This action might not be possible to undo. Are you sure you want to continue?
for an open economy. They record (in principle) all transactions between residents of the country concerned and those of other countries, where’ residents’ are broadly interpreted as all individuals, businesses and governments and their agencies, international organizations are also classified as ‘foreign’ residents for this purpose. The BOP accounts however serve another purpose. The balance of a country’s
foreign transactions and the accompanying issues of the exchange rate and reserves (whether of gold or of foreign currencies) has long been a focus of interest for policy makers. The way in which policy makers view these foreign transactions and the policies they have adopted, have of course varied overtime. Whatever the objectives of policy makers however and regardless of the institutional arrangements, the state of the balance of payments plays an essential role in providing information to both firms. governments and private individuals and The traditional question asked is whether the balance of payments is in
equilibrium, since that may provoke government action and / or lead to changes in exchange rates. As we shall see, however, there have been disagreements about what is meant by ‘equilibrium’ and ‘disequilibrium’ in the balance of payments. The Balance of payments: book keeping The BOP is essentially an application of double-entry book keeping, since it records both transactions and the money flows associated with those transactions. If we do this in a proper way, debits and credit will always be equal, so that in an accounting sense the balance of payments will always be in balance. An accounting balance is however not synonymous with equilibrium. An overall balance, with inflows of foreign currency equating outflows, may conceal imbalances within it that will lead to changes. In such a case, we do not have equilibrium in any meaningful sense. A major task will be to look into this apparent paradox and understand in what way the balance of payments can be in disequilibrium and in what be in equilibrium. sense it will always
It is important to keep it in mind that a balance of payments account records flows between countries over a specified period of time (usually a year for the full accounts, but often less for some components of the accounts). Some items in the balance of payments are readily identified as flows, such as exports. Other items, however are flows arising from changes in stocks, and the appropriate handling of these is often a source of confusion. In basic terms, the accounts usually gather together the transactions that give rise to the balancing monetary flows under what are considered to be appropriate headings (e.g. exports) and record them first. The net values of the monetary flows are then entered in the same column, with their sign reversed. We thus have an account in a single column, which must sum to zero. Traditionally there are two basic elements in a perfectly compiled set of BOP account: the current account and the capital account. Each of these is usually subdivided, the former into visible and invisible trade and unrequited transfers, the latter into long-term and short-term private transactions and changes in official reserves. The essential difference between the two is that capital account In transactions necessarily involve domestic residents either acquiring or surrendering claims on foreign residents, whereas current account transactions do not. practice there is a third element, the ‘balancing item’ or ‘errors and omissions’, which reflects our inability to record all international transactions accurately. We will follow the conventions used in IMF statistics and by majority of countries regarding the ways in which accounts are presented. The current Account: The current account records exports and imports of goods and services and unilateral transfers. Exports, whether of goods or services, are by convention Imports accordingly are entered as entered as positive items in the account.
negative items. Exports are normally calculated f.o.b. (free on board ), i.e. costs for transportation, insurance etc. are not included, whereas imports are normally calculated c.i.f. (cost insurance freight), ie. transportation, insurance costs etc. are included. 2
In many cases the payment for exports and imports will result in the transfer of money between the trading countries. For example, a UK firm importing a good from the USA may settle its debt by instructing its UK bank to make a payment to the US account of the US exporter. This is not necessarily the case however. If the UK firm holds a bank account in the US then it may make payment to the US exporter from that account. In the former case, the financial side of the transaction will appear in the UK balance of payments as part of the net change in UK foreigncurrency reserves. In the latter it will appear as part of the capital account, since the UK firm has reduced its claims on the US bank. Balance of payments accounts usually differentiate between trade in goods and trade in services. The balance of exports and imports of the former is referred to in the UK accounts as the balance of visible trade, in other countries it may be referred to as the balance of merchandise trade or simply as the balance of trade. The net balance of exports and imports of services is called the balance of invisible trade in the UK statistics. Invisible trade is a much more heterogeneous category than is visible trade. It is often useful for economic purposes to distinguish between factor and non-factor services. Trade in the latter, of which shipping, banking and insurance services and payments by residents as tourists a board are usually the most important, is in economic terms little different from trade in goods. That is, exports and imports of such services are flows of outputs whose values will be determined by the same variables that would affect the demand and supply for goods. Factor services, which consist in the main of interest, profits and dividends, are on the other hand payments for inputs. Exports and imports of such services will depend in large part on the accumulated stock of past investment in and borrowing from foreign residents. Unilateral transfers, or unrequited receipts’ are receipts which the residents of a country receive ‘for free’, without having to make any present or future payments in return. Receipts from abroad are entered as positive items, payments abroad as negative items. This kind of receipt usually takes one of two forms. The first often referred to as private unrequited transfers, most notably when migrant workers send money back to relatives living in the country in question. The United States, 3
many European countries and the Arab Gulf-States are major sources of such remittances, while many Caribbean, Mediterranean and Muslim non-oil exporting states are recipients. The second, official unrequited transfers is the payment of ‘pure’ aid (as opposed to ‘tied’ aid) by governments in developed countries (perhaps via an international agency) to government in LDCs. Historically, a third form of unilateral transfer has been important i.e. reparation payments. Typically, such payments occurred when a country came out of a war, morally and physically superior and was in a position to make the foreign country (its former enemy) pay indemnities. Such payments played an important part after the first world war but have since fallen into relative obscurity except few occasions such as Iraq’s invasion of Kuwait and subsequent attack by the United States under the UN flag. The net value of the balances of visible trade and of invisible trade and of unilateral transfers defines the balance on current account. the United Kingdom in 1989. Table 1 current account summaries for four countries, 1989 ($US billion) United States Kingdom A. B. C. Merchandise Exports Merchandise Imports Visible trade balance (A+B) D. Exports of Services 172.01 E. Imports of Services 157.79 F. Invisible trade balance (D+E) G. Private unrequited -0.49 Transfers (net) H. Official unrequited -6.93 Transfers (net) 360.46 -475.33 -114.87 269.59 -192.74 76.85 324.48 -247.77 76.71 151.31 -189.26 -37.96 Japan West United Germany Table 5.1 shows the various components of the current accounts of the United States, Japan, West Germany and
242.71 -223.14 19.57 -1.33 - 13.43
98.31 -101.13 -2.82 14.22 -6.17 -12.24
-15.62 -0.99 - 3.30
I. Current account balance -31.16 The capital Account:
The capital account records all international transactions that involve a resident of the country concerned changing either his assets with or his liabilities to a resident of another country. As we noted earlier, transactions in the capital account reflect a change in a stock-either assets or liabilities. It is often useful to make distinctions between various forms of capital account transactions. The basic distinctions are between private and official transactions, between portfolio and direct investment and by the terms of the investment (i.e. short or long-term). The distinction between private and official transactions is fairly transparent and need not concern us too much, except for noting that the bulk of foreign investment is private. Direct investment is the act of purchasing an asset and at the same time acquiring control of it (other than the ability to re-sell it). The acquisition of a firm resident in one country by a firm resident in another is an example of such a transaction, as is the transfer of funds from the ‘parent’ company in order that the ‘subsidiary’ company may itself acquire assets in its own country. Such business transactions form the major part of private direct investment in other countries, multinational corporations being especially important. home’ in another country. Portfolio investment by contrast is the acquisition of an asset that does not give the purchaser control. An obvious example is the purchase of shares in a foreign company or of bonds issued by a foreign government. Loans made to foreign firms or governments come into the same broad category. Such portfolio investment is often also distinguished by the period of the loan. The distinction between shortterm and long-term investment is often confusing, but usually relates to the specification of the asset rather than to the length of time for which it is held. For example, a firm or individual that holds a bank account in another country and increases its balance in that account will be engaging in short term investment, 5 There are of course some examples of such transactions by individuals, the most obvious being the purchase of a ‘second-
would appear as a negative item in the capital account for the purchasing firm’s country. and changes in official reserves and in official liabilities that are part of the reserves of other countries. Official long term transactions are subsumed in ‘Other long term capital’. One way of avoiding this is to consider the direction in which the payment would go (if made directly). On the other hand.3 shows the various components of the capital accounts of the USA. The purchase of a foreign asset would then involve the transfer of money to the foreign country. but which we know must appear since the full balance of payments account must sum to zero. a wide variety of transactions that occur within a given period (usually 12 months). Table 5. often causes confusion. In some cases there is such a large number of transactions that a sample is taken rather than recording each transaction. if at all. with the inevitable errors that occur. The remaining items in the BOP: The balance of payments accounts are completed by the entry of :other minor items that can be identified but do not fall comfortably into one of the standard categories. The purchase of an asset in another country. Errors and omissions (or the balancing item) reflect the difficulties involved in recording accurately. Portfolio investments may also be identified as either private or official. an individual buying a long term government bond in another country will be making a long term investment. That capital outflows appear as a negative item in a country’s BOP and capital inflows as positive items. The net value of the balances of direct and portfolio investment defines the balance on capital account. as would the purchase of an (imported ) good and so must appear as a negative item in the balance of payments of the purchaser’s country (and as a positive item in the accounts of the seller’s country). even if that bond has only one month to go before maturity.even if its intention is to keep that money in that account for many years. West Germany and the UK in 1989. whether it is direct or portfolio investment. according to the sector from which they originate. Japan. when samples are used. and as a positive item in the capital account for the other country. errors and omissions. which reflect transactions that have not been recorded for various reasons and so cannot be entered under a standard heading. In others problems may arise 6 .
as when goods are smuggled in which case the merchandise side of the transactions unreported although payment will be made somehow and will be reflected somewhere in the accounts. Table 3 records the full BOP for the United States. Note that reserves do not have to be held within the country. Dishonesty may also pay a part. The balances on current account on the long and short term capital accounts are taken from tables 2 and. Finally. West Germany and the UK in 1989. The changes in the country’s reserves must of course reflect the net value of all the other recorded items in the balance of payments. the desire to avoid taxes may lead to under-reporting of some items in order to reduce taxable liabilities. Indeed most countries hold a proportion of their reserves in accounts with foreign central banks. Japan. there are changes in the reserves of the country whose balance of payments we are considering and changes in that part of the reserves of other countries that is held in the country concerned. as gold and as special Deposit Receipts (SDRS) borrowed from the IMF. These changes will of course be recorded accurately and it is the discrepancy between the changes in reserves and the net value of the other recorded items allows us to identify the errors and omissions. usually but not always the US dollar. Table 2 : capital Account summaries for four countries. but: the last payment will not be made until the contract has been completed.when one or other of the parts of a transaction takes more than one year: for example with a large export contract covering several year some payment may be received by the exporter before any deliveries are made. 1989 ($US billion) 7 . Reserves are held in three forms: in foreign currency. Similarly.3.
75 0.64 -32.53 Source: Based on Table 2.60 -21.95 7. Direct Investment (net) 40.01 22.6.55 8.12 12.48 -26.99 .4.19 9.86 -56.33 -110.22 44.94 -93.48 -11.53 -15.77 13.76 M N 2.3 in Pilbeam (1992) Table 3: Balance of payments summaries for four countries 1981 (US $ billion) United States Kingdom I.54 2.98 N.43 -2.86 Long term capital balance (J+K+L) 87.79 .3 in pilbeam (1992) Balance of Payments and Balance of Trade : The meaning of the concepts of balance of trade (BOT) and BOP are often misunderstood.28 -11.81 45.United States Kingdom J.16 M.65 -56.23 .61 -34.32 1.0.55 Exceptional financing Liabilities constituting other authorities’ reserves Total change in reserves 16.93 -93.61 55.50 Japan West United Germany -45.06 87. Current Account Balance 31.86 Short-term capital Balance)Net) 16.32 27. Balance of trade is a part 8 .95 - Source : Based on Table 2. Portfolio Investment (net) 43.65 Japan West United Germany -0.93 56.98 45. O P Q R S Short term capital balance 27.53 Other recorded items Net errors and omissions 24.17 L Other long term capital (net) 1.34 -0. Long term capital balance -34.75 - K.38 -0.
The accommodating capital movements are a direct consequence of the BOP situation. Balance-of –payments: Surplus and deficits (Autonomous and Accommodating items) The terms. These capital flows are unforeseen and take place to bring the country’s BOP into equilibrium. postal. These terms convey some implicit judgment usually to the effect that a country with a BOP deficit is in some sense in trouble. – comprise the balance of services but the BOP is more comprehensive which includes total debits and credits relating all the items for which a country makes payments to and receives payments from rest of the world.of balance of payments. For example. shipping. ‘BOP deficit’ and ‘BOP surplus’ are familiar. banking and insurance services etc. passenger fares. If a country has a deficit in her balance of current account. freights. banking and insurance services for imports & exports of which payments are made A country’s BOT refers to the value of imports and exports of merchandise goods only. if a country had imported more than it had exported it will have to borrow abroad to pay for its excess imports and this will be registered as an inflow of capital on he capital 9 . BOT is only a part of the BOP. By a deficit or surplus in the BOP is usually meant gold movements plus ‘accommodating’ capital movements – those capital movements which are induced by the conditions of BOP and by loans that are given or taken for the explicit purpose of equalizing the payments balance. and received by a country. telephone and telegraph fees. until recently although England’s balance of trade was unfavourable but her balance of payments was favourable because due to the exports of invisible services and receipts on items being more from rest of the world than she paid to rest of the world. The exports and imports of services-transport services. A favourable BOT may coexist with an adverse balance-of-payment and vice versa. while one with a surplus is ‘strong’. there will always be an offsetting transaction on the capital account to bring the BOP into equilibrium. Therefore. harbour and canal dues. however. A country exports and imports a vast assortment of Invisible service items include shipping. For example. tangible goods and invisible services. The BOP of a country may be in balance in the sense of equality between total payments and total receipts. it shows either a surplus or a deficit. More generally.
the government will have to change its economic policy.account. items in the BOP. The deficit can be settled either by a short-term loan or a depletion of the reserves. Although these capital transactions have their effect on the country’s BOP but these are in no way caused by the BOP situation. firms or government for that matter-plan to engage in these capital movements at the beginning of the relevant period. firms or the government to engage in capital transactions with rest of the world. Conversely. Accommodating capital movements are politically of great significance. These accommodating capital flows are the direct consequence A deficit in the Country’s BOP will cause accommodating capital outflows while a surplus in the BOP will cause accommodating capital inflows. While the autonomous capital movements can be regarded as planned capital movements emerging from the decisions of individuals. For example. In other words. this situation cannot continue for long because the foreign lenders will seldom be willing to extend short term loans for ever while the foreign exchange or gold reserves of the country will become depleted after some time. Thus. In all these cases private firms or persons have capital transactions conducted with the foreigners. In either case. On the other hand. It may also be due to a foreign firm or a foreign resident paying an old loan to a firm or person in the country. flows arise due to either a surplus or a deficit in a country’s BOP.so as to eliminate causes of BOP deficit causing the 10 . such inflow should serve as a warning signal for the country. the autonomous capital flows are ordinary capital flows which take place regardless of the other The autonomous capital flows have no connection with the country’s BOP situation. an autonomous capital inflow may be due to a foreign corporation buying a domestic company thereby acquiring the assets equal to the capital inflow in the country. If a country has a deficit in her BOP which is covered by an accommodating capital inflow. Autonomous capital flows should be regarded as planned or ex-ante flows as they result from the different decision making units-individuals. The autonomous capital flows may take many forms. accommodating capital of the BOP. the magnitude of accommodating capital flows represents the extent or size of deficit in the country’s BOP. accommodating capital flows are ex post in nature which are discovered only at the end of the period whether such capital movements have occurred.
carried by oriental rat fleas that lived on rodents that stowed away on ships and caravans. such as severe acute respiratory syndrome (SARS) and avian flu was international trade’s association with the spread of the plague. although they must be interpreted with care. individual consideration should be given to the current account and long-term capital account balances. Phoenicians. Accommodating items on the other hand are determined by the net consequences of the autonomous items. The impact of this trading system was extensive in a way that politics. In particular. In short. The government will have to adopt appropriate economic or trade policy which may increase foreign exchange earnings and / or reduce the foreign exchange payments. Called the Black Death in 11 . so that the BOP as a whole must balance. Believed to have originated in Asia. the plague moved west with traders and soldiers. Even Indian traders established trade links with their European counterparts in general and Roman Empire in particular when they exported spices . one of the worst disasters in history.An interesting precursor to contemporary concerns about global health epidemics. transactions are said to be autonomous if their values determined independently of the BOP. Sum Up: The BOP accounts are constructed on a double entry basis. arts and culture. industry and many other sectors of human life were profoundly influenced by the goods and ideas that came along with trade. Subsequently in medieval times a vast expansion of agricultural and industrial production in China stimulated the emergence of an internationally integrated trading system. Nevertheless we can identify various imbalances within the accounts that are of use to the economic analyst and the policy maker. and Greek merchants were sending representatives abroad to sell their goods. Public health was also affected . the states of which have important implications for the consequences of an overall surplus or deficit. Even before Jesus Christ. agriculture. ******** Evolution of International Business Historical Perspective International business as a practice has been age old.accommodating capital inflow.
the International Monetary Fund (IMF) and its sister institution 12 . The end of world war – II saw the birth of global and multinational institutions such as General Agreement on Tariffs and Trade (GATT) and its successor World Trade Organizer (WTO). By 1880 the company had become a global organization with an outstanding international sales organization and several overseas manufacturing plants. The 17th and 18th centuries have frequently been termed the age of ‘Mercantilism’ because the power of nations depended directly on the sponsorship and control of merchant capital. before the outbreak of world war– I. European countries such as the UK. Spain. One of the first to win foreign production facilities. Colonial traders in the America began operating in a similar fashion in the 1700s. the first successful American venture into foreign production. 37 American companies had production facilities in two or more overseas locations. especially concerning the increased globalization of their operations. the Netherlands. spices and other goods that would yield significant profits for investors. In early seventeenth century.Europe and repeated in waves from the mid 1300s and through the 1500s. have worldwide distribution networks and market its product under global brands was singer sewing machine. Interestingly and quite a contrast to present situation. caused widespread hysteria and killed one quarter of china’s people and one third of population of Europe. and France carried out colonial activities across nations via an interconnected Atlantic. In 1968 it builds a factory in Scotland. As discussed above. the plague ravaged cities. But only in recent years the multinationals have become the object of much discussion and investigation. By 1914. Indian and Pacific Ocean system of government protected trade routes. having a substantial share in the global trade during beginning of 20th century as it is today. Their goal was to acquire goods for sale or resale within various Asian markets and ultimately to return to Europe with notable cargos of cloths. multinational firms existed well before world war – I. all the cars sold in Japan were made in the US by Ford and GM and sent to Japan in knocked down kits to be assembled locally. Portugal. A number of multinational companies existed in the late 1800s. Even European companies were also moving overseas.
World Bank. Thus most managers. 13 . Introduction to International Trade International business comprises a large and growing portion of the world’s total business. As a manager in almost any industry. regulate and police the global market place and to promote the establishment of multinational treaties to govern the global business system. these institutions were needed to help manage. global events and competition affect almost all companies large and small. As markets globalized and an increasing proposition of business activity transcended national borders. The WTO is primarily responsible for policing the World Trading System and ensuring nation states adhere to the rules laid down in trade treaties signed by WTO member states. Today. Many companies also compete against products and services that come from abroad. you will need to consider both where to obtain the inputs you need of the quality you need and at the best possible price and where you can best sell the product or service that you have put together from them. All these institutions were created by voluntary agreement between individual nation’s states and their functions are enshrined in international treaties. because most sell output and secure supplies from foreign countries. regardless of industry or company size need to approach their operating strategies from an international standpoint.
He could tell the stock broker to purchase shares in Sony electronics. he was wearing a business suit made by Mark and Spencer. They seek foreign customers and engage in collaborative relationships with foreign business partners. government and international agencies also engage in international business transactions. the American may talk to his stock broker on a Ericson mobile phone that was designed in Finland and assembled in Texas using chip sets produced in Taiwan that were designed by Indian engineers working for Texas instruments. followed by chocolate coffee from another outlet. market and conduct other value adding activities on an international scale. While driving to work. Firms and nations 14 . While international business is primarily carried out by individual firms. he watches British News Channel (BBC) and is amazed by the development of a anti-globalization protest at a meeting of heads of states in Davos. manufacture. a British brand. source. The gasoline could have been made from oil pumped out of a well off the coast of Indonesia by an Italian oil company that transported it to the US in a ship owned by a Dubai based shipping line. This is followed by another event that Japan’s Nikkei stock market index has gone bearish due to South East Asian economic turmoil. On this typical day. otherwise called cross border business refers to the performance of trade and investment activities by firms across national borders. a Japanese firm. The coffee beans come from Brazil and chocolate from Switzerland and crystal tumbler from Belgium. He may have filled the car with gasoline at a BP service station owned by British Multinational Company. While sipping coffee. His income got affected as he had invested in Japanese stock market. an American might drive to work in a car designed in Japan that was assembled in India by Honda from components made in China that were fabricated from Korean steel and Sri Lankan rubber.Case Study : A day in International Business In this independent global economy. Firms organize. International business. Switzerland which has turned violent. The driver stops for lunch at a road side Pizza-hut restaurant which is the Italian brand.
including labor are cheap. know-how and labor. technology and knowledge.100 billion in 2008. Lastly this globalization has brought about a greater degree of collaboration among nations through multilateral regulatory agencies such as WTO and IMF. touching the lives of billions of people around the world. The growth of international business activity coincides with the broader phenomenon of globalization of markets. there was an unprecedented growth of exports which has moved from $59 billion in 1948 to around $15. for companies it has produced many opportunities. While on one hand the vigorous and vocal groups protest against globalization for the list of ills it has brought in from unemployment. to westernization of culture. A few decades ago. trade between nations is accompanied by substantial flaws of capital. Firms seek international market opportunities more today than ever before. Even companies in the services sector are also 15 . While international business has been around for centuries. capital. Firms can expand their revenue by selling around the world and reduce their cost by producing in nations where key inputs. money.900 billion in 2008. Third is the development of highly sophisticated global financial systems and mechanisms that facilitated the cross-broader flow of products. from both advanced and developing nations expanded internationally. Firstly. services. Recent development has created more level playing field that allows firms of any size to benefit from active participation in international business. Since the collapse of communism from erstwhile USSR and Eastern Europe at the end of 1980s. technology and knowledge. technology. As regulatory and administrative barriers to doing business in foreign nations have been reduced. The globalization of markets is evident in several related trends. This is the world we live in today. environment degradation. both large and small. businesses. it has gained much speed and complexity over the past two decades. economic policy of those countries has moved from a command economy to a market economy. Secondly. international business was largely restricted to large multinational companies.exchange many physical and intellectual assets including products. Similarly there was huge growth of imports which rose from $61 billion in 1948 to $16.
The WTO system regulates international trade in goods and services using a system of objectives and rules laid out in articles of agreements by member governments. the WTO is a more formal. These developments had brought in its wake the appreciation that cooperative efforts of countries were needed to bring the economies onto a growth path. design.internationalizing in such industries as banking. the insistence of the US on the 16 . Reconstruction and rehabilitation of Western Europe in the post war era needed a multilateral framework for trade.1995. The WTO advocates ‘Liberalization of trade’ that is freeing trade from tariffs and other governmental restrictions and thereby allowing competition and markets to function freely at international level. Simultaneously. which would lead to more rapid economic growth that benefits everyone. through its Economic and social council (ECOSOC) in convening the Havana conference had in its background the extensive devastation of Western Europe after World War II and the still earlier experience of the Great Depression of the late 1920s and early 1930s. advertising and retailing etc. The problem had started after the World War –I. The insistence of the victor countries of Western Europe on reparations from the defeated countries resulted in severe economic strains on the latter. Europe was under tremendous economic strain. The initiative of the United Nations. institutionalized version of the General Agreement on Tariffs and Trade (GATT). transportation. During the 1920s and 1930s. Evolution of GATT The origins of the GATT /WTO were in the abortive negotiations to create an International Trade Organization (ITO) following World War II. engineering. ************************ General Agreement of Tariffs & Trade (GATT) / World Trade Organization (WTO) Background: Established on January 01. signed by Governments of 23 nations (12 developed and 11 developing) in 1947.
The International Conference held during 1947-48 in Havana. it sowed the seeds of the most – favoured – nation (MFN) principle that would become the most important pillar of the GATT. Tariffs were raised in other countries of Europe and the American Continent and some countries also introduced quantitative import restrictions. viz. Across the Atlantic. Naturally amidst this gloomy picture. 17 . Some actions of the two major powers. the idea was to establish three main international institutions. Prior to Havana conference. Soon the US realized that certain concrete and positive initiatives were necessary to address the problem. had encouraged the building up of trade barriers all around. IBRD and an international Trade Organization (ITO) that would regulate trade as a necessary complement to the other two organizations. the ITO that would give the GATT its organizational enforcing mechanism. As the proposed ITO would threaten US interests. Cuba was supposed to draft a charter for a regulatory organization. the IMF. This was not acceptable to the UN which is more democratic and egalitarian in approach and supported by communist countries. which came into force from 1948 due to the failure of the ITO. It also started multilateralisation of its reciprocal agreements. the countries became more inward looking and tried to protect their respective economies without consideration for the impact on the economies of the other countries. 23 member countries met at Geneva in October 1947 to sign an interim agreement known as GATT.. the US and UK. Its own average tariff came down to nearly 30 percent. As the main source of funds for the reconstruction of Europe in the post Second World War period and as the world’s most powerful economy. The UK gave up its free trade policy and went in for imperial preferences in 1932. In this manner.repayment of loans by victor countries of Western Europe put a heavy burden on the economies of these countries. US congress did not approve of such an organization leading to its collapse. It reduced its own tariffs and also encouraged many others to do so. Aftermath of Second World War brought its own compulsions for economic cooperation between the US and the UK as the tendency was to establish international organization in the search for a new kind of global economic stability. Initially. The US enacted the Smoat – Hawley Act in 1930 which raised its un weighted average tariff to 52 percent. US wanted to establish its hegemony over such an organization which would be favourable to its corporations like IMF and World Bank. It entered into as many as 27 bilateral reciprocal trade agreements with various countries during 1934 – 39. Trade barriers through high tariffs and direct import control became common. the stock market crash of 1929 dealt a severe blow to the US economy.
it included services. The Kennedy Round (1964-67) included. This Round brought a revolution in the history of global trading system after the collapse of Havana Conference to establish ITO. textiles & clothing within its umbrella making it more comprehensive in comparison to GATT.1995 established rule based trading System with the support of a Dispute Settlement Body (DSB) with a permanent institution located at Geneva. Most of the GATT’s early rounds were devoted to reduce tariffs. The transformation of GATT to WTO from January 01. The Tokyo Round (1973-79) with 102 participants was a continuation of the GATT’s efforts to progressively reduce tariffs.K) Geneva 45. However. Besides. services.Various Rounds under GATT The GATT trade rounds of multilateral trade negotiations. MFA Phase –out for textiles and clothing sector. have served as an important vehicle of boosting international trade liberalization. it addressed the non-tariff barriers for the first time and prepared a ‘framework’ agreement. IPR. GATT Trade Rounds Years Round Subject covered Participa ting Countrie s 23 29 32 33 39 1947 1949 195051 195556 196061 Geneva Annecy (France) Torquay(U.000 tariff concession Unilateral & bilateral tariff concessions 8. It also addressed liberalization of trade in agro commodities by reduction of subsidies by major developed countries such the European Union through its common Agriculture Policy. The Uruguay Round (1986-94) in which 123 members participated was the most comprehensive and important of all the eight GATT rounds as it covered besides tariff. The Uruguay Round started at Punta del Este in Uruguay in 1986 and concluded at Marrakesh (Morocco) in 1994. investment measures. dispute settlement. the Uruguay Round being the latest and most extensive.700 tariff concessions Modest tariff concessions Geneva (Dillon Round Tariff Concessions & Nonnamed after US Secretary tariff barriers addressed for of Treasury) the first time (Regional blocs not to raise average tariff among other member 18 . USA and Japan. Trade Related investment Measures (TRIMs). Trade Related intellectual Property Rights (TRIPs). non –tariff measures. The following chart casts a bird’s eye view on the eight GATT rounds between 1947 and 1994. liberalization Agricultural sector by reducing subsidies and establishment of WTO etc. however a new antidumping agreement.
Peferential treatment for developing countries Tariff Concessions on Industrial and agriculture products. Sanitary & Phyto-Sanitary measures. customs valuations. Anti-dumping code extended. technical barriers such as product standards . Uruguay signed at Marrakesh Morocco (Uruguay Round) Tariffs. The rush of new members during Uruguay Round proved beyond dispute that the multilateral 19 . but Investment Measures (TRIMs) reached Trade Related Intellectual 128 by the Property Rights (TRIPs) MFA end of the Phaseout. the success of GATT in promoting and securing the liberalization of world trade during its 47 years of life cannot be disputed.countries) 196367 Geneva (Kennedy Round. Throughout the GATT era.govt. agreement on technical barriers such as product standard. Services establishment of Dispute Settlement Body & establishment of WTO Achievements of GATT Given its provisional nature and limited field of action. negotiation on Nontariff barriers. Liberalization of round Agriculture sector. food & health security. import licensing. addressed issues concerning adoption of counter vailing code. revision of anti.dumping code 46 197379 Geneva (Tokyo Round) 102 19861994 Started at Punta Del Este. named after US President) New formula for tariff reduction. The continual reductions in tariff alone spurred very high rates of growth in world trade of around 8 percent a year on average during 1950s and 1960s. the momentum of trade liberalization ensured that trade growth consistently outpaced output growth promoting globalization. procurement . Non-tariff barriers such 123 at the as revision of anti-dumping beginning code. agreement on New of the areas such as Trade related round.
it has a very different character. Difference between and superiority of the WTO over the GATT It may be legitimately asked as to what was the compelling need to replace the GATT by the WTO . it may be said that the WTO is different from and superior to the erstwhile GATT in several ways. developed countries agreed to slash down their average tariffs on industrial goods by 40 percent over five years. The developing countries agreed to raise from 13 percent to 61 percent the share of their imports covered by bound tariff. In the Uruguay Round. However. Further. as well as trading in services which was more against developing countries. The principal differences between the two institutions are given below: GATT WTO 20 . which resulted in more developing countries joining the systems. In fact. most of NTBs were to be replaced by tariffs while the share of imports covered by bound tariffs rose. Up to Kennedy round. there was more reduction of tariff by developed countries without any reciprocity from developing ones. there was hardly any attempt by developed countries such as EU. However. Also Uruguay round witnessed the pressure from developed countries for implementation of regulations related to TRIPs.trading system represented by the GATT was perceived as an anchor for the development and an instrument of economic and trade reforms. The share of the duty free imports in total imports also rose. Another major milestone in this Round was inclusion of trade in services. TRIPs. TBT etc. there have been grey/dark spots in the success story. stricter anti-dumping and countervailing codes. domestic price supports or “floor prices” were to be reduced by 20 percent (relative to 1986-88 base) over six years in the case of developed countries and by 13 percent over 10 years by developing countries. In agriculture. Uruguay Round was also instrumental in phasing out the quota of MFA and integrating it with WTO in 10 years time starting from 1995. USA and Japan to liberalize agriculture sector by reducing subsidies. The WTO is not a simple extension of GATT. TRIMs and stricter anti-dumping and countervailing codes within the trading behaviour of contracting parties. which was the last round within framework of GATT. There have been more tariff reduction on products having interest for developed countries and high tariff peaks/tariff escalation for products with interest for developing countries. Commitments were also made to reduce the export subsidies. which still exists. TRIMs. after 1980s expectation from developing countries for reduction of tariff and non-tariff barriers increased. While completely replacing the GATT. However.
enduring and permanent. WTO is a permanent institution with its own full fledged secretariat located institutional in Geneva headed by a Director-General. not created by a International treaty which was ratified by the governments and legislature of the members.GATT was an adhoc body. agriculture etc besides goods. 5. GATT was a set of rules. 4. 2.General and around 500 staff.GATT was susceptible to blockage due to absence of dispute settlement body. It was restricted to trade in goods only. 3. 4.While WTO was more comprehensive which included services.While GATT was multilateral instrument. consequently making it less susceptible to blockages. TRIPs. 3. GATT was provisional in character. 6. 2. TRIMs.WTO has a dispute settlement body to look into the dispute among member countries which is faster and more automatic . . 1.1.WTO is a permanent organization created by international treaty ratified by the governments and legislatures of the member states. WTO commitments are full. a multilateral agreement without foundation with only a small associated secretariat. 5. four deputy Directors. As the apex body concerned with solving trade problems between nations and providing a forum for multilateral trade negotiations. it 21 6. by the 1980s many new agreements of plurilateral and therefore selective nature were added rendering its functioning complex and difficult.Agreements under the WTO are almost all multileral involving commitments for entire membership.
In fact its definition continues to broaden. 2nd Phase The second phase of globalization began around 1900 and was associated with the rise of electricity and steel production. every stage is accompanied with some technological development and international trends. historical. We can divide the globalization process into four phases: 1st Phase Since the beginning of 19th century. However . During this time international business became widespread due to growth of rail roads. social scientists discuss the political. Africa and Europe has all contributed to the growth of cross-border trade over time. Middle East Asia. the most common definition in International business is that of economic globalization. technology. Early civilization in the Mediterranean. environmental. it is not a UN agency like IMF and World Bank although it has a cooperative relationship with the UN. social. Invention of the telegraph and the telephone in the late 1800s facilitated information flows between and within nations and greatly aided early efforts to manage companies’ supply chain. However.‘The tendency towards an international integration of goods. This phase reached its peak in 1880. it has simply accelerated and gained complex character in recent years. Trade through the ages fostered civilization. technological and even cultural implications of globalization. Globalization and Its Phases The term globalization means different things to different people. Exchange with others gave scientists the opportunities to expand and grow. For example. efficient ocean transport and rise of large manufacturing and trading companies. information. labor and capital or the process of making this integration happen is known as globalization’. Globalization is not a new phenomenon. It reached its height just before the great 22 . geographical.has global status similar to the IMF and World Bank .
British petroleum. the countries across Atlantic prospected their economies by raising tariff barriers in order to have strict control on currency and capital movements. PepsiCo. Western Europe and Japan. as the countries realized the gains they would accrue if they promote trade. such as IBM. Texas Instruments and 23 only merchandise trade. The Third phase mainly originated from the US. Singer and Levi’s. Western Europe established some of the subsidiaries of their multinational firms in Asia. Numerous companies developed internationally recognized trade names. This led to the subsequent signing of the multilateral treaty in 1947. However. Before the world war. The Middle East and Latin America. including Nestle. Coca-Cola. known as General Agreement on Tariffs and Trade (GATT). namely International Bank for Reconstruction and Development (IBRD) and International Monetary Fund (IMF). Bretton wood conference on 1945 had already established two more multilateral institutions. such as axis and allied groups. Kellogg’s. Even just before the World War I many firms were operating globally. it was transformed into World Trade Organization (WTO) in 1995 to cover more areas under international business . Boeing. American Multinationals. 3rd Phase The third phase of globalization began after world war – II. Africa. Caterpillar. Nestle. The Italian manufacturer Fiat supplied vehicles to nations on either side of the war. Europeans often expanded into their former colonies by establishing independent subsidiaries.depression in 1929. The epicenter of power shifted from Europe to the United States as Western Europe was thoroughly devastated and destroyed. KAFF. the scenario changed in the post war years. During this time the most industrialized region of the world. The rehabilitation and reconstruction of the ravaged European economies through America’s Marshall Aid helped stimulate economic activity in Europe. The aftermath of war transformed the political and economic land scale. Shell and Siemens had established foreign manufacturing plants by 1900. Through their colonization process. As GATT covered operations. the European companies such as BASF. On the other hand.
communication and manufacturing and Eastern technologies. Ford acquired Mazda in Japan. geographically distant yet electronically interconnected . communication and transportation made it feasible for the managers to organize far fling operations around the world. including China. such as banking. Gradually multinational firms began to seek cost advantages by locating factories in developing countries with low labor cost. insurance and retailing. Growing MNE activities and early efforts at trade liberalization resulted in substantial increase in international trade and investment beginning in the 1960s. ************************ 24 . There was huge growth of FDI in 1980s. leading into integration of global financial markets. The current phase was triggered by IT revolution. 4th Phase The fourth and the current phase of globalization began in early 1980s. This period witnessed enormous growth in cross border trade and investment. Technological advancements in information. especially in capital and technology intensive sectors. India and Mexico.Xerox spread out across the globe on the strength of technological and competitive advantages. Even firms from emerging markets acquired companies in west. In their own way globalization and technological advances are resulting in the death of distances. With the easing of trade barriers and currency control capital began to flow freely across national borders. Central Europe and the industrialization as well as modernization efforts of east Asian economies. These technologies also facilitated the globalization of the service sector in areas. For example GM acquired Saab in Sweden. the collapse of communism in Soviet Union. Mittal steel acquire Arcellar in France and Hindalco acquired Novelis a US-Canadian aluminum company. Growing international prosperity began to reach emerging market such as Brazil. tourism. The geographic and cultural distances that separate nations are shrinking and making the world a global village. Even merger and acquisition activities of firms across continents exemplified the growing integration of the world economy. entertainment.
discussion about the formation of international organizations dwelt almost exclusively on the IMF. 1944. New Hampshire.22. 25 . At Bretton Woods. USA to prepare the final text of the Articles of Agreement of the International Monetary Fund and IBRD from July 1. popularly known as World Bank.International Bank for Reconstruction and Development (IBRD/ World Bank) Introduction The International Bank for Reconstruction and Development (IBRD). owes its birth to the deliberations of the United Nations Monetary and Financial Conference which met at Bretton woods.
it was also recognized that stable world peace was threatened from the presence of great disparities in income and wealth manifested in the wide differences in the standards of living between the developed and underdeveloped countries. which reflects the country’s economic strength.IBRD was a mere afterthought. Only those countries which are members of the IMF can be considered for membership of the IBRD. Subscriptions by member countries to the capital stock of the IBRD are related to each member’s quota in the IMF. particularly in Western Europe. By March 2010. The Second World War had completely dislocated the multilateral trade and had caused massive destruction of life and property. effective upon receipt by the Bank of a 26 . the total membership of World Bank comprised of 186 countries. Consequently. Membership & Organization Any country is eligible for membership of the World Bank if it subscribes to its charter under the Bank’s Articles of Agreement. A member can withdraw at any time its membership. The World Bank now operates as a development agency with a mission statement that says ‘our dream is a world without poverty’. the problem of raising the standard of living of the vast masses of people of the underdeveloped countries brought to fore the need to develop the economies of these countries. Since its inception in 1944 it has expanded from a single institution to a closely associated group of five development institutions. While the need for promptly reconstructing the war ravaged economies of Western Europe was recognized.
e. With certain exceptions.written notice from the member to that effect. Of the total of 24 Executive Directors who direct the world Bank’s general operations. The contribution by members is reviewed periodically at least every five years so that the growth of the countries is taken into account while allocating the weightage. 5 are appointed by the 5 biggest share holders – the USA. UK and France and the remaining nineteen are elected by the remaining members. Japan. Failure to fulfill its obligation towards the Bank may lead to suspension of a member. a President and other staff. formal agreements with other international organizations. interpretation of Articles of Agreement. Each Governor has the voting power which is related to the financial contribution of the Government it represents. i.e. distribution of the net income of the Bank and its liquidation. increase or decrease of the capital stock. Each Director holds voting power in proportion to the shares held by his government.5 percent. i. The Bank has a Board of Governors. Germany. Executive Directors. The Board of Governors meets once every year.8 percent of total votes followed by Japan. All powers of the Bank are vested in the Board of Governors consisting one Governor and one alternate appointed for five years by each member. admission or suspension of a member.. The US has got the maximum share. although even the smaller member gets a minimum number of votes. which is a poor second with around 7. around 16. the Board of the Governors has delegated all its powers to the Executive Directors who are responsible for the conduct of the 27 .
(ii) The International Development Association (IDA) gives loans to countries that are ‘usually not creditworthy’ in international financial markets. 28 . Directors function in continuous session and meet regularly once a month. The president of the Bank acts as chairman of the Board of Directors and has no vote except a deciding vote in case of an equal division. (iii) The International Finance Corporation (IFC) is the largest multilateral source of loan and equity financing for private sector projects in the developing world. Staff provides the support for the daily operations of the Bank.general operation of the Bank.75 percent administrative charge is made annually. The World Bank group actually consists of five specialized institutions as given below: (i) The IBRD which makes development loans. (v) The International Centre for Settlement of Investment Disputes (ICSID) facilitates the settlement of investment disputes between governments and foreign investors. It borrows at low interest rates by selling bonds in private capital markets in first world countries and makes nearmarket interest loans to credit worthy countries in the third world and elsewhere. (iv) The Multilateral Investment Guarantee Agency (MIGA) provides investment insurance. IDA Loans carry no interest. but a 0. guarantees loans and offers analytical and advisory services.
to promote the long-range balanced growth of international trade and the maintenance of equilibrium in balance of payments by encouraging international investment for the development of the productive resources of members. most of the low income country except 29 . to arrange the loans made or guaranteed by it in relation to international loans through other channels so that the more useful and urgent projects. i. to promote private foreign investment by means of guarantees or participation in loans and other investments made by private investors and when private capital is not available on reasonable terms.e. are:— (i) (ii) (iii) (iv) (v) to assist in the reconstruction and development of territories of members by facilitating the investment of capital for productive purposes. thereby assisting in raising productivity.C. on suitable conditions finance for productive purposes out of its own capital. Therefore. our discussion will restrict to these two organizations. D. as stated in the original (Bretton Woods) Articles of Agreement. the standard of living and conditions of labour in their territories.The terms ‘World Bank’ or ‘The Bank’ refer properly only to the IBRD & IDA. Before a loan is made or guaranteed. borrower has reasonable prospects for repayment of loan. large and small alike. Therefore. Its headquarters is in Washington. funds raised by it and its other resources. to supplement private investment by providing. the Bank ensures that the (i) (ii) project for which the loan is asked has been carefully examined by a competent committee as regards the merits of the proposal. to conduct its operations with due regard to the effect of an international investment on business conditions in the territories of members. credit worthiness of borrower. Purposes The purposes of the World Bank.
telecommunication etc. India is the single biggest borrower of the Bank. education. Technical Assistance and Other activities Apart from giving massive loan assistance to its members for various economic development projects. water supply and sanitation etc. Pakistan etc. oil and gas. the term being related to the estimated useful life of the equipment or plant being financed. infrastructure development such as road. the loan is meant to finance the foreign exchange requirements of specific projects of reconstruction and development.(iii) (iv) few like India. industry. modifications in the technical plans for project designed to reduce its cost or to make it more efficient. 30 . loan is meant for productive purpose and except in special circumstances. rail and port development. defining priorities among different projects. environment. The Bank has made loans for specific development projects in the fields of agriculture. India and Pakistan avail loan along with grants due to their credit worthiness. 2. social sector such as population. avail grants from IDA instead of loan. The World Bank normally makes medium and long-term loans. The bank keeps itself informed on the projects which it finances by means of periodic reports received from the borrower and through on the spot inspections by its representatives. the IBRD has also been giving technical assistance to members on matters relating to loan operations. particularly in regard to: 1. finance. power generation. as well as urban development. nutrition.
telecommunicating systems. technical assistance has increasingly been directed at capacity building entailing a more complex process of creating and disseminating knowledge for development purposes at all levels of society. highways. The provision of technical assistance continues to be an integral and important element in Bank’s work. The bank also maintains close working relationship with other international organizations such as United Nations Development Programme (UNDP) and Economic Development Institute (EDI) etc. including the raising of local capital. Technical assistance has increasingly been directed at capacity building entailing a more complex process of creating and disseminating knowledge for development purposes at all levels of society.administrative or organizational arrangements for a project or as to plans for its financing. The World Bank has also promoted international peace by successfully resolving difficult international disputes. however. dams. through Institutional Development Fund (IDF). The Bank added another 31 . The Bank supported technical assistance in the early years and through the 1970s and much of the 1980s had focused on engineering assistance in designing bridges. It settled the dispute between the UK and the United Arab Republic on opening of Suez Canal for traffic. The Bank has also provided technical assistance in development of programming through various survey missions which make intensive studies of national resources of developing member countries and make recommendations to serve as the basis of long term development programmes. 3. In recent years.
an international center for settlement of investment disputes (ICSID) had been established for providing facilities for the settlement by voluntary recourse to conciliation or arbitration.important feather to its cap when it successfully liquidated in September 1960 one of the toughest and most frustrating disputes between India and Pakistan over the sharing of the waters of the Indus system of rivers. population planning and tourism within its activities. of investment disputes between contracting states and foreign nations. Likewise. Bank’s first population mission visited Jamaica in 1976-77 to assist that country’s government in preparing a long-range family planning programme. with a view to inducing these countries to raise finances for Pakistan’s planned economic development. Due to the sincere efforts of the Bank. other 32 . Under this. In addition to the conventional loans. Bank’s activities have been further diversified by taking urban development. world Bank has made sincere efforts to secure outside assistance from developed countries for under developed and developing countries. which provides technical assistance to new Tourist investment. To assist the developing countries in increasing their foreign exchange income through the development of tourism. It had also established a machinery to settle disputes between member nations and investors who are foreign nationals. which it has made available for development projects. The Bank also established a ‘Help Pakistan Club’ with leading developed countries as members. a consortium of 12 leading western nations along with Japan known as ‘Aid India Club’ was formed to help India out of her foreign exchange difficulties. It also provided fund for economic development of India during third plan also. the Bank has established a new Tourism Projects Department.
nicknamed as ‘the soft loan window’ from which underdeveloped / developing countries have borrowed for their development projects. there was a dramatic reversal of this situation in the next few months. at a time when fiscal deficit was high and the foreign exchange reserves low (covering only about weeks of imports). However. This event was followed by the conflict in Ayodhya over the Ram Janamboomi-Babri Masjid. made an attempt to reduce the fiscal deficit and begin the process of correction in the balance of payments position. The country found it more and more difficult to borrow internationally and there was an adverse impact on the inflow of funds from non resident Indians. in tandem with the conflict in the Gulf was sufficient to shake international confidence in India’s economic viability. conflict and high tension.countries also get similar support from the Bank. Consequent upon the annexation of Kuwait by Iraq on 2nd August 1990. Even though the Gulf war did not last long. For a while the economic situation seemed to show some improvement. crude oil prices rose sharply. For four weeks or so there was further disruption. Another minority government took office in mid -November. The budget. Within a period of six weeks. the Bank jointly with the IMF provided relief to the Heavily Indebted Poor Countries (HIPCs) by reducing their external debt burden by establishing. During 1996-97. A direct fallout was the fall of the government on 7 November 1990. The direct economic impact of the conflict in the Gulf was exacerbated by domestic social and political developments. This led to massive protest by students and a break-down of the law and order situation in several parts of the country. India’s fragile economy was badly shaken. Situation in 1980s 33 . A new government took over in December 1989. India’s Economic Reform Introduction The year 1990-91 has been among the cruelest in India’s post-independence economic history. The implementation of the Mandal commission report was announced by the government of 7 August 1990. those prices doubled. The establishment of International Development Association (IDA). introduced in March 1990. This series of events. the HIPC Debt Initiative Trust Fund.
Industrial production was increasing at the rate of over 8 per cent per annum and exports were doing well. The capital markets were buoyant and industrial growth averaged more than 8 percent for the period 1985-90. inflation had crossed the double digit level and was moving higher and the fiscal deficit was sharply widening. There has been large accumulation of external debt and a widening of the current account deficit which has rendered the economy highly vulnerable to external and internal shocks. the economic situation became highly precarious. The financial crisis was. in fact projected that the Indian economy was on a new growth path. At this critical juncture. The Country had to devalue its currency twice in 1991 to make our products more competitive and earn more foreign exchange. As a result of an excellent monsoon. Manmohan Singh was appointed as Finance Minister. Between September and November 1990s. agricultural production was at its peak. V. that the economy was poised upon a breakthrough. Several recommendations made by these committees were implemented and there was considerable loosening of direct control particularly in the field of Industrial licensing. Each of these committees recommended a move away from quantitative control to fiscal methods of economic management. Crisis of 1991 It was evident by then that the gains from the policy changes of the 1980s have proved temporary. Exchange reserves were at rock bottom. this severe financial crisis was taking place at a time when the real sectors of the economy seemed to be performing reasonably well. Although unavoidable. a new government headed by Prime Minister P. it had seemed. The effort to reduce the rate of fall in foreign exchange reserves meant a drastic curtailment in the imports of both oil as well as industrial raw materials and components. By the end of 1990. foreign exchange reserves which were already low. The growth rate for the decade certainly higher and there was evidence of substantial output growth in several sophisticated industries. IMF Package 34 . this step was not sufficient to meet the dwindling foreign exchange reserves. During this period.During the 1980s. there was also some reassessment of the control system for which a number of committees were appointed. The domestic prices of petroleum products were increased sharply to compensate for the rise in international prices. To solve the problem of foreign exchange and bring economic reforms. fell by nearly 50 percent. for a while. this added to costs and prices in the economy. Paradoxically. The economic survey of India for 1989-89. Narasimha Rao announced a programme of macroeconomic stabilization and structural adjustment. However. such as electronics. however of such magnitude that gains in the real sector were severely eroded by a crisis of confidence and the shortage of international liquidity. The growth in industrial production has been overshadowed by a balance of payments crisis of unprecedented magnitude.
205 crore.168 crore.094 crore in receipts from commercial banks and NRI deposits as compared with total receipts from these sources in 1989-90.Devaluation of Rupee was not sufficient to tide over the crises. short term debt and assistance from IMF.India had to depend on high cost methods of financing the deficit.In 1982-83. NRI deposits.there was a net erosion of Rs. India had to mortgage some of its gold with Bank of England to earn foreign exchange in a greater magnitude. the crisis didn’t last long and the country could solve the problem by mid 1990s.The EFF provides for assistance to member countries that need to make structural adjustments in their economies with a view to achieving BoP viability in the medium term. large outflows in any year would seriously deplete reserves.1. the conditions of the bank forced the country to move in a vigorous way towards a open door policy.3.334 crore from the Fund in 1990-91 under compensatory and contingency financing facility (CCFF). India drew Rs.363 crore in 1992-93. However. Under the stand-by arrangement with the Fund. India terminated the EFF before fully utilizing the amount originally contemplated. ************************ 35 . external commercial borrowings. This happened in 1990-91and 1991-92 as the international confidence in India’s abilities was shaken leading to a downgrading of India’s credit rating.3.60 percent of current account deficit was financed through EFF drawings and the proportion was 50 percent during the next year.the drawing was Rs.4. Moreover. Reserves were down to two weeks of imports. NRI deposits and short term debts are concerned . This facility enabled India to draw up to SDR 5 billion over a period of four fiscal years from 1980-81 to 1984-85. Besides the Reserve Tranche drawings of Rs.IThough the country had already launched the structural adjustment programme. In 1984-85.077 crore in 1991-92 and Rs.3. Following the Gulf crisis and deteriorating BoP situation.369 crore in 1990-91. being more vulnerable to expectations about foreign exchange risks. As the IMF package and other policy measures were not enough. viz. flattening out of private remittances and a fall in concessional aid to finance the ever increasing deficits . they represent a substantial future liability. the Government of India entered into an arrangement with International Monetary Fund (IMF) under the Extended Fund Facility (EFF) in early 1980s. In 1990-91. The loan package of the IMF are generally attached with high conditionalities.2.these three sources are not only more demanding and expensive in terms of debt-servicing obligations than external debt but are also more volatile. Also. India’s current account deficit was in the tune of Rs.17. GoI resorted to substantial drawings from the IMF from 1990-91 onwards under one or other facility. As far as external commercial borrowings. India received Rs. In 1991-92. Expecting prolonged BoP difficulties . As the BoP situation turned grim due to increasing trade deficits.
First. which are taxes/duties on imports of commodities into a country or region. free trade. they improve economic returns to firms and suppliers of resources to domestic industry that face competition from foreign imports. Second. Tariffs are widely used to protect domestic producers’ incomes from foreign competition.Tariff and Non Tariff Barriers (NTBs) Tariff and non tariff barriers (NTBs) are major hindrance for the growth of global trade. Tariffs Tariffs. Despite the low profile they have in global trade talks. yet one can’t be sure if there would be an effective means to question and nullify them. especially when he/she is caught off-guard. They are implemented for two clear economic purposes. regional trade blocs and bilateral free-trade pacts. While some barriers are easy to deal with while others may prove to be insurmountable. This protection comes at an economic cost to domestic consumers who pay higher 36 . the surge in NTBs is keeping apace. NTBs take various forms. somewhat foiling the object of tariff reduction viz. some of which truly apocryphal. they provide revenue for the government. are among the oldest forms of government intervention in economic activity. It is important for a manager to be fully aware of these barriers since overcoming these barriers can be cost prohibitive. Quite a few NTBs are obviously in defiance of the relevant global norms. NTBs have the potential to scupper all efforts for inter-country trade liberalization through multilateral and other means. As tariffs are S are brought down as a matter of policy through the tools of WTO rules.
5% imposed by developing countries. and many dairy products. and Europe currently have tariff levels averaging about 4% of the price of imported industrial goods. When coupled with other barriers to trade they have often constituted formidable barriers to market access from foreign producers. those economies have sought to reduce tariffs on manufactured goods through several rounds of negotiations under the General Agreement on Tariffs Trade (GATT). export subsidies. to replace them with tariffs – a process called tarrification. The typical TRQ will set a low tariff for imports of a fixed quantity and a higher tariff for any imports that exceed that initial quantity. A critical objective of the Uruguay Round of GATT negotiations was the elimination of NTBs to trade in agricultural commodities (including quotas) and. tariffs that are set high enough can block all trade and act just like import bans. In the United States.S. India had imposed the export duty on Basmati rice for a year to meet domestic demand. Countries use many mechanisms to restrict imports. infrastructure bottlenecks and unethical business practices. voluntary export restraints. A tariff-rate quota (TRQ) combines the idea of a tariff with that of a quota. tariff quotas. orderly marketing arrangements. Tarrification of agricultural commodities was largely achieved and viewed as a major success of the 1994 GATT agreement. Such measures constitute NTBs and are often justified from the 37 . where necessary. NTBs to trade can be defined as government laws. import licensing. Quantitative restrictions. the importance of NTBs in countries around the world has increased. Therefore. This acts as a temporary safeguard measure which is WTO compatible. as developing countries have not been able to export as per their potential. Recently. policies or practices that either protect domestic industry or products from foreign competition or artificially stimulate export of particular domestic products.S. some times a country imposes export tariff to ease the pressure on prices due to meet the domestic demand of a commodity/product in case of shortage. and to the economy as a whole through the inefficient allocation of resources to the import competing domestic industry. regulations. Non-Tariff Barriers As countries and regions have made efforts to reduce tariffs. profitability and the market position. This has resulted in trade distortion. Significant progress has been made over the past half century in lowering tariff barriers to international trade. government procurements. According to one EU estimate. political squabbles. peanuts. In fact. when average tariffs on manufactured goods exceeded 30 percent in most developed economies. compared with an average of 27. antidumping/countervailing duties and technical barriers to trade are some examples of such NTBs. important TRQ schedules are set for beef. Besides import tariff. “buy national” campaigns. the U. countries are allowed to combine the use of two tariffs in the form of a TRQ. even when they have agreed not to use strict import quotas. The U. sugar.prices for import competing goods. and Europe have successfully knocked down tariff barriers while harmonizing business rules between their own markets. For international businesses these barriers negatively affect market access. since 1948. In a legal sense and at the WTO. These also include a wide variety of operating practices ranging from bureaucratic delays in processing request for permits.
perspective of public policy. protection of health. the need to protect human health and safety. ethical practices . foreign exchange allocations. governments often provide trade consultations and administrative guidance to business. labeling and certification requirements Export subsidies and domestic support Government procurement Services barriers Lack of adequate protection to intellectual property rights Exchange Rate Management Policies Other barriers such as VERs. the environment. but are not limited to. Tactics used by governments to achieve their national goals include licensing. intellectual property and compliance with international obligations. detailed labeling requirements with extensive product content description. morality. minimum import price limitations and embargos. in effect. Regulatory Roadblocks To achieve their respective fiscal and monetary objectives.. i. coordination and arbitration acting. Such labeling requirements become a hindrance especially when the product is being exported to different countries each with dissimilar regulations. Sanitary and Phyto-Sanitary measures are one form of the non-tariff international trade barrier that has been developed to protect the consumer against unsafe products and deceptive marketing practices. countervailing duties and domestic assistance programs. NTBs normally include the following: • • • • • • • • Import policy barriers Standards. For example. The protection of local industry is facilitated through government procurement policies. In some countries the government provides guidance. SPS standards These barriers are viewed in the context of multiple roadblocks in international markets and are explored in conjunction with examples of such barriers from across the globe. export subsidies. Product related requirements include.e. safety. Strategic and Operational Roadblocks 38 . coordinator and leader for businesses. to protect infant (domestic) industries and the environment. quotas. religion. The most common justification given for this practice is to enable the country to speed up the development of new industries by the use of protective measures at early stages of development. testing. as a caretaker. Many countries use import licensing schemes to implement a wide variety of regulations relating to national security. local content requirements.
Customs and Market Entry Practices Every nation has its customs and entry procedures. For example. requirements to provide the same documentation to numerous agencies in one country significantly contribute to the costs. territorial restrictions to trade. The quota allocation normally is administered by the government export office or the national industry association of the exporting country. Quota Quota. they can still export either by selling their products to exporters with excess quota---having a quota but for reasons like shortage of supply. they are unable to serve or utilize all the amount or quantity allocated by the administering office---or by 'buying' the excess quota from willing sellers (exporters). in the form of a permit or a license. based on their past export records. Import quotas are normally imposed on an annual and a country basis. Earlier some of the Japanese and Korean products had VERs to comply with American importers’ demand. Voluminous and complicated document requirements and excessive delays in customs clearance due to human and technical factors serve as non-tariff barriers. with approval from the administering office. collusion among competing firms. named Voluntary Export Restraint(VER) which comes from exporter side . However.VERs are imposed when a product floods the import market and importer puts pressure on exporter to take self restraint. For many companies. to the exporters (the export-manufacturers and export-traders) usually on pro rata. Distributors may refuse to carry foreign products lest they alienate their domestic manufacturers or suppliers. There is also another type of Quota. In many countries existing border procedures are unnecessarily cumbersome.Lack of access to the latest manufacturing technologies. wholesalers and retailers. 39 . These procedures become barriers to market entry if their use is arbitrary and left to the judgment of customs officers. import of textiles and garments by developed countries was regulated through quota before 1995 under multi fibre arrangement (MFA). impossible because of the close ties between local manufacturers. otherwise called import quota is the number or amount of goods of a specific kind or class. the administering office of that country may allow the 'quota buying' between exporters. which the government of importing country will permit to be imported. The quota is allocated. at times. such as garments and shoes. the chance of being given a quota by the administering office is often slim. Access to a country’s distribution or commercial infrastructure is. for example garment manufacturers' association and footwear manufacturers' association. and close ties between transacting partners often conspire to restrict the timely availability of component parts and raw material blocking access to efficient distribution channels. For new exporters. To ensure that the quota granted to an exporting country is fully served or utilized within a given time.
030 in 2007. design. Conditions of roads. Besides. Member countries of trade agreements also use domestic 40 . to trips to other countries. airports and telecommunication limit the market potential and results in market barriers. Bribes take many forms ranging from money. Africa and Asia.Technical Barriers Trade Technical barriers to trade (TBT) refer to technical regulations and voluntary standards that set out specific characteristics of a product. Similarly. In this country. and textile production. and inter-provincial or interstate purchasing and distribution. cars and trucks must compete with bicycles and motorcycles for space in the movement of people and products.An example is eco friendly packaging material to be used by exporters while exporting to developed market. Socio-Cultural and Ethical Norms and Practices International marketers must be aware of the socio-cultural practices since it adds to the cost of doing business while challenging the ethical values and legal responsibility of the exporter. resulting in restrictions on products having child labor. China alone has 560 TBT measures in place followed by the US. harbors. Domestic content regulations typically specify the percentage of a product’s total value that must be produced domestically in order for the product to be sold in the domestic market. Such tactics become market entry barriers especially when they are not required of domestic firms. Physical Infrastructure Barriers Local administrative bodies and physical infrastructure built to protect local interests pose difficulties for road transportation. shape. private and commercial trucking. to favors. For example. Included in this set of measures are also the technical procedures that confirm that products fulfill the requirements laid down in regulations and standards. and theECat290. Smuggling. counterfeiting and bribery are more prevalent in some countries and regions than others. developed countries also practice ethical norms. as well as many of its neighboring countries. Several developing countries have imposed domestic content requirements to foster agricultural. or the way a product is labelled or packaged before it enters the marketplace. Australia used domestic content requirements to support leaf tobacco production. Domestic Content Requirements Governments have used domestic content regulations to restrict imports. They are normally used in conjunction with a policy of import substitution in which domestic production replaces imports. This is more prevalent in some of the developing and least developing countries (LDCs) in Latin America. The number of TBT measures has risen sharply from 365 in 1995 to 1. These practices create barriers to market access. Product specifications are often written in such detail that a fair chance of winning a contract might mandate extensive product modification. automobile. functions and performance. which has 460. The intent is usually to stimulate the development of domestic industries. such as its size. road construction in Thailand has not kept up with traffic growth. The product testing process might take several months to several years. in the automobile sector environmental norms are very high in developed countries. India had to remove child labor from its carpet export to the EU and US due to this policy shift.
therefore. a country can simply restrict imports on any basis it chooses through its allocation of import licenses.S.S. as well as imports of all other commodities. Oil and Foodstuffs Import and Export Commission (COFCO). STEs can restrict imports in several ways. dollar can be used to purchase 100 Japanese Yen (and vice versa). Exchange Rate Management Policies Some countries may restrict agricultural imports through managing their exchange rates. If. they can impose a set of implicit import tariffs by purchasing imports at world prices and offering them for sale at much higher domestic prices. rice.content rules to ensure that nonmembers do not manipulate the agreements to circumvent tariffs. First. They also often enjoy a partial or pure domestic monopoly over the sale of those commodities.S. Import STEs may also implement implicit general and targeted import quotas.S. One effect of currency depreciation is to make all imports more expensive in the country itself. then the price of that ton of beef in Japan would increase from 200. dollar and the Japanese yen is 100 yen per Dollar . or utilize complex and costly implicit import rules that make importing into the market 41 . dollar. South Korea’s Livestock Products Marketing Organization. A 10 percent depreciation or devaluation of the yen. Current important examples of import STEs in world agricultural commodity markets include the Japanese Food Agency (barley.000 yen. countries can and have used exchange rate policies to discourage imports and encourage exports of all commodities. The difference between the purchase price and the domestic sales price simply represents a hidden tariff. Prior to the implementation of NAFTA. if one U. Import State Trading Enterprises Import State Trading Enterprises (STEs) are government owned or sanctioned agencies that act as partial or pure single buyer importers of a commodity or set of commodities in world markets. and China’s National Cereals. for example. inhibit imports of commodities /products. for example. For example. the exchange rate between the U.S. The exchange rate between two countries’ currencies is simply the price at which one Currency trades for the other. If the yen depreciates in value relative to the U. For example. Import Licenses Import licenses have proved to be effective mechanisms for restricting imports.000 yen to 220. A policy that deliberately lowers the exchange rate of a country’s currency will.Some countries have targeted specific types of imports through implementing multiple exchange rate policy under which importers were required to pay different exchange rates for foreign currency depending on the commodities they were importing. the yen depreciates by 10 percent from an initial value of 100 yen per dollar. and the price of a ton of U. More recently the US has questioned Chinese Dual Exchange rate which was partly responsible for huge US deficit . for example. Without explicitly utilizing a quota mechanism. Mexico required that wheat and other agricultural commodity imports be permitted only under license. then a dollar is able to purchase more yen. importers of a commodity are required to obtain a license for each shipment they bring into the country. and wheat). would mean that the price of one U. North American Free Trade Agreement (NAFTA) rules of origin provisions stipulate that all single-strength citrus juice must be made from 100 percent NAFTA origin fresh citrus fruit. To some degree. dollar increased to 110 yen. beef on world markets is $2.000. Under an import licensing Scheme.
STEs often refuse to provide the information needed to make such assessments. Most recent attempts to invoke the principle have cited the use of toxic substances. Sanitary and Phyto sanitary (SPS) barriers to Trade The precautionary principle. the challenges provided by STEs will almost certainly continue to be addressed through bilateral and multilateral trade negotiations rather than in the context of domestic legislation through the 2002 Farm Bill. ozone depletion. high rates of birth defects. This requirement has resulted in a number of barriers being relaxed around the world. the United States targeted the trade restricting operations of import and export STEs as a primary concern. the environment. Thus. cancer.unprofitable. These phony technical barriers were just an excuse to keep out competitive products. The current WTO agreement requires that whenever a technical barrier is challenged. The precautionary principle has been interpreted by some to mean that new chemicals and technologies should be considered dangerous until proven otherwise. In spite of these difficulties. ****************** 42 . and contamination with toxic chemicals and nuclear materials have also been used to justify trade and other government restrictions on the basis of the precautionary principle. climate change. has recently been frequently proposed as a justification for government restrictions on trade in the context of environmental and health concerns. It should be emphasized that WTO rules do not require member countries to harmonize rules or adopt international standards only rather there must be some scientific basis for the rules that are adopted. Recently. Concerns about species extinction. often regardless of cost or scientific evidence. A major problem with import STEs is that it is quite difficult to estimate the impacts of their operations on trade. or agriculture from harmful diseases or pests that may accompany the imported product. It therefore requires those responsible for an activity or process to establish its harmlessness and to be liable if damage occurs. in a submission to the current WTO negotiations. because those operations lack transparency. or foresight planning. Similarly leather garments carrying azo dyes can not be exported to markets of the EU and US. restrictions on imports from certain places are fully consistent with protecting consumers. Some times. The WTO SPS provisions on technical trade rules specifically recognize that all countries feel a responsibility to secure their borders against the importation of unsafe products. learning deficiencies. For example. and environmental degradation. a member country must show that the barrier has solid scientific justification and restricts trade as little as possible to achieve its scientific objectives. countries seeking more open trading regimes have been concerned that the precautionary principle will simply be used to justify NTBs. exploitation of natural resources. claiming that such disclosure is not required because they are quasiprivate companies. Indian products such as marine products were banned in the EU during (1997-99) due to SPS norms.
It does not entail active management or control over these assets. Exchange can be through exporting. The most convenient forms of international business transactions are international trade and investment. technology and knowledge. touching the lives of billions of people around the world. With trade. Firms seek international market opportunities more today than ever before. Therefore. know-how and labour. It has also led to more rapid and widespread diffusion of products. regardless of origin. International trade refers to an exchange of products (tangibles) and services (intangibles). products and services cross national borders. While international business has been around centuries. International portfolio investment refers to the passive ownership of foreign securities such as stocks and bonds for the purpose of generating financial returns. it has gained much speed and complexity over the past two decades. services and capital flows. while importing is an inbound flow of products and services. by contrast. exporting is an outbound activity. managerial talent and manufacturing infrastructure. technology. Firms and nations exchange many physical and intellectual assets including products. governments. international agencies also engage in international business transactions. technology. While international business is primarily carried out by individual firms. The growth of international business activity coincides with the broader phenomenon of globalization of markets. are subject to importing and exporting. capital. services. With investment.Trade and Investment as key to International Business International business refers to the performance of trade and investment activities by firms across national boundaries. Economists refer to such assets as factors of production. an entry strategy involving the sale of products or services to customers located abroad from a base in the home country or at third country. The foreign investor has a relatively short term interest in the 43 . International business gives you access to products and services from around the world and profoundly affect your quality of life and economic well being. Both finished products and intermediate goods. such as raw materials and components. The two essential types of cross border investment are portfolio investment and foreign direct investment. International investment refers to the transfer of assets to another country or the acquisition of assets in that country. It allows many firms to internationalize in order to substantially increase their volume of transactions in goods. These assets include capital. the firm itself crosses borders to secure ownership of assets abroad.
second was its dominance in global Foreign Direct Investment(FDI). Germany. Advanced countries account for the greater proportion of 44 . Foreign direct investment refers to an internationalization strategy in which the firm establishes a physical presence abroad through acquisition of productive assets such as capital. Besides the growth in industrialization and services sector. plant and equipment. while the GDP growth was around 1 percent . or depot for petroleum products received from the Middle East which it then re-exports to china and other destinations. Faster economic growth and rapid industrialization of other emerging economies in Asia and Latin America in the last four decades contributed to the relative declining of share for the western world. The same is true for countries such as Singapore. While United States is the leading country in absolute value of merchandise trade. For example. Mexico and some south East Asian countries etc.S multinational firms dominating the international business scene. some of which they process into higher value added products and some they simply re-export to other destinations. Hong kong. These countries are known “enter pot” economies because they import a large value of products. trade has contributed immensely to the growth of these economies due to the liberalization process they have adopted. The same was the case with other industrialized countries of Europe such as the U.S dominance in the world economy . Netherlands (117 percent) and Germany (59 percent).5 percent. technology. The third factor was the dominance of U. land.K. Firms usually have a long term plan to invest such resources in foreign countries. It is a foreign market entry strategy that gives investors partial or full ownership of a productive enterprise dedicated to manufacturing. The trade growth has been more than 20 percent in many of the emerging economies. achieved a consistent growth in last two decades due to their paradigm shift in economic policy. Besides merchandise trade. labour. marketing or research and development activities. Globalization of markets has brought a dramatic change in the demographics of the global economy over the past four decades. it accounts for only 19 percent of its GDP. China. Russia. the growth of trade in major economies has been more than 3. New emerging economies such as Japan. the United States was still by far the world’s dominant industrial power. South Korea and Malaysia because trade accounts for more than 100 percent of their GDPs. The fourth was a deviation as nearly half of the world as off limits to western international business. there has been a phenomenal growth in trade in services. its share in world output is significantly down from 40. Brazil.There has been a slow growth in GDP and trade in 2008.S is the world’s largest industrial power. Nature of International Trade In the early 1960s. France and Italy. As late as 1960s four factors defined the nature of global economy while first was U. In 2006 and 2007.While the first was the US dominance of world economy and the world trade picture. The growth of trade has outpaced the growth in GDP. Though even today the U. In contrast merchandise trade is a much larger component of economic activity in countries such as Belgium (167 percent).3 percent in 1963 to around 20 percent in 2008. This shows that some economies are very dependent on international trade relative to goods and services domestically.ownership of these assets. as these nations have been affected by economic meltdown. Trade in services accounts for about a quarter of all international trade and is growing rapidly. India. Singapore is a major entrepot.
If we look 20 years into the future. while rich nations accounting for 55 percent of world economic activity now may account for only about 38 percent. Rapid integration of world economies is fueled by such factors as advances in information and transport technologies. Association of South East Asian Nations (ASEAN) and South Asian Free Trade Association (SAFTA) etc. most forecasts now predict a rapid rise in the share of world output accounted for by developing nations and a commensurate decline in the share for advanced nations. market access issues by member countries have been a deterrent for growth of services trade. by 2020 the Chinese economy could be larger than that of U. Due to its volatile nature. there has been a growth of regional blocs such as the European union (EU). today it has become much more dependent on imports. IMF and the remarkable economic growth of emerging market countries. Nature of International Investment Of the two types of investment discussed above. North American Free Trade Association (NAFTA). Even though trade in services is rapidly rising.world services trade. The growth of these blocs and their deepening integration has diverted a major portion of global trade towards the region. However. The best example is the European Union. The World Bank also estimates that today’s developing nations may account for more than 60 percent of world economic activity in 2020. otherwise called intra trade. there has been a change in the direction of trade. the decline of trade barriers as well as liberalization of markets promoted by multilateral organizations like WTO. The World Bank has estimated that if current trends continue. Whereas portfolio investment acts as a hot money because it flows out of a country when the return on investment declines and this is short term in nature. For example. FDI is the foreign entry strategy practiced by the most internationally active firms. Secondly services trade was included in WTO agenda under various modes of transaction only in 1995 and since then it is being pursued by member countries in an organized way.S. a country should prefer more of FDI than portfolio investment. Companies usually engage in FDI for the long term and retain partial or complete ownership of the assets they acquire. the absolute value of merchandise trade is still several times larger than the value of services trade. while Indian economy will approach that of Germany. This rapid growth of trade is in part due to advanced economies sourcing many of their products from low cost developing countries like China. Besides the rapid growth in the volume of trade. foreign direct investment (FDI) is of paramount importance as it helps in the internationalization of firm and encompasses the widest range of international business involvement. International banking and financial services are among the most internationally active service industries. although the United States once produced most of the products that it consumes. In the last two decades. India and Mexico. Firms undertake FDI for a variety of strategic reasons including (1) to set up manufacturing or assembling operations or other physical operations facilities (2) to 45 . One reason is that services face greater challenges and barriers in cross border trade than merchandise trade. a conglomeration of 27 European countries having the intra EU trade reaching about 75 percent of their total trade.
transfers from developed to developing countries since 1990s enabled their firms to become competitive and accordingly go global. rapidly increased its investment in automobile production facilities in the US and Europe in the late 1980s and early 1990s. U. However. In addition. Toyota also undertook these investments to head off growing political pressures in the US and Europe to restrict Japanese automobile exports to these markets. most notably France. Thus beginning in the 1970s. ***************** 46 . services and capital fell and as other countries increased their shares of world output. talked of limiting inward investment by U. resourceful companies with substantial international operations. the Japanese automobile company. Therefore. technology. The motivation for such FDI by non-US firms was the desire to disperse production activities to optimal locations and to build direct presence in major foreign markets. trade and technology etc. employment.S firms accounted for two third of worldwide FDI flows in the 1960s. Mexico. followed by British firms with about 10 percent. Korea. Toyota Inc. the relative share for firms from US and West Europe declined leaving way for firms from emerging economies of China. Even the dominance of U. Toyota Inc believed that an increasingly strong Japanese Yen would price Japanese automobile exports out of foreign markets. South Korea and Brazil etc. India. as the barriers to the free flow of goods. creating a $38 billion conglomerate – the world’s largest steel company. India and Brazil etc. many Japanese firms invested in North America and Europe – often as a hedge against unfavorable currency movements and possible imposition of trade barriers. The growing liberalization. therefore production in the most important foreign markets as. Russia. For example.S firms was so huge that several European governments.S firms due to the possible economic threat posed to Europe. Mexico has been a great beneficiary of this FDI from the US mainly which has created the Maquiladora region having more than 3000 industrial units. opposed to experts from Japan made sense. However. Also the Russian oil and gas firm Lukos recently established thousands of service stations in the US and Europe with an average of more than $250 billion investment annually in developing countries with China taking the lions share. This has contributed immensely to the growth of Mexican economy and its exports.open sales a representative office or other facility to conduct marketing or distribution activities (3) to establish a regional headquarter. acquired the Luxembourg based Arcelor SA in 2006. For example India’s Mittal Steel Co. European and Japanese firms began to shift labour intensive manufacturing operations from their home market to developing nations where labour costs were lower. the sustained flow of FDI into developing nations is a very important stimulus for economic growth in those countries and bodes well for the future of countries such as China. Reflecting the dominance of the US in the global economy. FDI is especially common among large. Hong Kong. in terms of the growth in income. non-US firms increasingly began to invest across national borders.
the Ministerial Conference (MC) comprising of representatives of all the WTO members.WTO: Structure & Ministerial Conferences Since its birth in 1995. Nepal. dominates the structure of the WTO. Guinea . Its highest authority. Brazil. It can take decisions on all matters under any of the 47 . Japan and Canada – to the increasingly influential emerging economies of Asia. EU. Gambia . The MC generally meets once in two years. Soloman Islands and Togo. Latin America and Africa such as China . South Africa etc to some of the world’s poorest countries like Bangladesh. India . At present the WTO has a membership of 153 countries ranging from the ‘quad group’ of top four world trade powers – the US. the organization is ever expanding.
Through these ministerial conferences. the Committee on BOP is responsible for consultations between the WTO members and countries with trade restrictive measures in order to cope with their BOP difficulties. Major trading powers’ trade policies are reviewed every two years while the trade policies of the other individual members are reviewed every four years. The DSB’s final decisions cannot be blocked. third in Seattle ( the USA) in Nov. six ministerial conferences have been held i. there is the council for trade in goods. named as Singapore issues have been brought under WTO’s ambit. fifth in Cancun (Mexico) in September 2003 and sixth in Hong Kong in December in 2005. the Committee on Balance of Payments and the Committee on Budget. the Council for trade in services and the Council for trade related aspects of Intellectual Property Rights. It sets up expert panels to study disputes and decide if the rules are being broken. 2001. first one in Singapore in a December 1996. second in Geneva in May1998. Apart from conducting its regular work on behalf of the MC. Besides these bodies. new issues such as investment. on which all members can sit. which is also composed of all the WTO members and which reports to the Ministerial Conference principally handles the day –to-day work of the WTO.multilateral trade agreements. The General Council. the General Council convenes in the two particular forms as the Dispute Settlement Body (DSB) and as the Trade Policy Review Body (TPRB). While some of the conferences have failed due to unbridgeable differences among countries in general and developed and 48 . WTO Ministerial Conferences The Ministerial Conferences is the highest decision-making body of the WTO. While the Committee on Trade and Development is concerned with issues relating to the developing and least developed countries (LDCs) . It has to be convened at least once in two years. Finance and Administration deals with issues relating to the WTO’s financing and budget. The committee on Budget. The three other bodies established by the MC and which report to the General Council are committee on Trade and Development. Till now. competition policy. it should be noted that the major developed countries have been using these events to press for new agendas and introduction of new subjects into the realm of WTO. fourth in Doha (Qatar) in Nov. The TPRB is a forum for the entire membership to review the trade policies of all WTO member countries. however .e. The ministerial conference is responsible for carrying out the functions of the WTO.From a historical and institutional perspective . Finance and Administration. usually meets twice a month to hear complaints of violations of WTO rules and agreements. government procurement and trade facilitation.. 1999. The DSB.
they started getting united against developed group. The 6 th conference raised some issues regarding trade distortion due to huge agricultural subsidy by developed world and restrictive non agricultural market access (NAMA) by developing countries that resulted in a major conflict between developed and developing countries. This resulted in formation of various groups of developing countries such as G-33. The differences between developed and developing countries have delayed WTO negotiation. E. particularly DDA.The strong group of 110 developing & least developing countries has become a deterrent in the way of developed countries monopolizing WTO. However. developed countries emphasize on Singapore issues. This started in Doha conference as it was decided to bring in a development orientation to functioning of WTO.e. As the modalities of Hong Kong agreement are yet to be finalized due to conflict between developed and developing world. Due to the failure of Cancun conference. not much has happened till now resulting in WTO at cross roads.S. India has played a key role in bringing solidarity among developing countries. DDA resurfaced again at Hong Kong.U. ******* International Monetary System 49 . otherwise called Doha Development Agenda (DDA). India & Brazil has been formed to find an amicable solution to the problem. A group of four countries . While developing countries are talking about implementation of Uruguay Round of Agreements focusing on agri subsidies . G-90 & G-110. G-4 having U. next ministerial conference could not be organized resulting to a setback to WTO system. When developing countries realized that developed countries are gradually pushing those issues which are favouring developed economies.developing as well as least developed countries in particular.i.
the international Monetary Fund (IMF) and International Bank for Reconstruction & Development (IBRD). 3. The most important example of this. 50 2. New Hampshire.Introduction: The International Monetary System. otherwise called World Bank were set up in 1945. usually in a pegged / managed / floating exchange – rate format. has gone through many incarnations since the start of the 20th century. others peg their currencies against some target currency (or basket of currencies). albeit with a degree of management designed to smooth short-term fluctuations. Objectives According to Article 1 of the Fund’s Articles of Agreement. is the European Monetary Union and single currency ‘Euro’. but which saw both a brief return to the gold standard and a period of floating exchange rates (1914-45). Over the same period. In broad terms. the purpose of the International Monetary Fund are: 1. at least in terms of its possible impact on the rest of the world. To promote international Monetary cooperation through a permanent institution which provides the machinery for consultation and collaboration on International Monetary problems. . the major western governments along with few developing countries (44 in total) met at Bretton Woods. and to avoid competitive exchange depreciation. some groups of countries are attempting to establish their own exchange – rate subsystems. To promote exchange stability. The present International Monetary System cannot be said to be either universal or in a stable state. from the pound sterling at the start of the century to the US dollar in the Bretton Woods system. followed by the global conflict of World War II in 1944. International Monetary Fund (IMF) At the wake of Great Depression. Moreover. and to contribute to the promotion and maintenance of high levels of employment and real income and to the development of the productive resources of all members as primary objectives of economic policy. certainly as defined by the rules of the game. As a result of the meetings. the system has moved from the fixed exchange rates of the gold standard (ending in 1914) through a period when there was no maintained universal system.1944 to determine the international institutions that were needed to bring relative economic stability and growth to the free world. to maintain orderly exchange arrangements among members. While many countries allow their currencies to float. USA during 1-22 July. the dominant currency has changed. To facilitate the expansion and balanced growth of international trade. economic recession /isolation and trade wars of the 1930s. into the Bretton woods pegged exchange rate system (1945-1973) and finally into the currently ‘managed and/or floating system’. culminating in the present system having dollar dominance.
Out of 24 Executive Directors. US. under the direction of the Executive Board. whose members are usually ministers of finance or heads of central banks in their countries. The Executive Board elects the Managing Director who is chairman of the Board. he is the chief of the operating staff of the Fund and conducts.. i. to shorten the duration and lessen the degree of disequilibrium in the international balance of payments of members. 51 . The Fund’s Governors. Membership and Quota All those countries. In addition.C. France and UK. normally meet once a year. Germany. in which each of the member countries (185 by early 2010) is represented by a Governor and an Alternate Governor. Member’s quotas in the Fund determine (1) their subscription to the fund (2) their drawing rights on the Fund both regular and special facilities. In accordance with the above. but may meet or vote by mail at other times.e. Rest of the 19 are elected for two-year term by the other member nations.4. an Executive Board. The Article XII states. Japan. Five are appointed by the members with largest quotas. issues Annual Reports to the Board of Governors. are eligible for Fund’s membership and allocated quotas. the ordinary business of the fund. The Executive Board deals regularly with a wide variety of administrative and policy matters. 5. To assist in the establishment of a multilateral system of payments. Structure The Fund’s organizational structure is mentioned in its articles of Agreement. 6. “The Fund shall have a Board of Governors. therefore in permanent session at the fund headquarters at Washington D. The fund is guided in all its policies and decisions by the purposes set forth in this Article. conducts discussions to complete the process of consultations with members and from time to time produces comprehensive studies on crucial issues of particular relevance to international financial aspects of the economies of Fund members. To give confidence to members by making the general resources of the fund temporarily available to them under adequate safeguards. which agree to subscribe to Fund’s Articles of Agreement. a Managing Director and a staff”. in respect of current transactions between members and in the elimination of foreign exchange restrictions which hamper the growth of world trade. The highest authority of the Fund is the Board of Governors. (3) their voting power and (4) their share of any allocation of the SDRs. thus providing them with opportunity to correct maladjustments in their balance of payments without resorting to measures destructive of national or international prosperity. The Board of Governors has delegated many of its powers to the Board of Directors which is responsible for conducting the business of the fund and is.
economic strength of a country which includes several factors such as national income. the German mark. As the US dollar was the cornerstone of the International Monetary System. Japanese Yen. The USA having the largest share in quota i. Review of the quotas of Fund members are made at least every five years to determine whether quotas should be increased looking at the growth of world economy and different rates of development among the members. several countries base the value of their currency on the value of the SDR or that of a combination of the SDR and another currency. the weights of each currency in the valuation basket are changed every five years. These weights were chosen because they broadly reflected the relative importance of the currencies in international trade and payments. The SDR is a unit of account that was distributed to countries to expand their official reserves bases. it has not taken over the role of gold or the dollar as a primary reserve asset. Euro. around 16. reserves. British Pound Sterling as well as Japanese Yen etc. The IMF uses the SDR rather than a specific national currency in most of its official reports.e. IMF began to use a simplified basket of five currencies for determining valuation: The US dollar. In addition. and the remainder is contributed in member’s own currency. 1971. The value of SDR stood at $ 1. India could trade some of its SDRs to the United States for dollars. Although the SDR was intended to serve as a substitute for gold. export variability and ratio of exports to national income are taken into consideration. Other countries could change the value of their currency against gold and the dollar. Unless the Executive Board of the IMF decides otherwise. its value remained constant with respect to the value of gold. 2008. On August 15. the French franc and British Pound. However. The value of the basket is the sum of the values of the four currencies. 1981. A member would contribute 25 percent of its quota in the form of widely accepted foreign currencies such as US dollar. On January 1. The increase in members’ quotas over the years has helped raising international liquidity position. The SDR initially was denominated in gold and later determined by a basket of currencies.8 percent claims the maximum voting power followed by Japan. but the value of dollar remained fixed.00. The voting power of a member is determined by 250 ‘basic votes’ plus one vote for each SDR 1. President Richard Nixon announced that Untied States would no longer trade dollars for gold unless other industrial countries agreed to support a 52 .000 of quota. Evolution of Floating Exchange Rate: The IMF’s initial system was one of fixed exchange rates. Special Drawing Rights (SDR) : To help increase international reserves.5 in first week of September. Allocations of SDRs are in proportion to quota and are made only to participants in the SDR department. in 2002 Euro has replaced German mark & French franc as a part of basket of currencies. For example. but each one has a specific weight. In determining the quotas of members. the IMF created special Drawing Rights (SDR) in 1969. The SDR is intended eventually to become the principal reserve asset in the international monetary system.Every Fund member must subscribe to the fund an amount equal to its quota.
The IMF classifies each country into one of the three broad categories: 1. provided they communicate their decision to the IMF. The resulting Smithsonian Agreement of December 1971 had several important aspects: An 8 percent devaluation of the dollar A revaluation of some other currencies ( an official increase in the value of each currency against gold) A widening of exchange rate flexibility (from 1 percent to 2. As part of this move. the IMF began to permit countries to select and maintain an exchange rate arrangement of their choice. the Supplemental Reserve 53 . the IMF had to change its rules in order to permit floating exchange rates. It also consults annually with countries to see if they are acting openly and responsibly in their exchange rate policies. provided they communicate their decision to the IMF. the IMF began to permit countries to select and maintain an exchange rate arrangement of their choice. The move towards greater flexibility can occur on an individual – country basis as well as overall system basis." that are tailored to address the specific circumstances of its diverse membership. Lowincome countries may borrow at a concessional interest rate through the Poverty Reduction and Growth Facility (PRGF) and the Exogenous Shocks Facility (ESF). World currency markets remained unsteady during 1972 and the dollar was devalued again by 10 percent in early 1973 ( the year of the Arab Oil Embargo and the start of first rising oil prices and global inflation). The IMF has a surveillance programme which allows it to monitor the economic policies of countries that would affect those countries’ exchange rates. the IMF has developed various loan instruments. however. Pegged exchange rates: currency is pegged to a single currency or a basket of currencies. to place each country in a specific country.restructuring of the International Monetary System. The Jamaica Agreement of 1976 amended the original rules to eliminate par values in order to permit grater exchange rate flexibility. More flexible arrangements: exchanges rates are fairly flexible. 2. or "facilities. Limited – flexibility arrangements: exchange rates having limited flexibility. IMF Facilities Over the years. As part of this move. Major currencies began to float against each other instead of relying on the Smithsonian Agreement. Non-concessional loans are provided mainly through Stand-By Arrangements (SBA). 3. and occasionally using the Extended Fund Facility (EFF).25 percent on either side of par value) This restructuring of the International Monetary System did not last. Because the Bretton Woods Agreement was based on a system of fixed exchange rates and par values. the countries notify the IMF of the exchange rate arrangement they will use and then the IMF uses the information provided by the country and evidence of how the country in the market. Each year. The Jamaican Agreement formalized the break from fixed exchange rates.
Supplemental Reserve Facility (SRF). Stand-bys have provided the greatest amount of IMF resources. In recent years. The SBA is designed to help countries address short-term balance of payments problems. The IMF continues to explore possible crisis prevention instruments. and repayment is normally expected within 2¼-4 years. The interest rate levied on PRGF and ESF loans is only 0. some loans may exceed the access limits. The rate of charge is based on the SDR interest rate. The amount that a country can borrow from the Fund-its "access limit"-varies depending on the type of loan. Stand-By Arrangements (SBA). Except for the PRGF and the ESF. The motivation for the SRF was the sudden loss of market confidence experienced by emerging market economies in the 1990s. Large loans carry a surcharge. Countries are expected to repay loans within 1-1½ years. This facility was established in 1974 to help countries address longer-term balance of payments problems requiring fundamental economic reforms. and loans are to be repaid over a period of 5½-10 years. delineated in their Poverty Reduction Strategy Papers (PRSPs). often caused by fluctuating world commodity prices." and some carry a surcharge. Repayment is normally expected within 4½-7 years. all facilities are subject to the IMF's marketrelated interest rate. Surcharges apply to high access levels. The length of a SBA is typically 12-24 months. The IMF also provides emergency assistance to support recovery from natural disasters and conflicts. known as the "rate of charge. Concessional lending arrangements to low-income countries are underpinned by comprehensive country-owned strategies. The CFF was established in 1963 to assist countries experiencing either a sudden shortfall in export earnings or an increase in the cost of cereal imports. in some cases at concessional interest rates. This facility was introduced in 1997 to meet a need for very short-term financing on a large scale. which is revised weekly to take account of changes in short-term interest rates in major international money markets. except that CFF loans carry no surcharge. but is typically a multiple of the country's IMF quota. 54 . the largest number of IMF loans has been made through the PRGF. Surcharges apply to high levels of access. Compensatory Financing Facility (CFF). All SRF loans carry a substantial surcharge of 3-5 percentage points. Arrangements under the EFF are thus longerusually 3 years. Financial terms are similar to those applying to the SBA.5 percent. which led to massive outflows of capital and required financing on a much larger scale than the IMF had previously provided. and the Compensatory Financing Facility (CFF). Extended Fund Facility (EFF). In exceptional circumstances. Poverty Reduction and Growth Facility (PRGF) and Exogenous Shocks Facility (ESF).Facility (SRF).
is not a panacea. including multilateral organizations and governments. the Inter-American Development Bank (IaDB) also decided to provide debt relief to the five HIPCs in the Western Hemisphere. The HIPC Initiative was first launched in 1996 by the IMF and World Bank. Emergency loans are subject to the basic rate of charge. The Initiative entails coordinated action by the international financial community. and social policies. to reduce to sustainable levels the external debt burdens of the most heavily indebted poor countries. although interest subsidies are available for PRGF-eligible countries. providing US$49 billion (net present value terms as of the decision point) in debt-service relief over time. the HIPC Initiative. To date.and World Bank-supported adjustment and reform programmes. deeper. a number of modifications were approved to provide faster. 27 of them in Africa. subject to availability. the HIPC Initiative was supplemented by the Multilateral Debt Relief Initiative (MDRI). debt reduction packages have been approved for 33 countries. poverty reduction. since their receipts of such assistance have been much larger than their debt-service payments for many years. Eight additional countries are potentially eligible for HIPC Initiative assistance and may wish to avail themselves of this debt relief. External Debt Relief Initiative: Heavily Indebted Poor Countries (HIPC) Initiative The HIPC Initiative is a comprehensive approach to debt reduction for heavily indebted poor countries pursuing IMF. even supplemented by the MDRI. The debt reduction assistance under the initiative permits eligible countries to exit from the debt-rescheduling process and to focus their energies on striving for sustainable 55 . Even if all of the external debts of these countries were forgiven. and the African Development Fund (ADF)—for countries completing the HIPC Initiative process. The joint IMF-world Bank initiative for HIPCs enables countries that have established good policy track record to achieve sustainability in their overall external debt burdens with the participation of bilateral and multilateral creditors alongwith the IMF and the World Bank. However. Following a comprehensive review in 1999. The IMF and the World Bank launched a joint initiative in providing external debt relief for the heavily indebted poor countries (HIPCs). The MDRI allows for 100 percent relief on eligible debts by three multilateral institutions—the IMF. to help accelerate progress toward the United Nations Millennium Development Goals (MDGs). In 2005.Emergency assistance. The IMF provides emergency assistance to countries that have experienced a natural disaster or are emerging from conflict. and broader debt relief and to strengthen the links between debt relief. In 2007. with the aim of ensuring that no poor country faces a debt burden it cannot manage. the International Development Association (IDA) of the World Bank. Loans must be repaid within 3¼-5 years. most would still depend on significant levels of concessional external assistance.
Burkina Faso and Cate d’Ivoire etc.. provides technical assistance and training to its members in four broad areas of (i) designing and implementing fiscal and monetary policies (ii) institution building (iii) collecting and refining statistical data and (iv) drafting and receiving financial legislation. ranging from broad policy issues to narrow technical problems. assists in its execution and in monitoring its effectiveness. (MAE). the Fiscal Affairs Dept. The Fund also receives requests for technical assistance on members ‘specific economic and financial problems encompassing aspects of general economic policy. exchange and trade systems. 56 . computer programming for economic analysis and data processing. and the Treasurers Dept. The IMF. Technical Assistance: The technical assistance provided by the IMF to its members constitutes an integral part of its activities. the Fund. problems arising from inflation. It takes many forms. have been benefited from such a programme in the past. Much of the technical assistance provided by the Fund is in the nature of regular annual consulting with members. the statistical Dept.. These consultations provide an occasion for review and appraisal of the country’s economic and financial situation and also an opportunity for the member to draw upon the expertise of the Fund’s staff for advice and assistance. the legal Dept. operates at all levels of authority within member countries and covers a wide array of topics. Bolivia. debt management systems. when the Fund and a member country develop a financial stabilization programme. apart from providing financial assistance for the programme drawn up by a member. the IMF Institute. macro economic modelling.growth and development. accounting and valuation problems. balance of payments programmes. Some of the HIPCs such as Uganda. This technical assistance is provided by the IMF through its Monetary and Exchange Affairs Dept. Similarly.
This action might not be possible to undo. Are you sure you want to continue?
We've moved you to where you read on your other device.
Get the full title to continue reading from where you left off, or restart the preview.