Welcoming Letter

Dear delegates,

We are more than thrilled to welcome you to the Economic and Financial Committee of the first-ever
edition of Sava Model United Nations! We feel truly honoured to have been given the opportunity to chair this
astonishing committee and we can’t wait to meet each of you and hear all of your bright ideas. We are certain
that you will exceed our expectations and we hope that we will live up to yours as well!

In order for this conference to be a valuable experience for all of us, it is needless to say that you need
to be exceptionally well prepared, since productive debates require you to have a strong base of knowledge.
We hope to be able to rely on your dedication and cooperation throughout the time before and during the
conference, since being a delegate implies meeting certain deadlines and following certain rules. In the
following pages, we have provided the basis of information regarding the two topics that will be discussed
in the committee sessions. We trust that you will not only read the Study Guide and the additional links very
attentively, but also continue with your own research based on your country’s stance on the topics given.

We tremendously encourage you to speak up and be active throughout the whole conference, regardless
if you are a first-timer or an experienced delegate. Since we are dealing with two topics of the utmost complexity,
every single idea of yours could help the work of the committee result in two excellent resolutions.

Should you have any questions or concerns, please do not hesitate to contact us, since our role is to
guide you throughout this unique experience! Enjoy your preparation and see you in November!

Your Chairpersons,
Ruxandra Sorocianu, Ilinca Margină & Raluca Spânu
 Introduction to the committee

The United Nations is an international organisation which currently comprises 193 countries. Since
its founding in 1945, the UN has been providing Member States with a forum to discuss, debate and reach
consensus on the most pressing world issues.

The UN comprehends six main organs: the General Assembly, the Security Council, the Economic
and Social Council, the International Court of Justice, the Trusteeship Council and the UN Secretariat. The
Economic and Financial Committee (ECOFIN), also known as The Second Committee of the General Assembly
is the UN body which deals with economic matters and global finance, as suggested by the name itself. Over
the years, ECOFIN has been focusing on economic growth and sustainable development, offering its financial
support and expertise for issues such as human settlements, agriculture development, macroeconomic policy
questions, globalisation and interdependence, information and communications technologies for development
and the eradication of poverty.

Since ECOFIN’s membership is open to every MS of the United Nations, a total of 193 nations are
represented in this committee. Also, it is utterly necessary to bear in mind that, just as any other of the six
committees of the General Assembly, ECOFIN’s mandate cannot infringe upon the national sovereignty of a
country and its documents are not legally binding.
 Topic A: The issue of economic dependency on a macro scale
Overview of the topic

Key Terms

“GDP” = Gross Domestic Product;

“FDI” = Foreign Direct Investment;

“Commodities” = raw materials which underpin our everyday lives products;

“CDDC” = Commodity Dependent Developing Country;

“Economic dependency” = endless scenario in which nations and economies depend on each other and
on numerous other economic and non-economic aspects;

“Dependency theory” = the term that defines the process of resources flowing from a “periphery” of
poor and underdeveloped states to a “core” of wealthy states, enriching the latter at the expense of the former;

“Macroeconomic factor” = an influential fiscal, natural, or geopolitical event that broadly affects a
regional or national economy;

“Foreign dependency” = international system within which less developed states are economically
reliant on stronger countries, inflicting the economic and political systems of the weaker nations to operate
below a notable control of the developed ones;

“Capitalist exploitation” = selling workforce for less than the value of the goods they produce;

The situation at hand

Based on economic criteria such as GDP per capita and industrialisation, the UN has divided the
world in two major categories: developing (or less-developed) and developed countries. Studies show that
the per capita financial gain of the highest income nation is four hundred times greater than that of the lowest
income nation. Instead of the inequality between developing and developed states to diminish, the economic
divergence is constantly increasing, which is substantially impacted by economic dependency in many of its
forms: commodity-dependence, reliance on foreign aid, foreign investment dependence etc.

One manner by which economic dependency can hinder the progress of a developing country is
clarified by the Dependency Theory. According to this document, most of the less-developed nations sell low-
priced raw materials to leading economies, which have the means to transform them into finished goods and
later sell them back to poor states at a profit
 (The diagram of the dependency theory)

However, the fact that developed countries take advantage of the developing ones is not the only reason
why an economy built on exporting commodities proves to be unfavourable. When raw materials represent
more than 60% of a state’s exports, the country is called commodity-dependent. The state of commodity
dependence is usually linked to vulnerability and poverty, since economies which are heavily reliant on basic
products put themselves at the mercy of global market prices: when prices go down, employment and exports
suffer.

Dependency on foreign aid also plays a vital role in shaping the economic and political framework
of the recipient country. Even though external help can bring beneficial economic and political impacts such
as increasing local public expenditures on social programs in developing states, donor nations tend to use
guarantees of aid or threats of stopping it to pressure donees into adopting the policies preferred by the donor,
which may turn out to be dangerous for a nation’s economic enhancement .

Reliance on foreign capital can likewise have a considerable influence when it comes to a country’s
development. It could take the form of FDI, which includes activities such as hosting foreign corporations
that provide jobs. However, FDI could also create issues, since firms originating from developed nations often
dominate the local market, thus preventing and debilitating the progress of local industries. Moreover, the
host nation may also need to relax workplace or environmental regulations or could be asked to provide tax
incentives to keep the foreign companies in the country, sometimes even leading to a blockage in the nation’s
advancement.
Timeline

The Dependency Theory emerged in the late 1950s under the guidance of Raul Prebisch, who was
intrigued by the fact that economic growth in the developed countries did not lead to progress in the poorer
ones as well. Indeed, the studies of Prebisch and his colleagues didn’t only indicate that the neoclassical theory
(which had assumed that economic growth was beneficial to all nations, even though the advantages weren’t
equally distributed) was wrong, but also affirmed that economic activity in wealthy countries led to massive
economic problems in the developing ones.

Raul Prebisch’s explanation was straightforward: Less-developed nations typically happen to be

former colonies whose economies were based on producing raw materials for the manufacturing industries of
their colonial powers. Subsequent to becoming independent, hardly any former colonies developed industry-
based economies or had trained employees that could compete on the global market, so they kept on exporting
commodities to former colonial masters. The industrial states then sold manufactured goods back to their
old colonies at higher prices, so the poor countries couldn’t earn enough from their exports to pay for their
imports. The theorist’s solution was for the less-developed states to continue selling raw materials on the
world market, but without making use of their foreign exchange reserves to purchase their manufactures from
abroad. Still, various factors such as the lack of political will and resources for transformation have made this
policy hard to follow.

However, Prebisch’s document isn’t the only version of the Dependency Theory. During the course of
history, Liberal Reformers, American Marxists and other theorists have shared different views on the causes
behind the state of underdevelopment of a nation and the ways to escape it. While liberal reformers regarded
Prebisch’s paper as a possible way to explain the persistent poverty of a country, explaining that the import-
substitution (ISI) was better than the trade-and-export strategy in the case of underdeveloped countries,
Marxists thought that underdevelopment was a result of capitalist exploitation, theory that emerged with the
help of Paul A. Baran in 1957. He stated that in order for an economy to grow, a country needs to produce
more than for bare subsistence, surplus which should be used for capital accumulation (purchasing new means
of production). Spending the surplus on luxury items is the opposite of what should be done in order to help
the development of a country. Baran observed that plantation agriculture, an economic activity that originated
in colonial times, was not profitable since most of the revenue went to the landowners who then used it to
emulate the patterns of consumption of the wealthy people of the developed world. This accumulation of
capital was spent on luxury goods and not enough helped the economy of an underdeveloped nation.

Beginning with the 1970s, a new approach to the Dependency Theory has developed, called the
World Systems theory. It refers to the division of labor, splitting the world in periphery, semi-periphery and
core countries. The terms “periphery” and “semi-periphery” stand for economies built on extraction of raw
materials and labor-intensive production, while the states whose economies are based on higher skill and
capital-intensive production are referred to as core nations. The point where this paper differentiates from
Prebisch’s theory is the cause behind the “core-periphery” system: Prebisch blames the wealthy countries for
the underdevelopment of others, while world systems theorists focus on a larger division of labour that occurs
nationally, regionally and internationally.
 A world map of countries by trading status, late 20th century, using the world system differentiation into core
countries - blue, semi-periphery countries - purple and periphery countries - red.

Current Situation
Nowadays, although reliance on foreign aid or foreign investment may also have its negative impacts
on a state’s development, commodity-dependence is proven to be significantly more harmful to economic
progress. Even though 13% of the developed nations also deal with dependence on commodities, this
phenomenon is usually associated with less-developed countries, since 64% of the developing states, as well
as 85% of the least-developed ones are commodity-dependent: the higher the dependence, the lower the
development.

The effects of commodity reliance go beyond economic aspects, having significant other implications.
Since commodities are the main source of income for many less-developed states, to produce more is the way
to earn more. This puts pressure on their natural resources, therefore compromising sustainability.

Nevertheless, commodity dependence is not necessarily a sentence for poverty. Whether natural
resources are a benefit or a burden relies on the way a country uses them. Success stories such as Brazil or
Columbia have managed to increase the value of their manufacturing exports, while states such as Cameron
boosted exports by diversifying into agriculture.
 
 Legal Framework
The UNCTAD report “State of Commodity Dependence 2019”

Every two years, the UNCTAD publishes a report titled “State of Commodity Dependence”, with the
aim of monitoring the evolution of such dependence all over the world.

Apart from reaffirming that reliance on commodities is nearly exclusively a developing-country

phenomenon, this year’s issue of the report acknowledges that two out of five commodity dependent countries
are located in sub-Saharan Africa.

Another alarming issue the UNCTAD points out is the continuingly increasing number of CDDCs over
the past 20 years. Moreover, the dominant export product group changed in only 25% of the nations, since the
prices of minerals and energy increased way more than those of manufacturing and agricultural goods.

The document also shows that, even though some energy-export-dependent states such as Egypt
managed to share their non-commodities exports by adding value in their downstream sectors, other nations
such as Nigeria faced either stagnation or fall when attempting to exercise this strategy. Likewise, although some
commodity-dependent countries such as Rwanda managed to expand their exports by boosting agriculture,
states such as Chad weren’t as successful.

Position of Main Actors

The example of India’s improvement after switching from state-controlled business to open trade is
one that contradicts the expentacies of dependency theorists. The growth of India was fuelled by its strategy of
outsourcing - one of the most mobile forms of capital transfer, this being against the initial position of experts
regarding comparative advantage and mobility.

South Korea and North Korea also crushed the expectations of theorists when the former pursued a
policy of export-oriented industrialization (suggested by the comparative advantage theory) while the latter
pursued a policy of import substitution industrialization. In 2013, South Korea’s per capita GDP was 18 times
that of North Korea.

In Africa, states which have focused their development on import-substitution, such as Zimbabwe,
have typically been among the worst performers, while the other most successful non-oil based economies,
such as Egypt, South Africa and Tunisia have pursued trade-based development.
 Points to be addressed

1. How could the UN help developing countries escape commodity-dependence?

2. To which extent should nations’ economies rely on foreign aid?
3. How could less-developed states be supported into diversifying their exports?
4. Is capitalist exploitation the reason behind underdevelopment? If so, how could Member States
address and ameliorate this issue?
5. Is the dependency theory the best option for LEDCs to overcome economic problems?
6. Should countries create new policies for imports or exports?
7. What could make a commodity-dependent developing country successful? Where does growth come
from?
8. What is the link between less developed countries and countries with high dependence need?

Further Reading

•https://unctad.org/en/PublicationsLibrary/ditccom2019d2_en.pdf
•https://www.researchgate.net/publication/322643984_Commodity_Dependence_and_Development_
Suggestions_to_Tackle_the_Commodities_Problems
•http://rochelleterman.com/ComparativeExam/sites/default/files/Bibliography%20and%20Summaries/
Cardoso%201972.pdf
•https://pdfs.semanticscholar.org/a7ca/f7857244e863925f6a133ebb01fd6a4dd5a3.pdf\
•https://unctad.org/meetings/en/Presentation/Commodities_Seminar_21June2019_Gayi.pdf
•https://eur-lex.europa.eu/legal-content/EN/TXT/?uri=CELEX:52011DC0025
•https://www.tralac.org/images/docs/12538/commodity-dependence-growth-and-human-
development-background-document-unctad-december-2017.pdf
•https://foreignpolicy.com/2009/11/09/the-dustbin-of-history-dependency-theory/
•https://pdfs.semanticscholar.org/d715/82f1a87a914036b3af3696b2be5e8411a7c8.pdf
•https://core.ac.uk/download/pdf/18623879.pdf
•https://pdfs.semanticscholar.org/394f/f194eb5c8bd5e07d680413182dc9e0b16bbc.pdf
 Topic B: Ways of avoiding global recessions
Overview of the topic

Key Terms

“GDP” = Gross Domestic Product;

“Real gross domestic product” (real GDP) = an indicator of the value of economic output adjusted for
price changes (i.e. inflation or deflation);

“Global recession” = an extended period of economic downturn all over the world;
“Capital flight” (in economics) = when assets or money rapidly flow out of a country, due to an event of
economic importance (increase in taxes on capital, capital holders or the government of the country defaulting
on its debt that disturbs investors and causes them to lower their evaluation of the assets in that country, or
otherwise to lose confidence in its economic strength);

“A bank run” = the retraction of multiple clients at once from a bank because of the influence of
external factors (i.e. predictions of economists that the bank will fail in the near future);

“IMF” = International Monetary Fund;

The situation at hand

If several countries experience an economic slowdown at the same time, we call it a global recession.
According to the IMF, such a downturn could be characterised by a wane in the worldwide GDP per capita,
but numerous other macroeconomic aspects (such as a weakening in trade, employment, oil consumption or
capital flows) could likewise be utilized to identify global recessions.

One must keep in mind that macroeconomic indicators must decrease for a significant period of time
to classify as a recession. Even though the IMF doesn’t specify a minimum time length when examining
an economic decline, for instance, in the United States, GDP typically has to diminish for two consecutive
quarters for a recession to occur.

The impact and severity of a global recession can vary from country to country, based on numerous
factors. For example, the effect on the manufacturing sector of a state is determined by the country’s relationship
with the rest of the world, while the sophistication of a nation’s markets and its investment efficiency dictate
how the industry of financial services is impacted.
Timeline

As stated by the International Monetary Fund, there have only been four global recessions since World
War II: in 1975, 1982, 1991 and 2009.

1975 – The recession occurring between 1973 and 1975, which was distinguished by high unemployment
and inflation rates, has put an end to the Post-World War II economic expansion. The 1973 oil crisis, as well
as the fall of the Bretton Woods system (= monetary management framework aiming to control economic
relations among independent states) after the Nixon Shock (= series of economic measures such as surcharges
on imports taken by US President Nixon in response to an alarmingly increasing inflation rate) were among
the causes behind the downturn.

1982 – The early 1980s recession strongly impacted several developed countries, having begun in the
late 1970s. Even though USA and Japan managed to exit the recession early, high unemployment continued
to affect other nations until at least 1985. The long-term effects of the economic slowdown had a substantial
contribution to the US savings and loans crisis and the Latin American Debt Crisis.

1991 – The recession of the early 1990s affected the majority of the Western world and it is believed
to be caused by various factors, such as the decline in defence spending due to the end of the Cold War, the
shortage of consumer and business confidence in response to the oil price shock and the restrictive policy
imposed by central banks as a result of inflation concerns.

2009 – The Great Recession, which had its origins in the United States, was a severe financial crisis
combined with a deep recession. While the recession lasted from December 2007 to June 2009, the period
of recovery was way longer since achieving pre-crisis levels was very difficult in terms of employment and
economic output. This slow process was due in part to economic agents paying off the debts they had before the
crisis along with restrained government spending following initial stimulus efforts. The causes of this event of
tremendous impact was caused by the bursting of the housing bubble, the housing market and correction and
subprime mortgage crisis. The US mortgage-backed securitie were marketed around the world, as they offered
higher yields than U.S. government bonds without being properly assessed in terms of risk. These subprime
mortgages had to suffer a collapse when the housing bubble burst in 2006 and homeowners began to default
on their mortgage payments in large numbers starting in 2007.

This triggered the start of the crisis and exposed other risky loans and over-inflated asset prices. With
loan losses growing by the day and the fall of Lehman Brothers on September 15, 2008, a major panic broke
out on the interbank loan market. This caused a bank run on the banking system, resulting in many large and
well established investment banks and commercial banks in the United States and Europe suffering huge
losses and even facing bankruptcy, this resulting in massive public financial assistance (government bailouts).

Causes of the recession:

● Widespread failures in financial regulation, including the Federal Reserve’s failure to stem the tide
of toxic mortgages;
● Dramatic breakdowns in corporate governance including too many financial firms acting recklessly
and taking on too much risk;
● An explosive mix of excessive borrowing and risk by households and Wall Street that put the financial
system on a collision course with crisis;
● Key policy makers ill prepared for the crisis, lacking a full understanding of the financial system they
oversaw; and systemic breaches in accountability and ethics at all levels.

The global recession that followed resulted in a sharp drop in international trade, rising unemployment
and slumping commodity prices.

Stance of main actors during the Great Recession (besides the US)

In China, the IMF predicted GDP growth for 2008 will be 9.7% and drop to 8.5% in 2009. The issue
that was raised was who would swallow the losses in US Agencies and Treasuries. On November 9, 2008
China announced a package of capital spending including income and consumption support measures. Four
trillion yuan ($586 billion) will be spent on:

● upgrading infrastructure (roads, railways, airports and the power grid);

● on raising rural incomes via land reform;
● on social welfare projects such as affordable housing and environmental protection.

As a result almost 700.000 small and medium companies (SMEs) have been closed. This means that
they left behind large enterprises who may or may not have outsourced their workplaces from the US, thus
leaving more than 4 and a half million people unemployed.

In the first quarter of 2009, France encountered a recession, the last developed nation in Europe to
do so. In order to fight the economic crisis, French president Nicolas Sarkozy announced a €26 billion rescue
plan which will amount to an additional €15.5 billion in addition to the normal budget for the year of 2009 and
will increase France’s public deficit to 4%. It is similar, to an extent, to Barack Obama’s proposal to stimulate
the U.S. economy by investing in the nation’s vital infrastructure. Further proposals include tax rebates for
small businesses as well as easing restrictions on building permits and government contracts particularly with
construction and civil engineering.

The economy of the United Kingdom has also been hit by rising oil prices and the credit crisis.
Moreover, house prices in Britain would fall constantly for two years from the end of 2007. On 30 July
2008 that 70,000 homeowners were in negative equity and it could rise to 1.7 million or about one in six
homeowners in the UK based on an expected 17 percent decline into 2009. The Bank of England reported that
mortgage approvals fell by a record of nearly 70 percent.

From 1999 until the autumn of 2008, Russia’s economy grew at a steady pace, which most experts
attributed to Putin’s policies, a sharp ruble devaluation of 1998, Boris Yeltsin-era structural reforms, rising oil
price and cheap credit from western banks. After Vladimir Putin’s first term as president (during most of which
Mikhail Kasyanov held prime-minister ship), some analysts described Russia’s short-term economic growth
as impressive and maintained that Putin was “at least partially responsible for it”: a series of fundamental
reforms had been implemented, including a flat income tax of 13 percent, a reduced profits tax, and new land
and legal codes. In October 2008 Russia emerged as one of the countries hardest-hit by the global economic
crisis.

Current Situation
Although the last recession has ended a decade ago, the global economy has remained fragile. Several
well-known economists have warned that the possibility of a global recession in 2020 is a present danger,
which relies on numerous economic and non-economic factors.

The US-China trade war

Eighteen months ago, the US President imposed 25% import taxes on steel against China and
numerous other nations (including countries of the EU, India, Canada and Mexico), beginning his “America
first” campaign. Trump blames China for undercutting US goods with an undervalued currency and, as a
punishment, he imposed import tariffs on several Chinese goods and has threatened to also exercise this
strategy on technology products. This ongoing trade conflict has determined numerous businesses to fear
investment.

Decrease in the growth of the US

A compilation of the tariff war against Beijing, higher borrowing costs and the end of the sudden
economic growth has damaged the industrial production of the US, causing the decline of the American
manufacturing industry for the first time in a decade.

The debt crisis of China

Many Chinese state industries and consumer have borrowed heavily, leading to loans that couldn’t be
repaid. Moreover, China’s industrial production is at a historical low, since Beijing wishes to become more
self-contained, shifting from manufacturing to services, which could take a lot of time.

The economic slowdown in Germany

Germany, which is believed to be the economic engine of Europe, has registered a quarter of negative
growth and many analysts are expecting a larger drop in the next quarter, leading to a recession. However, a
turnaround could be reliant on a recovery of Beijing, since China is the destination of many German exports
such as machine tools or cars.
 Brexit
Investment has already been damaged by the uncertainty around Britain’s future and whether it remains
in the world’s largest trading bloc or not. Furthermore, If the UK leaves the EU without a deal, global growth
will be knocked, since UK is the world’s 6th largest economy.

Argentina, South Africa, Turkey, Venezuela and Iran

While Iran is blocked by the US and is unable to sell its oil, Venezuela is in a political and economic
crisis, despite possessing the world’s largest oil reserves. Likewise, Argentina is tremendously affected by debts
and South Africa and Turkey face a far greater issue, being more integrated into regional and international
markets, meaning that a debt default would have a much more significant impact.

Legal Framework

G7 Summit in Biarritz, France – August 24th to August 26th, the G7 leaders met in Biarritz in order to
discuss the most pressing issues that need to be solved. The talking points included the trade war between China
and the United States. President Macron shared his enthusiasm to help the two parties reach an agreement,
while President Trump stated that China “wants to make a deal very badly”.

The Troubled Asset Relief Program (TARP) – was the solution provided by the United States government
in order to deal with the subprime mortgage crisis of 2008. It was a program designed to purchase toxic
assets from financial institutions in order to strengthen its financial sector. The program was supervised by the
government and had authorized expenditures of $700 million which were then cut in half.

Points to be addressed
1. How could China and US come to an agreement that will last and that will ensure a stable relationship
between the two economic powers?
2. How can Germany stabilize its economic status?
3. How can the burst of the housing bubble be avoided or how could the effects of its burst be minimized?
4. Is there a way for Brexit to end with a deal?
5. How is the IMF or other international financial organization important in solving a global recession?
6. Are national policy options and public financial resources much more constrained than in the past?
Is each country willing to be much more careful to sustain growth and to limit vulnerabilities?
7. How do you make people not spend their entire income and make them learn the importance of
personal savings?
8. What are the consequences of rapid productivity increases in manufacturing that outpaced growth in
demand?
9. Why were some workers“trapped” in the rural sector once rapid productivity growth in agriculture
forced labor to move from rural areas to urban manufacturing centers?
10. Should countries jump to creating policies to fight crises and regulatory regimes once a recession
started? Is it enough to combat this kind of crisis?
11. Are government’s investments of billions of money in infrastructure or public institutions a solution
for an eventual global recession?
 Further reading

•https://www.weforum.org/agenda/2019/01/what-can-we-do-to-prevent-another-global-financial-
crisis/
•https://slate.com/business/2011/10/how-to-end-the-global-recession-more-public-spending-and-
financial-reform.html
•https://en.wikipedia.org/wiki/Great_Recession
•https://en.wikipedia.org/wiki/Great_Recession_in_Europe
•https://impactdatasource.com/economic-output-vs-gdp/
•https://www.who.int/topics/financial_crisis/financialcrisis_report_200902.pdf
•http://www.oecd.org/general/42061463.pdf
•https://www.china-briefing.com/news/the-us-china-trade-war-a-timeline/
•https://www.ukessays.com/essays/economics/causes-solutions-2008-recession-9379.php
•https://www.economy.com/mark-zandi/documents/End-of-Great-Recession.pdf
•https://www.theguardian.com/business/2019/aug/23/global-recession-immune-monetary-solution-
negative-supply-shock
•https://www.channelnewsasia.com/news/commentary/recession-singapore-global-signs-sectors-
manufacturing-growth-11840686
•https://www.vox.com/policy-and-politics/2019/8/15/20806882/recession-warning-yield-curve-
stock-market-dow