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Friday, August 28, 2009

International Liquidity, and Efforts Made by the IMF to Solve this Problem

Friday, August 28, 2009 - 1 Comment

International Liquidity is defined as the aggregate stock of internationally acceptable assets held by the central bank to settle a deficit in a country’s balance of payments. In other words international liquidity provides a measure of a country’s ability to finance its deficit in balance of payments without resorting International Liquidity.

International liquidity is generally used as a synonym for international reserves. Such reserves include a country’s official gold stock holding of its convertible foreign currencies and its net position in the IMF. Economists like Heller and Mckinnon use a broader definition of international liquidity to include international borrowings, commercial credit operations and the international financial structure in a country’s reserves. This definition implies international availability of liquidity and the possibility of obtaining credit from financial institutions operating in international financial markets. Thus in the broader sense international liquidity includes private as well as official holdings of international liquidity assets.

IMF and International Liquidity:

There was no problem of international liquidity prior 1960. This was because under the Bretton Woods Agreement the exchange rates of countries were fixed in terms of gold or the US dollar at $35 per ounce of gold. Member countries were forbidden to impose restrictions on payments and trade except for transitional period. They were allowed to hold their monetary reserves partly as gold and partly in dollars and sterling. These reserves were meant to incur temporary deficits by member countries while keeping their exchange rates stable. The IMF insisted on expenditure reducing policies and devaluation to correct deficit in balance of payments. Therefore apart from adhoc loans made by the IMF, the growth in liquidity needed to finance the expansion of world trade had to be found in the expansion of gold and the supply of dollar and the sterling. But the physical supply of gold is virtually limited to the output of the mines in South Africa and Soviet Union. Since the dollar acted as a medium of exchange, a unit of account and a store of value of the IMF system, every country wanted to increase its reserves of dollar which led to the dollar holdings a greater extent than needed.

Consequently the US gold stock continued to decline and the US balance of payments continued to deteriorate. Robert Triffin warned in 1959 that the demand for world liquidity was growing faster than supply because the incremental supply of gold was increasing little. Since the dollar was convertible into gold, the supply of the US dollars would be inadequate in relation to the liquidity needs of the countries. This might introduce trade barriers by countries in order to have balance of payments surpluses and build up reserves thus according to Triffin a growing liquidity shortage would generate strong contractionary forces that would threaten the expansion of the world economy and lead to world recession of the 1931 type.

A crisis of confidence had already erupted. The pound had been devalued in November 1967. There was no control over the world gold market with the appearance of a separate price in the open market On 15 August 1970 the United States suspended conversion of dollars into gold and refused to intervene in the foreign exchange markets to maintain exchange rate stability. The ‘Group of Ten’ industrial countries met at the Smithsonian Institute in Washington in December 1971 and agreed to realignment of major currencies by devaluing dollar by 10 percent and revaluing their currencies. The Smithsonian agreement broke down following the US dollar devaluation of February 1973 again and in March 1973 a number of countries had floating exchange rates and EEC countries had a “Joint Float” of their currencies. The Jamaica Agreement of January 1976 formalised the regime of floating exchange rates. By the Second Amendment of the IMF Charter in 1978, the member countries are not expected to maintain and establish par values with gold or dollar. The fund has no control over the exchange rate adjustment policies of the member countries. But it exercise “surveillance” over the exchange rate policies of the members. The system of flexible exchange has tended to reduce the need for more reserves.

In early 1970’s IMF introduced for creation and issue of Special Drawing Rights (SDRs) as unconditional reserve assets to influence the level of world reserves and to solve the problem of international liquidity. There is SDR 146 billion in the Fund’s General Account. The Fund also creates SDRs and allocates them to members in proportion to quotas. For this purpose the Fund has established the Special Drawing Account. Thus SDRs are new form of international monetary reserves which have been created to free the international monetary system from its exclusive dependence on the US dollar and fluctuations in gold prices. As the international monetary asset SDRs are held in the international reserves of central banks and governments to finance and improve international liquidity so as to correct fundamental disequilibrium in the balance of payments of Fund members.

The Fund’s scheme has been criticised for favouring rich nations. It in an inadequate scheme which had tended to make unfair distribution of international liquidity. The allocation of SDR’s to participating countries is proportional to their quotas in this sense the allocation of SDRs to developing countries is too low as compared to their needs. Low allocation of SDRs reduces the borrowing capacity of such countries.

Moreover SDR scheme does not link the creation of international reserves in the form of SDRs with the need for development finance on the part of developing countries. The need for liquidity on the part of developing countries is great “because of their higher costs of adjustment, limited access to private banking and capital markets, greater variability of exchange earnings and higher opportunity cost of holding foreign exchange reserves” Under the circumstances there is need to create more SDRs with fair distribution so that more unconditional liquidity is made available for the greater needs of developing countries.

Unfortunately due to the rigid attitude of the United States and some other developed countries, the Fund has not been able to resume allocation of SDRs from January 1982, despite the repeated pleas of the developing countries over these years. So the Fund has failed in its objectives increasing international liquidity through SDRs. Consequently faced with a recession an inadequate flow of concessional aid and falling prices of commodities and raw materials, developing countries have been facing severe balance of payments and debt problems.

Bretton Woods System

In 1944 under UN, a monetary conference held at Bretton Woods USA. The purpose of this conference was to devise international finance and monetary system. In this conference, two plans were presented as Keynes Plan and White Plan. Keynes Plan proposed to establish a clearing house which will be entrusted with powers to issue some international reserve currency. While the White Plan proposed to establish an “International Fund” which will perform following three main functions.

1. It will be a pool of international reserves.

2. IT will assist in the removal of balance of payment deficit.

3. It will determine and maintain exchange rates between currencies.

The White Plan was approved. In this respect three institutions were setup (1) IMF (2) IBRD (3) ITO. IMF would deal with international monetary issues, like reserve currency, exchange rate determination and removal of deficit in balance of payments.

Under Bretton Woods System (BWS) it was decided that international liquidity or international reserves will be consisting or Pound, Dollar and Gold. Each country will have to represent the par value of its currency either in pound dollar or gold. Above all, in this system, the dollar and gold were convertible, because Federal Reserve System of America will sell the gold at the rate of 1 ounce of gold against $35. The rate of exchange once determined remained fixed. This is the reason that BWS is accorded as a system of fixed change rate. To meet deficit in balance of payments, if it occurred the members of IMF could borrow from IMF under difference rights of facilities.

Causes of Failure of Bretton Woods System:

Following are the reasons which led to the fall of Bretton Woods System.

1. Defective Economic Policies of US:

In Bretton Woods System US dollar was like a king without crown. Therefore, there was a need that dollar could remain a scarce currency. But same could not happen. Rather there was a glut of dollar all over the world. US spent lavishly in Viet-Nam war and the same was the situation in case of space-race expenditure. In this way, the US deficits in budget went on mounting. With this the supply of dollars increased heavily. More properly, the world had to see the era of “Dollar shortage to Dollar Glut”. The currency which was an international currency, failed to maintain itself, and confidence in dollars decreased.

2. Increase in Unofficial Price of Gold:

As we have mentioned above that dollar was convertible into gold at the official price of 35 dollars equal to one ounce of gold. But because of increased supply of dollars such rate could not be maintained. In 1969 the office price of gold went to $200 per ounce in the markets of Zuriche, Franfurt, London and New-York etc. The Speculators of gold anticipated that in future the open market price of gold would increase. Hence, they started purchasing of gold against dollars. In addition to individuals, the governments particularly France started accumulating gold. France was sure of collapse of Bretton Woods System and the Gold Standard may take over. With this the breeches occurred in Bretton Woods System.

3. Insufficient Sources of IMF:

As we mentioned earlier that abundance of dollars reduced the value of dollars, while the economic adversity of Britain led to dethrone British pound. Above all the price of gold went on increasing in the world markets, which led to the accumulation of gold with individuals and governments. This show that all the components of BWS i-e gold, dollar and pound had to face certain complications. In such situation a need was realized to entrance world’s liquidity. Therefore, SDRs were issued and quotas of SDRs were fixed for the members of IMF. Against such SDRs a country can borrow from IMF and with such borrowings the deficits can be removed. In addition to SDRs IMF provided loans to its member countries under different facilities to finance deficit, in their balance of payments. But inspite of all such measures, the balance of payments position of poor countries could not improve. The deficits of under-developed countries went worst while those of developed countries went on improving. The Bretton Woods System increased international inequalities, rather reducing them. The under-developed countries were found demanding for more resources to meet their deficits. But it could not happen due to insufficient sources of IMF.

4. Fixed Exchange Rate:

We have mentioned above that Bretton Woods System was the representative of fixed exchange rate where the value of each currency in dollar or in pound remained fixed. The country faced deficit in its balance of payments had to make the payments in the form of gold or it had to devalue its currency. Because of devaluation, the prices of exports would fall, while the prices of imports would rise. In this way the deficit could be removed through increasing the exports and the decreasing the imports. But the mechanism which was in operation at the international level did not help to increase exports of the poor countries as their exports were agriculture in nature where as their imports did o decrease even they were expensive. In such circumstances, the deficits of the poor countries went on increasing rather decreasing. The loans or drawing rights of the poor countries with IMF were very meagre. The major share of such drawings was taken away by the rich countries which had the greater subscription in IMF. The poor countries had to pay heavy interest against ordinary drawing rights and special drawing rights. They had to meet the conditions of IMF. Simply the adjustment process attached with Bretton Woods System always led to promote the demand for dollars, where as the dollars remained short as far as under-developed countries are concerned. Consequently the deficit of under-developed countries went on mounting. The governments of under-developed countries always wished to maintain the exchange rate once it was settled. Accordingly artificial rate of exchange was attempted to be maintained. As a result the exchange rate in the open market happened to be different from that of official exchange rate. In this way, the un-optimal resource allocation, unreal exports, un-optional levels of outputs, destabilizing speculation and multiple exchange rates were observed. In such circumstances, eth international monetary arrangements went on aggravating and Bretton Woods System lost its efficacy.

Working and Achievement of Asian Development Bank

During 1950s, it was strong by felt that there should be a bank for Asia like the World Bank to meet the development needs of this region. This view was suggested for the first time at Ministerial Conference on Asian Cooperation held at Manila in December 1963. This conference constituted a working group of experts which submitted its report to the UN Economic Commission for Asia and Far East (ECAFE) at its session held at Wellington in March 1965. It was on the basis of this report than an Agreement for establishing the Asian Development Bank was drafted and adopted at the Second Ministerial Conference on Asian Economic Cooperation at Manila in November-December 1965. By January 1966, 33 countries had signed its Charter and the Asian Development Bank was setup on 19 December 1966 with its head quarters at Manila in the Philippines.

Working of Asian Development Bank (ADB)

The Asian Development Bank (ADB) performs the following functions.

1. Financial Assistance: The Bank provides financial assistance in the form of grants and loans. It gives three types of loans; project loans, sector loans and programme loans. Project loans are tied to specific projects. Sector loans are given to number of related projects in a given sector. Programme loans cover more than one sector and relate to the implementation of policy or programme for bringing about certain changes.

The Bank advances loans out of its Ordinary Funds Reserve and Special Funds Reserve. Ordinary Funds Reserve refers to the Bank’s ordinary capital resources out of which direct loans are given for the development projects or specific projects. These consist of the financing of foreign exchange or local currency components of the cost of specific projects. The Bank also lends to development banks of member countries for re-lending to specific projects. All direct loans are “hard loans” repayable over 15 years with a three-year grace period. The interest rate is determined in accordance with ADB’s pool based variable lending rate system for US dollar loans.

For sector lending, the Bank has established Special Funds such as the Asian Development Fund, Multipurpose Special Fund and Agriculture Special Fund. Loans out of these funds are given for projects of high development priority, for longer periods and at lower rates of interest than for ordinary loans. These are called “Soft-loans”. The Special Funds are different from the Bank’s Ordinary Capital resources. The Bank contributes 10 percent of its paid in capital to these funds and the remaining amount comes as donations from its member countries. For lending out of Special Funds, the sanction by two thirds to the total number of Governors of the Bank is required.

The ADB grants loans on the basis of certain criteria. At the time of evaluating projects that it proposes to finance, the Bank considers their economic, technical and financial feasibility their effects on the general activity of the concerned country their contribution to the removal of economic bottle necks, and their capacity to repay the loans. In granting loans to the various types of projects, the ADB charter does not impose any restrictions. Even the minimum limits of loans are left open to be decided by the Bank on merits and viability of the projects.

2. Technical Assistance: The ADB also provides technical assistance to member countries out of the Technical Assistance Special Fund. The technical assistance is provided to the members in ECAFE region through their governments, agencies, regional institutions and private firms. It may be in the form of grants or loans or both. The Bank’s technical assistance has two main objectives. First to prepare and finance and implement specific national and regional development plans and projects, and second to help in working of existing institutions and the creation of new institutions on a national or regional basis in such areas as agriculture, industry, public administration etc. The Bank also provides advisory services under its technical assistance programme. It sends its own experts and even hires consultants from other institutions on short and long missions for setting up or reorganising institutions for project implementation in member countries.

3. Survey and Research: One of the functions of ADB is to conduct surveys and research in order to formulate policies for the future and to promote regional economic integration. It brings out an annual report in which it highlights the achievements, prospects and failure relating to the economic development of the member countries of ECAFA region and also suggests measures to solve their problems.

4. Poverty Reduction: One the basis of a report submitted by a Panel of ADB Experts in 1989, the bank has pledged its future direction towards achieving the twin objectives of maximising its impact on developing member countries, achievement of sustainable economic growth and corresponding reductions in poverty in the Asia Pacific region. The Banks greater emphasis in the 1990’s was on poverty reduction, social infrastructure and conservation of natural environment. In promoting economic growth, the Bank stresses the importance of increasing productivity. Productivity improvements depend on new investment, the efficiency with which new and existing capitals are used and incorporation of technological changes. The Bank encourages domestic resource mobilization to finance new investments, private sector development and public sector reform to improve efficiency. The Bank targets resources where private sector provision is inadequate and seeks to involve the private sector in services formerly left to the public sector. The ADB now pays more attention to human resource development in order to develop suitably skilled and capable manpower in developing member countries. Progress of Asian Development Bank:

The ADB has been playing an important role in providing finance in the form of loans and grants to the member developing countries for their development. The ADB was setup in 1966, for the first time it sanctioned loans amounting to $41.6 million in 1968. Its total assistance to developing member countries has risen to $32 billion in 1991. The Bank has been providing assistance in the fields of agriculture and agro-based industries, energy industry and non-fuel minerals, development banking, education health and population planning.

International Finance Corporation (IFC)

International Finance Corporation (I.F.C) is an institution of the World Bank Family. It was established in 1950. It is the major multilateral agency promoting productive private investment in developing countries by providing long-term loans and risk capital at commercial rates for maturity of 7 to 12 years. Its membership is open to all members of IBRD.

The purpose for which IFC was setup has been laid down in Article 1 of Articles of Agreement as “the purpose of the corporation is to further economic development by encouraging the growth of productive private enterprise in member countries, particularly in the less developed areas, thus supplementing the activities of IBRD. In carrying out this purpose, the corporation shall:

(i) in association with private investors, assist in financing the establishment, improvement and expansion of productive private enterprise which would contribute to the development of its member countries by making investments, without guarantee of repayment by member Government concerned, in cases where sufficient private investment is not available on reasonable terms;

(ii) Seek to bring together investment opportunities, domestic and foreign private capital and experienced management; and

(iii) Seek to stimulate and help to create conditions conductive to the flow of private capital, domestic and foreign into productive investment in member countries.

Organization of the I.F.C:

The I.F.C is the sister organization of the World Bank but it is separate from the World Bank, except for the fact that only a member of the Bank can be its member. It has its own staff but draws upon the Bank for administrative services. Its organizational structure regarding the President, the Chairman, the Board of Governors and Executive Directors in one the pattern of the World Bank. The World Bank President is the ex-officio Chairman of the Board of Directors of the IFC. But all the administrative powers of the IFC are vested in the Vice President of the IFC. The corporation has eight departments of these four relate to investment which function on geographical basis. The remaining four departments relate to capital markets, finance and management, legal matters and engineering which operates on functional basis.

The Types of Assistance Rendered by IFC:

The following types of assistance are rendered by IFC to private enterprises.

1. Investment: The IFC promotes productive private investment in developing countries in three ways (i) by direct investment (ii) by securing foreign and local capital, and (iii) by providing guidance and technical assistance. It provides long term loans and risk capital at commercial rates for maturity of 7 to 12 years. It invests in partnership with private investors from the capital exporting country or from the country in which the enterprise is located. But its investments will not be more than half of the capital requirements of the enterprise. The minimum investment by the Corporation in an enterprise is $1 million, but there is no upper limit. The enterprise seeking loans from IFC should be industrial, located in a developing country and should satisfy the criteria of both economic development and reasonable commercial return. The corporation’s assistance is not lied to expenditure in any particular country, but must be spent in the member country. It is used to buy machines and other equipments and to meet foreign exchange, local costs, working capital and any other legitimate business expenses. It does not seek or accept any type of government guarantee for making investments and repayment of loans, except when it is required by law in a country.

2. Secure Foreign and Local Capital: The IFC participates in promoting productive private investment in developing countries by way of equity and loan investment. It under writes equity capital, helps in sponsoring and bringing together investors for new enterprises. Thus it secures the cooperation of both foreign and local enterprises. It helps them in making feasibility studies of proposed projects.

3. Technical Assistance: The IFC provides project sponsors with the necessary technical assistance so that their enterprises are potentially productive and financially sound. For this purpose it undertakes financial studies and analysis. It also provides policy assistance to member governments so that they may develop the necessary investment climate to attract foreign and local private enterprise.

4. Capital Markets Development: The Corporation has a Capital Markets Development which provides specialised resources for studying the problems and needs of the financial markets of developing countries. It provides financial support and advice for the development of financial institutions and helps in developing a legal financial and institutional frame work which may encourage local and foreign capital in developing countries. The Corporation has been instrumental in the promotion of financial institutions development finance companies, leasing and venture capital companies, mutual fund etc by giving technical assistance to developing countries.

Over the years IFC has played an important role in promoting productive private investment in developing countries by providing loans and equity capital by rendering technical advice in the promotion of capital and money markets by bringing foreign and local enterprise to cooperate in joint ventures in starting new industrial projects. But its developing economies and very little to the less developing economies.

International Bank for Reconstruction and Development (IBRD) or World Bank

The International Bank for Reconstruction and Development (I B R D) was established in 1945 under Bretton woods Agreement of 1944 to assist in bringing about a smooth transition from a war time to peace time economy. It is a sister institution of the IMF.

Functions of I. B. R. D:

Following are main functions of I. B. R. D.

1. To assist in the reconstructions and development of territories of its member countries by facilitating the investment of capital for productive purpose and the development of productive facilities and resources in less developed countries.

2. To promote private foreign investment by means of guarantees or participations in loans and other investment made by private investors and when capital is not available on reasonable terms to supplement private investment by providing finance for productive purpose out of its own resources or from borrowed funds.

3. To arrange the loans made or guaranteed by it in relation to international loans through other channels so that more useful and urgent small and large projects are dealt with first.

4. To promote the long ranged balanced growth of international trade and maintenance of equilibrium in the balance of payments of member countries by encouraging international investment for the development of their productive resources there by assisting in raising productivity, the standard of living and conditions of workers in their territories.

Organisation of I. B. R. D:

Like the IMF, the I B R D has a three tier structure with a President, Executive Directors and Board of Governors. Number of Executive Director’s is 21 of these 5 are appointed by five largest share holders of the World Bank. They are US, UK, Germany, France and Japan. The remaining 16 are elected by the Board of Governors. There are also Alternate Directors. The first five belong to the same permanent member countries to which the Executive Directors belong. But the remaining Alternate Directors elected from among the group of countries who cast their votes to choose the 16 Executive Directors belonging to their regions. The President of the World Bank presides over the meetings of the Board of Executive Directors. The Executive Directors decide about policy within the frame work of the Articles of Agreement. They consider and decide on the loans and credit proposals made by the president. The President has a stag of more than 6000 persons who carry on the working of the World Bank.

Funding Strategy of IBRD:

The IBRD’s funding strategy has the following four objectives. The first is to ensure the availability of funds to the Bank. For this purpose the IBRD seeks to maintain unlimited access to funds in the markets in which it borrows. The second objective is to minimise the effective cost of those funds to its borrowers. This is done through the currency mix of its borrowings and the line of borrowings. In the former case, it tends to maximise borrowings in currencies with low nominal interest rates. The time of borrowings is manipulated in two ways (a) when interest rates are expected to rise, the Bank seeks to increase its borrowings and (b) when interest rates are expected to fall, and it seeks before borrowings. The third objective is to control volatility in net income and over all loan charges. For this purpose the Bank a pool based variable lending rate system that uniformly adjusts interest charges applicable to the outstanding balance on all loans made under it. The existing loans were not affected by this lending system. When the majority of loans and borrowings are incorporated into the new lending rate system in future, the volatility of interest rates will be much reduced. The fourth objective of funding strategy is to provide an appropriate degree of maturity transformation between its borrowing and lending. Maturity transformation refers to the Bank’s capacity to lend at longer maturities than it borrows. At the same time, it provides its borrowers with a modest degree of maturity transformation.

Borrowing and Lending Activities:

The IBRD is a corporate institution whose capital is subscribed by its members. It finances its lending operations primarily from its own medium and long term borrowings in the international capital markets and currency swap agreements (CSA). The bank also borrows under the Discount Note Programme. First it places bonds and notes directly with its member governments, government agencies and central bank. Second it offers issues to investors and in the public markets through investing banking firms, merchant banks and commercial banks.

The IBRD has evolved two new borrowing instruments first, Central Bank Facility (CBF) and second borrowing in Floating Rate Notes (FRNs). CBF is one year, US dollar dominated facility for borrowing from official sources particularly central banks. FRNs are meant to help the IBRD to meet some of the objectives of its funding strategy. The FRN market enables the Bank to gain access to set of investors like commercial banks and certain other financial institutions which have not traditionally bought IBRD notes.

The Bank lends to member countries in any of the following ways.

(i) By marketing or participating in loans, out of its own funds (ii) by marketing or participating in direct loans out of funds raised in the market of a member or otherwise borrowed by the Bank. (iii) By guaranteeing in whole or in part loans made by private investors through the usual investment channels.

The Bank provides the following facilities to member countries.

(a) Structural Adjustment Facility (SAF): The IBRD has introduced SAF since 1985 to borrowing countries in order to reduce their balance of payments deficit while maintaining or regaining their economic growth. SAF funds are used to finance general imports with a few agreed exceptions such as luxury and military imports.

(b) Enhanced Structural Adjustment Facility (ESAF): In 1987 the Bank has set up the ESAF to increase the availability of concessional resources to low-income member countries. It provides new concessional resources totalling SDR 6 billion which will be financed by special loans and contribution from developed and OPEC countries. Like SAF, ESAF is meant to help the borrowing countries to reduce their balance of payments deficits and encourage growth.

(c) Special Action Programme (SAP): The Special Action Programme (SAP) has been started in 1983 to strengthen the IBRD’s ability to assist member countries in adjusting to the current economic environment. It has four major elements (i) an expansion in lending for high-priority operations that support structural adjustment, policy changes maintenance of crucial infrastructure. (ii) Accelerated disbursement under existing and new investment commitments to ensure timely implementation of high priority projects (iii) Expanded advisory services on the design and implementation of appropriate policies. (iv) Existing familiar efforts by other donors for fast disbursing assistance in support of programmes of Banks and IMF.

Role of the European Economic Community (EEC)

European Economic Community (E. E. C.) or European Common Market (E. C. M.) was founded in 1957 under the Treaty of Rome by France, West Germany, Belgium, Luxemburg and Netherlands. The community now has 12 members and has an association with Turkey which is expected to become a full member in future. The E. E. C. consists of three organisations based on their separate treaties originally signed by the six member states, first eh ECSC, setup by the treaty of Paris in 1951 valid for 50 years. Second the E. E. C. by the treaty of Rome in 1957 of unlimited duration and third the European Atomic Energy Community (Euratom) by the second Treaty of Rome in 1957, also of unlimited duration. The first treaty was already in operation from July 1952 and the other two came into force from January 1958. Article 2 of the Treaty of Rome lays down that “the community shall have as its task, by setting up a common market to promote throughout the community a harmonous development by economic activities, a continuous and balanced expansion, an increase in stability and accelerated raising by the standard of living and closer relations between the Member States belonging to it”.

The European Economic Community’s relations with the developing countries go back to the Treaty of Rome in 1957. The original six signatories to the treaty agreed to associate the EEC to those non-European Countries and territories which had special relations with France, Belgium, Italy and the Netherlands. The exports and imports of the “associated members” are treated at par with the Community members. With the entry of the UK into the EEC in 1973, a large number of her former colonies have become associated with members of EEC. Initially separate agreements were signed with such developing countries who became associated members of the community. But in 1975, a single agreement was signed under the Lome Convention with 45 African, Caribbean and Pacific (ACP) countries. At present there are 12 countries in the Mediterranean region and 66 ACP countries that have signed the third Lome Convention. The Lome accord includes the relaxation of some non-tarrif barriers, less stringent enforcement of some trade regulations, and exemption from certain bilateral trade agreement such as the MFA. But it is subject to regulations which severely limit free access for the exports of beneficiaries, including safeguard clause which allows the EC to suspend any concession unilaterally. Although the ACP countries as a group have been receiving preferential tarrif rates and exemption from MFA, empirical evidence reveals that there ahs been actually decrease in trade between ACP countries and the EC. But some trade-Creating effects have occurred in the form of diversification of exports from the ACP countries in the form of manufacturers, and processed agricultural and temperate agricultural products. So far as the other developing countries of South East Asia, Latin America and Gulf and Southern Mediterranean are concerned, a link between them and the EC was provided by the Generalised System of Preferences (GSP) in July 1971. The GSP allows the free entry of certain manufactured goods exported by developing countries to the EC and helps them to industrialise. The EC has been importing from 56 Asian, Latin American and Middle East countries under the GSP scheme. All such countries have signed individually commercial and cooperation agreements with EC. Leaving aside those developing countries that are associated members of the Community, the other developing countries have not benefited much from the GSP. They continue to suffer from rising protectionism in their trade relations with EEC. Only about the 10% of the total imports of the Community are covered by the GSP. At the same time, budgetary constraints prevent the community from increasing its financial aid to developing countries. By remaining outside the UNCTAD the EEC has failed to help such countries much.

The EC is the largest textile market in the world. It has negotiated bilateral trade agreements with all South Asian and Latin American countries and other low wage textile exporting countries under the provisions of the GATT Multi-fibre Arrangements (MFA). When the single market becomes full operational, exports of clothing and textile will be boosted. The EC has agreed to a gradual phasing out of the MFA in three stages under the GATT Uraguay Round talks. Until then the bilateral agreements would continue to be extended for the benefit of developing countries.

The EC helps developing countries in developing telecommunication, science and technology, energy and human resource development. It carries on joint research projects in the developing countries which include biotechnology, health and food technology. It aids such countries in trade promotion, stabilisation of exports earnings and encourages regional integration among them. The EEC funded development projects are mostly in rural areas. They include rural electrification irrigation, primary education and community development. The EC has been playing a major role in the international drug control. It launched a special programme to curb drug abuse in 1987 with emphasis on backing the efforts of developing countries to reduce demand for and production of narcotics.

The European Community launched in 1958 the EC Investment Partners (EC IP) in order to boost economic development in Asia, Latin America and the Mediterranean countries. The scheme provides financial help to EC companies willing to undertake direct investment in developing countries. The EC IP promotes joint investment projects so as the encourage transfer of capital and technology and help to create jobs in new industrial sectors. It also helps those companies which want to operate in developing countries through licensing and technical assistance agreements. The emphasis is on promoting small and medium enterprises. It covers all sectors of the economy, including industry services, agriculture and mining. It operates through financial institutions, both in EC and the developing countries. They act as EC agents. They analyse projects, recommend whether to accept or reject joint ventures, draft contracts and make payments. The EC IP provides funds for project identification studies, for human resources development and for equity participation in joint ventures.

IMF, its Structure, Functions, Objectives Resources and Performance

IMF came into being on December 27, 1945 when 29 countries of the world signed on “Articles of Agreement”. It started functioning in March 1947.

Structure of IMF:

The Board of Governors is the supreme body of IMF, which is headed by a Governor and an alternate Governor who are appointed by the members of the Fund. The board of Governors deals with the entry of new members, determination of quotas and distribution of SDRs. Board of Governors consists of one Governor from each of its 184 members. 24 of the Governors sit on International Monetary and financial committee and meet twice a year. There is an annual meeting of the Fund which is held once in a year all members participate in it.

The other big authority in the IMF is “Executive Board”. It has a Managing Director who is the Chairman of the executive board and controls day-to-day matters of the Fund. IMF has two committees:

(1) Interim Committee now replaced by IM FC,

(2) Development Committee. The Interim Committee deals with international liquidity and world monetary arrangements. Moreover this committee analyses the amendments of the Articles of the Agreement. Where as the development committee suggests those measures where by the real resources could be transferred to the developing countries. Till the end of 2003 the total staffs of IMF was 2800 which was from 141 countries. The Fund has its headquarters at Washington with its offices at Paris and Genera.

Objectives of the IMF:

In the first article of the Fund’s Charter there have been described the six objectives of IMF. They are as:

1. To increase international cooperation by providing consultancy services regarding international monetary issues.

2. To assist in the balanced growth of world trade, which will be helpful in raising the efficiency, employment and income of the world.

3. To Stabilize the exchange rate and discourage the tendency of competitive devaluation.

4. To abolish those restrictions which are obstacles in the way of World Trade and create a multi-lateral system of payments.

5. The countries facing deficit in their balance of payments can borrow from IMF to finance temporarily.

6. To reduce the volume and time period of disequilibrium (deficit) in balance of payments.

Functions of IMF:

Following are some functions performed by IMF.

1. Exchange Arrangements:

As a result of 2nd amendment in Articles each country can opt for any one of the following in connection with exchange rate.

(1) A country can represent the value of its currency in terms of any other currency like dollar.

(2) The par value of a currency can be represented in SDRs.

(3) The exchange rate can be expressed in terms of some currency composite.

(4) No country is allowed to represent its currency in terms of gold.

(5) The members can make such arrangements where they can show the par value in terms of the currencies.

Accordingly, in 1985, the arrangements regarding exchange rate determination, the 32 countries had fixed exchange rate in terms of dollar, there are 14 countries whose value is fixed in terms of Franc. There 12 countries who show their value in terms of SDRs where as the large number of countries are on ‘Managed Floating’ exchange rate system.

2. Surveillance:

It is the responsibility of the Fund to see whether the members are serious regarding their functions, whether they get guidance from Fund regarding exchange rate policies. In respect of conduct of exchange rate policies fund has approved three principles (1) A member in order to get undue benefit will not prefer any other member (2) For the sake of abolition of destabilizing forces in exchange rate govt. should interfere in foreign exchange market (3) Regarding such intervention is should be kept in view that the interests of the other countries be not affected. Thus under this function there is regular dialogue and policy advice which IMF offers to each member. Hence IMF makes an appraisal of each member’s economy.

3. Exchange Restrictions:

In the light of Article VIII of the Fund, no country can put any type of restrictions on the payments regarding Current Account. However a country can impose restrictions on the movement regarding capital amount. Again no country can impose restrictions that the transactions will be made in certain currencies.

4. Consultation and Technical Assistance:

For the sake of effective performance of its functions fund must be having the information regarding the economic policies and economic conditions of its member countries. This will be possible if the fund and the members are linked to each other. In 1984, 118 countries completed their talks with fund under Article IV. Again the Fund provides technical assistance to its members regarding strengthening their capacity to design and implement effective policies. Fund assists in the areas of fiscal policy, monetary policy, exchange rate, banking and financial system etc.

5. Lending For BOP Difficulties:

Basically Fund is aimed to provide financial assistance to those member countries which suffer from BOP difficulties. But to the poor countries, it also assists in the attainment of growth and alleviation of poverty.

Resources of the IMF:

The main source of the Fund is those subscriptions which are paid by the members in form of quotas. We also know that each country has to pay 75% of its quotas in terms of the domestic currency and 25% in terms of SDRs. In 8th General Review which was promulgated in November, 1983, it was decided that 25% of quota can be paid in those currencies which are allowed by the Fund instead of SDRs. The New Arrangement to Borrow (NAB) introduced in 1997 with 25 participating countries and institutions. Under the GAB and NAB the IMF has upto SDRs 34 billion or $46 billion available to borrow.

In order to enhance its resources, the Fund can borrow from the official as well as unofficial sources. Fund obtained its first loan in 1962 under ‘General Arrangements to Borrow (GAB)’. In 1983 the GAB has been extended Accordingly under GAB Fund has borrowed from US Deutsche Bunds Bank, Japan, Saudi Arabia, France, Belgium, Holland, Italy, Canada and Swiss National Bank. Against such loans the Fund pays as much interest as it gets against the use of SDRs.

Fund gets three types of charges against the use of resources.

1. Each country has to pay 0.5% as service charges.

2. The agreement free is 25% per annum.

3. The borrowing country has to pay 7% as interest charges. However they very from facility to facility.

Performance of IMF:

We know that IMF was setup in 194 and has completed, its 60 years in 2004. Therefore we see how far the IMF has been successful in attaining its objectives. The role of IMF is discussed below.

1. IMF has been much more of value for developed countries. It not only plays an important role in the determination of exchange rate, but IMF arrangement provided the opportunities to European industrial countries to follow macro-economic management policies in better way. They followed the realistic exchange rates. They reduced the restrictions over world trade and foreign exchange, and depended upon monetary policy for economic stability. As a result not only their deficits decreased, but the inflation was also controlled. All this means that IMF helped in attaining both internal and external balances.

2. In 1960 IMF brought two big changes in operation. To increase its resources to finance the deficit countries it introduced GAB where by the IMF could be able to borrow from 10 big industrial countries. Secondly because of shortage of world’s liquidity in was authorized to issue SDRs.

3. During 1960’s IMF paid special attention on the under-developed countries. It introduced two facilities like CFF and BSF with aim of assisting those poor countries which faced fall in their export earnings.

4. During 1970’s, because of oil price like under-developed countries had to face soaring deficits. Moreover the world has to see melodrama of inflation and unemployment. In such circumstances, there was fear that rate of exchange will face big fluctuations and there will be big devaluation like 1940’s. In order to compensate the oil affected countries IMF introduced for oil Facility and 2nd oil Facility. In 1976, IMF set up TF, while in 1977 it formed SFF.

5. In 1986 and 1987 the Structural Adjustment Facility (ESAF) were introduced. Under these facilities, IMF helps those countries which are engaged in removing price distortions, maintaining real exchange rate and enhancing productive capacity. The purpose of such all reforms is to create a suitable environment for economic development. The above facilities have been renewed in 1944 with the aim of providing loans to developing countries at the concessionary rates so that they could initiate medium term programme of macro-economic stability.

6. In 1933 IMF initiated “Temporary Systematic Transformation Facility” for the assistance of former states of Soviet Union. As a result of such facility, the Central Asian States will be assisted which are transferring themselves from command economies to market-economics. Moreover IMF is providing training facilities to the staff of these states so that they could train themselves for a better macro economic management.

7. During 1977-98 Asian Financial Crisis, Fund pledged $21 billion to assist Korean to reform economy, restructure its financial and corporate sectors and recover from recession.

8. In the year 2000 IMF approved an additional sum of $52 million loan for Kenya to cope with sever effects of drought und PRGF.

United Nations Conference on Trade and Development (UNCTAD), its Aims and Objectives

The United Nations Conference on Trade and Development (UNCTAD) was established in 1964 following the growing dissatisfaction with the operation of such international institutions as the IMF and GATT. These institutions favoured the developed countries and failed to tackle the special trade and development problem of the less developed countries.

The UNCTAD expected to perform the following functions as laid down by the UN General Assembly.

1. To promote international trade between countries with different socio-economic systems, especially for accelerating the economic development of less developed countries.

2. To formulate principle and policies of international trade and related problems of economic development.

3. To make proposals for putting the social principles and policies into effect and to take such other steps this may be relevant towards the end.

4. Generally, to review and facilitate the coordination of activities other institutions with in the UN system in filed of international trade and related problems of economic development.

5. To be available as a centre for harmonious trade related development policies of governments and regional economic groupings.

Objectives and Achievements of UNCTAD:

UNCTAD is supposed to fulfil the following objectives which have been evolved gradually of the various conferences: (1) Trade in primary commodities (2) Trade in manufactured goods (3) Development financing (4) Technology transfer (5) Economic cooperation among developing countries.

We discuss below the extent to which UNCTAD has been successful in achieving these objectives.

1. Trade in Primary Commodities: The UNCTAD has been in international commodity arrangements since its inception. Less developed countries want to expand, the market for their traditional exports of primary commodities. Developed countries place restrictions on the exports of the latter in such forms as licensing, quotas, tarrifs, health and packaging regulations etc and provide subsidies to domestic producers. Such trade restrictions tend to be higher for processed products than for unprocessed. Besides, exports from less developed countries have been subject to wide fluctuations. Consequently there has been continued deterioration in the terms of trade of primary products of the less developed countries in relation to the export of manufactured products from the developed countries. Since UNCTAD II, the less developed countries have been insisting on International Commodity Arrangement (ICA) to stabilise the prices and market for their exports of primary products. The agreements seek: (1) to stabilise the price of the commodity concerned so as to reduce price fluctuations and the resulting stability in the economies of the less developed countries. (2) To increase its price to compensate for past worsening the terms of trade of less developed countries.

All UNCTAD IV in 1976 it was proposed to have an Integrated Programme for commodities (IPC) and to create a common fund for buffer stock financing. The proposal was to negotiate international commodity agreements to stabilize the prices of 18 commodities, ten of which were to be included in the initial buffer stock scheme. This programme led to the international commodity agreements on only cocoa (1981) and rubber (1980). UNCTAD VI in 1983 also emphasised the importance of negotiating ICA for ten commodities of the five agreements on commodities-coffee, cocoa, sugar, tin and rubber only that for rubber is still in operation.

UNCTAD VII has a subsidiary committee on commodities and the UNCTAD VIII setup standing Committee on Commodities for making recommendations to TDB. The UNCTAD proposed for a $6 billion Common Fund in 1976 to create and finance international buffer stock of ten storable commodities. It was at UNCTAD VII that the Common Fund for commodities under the ICP became operational after number of countries ratified it or expressed their intensions to do so. New pledge announced at UNCTAD VII raised its total pledged capital to 66.9 percent of the $4.7 billion fund allowing it to become operational.

2. Trade in Manufactured Goods (GSP): Less developed countries have strongly urged the developed countries to give them tarrif preferences on their manufactured and semi manufactured goods. A UNCTAD I the G-77 urged the developed countries to grant a Generalised System of Preferences (GSP) to the export of such good to the developed countries. It was at UNCTAD II in 1968 that all members unanimously agreed for the early establishment of a mutually acceptable system of generalised, non-reciprocal and non-discriminatory preferences. The objectives specified for GSP were (a) to increase the export earnings of less developed countries (b) to promote their industrialisation and (c) to accelerate their growth rate.

Under the GSP, most manufactured and semi-manufactured goods from less developed countries to developed countries enjoy tarrif reductions or exemptions from custom duties. A majority of developed countries grant duty free treatment for all or most products eligible for GSP. The US, Sweden, Norway and Finland give completely duty free treatment under their GSP schemes. Japan and Switzerland allow generally duty free treatment with varying rates of duty up to 50 percent lower than under MIN for individual products from less developed countries. The EEC also gives duty free treatment for al industrial products eligible for GSP.

During 1970s constant efforts were made to expand the coverage of the GSP. But in the wake of global recession, rising protectionism and other obstacles in the way of increased access to international markets, the less developed countries experienced as severe set back in their exports of manufactured and semi-manufactured products during 1980-82. Again in 1983-84 slower growth in developed countries and in world trade reduced the growth rate of exports of less developed countries due to fall in international commodity prices. However there has been a moderate recovery in export prices of manufacturers of less developed countries since 1985.

3. Development Finance: Right from the UNCTAD III less developed countries have been voicing their concern over the growing problems of their balance of payments deficits and indebtedness. The UNCTAD II held at Santiago in May 1972 passed a resolution asking the IMF to work out a scheme for the link-up of Special Drawing Rights (SDR) with development finance. This was essential because the SDRs had been linked with individual members quotas in IMF. Since the quotas of less developed countries were small they received very small share of SDRs. The UNCTAD III was also called upon to provide for close examination and to recommend appropriate remedial measures.

The UNCTAD IV held in May 1976 also failed to solve the debt and development finance problem of less developed countries. It passed three resolutions in this connection. The first deals with the debt problem of less developed countries and asked the developed countries to convert DDA debt into grants and establish a frame work within which future debt problem could be solved. The second related to an effective system of international financial cooperation which suggested a number of measures to improve the working of the IMF in relation to less developed countries. The third resolution concerned the establishment of multilateral guarantee facility.

The UNCTAD V held at Manila In 1979 passed a number of resolutions concerned with finance and debt problems of less developed countries. It asked the IMF to examine the over all size of its quotas in relation to the magnitude of world trade and balance of payments deficits of its members and to increase the quota of less developed countries.

The UNCTAD VI held in 1983 and UNCTAD VII held in 1987 relating to development finance, debt rescheduling conversion of loans into grants of the less developed countries.

UNCTAD VIII held in 1992 had on its agenda “resources for development”. It appointed adhoc working groups to deal with investment and capital flows, non-debt creating finance for development and new mechanism for increasing investment and financial flows to developing countries.

4. Technology Transfer: It was at the UNCTAD at Nairobi in 1976 that the resolution was passed for measures which would strengthen the technological capability of less developed countries. It was pointed out that better research facilities, training programmes and establishment of local and regional centres for technology transfer would serve the purpose.

The UNCTAD VI emphasised upon the need for transfer of technology to developing countries in order to promote their speedy and self reliant development. Policy formulation related with the transfer and development of technology varies from country to country. Therefore an international code of conduct on the transfer of technology has been under negotiation in UNCTAD. The code of conduct will provide important elements for the design and development of national policies for technology transfer. The UNCTAD has simply laid down the broad principles for transfer of publicly funded technologies at the inter-governmental level. It may facilitate the process of technology transfer by freer access to sources of information cutting down barriers to freer flow of technology etc.

5. Economic Co-operation among Developing Countries: UNCTAD II held at New Delhi in 1968 emphasised for the first time the need for promoting international cooperation and self reliance among the developing countries. UNCTAD VI held at Belgrade in 1983 again emphasised the need for cooperative efforts among less developed countries through widening the scope of preferential trading arrangements harmonizing industrial development programmes through infrastructural facilities particularly in respect of shipping services and simple payment mechanism under common clearing system. The first step towards economic cooperation among developing countries was taken at the ministerial meeting of G-77 held at New York in October 1982 when it decided to launch Global System of Tarrif preference (GSTP).

UNCTAD VII also stressed other importance of economic cooperation. UNCTAD VIII which setup new Standing Committee on Economic Cooperation among developing countries to study and report on all facts of cooperation toe the TDB. UNCTAD is a form where developing countries can meet, discuss and formulate plans for regional economic cooperation.

Globalization. its Advantages and Disadvantages

The efforts began to reform world economic system after the World War II. In order to liberalize world trade GATT was set up for reconstruction and world development World Bank was founded and for the improvement of international payment and receipt system IMF was formulated. From 1950 to 1980 the policy experts remained busy in stressing that exchange rate between currencies could be settled by the free forces of market and the restrictions on world trade could come to an end. For this purpose, WTO was set up in place of GATT. As a result during 1990’s we find a big movement towards free trade, dependence on market forces, abolition of regulations and promotion of Globalization. After this back ground of globalization let us discuss advantages and disadvantages of Globalization.

Advantages of Globalization:

Following are the advantages of Globalization.

1. Market Extension: Globalization will lead to promote world trade and extension of markets. In case of restricted trade a country can sell his products either in his own country or in some related countries. As a result the, the market of a country remains limited giving rise to low industrial development, employment and income. Because of globalization a country can sell its surplus goods in many countries. Thus when market is extended the internal and external economies will be accrued by the firms.

2. Increase in Consumer Welfare: Because of the globalization the competition will emerge at world level. As a result, each country would produce its products at the lowest price and sell them in the world market at lowest price. In this way not only the residents of a country would be able to have those goods which are not produced in the country, but these goods would also be available to them at reduced prices. This is would lead to increase their welfare.

3. Better Use of World Resources: The globalization will promote division of labour and specialization. As a result the world trade would take place in the light of theory of comparative cost as each country would produce the product which it can produce the cheapest. All this will lead to better allocation of resources. Here, there will be neither price distributions nor market imperfections.

4. Access of Technology and Other Information: The globalization will lead to abolish restrictions on the movement of goods and services. The poor countries of the world are backward because they lack modern technology, skilled labour force and knowledge. Therefore when globalization takes place their will be mobility of modern technology, skill and other information across the borders. The multinational companies of developed countries will make investment in poor countries. They will bring new technologies. As a result the process of development will set into motion.

5. Cultural Change: Because of globalization in addition to movement of goods, technology and services, there will occur cultural changes in those countries which are socially backward. The backwardness and illiteracy will come to an end. The poor nations will adopt the life style of developed countries. The print and electronic media will acquaint the people with importance of work. People will accept change and initiative.

Disadvantages of Globalization:

Following are some disadvantages of globalization

1. International Economic scenario: The proponents of globalization think that it will promote mobility of trade, capital and technology. But the facts reveal that technology transfer could not take place to the desired extent as the multi national companies were having monopoly over superior technology. They transfer technology for the sake of their interests. The poor countries could not be provided with capital and financial resources. Their debt burden went on increasing. The financial and economic crises in ASEAN countries during 1997-98 were due to such so called globalization. The unemployment and miseries increased. The globalization created instability and non-competition. This is well evident from the Protests which were made at the time of international conferences and meetings of world economic forums.

2. Domination of Multi National Companies: The globalization is justified on the basis of free market economy and free play of competitive forces. But in fact international economic system has been hijacked Multi National Companies. They hardly believe in competition. They earn abnormal profits following the Mercantile’s philosophy. They determine price and output under cartels and price leadership models. They make business under economic values of self-interest, rather ethical values. They have a least interest for the people and labour of developing countries. They go on flying their capital from one country to the other country in search of lucrative profits. The owner of MNCs of oil, electronics and medicines etc govern over the developing countries just by sitting in their head quarters in London New York and Paris etc. They have won the race but they are inviting the poor countries to join this race who are handicapped.

3. Increase in International Inequalities: The financial and business enterprises have monopoly over world’s capital information technology and strategic raw material. They charge the price whatsoever they like, as demand for most of their goods is inelastic. As a result the world’s resources go on shifting form under developed countries to developed countries. The incomes and standard of living of the rich countries go on increasing while that of poor countries goes on worsening.

4. Increase in Balance of Payments Deficit: It is the globalization which has promoted economic and social distortions at international level. Because of lack of protection the industries of developing countries are closing. Again the prices of agricultural goods produced by developing countries go on decreasing. As a result the exports from developing countries are decreasing or they are getting lower prices for their exports. Where as the demand for durable goods in developing countries are increasing. Particularly due to WTO rules the tarrif rate is being decreased. This will bring a flood of vehicles, electronics, luxurious goods, garments cosmetics, computers and drinks in the markets of under-developed countries. The under-developed countries will fail to boost their exports as they have low prices and income elasticity of demand for their goods. In such state of affairs the deficit in balance of payments of under-developed countries will go on increasing. To remove it, they will have to ask for assistance from IMF result, the IMF will impose host of condition abilities. As a result, the inflation and instability will become the destiny of the developing countries.

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