International Business

International Trade - Exchange of Goods and services outside

the frontier of a country.

International Marketing: International Trade plus marketing

mix decisions.

International Business: International trade, marketing,

investment, financing, procurement and production.

International Trade Theories: Why do we go for a

discussion?

• Absolute cost advantage (climate and natural resource

endowment)

• Comparative cost advantage (labor productivity)

• Stages in product life cycle (introduction, growth, maturity

and decline)

• Factor endowment theory (land, labor and capital)

What is 'Countertrade'?
Countertrade is a reciprocal form of international trade in
which goods or services are exchanged for other goods or
services rather than for hard currency. This type of international
trade is more common in lesser-developed countries with limited
foreign exchange or credit facilities. Countertrade can be
classified into three broad categories: barter, counter
purchase and offset.

Barter

Bartering is the oldest countertrade arrangement. It is the

direct exchange of goods and services with an equivalent value
but with no cash settlement. The bartering transaction is
referred to as a trade. For example, a bag of nuts might be
exchanged for coffee beans or meat.

Counter purchase
Under a counter purchase arrangement, the exporter sells
goods or services to an importer and agrees to also purchase
other goods from the importer within a specified period. Unlike
bartering, exporters entering into a counterpurchase
arrangement must use a trading firm to sell the goods they
purchase and will not use the goods themselves.  

Offset
In an offset arrangement, the seller assists in marketing
products manufactured by the buying country or allows part of
the exported product's assembly to be carried out by
manufacturers in the buying country. This practice is common in
aerospace, defense and certain infrastructure industries.
Offsetting is also more common for larger, more expensive items.
An offset arrangement may also be referred to as industrial
participation or industrial cooperation.
Benefits and Drawbacks
A major benefit of countertrade is that it facilitates the
conservation of foreign currency, which is a prime consideration
for cash-strapped nations and provides an alternative to
traditional financing that may not be available in developing
nations. Other benefits include lower unemployment, higher
sales, better capacity utilization and ease of entry into
challenging markets.

Classical Theories of International Trade

• Theory of Mercantilism

• Increase our wealth and treasure by foreign trade, where in

we must ever observe this rule: sell more to strangers than
we consume of theirs in value

Limitations : Zero sum game, Short run balance of trade

(David Hume’s argument) Overlooks other factors and
Creates restrictive trade environment

• Neo mercantilism; Japan which equate political power

with economic power and economic power with trade
surplus
 • Theory of Absolute cost advantage: Adam Smith

• ‘Ability of country to produce a good more efficiently

and cost effectively than any other country’.

• Trade will happen between countries with absolute

cost advantage in different products.

Cost Advantage

• Natural: petroleum in Saudi Arabia, aluminum ore in

Jamaica

• Acquired: Through specialization, Auto mobiles

technology of Japan

• Benefits

• Production impact Consumption impact

Example: Trade between Ghana and Korea based on 200 units of

resources each available

Resource Production Production Consumption Incremental

requirement/ unit and with after Ghana consumption
consumptio specialization trades of cocoa
n for 6 tons of S K
rice
Country Cocoa Rice Cocoa Rice Cocoa Rice Cocoa Rice Cocoa Rice
Ghana 10 20 10 5 20 0 14 6 4 1
S Korea 40 10 2.50 10 0 20 6 14 3.5 4
Total 12.50 15.0 20.0 20.0

• Theory of Comparative cost advantage : David Ricardo

 • Producing a product in a country more efficiently than
other products

• Export products with comparative cost advantage and

imports less cost-efficient products.

• Focus

• Labour productivity

• Both production and consumption impact

• Criticism

• Immobile resources

• Diminishing returns

• Samuelson critique

Resource Producti Producti Consum Incremental

requirement/ on and on with ption consumption
unit consump specializ after
tion ation Ghana
trades 4
tons of
cocoa
for 4
tons of
S K rice

Cou Co Ri Coc Ri Co Rice Cocoa Ric Coc Rice

ntry coa ce oa ce co e oa
a
Gha 10. 1 10. 7. 15. 3.75 11.00 7.7 1.0 0.25
na 00 3. 00 50 0 5 0
3
3

S 40. 2 2.5 5. 0 10.0 04.00 6.0 1.5 1.00

Kore 00 0 0 00 0 0 0
a

Tota 12. 12 15. 13.7

l 50 .5 5

J.S Mills International trade theory: If a country’s demand for

imports a product greater than other country’s demand for
another product, then the barter terms and gains would favor
former.

The relative strength of the demands for imports will depend on

the "inclinations and circumstances of the consumers on both
sides," and the international price or terms of trade will be a
value such that "the quantities required by each country, of the
articles which it imports from its neighbor, shall be exactly
sufficient to pay for one another." 

• How the gains could be divided

• The terms of trade depends upon the demand for

imported products by countries
 • Relative strength of demand for imports

• Inclinations and circumstances of the consumers on

both sides

• Price equilibrium ( International demand equation or

law of international values)

• The quantities required by each country of the articles

which it exports to neighbor exactly sufficient to pay
for its imports.

Taussig’s restatement of classical theory

Taussig tried to defend Ricardo by pointing out that even if

labour theory of value was defective and even if other factors
made important contributions to the production of goods,
comparative costs could still be based on labour cost alone, if it
is assumed that the trading countries are at the same stage of
technological development.

This is because, he argued that given the same technological

development, the proportions in which other factors could be
combined with labour would be the same. In view of this he
asserted that other factors could be validly ignored and for
purpose of comparative costs relative efficiency of labour alone
of different countries could be considered.

At any equilibrium rates between, both countries would gain

from an exchange and there need not be any equilibrium rates
strictly in between.

Classical theory: criticisms

 • Criticisms

• Constant labor cost, homogeneity of labor, perfect

internal mobility and external immobility

• Free trade, barter as the basis, two countries trading

in two commodities

• Perfect competition, no transportation cost

Modern Theories of Trade

• B. Ohlin is regarded as the father of modern theories of

international trade. Two major theories were at the
beginning.

• Heberler 's Opportunity cost theory

• Haberler has reformulated the doctrine of comparative

costs in terms of opportunity costs.
• According to Haberler, the ratio of prices in each country in
isolation is a reflection not only of the money costs of
production but more fundamentally of social opportunity
costs.
• Opportunity cost refers to the cost of a commodity in terms
of other commodity which must be foregone in order to
obtain the first.
• Hecksher-Ohlin

• Factor endowment theorem

Factor Endowment Theory

• Factor endowment -Cost difference -Price difference

• Comparative cost advantage arises from differences in

factor endowments
 • Export goods that make intensive use of locally abundant
factor resources for the import of goods that make intensive
use of factors locally scarce.

• (Wassily ) Leontief Paradox is a challenge of the validity of

this theory

• Factor endowment means extent to which a country is

endowed with factor resources

Classical Vs Modern theories

• Classical

• Internal trade differences from domestic trade

• Labor theory
• Labor factor
• Fails to explain why production cost differs

• Difference in labor productivity

• Modern

• Special case of domestic trade

• General equilibrium
• Labor and capital
• Explains causes of trade
• Differences in labor and capital productivity

Posner’s technological gap model

Difference between demand lag and imitation lag decides trade
between countries

• A. Imitation lag: Time lag between development of a

product in one country and its imitation in other country

• B. Demand lag: Time difference between the development of

product and the demand for the same from other country

• If A<B, there is possibility of global trade

• Vernon’s International product life cycle theory

• Explains variations in production and consumption pattern

• Introduction: Advanced economies because of R&D

and customer nexus
• Growth: Start production locations in other developed
nations
• Maturity: Establish operations in middle and low
income countries
• Decline: Production in LDCs and exports goods to
innovating country
•

• Competitive advantage
 • Michel porter
• Factor conditions, demand conditions, supporting
industries and structure and rivalry

• Country similarity theory

• A Swedish economist, Staffan B. Under, studied

international trade patterns in two different categories, i.e.,
primary products (natural resource products) and
manufactures.
• It was found that in natural resource-based industries, the
relative costs of production and factor endowments
determined the trade. However, in the case of
manufactured goods, costs were determined by the
similarity in product demands across countries rather than
by the relative production costs or factor endowments.
• It has been observed that the majority of trade occurs
between nations that have similar characteristics. The
major trading partners of most developed countries are
other developed industrialized countries.

Similarity in the sense:

• Similar demand pattern (preference similarity)
• Similar per capita
• Cultural and economic similarity
• Proximity of geographical locations
• New trade theory

• Paul Kruegman

• Countries do not necessarily trade only to benefit from their

differences but they also trade so as to increase their
returns, which in turn enable them to benefit from
specialization. International trade enables a firm to increase
its output due to its specialization by providing a much
larger market those results in enhancing its efficiency.
• The theory helps explain the trade patterns when markets
are not perfectly competitive or when the economies of
scale are achieved by the production of specific products.
Decrease in the unit cost of a product resulting from large
scale production is termed as economies of scale.
• Since fixed costs are shared over an increased output, the
economies of scale enable a firm to reduce its per unit
 average cost of production and enhance its price
competitiveness.
• Economies of scale (internal and external) and
asymmetrical control over world trade (for eg. By First
movers)
• Gains from international trade

• Terms of trade: ratio of price of export to the price of

import (net barter terms)
• Net terms: unit value index of exports/unit value index
of imports
• Gross terms: Volume index of imports/volume index of
exports
• Income terms: net terms of trade * volume index of
exports
Determinants

• Volume of exports
• Volume of imports
• Cost of production
• Export and import prices
• Factor productivity
• Location advantage
International Orientations

Ethnocentrism is pre- dominantly a home country orientation.

The domestic companies view foreign markets as an extension to
domestic markets. No international investment needed This
approach entails a minimal risk and commitment to overseas
markets. No additional selling cost incurred.
Polycentric Approach As the company begins to recognise the
importance of inherent differences in overseas markets, a
polycentric attitude emerges. The prevalent philosophy at this
stage is that local personnel and techniques are best suited to
deal with local market conditions. Subsidiaries are established in
overseas markets, and each subsidiary operates independently of
the others and establishes its own marketing objectives and
plans. The environment of each market is considered while
formulating the marketing strategy. The important merit of
polycentrism is the adaption of the business strategies to the
local conditions.

Regiocentric Approach A regiocentric company views different

regions as different markets. A particular region with certain
important common marketing characteristics is regarded as a
single market, ignoring national boundaries. Strategy
integration, organisational approach and product policy tend to
be implemented at regional headquarters on the one hand and
between regional headquarters and individual subsidiaries on the
other.

Geocentric Approach A geocentric company views the entire

world as a single market and develops standardised marketing
mix, projecting a uniform image of the company and its products,
for the global market .The business of the geocentric
multinational is usually characterised by sufficiently distinctive
national markets that the ethnocentric approach is unworkable
and where the importance of learning curve effects in marketing,
production technology and management makes the polycentric
philosophy substantially suboptimal.

Diamond Model of National Advantage”).

According to the model, the ability of the firms in an industry

whose origin is in a particular country (e.g., South Korean
automakers or Italian shoemakers) to be successful in the
international arena is shaped by four factors: (1) their home
country’s demand conditions, (2) their home country’s factor
conditions, (3) related and supporting industries within their
home country, and (4) strategy, structure, and rivalry among
their domestic competitors.

Levels of Internationalization

Domestic Company : operations confine to domestic country.

Multi domestic company: Branches and establishments in many

countries

International Company: No FDI but export to/import goods from

other countries

Multinational company: Operates in more than two countries

with investment in subsidiaries. Centralized organisation.

Global company: Operations and investment in many countries.

Usually have global outsourcing/global marketing strategies.
Decentralized organisation.

Transnational company: Combined features of international,

multinational and global companies.

MODES OF ENTRY

Non Equity Mode

Exporting:
Exporting is selling some of a company’s regular production
overseas.

• Most firms begin by exporting because: – requires little

investment – relatively risk free – means of getting a feel for
international business without a large commitment

• Direct exports: are exports of goods and services by the same

company or manufacturer that produces them.

• Indirect exports: are exports that are not handled directly by

the manufacturer or producer but through an export agent or
freight forwarder (it is simpler but commissions are paid and the
firm gains little experience):

Subcontracting:

It is a contract under which a firm agrees to fully design,

construct and equip a ready-to-operate facility and turn the
project over to the purchaser when it is ready for operation. •
Subcontracting is also called turnkey projects (“contrato llave en
mano”). • Usually is only for industrial-equipment
manufacturers, construction companies or consulting firms. •
Exporter of a turnkey project may be a – contractor that
specializes in designing and building plants in a particular
industry – company that wishes to earn money from its expertise
Licensing: It refers to a contractual arrangement in which one
firm (the licensor) sells access to its expertise or intangible
property to another firm (the licensee). – Expertise can be
patents, trade secrets, technology – Licensee pays fixed sum and
sales royalties (2%-5%) • Licensing is attractive because: – avoid
patent infringement claims – faster start-up – lower costs –
access to additional resources Non-Equity Mode Licensing •
Franchising is a form of licensing in which one firm (the
franchisor) contracts with another (the franchisee) to operate a
business. • The franchisee sell products or services and gets: –
well-established brand name – well-proven set of procedures and
training – carefully controlled marketing and sales strategy –
operational assistance and support on continuing basis – in some
cases, the franchisor also provides supplies • The franchisor
retains the right to enforce processes and strategy.

Franchising: It is a form of licensing in which one firm (the

franchisor) contracts with another (the franchisee) to operate a
business. • The franchisee sell products or services and gets: –
well-established brand name – well-proven set of procedures and
training – carefully controlled marketing and sales strategy –
operational assistance and support on continuing basis – in some
cases, the franchisor also provides supplies • The franchisor
retains the right to enforce processes and strategy.

Management Contract – Arrangement by which one firm

provides managerial know-how in some or all functional areas to
another company for a fee. – Is used by both manufacturing and
service operations when the foreign company can mange better
than the owners.

• Contract Manufacturing – Arrangement in which one firm

contracts with another to produce products to its specifications
but assumes responsibility for sales without investing in plant
facilities. – Kind of a subcontract assembly work or production of
parts to independent companies overseas.

Equity Mode

a) Foreign Direct Investment (FDI)

Foreign investment is investment in international

securities ie., investment in shares issued by cos. registered
abroad. Based on the purpose of investment, foreign investments
are classified into 2:-

1. Foreign Direct Investment

2. Foreign Portfolio investment.
Foreign Direct Investment (FDIs)

FDIs are made by the cos. in foreign land in order to

augment, diversify and expand their own domestic business. The
main objective of such investment is to gain a control over the
business entity in which they are deploying their funds. FDIs are
made mainly in 3 forms:-

1. Strategic alliances
2. Wholly owned subsidiary creation
 3. Joint ventures and
4. Merger and acquisitions
Wholly owned subsidiary creation otherwise known as
“Green field investment” (for eg: GE Electricals, Samsung India
Pvt. Ltd., LG India Pvt. Ltd., etc.) is a process in which the
domestic co. open a new co. in foreign country by making 100%
investment in it. It is an important method to expand the
business activity with possibilities of large fund transfer and
investment opportunity in new country.

Joint Ventures

Joint ventures is a form of FDI in which 2 cos., one

domestic co. and another a foreign co. jointly set up a business
entity in the domestic country. Such business entities have
separate existence from that of parent cos. It is a temporary
agreement lasts for a specific period. After the expiry of the
period of agreement the entity shall be liquidated and parent cos.
shall be liquidated and parent cos. shall run their business
activities individually.

Egs: 1. Maruti Suzuki – Maruti Udyog Ltd. and Suzuki Corpn.

Ltd. , 2. Hero Honda, TVS Suzuki, Mahindra Nizzan, DCM
Toyota, etc.

Merger and Acquisition

It is the most common form of FDIs. Mergers and

acquisitions are popularly known as corporate restructuring. In
merger 2 or more cos. are liquidated and a new co. is formed by
taking over their assets. But in acquisition (absorption) one co.
(foreign co.) absorb the business of the domestic co. there by the
domestic co. is losing their existence. Eg: COCO Cola take over
the soft drink division of Parle.

Advantages to the Host Country

1. Creation of employment opportunity

2. Better standard of living because of better quality products
at cheaper cost
3. Use of high technology
4. More revenue to the government.
5. More inflow of foreign currency and there by better BOP
position.
Limitations / Drawback

1. Weakening of domestic industry.

2. Repatriation of profit shall unfavorably affect the BOP
position.
The major advantages of FDI to the foreign investor

1. They can expand their market.

2. Make utilization of cheap production inputs (mainly labour
inputs)
3. Trade barriers such as import duties, quota, etc. can be
avoided.
4. More portfolio or market diversification is possible (ie.,
investment in more than one country)
Risk to foreign investor

1. Foreign exchange fluctuation cause risk to the investment

2. Some time the domestic Govt. may put restriction on
repatriation of profits and other benefits.
3. Establishment of business in the domestic country may
cause agitation from the people there.
4. Starting of new business unit in the foreign country shall
have almost all risk of a new business unit even in domestic
market.

Strategic alliances
It involve partnerships between competitors, customers, or
suppliers. • Types of strategic alliances are: – Pooling alliances
are driven by similarity and integration – Trading alliances are
driven by the contribution of dissimilar resources • Advantages:
faster market entry and start-up, access to new products,
technologies or markets and cost-savings by sharing costs,
resources and risks. • Disadvantages: shared profits and loss of
control.

Foreign Portfolio Investment (FPI)

FPIs mean investment in securities issued by foreign cos.

for the purpose of making advantage of port folio diversification.
In FPI, investments are made in securities traded in foreign
market for capitalizing the investment opportunities prevailing
there. Here the investor shall not have any objective of
exercising control over the business unit in which he invested.
FPI is mainly done in 2 forms:-

1. Foreign institutional investment i.e., through foreign mutual

funds.
Foreign equity investment i.e., Euro issue i.e., through
Foreign Currency Convertible Bonds (FCCB) or Depository
Receipts like GDRs and ADRs.

Euro Issue Market

Euro issue market is also known as Euro Equity market

which are meant for equity form of financing by international
organizations – Access to Euro-equity market is made through
the issue of:-

1. Foreign Currency Convertible Bonds (FCCB)

2. Depository receipts.
1. Foreign Currency Convertible Bonds (FCCB)

A type of convertible bond issued in a currency different

than the issuer's domestic currency. In other words, the money
being raised by the issuing company is in the form of
a foreign currency. A convertible bond is a mix between a debt
and equity instrument. It acts like a bond by making regular
coupon and principal payments, but these bonds also give the
bondholder the option to convert the bond into stock.
 These types of bonds are attractive to both investors and
issuers. The investors receive the safety of guaranteed payments
on the bond and are also able to take advantage of any large
price appreciation in the company's stock. (Bondholders take
advantage of this appreciation by means warrants attached to
the bonds, which are activated when the price of the stock
reaches a certain point.) Due to the equity side of the bond,
which adds value, the coupon payments on the bond are lower
for the company, thereby reducing its debt-financing costs.

2. Depository Receipts

Depository receipts are issued by an intermediate bank

called depository on behalf of the equity shares issued by the
companies and other corporate bodies. Main depository receipts
traded in euro market are Global Depository Receipt and
American depository Receipts.

A GDR is a negotiable instrument denominated in US $

which represent shares issued in a local currency. The shares of
the issuer co. are issued in the name of an international bank
called the depository who is functioned in a foreign country. The
physical possession of the shares issued is with their custodian in
the issuing country. The shares are issued to the depository in
the local currency. Based on the shares held by it the depository
issues the GDR in US $. The dividend after withholding tax etc. is
paid by the issuing company to the depository in the local
currency. The depository convert the dividend received into US $
at the ruling exchange rate and distribute it among the GDR
holders. The GDR are bearer instruments and traded freely in
international market either through stock exchange mechanism
or on an over the counter basis. The settlement is done through
international clearing system like Euro clear.

Advantages

1. The exchange risk is borne by the investor as the payment

towards divided is made in the local currency.
2. There is no dispersal of voting right as the right to votes
vested only with the depository and is regulated by an
agreement between the co. and the depository.
3. It enables the co. to broaden the capital base by tapping the
large foreign equity market.
The main risk of GDR issue is that its value mainly depends
on value on the shares of the co. The share value in the local
market may subject to fluctuation due to various unfair trade
practices adopted by speculators and same result be able to be
seen in the GDR value also.

For the investors it offers Portfolio diversification in a freely

traded instrument in a convertible currency. The investors bear
exchange risk as well as risk of capital erosion.

American Depository Receipt (ADR) is similar to GDR, but

issued in the USA. It is a security issued by a bank or a
depository in the USA against underlying rupee shares of a
company incorporated in India.
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Advantages of GDRs to the issuing company

1.
1. Exchange risk is borne by the investor.
2. No voting rights are passed to the investor as the shares are
issued in the name of depository. Depository’s voting right
is controlled by an agreement between co.
3. Co. can raise the capital from world market in general.
Risk of GDR to investor

Company’s share prices are affected by the various factors

which in turn affect the value of GDR also.

Advantage of GDR

1. It gives wider are of port folio diversification for the

investor.
BALANCE OF PAYMENT

A systematic summary of the economic transactions of the

residents of a country with the rest of the world during a
specified time period, normally a year.

BALANCE OF PAYMENTS
,Definition

Balance of payment is the systematic summary of the

economic transactions of the residents of a country with the rest
of the world during a specified time period, normally a year.

Components of BOPs

Balance of payments statement is presented with three major

components:

1. Current Account
2. Capital Account
3. Official reserves account.
1. Current Account
The current account of the BOPs refers to transactions in
goods and services, income and current transfers. In other
words, it covers all transactions between residents and non-
residents, other than financial terms.

Merchandise Trade: Merchandise represents exports and

import of commodities from / into India. The credit in the item
represents exports and debit represents imports.

Invisibles: Includes services, transfers and investment income.

It is titled invisibles to distinguish from merchandise trade, also
known as visible trade.
 Travel covers expenditure incurred by non-resident
travelers during their stay in the country. It excludes
international passenger services, which are included in
transportation. Debit entries represent exchange sold for private
and official travel.

Transportation covers all receipts and payments on account

of international transportation services except for the freight on
imports invoiced CIF / CFR included under import payments.

Insurance covers all receipts and payments relating to all

types of insurance as well as reinsurance.

Government, not included elsewhere, relates to receipt and

payments on government account not included else where as
well as receipts and payments on account of maintenance of
embassies and diplomatic missions and offices of international
institutions such as UNO, WHO, etc.

Miscellaneous items cover receipts and payments in respect

of all other services such as agency services, technicians, and
professional services, technical know-how, royalties and
subscriptions for periodicals, etc.

The net balance, being the difference between exports and

imports of goods and services of is known as the balance of
trade.
 Transfer payments or unilateral transfers represent all
receipts and payments without a quid pro quo. They include
items like aid and grants received from / extend to foreign
governments, migrants’ transfer, repatriation of savings,
remittances for family maintenance, contributions and donations
to religious organizations and charitable institutions, etc.

Investment income relates to remittances, receipts and

payments on account of profits, dividends, interest and discounts
including interest charges and commitment charges on foreign
loans including those on purchase from the International
Monetary Fund.

Balance of trade refers to the net difference between the

value of export and import of merchandise or the visible/invisible
trade. When the aggregate exports of goods from the country
during the period exceed its aggregate import, the balance of
trade is said to be “favorable”, or “surplus” or “positive”.

Balance of payments includes the foreign trade in its broad

sense and includes not only visible trade but invisible items also.
Thus, this term is more comprehensive than balance of trade.

2. Capital Account
 The capital account represents transfer of money and other
capital items and changes in the country’s foreign assets and
liabilities resulting from the transactions recorded in the current
account.

Foreign investment in India is the amount invested by non-

residents in the equity of entities in India. The difference
between direct and portfolio investment is one of the intention of
the investor.

Loans comprise external assistance, commercial borrowings

and short term loans. External assistance is borrowings from
multilateral organizations like World Bank and from bilateral
sources, mainly on concessional terms.

Commercial borrowings are debts owed to international

banks, borrowing in bond markets, credits from export credit
agencies and loans provided on commercial terms by specialized
multilateral or bilateral institutions like International Finance
Corporation.

Short term credit is those repayable within one year.

Banking capital covers the assets and liabilities of commercial

banks, non-residents’ deposit accounts and other financial
institutions.

Rupee debt service is the payments under rupee/rubble

agreement with Russia
Balance on Capital Account

Balance on capital account is the net of inflows and outflows

on capital transactions. It is also appropriate to call this balance
of private capital account as this excludes movement in official
reserves.

3. Official Reserves account

Official reserves represent the balance of foreign exchange

reserves of the country. The net balances of current and capital
account shall be adjusted through the official reserve account
which is maintained by the central bank of the country. If the
foreign exchange transactions of the country during a particular
period bring in exchange inflows which are more than the
exchange outflows from there, it increases the country’s
exchange reserve position. Result shall be the opposite if foreign
exchange outflows exceed the inflows.

Thus balance of payment account is always balanced. It is

working on the same principle of double entry system.

BOP Disequilibrium Adjustment

 Types of disequilibrium

 Cyclical

 Structural

 Secular
 Measures to correct disequillibrium

 Monetary measures

1. Deflation.
2. Devaluation of home currency.
3. Exchange rate depreciation.
4. Exchange control.
 Non monetary measures

Import quotas and Import duties

Surplus vs Deficit in BOP

• Deficit

• Accommodating or compensatory capital (below the

line item)
• Contraction in official reserves
• Surplus

• Investment in foreign currency assets

• Expansion in official reserve
Exchange rate : Key concepts

Determinants Concepts

BOP Direct quote Vs Indirect quote

Inflation American term Vs European
term (respective currency per
dollar)
Money supply Bid rate Vs Ask rate
Spread
Interest rate Cross rate – rate derived from
two other rates.
National income Depth of the market – volume
of transactions
Resource discovery Swap points

Capital flows Floating Vs Fixed exchange

rate system
Political

Psychological

Technological

Market

Fixed vs Flexible rate regime

 1. Fixed Exchange Rates

1. Promotion of international trade
2. Promotion of international investment
3. Facility of long-range planning
4. Development of currency areas
5. Prevention of speculation
6. Small open economies
7. Inflation
 8. Terms of trade
9. Competitive exchange depreciation

Flexible exchange rate

 Adjustment of BOP
 Better confidence
 Better liquidity
 Gains from free trade
 Independence of policy.
 Cost price relationship.
Managed float – Govt. allow the currency to fluctuate evry day
basis, but intervene from currencies moving too far in certain
direction.

Current account convertibility

Convertibility on current account is the freedom to buy or sell

foreign exchange for the following international transactions.
 All payments due in connection with foreign trade and other
current business.
 Payment due as interest on loans and as net income from
other investment
 Moderate remittance for family living expenses.
Convertibility on current account is the freedom to buy or sell
foreign exchange for the following international transactions.

 Capital Account Convertibility

  CAC refers to a policy change that permits capital to flow
more freely in and out of a country. It is the freedom to
convert the local financial assets in to foreign financial
assets and vice versa at market determined rate of
exchange

 Tarapore committee recommends three important signposts

for full CAC in India – fiscal consolidation, a mandated
inflation target and strengthening of the financial system.

Objectives of exchange control

 Stability of exchange rates

 Over valuation of Currency
 Under valuation of currency
 Balance of payment deficits:
 Reserve foreign exchange for essentials of the country
 Freeze foreign national assets
 Economic Planning
 Develop bilateralism
 Encourage local industries
 Exchange intervention

 Purchase and sale of currencies by central banks

 Exchange restrictions

 Blocked accounts
 Transfer moratoria
  Multiple exchange rate
 Indirect methods

 Import restrictions and tariffs

 Export subsidies
 Interest rate change
 Exchange clearing arrangement

 Settlement of accounts through central banks

Trade Barriers

In order to protect domestic industries from foreign

competitors, to insulate the domestic economy from vibrant
international competitions and also to strengthen the domestic
market by curbing the dumping practices adopted by the
multinationals the governments of almost all countries are put
up some barriers to their international trade. In fact the trade
barriers and restrictions imposed by the countries are the major
instruments of their trade policies. These barriers may be in
the form of Tariff Barriers (TBs) and Non Tariff Barriers (NTBs).

Tariff barriers

Tariffs are the duties or taxes imposed on import or export on

certain goods and services or the products moving across the
borders. However tariffs are more commonly imposed on imports
and are a blatant way of making imports expensive. The tariff
instruments may be classified as below:
 1. On the basis of direction of trade
 Export duties
 Import duties
 Transit duties

Import tariffs or custom duties are the most common form of

tariffs among this group. But countries sometimes force to
charge export tariffs to conserve their domestic resources.

2. On the basis of purpose

 Protective tariffs: To protect the domestic industries
from foreign competitions.
 Revenue tariffs: To generate revenue for the
country.
 Countervailing tariff:
 Anti dumping tariff
Dumping: Selling goods in international market at a
price lower than in domestic market
• Sporadic
• Occasional sale of goods in international market at
below cost in order to adjust the temporary surplus
• Predatory
• Temporary sale of goods at below cost in international
market in order to drive foreign producers out of
business
• Persistent
 • Dumping resulting from international price
discrimination
3. On the basis of tariff rates
 Ad valerom duties: It is collected as a percentage of
the value of the product.
 Specific duties : A fixed amount is charged per unit
of goods traded regardless of its value.
 Compound duties: A combination of Specific and
Advalerom duties on a single product.
4. On the basis of discriminatory rates of different countries
 Single column tariffs: Uniform tariffs without
discrimination.
 Double column tariffs: Two rates of tariff for same
commodities. Lower rate to preferred countries
(trading partners) and higher rate for other
countries.

Impact of Tariff Barriers

Tariffs are explicitly pro producer and anti consumer. This is

because hike on tariffs protect the domestic producers from
foreign competitors, but makes the domestic supplies more
expensive for the consumers.

From the perspectives of government tariffs can strengthen

the balance of payment position of the country through the
reduction in imports and increased revenues from duties.
Similarly import control by tariffs automatically enhances
spending on domestic goods leading to the expansion of domestic
economy through improvement in GDP and employment
generation in the country.

Import tariffs shall reduce the overall efficiency of the world

economy. Because of protective tariffs the domestic firms may be
encouraged to produce products at home that, actually could be
done more efficiently abroad. Ultimate consequence of this is the
inefficient utilization of the resources.

Non Tariff Barriers

Non Tariff Barriers are the rules, laws or regulations , which

being part of the trade policy of a country, designed to
deliberately tighten the foreign manufacturer’s access to its
domestic market. Since the importing country has different
options to impose NTBs, they are usually less transparent and
difficult to identify. It is also very difficult to quantify NTB’s
impact on exporting countries and they pose serious obstacles to
free trade. The most common forms of NTBs include:

1. Quotas

Quantitative restrictions which take the form of quotas

are the most popular traditional form of NTBs. The term
quota refers to the explicit limit (usually measured by
volume or sometimes by value) on the amount of a
particular product that can be imported or exported during
a specified time period.
 Quota may be of export quota or import quota. Import
quotas are aimed at reducing the quantity of imports in
order to protect the domestic industry or to preserve
foreign exchange reserves of the country. Export quota
prevents the excessive exports of certain specified goods
from an economy.

A common hybrid of a quota and a tariff called ‘tariff

quota rate’ is also prevailing. Under a tariff quota rate lower
tariff is charged to imports with in the quota than that
charged over the quota.

• Tariff Quota Rate’ – a combination of tariff and quota

barriers

2. Subsidies
Subsidies are provided to domestic supplier especially
by developing countries in order to make their products
more competitive in global market. Subsidies take many
forms including cash grants, soft loans, tax exemptions or
government investments in domestic firms. By lowering
production costs, subsidies help domestic producers to
compete against foreign imports and to make gains from
export markets.
3. Licensing
Under the licensing system the prospective
importers/exporters are obliged to obtain license from the
licensing authorities in order to make imports to/export
 from other countries. A large number of countries
(including India) use import licensing as a powerful tool for
controlling the quantity of imports from other countries.
4. Voluntary Export Restraints (VERs)
VER’s are bilateral agreements between countries to
restrain the mutual exports of specific manufactured goods.
The United States and European Union regulated the
imports of many products through this mechanism.
5. Administered protection
Administered protection encompasses a wide range of
government regulatory actions such as-
a. Imposing rigorous health and safety standards
b. Frequent changes in customs and entry procedures
c. Insisting on consular formalities on export documents.
d. Government participation in trade through state trading,
government procurement policies etc. This will be
disguised protection of national interests and barriers to
foreign firms.
e. Foreign exchange regulation through the State
monopolization of foreign exchange resources and by
imposing restrictions on currency convertibility.
f. Extending environmental protection laws to imported
goods.

GATT 1947
The General Agreement on Tariff and Trade (GATT) was
originally

 The ancestor organization to the GATT, called the

International Trade Organization (WTO) was first proposed
in 1947 during the United Nations Conference on Trade and
Employment but could not be materialised . GATT was
signed by 23 countries on January 1, 1948 . 45,000 tariff
concessions were made affecting over $10 billion in trade
which comprised 20% of the total global market at the time.

 The GATT, as an international agreement, is a treaty. Under

United States law it is classified as a congressional-
executive agreement. The agreement is based on the
"unconditional most favored nation principle" This means
that the conditions applied to the most favored trading
nation (i.e. the one with the least restrictions) apply to all
trading nations.

Round conference

 IInd round 1949(Annency): The main focus of the talks was

more tariff reductions, around 5000 total.

 IIIrd round 1951(Torquay). 8,700 tariff concessions were

made

 IVth round GATT 1955-1956 returned to Geneva. $2.5

billion in tariffs were eliminated or reduced
  Vth roundThe fifth round occurred once more in Geneva
Along with reducing over $4.9 billion in tariffs, creation of
the(EEC)

 VI th roundGATT "Kennedy" 1964-1967: take place in

Geneva . Concessions were made on $40 billion worth of
tariffs. Some of the GATT negotiation rules were also more
clearly defined.

 GATT "Tokyo Round" 1973-1979

 Reduced tariffs and established new regulations aimed at

controlling the proliferation of non-tariff barriers and
voluntary export restrictions. Concessions were made on
$190 billion worth

Uruguay round (1986-1993

 It was the most ambitious round to date, hoping to expand

the competence of the GATT to important new areas such as
services, capital, intellectual property, textiles, and
agriculture.

 In 1993 the GATT was updated (GATT 1994) and World

Trade Organization (WTO) was formed. The

 75 existing GATT members and the European Communities

became the founding members of the WTO on January 1,
1995.

Reasons for failure of GATT

  Domestic legislation vs GATT agreement.
 No platform for trade in services.
 No platform for intellectual property rights and investment
areas.
 No platform for settlement of trade disputes, trade reviews
etc.
 No scope for strengthening of multilateral and plurilateral
trade agreements.
Obligations under WTO

 Tariff reductions.
 Lifting of NTBs(MFA)
 Inclusion of agriculture.
 Change in domestic policies on subsidies.
 MFN obligation.
 Inclusion of service sector(GATS).
 TRIMS.
 TRIPs.
 Antidumping measures.

Principles of the trading system (WTO)

1. Trade without discrimination: MFN and National treatment

2. Free trade: Gradually through negotiation

3. Predictability: through binding and transparency

4. Promoting fair competition

5. Encouraging development and reforms

Ministerial Conferences

# Date[1] Host City

1st 9–13 December 1996  Singapore

2nd 18–20 May 1998  Geneva, Switzerland

3rd 30 November – 3 December 1999  Seattle, United States

4th 9–14 November 2001  Doha, Qatar

5th 10–14 September 2003  Cancún, Mexico

6th 13–18 December 2005  Hong Kong

7th 30 November – 2 December 2009  Geneva, Switzerland

8th 15–17 December 2011  Geneva, Switzerland

9th 3–6 December 2013  Bali, Indonesia

10t
15–18 December 2015  Nairobi, Kenya
h

11t
11–14 December 2017  Buenos Aires, Argentina
h
Doha Round
The WTO launched the current round of negotiations, the
Doha Development Agenda (DDA) or Doha Round, at the Fourth
Ministerial Conference in Doha, Qatar in November 2001. The
Doha round was to be an ambitious effort to make globalisation
more inclusive and help the world's poor, particularly by slashing
barriers and subsidies in farming. The initial agenda comprised
both further trade liberalization and new rule-making,
underpinned by commitments to strengthen substantial
assistance to developing countries. Tariffs, non-tariff measures,
agriculture, labor standards, environment, competition,
investment, transparency, patents etc are the main focus.

The negotiations have been highly contentious and

agreement has not been reached, despite the intense
negotiations at several Ministerial Conferences and at other
sessions. Disagreements still continued over several key areas
including agriculture subsidies. The round has not yet
concluded. Bali Package signed on the 7th December 2013.

TRADE AGREEMENTS

The Results of the Uruguay Round of Multilateral Trade

Negotiations has six main parts:
 an umbrella agreement (the Agreement Establishing the
WTO)
 General Agreement on Tariffs and Trade(GATT) (for goods)
 General Agreement on Trade in Services (GATS)
 Trade-Related Aspects of Intellectual Property Rights
(TRIPS).
 TRIMS
 Dispute settlement
 governments’ trade policies reviews
General Agreement on Trade in Services (GATS):

 Responding to the huge growth of the services economy

over the past 30 years and the greater potential for trading
services brought about by the communications revolution.

 Outline of GATS:

(1)the main text : general obligations and disciplines;

(2)annexes: dealing with rules for specific sectors;
(3)individual countries’ specific commitments: to provide
access to their markets, including indications of where
countries are temporarily not applying the “most-favoured-
nation” principle of non-discrimination.

 General obligations and disciplines

(1) fields covered: all internationally-traded services — for

example, banking, telecommunications, tourism,
professional services, etc
 (2) four ways (or “modes”) of trading service

 mode 1: “cross-border supply”

 -- mode 2: “consumption abroad”

 -- mode 3: “commercial presence”

 -- mode 4:“presence of natural persons”

(3) Most-favoured-nation (MFN) treatment:

Favour one, favour all

TRIPS: Agreement on Trade-Related Aspects of

Intellectual Property Rights

 1.Coverage: products lies in the amount of invention,

innovation, research, design and testing involved

TRIMs: Trade-Related Investment Measures (TRIMs)

Agreement
Main content of TRIMs:
-- no member shall apply any measure that discriminates
against foreigners or foreign products (i.e. violates “national
treatment” principles in GATT)
outlaw investment measures that lead to restrictions in
quantities
-- measures which require particular levels of local
procurement by an enterprise (“local content
requirements”)
 -- discourages measures which limit a company’s imports or
set targets for the company to export (“trade balancing
requirements”).
Market reserve policy: some markets are reserved for local
production
-- Licensing requirements ; obtain licence for the operations
in the host country
-- Minimum export requirements
Agreement on Agriculture (AOA): fairer markets for
farmers
1. New rules and commitments of The Agriculture
Agreement:
-- market access , Numerical targets for agriculture
-- domestic support ,
-- export subsidies
(2) Domestic support: some you can, some you can’t
“amber box”: Domestic policies that do have a direct
effect on
production and trade have to be cut back.
-- “green box”:Measures with minimal impact on trade
can be used freely
“blue box” : (a)certain direct payments to farmers where
the farmers are
required to limit production (sometimes called “blue box”
measures),
 (b) certain government assistance programmes to
encourage agricultural and rural development in developing
countries
Export subsidies: limits on spending and quantities
to cut both the amount of money they spend on export
subsidies and the quantities of exports that receive
subsidies

Regional Economic Integrations/trade blocks

Economic integrations have been conceived as the stronger

bases for the economic development of the nations in the present
globalised scenario. Regional trade blocks have been established
all over the world at an increasing trend, especially during the
last two decades and at present global business has been
significantly affected by the economic integration schemes of
different nations across the world.

Regional economic integrations can be defined as the

agreements between group of countries in a region to reduce
and ultimately remove Tariff and Non tariff barriers to ensure the
free flow of goods, services and other factors of production
between each other. By entering in to regional agreements
countries aim to reduce trade barriers more rapidly than what
can be achieved under WTO. They facilitate a friendly trading
environment among a limited number of countries located
geographically close to each other.
Arguments for/against economic integrations

The economic reasons behind these trade agreements are to

allow the regional members the benefit from economic
cooperation and comparative advantages of trade and make
them less dependent on necessary imports from more distant
countries. Unrestricted trade leads to specialization which
further improves productivity of countries. It generates sufficient
economic activity, improve efficiency, heighten competition,
attract investments, and thus create jobs in the trade area.  It
ensures increased security of market access for smaller countries
by their trade integration with larger economies in the region.
More over it is expected to maintain peace and stability in the
region and improve member’s bargaining strength in multilateral
trade negotiations.

But some people argues that the regional groupings cause

trade diversion when low cost external suppliers are replaced by
high cost supplier from the region. More over it will benefit to
the countries only if the amount of trade exceeds the amount it
diverts. But GATT and WTO rules ensure that the integration
shall not result in trade diversion.

Levels of Economic Integration

Stages of Economic Integration

 There are several stages in the process of economic
integration, from a very loose association of countries in
a preferential trade area, to complete economic integration,
where the economies of member countries are completely
integrated.

A regional trading bloc is a group of countries within a

geographical region that protect themselves from imports from
non-members in other geographical regions, and who look to
trade more with each other. Regional trading blocs increasingly
shape the pattern of world trade - a phenomenon often referred
to as regionalism.

 Preferential trade area

Preferential Trade Areas (PTAs) exist when countries within a

geographical region agree to reduce or eliminate tariff barriers
on selected goods imported from other members of the area. This
is often the first small step towards the creation of a trading
bloc. Agreements may be made between two countries (bi-
lateral), or several countries (multi-lateral).

 Free Trade Area

Free Trade Areas (FTAs) are created when two or more countries
in a region agree to reduce or eliminate barriers to trade on all
goods coming from other members. The North (NAFTA) is an
example of such a free trade area, and includes the USA,
Canada, and Mexico.

 Customs Union

A customs union involves the removal of tariff barriers between

members, together with the acceptance of a common (unified)
external tariff against non-members. Countries that export to the
customs union only need to make a single payment (duty), once
the goods have passed through the border. Once inside the union
goods can move freely without additional tariffs. Tariff revenue is
then shared between members, with the country that collects the
duty retaining a small share.

 Common Market

A common (or single) market is the most significant step towards

full economic integration. In the case of Europe, the single
market is officially referred to as the 'internal market'. The key
feature of a common market is the extension of free trade from
just tangible goods, to include all economic resources.  This
means that all barriers are eliminated to allow the free
movement of goods, services, capital, and labour. In addition, as
well as removing tariffs, non-tariff barriers are also reduced and
eliminated.

For a common market to be successful there must also be a

significant level of harmonization of micro-economic policies, and
common rules regarding product standards, monopoly power and
other anti-competitive practices. There may also be common
policies affecting key industries, such as the Common
Agricultural Policy (CAP) and Common Fisheries Policy (CFP).

 Full Economic Union

Economic union is a term applied to a trading bloc that has both

a common market between members, and a common trade policy
towards non-members, although members are free to pursue
independent macro-economic policies.

The European Union (EU) is the best known Economic union, and
came into force on November 1st 1993, following the signing of
The Maastricht Treaty (formally called the Treaty on European
Union.)

 Monetary Union

Monetary union is the first major step towards macro-economic

integration, and enables economies to converge even more
closely. Monetary union involves scrapping individual currencies,
and adopting a single, shared currency, such as the Euro for the
Euro-17 countries, and the East Caribbean Dollar for 11 islands
in the East Caribbean. This means that there is a
common exchange rate, a common monetary, including interest
rates and the regulation of the quantity of money, and a single
central bank, such as the European Central Bank or the East
Caribbean Central Bank.

 Fiscal Union

A fiscal union is an agreement to harmonize tax rates, to

establish common levels of public sector spending and
borrowing, and jointly agree national budget deficits or
surpluses. The majority of EU states agreed a fiscal compact in
early 2012, which is a less binding version of a full fiscal union.

 Economic and Monetary Union

Economic and Monetary Union (EMU) is a key stage towards

compete integration, and involves a single economic market, a
common trade policy, a single currency and a common monetary
policy.

 Complete Economic Integration

Complete economic integration involves a single economic

market, a common trade policy, a single currency, a common
monetary policy, together with a single fiscal policy, including
common tax and benefit rates – in short, complete harmonization
of all policies, rates, and economic trade rules.
European Union

European Union (earlier known as the Eurupean Economic

Community(EEC) or the European Common Market (ECM) or the
European Community (EC) is so far the most successful case of
economic integretion in the world. Actually EU is the product of
two political factors -devastation of two wars and the desire to
hold their own on the world’s political and economic stage by the
developed europe..

 The EEC , which was originally formed by six nations –

France, Federal Republic of Germany, Italy, Belgium,
 Luxumberg and Netherlands in 1958 by virtue of the
Treaty of Rome, 1957. In 1973, first enlargement of the
EC made by welcoming U.K, Denmark and Ireland.
Other major additions to membership were Greece in
1981, Spain and Portugal in 1986, and Finland,
Austria and Sweden in 1996. With a population of 350
million and a GDP greater than that of the United
States, these enlargements made the EU a potential
global superpower. At present it has 27 members by
contributing more than 20 per cent of the World
nominal GDP. The Stockholm convention in 1960
created EFTA by seven countries to counteract EEC.

European Union: The Treaty of Maastricht (formation of

European Union)

Special focus of EU

 CAP(common Agricultural policy) aims to better production,

certainty in food supplies, quality of life and stabilized
market.

 Energy policy- increase competition in the internal market,

encourage investment and boost interconnections between
electricity grids; diversify energy resources with better
systems to respond to a crisis;

 Infrastructure development.

 Balanced regional growth.

  Environmental protective measures.

The NAFTA Agreement : (USA,Canada & Mexico)

Nafta became law January 1, 1994.

Guidelines:

- Abolition within 10 years of tarifs on 99% of the goods traded

among Mexico, Canada, and the U.S.
- Remove most of the barriers on the cross-border flow of
services
- Protect intellectual property rights
- Removes most restrictions on FDI among the three members
- Arguments against NAFTA:

- mass exodus of jobs from the US and Canda (Perot’s “Sucking

Sound”)
- Expose Mexican firms to highly efficient Canadian and
American firms.
- Painful Economic Restructuring and Unemployment in Mexico
- Loss of National Sovereignty
Members are allowed to apply its own environmental standards
SAARC

 an economic and political organization of eight countries in

Southern Asia.
 Formed on Dec 8 1985 by 7 countries in the region.
 Afganistan is the 8 th member in 2007.
 Largest of any regional organisation in this world.
 Hedquarter is Kathmandu.
Objectives

 Improve welfare and quality of life.

 Accelerate economic growth, social progress and cultural
development .
 Promote and strengthen collective self-reliance .
 Strengthen cooperation with other developing countries.
 Strengthen cooperation among themselves in international
forums on matters of common interest.
 Cooperate with international and regional organisations
with similar aims and purposes.
 Strengthen cooperation among themselves in international
forums on matters of common interest.
 The agreement on SAFTA was signed on January 6,
2004 during the 12th summit of the South Asia
Association for Regional Cooperation (SAARC) in
Islamabad. SAFTA came into force on January 1, 2006
in a limited way. The main objectives of SAFTA are to
facilitate regional trade without any barriers and to
share each country’s strategic advantage with others.
Hence, at least from a legal point of view, SAFTA has
emerged as a regional trade block.

 Governed by the principles of WTO

 Small in terms of economic size and share of world

exports

 High level of protectionism, restrictive measures

  Low level of implementation impeding meaningful
economic cooperation, largely due to rivalries between
India and Pakistan.

ASEAN

 Established on 8th August 1967

 Headquarter is Bankok.

 At present 10 members.

 India has entered an FTA named ‘AIFTA ‘ with ASEAN

countries in Aug 2009.

 Trade competitiveness mainly in fisheries, plantation crops

and light electronic products.

 accelerate the economic growth, social progress and

cultural development in the region .

 promote regional peace and stability .

 Maintain beneficial cooperation with existing international

and regional organisations .

 Promote training and research in the region.

 Development in agriculture, trade and industry,

transportation and other infrastructural facilities in the
region.

 Promote southeast Asian studies.

MERCOSUR

 Regional Trade Agreement (RTA) among Argentina, Brazil,

Paraguay and Uruguay founded in 1991.

 UNCTAD: 1964
United Nations Conference on Trade and Conference on
Trade and Development

It is established as a permanent organ of General Assembly

of the United Nation.
It has a permanent organ called Trade and Development
Board´ as the main executive body.
The plenary session of the Conference meets twice annually
which is composed of 55 members, elected by the
conference from among its members on the basis of
equitable geographical distribution.
Asia Pacific Economic cooperation (APEC)

Formed in 1989 to promote trade and investment

21 member countries that border the Pacific Rim
APEC is not a trading bloc
For trade liberalization and against protectionism
Prefer open regionalism over closed regionalism
Goal: Free and open trade by 2010 for the industrialized
countries
by 2020 for the rest of the members
 Andean group (Andean Common Market)
 ALADI (Latin American Integration Association)
 CARICOM (Caribbean Community and Common
Market)
 CACM (Central American Common Market)
BRICS

The BRICS nations (Brazil, Russia, India, China and South Africa)
are considered as the new building blocks of the global economy.
In the background of the deceleration of the developed
economies in terms of growth and economic expansion, BRICS
assumed greater significance and wider acceptance as emerging
super powers. BRICS is the acronym for an association of five
major emerging national economies: Brazil, Russia, India, China
and South Africa. The grouping was originally known as “BRIC”
before the inclusion of South Africa in 2010. The acronym was
coined by Jim o’ Neil in a 2001 paper entitled “Building Better
Global Economic BRICS “. The acronym has come in to
widespread use as a symbol of the apparent shift in global
economic power away from the developed G7 economies towards
the developing world.

CIVETS

CIVETS is an acronym for the countries Colombia, Indonesia,

Vietnam, Egypt, Turkey, and South Africa, which in the late
2000s, were widely regarded as the next emerging
markets economies that would rise quickly during the coming
decades. The acronym, CIVETS, was coined in 2008 at
the Economist Intelligence Unit (EIU) in London. 

International Monetary System

Even before the Second World War ended, the allied

countries began to devote serious thoughts and efforts in
developing a system that would end the chaotic conditions
prevailing and pave the way for an orderly conduct of
international trade and promote monetary relations among the
countries. The main objectives of the system that may seek are 1)
Help to remove the restrictions on trade. 2) ensure the
convertibility of currencies and maintain stability in exchange
rate among currencies. In this effort the USA and the UK had a
greater role to play.

In June, 1944 representative of 44 allied measures met at

Brettonwoods, New Hampshire USA, to give concrete shape to
their ideas. The agreement reached at this meeting provided for
establishing two institutions which came to be known as the
“Brettonwoods Twins”. The institutions set up were the IMF and
IBRD (World Bank)

International Monitory Fund

The International Monetary Fund (IMF) is an international

organization that oversees the global financial system by
observing exchange rates and balance of payments, as well as
offering financial and technical assistance when requested. Its
headquarters are located in Washington, D.C. It provides short
term financial assistance to member countries for adjusting their
short term liquidity crisis.

Organization and purpose

IMF describes itself as "an organization of 184 countries,

working to foster global monetary cooperation, secure financial
stability, facilitate international trade, promote high employment
and sustainable economic growth, and reduce poverty". With the
exception of North Korea, Cuba, Liechtenstein, Andorra,
Monaco, Tuvalu and Nauru, all UN member states either
participate directly in the IMF or are represented by other
member states.

In the 1930s, as economic activity in the major industrial

countries diminished, countries began to adopt mercantilist
practices, as an attempt to defend their economies by increasing
restrictions on imports. To conserve diminishing reserves of

gold and foreign exchange, some countries restricted foreign

imports, some devalued their currencies, and some began
policies of complicated restrictions on foreign exchange accounts
held by their citizens. These measures were arguably detrimental
to the countries themselves as the theory of Ricardian
comparative advantage states that everyone gains from trade
without restrictions. It is noteworthy to mention that, although
the "size of the pie" is enhanced according to this theory of free
trade, improving all industries, when distributional concerns are
taken into account, there are always industries that lose out even
as others benefit in any given country. World trade declined
sharply, as did employment and living standards in many
countries.

As World War II came to a close, the leading allied countries

considered various plans to restore order to international
monetary relations, and at the Bretton Woods conference the
IMF emerged. The founding members drafted a charter (or
Articles of Agreement) of an international institution to oversee
the international monetary system and to promote both the
elimination of exchange restrictions relating to trade in goods
and services, and the stability of exchange rates.

The IMF came into existence in December 1945, when the

first 29 countries signed its Articles of Agreement. The statutory
purposes of the IMF today are the same as when they were
formulated in 1944 .From the end of World War II until the late-
1970s, the capitalist world experienced unprecedented growth in
real incomes. (Since then, the People's Republic of China's
integration into the capitalist system has added substantially to
the growth of the system.) Within the capitalist system, the
benefits of growth have not flowed equally to all (either within or
among nations) but most capitalist countries have seen recent
increases in prosperity that contrast starkly with the conditions
within capitalist countries during the interwar period. The lack of
a recurring global depression is likely due to improvements in
the conduct of international economic policies that have
encouraged the growth of international trade and helped smooth
the economic cycle of boom and bust.

In the decades since World War II, apart from rising

prosperity, the world economy and monetary system have
undergone other major changes that have increased the
importance and relevance of the purposes served by the IMF, but
that has also required the IMF to adapt and reform. Rapid
advances in technology and communications have contributed to
the increasing international integration of markets and to closer
linkages among national economies. As a result, financial crises,
when they erupt, now tend to spread more rapidly among
countries.

The IMF's influence in the global economy steadily

increased as it accumulated more members. The number of IMF
member countries has more than quadrupled from the 44 states
involved in its establishment, reflecting in particular the
attainment of political independence by many developing
countries and more recently the collapse of the Soviet bloc. The
expansion of the IMF's membership, together with the changes
in the world economy, have required the IMF to adapt in a
variety of ways to continue serving its purposes effectively.

Membership qualifications

Any country may apply for membership of the IMF. The

application will be considered first by the IMF's Executive Board.
After its consideration, the Executive Board will submit a report
to the Board of Governors of the IMF with recommendations in
the form of a "Membership Resolution." These recommendations
cover the amount of quota in the IMF, the form of payment of the
subscription and other customary terms and conditions of
membership. After the Board of Governors has adopted the
"Membership Resolution," the applicant state needs to take the
legal steps required under its own law to enable it to sign the
IMF's Articles of Agreement and to fulfill the obligations of IMF
membership.

A member's quota in the IMF determines the amount of its

subscription, its voting weight, its access to IMF financing, and
its allocation of SDRs.

Special Drawing Rights

Definition

The collapse of Bretton Woods system in 1973 and the shift

of major currencies to floating exchange rate regimes
lessened the reliance on the SDR as a global reserve asset.
Nonetheless, SDR allocations can play a role in providing
liquidity and supplementing member countries’ official
reserves, as was the case with the 2009 allocations totaling
SDR 182.6 billion to IMF members amid the global financial
crisis.

SDRs are defined in terms of a basket of major currencies used

in international trade and finance. At present, the currencies in
the basket are the euro, the pound sterling, the Japanese yen,
Chinese yuan and the United States dollar. The amounts of each
currency making up one SDR are chosen in accordance with the
relative importance of the currency in international trade and
finance. The determination of the currencies in the SDR basket
and their amounts is made by the IMF Executive Board every five
years. The weights of the currencies in the basket in the past
were and currently are:

 1981–1985: USD 42%, DEM 19%, JPY 13%, GBP 13%, FRF
13%
 1986–1990: USD 42%, DEM 19%, JPY 15%, GBP 12%, FRF
12%
 1991–1995: USD 40%, DEM 21%, JPY 17%, GBP 11%, FRF
11%
 1996–2000: USD 39%, DEM 21%, JPY 18%, GBP 11%, FRF
11%
 2001–2005: USD 45%, EUR 29%, JPY 15%, GBP 11%
 2006–2010: USD 44%, EUR 34%, JPY 11%, GBP 11%
 Effective from October1 2016
 Fixed Number
Weights of Units of
determined Currency for a
Currency
in the 2015 5-year period
Review Starting Oct 1,
2016

  U.S. Dollar 41.73 0.58252

  Euro 30.93 0.38671

  Chinese
8.33 1.0174
Yuan

  Japanese
8.09 11.900
Yen

  Pound
 10.92 0.085946
Sterling

Purpose

SDRs are used as a unit of account by the IMF and several

other international organizations. A few countries peg their
currencies against SDRs, and it is also used to denominate some
private international financial instruments. For example, Air New
Zealand uses SDR to value their baggage liability limits.

SDRs basically were created to replace gold in large

international transactions. Being that under a strict
(international) gold standard, the quantity of gold worldwide is
relatively fixed, and worldwide the economies of all participating
IMF members as an aggregate are growing, a need arose to
increase the supply of the basic unit or standard proprotionately.
Thus SDRs, or "paper gold" are credits that nations with balance
of trade surpluses can 'draw' upon nations with balance of trade
deficits.
 So-called "paper gold" is little more than an accounting
transaction within a ledger of accounts, which eliminates the
problem of shipping gold back and forth across borders to settle
national accounts.

The process of IMF lending

An IMF loan is usually provided under an "arrangement,"

which stipulates the specific policies and measures a country has
agreed to implement to resolve its balance of payments problem.
The economic program underlying an arrangement is formulated
by the country in consultation with the IMF, and is presented to
the Fund's Executive Board in a "Letter of Intent." Once an
arrangement is approved by the Board, the loan is released in
phased installments as the program is carried out.

IMF Facilities

1) Stand-By Arrangements (SBA). The SBA is designed to

help countries address short-term balance of payments
problems. Stand-bys have provided the greatest amount of IMF
resources. The length of a SBA is typically 12-24 months, and
repayment is normally expected within 2¼-4 years. Surcharges
apply to high access levels.

2) Extended Fund Facility (EFF). This facility was

established in 1974 to help countries address longer-term
balance of payments problems requiring fundamental economic
reforms. Arrangements under the EFF are thus longer—usually
3 years. Repayment is normally expected within 4½-7 years.
Surcharges apply to high levels of access.

3) Supplemental Reserve Facility (SRF). This facility was

introduced in 1997 to meet a need for very short-term financing
on a large scale. The motivation for the SRF was the sudden loss
of market confidence experienced by emerging market
economies in the 1990s, which led to massive outflows of capital
and required financing on a much larger scale than the IMF had
previously provided. Countries are expected to repay loans
within 2-2½ years, but may request an extension of up to six
months. All SRF loans carry a substantial surcharge of 3-5
percentage points.

4) Compensatory Financing Facility (CFF). The CFF was

established in 1963 to assist countries experiencing either a
sudden shortfall in export earnings or an increase in the cost of
cereal imports, often caused by fluctuating world commodity
prices. Financial terms are similar to those applying to the SBA,
except that CFF loans carry no surcharge.

5) Emergency assistance. The IMF provides emergency

assistance to countries that have experienced a natural disaster
or are emerging from conflict. Emergency loans are subject to
the basic rate of charge, although interest subsidies are
available for PRGF-eligible countries, subject to availability.
Loans must be repaid within 3¼-5 years.

WORLD BANK GROUP

The World Bank Group is a group of five international

organizations responsible for providing finance and advice to
countries for the purposes of economic development and poverty,
where the United Nations Monetary and Financial Conference
that led to their establishment took place (1 July-22 July 1944).
The Bank came into formal existence on 27 December 1945
following international ratification of the Bretton Woods
agreements. Commencing operations on 25 June 1946, it
approved its first loan on 9 May 1947 ($250m to France for
postwar reconstruction, in real terms the largest loan issued by
the Bank to date). Its five agencies are:

 International Bank for Reconstruction and Development

(IBRD)
 International Finance Corporation (IFC)
 International Development Association (IDA)
 Multilateral Investment Guarantee Agency (MIGA)
 International Centre for Settlement of Investment Disputes
(ICSID)

The World Bank's activities are focused on developing

countries, in fields such as human development (e.g. education,
health), agriculture and rural development (e.g. irrigation, rural
services), environmental protection (e.g. pollution reduction,
establishing and enforcing regulations), infrastructure (e.g.
roads, urban regeneration, electricity), and governance (e.g.
anti-corruption, legal institutions development). It provides loans
at preferential rates to member countries, as well as grants to
the poorest countries. Loans or grants for specific projects are
often linked to wider policy changes in the sector or the
economy. For example, a loan to improve coastal environmental
management may be linked to development of new
environmental institutions at national and local levels and to
implementation of new regulations to limit pollution.

1) International Bank for Reconstruction and Development

The International Bank for Reconstruction and

Development (IBRD) is one of five institutions that comprise the
World Bank Group. The IBRD is an international organization
whose original mission was to finance the reconstruction of
nations devastated by WWII. Now, its mission has expanded to
fight poverty by means of financing states. Its operation is
maintained through payments as regulated by member states. It
came into existence on December 27, 1945 following
international ratification of the agreements reached at the
United Nations Monetary and Financial Conference of July 1 to
July 22, 1944 in Bretton Woods, New Hampshire.

The IBRD provides loans to governments, and public

enterprises, always with a government (or "sovereign")
guarantee of repayment. The funds for this lending come
primarily from the issuing of World Bank bonds on the global
capital markets - typically $12-15 billion per year. These bonds
are rated AAA (the highest possible) because they are backed by
member states' share capital, as well as by borrowers' sovereign
guarantees. (In addition, loans that are repaid are recycled
(relent).) Because of the IBRD's credit rating, it is able to borrow
at relatively low interest rates. As most developing countries
have considerably lower credit ratings, the IBRD can lend to
countries at interest rates that are usually quite attractive to
them, even after adding a small margin (about 1%) to cover
administrative overheads.

The IBRD was established mainly as a vehicle for

reconstruction of Europe and Japan after World War II, with an
additional mandate to foster economic growth in developing
countries in Africa, Asia and Latin America. Originally the bank
focused mainly on large-scale infrastructure projects, building
highways, airports, and powerplants. As Japan and its European
client countries "graduated" (achieved certain levels of income
per capita), the IBRD became focused entirely on developing
countries. Since the early 1990s the IBRD has also provided
financing to the post-Socialist states of Eastern Europe and the
former Soviet Union.

2) International Finance Corporation

 The International Finance Corporation (IFC) promotes
sustainable private sector investment in developing countries as
a way to reduce poverty and improve people's lives.

IFC is a member of the World Bank Group and is

headquartered in Washington, DC. It shares the primary
objective of all World Bank Group institutions: to improve the
quality of the lives of people in its developing member countries.
IFC Mission Statement.

Established in 1956, IFC is the largest multilateral source of

loan and equity financing for private sector projects in the
developing world. It promotes sustainable private sector
development primarily by:

1. Financing private sector projects located in the developing

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

3) International Development Association

The International Development Association (IDA)

created on September 24, 1960, is a UN specialized agency. It is
responsible for providing long-term interest-free loans to the
poorest of developing countries on terms more lenient than those
of the World Bank proper, and forms part of the World Bank
Group based in Washington, D.C.

The International Development Association (IDA) provides

grants and "soft loans", with repayment periods of some 30 years
and no interest, to the poorest countries (generally with per
capita incomes below $500 per year). IDA concessionary lending
is funded by direct contributions from member states, which
subsidise the difference between the IBRD's costs and the price
charged to IDA borrowers.

Criticisms include the improper use of financial resources

as well as its structure of voting power, based on financial
contributions (the largest being from the USA).

4) Multilateral Investment Guarantee Agency

The Multilateral Investment Guarantee Agency (MIGA) is a

member of the World Bank group. It was established to promote
foreign direct investment into developing countries. MIGA was
founded in 1988 with a capital base of $1 billion and is
headquartered in Washington, D.C.

MIGA promotes foreign direct investment into developing

countries by insuring investors against political risk, advising
governments on attracting investment, sharing information
through on-line investment information services, and mediating
disputes between investors and governments. MIGA also
requires host country government approval for every project.
MIGA tries to work with host governments - resolving claims
before they are filed.

5) International Centre for Settlement of Investment

Disputes

The International Centre for Settlement of Investment

Disputes (ICSID), an institution of the World Bank group, was
founded 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). As of
May 2005, 155 countries had signed the ICSID Convention.

ICSID has an Administrative Council, chaired by the World

Bank's President, and a Secretariat. It provides facilities for the
conciliation and arbitration of investment disputes between
member countries and individual investors.

During the past decade, with the proliferation of bilateral

investment treaties (BITs), most of which refer present and
future investment disputes to the ICSID, the caseload of the
ICSID has substantially increased. As of June 30, 2005, ICSID
had registered 184 cases more than 30 of which were pending
against Argentina – Argentina's economic crisis and subsequent
Argentine government measures led several foreign investors to
file cases against Argentina.
 ICSID’s headquarters are located in Washington, D.C.

ADB: December 19 1966

The Asian Development Bank (ADB) was established as a financial institution

that would foster economic growth and cooperation in the Asia-Pacific region.
It assists its members and partners by providing loans, technical assistance,
grants, and equity investments to promote social and economic development.

African Development Bank: September 10 1964

The Asian Infrastructure Investment Bank: Commenced business on January 16 2016

December 25, 2015 (Entry into force Articles of Agreement)

It is a multilateral development bank that aims to support the building of infrastructure in the
Asia-Pacific region. The Asian Infrastructure Investment Bank (AIIB) have approved $140
million loan for project aimed at improving rural roads (connectivity) in Madhya Pradesh.

The New Development Bank (NDB),

Formerly referred to as the BRICS Development Bank, is a multilateral development bank
established by the BRICS states ...

Legal status: Treaty

Headquarters: Shanghai, China

Abbreviation: NDB, or NDB BRICS

Formation: July 2014 (Treaty signed); July 2015 (Treaty in force)