07 int busi. int fin & trade orgs. sess 10, 11, 12

7/30/2019 07 Int Busi. Int Fin & Trade Orgs. Sess 10, 11, 12

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International BusinessInternational Finance

&Trade Organisations

Prof Bharat Nadkarni


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International Business : Prof Bharat Nadkarni

Components of Balance of Payments

Item Credit Debit Net(A) Current Account

I Merchandise

II Non Monetary Gold Movement

III Invisibles

(B) Capital Account

I Private

II Banking

III Official (Govt)

(C ) IMF

(D) SDR Allocation

(E) Errors & Omissions

(F ) Reserves and Monetary Gold


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Balance of Payment is a standard double entry accounting

record to capture all the transactions of an economy with Restof the World.

Balance of Payment always balances as it is double entryaccount. There may be deficit or surplus in current and/or

capital account or any sub account. But final adjustmenthappens by increasing or reducing Forex reserves.

In practical sense it means that, the government has to

balance the BoP account either by borrowing or reducingreserves.


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Important Driving factors and entities of World Economy

1. WTO (The World Trade Organization)WTO deals with the rules of trade between nations at aglobal or near-global level; it is responsible for negotiatingand implementing new trade agreements, and is in chargeof policing member countries adherence to all the WTO

agreements, signed by the bulk of the worlds tradingnations and ratified in their parliaments. Hence WTO is aprime driving factor for current account transactions acrossthe globe.

The twin international financial institutions, which emergedduring the post war deliberations, are the InternationalMonetary Fund (IMF) and the International Bank forReconstruction and Development (IBRD). WTO, is nowviewed as the third pillar of the global business. IMF mostly


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Provides short term international finance and the IBRDprovides long term international finance, while WTO enlargesthe global business.The three main legal instruments of the WTO are:1. The General Agreement on Tariff & Trade (GATT) alongwith

associated agreements and jurisprudence.2. The General Agreement on Trade in Services (GATS)3. The Agreement on Trade-Related Intellectual Property

Rights (TRIPS)

The birth of WTO paved the way for the reduction of duties,

tariffs, non tariff barriers like quotas and controls. WTOenlarged the market access opportunities and providedefficient rules for undistorted competition among the worldcountries. WTO contributes to the strengthening theinstitutional framework for business relations among member

countries.


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Though, it is expected that WTO would play a significant role in

expanding the world trade, it is also cautioned that WTO has toface challenges. The WTO had to contend with a number ofdisputes during 1995-2007. The disputes were also relating tothe appointment of the WTOs chief. Constitution of WTO committee that will oversee the demise

of Multi-fibre Agreement in phases over the next seven years. Disputes over the trade financial service.

WTO could face these challenges and solve the problems. It is

now established as an efficient institution for re-engineeringand reprocessing the world trade.

Deal on cheap drugs Doha declaration in 2003 on TRIPsagreement and public health.


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Ministerial conferences of the WTO First conference held in 1996 at Singapore.

Reaffirmation of ILO and commitment to core labour standards.

Second conference held in 1998 at Geneva.Ensure implementation of existing multilateral agreements, accepting openand transparent rule-based trading system.

Third conference held in 1999 at Seattle.This meeting was a failure as the developing nations jointly protested againstthe lack of transparency and imposition of views of the rich countries on the

poor countries in the negotiations. Fourth conference held in 2001 at Doha.

Doha declaration on TRIPs agreement and public health, deal on cheapdrugs. Reductions in industrial tariffs, phasing out agricultural exportsubsidies etc.

Fifth conference held in 2003 at Cancun, Maxico.Drastic reduction in agriculture subsidies undue advantages of US & EU.

Sixth conference held in 2005 at Hong Kong.

NAMA non agriculture market access take into account special needsand interests of developing countries


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India and WTOIndia was one of the 76 governments that became members of

the WTO on the first day of formation of WTO in 1995. Thus,India was one of the founder members of the WTO.

India is expected to play a leaders role for the developing

countries in the WTO. Recently, India is experiencing the

problems from the WTO due to dumping. Indian agriculturesector is affected badly compared to industrial sector bydumping.

2. IMF (International Monetory Fund)IMF provides loans to countries experiencing balance ofpayment problems. Also it promotes capital accountconvertibility. Hence on both these factors, IMFs role is

crucial in world economic transactions.


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IMF (International Monetory Fund) .. Contd.

The IMF is an organization of 185 countries, working to fosterglobal monetary co-operation, secure financial stability,facilitate international trade, promote high employment andsustainable economic growth, and reduce poverty.A core responsibility of the IMF is to provide loans to

countries experiencing balance of payments problems.This financial assistance enables countries to rebuild theirinternational reserves; stabilize their currencies; continuepaying for imports; and restore conditions for strong economic

growth. Unlike development banks, the IMF does not lend forspecific projects.IMF account in BoP denotes quota contributions to IMF(reserve trench) and SDR are special drawing rights.


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IMF (International Monetory Fund) .. Contd.The work of the IMF is of three main types.Surveillance involves the monitoring of economic andfinancial developments, and the provision of policy advice,aimed especially at crisis prevention. The IMF also lends tocountries with balance of payment difficulties, to providetemporary financing and to support policies aimed at correctingthe underlying problems. Third, the IMF provides countries withtechnical assistance and training in its areas of expertise.The SDR is an international reserve asset, created by the IMFin 1969 to supplement the existing official reserves of member

countries. SDRs are allocated to member countries inproportion to their IMF quotas. The SDR also serves as theunit of account of the IMF and some other internationalorganizations. Its value is based on a basket of keyinternational currencies.


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3. World Bank

World Bank works on World free of poverty. Thus it is adevelopmental institution. It extends help in the form of softloans and contributions to underprivileged societies andregions. It has four arms : IBRD (Intl Bank for

Reconstruction & Development), IDA (Intl Dev

Association), IFC (Intl Finance Corpn.) and MIGA(Multilateral Investment Guarantee Agency). IBRD and IDAprovide loans to Governments for infrastructure, educationand health. IDA is soft loan window i.e. it provides loans to

Less Developed Countries (LDC) on concessional terms.IFC provides loan and equity support to corporate desirousof setting up plants in LDCs. MIGA guarantees such crossborder investments against political risks.


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4. OPEC (The Organization of the Petroleum Exporting Countries)OPEC is made up of 12 developing nations whoseeconomies rely on oil export revenues. One of OPECsprimary missions is to achieve stable oil prices, which arefair and reasonable for producers and consumers. OPECsinfluence on the market has not always been a stabilizingone. It alarmed the world and triggered high inflation acrossboth the developing and developed world through its use ofthe oil weapon in the 1973 oil crisis. OPEC nations accountfor two-thirds of the worlds oil reserves, and over 40% ofthe worlds oil production, affording them considerable

control over the global market.5. European Union (EU)The EU is a supranational and intergovernmental union oftwenty-seven states. It was established in 1992 by theTreaty on EU (The Maastricht Treaty), and is the de facto

successor to the six-member European Economic


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Community (EEC) founded in 1957. Since then newaccessions have raised its number of member states, andcompetences have expanded. The EU is the current stageof a continuing open-ended process of Europeanintegration.The EU is one of the largest economic and political entitiesin the world, with 494 million people and a combinednominal GDP of US$ 14.5 trillion in 2006. The union is asingle market with common trade policy, a common

Agriculture/ Fisheries policy, and a Regional policy to assistunderdeveloped regions. It introduced a single currency,

the euro, adopted by 13 member countries. The EU is thelargest exporter in the world and the second largestimporter. On the world stage the Union is gaining greaterinfluence and ability to speak as a bloc. All 27 memberstates are represented in the WTO through its Trade

Commissioner.


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6. The U S EconomyThe United States is one of the wealthiest countries in theworld, with a GDP for 2006 of 13.22 trillion dollars. The UShas a mixed economy where corporations and other privatefirms make a majority of microeconomic decisionsregulated by the government. Since the end of World WarII, the US economy has been characterised by relativelysteady growth and low unemployment. The US has arelatively high median household income compared to itsfellow developed nations. The Government activelypromotes exports and seeks to prevent foreign countries

from maintaining trade barriers that restrict imports.7. ChinaOver the past 20 years, and after a long period of isolation,Chinas role in the global economy has increased sharply.Its GDP has grown at an average annual rate of over 9

percent, while its share of world trade has risen from


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less than 1 percent to almost 6 percent. As a result, Chinais now the sixth largest economy (at market exchangerates) and the fourth largest trader in the world, after US,EU and Japan. Not only have its exports gained significantmarket share abroad, but its rapidly rising imports havesupported the strong performance of neighboringeconomies and contributed to the recent strength in worldcommodity prices. Chinas economic weight and itsintegration into the world economy are likely to continueincreasing rapidly. Industrial-country exports to China,particularly of skill and technology intensive items, are likely

to continue increasing rapidly; certain sectors may undergojob losses as Chinese firms market share expands.Similarly, some developing countries facing increasedChinese competition may experience an erosion of theirmarket share for unskilled-labour-intensive manufactures.

In addition, rapid growth in China may significantly


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increase world prices for some commodities, includingagricultural products and energy.

8. Central Banks and Governments of Most CountriesGovernment decisions and policies drive the trade andcapital flow across the globe. Despite the size andimportance of the foreign exchange market, it remainslargely unregulated. There is no international organizationthat supervises it, nor any institution that sets rules.However, since the advent of the flexible exchange ratesystem in 1973, governments and central banks, such asthe Federal Reserve System in the United States,

occasionally intervene to maintain the stability in the Forexmarket. To restore stability, the central banks often worktogether. Also central banks policies influence domesticmoney supply, inflation and interest rates which in turnaffect world trade and investment flows.


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9. OECD (The Organization for Economic Co-operation and Development)It is an international organization of those developed countries

that accept the principles of representative democracy anda free market economy, The organization provides a settingwhere governments can compare policy experiences, seekanswers to common problems, identify good practice and

co-ordinate domestic and international policies. Themandate of the OECD is very broad, as it covers alleconomic, environmental and social issues. It is a forumwhere peer pressure can act as a powerful incentive to

improve policy and implement soft law non-bindinginstruments that can occasionally lead to binding treaties.10.Other influential Economies

India, U.K., Japan are powerful economies which influenceworld transactions in terms of trade, investments, etc.


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Role of Central Banks in International Banking and BusinessIn growth phase of international banking and economic crisis,following role of central banks in international business isImportant:1. Risk assessment : Central banks need to assess risks on

a system-wide basis taking into consideration the linkages

between the real economy and financial markets as well asamong financial institutions. Such assessment will be thebasis for policy actions regarding financial system stability.

2. Monetary Policy : Monetary policy be conducted prudently

in an environment where asset prices are rising, credit andleverage are increasing and the economy is growing,strongly signaling a need for policy tightening.


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3. Revamping Prudential Regulation :Central banks, which are responsible for the stability of thefinancial system, can and should play a constructive role indesigning prudential rules. The behaviour of financialinstitutions is strongly influenced both by macro economicenvironment and by prudential rules.

4. Strengthening the provision of banking services :The banking services need to be strengthened. In recentyears, central banks have taken multiple steps to enhancethe stability and efficiency of the payment and settlement

system, such as steps to minimize settlement risksemerging from time zone differences in foreign exchangetransactions and enhancing payment and settlementsystem oversight. During this crisis, in the area of moneymarket operations, central banks have expanded the rangeof collateral and counterparties, and major


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central banks have conducted co-ordinated operations toprovide US dollar liquidity. These measures have helpedbring back stability to financial markets.

5. Settlement Systems :During the day, incoming payment instructions andoutgoing payment instructions are not completely

synchronised, and thus the need for intraday creditemerges. This is most typical in foreign exchangetransactions. Additionally, market volatility can suddenlyincrease short term funding needs, as financial institutions

require additional collateral under margining arrangementsAs a result, in the process of financial transactions,leakages of liquidity or temporary storage of liquiditybecome inevitable, and seams emerge. In times of crisis,the shortage of liquidity caused by such seams can


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aggravate the situation. Central banks will need tocontinuously review how the banking services can fill suchgaps.

G 8 Countries

1. Canada2. France3. Germany4. Italy

5. Japan6. Russia7. U K8. U S A


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G 20 Countries1. Argentina2. Australia3. Brazil4. Canada5. China

6. EU7. France8. Germany9. India

10.Indonesia11.Italy12.Japan13.Mexico14.Russia


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G 20 Countries --- contd.15.Saudi Arabia16.South Africa17.Republic of Korea (South Korea)18.Turkey19.UK

20.USA


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O P E C

1. Algeria2. Angola3. Ecuador4. Iran

5. Iraq6. Kuwait7. Libya8. Nigeria

9. Quatar10.Saudi Arabia11.U A E12.Venezuela


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Thank you

07 int busi. int fin & trade orgs. sess 10, 11, 12

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