation of data sources and analytical perspectives. We have seen in our research that by using more than one method of data collection, we obtained a wider and deeper understanding of the issues.
The quality of a research is not only how reliable and valid the data and findings are, but also how useful the findings are in solving the problems of the organization. To increase the validity of case study method, four types of triangulation namely data triangulation, investigator triangulation, theory triangulation and methodological triangulation can be used. Data triangulation or collection of data using more than one technique such as interviews, observations etc can be employed. Due to various constraints, theory triangulation, investigator triangulation and methodological triangulation cannot be employed here.
Types of CRM
There are several types of CRM that has different software packages that focuses on different aspects. These include:
Sale Force Automation
The SFA is the most popular among them all.
The operational CRM is a CRM suit that supports the front office. These include the sales and marketing as well as the service staff. The customers’ information is generally stored in the customers’ history of contact to the company and this makes it easy for the staff to access the customer’s information if required without much struggle.
The stored contact history makes it possible for the staff to access the customers’ information and this enables in reaching the customer at the right time as it would be preferred and individually attend to him.
The analytical CRM analyses the customer’s data for a number of reasons that include:
Designing and execution of target market campaigns
Analyzing of customer behavior to enable the decision making in regard to product
Managing the information system
The system uses a heavy tactic to access data so as to make it possible to have a proper decision making. The more information the software access, the better as there would be better recommendation.
Sales intelligent CRM
The sales intelligent CRM has no much difference with analytical CRM but it is directly involved in sales tools. The software alerts the staff the information regarding,
The customer trends and
The performance of sales
In this analysis, we will have a comparison between the empirical data and the theories which are presented in the frame of reference and other support theories, which are all, derived from literature review. In the analysis we will follow the same structure as the research problem and the research questions. The analysis will begin with Lansforsakringar AB’s within case analysis, later we will look at HSB’s within case analysis and thereafter a cross-case analysis where there will be a comparison between the two cases so as to find out and examine the anomalies and the common patterns.
According to Goldenberg(2002)CRM is not only technological applications for service and sales, marketing, but also when successfully and fully implemented, a customer driven, cross functional ,technological integrated process of business management strategy that makes maximum use of relationships brings together the whole organization.
In this case, the concept began by shaping itself up after the year 2000 during which management decision that was conscientious came to rebuild the separate processes and systems that used operate in the company since they had proved not to be efficient in giving out a good overview of customers. There are different perceptions and definitions of CRM as it was also confirmed by a manager at Lansforsakringar when he was explaining that the company was operating with different ideas and activities which were oriented to providing a good understanding of customers but they had never thought of them as CRM until the component of technology came in place. According to the previous studies, the CRM does not have a satisfaction level which is high among managers and its projects tend not to succeed, but there is also some companies which have the opposite as described by Kotorov (2003, p. 568). One of those companies is Lansforsakringar where the manager started to get high satisfaction with CRM after its implementation.
How can a firm’s major benefits of implementation of CRM and reasons be described?
As it was mentioned before the benefits of CRM implementation have been summarized by Swift (2001, p 45) in terms of loyalty, profitability, customer satisfaction and cost reduction. He mentions for example the advantages of long term consumers, how the cost of recruiting customers has dropped and evaluating the profitability of customers. It was learnt at Lansforsakringar that the benefits concerning cost and improvement in profit were present where some of them were; sales volume improved, cost of production was lowered, the ability to up sell and cross and the categorization of customer potential and profitability. Lansforsakringar has experienced results in terms of satisfaction of customers as they say that customers claim to be satisfied more for they now receive improved and personalized attention and they can also now receive answers to their questions quickly since every agent has information and also the insurance premium rates are low.
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THE ROLE OF FOREIGN AID IN ECONOMIC DEVELOPMENT IN KENYA, 2002-2008.CHAPTER ONE
Foreign Aid or Official Development Assistance (ODA) is the transfer of resources on concessional term, which is undertaken by official aid agencies (bilateral and multilateral) with the aim of promoting economic development and technological transfer and transfer of expertise from the aid agency to the poor countries. Foreign aid can also be in terms of money to support development projects in the poor countries.
Foreign aid can be multilateral or bilateral. Bilateral aid is provided from state to state mostly from a developed nation to a less developed country while the multilateral aid comes from international organizations such as the World Bank and the International Monetary Fund(IMF) and regional organizations such as the European Union and the African Development Bank. Foreign aid also comes from the Non-governmental Organizations. This includes transfers by private institutions in the form of donations, technical assistance, and a wide range of personal or financial participation or low-interest loans.
The core objective of foreign aid is to promote political, social and economic development though sometimes it is overridden by other interests that serve to play part, for example a donor country may extend aid to a less developed nation in order to get access to raw materials. Although there has been debate revolving the main objective of foreign aid, it is important to note that whatever the motive of the donor, at least outwardly the objective remains enhancement of development in the recipient country.
Foreign aid as a subject matter of political economy has been widely and intensely debated internationally. The main question has been as to whether foreign aid really brings development. The answer can only be provided by examining foreign aid vis-à-vis development in the third world countries..
Internationally, the foundation of today’s foreign aid was laid towards the end of the Second World War. There were international actions that led to the formation of the international organizations to oversee the postwar reconstruction. These organizations later formed the basis for the evolution of institutions such as the World Bank and the International Monetary Fund that are actively involved in foreign aid activities. In the summer of 1944, a year before the end of Second World War, U.S president, Roosevelt, convened a monetary and financial conference at Bretton Woods under the sponsorship of United Nations which didn’t officially exist. This marked the beginning of the modern development aid after signing an agreement on 22 July, 1944 to create an International Bank for Reconstruction and Development which is known today as the World Bank. IMF was also createdat the same time.
In March, 1947, the Cold War began with U.S president Harry Truman’s doctrine which laid down plans to expand American aid to include developing countries threatened by the spread of communism. On 5th June, 1947, General George Marshall, U.S secretary of state, unveiled a vast aid plan for the reconstruction of European Countries. The basis was to give massive aid to the European in order to rebuild them after the Second World War. The Marshall Plan was successful and was later used for development that could realize same results as in Europe if applied elsewhere as a development model.
In the 1960s, the United Nations proclaimed the development decade with the aim of having the developing countries reach economic take-off within ten years.In 1961, the United States Agency for International Development (USAID) was established and in 1962, the British Department For International Development (DFID) followed. Thus the early 1970s, development aid was already generalized and institutionalized.
As Africa emerged from colonialism it depended on the former colonial economy. With the competitive nature of the international economic system and the desire for capital by the African ruling elite, foreign aid was admired in Africa. It was viewed as bringing with it the element of initiation of development projects in Africa as it had done with the Marshall Plan initiative. It was believed that foreign aid was to enhance Africa’s ability to participate in the global capitalist economy and compete with other continents in development. All these, coupled with the modernization theory prevalent in the 1960s, made the third world countries especially in Africa to prefer foreign aid.
The role of foreign aid which primarily is that of economic development has always been contested by some scholars who argue that there are other motivations like the security of the donor countries and also that donor countries through foreign aid seek to advance and strengthen their foreign policy. However, despite the skepticism that is shown by the critics, foreign aid has actually led to development albeit with some challenges. Our study therefore seeks to examine the role that foreign aid has played in development in Kenya.
STATEMENT OF THE PROBLEM
Foreign aid has been described as a tool of manipulation used by the developed countries. Foreign aid, it is said, creates the problem of underdevelopment since it subjects the recipient country to aid conditions that create a dependent relationship whereby the growth of the recipient country’s economy is determined by the donor country. Further, foreign aid is said to advance the donor interests or that it aggravates the problem it seeks to address.
However there are other scholars such as Sachs who have argued that for the third world countries to develop, external help must be seriously considered. As has been pointed out above, analysts differ with respect to the question as to whether foreign aid promotes development in the recipient country. While some people argue that foreign aid has a positive contribution, others are of the opinion that foreign aid does more harm than good in the recipient country. Our study therefore adopts the question as to whether or not foreign aid has contributed to economic development in Kenya.
OBJECTIVES OF THE STUDY
To examine foreign aids contribution to the improvement of infrastructure, health, education and agriculture in Kenya
T o examine challenges posed by foreign aid.
To recommend ways in which the government of Kenya can deal with challenges of foreign aid in order to reap full benefits.
JUSTIFICATION OF THE STUDY
The study seeks to put into perspective the contribution of foreign aid in the economic development in Kenya and critically assesses both the arguments for and against the foreign aid in trying to come up with a clear understanding of the main objective of foreign aid.
The study seeks to show why the government should come up with policies that will prioritize investments in the education, health, infrastructure and agricultural sectors in order to achieve the desired economic development.
The period between 2002 and 2008 has specifically been chosen because this is the period that most of the donor countries resumed advancing foreign aid to Kenya after having stopped during the Moi era due to corruption and mismanagement. It is also a period where infrastructure, agriculture, health and education sectors have improved tremendously and at the same time institutional reforms took place to compliment foreign aid. The study also shows how a peaceful political transition from 2002 to 2003 led to conducive environment for growth while at the same time showing how political violence like what happened in 2007 election can lead to decline in economic growth.
The study hence seeks to show the connection between foreign aid and improvement of the agricultural, infrastructure, health and education sectors and how this contributes to economic development in Kenya.
LIMITATION OF THE STUDY
Due to time and financial constraints, the study limited itself to secondary data available. The scope of the study, the institutions involved and the complexities of their operation made me to scale down to the information available to me.
Since development means different things to different people, it is therefore important to develop some agreed criteria on the measurement of development from which one can develop a working definition. According to Todaro (2005), development must be concerned with the economic,cultural,social and political requirements for affecting rapid structural and institutional transformations of the entire societies in a manner that will effectively bring the fruits of economic development to the broadest segments of the population(Todaro &Smith,2005:47).Concepts and goals such as the elimination of poverty, rising levels of living, national independence, modernizations of institutions, political and economic participation, personal fulfillment must be considered if the development is to be achieved.
Development can therefore be defined as the set of all activities that contribute to the gradual formation of physical and human capital for the purpose of self sustained production geared towards satisfying community’s present and future needs as defined by the community itself. (Gelinas, 1998:17)
Underdevelopment can only be understood when compared with development. Thus there are identified characteristics of underdevelopment. These include; poverty, high levels of unemployment, low and stagnating levels of productivity, inappropriate education and health systems, poor infrastructure and technological backwardness.
The process of development and growth depends on various factors. These factors are of two types; economic and non-economic factors. Economic development emanates from economic activities and the transformation of the human agent and his social as well as his physical environment. The process of growth and development is being brought about by economic and non- economic variables. Economic variables here need to include natural resources, capital formation, technology, government expenditure and foreign aid. Non-economic variables include; the domestic environment, social-cultural values and institutions. These factors are interlinked through cause and effects relationship so that one factor can easily destabilize the rest. Some of the economic and non-economic factors are addressed below.
Natural resources seem to be the principal factor affecting the development of a given economy. The critical factors such as the fertility of the soil, its situation and composition, forest wealth, minerals, climate, water resources, sea resources etc. A country that is deficient of natural resources will not be in the position to develop rapidly. Although availability of natural resources is essential, proper utilization is required for actual development to be realized. Unfortunately, in most LDCs, the majority of the resources have not been fully tapped due the lack of adequate capital and technology, poor expertise, inadequate infrastructural facilities and poor resource surveys and discoveries. Lewis observes:
“The value of our resources depends upon usefulness and its usefulness is changing all the time through changes in tastes, technology or new discovery.”(W.A.Lewis, 1954)
When such changes are taking place any nation can develop itself economically through the fuller utilization of natural resources and this can happen if LCDs acquire foreign aid mostly in terms of technology.
Capital refers to all forms of productive wealth that are used both directly and indirectly in the production process. These include plant and machinery, equipment, and other materials. When capital increases with the passage of time, then there is capital accumulation (capital formation). The various direct production investments are supplemented by investments known as social and economic infrastructure (roads, electricity, water and sanitation, communication and security) which facilitates and integrates various economic activities. The degree of capital formation should be viewed as the critical determinant towards economic growth and development. This is so because increased stock paves the way to increased production capacities thereby raising production as well as employment opportunities.
There are various possibilities of increasing the rate of capital accumulation since the propensity to save is low in the majority of LDCs voluntary savings will not be forthcoming in sufficient quantities hence there is need to seek for external resources inform of loans, grants and larger exports that can help in capital formation.
Population is a critical factor in economic development. In this case populations need to be looked at in two dimensions. The first deals with population growth rate. If it exceeds the economic growth, this will result in negative par capital figures, hence economic welfare is reduced making the populace worse off. Consequently, the dependence ratio and more mouth to feed are increased against the few active members of the population to make food. This leads to fall in desired savings and investments therefore retarding economic growth. Such population presents an obstacle to economic growth.
The other dimension is that population growth will imply a large labor force and increased potential of domestic market, but this need to be subject to its ability to purchase. For any country to achieve economic development when it has labor surplus, human capital need be emphasized. This is because human capital increases the efficiency of labor. The government therefore has to spend a lot on health, education to raise the life expectancy period and literacy levels respectively and also research and development is key to economic development.
Technological changes are regarded as the most important factor in the process of economic growth. They are related to changes in the methods of production which is the result of some new techniques of research or innovation. Changes in technology lead to increase in productivity of labor, capital and other factors of production. Kuznets traces five distinct patterns in the growth of technology in the modern economic growth. They are; a scientific discovery or an additional to technical knowledge, an invention, an innovation, an improvement and the spread of innovation (Kuznet, 1971).
The social, economic and political institution in a country constitutes its domestic environment. The quality of the country’s domestic environment determines the country’s rate of growth, that is, the degree and level of the utilization of the country’s resources. The government in any country is a key political institution meaning its behavior will always act as a stimulating economic activity. Political stability is of essence for economic development. A country’s social institutions consist of its cultural values, attitudes and institutions. These social institutions affect the level of economic activities for they determine for instance consumption patterns, models of economic organizations, labor efficiency and attitudes towards work.
All these equally call for good governance which entails sound management of economic resources, building capacity for the analysis and formation of sound policies and their implementation. Similarly, by providing security for an enabling environment for economic activities both public and private will attract investment. In addition there should be equity and social justice in resource allocation not forgetting an end to corruption and political manipulation.
Development is not just having plenty of wealth nor is it purely an economic phenomenon. It embraces all aspects of social behavior, the establishment of law and order and positive attitudes towards law and order
The social attitudes, values and institutions should be changed or modified for economic development to take place. But it is not an easy task. Any social change will bring discontent and resistance in its wake. It may therefore adversely affect the national economy. Therefore all cultural changes should be selective. The changes should be selective and should be introduced in stages. Persuasion and not coercion should be the method.
Myrdal in his book ‘Asian drama’ (1968) advocated for the adoption of ‘modernization values’ or ‘modernization ideas’ for the rapid economic development LDCs. Modernization means social, cultural and psychological framework which facilitates the application of tested knowledge to all phases and branches of production.(Myrdal,1968)
Myrdal continues to argue that for LDCs to achieve economic development they must first achieve national consolidation, by this, he means ‘a national system of government. Courts and administration that is effective, cohesive and internally united in purpose and action with unchallenged authority over all regions and groups’.(Myrdal,1968)
Foreign aid therefore becomes critical in helping the developing nations utilize their natural resources through making available the technology required. Foreign aid will also help in improving the education and health systems in the developing countries. Aid can also help in capacity building of both economic and political institutions so as to provide a conducive domestic environment for economic growth.
In light with this, many scholars have therefore advocated for advancement of foreign aid to LDCs.One of such scholars is Jeffrey Sachs(2005) who explains the role foreign aid plays in the development by use of what he calls poverty trap. He argues that a household that is impoverished has its income going into consumption, just to stay alive. There are no taxes or personal savings, depreciation and population growth continue relentlessly. This leads to a vicious circle of falling incomes, zero savings and hence zero investments.Sachs therefore proposes a solution in the form of Official Development Assistance. This will help in jumpstarting the process of capital accumulation, economic growth and rising household incomes. The foreign aid feeds into three channels, a little bit goes directly to households mainly for humanitarian emergencies such as food incase of drought, some is directed to the budget to finance public investment and some towards private businesses (e.g. farmers through microfinance institutions).
If foreign aid is substantial enough and lasts long enough, the capital stock rises sufficiently to lift households above subsistence. At that point poverty trap is broken (Sachs, 2005:44)
As a result growth becomes self-sustaining through household savings and public investments supported by taxations of households. In this case aid is not a welfare handout, but is actually an investment that breaks dependence once and for all.
Sachs goes on to point out that foreign aid is paramount in enhancing and improving human capital which entails good education and a healthy nation, infrastructure which includes roads, power, airports and seaports and telecommunication systems and improvement in the agricultural sector that is very crucial to put a country in the path to industrialization (Sachs,2005:246).
Sachs offers an example of Poland that was able to emerge from communism to capitalism. He was personally involved in 1989 in advising the government of Poland on how to become a market economy, stabilize her economy mostly in dealing with the hyper inflation. What he did was to come up with a stabilizing fund for the Polish currency, the Zloty Stabilizing Fund. To do this Poland needed foreign exchange reserves and the U.S government gave $ 200 million and other donor countries gave $ 800 million. In Poland, foreign aid was therefore able to take Poland out of a crisis and put it on the path of economic development.
South Korea also confirms some linear stages in development as advocated by modernization theorists who strongly believe in the idea of foreign aid as a catalyst for economic development. Its share of investment in the national income has been among the highest in the world. South Korea which was a Japanese colony until 1945 has been able to develop through foreign aid. South Korea received a large portion of its budget from the U.S in the 1950s.South Korea went ahead to carry out an extremely active upgrading policy, sharply limiting the role of MNCs and deliberately establishing indigenous industries as an alternative. South Korea also implemented one of most comprehensive land reform programs in the developing world and placed strong emphasis on primary education.
Contrastingly, the case of Argentina presents a rather different scenario. The country relied to a larger extent on exporting primary goods, and real prices of these goods fell compared to imports. MNCs played a larger role and Argentina was unable to create its own viable manufacturing export industries ultimately having to submit to stringent structural programs, sell state industries and other constraints. Proponents of the dependency theory can claim with some justification that Argentina’s conditioned development fell victim to Developed nation’s economic interests especially from Britain and U.S.
However, looking critically at Argentina, one realizes there were faulty interventionist restrictions, inefficient state enterprises, bias against production of exports and unnecessary red tape which ended up hurting the industry.(World Bank,1987:Managing the Industrial Transition).
Some scholars especially those from the Third World countries have totally been against foreign aid because to them, foreign aid only serves as a catalyst for underdevelopment in the third world. Henrique Fernando Cardosso (1979) argues that Third World dependency is not as a result of lack of capital or entrepreneur capacity; it is the nature of the relationship between the central and the periphery. Third world countries have been relegated to the peripheral capitalism characterized by production of raw materials, availability of cheap labor and dependent structures, systems and institutions while the developed nations( the center) is characterized by high levels of manufacturing, abundant skilled labor and sophisticated economies and massive surplus accumulation. Cardosso argues that that the centre develops by under developing the periphery. He therefore notes that the solution is disengagement from the center so that the third world countries adopt socialism.
Steven Langdom and Raphael Kaplinsky (1978) supported Cardosso’s observation and argued further that in the case of Kenya there was indeed a domestic bourgeoisie at independence. Unfortunately, the capital accumulated by the domestic bourgeoisie was not based on any form of production. Instead, these were capital handouts passed over by the departing colonial authority to guarantee production. The domestic bourgeoisie has successfully used the state power to insubordinate domestic capital to international capital.
The problem of underdevelopment led to the Latin America, through Economic Commission of Latin American Countries to come up with an inward oriented policy in order to develop and run away from dependency. Import Substitution Industrialization (I.S.I) was considered the solution. They didn’t want foreign aid as they argued that the developed nations used foreign aid to exploit them.
These countries had realized that heir products registered low income elasticity in the international markets and therefore value addition was mandatory. To them, I.S.I was the surest way to satisfy domestic market demands, they wanted to familiarize and socialize locals to consume their own goods and services, this is because if an economy is too open, then the people tend to be alienated from their goods and services hence local products loose market
Although I.S.I had become popular because it was viewed as a way in which the Third World would achieve development and it represented a partial disengagement from the industrialized economies which were to blame for dependency in the third world, it failed. Various reasons can be given to explain this. First, Latin American countries didn’t have sufficient capital in which to set up industrial base on which I.S.I was to be developed. This is because they had been importing a large number of goods, it was mandatory they set up large industries to produce goods that had been identified for substitution. Secondly, industrial growth relies heavily on technology which these countries didn’t have. Third, they lacked skills and expertise that industrialization requires mainly because they were economies that were just emerging from colonialism.
To try and solve these problems, Latin American countries partnered with Multi-National Corporations in order to bring the needed capital, technology and expertise. However, these MNCs went ahead to dominate the economies hence contradicting their aim which was to run away from foreign domination.
I.S.I was an attempt to achieve self reliant based industrial development through inward oriented policy but failed hence reinforcing the argument that foreign aid is important in LDCs development up to the stage of self-sufficiency.
Although many scholars that advocate for foreign aid are right in observing that it facilitates building of roads, increases agricultural productivity and leads to education and health improvement, many have not critically addressed foreign aid in the context of value addition to primary products in LDCs which will totally change the trading patterns in the international trade. If substantial foreign aid was directed to increasing exports (value added), even the aid required by LDCs will significantly reduce. If developing countries increased their share of world exports by just 5%, these would generate 350 billion dollars, seven times as much as they receive in aid. The $70 billion that Africa would generate through 1% increase in the share of world’s export is approximately five times the amount provided to the region through aid and relief (Oxfam Report, 2002)
In conclusion, foreign aid cannot achieve development in isolation; there must be attitude change and the right political environment to compliment the foreign aid. Aid should be directed towards value addition on primary products so as to increase market share of exports in order to realize development that is balance between the Developed and Developing countries.
Opinion is divided as to whether foreign aid actually stimulates economic development or it is a tool to exploit the Third World. One school of thought dominated by modernization theory views foreign aid as almost indispensable in the economic development of the developing countries. This school of thought argues that development is a linear process from a comparatively low level and finally achieving final levels of development. Modernization theorists summarized development as composed of; increased level of urbanization, widespread literacy, enhanced communication systems, reliable road networks high level of commercialization and industrialization in the economy. To achieve this, modernization theorists argue that foreign aid is imperative as it accelerates investments and helps in improving the structural problems in the third world.
Modernization theorists observed that development process moved through specific stages. In his analysis, Walt W. Rostow pointed out that the transition from underdevelopment to development can be described in terms of steps or stages through which all countries must proceed. Rostow observed; “. . . it is possible to identify all societies in the economic dimensions as lying within one five categories: traditional society, the pre-condition for take off into the self-sustaining growth, take off, the drive to maturity, and the age of mass consumption.“ (Rostow, 1960:12)
Rostow went on to argue that the developed countries had passed the stage of take-off into the self-sustaining growth and therefore the underdeveloped nations that were either still in the traditional society or the pre-condition stage had only to follow a certain set of rules of development to take-off towards self-sustaining economic growth. One of the strategies of development for any take-off was mobilization of domestic and foreign savings in order to generate sufficient investment to accelerate growth. According to Rostow, the rate of investment in the developing countries can be enhanced by the injection of foreign aid. Foreign aid though necessary but not sufficient plays an important role in speeding up the process of attaining self-sustaining growth. Aid is hence beneficial and only relevant during the period prior to take-off after which the recipient country look forward to a time when extra-ordinary measures to obtain capital from outside can be discontinued.
In order to understand modernization fully, it is imperative to look critically at every stage as discussed by Rostow.Rostow observes that in all these stages, growth causes structural changes within society so that it moves from simplicity to greater levels of production and sophistication.
First, there is the Traditional stage. This stage is characterized by a ceiling on productivity imposed by limitation of the application of science and technology, a very high proportion of workforce engaged in agriculture, and at this stage, traditions rule people and the customs and beliefs have the final word. It is not easy to change such a society which is submerged with prejudices, beliefs and customs and where everything is looked down upon with suspicion. Planning growth in such a society will require greater focus in agriculture, power and irrigation projects. Most societies have come of this stage due to external challenges and aggression or nationalization.
The second stage is the Pre-condition for Take-Off. According to Rostow, this is the transition era in which pre-conditions are created for sustained growth.These conditions include; fundamental changes in the economic structures which involves changes in the societies attitude towards science, risk-taking and profit earning, political freedom, development of centralized taxation system, land reforms, and development of social-overhead capital( education and health).Rostow continues to argue that at his stage, investments should be raised to at least 5% of the national income in order to ensure self-sustaining growth, investments need to directed in the development of various infrastructural facilitates and on the social front a new elite must emerge to fabricate the industrial society. The length of the transition will depend on the speed at which the local talent, energy and resources are mobilized and devoted to modernization alongside with political leadership.
The third stage is the take-off. It is a very short stage in which development becomes self- sustaining. The stage is characterized by three events. First, a proportion of the net investment to national income rises from 5% to 10%.Seondly,the appearance of one or more substantial income manufacturing with high rate of growth. Thirdly, the existence of quick emergence of political and institutional framework which exploits the impulse to expansion and gives growth an ongoing character. There must be institutions which would be able to mobilize savings from extra incomes and enhance further investments.
The fourth stage is the drive to maturity. This is a stage where the society effectively applies the range of modern technology to the bulky of its resources. In such stage the rates of savings and investments are of such magnitude that economic growth and development becomes more less automatic. There is equally social, cultural and attitudinal changes and transformation of people values and morals. There is greater degree of urbanization with the proportion of professional labor increasing, the people aspire for technological progress and new trading sectors emerge.
The fifth and final stage is the stage of high mass consumption .Here, the society shifts the production of the mass consumer goods and durable goods. At this stage there is high standards of living with automobiles being extensively used, high consumption of durables and household gadgets, welfare is considered vital and society focuses on expansion of power beyond national frontiers. There is equitable distribution of income through taxation policy and there is increased financial security.
Rostow’s arguments have been greatly criticized by other economists. Kuznet points out that Rostow’s stages are considerably blurred. Much of which Rostow considers take-off Kuznets argues has already occurred at the pre-condition stage. Kuznet continues to argue that Rostow lacks analytical power since data for great Britain do not indicate any take-off at all, but rather a slow and relatively steady acceleration throughout the whole period from 1770-1914.
Despite the fact that Rostow’s model may be lacking analytical power, the purpose of stages is not that stages distinguished should necessarily have parallel in history, or be rigidly distinct, but to distinguish situations in which an economy may find itself. Rostow has also stressed the importance of agriculture and investment in the economic growth. It should be acknowledged that certain political and sociological pre-conditions for development which are forgotten by nations are mentioned by Rostow.
The opposite school of thought which is Dependency Theory argues that foreign aid is basically an exploitative instrument that increases external dependency and internal underdevelopment in the third world. Proponents of dependency theory, like Theotonio Dos Santos points out that foreign aid has subjected third world countries to financial dependency where they have to seek capital from outside. Santos observes; “Underdevelopment, far from constituting a state of backwardness prior to capitalism, is rather a consequence and a particular form of capitalism…Dependency is a conditioning situation in which the economies of one group of countries are conditioned by the development and expansion of others…” (Santos, 1969:21)
Dos Santos observes that foreign aid has subjected third world countries to financial dependency. Funding, according to Santos, is so conditioned to the extent that it imposes particular policy demands on the recipient country’s economy. For instance, the privatization of government parastatals, reduction of the government workforce, liberalization of the economy among others. Secondly, foreign aid has led to high levels of external debt which means that most of the third world countries spend a significant amount of their income not for development but for debt repayment. Consequently, this behavior continues to see large resources being transferred from third world to industrialized nations making interest rates become quite high and therefore capital becomes very expensive. Another form of dependency emanates from the technological backwardness of the third world countries. This means that they depend on the developed nations that are technologically advanced hence becoming consumers of other’s technology. The problem becomes further complicated since they can’t reproduce this technology as it is highly patented through copyright policies. Moreover, developed nations are capital intensive while the LDCs enjoy comparative advantage of labor, the consequence is that the developed nations’ technology reduce the opportunities for employment in the third world countries hence not appropriate for development.
The dependencistors attribute the existence and continuance of underdevelopment primarily to the historical evolution of a highly unequal international capitalist system of rich country- poor country relationship. The co-existence of rich and poor countries in an international system dominated by such unequal power relationships between the center(rich nations) and the periphery(poor nations) renders attempts by poor nations to be self-reliant and independent difficult and sometimes even impossible. They go on to argue that institutions either knowingly or unknowingly serve the interests of the powerful nations.
Critics of the dependency school of thought have argued that the dependency theorists do not offer viable alternatives to underdevelopment. This is because, first, they blame the developed nations for underdevelopment in the LDCs while ignoring the internal factors that have actually contributed immensely to underdevelopment. These internal factors include; political instability, ethnic polarization, bad governance, lack of prioritization of development projects and inefficiency on the part of the civil service. Secondly, it proposes disengagement from the international trade which in essence is self –defeating as this would lead to the collapse of the third world economies. Thirdly, dependecistors advocate for Import-Substitution Industrialization (I.S.I.) as tried by Latin Americans, unfortunately this strategy failed because these countries didn’t have the necessary capital,technology,expertise and skills needed which could only be acquired through aid.
Despite the dependency theory failing to give viable alternatives, it cannot be out-rightly dismissed as it has some valid arguments. For example, the dependencistors argue that the process of social and attitudes change should be evolutionary rather than revolutionary. Otherwise radical changes in social attitudes and values will bring about dissatisfaction, discontentment and violence in their wake and retard the path to economic development.
In this chapter, both the Modernization and Dependency theories of development have been reviewed. Each theory has both its strengths and weaknesses. The fact that there exist disagreements be they ideological or theoretical makes the study of development both challenging and exciting. The question that emerges is whether a consensus will ever emerge. However, despite the disagreements, something of significance can be extracted from each of the theories. For example, the linear stages model emphasizes the crucial role that the savings and investment plays in the long-run economic growth and the need for foreign aid to augment domestic savings in order to accelerate growth. On the other hand, dependency theorists have argued that there is need to appreciate the fact that the structure and the workings of the world economies is that it negatively affect the developing countries’ economies. This study therefore proceeds on the assumption based on the modernization theory that foreign aid is necessary in economic development until the stage of self sufficiency is achieved while at the same time recommending solutions to cope with the challenges that arise thereof.
The foreign aid advanced to Kenya in form of grants and loans has led to economic growth hence contributing to economic development.
The more effectively and efficiently foreign aid is used, the more development is achieved.
The data that informs this study was gathered from literature books, government economic surveys as well as World Bank’s reports. It involved secondary data which was analyzed to get the economic growth rates under study and to know how much foreign aid has been advanced to health, education, agriculture and infrastructure and how this led to overall economic growth
Introduction section which gives summarized information on the background/introduction and the justification of the study as well as literature review and theoretical framework.
This chapter looks at the different types of foreign aid and the connection between foreign aid and economic development.
The chapter presents an overview of Kenya’s economic development from independence, the challenges and how these development challenges have been tackled.
This chapter looks at Kenya’s economic development from 2002 to 2008 and how foreign aid advanced to Kenya especially in education, health, agriculture and infrastructure sectors has contributed to economic development.
The chapter presents the findings, recommendations as well as conclusion for the study.
FOREIGN AID AND DEVELOPMENT
Foreign aid is advanced from developed economies either for economic, political, or humanitarian motives. The principal economic rationale for aid is to increase growth rate of Gross Domestic Product (GDP) in recipient countries in order to fight poverty, malnutrition and help in raising the standards of living especially housing. To achieve this, developing countries must ensure there is economic growth that is sustainable and this usually requires imported capital goods. Unfortunately, developing countries face two fundamental constraints or financial gaps.
First, domestic savings rates are insufficient to provide resources to meet desired levels of investment. Second, foreign exchange through export earnings is inadequate to finance all the desired imports of capital goods and hence unable to achieve the targeted growth rate. Capital inflows are therefore meant to fill these gaps and contribute in achieving target growth rates.
A general hypotheses is that aid contributes to growth. But the debate on aid effectiveness has drawn mixed reactions among scholars and policy makers both in the donor and recipient countries. While others argue that development cannot be directly linked to foreign aid, there are countries where aid has led to development. United Kingdom and United States of America borrowed in their initial stages of their economic take-off(Kuznet:1965)
These countries took advantage of such inflows to build the necessary social infrastructure; others in Africa where aid has led to growth are Mauritius and Botswana.
FORMS OF FOREIGN AID
Aid can take either of two forms: grants or loans. Grants refer to outright transfer payments either in money terms or technical assistance which don’t have to be repaid. Loans on the other hand, refer to funds from one economic entity to another, which must be repaid with interest over a prescribed period of time. Loans may be ‘hard’ or ‘soft’. Hard loans are those given at market rates of interest while soft loans are those given at concessionary or low rates of interest.
TYPES OF AID
Aid may be tied or untied. Tied aid refers to that given with restrictions while untied aid refers( also known as general purpose aid or program, on-project aid) to that aid given without restrictions. Restrictions tend to be of two kinds: those on where the recipient can spend the aid and those on how the aid can be used. Spending restrictions normally take the form of tying aid to purchases from the donor country( procurement tying).This reduces the real worth of the aid because it prevents the recipients from shopping around to find exactly the goods they want from the cheapest markets. A ‘use’ restriction normally means tying aid to cover the foreign exchange costs of an identifiable project. Such aid is known as project aid. Restricting the use of aid to particular projects, as well, to a country’s goods amounts to double tying. Tying can be very costly since there are many costs of tying apart from the inability of the recipient to buy in the cheapest markets. This is because if there is double tying, the project for which aid is given might not fit perfectly into the recipient country’s development program , the technology might be inappropriate, the donor may raise the import content unnecessarily, the suppliers may exploit knowing that they have a captive consumer, and servicing over the life of the investment may be expensive.
CHANNELS OF AID
Aid may be provided bilaterally and multilaterally. Bilateral provision of aid refers to the provision of aid directly from one government to another. For example, Japan to Kenya while multilateral provision of aid refers indirect provision of aid from one government to another through the vehicle of multilateral agency such as the WB and IMF.It may also be channeled through NGOs.
MOTIVES OF GIVING AID
Scholars have identified three motives for giving aid, political, military and historical motives. Foreign aid is part of the foreign policy of a donor country. This is where aid is seen as an instrument in pursuit of national interests. Security interests rank high as well as economic interests. United States’ foreign aid has always been driven by security interests. United Kingdom and French aid tends to be concentrated on ex-colonial territories reflecting strong political ties. There is also the moral, humanitarian motive to assist countries and particularly poor people in poor countries. An example would include U.S. helping the earthquake victims in Haiti. There are also economic motives for developed countries investing in developing countries not only to raise the growth rate of the developing countries but also to cater for their own welfare.
ROLE OF FOREIGN AID IN ECONOMIC DEVELOPMENT
One of the developing Worlds’ greatest challenges is halving the incidence of absolute poverty defined by the international poverty line of $1 per person per day. According to World Bank (2000), simply preventing the number of poor people from increasing in Africa requires annual growth of 5%, while cutting the number of poor people by half by 2015 will take growth rate of 7% or more. But Least Developed Countries (LDCs) are characterized as ‘capital poor’ and have low saving rates. In Africa, for example, saving levels in the 1990s were on average 13% of G.D.P. Such savings are too low to support the recommended growth rates. The importation of foreign capital helps reduce the shortage of domestic savings through the inflow of capital equipments and raw materials thereby raising the marginal rate of capital formation. Secondly, along with low-savings and low investment which imply capital deficiency, LDCs suffer from technological backwardness. This is reflected in high average costs of production. Foreign capital overcomes not only capital deficiency but also technological backwardness. It brings sufficient physical and financial capital along with technical know-how, skilled manpower, organizational experience etc. All these accelerate economic development. With sufficient technological know-how, LDCs can undertake big projects like rail and modern road construction.
Thirdly, foreign capital helps in industrializing the economy. It helps LDCs to start basic and key industries (e.g. steel, machine tools, heavy electrical and chemical plants), something they could not do by themselves. It also helps in increasing the productivity hence leading to an increase in the demand of industrial products like mobile phones, electrical products as people in rural areas increase their incomes as a result of increased farm incomes.
Fourthly, foreign aid opens up inaccessible areas, tap new resources and helps in augmenting natural resources hence solving the problem of regional imbalances. It does this by assuming all risks and losses that go with the pioneering stage since private enterprise in LDCs is reluctant to undertake risky ventures such as exploitation of untapped natural resources.
Fifthly, by creating a country’s infrastructure, establishing new industries, tapping new resources, and opening up new areas, foreign aid creates more employment in urban sector leading to the migration of surplus labor from the rural to the urban sector.
Sixthly, all the above imply that foreign aid raise the level of national productivity, income and employment which in turn lead to higher real wages for labor, lower prices to consumers and rise in their standards of living. With the inflow of foreign capital, local labor becomes skilled, its marginal productivity increases thereby raising real total wages for labor.
By importing superior technology, management, machines and equipment, large quantities of new and quality products are available to consumers at lower prices.
Lastly, foreign aid overcomes the problem of balance of payments experienced by the LDCs in the process of development. A typical LDC needs import goods, raw materials, technical know-how etc in order to accelerate its economic growth. Developing country’s exports to developed countries are either stagnant or have a tendency to decline. There exists therefore, a gap between the country’s imports and exports, which leads to balance of payments’ deficit. It is through foreign aid that such a country can meet most of her imports requirement while at the same time avoiding balance of payment difficulties.
However, arguments against foreign aid have been advanced. First, foreign aid may lead to external control of the recipient country’s economy by funding populist projects without viable productive capacity in order to support the ruling regime. Secondly, foreign aid is highly conditioned to the extent that many recipient countries are forced into other agreements which may contradict their interests.Thirdly; foreign aid transfers capital intensive technologies which undermine the labor potential that many developing countries have comparative advantage of. Finally, in most developing countries, foreign aid does not solve the balance of payments deficit more so if the aid received is used to buy capital goods from the donor country.
The provision of aid has played a major part in development in many third world countries. Foreign aid therefore must be viewed positively as a catalyst for development while still appreciating its shortcomings. However it must be noted that foreign aid only yields maximum results if coupled with the necessary social and political reforms especially political stability and sound governance and an entrepreneurial spirit on the part of the citizens.CHAPTER THREE
AN OVERVIEW OF KENYA’S ECONOMIC DEVELOPMENT SINCE INDEPENDENCE
Kenya is located in East Africa with an estimated area of about 528,646 km squared with a population of 39.8 million people. Kenya was a British colony and got its independence in 1963 subsequently becoming a Republic in1964.By this time, a significant private sector based on commercial agriculture and light manufacturing had developed. Thus by 1963, Kenya had one of the most diversified and advanced economies in Africa. Kenya went on to adopt the Sessional Paper no. 10 of 1965, ‘African Socialism and its Application to Planning in Kenya’. The paper envisaged private sector led economy with an increasing role of the State in certain ‘Strategic sectors’ of the economy. Indeed, the development policy envisaged in the sessional paper implicitly rejected the notion that the integration into the global capitalist economy would lead to underdevelopment in the third world, a view mostly held by ‘Dependency Theory’. Instead foreign investment was encouraged. However, a policy of gradual ‘Africanizing’ the economy, for instance, foreign investors to partner with indigenous Kenyans was to be pursed. Moreover, the country would pursue an import substitution strategy for industrialization.
However, the development path undertaken ended up benefiting a section of new elite that was able to take advantage of their proximity to state patronage to greatly enhance their wealth. This led to regional inequalities, formation of social stratification and problems started affecting Kenya. These were further enhanced for instance, through the spread of cooperatives and eventually through the formation of the Ndegwa Commission which encouraged civil servants to set up businesses while still working in the public service. This created the problem of corruption that still remains today as Kenya’s biggest challenge to economic development. Throughout 1960s to 1970s, Kenya’s economic growth was very high, considerable progress was recorded in expanding access to essential services (basic education) and poverty levels declined. The inequalities that emerged from sessional paper no. 10 led to the formation of District for Rural development in 1983 during the Moi regime. Unfortunately, this model was running out of dynamism and hence Kenya was characterized by high rates of unemployment. During this time, extensive structural reforms were being demanded by donors and the international development institutions.
An expansionary economic policy characterized by large public investments, support of small agricultural units and incentive for private (foreign and domestic) industrial investment had played an important role in the first decade after independence. During this decade the growth rate was 7% annually. From 1973-1980, the oil crises helped lower GDP to an annual rate of 5%.Along with oil price shock, lack of adequate domestic saving and investment slowed the growth of the economy. Various economic policies designed to promote industrial growth led to a neglect of agriculture and a consequent decline in the farm prices, farm production and farmers income leading to rural-urban migration. the slowdown of the GDP persisted from 1980 to 1985 when the annual average growth was 2.6%.It was a period in which the political shakiness of the 1982 and the severe drought of 1984 contributed to break the industrial growth. Towards the 1990, the Moi regime was beset by corruption, cronyism and economic plunder. This is the time that Kenya seriously experienced economic problems, high rate of school drop outs, dilapitated infrastructure, declining agricultural sector among other social and economic problems. By, 1990, Kenya’s per capita income was 9% lower than it was in 1980: $370 compared to $410.It continued to decline and GDP per capita fell at an annual rate of 0.3% throughout the decade. Urban unemployment rose to about 30%.This led to widespread poverty, high unemployment and growing income inequality. Kenya also experienced spread ethnic violence and ethnic upheavals especially in 1992.
Agricultural sector comprised 23% of 2000 GDP and 77% of merchandise exports hence agriculture is the backbone of the Kenyan economy. Because of this importance, the Kenyan government has come up with several policies to nourish the agricultural sector. Two of such policies include setting attractive producer prices and making affordable fertilizer. Kenya’s chief exports are coffee, tea, sisal, cashew nuts, pyrethrum and horticultural products. Although Kenya is chiefly agrarian, she is the most industrialized country in East Africa. Public and Private industry accounted for 16% of GDP in 2000.Kenya’s chief manufacturing activities include food processing and production of beverages, tobacco, footwear, textiles, cement, metal products, paper and chemicals. To improve manufacturing and industrialization sector, Kenya has tried to improve the road network, airports and seaports in order to facilitate transport and lower the cost of doing business.
From 2003, after President Kibaki took over, the government has prioritized infrastructure since it is the catalyst of both agricultural and industrial growth. From 2006 towards 2007 the economy was growing at an average of 7% and this was as a result of growth in the agricultural sector aided by good infrastructure which has been funded by partly by the Kenya government, WB, African Development Bank as well as individual donor countries. Unfortunately, 7% growth rate was reversed by the late 2007 and the early 2008 election violence. The growth rate dropped to 1.7% annually in the year 2008.In the following years the economy started picking up due to both political and economic reforms that have been undertaken, more so the passing of the constitution and the respect of the National Accord between the two principals. At this point economy was projected to grow at an average of 4-5% annually.
To achieve and sustain this economic growth, the government of Kenya has embarked on an ambitious programme of building roads, expanding airports and putting into place agricultural policies that will lead to increased food production to ensure food security. This is in line with the Vision 2030 where Kenya wants to a middle income economy by 2030 with an economic growth of 10% annually.
Kenya economic development heavily depends on increased agricultural productivity, reliable infrastructure and emphasis on affordable and accessible healthcare as well access to education mostly primary education. Foreign aid will therefore be needed if Kenya is to realize vision 2030 and reach that stage of self-suffiency. Political Stability and fight against corruption must also be given priority.
THE ROLE OF FOREIGN AID IN ECONOMIC DEVELOPMENT IN KENYA
The period prior to 2003 saw Kenya performs poorly in terms of economic growth and the different economic sectors were not performing well. This chapter looks at how the country was in 2002 before the change of regime, assesses how the economy performed from2003 to2007 and in the year 2008 after the post election violence. The chapter will also look at specific sectors namely; education, health, infrastructure and agriculture in terms of how much foreign aid has been directed to these sectors as well as the role they play in the economic development.
Kenya’s economy recorded a slight growth of 1.1% in 2002 compared to 1.2% in 2001.This slow growth was attributed to the effects of poor infrastructure, low domestic credit, low output and prices of major agricultural exports and the uncertainties regarding the general election. Government borrowing from domestic market increased by13% from Kshs.100,383 million to 113,384 million in 2002 as withholdings of donor funding continued.(Kenya’s Economic survey 2003:Pg 1)
In 2003, National Rainbow Coalition (NARC) government after taking office through a democratic process and peaceful transition, embarked on reforms aimed at jumpstarting the economy in order to create additional jobs, improve governance and reduce the level of poverty in the society. The government therefore put in place an Economic Recovery for Job Creation and Poverty Reduction (ERPR).The strategy defined a new strategic direction and spelled out priorities that will lead to rapid economic growth. In the productive sector, increased investment in infrastructure, agriculture, manufacturing, tourism trade and industry were accorded priority while in the social sector increasing access to education and health services and facilities received special attention. The fight against corruption and promotion of good governance were also prioritized. These initiatives resulted to generating confidence among foreign and domestic investors. The country therefore expected to receive budgetary support from development partners to finance priority programs that would revamp economic growth. Resumption of donor funding also increased the investors’ confidence thus increasing the investment level in the country.
To understand the role of foreign aid in development in Kenya it is important to look critically at these specific sectoral areas namely; education, health, infrastructure and agriculture.
Education must be critically considered if Kenya is to realize a sustainable economic development. This is because education is fundamental strategy in human resource development. A properly skilled human resource is an asset to effective management and utilization for resources for increased productivity. Effective management and enhanced productivity requires a well trained and healthy human resource.
Unfortunately, Kenya has faced numerous challenges in trying to make education accessible to all especially primary school education. These challenges include cost of education and inequity in access, under-enrollment and school drop-out. To make sure that education especially primary school is accessible to all, the government has sought the help of donors. In 2003,the NARC government took over and introduced free primary education which is funded by the government of Kenya and the United Kingdom Department For International Development.(DFID).In 2003,the government at a cost of Kshs.3.6 billion and DFID at a cost of ksh 1.2 billion met the cost of teaching and learning materials, wages of critical non-teaching staff and co-curricular activities at a cost of Kshs 647 per pupil. World Bank also committed grants during the year 2003 totaling Kshs 3.8 billion in supply of the teaching and learning materials in public primary schools. As a result enrollment in primary school increased by 17.6% from 6.1 million in 2002 to 7.2 million in 2003.(Kenya’s economic survey 2004).Primary school enrollment also grew from 7.6 million in 2006 to 8.2 million in 2007.The continued rise in enrollment indicates positive steps towards realizing the millennium development goal of universal primary education. In 2004, only about 60% of primary students completed their education compared with 80% in 2008.The transition from primary to secondary and later to tertiary and university education has also improved in recent years due to improved public and private investment in the education sector(http://90.worldbank.org).This increase in transition levels has led to economic development since the number of those dropping out of school and hence engaging in crime has significantly reduced. The amount that would have otherwise been used to fight crime can be used for development purposes.
In the health sector, the government is also very keen in ensuring that every individual has access to affordable health care. This is because a healthy manpower is productive hence needed if increasing both the industrial and the agricultural production is anything to go by.
However, unfavorable distribution of health services continue to widen with observed disparities and affordability across the country. In 2002, only 42% of the population had access to health facilities within 4km radius and 75% within 8 km. Although the government has always come up with excellent programs to ensure accessibility to health care to all, shortage of funds has always been the hindrance. To address this inadequacy of resources the government has therefore sought the help of the donors. This is because the National Hospital Insurance Fund (NHIF) finances partial in-patient care services for its members. Additionally, HIV and AIDS present a major challenge to Kenya’s development. The rapid increase in the number of HIV/AIDS infected people has always presented a major challenge to the provision of health services.
The government of Kenya overwhelmed by this challenge has partnered with World Bank for funding. In 2003, the WB released US$ 80 million for Kenya to expand the coverage of targeted HIV and AIDS interventions to prevent and mitigate the impact of the disease. Under the project, Total War Against HIV and AIDS (TOWA), this helped to reduce the prevalence of HIV and AIDS from over13% in 2001 to about 6 % in 2005, further strengthening the governance of National AIDS Control Council (NACC), the lead agency for designing strategies and overseeing the implementation the programs to control the pandemic. The British Department For International Development(DFID) also gave US $33 Million towards the TOWA project(http//90.worldbank.org/3Q).This initiative will see over 5 million people in Kenya especially orphans and young women who are directly and indirectly affected and made vulnerable be reached and supported. As a result this will in turn lead to accelerated economic growth as more healthy people engage in production either in industries or the agricultural sector.
Infrastructure is core to any country’s economic growth, this is because it affects any other sector o f the economy in that you need good roads, rail and airports to transport people, agricultural and industrial produce from one point to the other. Other infrastructural areas include; telecommunication and ports. The government of Kenya has therefore embarked on an ambitious program of building infrastructure mainly roads, expanding airports and ports in order to ease the flow of goods in and out of Kenya. This has seen the government like the construction of Thika super highway which is funded partly by African Development Bank and the government. This will reduce traffic jam as well as lower the cost of doing business due to fast movement of goods and hence lead to achieving the objectives of the vision 2030 which aims at reaching an economic growth of 10% annually. Another major project being undertaken is the 250 billion Lamu free-port which will see the development of a new transport corridor to southern Sudan and Ethiopia. The government of Kenya secured a 1.2 billion funding from China and Japan for the feasibility Study. This project will spur economic growth as it will open up the Northern Kenya. This project is expected to approximately create 1.5 million direct and indirect job opportunities.
In 2008, WB’s portfolio in Kenya comprised of 15 projects with a total commitment of almost US$ 1 billion in all key development areas including infrastructure. For example, the World Bank in 2007 approved the Transparency Communications Infrastructure project funding amounting to US$ 164.5 million that targeted Kenya, Burundi and Madagascar. This led to Kenya liberalizing the telecommunications gateway that saw the number of operators in the sector jump from 1 to 18 and in a short time-price of telecoms service dropped by 70% within a short time and this led to accelerated activity and growth. (www.worldbank.org)
The continued construction of roads has led to growth in the building and construction sector. Some of these infrastructural projects include the expansion of Jomo-Kenyatta International Airport, construction of Mai-Mahiu-Narok road. Disbursement of funds by Kenya Roads Board to various road agencies went up in 2007 by 49.5% to stand at Kshs.15.4 billion from 10.3 billion in 2006.Cement consumption went up by 16.7 % to 2,061,400 tonnes in 2007 from 1,765,800 tonnes in 2006.Total wage employment in the sector stood at 81,799 persons in 2007 an increase of 2.4% from the previous year. This shows how the roads construction leads to economic growth because as roads are built, real estate industry grows and hence cement consumption goes up and at the same time employment is created. Other sectors that grow as a result of improved infrastructure due easy travelling and communication include tourism and industrial sector
The agricultural sector contributes about 25-30% of the overall Gross Domestic Product. Majority of the world’s poor live in the rural areas and depend upon agriculture for their livelihood. Agriculture is therefore critical for both economic development and poverty reduction. The contribution of agriculture to economic development lies in providing more food to the rapidly expanding population, increasing the demand for industrial products and thus necessitating expansion of the secondary and tertiary sectors, providing additional foreign earnings for the import of capital goods for development through increased agricultural exports, increasing rural incomes, providing productive employment and improving the welfare of rural people. Increased rural purchasing power caused by expansion of agricultural output and productivity will tend to raise the demand for manufactured goods and extend the size of the market and this will lead to the expansion of the industrial sector.
Despite the importance of agriculture, its full potential has not been realized due to low farm level productivity, poor marketing, limited access to credit and high cost of farm inputs.80% of Kenya is arid and semi-arid and sustainable agriculture can only be achieved through well planned and operated irrigation. However this requires a lot of money which the government cannot afford and hence is forced to turn to donors for support.
The government of Kenya has been receiving aid from various donors .In 2008,Kenya received Kshs.80 billion to alleviate food shortage. Food Agricultural Organization (FAO) donated 2.4 billion for the purchase of fertilizers, livestock feed and vaccine as well as purchase and develop new variety of seeds. World Food Program (WFP) funded the school feeding program to tune of 5.1 billion. Also a substantial amount of money has been directed to irrigation programs and construction of dams in parts of Ukambani and Turkana and has yielded results.
Agriculture has contributed to economic growth. For example, in 2006 the GDP expanded by 6.1% compared to 5.7% in 2005 in spite the drought that was experienced. The main sources of this growth were the Agriculture and Transport and Communication sectors. The production of maize grew by 11.8% to 36.1million bags in 2006 from 32.2 million bags in 2005.Coffee production recorded a significant increase of 6.9% to stand at 48.3 thousand tones up from 45.2 thousand tones in 2005(Kenya’s Economic Survey 2007).This in turn led to increased foreign earnings to Kenya and hence contributing to economic development as farmers increased their income thereby raising their living standards.
In this chapter we have examined the foreign aid extended to Kenya in the education, health, infrastructure and agricultural sectors and the resultant economic growth. The importance of foreign aid in economic development cannot be overlooked as this chapter has clearly shown that in 2002 the economy was growing at an average of 1.1% but after resumption of foreign aid, the economy by the end of 2007 was growing at an average of 7%.The heavy investment in education, health, agriculture and infrastructure sectors by the government and the donors has contributed to economic development as people can now access both education and health services more easily without any communication problems due to improved infrastructure. It is also important to note that foreign aid was complimented by sound governance and the fight against corruption together with strong political and social institutions. The economic growth decline in 2008 that saw the economic growth reduce to almost 2% was as a result of political instability brought about by the contested 2007 presidential election. This clearly shows that foreign aid must go hand in hand with conducive political and social environment.
SUMMARY OF FINDINGS, CONCLUSION AND RECOMMENDATIONS
SUMMARY OF FINDINGS
In this study, the relationship between foreign aid and development has been carefully analyzed. In chapter one, the whole debate surrounding foreign aid has been captured through literature review and the Modernization and Dependency theories and it is through this analysis that modernization theory appears to be the one suitable for development. This is because it recognizes that developing countries lack capital and technology required for development hence foreign aid becomes the alternative. In chapter two, types and channels of foreign aid are discussed and what comes out clear is that tied aid is very dangerous to the growth of the recipient country. The chapters also capture the arguments for and against foreign aid and the advantages outweigh the disadvantages. Foreign aid can therefore be considered as necessary for development as it can help in starting up industries in developing countries.
Chapter three gives an overview of Kenya’s economic development since independence up to 2008 and what comes out clear is that the period from 2003 to 20007 experienced economic growth due to resumption of donor funding coupled with institutional reforms and fight against corruption. Chapter four specifically shows how much foreign aid has been advanced to education, health, infrastructure and agricultural sectors and the economic growth as a result of growth in these sectors. The chapter clearly shows that when foreign aid that is used efficiently it can indeed lead to rise in GDP since the economy rose from 2% growth in 2002 to 7.1% in 2007.
The role of foreign aid is characterized with disagreements, where on one side are the modernization theorists who argue that aid has indeed promoted growth and structural transformation in many developing countries. On the other side are critics who argue that aid does not promote faster growth but may in fact retard it. For example, by exacerbating developing country’s balance of payments deficits as a result of rising debt repayment obligations and the linking of aid to donor – country exports will retard their growth.
However, dissatisfaction on both sides creates the possibility of new arrangements characterized by greater congruence of interests and motivation on the part of the donor and the recipient. Aid from developed Nations that is geared more towards real development needs of recipients and permits them greater flexibility and autonomy in meeting their development priorities represents a positive step. In future aid should be linked to market reforms and the building of institutional capacities and more effective forms of governance. In addition, the more aid takes the form of outright grants and concessional loans, the less it is tied to donor exports, the more autonomy is permitted in it’s allocation, and the more it is supplemented by the reduction of the donor country tariff and non-tariff trade barriers against LDC exports the greater will be it’s developmental impact.
Aid also cannot lead to development without being complimented by observance of human rights, access to quality education and affordable health care as well as a society free from political conflict. Any developing country must seek to ensure that there are stable and independent political and social institutions especially a credible electoral commission to provide peaceful and transparent political transition in order to ensure a conducive-environment for investment and economic development.
After critically assessing the role of foreign aid in economic development and the challenges that face the third world countries, a number of issues need to be looked at. Here are some of the recommendations that if implemented will help in making foreign aid more effective in bringing meaningful economic development. The recommendations are in no way exhaustive as development problems will vary from country to country.
First, the recipient countries should demand that aid be aligned with their development priorities. Donors should support country’s own strategies for growth and poverty reduction or equivalent national development plans and base their programs on the needs and priorities identified in these strategies.
Secondly, recipient countries should always demand for untied aid. Untying aid significantly increases its effectiveness. This means, not tying aid to donor exports and granting greater latitude to recipient countries to decide for themselves. For example, donor countries normally tie aid to purchases from their countries. This reduces the real worth of aid because it prevents the recipient from shopping around to find the goods they want from the cheapest markets. Untied aid hence will save the recipient money as they can buy where they like and spend less.
Thirdly, donor countries should ensure reliability in aid flows. Given the size of official flows relative to incomes of many countries, variations in these flows can cause problems. Volatile, unreliable aid flows can undermine budget management in recipient countries because in poor countries, aid shortfalls are usually offset by cutbacks in spending and sometimes by tax increases. Improving the reliability of aid is important to improving its effectiveness.
Fourthly, aid should be geared more towards the countries that undertake market reforms and the building of institutional capacities and more efficient forms of governance. Corruption must be eliminated as this is the greatest form of hindrance towards real development. The recipient countries should come up with Anti-Money laundering laws to prevent money stolen being stashed in foreign accounts.
Finally, the recipients of aid should improve their budgetary management and service delivery, strengthen institutions and improve on technology for efficiency in their operations. This will improve their absorptive capacity and hence can absorb more aid and put it into the intended use with efficiency and effectiveness.
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