MNC’s and the Host Countries

Transnational Corporations/Multinational Corporations- is a direct

production and generally direct business activities abroad. In order to engage
in these direct activities, the TNCs establish affiliates abroad and acquire the
ownership and control of their assets. This gives them a long-term interest in
the strategies and management of the foreign enterprises which they control.

Connotations of CONTROL:
1. Ownership- ownership of sufficient equity stake in the foreign
enterprise.
2. Managerial-ability to manage strategically at a distance which
depends on: + systems of transportation and personal
communications; + internal organization of the firm.
3. Contractual- contractual arrangements between a powerful TNC
and less powerful suppliers or distributors.
Evolution of Internal Organization of Firms
In the relevant literature, developments in the internal organization of
companies have been analysed under several paradigms and particularly:
the ‘strategy’, the ‘efficiency’, and the ‘institutionalist’ paradigms (Penrose
([1959] 2009)
The organizational field of reference is loosely defined to include all agents
who have some form of business interaction with the company, from
suppliers to consumers to rival firms to regulatory agencies (DiMaggio and
Powell, 1983).

Modalities of TNCs operations

1. Foreign Direct Investment
International investment falls into two categories: International Portfolio
Investment and Foreign Direct Investment.
International financial investment – or international portfolio
investment – is investment undertaken for purely financial reasons, often on
a short-term basis. It includes loans as well equity investment, i.e. the
acquisition of shares in a foreign company. In the latter case what we mean
by financial or portfolio reasons is that the equity share is not substantial
enough to give the investors control or a long-lasting interest in the
management of the company they have invested in. Portfolio investment may
be undertaken at the national or international level according to whether the
equity acquisition or the loans are between institutions/ people belonging to
the same country or to different countries.
Foreign Direct Investment- This is the type of investment that companies
use to acquire substantial assets abroad. FDI is therefore the defining
modality of TNCs.

Inward FDI- investment for a specific country is the direct investment by

foreign companies into that country.

Outward FDI- the investment abroad by companies whose nationality is in

the specific country under consideration.

How do central statistical offices of various countries decide to

apportion international investment between the two categories?
The IMF gives the guideline of a 10 per cent ownership for the investment to
be included into the FDI statistics.
In principle, all international investment – whether portfolio or direct – can be
made by private or public institutions and by individual or corporate actors.
The developed countries play the key role in both outward and inward FDI
stock with percentages of total world FDI 74 and 64, respectively, in 2018.
However, the corresponding figures for inward and outward stock in 1980
were considerably higher at 98.8 and 77.5, respectively.
Greenfields vs. Mergers and Acquisitions
Greenfield investment- is a type of foreign direct investment (FDI) in which a
parent company creates a subsidiary in a different country, building its
operations from the ground up. In addition to the construction of new
production facilities, these projects can also include the building of new
distribution hubs, offices, and living quarters.

Risks and Benefits of Green Field Investments

Developing countries tend to attract prospective companies with offers of tax
breaks, or they could receive subsidies or other incentives to set up a green-
field investment. While these concessions may result in lower corporate tax
revenues for the foreign community in the short run, the economic benefits
and the enhancement of local human capital can deliver positive returns for
the host nation over the long term.

As with any startup, green-field investments entail higher risks and higher
costs associated with building new factories or manufacturing plants.
Smaller risks include construction overruns, problems with permitting,
difficulties in accessing resources and issues with local labor.
Companies contemplating green-field projects typically invest large sums of
time and money in advance research to determine feasibility and cost-
effectiveness.

Mergers and Acquisitions (M&As)- Mergers and acquisitions (M&A) is a

general term that describes the consolidation of companies or assets
through various types of financial transactions, including mergers,
acquisitions, consolidations, tender offers, purchase of assets, and
management acquisitions.

Merger describes two firms, of approximately the same size, that join forces
to move forward as a single new entity, rather than remain separately owned
and operated. This action is known as a merger of equals. In a merger,
the boards of directors for two companies approve the combination and
seek shareholders' approval. For example, in 1998, a merger deal occurred
between the Digital Equipment Corporation and Compaq, whereby Compaq
absorbed the Digital Equipment Corporation. Compaq later merged with
Hewlett-Packard in 2002. Compaq's pre-merger ticker symbol was CPQ.
This was combined with Hewlett-Packard's ticker symbol (HWP) to create
the current ticker symbol (HPQ).

In a simple acquisition, the acquiring company obtains the majority stake in

the acquired firm, which does not change its name or alter its organizational
structure. An example of this type of transaction is Manulife Financial
Corporation's 2004 acquisition of John Hancock Financial Services, wherein
both companies preserved their names and organizational structures. A
company can buy another company with cash, stock, assumption of debt, or
a combination of some or all of the three. In smaller deals, it is also common
for one company to acquire all of another company's assets. Company X
buys all of Company Y's assets for cash, which means that Company Y will
have only cash (and debt, if any). Of course, Company Y becomes merely a
shell and will eventually liquidate or enter other areas of business.

The official statistics on foreign direct investment do not usually distinguish

between Greenfield and M&As FDI. Databases on M&As are often supplied
by private research businesses that collect the data on the basis of stock
exchange selling and purchasing deals. They are not directly comparable
with overall FDI data and this is a source of difficulty for researchers in the
field.

Data on FDI is available as flows or stocks. Flow concepts refer to a period

of time, whether they are in relation to an economic/business concept or not

Example A: Population changes

Let us assume that the total population in a country at the beginning of

January 2019 is 100 million people; this is a stock concept. Let us now
assume that a year later at the beginning of January 2020 the total
population is 110 million. This is also a stock concept. The difference
between the two stocks (10 million) is due to a variety of population flows
that take place during the year 2019. In particular: the positive flow of births
and the negative flow of deaths during the year plus the positive flow of
immigrants and the negative flow of emigrants during the year.

Example B: Foreign direct investment: flows and stocks

As regards FDI, flows data record the year-to-year value of investment,

that is, the value of investment undertaken during a specific year. Stock data
represent the net accumulated value resulting from past flows; they give us
the value of accumulated capital stock at a point in time such as the end of
the year

Foreign direct investment statistics record that part of investment abroad that
is funded in one of the following forms (OECD, 1994: 100):

 net capital contribution by the direct investor in the form of purchases

of corporate equity, new equity issues or the creation of companies;
 net lending, including short-term loans and advances by the parent
company to the subsidiary;
 retained (reinvested) earnings.
It is important to bear in mind that foreign direct investment is not fully
analogous to the concept of capital formation.

These two forms of company’s foreign direct investment both lead to an

increase in productive capacity for the company. However, only the former
(Greenfield) leads to new productive capacity for the host country. The latter
(M&As) only leads to a change in ownership of the acquired company into or
in part. These are not just statistical issues and demarcation problems.
Essentially, in the collection of data on GDFCF, statistical offices take a
macro perspective in which the relevant issue is whether the investment
adds to the country’s capacity, not whether the nationality of the investor is
foreign or domestic. In the statistics on FDI, the perspective is micro and, in
particular, the key issue is the nationality of the investor. Therefore, the
investment is included if it adds to the capacity of the investor, independently
of whether it may or may not add to the productive capacity of the host
country.

2. International Production
The term international production refers to the value of foreign production
activities for which TNCs are responsible, i.e. all their foreign value-added
activities.

Dunning (2000) defines international production as ‘the production

financed by foreign direct investment’.

3. Trade: Intra-firm Trade and Intra-industry Trade

The so-called intra-firm trade, that is, in trade that is external to the
country (and therefore forms part of international trade) but internal to the
firm. The latter characteristic means that the trade takes place between
parts of the same company located in different countries (parent to affiliate
or affiliate to affiliate).

Some 80 per cent of world trade originates with TNCs and, indeed, over a
third of world trade is estimated to take place on an intra-firm basis
(UNCTAD, 2013).

Another emerging pattern of international trade is the so-called intra-

industry trade by which expression we denote that part of trade that
results in the imports and exports – for the same country – of products
belonging to the same industrial category. Examples of intra-industry
trade are: imports of motor cars and exports of parts and components of
motor cars; exports of leather bags and imports of leather shoes; or
exports of leather handbags and imports of textile bags.

Non-equity Modes
 Contractual relationships between TNCs and partner firms, without equity
involvement. Bargaining power represents an additional level with which
TNCs influence their partners, and the source of this power vary with
mode’.

The type of contract within NEMs include: contract manufacturing;

licensing; franchising; management contracts concessions; and strategic
alliances

a. Outsourcing
The act of transferring some of a company’s recurring interval activities
and decision rights to outside providers, as set in a contract (Greaver,
1999 reported in WTO, 2005: 266). It is part of the make-or-buy strategic
decision. The two parties to the outsourcing contract can be located in the
same country or in different ones.

4. Indirect Cross-border Flow

The TNCs’ activities discussed so far are modalities of business
used by TNCs to operate in their markets and/or to organize their
production activities. All these activities together give, directly, rise to
considerable flows of resources and products across borders.

Earnings from portfolio and direct investment

Both portfolio and direct investment give their investors returns in

the form of interest or dividends or profits. The flow of earnings travels in the
opposite direction to the flow of funds for the original investment

Movements of people across borders

International business generates large movements of people

across frontiers. Such movements may, at times, be the direct result of
specific types of international business, as in the case of tourism or
international transport business. It can also relate to the exchange of labour
services between business units located in different countries.

Potential Benefits of MNCs on Host Countries

The potential benefits of MNCs on host countries include:

 Provision of significant employment and training to the labour

force in the host country
  Transfer of skills and expertise, helping to develop the quality of
the host labour force
 MNCs add to the host country GDP through their spending, for
example with local suppliers and through capital investment
 Competition from MNCs acts as an incentive to domestic firms in
the host country to improve their competitiveness, perhaps by
raising quality and/or efficiency
 MNCs extend consumer and business choice in the host country
 Profitable MNCs are a source of significant tax revenues for the
host economy (for example on profits earned as well as payroll
and sales-related taxes)

Potential Drawbacks of MNCs on Host Countries

The potential drawbacks of MNCs on host countries include:

 Domestic businesses may not be able to compete with MNCs and

some will fail.
 MNCs may not feel that they need to meet the host country
expectations for acting ethically and/or in a socially-responsible way.
 MNCs may be accused of imposing their culture on the host country,
perhaps at the expense of the richness of local culture. Might MNCs
reduce cultural diversity around the world as they continue to expand,
particularly into less developed or developing countries?
 Profits earned by MNCs may be remitted back to the MNC's base
country rather than reinvested in the host economy.
 MNCs may make use of transfer pricing and other tax
avoidance measures to significant reduce the profits on which they
pay tax to the government in the host country

World Economic Division

 The term "world economy," also known as "global economy," refers to the global
economic system, which includes all economic activities conducted both within and
between nations, such as production, consumption, economic management, general
work, financial value exchange, and trade of goods and services.
 In certain instances, the two terms are distinct, with the "international" or "global
economy" being measured independently and apart from national economies, whereas
the "world economy" is merely an aggregate of the measures of the individual nations.
Beyond the very minimum of value in production, consumption, and trade, definitions,
representations, models, and values of the global economy vary greatly.
https://en.wikipedia.org/wiki/World_economy

Global North and Global South

 The notion of Global North and Global South (or North–South divide in a global context)
is used to represent a grouping of countries based on socioeconomic and political
features.
 The three categories are frequently described by their varying degrees of wealth,
economic development, income disparity, democracy, and political and economic
freedom, as measured by freedom indexes.
 The Global South is a term often used to identify lower-income countries on one side of
the so-called divide, the other side being the countries of the Global North (often
equated with developed countries).
 The Global North includes Western Europe and Northern America, as well as Australia,
Israel, Japan, and New Zealand — whereas the Global South includes developing
nations (formerly known as the "Third World") in Asia, Africa, Latin America, and the
Caribbean (among others).
 States considered to be part of the Global North are usually wealthier and less unequal;
they are industrialized, democratic countries that export technologically superior
manufactured goods. Southern nations are often poorer developing countries with
younger, more fragile democracies that rely primarily on primary sector exports, and they
frequently share a history of previous colonization by Northern governments.
 In economic terms, the North, with one-quarter of the world's population, controls four-
fifths of all money made elsewhere in the globe as of the early twenty-first century. The
North owns and operates 90 percent of the industrial industry.
 In contrast, the South, which accounts for three-quarters of the global population, has
access to one-fifth of global revenue. As nations become economically developed, they
may be included in definitions of the "North," regardless of geographical location;
similarly, any nations that do not qualify for "developed" status are effectively assumed
to be included in definitions of the "South."
  In general, definitions of the Global North include nations and places such as Australia,
Canada, the entirety of Europe and Russia, Israel, Japan, New Zealand, Singapore,
South Korea, Taiwan, and the United States. Africa, Latin America and the Caribbean,
the Pacific Islands, and emerging Asian nations, plus the Middle East, comprise the
Global South. It is often regarded as the home of Brazil, India, Indonesia, and China,
which, together with Nigeria and Mexico, constitute the largest Southern states in
terms of geographical size and population.
 The term Global North is often used interchangeably with developed countries. Likewise,
the term Global South is often used interchangeably with developing countries.
 Because many of the nations deemed to be in the Global South were colonized by
countries in the Global North, they are at a disadvantage in terms of developing as
rapidly. According to dependency theorists, information is distributed top-down, with the
Global North receiving it first before the countries of the Global South.
 The attempt to modernize was responsible for a large portion of the dependency.
Following WWII, the United States undertook financial efforts to aid developing nations
in their efforts to lift themselves out of poverty. According to modernization theory, the
goal was to "remake the Global South in the image and likeliness of the First
World/Global North."
 After attempts at modernization were made, thinkers began to analyze the impacts
through post-development viewpoints. Post-development theorists attempt to explain
why not all developing nations should follow Western development models, but rather
should construct their own.
https://en.wikipedia.org/wiki/Global_North_and_Global_South

WESTERN AND EASTERN BLOC

World map of the First, Second, and Third World. The map shows the countries of the US
aligned countries of the First World (in green), the Communist states (in red), the Third World (in
yellow). European neutral states (in white), and countries which have been communist nations
for a short period in light red.

 The "Cold War" era was a political constellation of countries with opposing worldviews.
On one side were the Western Bloc of industrialized capitalist nations aligned with the
United States, which likes to call itself the "Free World" or the "Western World," and on
the other were the Communist workers and peasant states of the Eastern Bloc, the
socialist countries within the Soviet Union's power fabric, and Mao's China. There were
some neutral countries in Europe, and then there was the rest of the globe, the Third
World.
When individuals talk about the world’s poorest or least developed countries, they frequently
use the broad phrase "Third World," as if everyone understands what they're talking about.
When you ask them if there is a Third World, or if there is a Second or First World, they nearly
invariably give you an evasive answer. Others have attempted to utilize the phrases as a
ranking scheme for countries' levels of development, with the First World at the top, followed by
the Second World, and so on.
  The terms First, Second, and Third World refer to a rough and, it is safe to say, outdated
model of the geopolitical world from the Cold War era.
 The "First World," also known as The West, is a bloc of democratically industrialized
countries within the American sphere of influence. On the other hand, Second World, the
Eastern bloc of communist-socialist states, where political and economic power should
be derived from previously oppressed peasants and workers.
 The term "First World" refers to industrialized, capitalist, industrial countries that are
generally affiliated with NATO and the United States of America. After World War II, the
countries of North America and Western Europe, as well as Japan, South Korea, and
Australia, formed a bloc with the United States that shared more or less common
political and economic goals.
 First-world nations have stable currencies and vibrant financial markets, making them
appealing to investors from all over the world. While not entirely capitalist, the
economies of first-world countries are characterized by free markets, private
entrepreneurship, and private ownership of property.
Because of their ties with Western countries, some African countries were placed to the First
World. At the time, Western Sahara was a territory of Spain. South Africa's anticommunist
Apartheid regime was a Commonwealth member until May 1961, and Namibia was then known
as South West Africa and was administered by South Africa. The Portuguese ran similar
businesses in Angola and Mozambique.

 The Eastern Bloc, or former communist-socialist states, is referred to as the Second

World. The Soviet Union's sphere of influence encompassed the Soviet Socialist
republics, Eastern and Central European countries such as Poland, East Germany
(GDR), Czechoslovakia, and the Balkans. Mongolia, North Korea, Vietnam, Laos, and
Cambodia were among the Asian communist republics inside China's sphere of
influence.
 The obsolete term "second world" referred to countries that were formerly ruled by the
Soviet Union. The economies of the second world were centrally planned and one-party
regimes. Notably, the term "second world" to refer to Soviet nations went out of favor in
the early 1990s, just after the Cold War ended.
 The Eastern Bloc nations made some economic and technological advances,
industrialisation, labor productivity growth rates, and improvements in living standards.
However, due to a lack of market signals, Eastern Bloc economies were mismanaged by
central planners. The Eastern Bloc was likewise heavily reliant on the Soviet Union for
raw supplies.
CONCLUSION

 Finally, First-world countries have sophisticated capitalist economies and are fully
industrialized. This phrase was coined for a variety of reasons. After World War II, the
world's main nations divided into two big groupings, or blocs, which were characterized
by their support to either of the two great powers competing to control the global
economy.
 There were two of them: the United States and the Soviet Union. They were
characterised by their devotion to the United States and capitalism, which was practiced
by the United States. The Western bloc consisted of the United States and the
countries
 that allied with them. Or they were defined by their commitment to the Soviet Union and
communism, which was practiced by the Soviet Union and its successor nations.
 These were referred to as the Eastern bloc. Members of the Western bloc, which
included the majority of North American, Western European, Australian, and Japanese
countries, were now referred to as first-world nations. This definition is no longer valid.
This tells you when this word first appeared. It was the aftermath of World War II, and
both the United States and the Soviet Union were competing for global dominance. They
both desired to be the world's leading force, and different countries associated with them
based on their allegiances throughout World War II.
 The Western bloc nations were recognized as first world nations, while the Eastern bloc
nations became known as second world nations. That's how they distinguished between
the first and second worlds. It was determined by which group they belonged to.
Originally, it was less about how sophisticated your economy was or how industrialized
you were. It did have something to do with your economy, because the Western bloc
practiced capitalism while the Eastern bloc practiced communism.

Principle of Gold Standard

Gold standard is a monetary system in which the standard unit of currency is a fixed quantity of gold or is
kept at the value of a fixed quantity of gold. The currency is freely convertible at home or abroad into a
fixed amount of gold per unit of currency

In an international gold-standard system, gold or a currency that is convertible into gold at a fixed price is
used as a medium of international payments. Under such a system, exchange rates between countries are
fixed; if exchange rates rise above or fall below the fixed mint rate by more than the cost of shipping gold
from one country to another, large gold inflows or outflows occur until the rates return to the official
level.

Implementation of Gold Standard

The gold standard was originally implemented as a gold specie standard, by the circulation of gold coins.
The monetary unit is associated with the value of circulating gold coins, but other coins may be made of
less valuable metal. With the invention and spread in use of paper money, gold coins were eventually
supplanted by banknotes, creating the gold bullion standard, a system in which gold coins do not
circulate, but the authorities agree to sell gold bullion on demand at a fixed price in exchange for the
circulating currency.

Countries may implement a gold exchange standard, where the government guarantees a fixed exchange
rate, not to a specified amount of gold, but rather to the currency of another country that uses a gold
standard. This creates a de facto gold standard, where the value of the means of exchange has a fixed
external value in terms of gold that is independent of the inherent value of the means of exchange itself.

The Rise of the Gold Standard 

The gold standard is a monetary system in which paper money is freely convertible into a fixed amount of
gold. In other words, in such a monetary system, gold backs the value of money. Between 1696 and 1812,
the development and formalization of the gold standard began as the introduction of paper money posed
some problems.
The U.S. Constitution in 1789 gave Congress the sole right to coin money and the power to regulate its
value.5 Creating a united national currency enabled the standardization of a monetary system that had
up until then consisted of circulating foreign coin, mostly silver.

With silver in greater abundance relative to gold, a bimetallic standard was adopted in 1792. While the
officially adopted silver-to-gold parity ratio of 15:1 accurately reflected the market ratio at the time,6
after 1793 the value of silver steadily declined, pushing gold out of circulation, according to  Gresham's
law.

The issue would not be remedied until the Coinage Act of 1834, and not without strong political
animosity. Hard money enthusiasts advocated for a ratio that would return gold coins to circulation, not
necessarily to push out silver, but to push out small-denomination paper notes issued by the then-hated
Bank of the United States. A ratio of 16:1 that blatantly overvalued gold was established and reversed the
situation, putting the U.S. on a de facto gold standard.8

By 1821, England became the first country to officially adopt a gold standard. The century's dramatic
increase in global trade and production brought large discoveries of gold, which helped the gold standard
remain intact well into the next century. As all trade imbalances between nations were settled with gold,
governments had strong incentive to stockpile gold for more difficult times. Those  stockpiles still
exist today.

The international gold standard emerged in 1871 following its adoption by Germany. By 1900, the
majority of the developed nations were linked to the gold standard. Ironically, the U.S. was one of the last
countries to join. In fact, a strong silver lobby prevented gold from being the sole monetary standard
within the U.S. throughout the 19th century.

From 1871 to 1914, the gold standard was at its pinnacle. During this period, near-ideal political
conditions existed in the world. Governments worked very well together to make the system work, but
this all changed forever with the outbreak of the Great War in 1914.

The Fall of the Gold Standard

With World War I, political alliances changed, international indebtedness increased and government
finances deteriorated. While the gold standard was not suspended, it was in limbo during the war,
demonstrating its inability to hold through both good and bad times. This created a lack of confidence in
the gold standard that only exacerbated economic difficulties. It became increasingly apparent that the
world needed something more flexible on which to base its global economy.

A desire to return to the idyllic years of the gold standard remained strong among nations. As the gold
supply continued to fall behind the growth of the global economy, the British pound sterling and U.S.
dollar became the global reserve currencies. Smaller countries began holding more of these currencies
instead of gold. The result was an accentuated consolidation of gold into the hands of a few large nations.

The stock market crash of 1929 was only one of the world's post-war difficulties. The pound and
the French franc were horribly misaligned with other currencies; war debts and repatriations were still
stifling Germany; commodity prices were collapsing; and banks were overextended. Many countries tried
to protect their gold stock by raising interest rates to entice investors to keep their deposits intact rather
than convert them into gold. These higher interest rates only made things worse for the global economy.
In 1931, the gold standard in England was suspended, leaving only the U.S. and France with large gold
reserves.
Then, in 1934, the U.S. government revalued gold from $20.67/oz to $35/oz, raising the amount of paper
money it took to buy one ounce to help improve its economy.9 As other nations could convert their
existing gold holdings into more U.S dollars, a dramatic devaluation of the dollar instantly took place. This
higher price for gold increased the conversion of gold into U.S. dollars, effectively allowing the U.S. to
corner the gold market. Gold production soared so that by 1939 there was enough in the world to replace
all global currency in circulation.

As World War II was coming to an end, the leading Western powers met to develop the  Bretton Woods
Agreement, which would be the framework for the global currency markets until 1971. Within
the Bretton Woods system, all national currencies were valued in relation to the U.S. dollar, which
became the dominant reserve currency. The dollar, in turn, was convertible to gold at the fixed rate of
$35 per ounce. The global financial system continued to operate upon a gold standard, albeit in a more
indirect manner. 

The agreement has resulted in an interesting relationship between gold and the U.S. dollar over time.
Over the long term, a declining dollar generally means rising gold prices. In the short term, this is not
always true, and the relationship can be tenuous at best, as the following one-year daily chart
demonstrates. In the figure below, notice the correlation indicator which moves from a strong negative
correlation to a positive correlation and back again. The correlation is still biased toward the inverse
(negative on the correlation study) though, so as the dollar rises, gold typically declines.

At the end of WWII, the U.S. had 75% of the world's monetary gold and the dollar was the only currency
still backed directly by gold. However, as the world rebuilt itself after WWII, the U.S. saw its gold reserves
steadily drop as money flowed to war-torn nations and its own high demand for imports. The high
inflationary environment of the late 1960s sucked out the last bit of air from the gold standard.  

In 1968, a Gold Pool, which included the U.S and a number of European nations, stopped selling gold on
the London market, allowing the market to freely determine the price of gold. From 1968 to 1971,
only central banks could trade with the U.S. at $35/oz. By making a pool of gold reserves available, the
market price of gold could be kept in line with the official parity rate. This alleviated the pressure on
member nations to appreciate their currencies to maintain their export-led growth strategies.

However, the increasing competitiveness of foreign nations combined with the monetization of debt to
pay for social programs and the Vietnam War soon began to weigh on America’s balance of payments.
With a surplus turning to a deficit in 1959 and growing fears that foreign nations would start redeeming
their dollar-denominated assets for gold, Senator John F. Kennedy issued a statement in the late stages of
his presidential campaign that, if elected, he would not attempt to devalue the dollar.

The Gold Pool collapsed in 1968 as member nations were reluctant to cooperate fully in maintaining the
market price at the U.S. price of gold. In the following years, both Belgium and the Netherlands cashed in
dollars for gold, with Germany and France expressing similar intentions. In August of 1971, Britain
requested to be paid in gold, forcing Nixon's hand and officially closing the gold window. By 1976, it was
official; the dollar would no longer be defined by gold, thus marking the end of any semblance of a gold
standard.

In August 1971, Nixon severed the direct convertibility of U.S. dollars into gold. With this decision, the
international currency market, which had become increasingly reliant on the dollar since the enactment
of the Bretton Woods Agreement, lost its formal connection to gold. The U.S. dollar, and by extension,
the global financial system it effectively sustained, entered the era of fiat money.

Bretton woods
It was clear during the Second World War that a new international system would be needed to
replace the Gold Standard after the war ended. The design for it was drawn up at the Bretton Woods
Conference in the US in 1944. US political and economic dominance necessitated the dollar being at the
centre of the system. After the chaos of the inter-war period there was a desire for stability, with fixed
exchange rates seen as essential for trade, but also for more flexibility than the traditional Gold Standard
had provided. The Bretton Woods system was drawn up and fixed the dollar to gold at the existing parity
of US$35 per ounce, while all other currencies had fixed, but adjustable, exchange rates to the dollar.
Unlike the classical Gold Standard, capital controls were permitted to enable governments to stimulate
their economies without suffering from financial market penalties.

During the era of the Bretton Woods system, the world economy grew rapidly. Keynesian economic
policies enabled governments to dampen economic fluctuations, and recessions were generally minor.
However, strains started to show in the 1960s. Persistent, albeit low-level, global inflation made the  price
of gold too low in real terms. A chronic US trade deficit drained US gold reserves, but there was
considerable resistance to the idea of devaluing the dollar against gold; in any event this would have
required agreement among surplus countries to raise their exchange rates against the dollar to bring
about the needed adjustment. Meanwhile, the pace of economic growth meant that the level of
international reserves generally became inadequate; the invention of the ‘Special Drawing Right’ (SDR)
failed to solve this problem. While capital controls still remained, they were considerably weaker by the
end of the 1960s than in the early 1950s, raising prospects of capital flight from, or speculation against,
currencies that were perceived as weak.

In 1961 the London Gold Pool was formed. Eight nations pooled their gold reserves to defend the US$35
per ounce peg and prevent the price of gold moving upwards. This worked for a while, but strains started
to emerge. In March 1968, a two-tier gold market was introduced with a freely floating private market,
and official transactions at the fixed parity. The two-tier system was inherently fragile. The problem of the
US deficit remained and intensified. With speculation against the dollar intensifying, other central banks
became increasingly reluctant to accept dollars in settlement; the situation became untenable. Finally in
August 1971, President Nixon announced that the US would end on-demand convertibility of the dollar
into gold for the central banks of other nations. The Bretton Woods system collapsed and gold traded
freely on the world’s markets.

Benefits of Bretton Woods Currency Pegging

The Bretton Woods System included 44 countries. These countries were brought together to help
regulate and promote international trade across borders. As with the benefits of all currency pegging
regimes, currency pegs are expected to provide currency stabilization for trade of goods and services as
well as financing.

All of the countries in the Bretton Woods System agreed to a fixed peg against the U.S. dollar with
diversions of only 1% allowed. Countries were required to monitor and maintain their currency pegs
which they achieved primarily by using their currency to buy or sell U.S. dollars as needed. The Bretton
Woods System, therefore, minimized international currency exchange rate volatility which helped
international trade relations. More stability in foreign currency exchange was also a factor for the
successful support of loans and grants internationally from the World Bank.

The IMF and World Bank

The Bretton Woods Agreement created two Bretton Woods Institutions, the IMF and the World Bank.
Formally introduced in December 1945 both institutions have withstood the test of time, globally serving
as important pillars for international capital financing and trade activities.
The purpose of the IMF was to monitor exchange rates and identify nations that needed global monetary
support. The World Bank, initially called the International Bank for Reconstruction and Development, was
established to manage funds available for providing assistance to countries that had been physically and
financially devastated by World War II.1 In the twenty-first century, the IMF has 189 member countries
and still continues to support global monetary cooperation. Tandemly, the World Bank helps to promote
these efforts through its loans and grants to governments.

Structural Change Theory and Demographic Transition Theory

Structural Change Theory

▸ In economics, structural change is a shift or change in the basic ways a market or economy
functions or operates
▸ Structural change indicates essentially a qualitative transformation and evolution of the
economic systems, usually marked by technological progress and organizational changes.
▸ Technological factors, knowledge, institutions are all elements that contribute to the
process of structural change.
▸ Such change can be caused by such factors as economic development, global shifts in
capital and labor, changes in resource availability due to war or natural disaster or
discovery or depletion of natural resources, or a change in the political system.
Structural changes appear when some parts or properties are lost or added to the object,
some relations appear, disappear or change their form. In other words, SC implies changes in
the object identity.
For example, a subsistence economy may be transformed into a manufacturing economy, or a
regulated mixed economy may be liberalized
Examples:
 South Korea's economy before the 1950s mostly consisted of agriculture. During the 1960s
and 1970s, Korea began to change its structure to IT, microsystems technology, and also
services. More than 50% of the world uses a Samsung smartphone, whose headquarters
are located there. Today, South Korea's economy is the 15th strongest economic system.
 In the Ruhr Area (Ruhrgebiet) in Germany, the economy was mostly marked by the coal
and steel industry. During and after the coal crisis began in the 1960s and 1970s, this area
started to change its economic structures to services, IT and logistics. The city Dortmund
opened the first technology center named "Technologiepark Dortmund" in the 1980s.
Companies including Signal Iduna and Wilo are based there.
Demographic Transition Theory
▸ The demographic transition theory is a generalised description of the changing pattern of
mortality, fertility and growth rates as societies move from one demographic regime to
another.
▸ The demographic transition is the change in the human condition from high mortality and
high fertility to low mortality and low fertility.
▸ The term was first coined by the American demographer Frank W. Notestein in the mid-
twentieth century, but it has since been elaborated and expanded upon by many others.
Your audience will listen to you or read the content, but won’t do both.
Societies develop along a predictable continuum as they evolve from unindustrialized to
postindustrial. Demographic transition theory (Caldwell and Caldwell 2006) suggests that
future population growth will develop along with a predictable four-stage model.

4 Stages of Demographic Transition

1st stage- pre-industrial
Death, and infant mortality rates are all high, while life expectancy is short
▸ Population growth was kept low by Malthusian "preventative" (late age at marriage)
and "positive" (famine, war, pestilence) checks.
2nd Stage- urbanizing/Industrializing
Birth rates are higher while infant mortality and death rates drop. Life expectancy also
increases.
3rd Stage- mature industrial
Birth rates decline, while life expectancy continues to increase. Death rates continue to
decrease
4th post-industrial
Birth and death rates are low, people are healthier and live longer, and society enters a
phase of population stability.

In essence, the demographic transition model argues for economic development to help
reduce crude death rates. It is assumed that access to medicines, safe drinking water and
sanitation, and information about the disease, will help improve human health. There is a
behavioral component to this way of thinking, in that it assumes that people change their
decision-making because they have access to information or other opportunities that reduce
certain behaviors.
Facts:
 The United Nations Population Fund (2008) categorizes nations as high fertility, intermediate
fertility, or low fertility. The United Nations (UN) anticipates the population growth will triple
between 2011 and 2100 in high-fertility countries, which are currently concentrated in sub-
Saharan Africa. For countries with intermediate fertility rates (the United States, India, and
Mexico all fall into this category), growth is expected to be about 26 percent. And low-fertility
countries like China, Australia, and most of Europe will actually see population declines of
approximately 20 percent.

Questions:
1. Do you think Structural Change is inevitable in an economy? Why?
2. Based on the Four Stages of Demographic Transition, at what stage do you think the Philippines is
now? Explain.

The New International Economic Order

The new economic order

 The G-77 group of nations (now Coalition of 134 countries) demanded a new
economic order
o This is the nation is the so-called south nations or the developing nations
compared to the northern nations or the developed one’s
o They aim for financial independence, especially for their resources, and
equal standing with developed countries in the global market.
 In the 1970s, developing countries proposed a new international economic order
in the United Nations Conference on Trade and development
o This is to promote countries’ national interest in the developing nations in
terms of trades, increase in aid or assistance, and tariff agreement. Also,
to end economic colonialism and dependency, and equitable wealth
distribution between developed and developing countries
 This led to North and South Nations Dialogue after the declaration of the United
Nations Assembly in its Special Session way back in 1974.

The United Nations Conference on Trade and Development

- Its purpose is to promote trade and development, particularly in

developing countries, also intended to promote the interests of developing
states in world trade.
- The main goals of UNCTAD are to expand the capabilities of developing
countries in the sphere of trade, investment, and development, to assist
them in overcoming the difficulties arising as a result of globalization, and
integrate on an equal footing into the world economy. UNCTAD achieves
these goals by conducting researches and policy analyses,
intergovernmental debates with the help of technical cooperation,
cooperation with civil society and the business world.
- The objectives of UNCTAD in the sphere of competition are analysis and
improvement of the international bases of the introduction of competition
 policy and law, harmonization of competition and trade policy,
convergence of the national norms of competition with the Set of
multilaterally agreed equitable principles and rules relating to the Control
of Restrictive Business Practices adopted by the UN Conference.
-

UNCTAD in the UN System

 The UNCTAD is a permanent intergovernmental body established by the United

Nations General Assembly in 1964, located in Geneva, Switzerland. Under the
UN secretariat reports to the United Nations General Assembly and the
Economic and Social Council.
o What is unique to UNCTAD is an independent body with its membership,
leadership, and budget.

Partnership

- The UNCTAD to improve its policies and practices at the national, regional, and
global levels, UNCTAD has strengthened its collaboration with other international
organizations, governments, corporations, civil society, youth, and academia.
 UNCTAD and the UN system
o UNCTAD is part of the UNDG or the United Nations Development Group,
a consortium of UN agencies created to improve the effectiveness of
development activities at the country level.
o Since 2008 UNCTAD led the so-called UN inter-agency cluster on trade
and productive capacity. The Cluster is committed to coordinating trade
and development operations at the national and regional levels within the
UN system. This include 15 agencies in that five agencies are five UN
Regional Commissions:
- UNIDO- United Nations Industrial and Development Organization
- UNDP- United Nations Development Programme
- ITC- International Trade Center
- FAO- Food and Agriculture Organization of United Nations
 - WTO- World Trade Organization
- UNEP- United Nations Environment Programme
- ILO- International Labour Organization
- UNCITRAL – United Nations Commission on International Trade
Law
- UNOPS- United Nations Office for Project Services
o Regional
- ECA- Economic Commission for Africa
- ECLAC- Economic Commission on Latin America and the Caribbean
- ESCAP- Economic and Social Commission for Asia and the Pacific
- ESCWA- Economic and Social Commission for Western Asia
- UNECE- United Nations Economic Commission for Europe
 UNCTAD and the Geneva-based Organizations: WTO and ITC
o These three institutions are called the global trade hub because they are
considered as the three critical international institutions on trade
- WTO - Ensure that trade flows as freely, reliably, and efficiently as
possible, and primarily governs global trade rules and adjudication
- ITC – They work mainly on agribusiness and information and aid for
trade initiatives. And this is by focusing on connecting the small and
medium enterprises to the global market
- While the UNCTAD – UNCTAD deals with trade policies,
regulations, and institutions at national, regional, and international
levels from a developmental perspective.
 UNCTAD and strategic partnership
o UNCTAD has formed strategic alliances with hundreds of businesses,
academia, and other international and regional organizations. Some apply
to a wide range of jobs, while others focus on specific tasks. However,
they all have one thing in common: they're all geared at strengthening
collaboration and boosting collaborative delivery.
- Example is the partnership with OECD (Organization for Economic
Co-operation and Development)
 - World Bank’s Global Competitiveness Practice
- And partnership with ILO (International Labour Organization)
 UNCTAD's principal objectives are to strengthen developing nations' trade,
investment, and development capacities and aid them in overcoming the
challenges posed by globalization and integrating on an equal basis into the
global economy.
 To do this, we provide analysis, facilitate consensus-building, and offer technical
assistance. This helps them use trade, investment, finance, and technology as
vehicles for inclusive and sustainable development.

The World Bank

- The World Bank is an international

financial institution that provides loans
and grants to the governments of low-
and middle-income countries to pursue
capital projects.

- Created in the 1994 Bretton

Woods Conference as an international
bank for reconstruction and development.
The intellectual leaders in the conference
were John Maynard Keynes (Adviser to
the treasury in the United Kingdom) and
Harry Dexter White (Assistant of the
treasury of the United States).

- The World Bank, which has 189

member countries, is similar to a
cooperative. A Board of Governors, the
World Bank's ultimate policymakers,
represents these member countries or
shareholders. The governors are usually
the finance or development ministries of
member nations. They meet once a year
at the World Bank Group's Annual
Meetings of the Boards of Governors and
the International Monetary Fund's World
Banks’s Mission/Goals:

o To end extreme poverty

o Promote shared prosperity in
a sustainable way
o How?
 Data – World Bank
engage in a
development
community with
accurate world
statistics; what they
do is use these data
to oversee climate
change, poverty, and
inequality over its
members, and they
also fund
investments in
developing countries,
helping countries to
reduce poverty and
the rise of the
challenges of the
climate change
 Results – To ensure
favorable results, WB
works closely with its
client countries to
enhance measuring
methods and
systems that enable
them to track
progress, learn
lessons, and make
timely modifications
to meet their growth
objectives. Also,
using this to a tailor-
fit solution based on
 countries
development
challenges
 Research – WB
provide analysis and
advice for developing
countries; they do
research and
analysis and open-
sourced it that
governments can use
it freely for their
challenges

 What does WB do?

o The World Bank Group is active in every significant development sector.
They provide a wide range of financial goods and technical support and
assist nations in sharing and applying new ideas and solutions to their
problems.
 Development Projects – World Bank funds projects via traditional
loans, interest-free credits, and of course also grants
 Priorities – WB has three priorities that guide their work: People,
Peace, and Prosperity. They aim to invest in people and help create
sustainable economic growth to achieve this. This also promotes
the Human Capital Project. This requires investing in people
through nutrition, health care, quality education, jobs, skills, ending
extreme poverty, and creating more inclusive societies by
developing human capital.
 Products and Services – WB supports countries thru policy advice,
research and analysis, and technical help to developing nations
  Financing – Funds public project
 Advice and Analytics - They assist governments in
formulating or executing better policies, improving
institutions, increasing capacity, informing plans or
operations, and contributing to the global development
agenda through research and analysis.
 Partners
o The World Bank collaborates with other international institutions and
donors, civil society organizations, and professional and academic
organizations to strengthen assistance policy and practice coordination in
countries, regions, and globally.
 Thousands of donor-funded development initiatives exist worldwide,
each subject to a slew of criteria, standards, and processes to
safeguard the programs and ensure that help reaches the needy.
o World Bank and United Nations
 WB and UN partnership focuses on three levels
 Intergovernmental - interacting with diplomatic missions
represented in New York and the bodies governing the UN
General Assembly, Economic and Social Council (ECOSOC), and
Security Council
 Interagency bodies - such as the Chief Executives Board
(CEB) led by the Secretary-General and the UN Development
Group (UNDG), in which the Bank is an observer member
 Institutional - with the UN Secretary-General, UN
Secretariat and various UN Funds and Programs, e.g., UN
Development Programme (UNDP), UN Population Fund (UNFPA),
and UN Children’s Fund (UNICEF)

Foreign Debt Trap

- Debt Trap means or defines a situation in which a powerful lending country or
institution tries to suffocate a borrowing country with debt to gain more control
over it.
o The Bretton woods institutions
 IMF and WB have made systematic loans to states to influence
their policies. But foreign indebtedness is used by these
institutions as an instrument to control or subordinate the
borrowers. These institutions’ goal is to promote an economic
group of countries in the south; they encouraged developing
countries to take loans with high- interest rates.
 The policies of the IMF and MB increase inequality and poverty in
the developing countries and results in nations losing their crucial
resources and directing resources towards the north
 Indebtedness in these institutions will influence the nation’s
affairs. Every crisis, IMF and WB highly encouraged governments
to take loans on higher amounts and higher interest rates by
guarantees that favor the creditor rather than the debtor
 Example Pakistan.
- Debt Trap Diplomacy
o Just like the institutions, highly industrialized nations seek influence in a
particular country and for them to penetrate is by giving loans, funding
projects, and infrastructure
 China’s debt-trap diplomacy will start if the countries fail to
service their loans. The said lender pressures the countries
policy. Nations were pressured for a geostrategic alliance to
serve China’s geopolitical interest.
 China also changes a nation's policy in the economy by
pressuring the government for non-competitive pricing for
projects linked to state-owned companies or contractors.