Unit 4 IB management of international business MBA 3rd SemIP


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International Economic Institutions : 

International Economic Institutions IBE-Unit 4

IMF : 

IMF The International Monetary Fund (IMF) is an international organization that oversees the global financial system by following the macroeconomic policies of its member countries, in particular those with an impact on exchange rates and the balance of payments. It also offers financial and technical assistance to its members, making it an international lender of last resort. Its headquarters are located in Washington, D.C., USA.

History : 

History The International Monetary Fund was formally created in July 1944 during the United Nations Monetary and Financial Conference. The representatives of 45 governments met in the Mount Washington Hotel in the area of Bretton Woods, New Hampshire, United States of America, with the delegates to the conference agreeing on a framework for international economic cooperation.[3] The IMF was formally organized on December 27, 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

Organization and purpose : 

Organization and purpose The International Monetary Fund was created in 1944, with a goal to stabilize exchange rates and supervise the reconstruction of the world's international payment system. Countries contributed to a pool which could be borrowed from, on a temporary basis, by countries with payment imbalances. The IMF describes itself as "an organization of 185 countries (Montenegro being the 185th, as of January 18, 2007), working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty". With the exception of North Korea, Cuba, Andorra, Monaco, Liechtenstein, Tuvalu, and Nauru, all UN member states participate directly in the IMF. Most are represented by other member states on a 24-member Executive Board but all member countries belong to the IMF's Board of Governors.[2]

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Membership qualifications Any country may apply for membership to 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 fulfil the obligations of IMF membership. Similarly, any member country can withdraw from the Fund, although that is rare. For example, in April 2007, the president of Ecuador Rafael Correa announced the expulsion of the World Bank representative in the country.

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A few days later, at the end of April, Venezuelan president Hugo Chavez announced that the country would withdraw from the IMF and the World Bank. Chavez dubbed both organizations as “the tools of the empire” that “serve the interests of the North”. [3] As of April 2008, both countries remain as members of both organizations. Venezuela was forced to back down because a withdrawal would have triggered default clauses in the country's sovereign bonds. [4] 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 Special Drawing Rights (SDRs). A member state cannot unilaterally increase its quota — increases must be approved by the Executive Board and are linked to formulas that include many variables such as the size of a country in the world economy. For example, in 2001, China was prevented from increasing its quota as high as it wished, ensuring it remained at the level of the smallest G7 economy (Canada). In September 2005, the IMF's member countries agreed to the first round of ad hoc quota increases for four countries, including China. On March 28, 2008, the IMF's Executive Board ended a period of extensive discussion and negotiation over a major package of reforms to enhance the institution's governance that would shift quota and voting shares from advanced to emerging markets and developing countries. The Fund's Board of Governors must vote on these reforms by April 28, 2008.

Quotas : 

Quotas IMF is a financial cooperative On joining , each member country pays in a sum of money called its quota Quota depends upon economic size and characteristics Quotas define members financial and organisational relationship with IMF At regular intervals ( not exceeding 5 years), IMF’s Board of Governors reviews member s’ quotas and decides change depending upon change in relative economic condition of the member A member can request an adjustment of its quota at any time

Assistance and reforms : 

Assistance and reforms The primary mission of the IMF is to provide financial assistance to countries that experience serious financial and economic difficulties using funds deposited with the IMF from the institution's 185 member countries. Member states with balance of payments problems, which often arise from these difficulties, may request loans to help fill gaps between what countries earn and/or are able to borrow from other official lenders and what countries must spend to operate, including to cover the cost of importing basic goods and services. In return, countries are usually required to launch certain reforms, which have often been dubbed the "Washington Consensus". These reforms are generally required because countries with fixed exchange rate policies can engage in fiscal, monetary, and political practices which may lead to the crisis itself. For example, nations with severe budget deficits, rampant inflation, strict price controls, or significantly over-valued or under-valued currencies run the risk of facing balance of payment crises. Thus, the structural adjustment programs are at least ostensibly intended to ensure that the IMF is actually helping to prevent financial crises rather than merely funding financial recklessness.

World Bank : 

World Bank The World Bank Group (WBG) is a family of five international organizations responsible for providing finance and advice to countries for the purposes of economic development and eliminating poverty. 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).

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Its five agencies are: International Bank for Reconstruction and Development (IBRD) International Development Association (IDA) International Finance Corporation (IFC) Multilateral Investment Guarantee Agency (MIGA) International Centre for Settlement of Investment Disputes (ICSID) The term "World Bank" generally refers to the IBRD and IDA, whereas the World Bank Group is used to refer to the institutions collectively

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World Bank Group agencies The World Bank Group consists of the International Bank for Reconstruction and Development (IBRD), established in 1945, which provides debt financing on the basis of sovereign guarantees; the International Finance Corporation (IFC), established in 1956, which provides various forms of financing without sovereign guarantees, primarily to the private sector; the International Development Association (IDA), established in 1960, which provides concessional financing (interest-free loans or grants), usually with sovereign guarantees; the Multilateral Investment Guarantee Agency (MIGA), established in 1988, which provides insurance against certain types of risk, including political risk, aw primarily to the private sector; and, the International Centre for Settlement of Investment Disputes (ICSID), established in 1966, which works with governments to reduce investment risk

IBRDOrganisation : 

IBRDOrganisation Its an inter governmental org, only govt.s of various countries can become members Management: Board of Governors, 22 Executive directors ( 5 nominated by biggest shareholders – USA, UK, France, Germany and Japan) and a President Voting rights of Governors and the executive Directors is in proportion

IBRDFinancial Operations : 

IBRDFinancial Operations Capital: Members subscription, borrowing from world market, retained earnings, repayments Variable rate of interest Period of repayment : over 15 years, 5 years grace period Loans normally for projects having commercially viable rate of return In 1980, also started structural adjustment lending

IBRD Areas of focus : 

IBRD Areas of focus Pursuit of Economic reforms Investment in people through education Health, nutrition and family planning Env. Protection Stimulation of pvt sector Reduce Poverty Collaborate with other UN agencies to tackle problems of developing countries Research : sustainable growth, env, poorest sections of society Agri research: cooperate with FAD , UNDP, etc.

IBRDLending Activities : 

IBRDLending Activities Direct loan : own funds Indirect loan All loans are made to govts must be guaranteed by the govts. Repayment: 10 – 35 years Loans given : when other sources are not readily avlaible Investigations are made on probability of repayment, soundness of project, Sufficient surveillance

IDA : 

IDA Affiliate of IBRD Estb. 1960 Provides soft loans to eco. Sound high priority projects Shares the staff and building of IBRD IDA credits are reserved for developing countrioes not capable of borrowing from IBRD Finances : Foreign Currency as well as domestic cost Loans : Interest free, Service charges: 0.75%, Maturity : 35 –40 years, Grace : 10 years, Moratorium : 10 years Funds: Members grants( 3 year replenishments), retained profits, principal repayments, special complementary contributions from members.

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