International Business

International Finance & Trade Organisations

Prof Bharat Nadkarni

International Business : Prof Bharat Nadkarni

Components of Balance of Payments

Item (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 Credit Debit Net

International Business : Prof Bharat Nadkarni

Balance of Payment is a standard double entry accounting record to capture all the transactions of an economy with Rest of the World. Balance of Payment always balances as it is double entry account. There may be deficit or surplus in current and/or capital account or any sub account. But final adjustment happens by increasing or reducing Forex reserves.

In practical sense it means that, the government has to balance the BoP account either by borrowing or reducing reserves.

International Business : Prof Bharat Nadkarni

Important Driving factors and entities of World Economy 1. WTO (The World Trade Organization) WTO deals with the rules of trade between nations at a global or near-global level; it is responsible for negotiating and implementing new trade agreements, and is in charge of policing member countries adherence to all the WTO agreements, signed by the bulk of the worlds trading nations and ratified in their parliaments. Hence WTO is a prime driving factor for current account transactions across the globe. The twin international financial institutions, which emerged during the post war deliberations, are the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD). WTO, is now viewed as the third pillar of the global business. IMF mostly

International Business : Prof Bharat Nadkarni

Provides short term international finance and the IBRD provides long term international finance, while WTO enlarges the 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. WTO enlarged the market access opportunities and provided efficient rules for undistorted competition among the world countries. WTO contributes to the strengthening the institutional framework for business relations among member countries.

International Business : Prof Bharat Nadkarni

Though, it is expected that WTO would play a significant role in expanding the world trade, it is also cautioned that WTO has to face challenges. The WTO had to contend with a number of disputes during 1995-2007. The disputes were also relating to the 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-engineering and reprocessing the world trade. Deal on cheap drugs Doha declaration in 2003 on TRIPs agreement and public health.

International Business : Prof Bharat Nadkarni Ministerial conferences of the WTO First conference held in 1996 at Singapore. Second conference held in 1998 at Geneva. Third conference held in 1999 at Seattle.
Reaffirmation of ILO and commitment to core labour standards.
Ensure implementation of existing multilateral agreements, accepting and transparent rule-based trading system. open

Fourth conference held in 2001 at Doha.

This meeting was a failure as the developing nations jointly protested against the lack of transparency and imposition of views of the rich countries on the poor countries in the negotiations. Doha declaration on TRIPs agreement and public health, deal on cheap drugs. Reductions in industrial tariffs, phasing out agricultural export subsidies etc. Drastic reduction in agriculture subsidies undue advantages of US & EU.

Fifth conference held in 2003 at Cancun, Maxico. Sixth conference held in 2005 at Hong Kong.

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

International Business : Prof Bharat Nadkarni

India and WTO India 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 agriculture sector is affected badly compared to industrial sector by dumping. 2. IMF (International Monetory Fund) IMF provides loans to countries experiencing balance of payment problems. Also it promotes capital account convertibility. Hence on both these factors, IMFs role is crucial in world economic transactions.

International Business : Prof Bharat Nadkarni

IMF (International Monetory Fund) .. Contd. The IMF is an organization of 185 countries, working to foster global monetary co-operation, secure financial stability, facilitate international trade, promote high employment and sustainable 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 their international reserves; stabilize their currencies; continue paying for imports; and restore conditions for strong economic growth. Unlike development banks, the IMF does not lend for specific projects. IMF account in BoP denotes quota contributions to IMF (reserve trench) and SDR are special drawing rights.

International Business : Prof Bharat Nadkarni

IMF (International Monetory Fund) .. Contd. The work of the IMF is of three main types. Surveillance involves the monitoring of economic and financial developments, and the provision of policy advice, aimed especially at crisis prevention. The IMF also lends to countries with balance of payment difficulties, to provide temporary financing and to support policies aimed at correcting the underlying problems. Third, the IMF provides countries with technical assistance and training in its areas of expertise. The SDR is an international reserve asset, created by the IMF in 1969 to supplement the existing official reserves of member countries. SDRs are allocated to member countries in proportion to their IMF quotas. The SDR also serves as the unit of account of the IMF and some other international organizations. Its value is based on a basket of key international currencies.

International Business : Prof Bharat Nadkarni

3. World Bank World Bank works on World free of poverty. Thus it is a developmental institution. It extends help in the form of soft loans and contributions to underprivileged societies and regions. 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 IDA provide loans to Governments for infrastructure, education and 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 desirous of setting up plants in LDCs. MIGA guarantees such cross border investments against political risks.

International Business : Prof Bharat Nadkarni

4. OPEC (The Organization of the Petroleum Exporting Countries) OPEC is made up of 12 developing nations whose economies rely on oil export revenues. One of OPECs primary missions is to achieve stable oil prices, which are fair and reasonable for producers and consumers. OPECs influence on the market has not always been a stabilizing one. It alarmed the world and triggered high inflation across both the developing and developed world through its use of the oil weapon in the 1973 oil crisis. OPEC nations account for two-thirds of the worlds oil reserves, and over 40% of the worlds oil production, affording them considerable control over the global market. 5. European Union (EU) The EU is a supranational and intergovernmental union of twenty-seven states. It was established in 1992 by the Treaty on EU (The Maastricht Treaty), and is the de facto successor to the six-member European Economic

International Business : Prof Bharat Nadkarni

Community (EEC) founded in 1957. Since then new accessions have raised its number of member states, and competences have expanded. The EU is the current stage of a continuing open-ended process of European integration. The EU is one of the largest economic and political entities in the world, with 494 million people and a combined nominal GDP of US$ 14.5 trillion in 2006. The union is a single market with common trade policy, a common Agriculture/ Fisheries policy, and a Regional policy to assist underdeveloped regions. It introduced a single currency, the euro, adopted by 13 member countries. The EU is the largest exporter in the world and the second largest importer. On the world stage the Union is gaining greater influence and ability to speak as a bloc. All 27 member states are represented in the WTO through its Trade Commissioner.

International Business : Prof Bharat Nadkarni

6. The U S Economy The United States is one of the wealthiest countries in the world, with a GDP for 2006 of 13.22 trillion dollars. The US has a mixed economy where corporations and other private firms make a majority of microeconomic decisions regulated by the government. Since the end of World War II, the US economy has been characterised by relatively steady growth and low unemployment. The US has a relatively high median household income compared to its fellow developed nations. The Government actively promotes exports and seeks to prevent foreign countries from maintaining trade barriers that restrict imports. 7. China Over 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

International Business : Prof Bharat Nadkarni

less than 1 percent to almost 6 percent. As a result, China is now the sixth largest economy (at market exchange rates) and the fourth largest trader in the world, after US, EU and Japan. Not only have its exports gained significant market share abroad, but its rapidly rising imports have supported the strong performance of neighboring economies and contributed to the recent strength in world commodity prices. Chinas economic weight and its integration into the world economy are likely to continue increasing rapidly. Industrial-country exports to China, particularly of skill and technology intensive items, are likely to continue increasing rapidly; certain sectors may undergo job losses as Chinese firms market share expands. Similarly, some developing countries facing increased Chinese competition may experience an erosion of their market share for unskilled-labour-intensive manufactures. In addition, rapid growth in China may significantly

International Business : Prof Bharat Nadkarni

increase world prices for some commodities, including agricultural products and energy. 8. Central Banks and Governments of Most Countries Government decisions and policies drive the trade and capital flow across the globe. Despite the size and importance of the foreign exchange market, it remains largely unregulated. There is no international organization that supervises it, nor any institution that sets rules. However, since the advent of the flexible exchange rate system in 1973, governments and central banks, such as the Federal Reserve System in the United States, occasionally intervene to maintain the stability in the Forex market. To restore stability, the central banks often work together. Also central banks policies influence domestic money supply, inflation and interest rates which in turn affect world trade and investment flows.

International Business : Prof Bharat Nadkarni

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 and a free market economy, The organization provides a setting where governments can compare policy experiences, seek answers to common problems, identify good practice and co-ordinate domestic and international policies. The mandate of the OECD is very broad, as it covers all economic, environmental and social issues. It is a forum where peer pressure can act as a powerful incentive to improve policy and implement soft law non-binding instruments that can occasionally lead to binding treaties. 10. Other influential Economies India, U.K., Japan are powerful economies which influence world transactions in terms of trade, investments, etc.

International Business : Prof Bharat Nadkarni

Role of Central Banks in International Banking and Business In growth phase of international banking and economic crisis, following role of central banks in international business is Important: 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 as among financial institutions. Such assessment will be the basis for policy actions regarding financial system stability. 2. Monetary Policy : Monetary policy be conducted prudently in an environment where asset prices are rising, credit and leverage are increasing and the economy is growing, strongly signaling a need for policy tightening.

International Business : Prof Bharat Nadkarni

3. Revamping Prudential Regulation : Central banks, which are responsible for the stability of the financial system, can and should play a constructive role in designing prudential rules. The behaviour of financial institutions is strongly influenced both by macro economic environment and by prudential rules. 4. Strengthening the provision of banking services : The banking services need to be strengthened. In recent years, central banks have taken multiple steps to enhance the stability and efficiency of the payment and settlement system, such as steps to minimize settlement risks emerging from time zone differences in foreign exchange transactions and enhancing payment and settlement system oversight. During this crisis, in the area of money market operations, central banks have expanded the range of collateral and counterparties, and major

International Business : Prof Bharat Nadkarni

central banks have conducted co-ordinated operations to provide US dollar liquidity. These measures have helped bring back stability to financial markets. 5. Settlement Systems : During the day, incoming payment instructions and outgoing payment instructions are not completely synchronised, and thus the need for intraday credit emerges. This is most typical in foreign exchange transactions. Additionally, market volatility can suddenly increase short term funding needs, as financial institutions require additional collateral under margining arrangements As a result, in the process of financial transactions, leakages of liquidity or temporary storage of liquidity become inevitable, and seams emerge. In times of crisis, the shortage of liquidity caused by such seams can

International Business : Prof Bharat Nadkarni

aggravate the situation. Central banks will need to continuously review how the banking services can fill such gaps.

G 8 Countries
1. 2. 3. 4. 5. 6. 7. 8. Canada France Germany Italy Japan Russia UK USA

International Business : Prof Bharat Nadkarni

G 20 Countries 1. Argentina 2. Australia 3. Brazil 4. Canada 5. China 6. EU 7. France 8. Germany 9. India 10. Indonesia 11. Italy 12. Japan 13. Mexico 14. Russia

International Business : Prof Bharat Nadkarni

G 20 Countries --- contd. 15. Saudi Arabia 16. South Africa 17. Republic of Korea (South Korea) 18. Turkey 19. UK 20. USA

International Business : Prof Bharat Nadkarni

OPEC 1. Algeria 2. Angola 3. Ecuador 4. Iran 5. Iraq 6. Kuwait 7. Libya 8. Nigeria 9. Quatar 10. Saudi Arabia 11. U A E 12. Venezuela

Thank you