INTERNATIONAL FINANCIAL AND ECONOMIC ORGANISATION
11.1 INTERNATIONAL MONETARY FUND (IMF)
- The International Monetary Fund (IMF) is the inter – governmental organisation that overseas takes care of the global financial systems by following the macroeconomic policies of its member countries, in particular, those with an impact on exchange rate and the Balance of Payments (BoP). Its head quarters is in Washington DC, United states.
- The IMF was formally organised on 27th, December 1945, when the first 29 countries signed its Articles of Agreement.
- Presently, the IMF has 188 member countries. It is a specialised agency of the United Nations, but has its own charter, governing structure and finances. Its members are represented through a quota system broadly based on their, relative size in the global economy.
11.1.1 IMF Lending
- IMF loans are meant to help member countries to tackle Balance of Payments (BoP) problems, stabilise their economies and restore sustainable economic growth.
- Today, IMF lending serves three main purposes
− First, it can smoothen adjustment to various shocks, helping a member country avoid disruptive economic adjustment or sovereign default, something that would be extremely costly, both for the country itself and possibly for the other countries through economic and financial ripple effects (know as contagion)
− Second, IMF programmes can help to unlock other financing agencies, acting as a catalyst for other lenders.
− Third, IMF lending can help prevent crisis for nations. The experience is crisis capital account crisis typically inflicts substantial costs on countries themselves and on other countries through contagion.
184.108.40.206 Main Lending facilities
- In an economic crisis, countries often need financing to help them overcome their balance of Payments (BoP) problems. Since, its creation in June, 1952 the IMF’s Stand – by Arrangement (SBA) has been used time and again by member countries.
- Flexible Credit Line (FCL) is for countries with very strong fundamentals, policies and track records of policy implementation. It represents a significant shift in how the fund delivers fund financial assistance, particularly with recent enhancements, as it has no ongoing (ex – post) conditions and no caps on the size of the credit line.
- Precautionary and Liquidity Line (PLL) builds on the strengths and broadens the scope of the Precautionary Credit Line (PCL). The PCL provides financing to meet actual or potential Balance of Payments (BoP) needs of countries with sound policies and is intended to serve as insurance and help resolve crisis.
- Rapid Financing Instruments (RFI) provides rapid and low – access financial assistance to member countries facing an urgent Balance of Payments (BoP) need, without the need for a full – fledged programme.
- Extended Fund Facility is used to help countries address Balance of Payments (BoP) difficulties related partly to structural problems that may take longer to correct than macro economic imbalances.
- Trade Integration Mechanism allows the IMF to provide loans under one of the its facilities to a developing country, whose Balance of Payments (BoP) is suffering because its export earnings decline, when it loses preferential access to certain markets or because prices for food imports go up, when agricultural subsidies are eliminated.
Lending to Low – Income Countries
- Three types of loans were created under the new Poverty Reduction and Growth Trust (PRGT) as part of this broader reform: the Extended credit facility, the Rapid credit facility and the Standby credit facility.
- Extended Credit Facility (ECF) provides financial assistance to countries with protracted balance of payments (BoP) problems. The ECF succeeds the Poverty Reduction and Growth Facility (PRGF) as the fund’s main tool for providing medium – term support LICs, with higher level of access, more concessional financing terms, more flexible programme design features as well as streamlined and more focused conditionality.
- Rapid Credit Facility (RCF) provides rapid financial assistance with limited conditionality to Low – Income Countries (LICs) facing an urgent Balance of Payments (BoP) need.
- Standby Credit Facility (SCF) provides financial assistance to low – income countries (LICs) with short – term balance of payments (BoP) needs.
- Several low – income countries have made significant progress in recent years towards economic stability and no longer require IMF financial assistance. But, many of these countries still seek the IMF’s advice and the monitoring and endorsement of their economic policies that comes with it. To help these countries, the IMF has created a programme for policy support and signalling, called the Policy support Instrument.
11.1.2 IMF Quota
- When a country joins the IMF, it is assigned an initial quota in the some range as the quotas of existing members that are broadly comparable in economic size characteristics.
- The quota determines the country’s financial contribution to the IMF its voting power and ability to access IMF financing Quota subscription generate most of the IMF’s financial resources.
11.1.3 Special Drawing Rights (SDRs)
- SDR is an international reserve asset, created by the IMF in 1969, to supplement its member countries’ official reserves. Its value is based on a basket of four key international currencies (US dollar, Japanese, Yen, Pound sterling euro) and SDRs can be exchanged for freely usable currencies.
SDR’s (Special Drawing Rights) as Global Reserve Currency
- In recent times, there has been a call to make the SDR’s i.e. the global reserve currency. In this light, there are several issues related to reserve currency that we need to understand.
- A reserve currency is one, which is held widely by Central Banks and other financial institutions internationally and is used for most international trade and other transaction.
- Having a currency as one of the global reserve currencies, enables the issuer to import at lower rates that other countries, since theydon’t need to pay transaction costs. It also provides the ability to import according of the needs, if needed, by simply printing more money.
- A currency to be a global currency should be widely available in the international market. It should be freely convertible. Also reserve currencies are generally held as government bonds and not as herd cash for these reasons, the Chinese yen cannot yet become the global reserve currency.
- The SDR of IMF is not a currency. It is a potential claim on the currencies of the member countries. To increase the importance of SDRs internationally, it should be issued in larger quantities annually and it should be made the main or only means of IMF financing.
11.1.4 IMF Reforms
- On 15th December, 2010, IMF’s Board of Governors approved a package of reforms of the fund’s quotas and governance completing the 14th General Review of Quotas.
- The reform package builds on the 2008 reforms, which became effective on 3rd March 2011.
- The 14th general review of quotas will
− Double quotas from approximately SDR 238.4 billion to SDR 476.8 billion (about US $ 720 billion)
− Shift more than 6 % quota share from over represented countries to under represented countries.
− Shift more than 6% quota share to dynamic emerging market and developing countries.
− Realign quota share to make all 4 BRIC countries, among top 10 largest shareholders in the fund
− Preserve the quota and voting share of the poorest member countries.
- Subsequent to the 2010 reforms implementation , India’s quota share will go up to 2.75 % and voting share to 2.63 %, giving it a rank of 8th on both. IMF quota changes have to be approved by 85% votes along with consent of the country, whose share is changed.
- However, repayment of all the loans taken from the IMF has been completed on 31st May, 2000. India is now contributor to the IMF.
- The quotas determine the amount of foreign exchanges a member may borrow from the IMF and its voting power on IMF policy matters, Quotas as denominated in SDRs.
11.1.5 Debt Relief
- In addition to concessional loans, some low – income countries are also eligible for debts to be written off under two key initiatives. They Heavily indebted Poor Countries (HIPC) Initiative and the Multilateral Debt Relief Initiative (MDR).
11.2 WORD BANK GROUP
- The world Bank Group (WBG) is a family of five international organisations that provide leveraged loans, generally to poor countries. The bank came into formal existence on 27th December, 1945 following international ratification of the Bretton woods Agreements, which emerged from the united Nations Monetary and Financial conference (1st – 22nd July, 1944)
- It also provided the foundations of the Osiander – Committee in 1951, responsible for the preparation and evaluation of the World Development Report.
- Commencing operations on 25th June, 1946
- The world bank itself comprises of two major organisations
i. International Bank for reconstruction and development
ii. International development association
(The three other organisation associated with the World bank, but legally and financially separate are)
− International finance corporation
− International centre for settlement of investment disputes.
− Multilateral investment guarantee agency
International Bank for Reconstruction and Development (IBRD)
- Founded in 1944, to help Europe recover from world war – II, the international Bank for reconstruction and Development (IBRD) works with middle – income and credit worthy poorer countries to promote sustainable, equitable and job – creating growth, reduce poverty and address issues of regional and global importance.
IBRD is owned and operated for the benefit of its 188 member countries. Delivering flexible, timely and tailored financial products, knowledge and technical services and strategic advice helps its members achieve results.
11.3 INTERNATIONAL DEVELOPMENT ASSOCIATION (IDA)
- The International Development Association (IDA) is the part of the World Bank that helps the world’s poorest countries. Established in 1960, it aims to reduce poverty by providing interest – free credits and grants for programmes that boost economic growth, reduce inequalities and improve people’s living conditions.
- It serves middle – income countries with capital investment and advisory services. It is one of the largest sources of assistance for the world’s 79 poorest countries, 39 of which are in Africa. It is the single largest source of donor funds for basic social services in the poorest countries.
- It lends money known as credits on concessional terms. This means that IDA credits have no interest change and repayments are stretched over 35 to 40 years, including a 10 year grace period.
11.4 INTERNATIONAL FINANCE CORPORATION (IFC)
- The International Finance corporation (IFC) promotes sustainable private sector investment in developing countries. It 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. It has 182 member countries.
- It promotes sustainable private sector development primarily by
− Financing private sector projects and companies located in the developing world.
− Helping private companies in the developing world mobilise financing in international financial markets.
− Providing advice and technical assistance to businesses and governments
− IFC currently has 1847 member countries.
11.5 MULTILATERAL INVESTMENT GUARANTEE AGENCY (MIGA)
- The multilateral Investment Guarantee Agency (MIGA) is a member organisation of the World Bank Group that offers political risk insurance. It was established to promote foreign direct investment into developing countries.
- It promotes foreign direct investment into developing countries by insuring investors against political risk, advising governments on attracting investment, sharing information through online investment information services and mediating disputes between investors and governments.
Objectives of MIGA
− Raising FDI inflows to the developing countries.
− Reducing poverty
− Achieving higher economic growth
− Increasing standard of livings.
11.6 INTERNATIONAL CENTRE FOR SETTLEMENT OF INVESTMENT DISPUTES (ICSID)
- The International centre for settlement of investment disputes (ICSID), an institution of the World Bank Group based in Washington DC was established in 1966, pursuant to the convention on the settlement of investment disputes between states and nationals of other states (the ICSID Convention or Washington Convention)
- ICSID has administrative council, chaired by the World Bank’s President and Secretariat. It provides facilities for the conciliation and arbitration of investment disputes between member countries and individual investors.
- IMF VS WORLD BANK
Similarities: Both are global institutions since most countries of the world are their members, but are concerned with strengthening the economies of member nations.
Difference: World Bank’s purpose is to promote economic and social progress in developing countries. IMF’s purpose is to oversee and maintain an orderly system of payments and receipts between nations.
11.7 THE UNITED NATIONS CONFERENCE ON TRADE AND DEVELOPMENT (UNCTAD)
- The united nations conference on Trade and Development (UNCTAD) was established in 1964, as a permanent inter – governmental body. It is the principal organ of the united Nations general assembly dealing with trade, investment and development issues.
- The organisation’s goals are to “Maximise the trade, investment and development opportunities of developing countries and assist them in their efforts to integrate in to the world economy on an equitable basis”
Objectives of UNCTAD
- The highest decision – making body UNCTAD is the quadrennial (every 4 years) conference, at which member countries make assessments of current trade and development issues, discuss policy options and formulate global policy responses. The conference also sets the organisation’s mandate and work priorities.
- The conference is a subsidiary organ of the united nations general assembly
- The conferences serve an important political function they allow inter governmental consensus building regarding the state of the world economy and development policies and they play a key role in identifying the role of the united nations and UNCTAD an addressing economic development problems.
11.8 WORLD TRADE ORGANISATION (WTO)
- The World Trade Organisation (WTO) is the only global international organisation dealing with the rules of trade between nations. At its heart are the WTO agreements, negotiated and signed by the bulk of the world’s trading nations and ratified in their Parliaments.
- The goal is to help producers of goods and service, exporters and importers conduct their business smoothly.
11.8.1 Structure of the WTO
- The ministerial conference is the top most body of the WTO, which meets every two years. It brings together all the members of WTO.
Second and Level General Council
- The general council of the WTO is the highest level decision making body in Geneva, which meets regularly to carry out the functions of WTO.
Third level Councils for Trade
- The working of GATT, which covers international trade in goods, are the responsibility of the council of Trade.
Fourth Level Subsidiary Bodies
- There are subsidiary bodies under the various councils dealing with specific subjects such as agriculture, subsides, market access etc.
11.8.2 Function of WTO
- Regulating WTO trade agreements
- Establish from for trade negotiations
- Monitoring trade policies and handling trade disputes.
- Provide Technical Assistance
- To cooperate with other international or trade organisation
11.8.3 Benefits of WTO
- It helps promote peace and prosperity across the globe.
- Disputes are settled amicably. Rules bring about greater discipline in trade negotiations, thereby reducing inequalities to large extent.
- Free trade reduces the cost of living and increases the house hold income
- Companies have greater access to markets and consumers have wider range of products to choose form.
General Agreement on Trade in Services (GATS)
- The General Agreement on Trade in Services (GATS) has a ‘positive list’ approach, thereby allowing WTO members to take on obligations in the sector of their choice. India has made commitments in 33 activities, as compared with an average of 23 activities for developing countries. The objective in service negotiations has been to offer entry to foreign service providers where the entry was considered to be most advantageous for the country in terms of capital inflows, technology employment.
11.8.4 WTO’s Agreement on Agriculture and its Implication
- The original GATT did apply to agricultural trade, but it contained loopholes e.g. it allowed countries to use some non – tariff measures such as import quotas and to subsidise. Agricultural trade become highly distorted. Especially with the use of export subsidies which would not normally have been allowed for industrial products.
The Uruguay Round produced the first multilateral agreement dedicated to the sector. It was a significant first step towards order. Fair competition and a less distorted sector. The Uruguay Round agreement included a commitment to continue the reform through new negotiations.
- The objective of the Agriculture Agreement is to reform trade in the sector and to make policies more market – oriented. This would improve predictability and security for importing and exporting countries alike.
- The new rules and commitments apply to
− Market access various trade restriction confronting imports.
− Domestic support subsides and other programmes, including those that raise or guarantee farm gate prices and farmers’ incomes.
- Export subsides and other methods used to make exports artificially competitive.
- Least developed countries do not have to make commitments to reduce tariffs or subsides.
- The base level for tariff cuts was the bound rate before 1st January, 1995 or for unbound tariffs, the actual rate charged in September, 1956 when the Uruguay round began.
- The other figures were targets used to calculate countries legally – binding ‘schedules’ of commitments.
- All services are covered by GATS
- Most – favoured – nation treatment applies to all services, except the one – off temporary exemptions.
- National treatment applies in the areas where commitments are made.
- Transparency in regulations, inquiry points.
- Regulations have to be objective and reasonable.
- International payments: normally unrestricted.
- Individual countries commitments : negotiated and bound
- Progressive liberalisation: through further negotiations
11.8.5 Intellectual Property
- The WTO ‘s Agreement of Trade – Related Aspects of Intellectual Property Rights (TRIPS), negotiated in the 1986 – 94 Uruguay round, introduced intellectual property rules into the multilateral trading system for the first time.
- The agreement covers five broad issues.
1. How basic principles of the trading system and other international intellectual property agreements should be applied.
2. How to give adequate protection to intellectual property rights.
3. How countries should enforce those rights adequately in their own territories.
4. How to settle disputes on intellectual property between members of the WTO
5. Special transitional arrangements during the period when the new system is being introduced.
- The agreement says patent protection must be available for inventions for at least 20 years. Patent protection must be available for both products and processes, in almost all fields of technology. Government can refuse to issue a patent for an invention if its commercial exploitation is prohibited for reasons of public order or morality.
- A patent owner could abuse his rights, e.g. by falling to supply the product on the market. To deal with that possibility, the agreement says governments can issue compulsory licences, allowing a competitor to produce the product or use the process under licence. But this can only be done under certain conditions aimed at safeguarding the legitimate interests of the patent – holder.
- Transition period when the WTO agreements took effect on 1st January, 1995 developed countries were given one year to ensure that their practices
conform with the TRIPS agreement.
- Developing countries and (under certain conditions) transition economies were given five years, until 2000, least developed countries had 11 years, until 2006 – now extended to 2013 in general and to 2013 for pharmaceutical patents and undisclosed information.
- If a developing country did not provide product patent protection in a particular area of technology when the TRIPS Agreement became applicable to it (1st January, 2000) it had up to five additional years to introduce the protection. But for pharmaceutical and agricultural chemical products, the country had to accept the filling of patent applications from the beginning of the transitional period.
- Subject to certain exceptions, the general rule is that obligations in the agreement apply to intellectual property rights that existed at the end of a country’s transition period as well as to new ones.
Trade Related Investment Measures – (TRIMs)
- Under Trade Related Investment Measures (TRIMs), India has already notified the TRIMs maintained by it. These had to be eliminated by 1 January 2000. Under the Information Technology Agreement (ITA), tariffs had to be brought down to zero on 95 lines by the year 2000, on 4 tariff lines by 2003, on 2 tariff lines by 2004, and on the balance 116 tariff lines in the year 2005. India is also committed, under the Agreement on Technical Barriers to Trade and Sanitary and Phytosanitary Measures, for establishing and administering national standards and technical regulations, keeping in view the basic precepts of MFN, National Treatment and Transparency Policy.
11.8.6 General agreement on Trade in Service (GATS)
- GATS was one of the three agreement signed in 1995, along with AOA and TRIPS. It provided for regulation on international trade in services for the first time, which were not there even in GATT. GATS negotiations are conducted among nations bilaterally on the basic of requests and offers.
The GATS agreement covers four modes of supply of services
− Mode 1 (Cross – border supply) includes services, which are delivered in the territory of the member from the territory of another member (supplier not present in the member)
− Mode 2 (Consumption Abroad) Services delivered outside the territory of the member, in the territory of another member to a consumer belonging to the member (supplier not present in the member)
− Mode 3 (Commercial Presence) Service delivered within the territory of the member through the commercial presence of supplier from another member.
− Mode 4 (Presence of Natural Persons) includes services delivered within the territory of the member through the presence of supplier as a natural person.
11.9 OTHER IMPORTANT INTERNATIONAL ORGANISATIONS
11.9.1 G 20
- The G20 comprise 19 countries namely, Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, the Republic of Korea, Turkey, the United Kingdom, the United States of America and the European Union, Which is represented by the rotating council presidency and the European Central bank as the 20th member.
- It represent 90% of the global gross national product, 80% of the world’s trade and two – third of the world’s population
India and G – 20
- India is a member of the G-20, since it was established as Finance Minister Forum in 1999.
- Currently, India is co – chair of the working group on G-20 frame work for strong, sustainable and balanced growth along with Canada.
- India is contributing to various thematic issues being deliberated in G-20 such as
− Financial sector regulatory reforms
− Climate change
− IFIs (International Financial Institution ) reform
− Growth and fiscal consolidation
− Enhancing shareholding in forums such as FSB, IASB
− Issues pertaining to Non – Cooperative jurisdiction (Global Forum, FATF etc)
UPSC Previous Year Questions:
1. Which one of the following issues the ‘Global Economic Prospects’ report periodically?
a) The Asian Development Bank
b) The European Bank for Reconstruction and Develpoment
c) The US Federal Reserve Bank
d) The World Bank
2. Which of the following organizations brings out the publication known as ‘World Economic Outlook’? (CSE 2014)
a) The International Monetary
b) The United Nations Development Programme.
c) The World Economic Forum
d) The World Bank
3. Regarding the International Monetary Fund, which one of the following statements is correct? (CSE 2011)
a) It can grant loans to any country
b) It can grant loans to only developed countries
c) It grants loans to only member countries
d) It can grant loans to the Central Bank of a country
4. In order to comply with TRIPS Agreement, India enacted the Geographical Indications of Goods (Registration & Protection) Act, 1999. The difference / differences between a “Trade Mark” and a Geographical Indication is / are : (CSE 2010)
1. A Trade Mark is an individual or a company’s right whereas a Geographical Indications is a community’s right.
2. A Trade Mark can be licensed whereas a Geographical Indication can not be licensed.
3. A Trade Mark is assigned to the manufactured goods whereas the Geographical Indications is assigned to the agricultural goods / products and handicrafts only.
Which of the statements given above is/are correct?
a) 1 only b) 1 and 2 only
c) 2 and 3 only d) 1, 2 and 3
5. Consider the following statements: (CSE 2010)
3. South Africa.
According to UNCTAD, which of
the above is / are categorized
as “Emerging Economies”?
a) 1 only b) 1 and 3 only
c) 2 and 3 only d) 1, 2 and 3
6. With reference to BRIC countries, consider the following statements: (CSE 2010)
1. At present, China’s GDP is more than the combined GDP of all the three other countries.
2. China’s population is more than the combined population of any two other countries.
Which of the statements given above is/are correct?
a) 1 only b) 2 only
c) Both 1 and 2 d) Neither 1 nor 2
7. As regards the use of international food safety standards as reference point for the dispute settlements, which one of the following does WTO collaborate with? (CSE 2010)
a) Codex Alimentarius Commission.
b) International Federation of Standards Users.
c) International Organization for Standardization.
d) World Standards Cooperation.
1. (d) 2.(a) 3.(c) 4.(b) 5.(d) 6.(b) 7. (a)