International Business Environment Full Syllabus

INTERNATIONAL BUSINESS ENVIRONMENT

The objective of this course is to introduce students to the contemporary issues in Global
Business that illustrates the unique challenges faced by managers in the global business
environment and to assist students to develop a truly global perspective.

UNIT-I: Globalization – Introduction to the field of Global Business, Significance, Nature and
Scope of Global Business, Modes of Global business – Global Business Environment- Social,
Cultural, Economic, Political and Ecological factors

UNIT-II: Theories of International Trade, Trading Environment of International Trade - Free
Trade Vs Protection- Tariff and Non-tariff Barriers –Trade Blocks.

UNIT-III: Balance of Payment: Concept, Components of BOP, Disequilibrium in BOP –
Causes for disequilibrium and Methods to correct the disequilibrium in Balance of Payment.

UNIT-IV: Foreign Exchange Market: Nature of transactions in foreign exchange market and
types of players, Exchange rate determination, Convertibility of rupee – Euro currency market.

UNIT-V: World Trade Organization – Objectives, Organization Structure and Functioning,
WTO and India, International liquidity: Problems of liquidity; International Financial institutions
- IMF, IBRD, IFC, ADB – Their role in managing international liquidity problems

Text Books

Daniel, John D and Rdebangh, Lee H. International Business, 6h ed., New York, Addision Wesley, 2007.

Reference Books

1. Michael R. Czinkota, Iikka A. Ronkainen & Michael H. Moffett., International Business,
Cengage Learning, 2008.
2. Bhall, V.K. and S. Shivaramu, International Business Environment and Business, New Delhi,
Anmol, 2003
3. Charles W. L. Hill, Irwin , International Business, 3rd Edition, McGraw-Hill, 2000
4. Francis Cherunilam, International Business Environment, Himalaya Publishing House, 2008.
5. K.Aswathappa, International Business, Tata Mc-Graw Hill Publishing Company Ltd., New
Delhi, 2004
6. Roger Benett, International Business, Pearson Education, New Delhi, 2006
7. S. Shiva Ramu, Globalisation and Indian Liberalisation, South Asia Publication, New
Delhi,2007.
8. Sundaram & Black , International Business Environment, The Text and Cases, , Prentice Hall
of India
9. Shim Jack, The Directory of International Business Terms.

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UNIT-I: Globalization – Introduction to the field of Global Business, Significance, Nature and
Scope of Global Business, Modes of Global business – Global Business Environment- Social,
Cultural, Economic, Political and Ecological factors

International Business Environment
International Business Environment
Learning Objectives
• To understand the history and impact of international business.
• To learn the definition of international business.
• To recognize the growth of global linkages today.
• To appreciate the opportunities and challenges offered by international
business.
Need for International Business
• More and more firms around the world are going global, including:
– Manufacturing firms
– Service companies (i.e. banks, insurance, consulting firms)
– Art, film, and music companies
• International business:
– causes the flow of ideas, services, and capital across the world
– offers consumers new choices
– permits the acquisition of a wider variety of products
– facilitates the mobility of labor, capital, and technology
– provides challenging employment opportunities
– reallocates resources, makes preferential choices, and shifts
activities to a global level
What is International Business?
International business consists of transactions that are devised and carried
out across national borders to satisfy the objectives of individuals,
companies, and organizations.
International Business Questions
• How will an idea, good, or service fit into the international market?
• Should trade or investment be used to enter a foreign market?
• Should supplies be obtained domestically or abroad?
• What product adjustments are necessary to be responsive to local
conditions?
• What are the threats from global competitors, and how can these
threats be counteracted?


Global Links Today
• International business has created a network of global links that bind
countries, institutions, and individuals with trade, financial markets,
technology, and living standards.
– For example, a reduction in coffee production in Brazil would
affect individuals and economies worldwide.
Recent Changes in International Business
• Total world trade declined dramatically after 2000, but is again on the
rise.
• The rate of globalization is accelerating.
• Regionalization is taking place, resulting in trading blocs.
• The participation of countries in world trade is shifting.
The Composition of Trade
• Between the 1960’s and the 1990’s the importance of manufactured
goods increased while the role of primary commodities (i.e. rubber or
mining) had decreased.
• More recently, there has been a shift of manufacturing to countries
with emerging economies.
• There has been an increase in the area of services trade in recent
years.

Globalization
• Because of globalization, for the first time in history, the availability
of international products and services can be accessed by individuals in
many countries, from diverse economic backgrounds.
The Globalization Debate
• Antiglobalization Protest
• Globalization, Jobs and Debate
• Globalization, Labour Policies and the Environment
• Globalization and National Sovereignty
• Globalization and the National Sovereignty


MODES OF GLOBAL BUSINESS

Learning Objectives
• To learn how firms gradually progress through an internationalization
process.
• To understand the strategic effects of internationalization.
• To study the various modes of entering international markets.
NEED
• Managerial commitment is critical because foreign market penetration
requires a vast amount of market development activity, sensitivity
toward foreign environments, research, and innovation.
The Steps to Developing International Commitment
• Become aware of international business opportunities.
• Determine the degree of the firm’s internationalization.
• Decide the timing of when to start the internationalization process and
how quickly it should progress.

Modes of International Business
• Licensing
• Franchising
• Inter firm cooperation
• Importing
• Exporting
• Foreign Direct
• Investment

Licensing
• The property licensed may include:
– Patents: A patent is a set of exclusive rights granted by a state
to an inventor or his assignee for a limited period of time in
exchange for a disclosure of an invention.
– Trademarks:
 A trademark or trade mark,[1] identified by the symbols ™ (not
yet registered) and ® (registered), is a distinctive sign or
indicator used by an individual, business organization or other
legal entity to identify that the products and/or services to

consumers with which the trademark appears originate from a
unique source of origin, and to distinguish its products or
services from those of other entities.
 A trademark is a type of intellectual property, and typically a
name, word, phrase, logo, symbol, design, image, or a
combination of these elements.[2]
– Copyrights: Copyright is a form of intellectual property which
gives the creator of an original work exclusive rights for a certain
time period in relation to that work, including its publication,
distribution and adaptation; after which time the work is said to
enter the public domain.
– Technology
– Technical know-how
– Specific business skills

Benefits and Costs of Licensing

Why go in for Licensing
• Less risk of capital and no involvement with foreign
customers
• Avoids host-country regulations
• Allows a company to test the market
• Avoids cultural problems
• Trademark licensing—permits the names or logos to be
used on products made in foreign market
• May be creating own future competitor


Franchising
• The major forms of franchising are:
– Manufacturer-retailer systems such as car dealerships,
– Manufacturer-wholesaler systems such as soft drink, companies
– Service-firm retailer systems such as fast-food outlets.
Key Reasons for Franchising
- Financial Gain
- Market Potential
- Saturated Domestic Markets
Need for Franchising
• Internationally, the firm must be able to offer unique products or
selling propositions
• Must offer a high degree of standardization, but be adaptable to local
circumstances
• Growing fast internationally, but government intervention is a major
problem
• Selection and training of franchisees is also a problem area

Inter firm Cooperation
• Reasons for inter firm cooperation include:
– Market development
– To share risk or resources
– To block and co-opt competitors
Types of Inter firm Competition

 Informal Cooperation
 It has not binding agreement. It is where one country shows concern
to other country.
 Ex.: At the times of Tsunami, countries around the globe helped
Indonesia to overcome that tragedy.
 Consortia
 It is where the firm shares its opportunities as well as its
competences along with other companies as a result of the inter firm
competition.
 There may be new equity sharing or none. There will be more than 2
partners.
 Contractual Agreements
 Strategic alliance partners may join forces for R&D, marketing,
production, licensing, cross-licensing, cross-market activities, or
outsourcing.
 Contract manufacturing allows the corporation to separate the
physical production of goods from the R&D and marketing stages.

 Management contracts involve selling one’s expertise in running a
company while avoiding the risk or benefit of ownership.
 A turnkey operation is a contractual agreement that permits a
client to acquire a complete system following its completion.
 Equity Participation
 Some companies have acquired minority ownerships in companies
that have strategic importance for them.
 Reasons for engaging in equity participation include:
- It ensures supplier ability
- It builds working relationships
- It creates market entry and support of global operations
 FDI
 It is of 2 types
- Equity participation
- Non –Equity participation (Portfolio Investment)

Global Business Environment

Culture Environment
Culture is an integrated system of learned behavior patterns that are characteristic of
the members of any given society.
Elements of Social and Culture
 Language (verbal and nonverbal)
 Religion
 Values and Attitudes
 Manners and Customs
 Material Elements
 Aesthetics
 Education
 Social Institutions

Political Environment
 The Home Country Perspective
Major areas of governmental activity that are of concern to the international business
manager:
– Embargoes and Sanctions
– Export Controls
– Regulation of International
– Business Behavior


 Host Country Political and Legal Environment
Political Action and Risk
o Varies widely from country to country
o Three Types of Political Risk
o Ownership Risk
Exposes property and life
o Operating Risk
Interference with the ongoing operations of a firm
o Transfer Risk
Limitations on the outflow of funds
Political Risk May Involve
• Confiscation
– The government takeover of a firm without compensation to the owners.
• Expropriation
– A form of government takeover in which the firm’s owners are
compensated.
• Domestication
– The government demands transfer of ownership and management
responsibility.

Economic Risk
o Less dangerous, but more common

Economic Environment
• Economic Size
• Economic Systems
• Key Macroeconomic Indicators
• Economies in Transition


UNIT-II: Theories of International Trade, Trading Environment of International Trade - Free
Trade Vs Protection- Tariff and Non-tariff Barriers –Trade Blocks.

(Refer Michael R. Czinkota, Iikka A. Ronkainen & Michael H. Moffett., International Business,
Cengage Learning, 2008.)

Theories of International Trade
The Theories of Trade
Learning Objectives
• To understand the traditional arguments of how and why international
trade improves the welfare of all countries
• To explore the similarities and distinctions between international trade and
international investment
Evolution of Trade Theory
• The Age of Mercantilism (pg no. 150)
• Classical Trade Theory (pg no. 151-153)
• Factor Proportions Trade Theory
• International Investment and Product Cycle Theory
• The New Trade Theory: Strategic Trade
Mercantilism
• Mixed exchange through trade with accumulation of wealth
• Conducted under authority of government
• Demise of mercantilism inevitable
Classical Trade Theory
• The Theory of Absolute Advantage
– The ability of a country to produce a product with fewer inputs than
another country
• The Theory of Comparative Advantage
– The notion that although a country may produce both products more
cheaply than another country, it is relatively better at producing one
product than the other

Classical Trade Theory Contributions (pg no. 159)
• Adam Smith—Division of Labor
– Industrial societies increase output using same labor-hours as pre-
industrial society
• David Ricardo—Comparative Advantage
– Countries with no obvious reason for trade can specialize in production,
and trade for products they do not produce

• Gains From Trade
– A nation can achieve consumption levels beyond what it could produce
by itself

Factor Proportions Trade Theory
• Developed by Eli Heckscher
• Expanded by Bertil Ohlin
Considers Two Factors of Production (pg no. 159-160)
• Labor
• Capital

A country that is relatively labor abundant (capital abundant) should specialize in the
production and export of that product which is relatively labor intensive (capital
intensive).

Product Cycle Theory (pg no. 163)
• Raymond Vernon
• Focus on the product, not its factor proportions
• Two technology-based premises

Product Cycle Theory: (pg no. 163)
Vernon’s Premises
• Technical innovations leading to new and profitable products require large
quantities of capital and skilled labor
• The product and the methods for manufacture go through three stages of
maturation
Stages of the Product Cycle (pg no. 164)
• The New Product
• The Maturing Product
• The Standardized Product
The Product Cycle and Trade Implications (pg no. 165)
• Increased emphasis on technology’s impact on product cost
• Explained international investment
• Limitations
– Most appropriate for technology-based products
– Some products not easily characterized by stages of maturity
– Most relevant to products produced through mass production


The New Trade Theory:
Strategic Trade
Two New Contributions
• Paul Krugman-How trade is altered when markets are not perfectly
competitive
• Michael Porter-Examined competitiveness of industries on a global basis
Strategic Trade (pg no. 167)
Krugman’s Economics of Scale:
• Internal Economies of Scale (pg no. 168)
• External Economies of Scale (pg no. 169)
Strategic Trade (pg no. 169-171)
• Government can play a beneficial role when markets are not purely
competitive
• Theory expands to government’s role in international trade
• Four circumstances exist that involve imperfect competition in which strategic
trade may apply
• The Four Circumstances Involving Imperfect Competition:
• 1.Price
• 2.Cost
• 3. Repetition
• 4.Externalities
•
Barriers to Trade (pg no. 82-86)

Why do countries produce goods and services that could be more cheaply purchased
from other countries?
Reasons:
• To encourage local production
• To help local firms export
• To protect local jobs
• Protect infant industries
• Reduce dependency
• Encourage local and foreign direct investment
• Reduce balance of payment problems
• Reduce or avoid dumping
Commonly used barriers
• Price based barriers- Ad valorem
• Quantity limits-quotas- embargo
• International price fixing- cartel
• Financial limits- exchange control
• Foreign investment controls-minority stakes, limiting profits etc
Tariffs


 Tariff barriers affect prices; nontariff barriers may affect either price or quantity
directly.
 A tariff (sometimes called duty) is the most common type of trade control and is
a tax that governments levy on an official boundary.
 Tariffs also serve as a source of government revenue.
• Export tariff
If the tariff collected by the exporting country are called Export tariff
• Import tariff
If the tariff collected by importing country, it is an import tariff.
• Transit tariff
If the tariff collected by a country through which the goods have passed, it is an
transit tariff.
• Specific duty
A government may asses a tariff on a per-unit basis, in which case it is applying
specific duty.
• Ad valorem duty
It may access a tariff as a percentage of the value of the item, in which case it is
an ad valorem duty
• Compound duty
If it accesses both a specific duty & an ad valorem duty on the same product, the
combination is a compound duty.
• Dumping – i.e., selling goods overseas, or both. Dumping ranges from predatory
to unintentional. Predatory dumping is the tactic of a foreign firm that
intentionally sells at a loss in another country to increase market share at the
expense of domestic producers. This amounts to an international price war.
Unintentional dumping is the result of time lags between the date of sales
transactions, shipment & arrival.

Non – tariff barriers- rules , regulations and bureaucratic
• Quotas
 The quota is the most common type of quantitative imports or export
restriction.
 An import quota prohibits or limits the quantity of a product that can be
imported in a year.
 Quota raise prices just as tariffs do but, being defined in physical terms, they
directly affect the amount of imports by putting an absolute ceiling on
supply.
 Quota generate revenues for those companies that are able to obtain a portion
of the intentionally limited supply of the product that they can then sell to
local customers.
• Buy national restrictions
 Another form of quantitative trade control is “Buy local” legislation or “buy
national” restrictions.


 Government purchases are a large part of total expenditures in many
countries; typically governments favor domestic products.
 Sometimes governments specify a domestic content restriction- i.e., a certain
percentage of products must be of local origin. Sometimes they favor
domestic producers by establishing price mechanisms.
• Customs valuation
 It is difficult for customs officials to determine if invoice prices are honest
- They may arbitrarily increase value
- Valuation procedures have been developed.
• Technical barriers
• Restriction on services
• Counter trade
 It is a sale that encompasses more than an exchange of goods, services or idea
for money.
 In International Market, Counter trade Transactions "are those transactions
that have as a basic characteristic - linkage, legal or otherwise between
exports & imports of goods or services in addition to or in places of Financial
settlements”
Trade bloc
• A trade bloc is a type of intergovernmental agreement, often part of a regional
intergovernmental organization, where regional barriers to trade (tariffs and
non-tariff barriers) are reduced or eliminated among the participating states.[1]
• One of the first economic blocs was the German Customs Union (Zollverein)
initiated in 1834, formed on the basis of the German Confederation and
subsequently German Empire from 1871.
• Surges of trade bloc formation were seen in the 1960s and 1970s, as well as in the
1990s after the collapse of Communism.
• By 1997, more than 50% of all world commerce was conducted under the
auspices of regional trade blocs.[2]
• Economist Jeffrey J. Scott of the Peterson Institute for International Economics
notes that members of successful trade blocs usually share four common traits:
similar levels of per capita GNP, geographic proximity, similar or compatible
trading regimes, and political commitment to regional organization.[3]
• Advocates of worldwide free trade are generally opposed to trading blocs,
which, they argue, encourage regional as opposed to global free trade.[4]
• Scholars and economists continue to debate whether regional trade blocs are
leading to a more fragmented world economy or encouraging the extension of
the existing global multilateral trading system.
• Trade blocs can be stand-alone agreements between several states (such as
NAFTA) or part of a regional organization (such as the European Union).
• Depending on the level of economic integration, trade blocs can fall into different
categories, such as:[7] preferential trading areas, free trade areas, customs
unions, common markets and economic and monetary unions.

UNIT-III: Balance of Payment: Concept, Components of BOP, and Disequilibrium in BOP –
Causes for disequilibrium and Methods to correct the disequilibrium in Balance of Payment.

The Balance of Payments
Learning Objectives
• To understand the fundamental principles of how countries measure
international business activity, the balance of payments

• To understand the critical differences between trade in merchandise and services

• To understand how countries with different government policies toward
international trade and investments, or different levels of economic
development, differ in their balance of payments

Introduction

(Refer Page no. 182, Michael R. Czinkota, Iikka A. Ronkainen & Michael H. Moffett.,
International Business, Cengage Learning, 2008.)

• The measurement of all international economic transactions between the
residents of a country and foreign residents is called the balance of payments
(BOP)

• The two major sub accounts of the balance of payments are:

– Current account

– Capital account

– Reserves

Current Account


• I.A. goods, services, and income: 1.Merchandise

• 2. Shipment and other transportation

• 3. Travel

• 4. Investment income

• 5. Other official

• 6. Other private

• B. Unrequited transfers:

• 1. Private

• 2. Officials

Capital Account


• II.C. Capital excluding reserves

• 1. Direct investment

• 2. Portfolio investment

• 3.Other long-term, official

• 4. Other long- term, Private

• 5. Other short- term, official

• 6. Other short – term, private

Reserves
• III. D. Reserves

• 1. Monetary gold

• 2. Special Drawing Rights

• 3. IMF reserve position

• 4. Foreign Exchange assets

• Reserve assets consist of those external assets that are readily available to and
controlled by monetary authorities for direct financing of payments imbalances, for
indirectly regulating the magnitude of such imbalances through intervention in
exchange markets to affect the currency exchange rate and/or for other purposes.


• The category of reserve assets in the IMF's Balance of Payments Manual, Fifth
Edition (BPM5) comprises:

- Monetary gold;
- Special drawing rights (SDRs);
- reserve position in the Fund;
- Foreign exchange assets (consisting of currency and deposits and securities);
and
- Other claims.

Balance of payment equilibrium
• Occurs when surplus or deficit is eliminated from the BOP

• Causes for disequilibrium

• 1. National output and National spending

• 2. Money supply

• 3. Exchange Rate

• 4. Interest rate

Balance of Payment Equilibrium:
Equilibrium is that state of balance of payment over the relevant time period which
makes it possible to sustain an open economy without severe unemployment on a
continuing basis.
In BOP equilibrium, we have to make certain assumptions for the simplicity of our
analysis. These assumptions are:
(a) A given supply curve,
(b) No change in price expectations,
(c) Internal capital flows depend on the level of the interest rate at home and abroad,
(d) No accumulation of real capital.
It is evident that the balance of payments depends on both the level of domestic
economic activity and the level of domestic interest rate.
Additional
FE curve is the set of all transactions of income and interest rate levels for which the
overall payments balance is in equilibrium, i.e. neither in surplus nor in deficit (as
shown in the following figure).
In the above figure, FE curve showing equilibrium in BOP. All the points above FE
curve show surpluses in BOP and all the points below FE show deficits. B is the target
point of policy at which the nation has achieved both internal balance (full employment
without excessive inflation) and external balance.
(Needed)


Types of BOP Equilibrium:
There are two types of BOP equilibrium, i.e., static equilibrium and dynamic
equilibrium:
(a) Static Equilibrium: The distinction between static and dynamic equilibrium
depends upon the time period. In static equilibrium, exports equal imports including
exports and imports of services as well as goods and the other items on the BOPs –
short term capital, long term capital and monetary gold are on balance, zero. Not only
should the BOPs be in equilibrium, but also national money incomes should be in
equilibrium vis-à-vis money incomes abroad. The foreign exchange rate must also be in
equilibrium.

(b) Dynamic Equilibrium: The condition of dynamic equilibrium for short periods of
time is that exports and imports differ by the amount of short-term capital movements
and gold (net) and there are no large destabilising short-term capital movements.
Additional
The condition for dynamic equilibrium in the long run is that exports and imports
differ by the amount of long term autonomous capital movements made in a normal
direction, i.e. from the low-interest rate country to those with high rates. When the BOP
of a country is in equilibrium, the demand for domestic currency is equal to its supply.
The demand and supply situation is thus neither favourable nor unfavourable. If the
BOP moves against a country, adjustments must be made by encouraging exports of
goods, services or other forms of exports or by discouraging imports of all kinds. No
country can have a permanently unfavourable BOP, though it is possible – and is quite
common for some countries – to have a permanently unfavourable balance of trade.
Total liabilities and total assets of nations, as of individuals, must balance in the long-
run.
(Needed)
Types and Causes of BOP Disequilibrium:
There are three main types of BOP Disequilibrium which are discussed below:
(a) Cyclical disequilibrium,
(b) Secular disequilibrium, and
(c) Structural Disequilibrium.
(a) Cyclical Disequilibrium: Cyclical disequilibrium occurs because of two reasons.
First, two countries may be passing through different paths of business cycle. Second, the
countries may be following the same path but the income elasticities of demand or price
elasticities of demand are different. If prices rise in prosperity and decline in depression, a
country with a price elasticity for imports greater than unity will experience a tendency
for decline in the value of imports in prosperity; while those for which import price
elasticity is less than one will experience a tendency for increase. (These tendencies may
be overshadowed by the effects of income changes, of course. Conversely, as prices
decline in depression, the elastic demand will bring about an increase in imports, the
inelastic demand a decrease. )


(b) Secular Disequilibrium: The secular or long-run disequilibrium in BOP occur because of
long-run and deep seated changes in an economy as it advances from one stage of growth to
another. (The current account follows a varying pattern from one state to another. In the
initial stages of development, domestic investment exceeds domestic savings and
imports exceed exports.
Disequilibrium arises owing to lack of sufficient funds available to finance the import
surplus, or the import surplus is not covered by available capital from abroad. Then
comes a stage when domestic savings tend to exceed domestic investment and exports
outrun imports. Disequilibrium may result, because the long-term capital outflow falls
short of the surplus savings or because surplus savings exceed the amount of
investment opportunities abroad. At a still later stage, domestic savings tend to equal
domestic investment and long term capital movements are on balance, zero. )
(c) Structural Disequilibrium: Structural disequilibrium can be further bifurcated into:
(i) Structural Disequilibrium at Goods Level: Structural disequilibrium at goods level
occurs when a change in demand or supply of exports or imports alters
a previously existing equilibrium, or when a change occurs in the basic circumstances under
which income is earned or spent abroad, in both cases without the requisite parallel changes
elsewhere in the economy. (Suppose the demand for Pakistani handicrafts falls off.
The resources engaged in the production of these handicrafts must shift to some
other line or the country must restrict imports, otherwise the country will experience
a structural disequilibrium.

A deficit arising from a structural change can be filled by increased production or
decreased expenditure, which in turn affect international transactions in increased
exports or decreased imports. Actually it is not so easy, because the resources are
relatively immobile and expenditure not readily compressible. Disinflation or
depreciation may be called for to correct a serious disequilibrium.)

(ii) Structural Disequilibrium at Factors Level: Structural disequilibrium at the
factor level results from factor prices which fall to reflect accurately factor endowments, i.e.,
when factor prices are out of line with factor endowments, distort the structure of production
from the allocation of resources which appropriate factor prices would have indicated. If, for
instance, the price of labour is too high, it will be used more sparingly and the country
will import goods with a higher labour content. This will lead to unemployment,
upsetting the balance in the economy.
General Measures to Correct BOP Disequilibrium:
To correct the different types of disequilibrium in BOP the following general measures
are used:
(a) Exchange depreciation (price effect) or devaluation (by government),
(b) Deflate the currency,
(c) Tariffs,


(d) Import quotas, and
(e) Export duties.
(a) Exchange Depreciation (Price Effect) or Devaluation (by Government): Exchange
depreciation means a reduction in the value of a currency in terms of gold or other currencies
under ‘free market’ conditions and coming about through a decline in the demand for that
currency in relation to the supply. This is usually applied to ‘floating exchange rates’.
The purpose of this method is to depreciate the external exchange value of the home
currency, thus cheapening the domestic goods for the foreigner. Whereas, under ‘fixed-
parity system’ or ‘fixed exchange rate’, the reduction of currency value in against the gold or
other currencies is official and not market based. This official reduction of exchange rate is called
‘devaluation’. The purpose of both ‘depreciation’ and ‘devaluation’ is to cheapen the
domestic goods and boost up the exports. (But the governments regarded devaluation
as a means of correcting a balance of payments deficit only as a measure of last resort.
They predominantly relied on deflation of the home market and international
borrowing. Devaluation or depreciation of the exchange rate can correct a balance of
payment deficit because it lowers the price of exports in terms of foreign currencies and
raises the price of imports on the home market. This does not necessarily succeed in its
purpose. The immediate effect is similar to an unfavourable change in the TOT. For the
resources devoted to the production of exports, less foreign exchange is earned with
which to pay for imports. If the level of imports remained the same, more output
would have to be diverted to exports and away from home consumption and
investment simply to maintain the status quo. Devaluation or depreciation could lead
to a loss of real income without any benefit to the balance of payments. )
Pakistan has always faced negative BOT except for three years, i.e. 1947-48, 1950-51 and
1972-73. The newly born Pakistan had a quite high exports and a handsome balance of
trade (US $ 42 million). With the Korean War boom in 1950-51, once again Pakistan
gained a surplus in BOT (US $ 53 million). However, the reason for 1972-73’s positive
BOT ($ 20 million) was the massive currency devaluation in 1972 when the rupee was
devalued from Rs. 4.76 to 2.3 times higher level of Rs. 11 per US dollar. The exports
increased significantly and the share of exports in GDP rose to 14.9%.

(b) Deflate the Currency: According to this method, the currency is deflated. As the
currency contracts, prices will fall, which will stimulate exports and check imports. But the
method of deflation is also full of dangers. If prices are forced down while costs, which are
proverbially rigid (especially as regards wages in countries where trade unions are well
organised), do not follow suit, the country may face a serious depression and unemployment.
Correcting the balance of payments, therefore, once a disequilibrium has arisen is not an
easy matter.

(c) Tariffs: Tariff is a tax levied on imports. It is synonymous with import duties or
custom duties. Tariffs are used for two different purposes;
- for revenue and
- for protection.


‘Revenue Tariffs’ are a source of government revenue and ‘Protective Tariffs’ are
meant to maintain and encourage those branches of home industry protected by
the duties.
Tariff duties are of four types:
(i) Ad Valorem Tariff: It is levied as a percentage of the total value of the
imported commodity.
(ii) Specific Duties: These are levied per unit of the imported commodity.
(iii) Compound Duties: These are a mixture of above two.
(iv) Sliding Scale Duties: These vary with the prices of commodities imported.

(d) Import Quotas: As a protective device, import quotas are alternative to tariffs.
Under an import quota, fixed amount of a commodity in volume or value is allowed to
be imported into the country during a specified period of time. The major objectives of
import quotas are:
(i) to avoid foreign competition,
(ii) to provide greater administrative flexibility,
(iii) to solve the problem of BOP and BOT.

Import quotas are of the following five types:
(i) Tariff quota,
(ii) Unilateral quota,
(iii) Mixing quota,
(iv) Bilateral quota, and
(v) Import licensing.

(e) Export Duties: When world prices are higher than domestic prices, there is an
incentive to export. In such a situation, a government may levy export duties. Export
duties are used to prevent exports. The reason may be that exported commodities are
required domestically.


UNIT-IV: Foreign Exchange Market: Nature of transactions in foreign exchange market and
types of players, Exchange rate determination, Convertibility of rupee – Euro currency market.

Foreign Exchange Market
Foreign Exchange
Foreign exchange is the system or process of converting one national currency into
another, and of transferring money from one country to another

Foreign Exchange Market
• The foreign exchange market is a market in which foreign exchange transactions
take place

Functions of foreign exchange market
• Transfer of purchasing power
• Provision of credit
• Provision of Hedging facilities

Transactions in the foreign exchange markets
• Spot and forward exchanges
• Swap operations
• arbitrage

Participants in foreign exchange markets
• Traders- commercial banks
• Brokers- brokerages firms
• Speculators- long position and short position
• Hedgers
• Arbitrageurs
• Governments

Exchange control

Exchange control is one of the important means of achieving certain national objectives like
- an improvement in the balance of payments position
- restriction of inessential imports and conspicuous consumption
- facilitation of import of priority items
- control of outflow of capital and
- maintenance of the external value of the currency.
‘


Objectives of Exchange Control

• To Conserve Foreign Exchange
• To Check Capital Flight
• To Improve Balance of Payments
• To Curb Conspicuous Consumption
• To make Possible Essential Imports
• To Protect Domestic Industries
• To Check Recession-induced Exports into the Country
• To regulate foreign companies.
• To regulate Export and Transfer of Securities
• Facilitate Discrimination and Commercial Bargaining
• Enable the Government to Repay Foreign Loans
• To Lower the Price of National Securities held Abroad
• To Freeze Foreign Investments and Prevent Repatriation of Funds
• To Obtain Revenue

Determination of exchange rates

• Purchasing power parity (PPP)- Gustav Cassel
• Balance of payment theory-Demand and supply theory

Purchasing power parity
• The purchasing power parity (PPP) theory uses the long-term equilibrium
exchange rate of two currencies to equalize their purchasing power.
• Developed by Gustav Cassel in 1920, it is based on the law of one price: the
theory states that, in ideally efficient markets, identical goods should have
only one price.
• This purchasing power SEM rate equalizes the purchasing power of different
currencies in their home countries for a given basket of goods.
• Using a PPP basis is arguably more useful when comparing differences in
living standards on the whole between nations because PPP takes into account
the relative cost of living and the inflation rates of different countries, rather
than just a nominal gross domestic product (GDP) comparison.
• The best-known and most-used purchasing power parity exchange rate is the
Geary-Khamis dollar (the "international dollar").
• PPP exchange rates (the "real exchange rate") fluctuations are mostly due to
market exchange rates movements.

Balance of payment theory


• The balance of payments theory of exchange rate is also named as general
equilibrium theory of exchange rate.
• According to this theory, the exchange rate of the currency of a country
depends upon the demand for and supply of foreign exchange.
• If the demand for foreign exchange is higher than its supply, the price of
foreign currency will go up. In case, the demand of foreign exchange is lesser
than its supply, the price of foreign exchange will decline.
• The demand for foreign exchange and supply of foreign exchange arises from
the debit and credit items respectively in the balance of payments.
• The demand for foreign exchange comes from the debit side of balance of
payments.
• The debit items in the balance of payments are import of goods and services
and loans and investments made abroad.
• The supply of foreign exchange arises from the credit side of the balance of
payments.
• It is made up of the exports of goods and services and capital receipts. If the
balance of payments of a country is unfavourable, the rate of foreign exchange
declines.
• On the other hand, if the balance of payments is favourable, the rate of
exchange will go up. The domestic currency can purchase more amounts of
foreign currencies.

Exchange Rate Systems

• Fixed exchange rates
• Flexible exchange rates

Fixed Exchange Rates
• Countries following the fixed exchange rate (also known as stable exchange rate and pegged
exchange rate) system agree to keep their currencies at a fixed, pegged rate and to change
their value only at fairly infrequent intervals, when the economic situation forces them to do
so.
• Under the gold standard, the values of currencies were fixed in terms of gold. Until
the breakdown of the Bretton Woods System in the early 1970, each member country
of the IMF defined the value of its currency in terms of gold or the US dollar and
agreed to maintain (to peg) the market value of its currency within:!: I per cent of the
defined (par) value.

Flexible Exchange Rates
• Under the flexible exchange rate system, exchange rates are freely determined III on open
market primarily by private dealings, and they, like other market prices, vary from day-to-
day.
• Under the flexible exchange rate system, the first impact of any tendency toward a surplus or
deficit in the balance of payments is on the exchange rate. surplus in the balance of payments

will create an excess demand for the tOlIl1try's currency and the exchange rate will tend to
rise. On the other hand, deficit in the balance of payments will give rise to an excess supply
of the country’s currency and the exchange rate will, hence, tend to fall.
• Automatic variations in the exchange rates, in accordance with the variation in the balance of
payment position, tend to automatically restore the balance of payments equilibrium.

Convertibility of the Rupee

• Free convertible-
• Partial convertibility -1992-93 in current account
• LERMS- Market rate and Official rate

Free convertible
• Free convertibility of a currency means that the currency can be exchanged
for any other convertible currency, without any restriction, at the market
determined exchange rates.
• Convertibility of the rupee, thus means that the rupee can be freely converted
into dollar, pound sterling', yen, Deutsche mark, etc. and vice versa at the
rates of exchange determined by the demand and supply forces.
LERMS
• According the Liberalized Exchange Rate Management System (LERMS) introduced
in March 1992, 60 per cent of all receipts under current transactions (merchandise
exports and invisible receipts) could be converted at the free market exchange rate
quoted by the authorized dealers.
• The rate applicable for the remaining 40 per cent was the official rate fixed by the
Reserve. Bank.
• This 40 per cent of the total foreign exchange receipts under the current account was
exclusively meant to cover government needs and to import essential commodities.
• In addition, foreign exchange at official rate was to be made available to meet 40
percent of the value of the advance licenses and special import licenses.
• In short, it was a dual exchange rate system.

Why partial convertibility?

• To make foreign exchange available at a low price for essential prices.
• At times of large deficit in current account- it is risky to go for full convertibility
• To bring in a stability in rupee value
• One major reason for introducing partial convertibility was to make foreign exchange
available at a low price for essential imports so that the prices of the essentials would not be
pushed up by the high market price of the foreign exchange.
• It was risky to introduce full convertibility when the current account showed large deficit.
• While introducing the partial convertibility, the government announced its intentions to
introduce full convertibility on the current account in three to five years, However, full
convertibility on trade account was introduced by the Budget for 1993-94.


• The fact that the free market rate was ruling fairly stable at a reasonable Ievel might have
encouraged the government to introduce full convertibility.

Merits of convertibility

• Real value of rupee
• It encourages exports
• Encourages import substitutions
• Attracts remittances by NRIs
• It gives an indication of the real value of the rupee.
• It encourages exports by increasing the profitability of the exports
• Profitability increases as the free market rate is higher than the official exchange rate.
• It encourages those exports with no or less import intensity. As the proportion of the
imported inputs in the exportables increases, the prof-itability cause of the higher free market
exchange rate gets correspond-ingly reduced. This could encourage import substitution in
export pro-duction.
• The high cost of foreign exchange could encourage import substitution in other areas also It
provides incentives for remittances by NRIs.
• The convertibility and the liberalisation of gold imports have been ex-pected to make illegal
remittances and gold smuggling less attractive. thereby increasing the remittances through
proper channels.
• It is described as a self balancing mechanism because the total imports and other current
account payments will be confined to the. total current account receipts unless there are
imports financed by foreign currency loans.

Eurocurrency market
• The money market in which Eurocurrency, currency held in banks outside of the
country where it is legal tender, is borrowed and lent .

Definition and background

• The Eurocurrency market consists of banks (called Eurobanks) that accept
deposits and make loans in foreign currencies.
• A Eurocurrency is a freely convertible currency deposited in a bank located in a
country which is not the native country of the currency.
• The deposit can be placed in a foreign bank or in the foreign branch of a
domestic US bank. [Note of caution! The prefix Euro has little or nothing to do
with the newly emerging currency in Europe.]
• In the Eurocurrency market, investors hold short-term claims on commercial
banks which intermediate to transform these deposits into long-term claims on
final borrowers.

• The Eurocurrency market is dominated by US $ or the Eurodollar.
• Occasionally, during weak dollar periods (latter part of 1970s and 1980s), the
EuroSwiss franc and the EuroDM markets increased in importance.
• The Eurodollar market originated post WWII in France and England thanks to
the fear of Soviet Bloc countries that dollar deposits held in the US may be
attached by US citizens with claims against communist governments!

THRIVING ON GOVERNMENT REGULATION

By using Euromarkets, banks and financiers are able to circumvent / avoid certain
regulatory costs and restrictions. Some examples are:

a) Reserve requirements
b) Requirement to pay FDIC fees
c) Rules or regulations that restrict competition among banks

• Continuing government regulations and taxes provide opportunities to engage in
Eurocurrency transactions.
• However, ongoing erosion of domestic regulations have rendered the cost and return
differentials much less significant than before.
• As a result, the domestic money market and Eurocurrency markets are closely
integrated for most major currencies, effectively creating a single worldwide money
market for each participating currency.


UNIT-V: World Trade Organization – Objectives, Organization Structure and Functioning,
WTO and India, International liquidity: Problems of liquidity; International Financial institutions
- IMF, IBRD, IFC, ADB – Their role in managing international liquidity problems

World Trade Organization
World Trade Organization

• WTO is the international organization dealing with the global rules of trade
between nations.
• Its main function is to ensure trade flows as smoothly, predictably & freely as
possible
• Heart of the system – known as the multilateral trading system – is
the WTO’s
• Agreements, negotiated and signed by a large majority of the world’s
trading nations, and ratified in their parliaments.
• Goal is to improve the welfare of the peoples of the member
countries.
• The basic purpose of the WTO is to promote international trade without any
discrimination-1st Jan, 1995
• The World Trade Organization came into being in 1995. One of the
youngest of the international organizations, the WTO is the successor
to the General Agreement on Tariffs and Trade (GATT) established in
the wake of the Second World War.

Functions of WTO

• WTO shall facilitate the implementation, Administration and operation
of the plurilateral trade agreement.

• WTO shall provide a forum for the negotiation among its members
concerning their multilateral trade relations


• WTO shall administer the understanding on rules and procedures
governing the settlement of disputes

• WTO shall administer the trade policy review mechanism and

• WTO shall co operate as appropriate with IMF AND IBRD and with the
affiliated agencies
• WTO administers the 28 agreements contained in the final act and the
no of plurilateral agreements and the government procurement
through various councils and committees
• It oversees the implementations of issues related to tariff cut an non
tariff measures agreed to in the trade negotiations
• It examines the trade regimes of the individual member countries
• WTO provides dispute settlement courts and panel
• It acts as a management consultant for world trade
• It provides technical co-operations and training
• It can be used as a forum for continuous negotiations
• It co-opts with the international institutions like IMF,IBRD etc for
making global economic policy
• And it oversees the national trade policies of member governments.

Organization Structure of WTO

• Ministerial Conference-policy and strategy making body

• General Council-executive body of WTO-disputes settlement and trade
related policy

• Councils-trade in goods , trade in services and trade related aspects of
intellectual property bodies

• Committees and Management Bodies-committee on trade and
development, balance of payment and budget, finance and
administrations

• The WTO has 153 members, accounting for over 97% of world trade.
Around 30 others are negotiating membership.


• The WTO’s top level decision-making body is the Ministerial Conference
which meets at least once every two years.
• Below this is the General Council (normally ambassadors and heads
of delegation in Geneva, but sometimes officials sent from members’
capitals) which meets several times a year in the Geneva
headquarters. The General Council also meets as the Trade Policy
Review Body and the Dispute Settlement Body.
• At the next level, the GOODS COUNCIL, SERVICES COUNCIL, &
INTELLECTUAL PROPERTY (TRIPS) COUNCIL report to the
General Council.

• Numerous SPECIALIZED COMMITEES, WORKING GROUPS and
WORKING PARTIES deal with the individual agreements and other
areas such as the environment, development, membership
applications and regional trade agreements.

WTO AND INDIA

India

• India is a founder member of the General Agreement on Tariffs and
Trade (GATT) 1947 and its successor, the World Trade Organization
(WTO), which came into effect on 1.1.95 after the conclusion of the
Uruguay Round (UR) of Multilateral Trade Negotiations.
• India’s participation in an increasingly rule based system in the
governance of international trade is to ensure more stability and
predictability, which ultimately would lead to more trade and
prosperity for itself and the 134 other nations which now comprise the
WTO.
• India also automatically avails of MFN and national treatment for its
exports to all WTO Members.

• INDIA’s ranking in leading exporters and importer in world
merchandise trade,2007 is 26 , & in leading exporters and importer in
world commercial services 2007 is 9.
• This fourth Trade Policy Review of India has greatly improved our
understanding of India’s trade and trade related policies and the


challenges it faces in sustaining, and indeed improving, its economic
growth.
• Members all agreed that India’s economic performance has been
impressive, with GDP growth averaging over 7% between 2001/02
(fiscal year, April-March) and 2006/07; growth has been particularly
rapid since 2003, averaging over 8.5% and has translated into
improved social indicators, including a reduction in the percentage of
the population living below the poverty line.

Additional (Optional to write)

• While import tariffs have declined, the export regime remains highly
complex, partly as a consequence of various measures to neutralize
duties levied on imported inputs used in exports; export processing
zones and special economic zones also offer tax holidays to investors.
• India’s active role in the multilateral trading system was commended,
and members encouraged it to continue to show leadership in bringing
the Doha Round to a successful conclusion.
• India remains a major user of anti-dumping measures, although the
number of investigations and measures in force has been declining.
Members urged India to exercise maximum restraint in initiating anti-
dumping and safeguard actions and in imposing such measures.
• Members commended India for taking steps to align its national
standards with international norms. They expressed concerns on SPS
(sanitary and phytosanitary measures), but welcomed measures
adopted to streamline SPS procedures.
• Members noted continued government intervention in agriculture
through; inter alia, high tariffs, price support, and direct subsidies to
inputs. Moreover, agricultural growth remains slow and erratic,
causing considerable distress, especially among small and marginal
farmers. Some concerns were expressed about the development of the
manufacturing sector, which is being held back by the complex
customs duty structure, as well as the relatively high tariffs in textiles
and clothing, and automobiles.
• This Review has been very informative and has given a useful
overview of India’s trade policies and practices and the challenges it
faces.


International Monetary Fund

• IMF is a post war international monetary institution.

• It came into existence to promote economic and financial cooperation
among member countries
• The International Monetary Fund (IMF) is an international organization
that oversees the global financial system by following the macroeconomic
policies of its member countries, in particular those with an impact on
exchange rates and the balance of payments.
• It is an organization formed to stabilize international exchange rates and
facilitate development.[2]
• It also offers financial and technical assistance to its members, making it an
international lender of last resort.
• Its headquarters are located in Washington, D.C., USA.
• The International Monetary Fund was created in 1944 [1], with a goal
to stabilize exchange rates and assist the reconstruction of the world's
international payment system.
• Countries contributed to a pool which could be borrowed from, on a
temporary basis, by countries with payment imbalances. (Condon,
2007)
• The IMF describes itself as "an organization of 185 countries
(Montenegro being the 185th, as of January 18, 2007), working to
foster global monetary cooperation, secure financial stability, facilitate
international trade, promote high employment and sustainable
economic growth, and reduce poverty".


Objectives of IMF

• Avoid the competitive devaluation and exchange control
• Establish and maintain currency convertibility with stable exchange
rate
• To promote international monetary cooperation
• To facilitate balance growth rate
• To lend confidence to members by making the fund’s resources
available
• To provide short term assistance to correct the balance of payment

Additional

Today

The IMF's influence in the global economy steadily increased as it accumulated
more members. The number of IMF member countries has more than quadrupled
from the 44 states involved in its establishment, reflecting in particular the
attainment of political independence by many developing countries and more
recently the collapse of the Soviet bloc.

• In 2008, faced with a shortfall in revenue, the International Monetary Fund's
executive board agreed to sell part of the IMF's gold reserves. On April 27,
2008, IMF Managing Director Dominique Strauss-Kahn welcomed the board's
decision April 7, 2008 to propose a new framework for the fund, designed to
close a projected $400 million budget deficit over the next few years. The
budget proposal includes sharp spending cuts of $100 million until 2011 that
will include up to 380 staff dismissals.[5]
• At the 2009 G-20 London summit, it was decided that the IMF budget will be
tripled to $1 trillion, to better meet the needs of the global community
amidst the late 2000s recession.[6][7]

International Liquidity and Special Drawing
rights
• Assets like bullion, commercial credit , currencies, foreign securities
and SDR’s maintained by the countries to settle the deficit in the BOP
and the aggregate total of such stock of all the central banks in the
world is known as international liquidity,.
• What Is ‘International Liquidity’?


• It used to be that the term ‘international liquidity’ meant the relative
amount of resources available to a nation’s monetary authorities that
could be used to settle a balance of payments deficit.
• In the days of the gold standard, this would mean access to gold
that could be used to redeem a nation’s currency held by foreigners.
• After Breton Woods and the advent of the dollar-gold exchange
standard, liquidity came to mean access to dollars, either held as
reserves or as credit lines, or the SDR system maintained by the
International Monetary Fund.
• After 1971, with the abandonment of the dollar-gold exchange
standard, as the world entered an era of ‘managed’ exchange rates,
some ‘floating’, some ‘pegged’, ‘international liquidity’ came to mean
the resources available to national monetary authorities to maintain
the value of their currencies as required by their exchange
management programs.
• Today, the international reserves of a national central bank is often
less important than the credit and reserves available to residents of
that country that permit them to import goods whatever the reserve
position of the monetary authorities.

Additional
• Liquidity In A Post-Gold-Standard World
•
• After the Asian financial crises of 1997, it became clear that with
globalization and open economies, national monetary authorities often
no longer had even nominal control over their exchange rates.
•
• As countries abandoned the licensing of imports, exports, and
international credit and investment operations, control of foreign
exchange assets passed to the private sector.
•
• For countries operating without exchange licensing, the access to
resources needed to settle a ‘balance of payments deficit’, no longer
were managed by central banks, but were controlled by private
businesses and individuals.
•


• Under liberal trading systems, Central banks often do not even have a
way to accurately measure foreign exchange assets controlled by
private citizens, much less the ability to determine the access of the
private sector to international lines of credit.
• Individualized ‘Balance of Payments’
•
• Today, the international reserves of a national central bank is often
less important than the credit and reserves available to residents of
that country that permit them to import goods whatever the reserve
position of the monetary authorities.
•
• If a country is not trying to peg its exchange rate to a specific foreign
currency, the aggregate ‘trade deficit’ of that country is not necessarily
relevant to an individual businessperson who controls his or her own
assets and credit.

International Liquidity Is A Fuzzy Concept

• Consequently, ‘international liquidity’ sometimes retains the older
meaning, related to the foreign currency assets of the monetary
authority, for countries that manage exchange rates and exercise
various degrees of direct control over international transactions of
residents.
•
• However, for countries with free trading regimes and floating exchange
rates, ‘international liquidity’ may more properly be thought of as the
foreign exchange assets and credit available to residents of a country
that would allow them to import from abroad at their discretion.
•
• Today’s international economy is supported by monetary authorities
with varying degree of control over their nation’s balance of payments
and foreign currency reserves.
•
• Consequently, the meaning of ‘international liquidity’ is somewhat
vague, relative to the particular foreign exchange policies of a specific
country.


Problems of international liquidity

• Imports, Globalization and structural shifts

International Bank for Reconstruction and
Development

• IBRD was established to provide long term assistance for the
reconstruction and development of economies of the economies of the
member countries
• The International Bank for Reconstruction and Development (IBRD) is
institutions that comprise the World Bank Group.
• The IBRD is an international organization whose original mission was to
finance the reconstruction of nations devastated by World War II.
• Now, its mission has expanded to fight poverty by means of financing
states.
• Its operation is maintained through payments as regulated by member
states.
• It came into existence on December 27, 1945 following international
ratification of the agreements reached at the United Nations Monetary and
Financial Conference of July 1 to July 22, 1944 in Bretton Woods, New
Hampshire.
• The IBRD provides loans to governments, and public enterprises, always with
a government (or "sovereign") guarantee of repayment subject to general
conditions (pdf).
• Commencing operations on June 25, 1946, it approved its first loan on May
9, 1947 ($250m to France for postwar reconstruction, in real terms the
largest loan issued by the Bank to date).


• The IBRD was established mainly as a vehicle for reconstruction of Europe
and Japan after World War II, with an additional mandate to foster economic
growth in developing countries in Africa, Asia and Latin America. Originally
the bank focused mainly on large-scale infrastructure projects, building
highways, airports, and power plants.

Functions of IBRD

• To assist in the reconstruction and development and development of
its member countries

• To promote private foreign investment by means of guarantees

• To promote long range balanced growth of international trade and the
maintenance of equilibrium in the BOP of member countries

Additional

• The funds for this lending come primarily from the issuing of World Bank
bonds on the global capital markets—typically $12–15 billion per year.
• These bonds are rated AAA (the highest possible) because they are backed
by member states' share capital, as well as by borrowers' sovereign
guarantees. (In addition, loans that are repaid are recycled, or relent.)
Because of the IBRD's credit rating, it is able to borrow at relatively low
interest rates. As most developing countries have considerably lower credit
ratings, the IBRD can lend to countries at interest rates that are usually quite
attractive to them, even after adding a small margin (about 1%) to cover
administrative overheads.
• As Japan and its European client countries "graduated" (achieved certain
levels of income per capita), the IBRD became focused entirely on developing
countries. Since the early 1990s the IBRD has also provided financing to the
post-Socialist states of Eastern Europe and the republics of the former Soviet
Union.

International Development Association

• Established in 1960 as an affiliate to IBRD

• Objectives –


• To provide development finance on easy terms to less developed
member countries

• To provide assistance for poverty alleviation in the poorest countries

• To provide finance at concessional interest rates

International Finance Corporation (IFC)

 The International Finance Corporation (IFC) promotes sustainable
private sector investment in developing countries as a way to reduce
poverty and improve people's lives.
 IFC is a member of the World Bank Group and is headquartered in
Washington, DC.
 It shares the primary objective of all World Bank Group institutions: to
improve the quality of the lives of people in its developing member
countries.
 Established in 1956, IFC is the largest multilateral source of loan and
equity financing for private sector projects in the developing world.
 It promotes sustainable private sector development primarily by:

1. Financing private sector projects and companies located in the
developing world.
2. Helping private companies in the developing world mobilize financing
in international financial markets.
3. Providing advice and technical assistance to businesses and
governments.


Ownership and management

 IFC has 181 member countries , which collectively determine its policies and
approve investments.
 To join IFC, a country must first be a member of the International Bank for
Reconstruction and Development (IBRD).
 ADDITIONAL
 IFC's corporate powers are vested in its Board of Governors, to which member
countries appoint representatives.
 IFC's share capital, which is paid in, is provided by its member countries, and
voting is in proportion to the number of shares held.
 IFC's authorized capital (the sums contributed by its members over the years)
is $2.45 billion; IFC's net worth (which includes authorized capital and retained
earnings) was $9.8 billion as of June 2005. [2]

[edit] Funding

 The IFC's equity and quasi-equity investments are funded out of its paid-in
capital and retained earnings (which comprise its net worth).
 Strong shareholder support, triple-A ratings and a substantial capital base allow
the IFC to raise funds on favorable terms in international capital markets.
 As of June 30, 2006, retained earnings represented almost three-quarters of the
IFC's $9.8 billion net worth.

Activities

Private sector financing is IFC's main activity, and in this respect is a profit-
oriented financial institution (and has never had an annual loss in its 50-year
history). Like a bank, IFC lends or invests its own funds and borrowed funds to its
customers and expects to make a sufficient risk-adjusted return on its global
portfolio of projects.

IFC's activities, however, must meet a second test of contributing to a reduction in
poverty in line with its mandate.

In practice, this is broadly interpreted, but considerable time and effort is devoted
to both (i) selecting projects with positive developmental outcomes,

(ii) improving the developmental outcome of projects by various means.

Apart from its core investment activities, IFC also carries out technical cooperation
projects in many countries to improve the investment climate.


Asian Development Bank
• The Asian Development Bank (ADB) is a regional development bank
established in 1966 to promote economic and social development in
Asian and Pacific countries through loans and technical assistance.
• It is a multilateral development financial institution owned by 67
members (as of 2nd February 2007)[1], 48 from the region and 19
from other parts of the globe. ADB's vision is a region free of poverty.
• Its mission is to help its developing member countries reduce
poverty and improve the quality of life of their citizens.
• The work of the Asian Development Bank (ADB) is aimed at improving
the welfare of the people in Asia and the Pacific, particularly the 1.9
billion who live on less than $2 a day. Despite many success stories,
Asia and the Pacific remains home to two thirds of the world are poor.
• The bank was conceived with the vision of creating a financial
institution that would be "Asian in character" to foster growth and
cooperation in a region that back then was one of the world’s poorest.
• ADB raises funds through bond issues on the world's capital markets,
while also utilizing its members' contributions and earnings from
lending. These sources account for almost three quarters of its lending
operations.


Organization

• ADB is headquartered in Mandaluyong City, Philippines.
• Traditionally, and because Japan is one of the largest shareholders of
the bank, the President has always been Japanese. The current
President is Haruhiko Kuroda.
ADDITIONAL

• The highest policy-making body of the bank is the Board of Governors
composed of one representative from each member state.
• The Board of Governors, in turn, elect among themselves the 12
members of the Board of Directors and their deputy. Eight of the 12
members come from regional (Asia-Pacific) members while the others
come from non-regional members.
• The Board of Governors also elect the bank's President who is the
chairperson of the Board of Directors and manages ADB.
• The president has a term of office lasting five years, and may be
reelected.

Notable ADB projects and Technical Assistance

1. Afghan Diaspora Project
2. Funding Utah State University led projects to bring labor skills in
Thailand[citation needed]
3. Earthquake and Tsunami Emergency Support Project in Indonesia
4. Greater Mekong Subregional Program[2]
5. ROC Ping Hu Offshore Oil and Gas Development
6. Solar energy development funds in India
7. Strategic Private Sector Partnerships for Urban Poverty Reduction in
the Philippines
8. Trans-Afghanistan Gas Pipeline Feasibility Assessment
9. Loan of $1.2 billion to bail it out of an impending economic crisis in
Pakistan[3]


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