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International business environment MB-IB-01-MBA-IIIrd SEM-UPTU


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International Business Environment - Sem III, UPTU.

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International business environment MB-IB-01-MBA-IIIrd SEM-UPTU

  1. 1. International Business Environment MB IB 01 1/29/2015 1Kartikeya Singh
  2. 2. Unit I – (10 sessions) I. International Business and Environment: An interface; II. World Trade in Goods and Services – Major trends and Developments; III. Framework for Understanding International Business Environment - Analysis of Physical, Demographic, Economic, Socio- cultural, Political, Legal and Technological Environment of a Foreign Country, IV. Legal Framework of International Business - Nature and Complexities; code and common laws and their implications to Business; V. International Business contract – Legal Provisions; International Sales Agreements, Rights and Duties of Agents and Distributors.1/29/2015 2Kartikeya Singh
  3. 3. International Business and Environment “A domestic transaction is the selling of items produced in the same country.” “An international transaction is the selling of items produced in other countries. These items contribute to the global economy.” 1/29/2015 3Kartikeya Singh
  4. 4.  IB field is concerned with the issues facing international companies and governments in dealing with all types of cross border transactions.  IB involves all business transactions that involve two or more countries.  IB consists of transactions that are devised and carried out across borders to satisfy the objectives of individuals and organizations.  IB consists of those activities private and public enterprises that involve the movement across national boundaries of goods and services, resources, knowledge or skills.1/29/2015 4Kartikeya Singh
  5. 5. Benefits of IB Benefits for International Business • Access to markets • Cheaper labour • Increased quality of goods • Increased quantity of goods • Access to resources 1/29/2015 5Kartikeya Singh
  6. 6. World Trade in Goods and Services – Major trends and Developments; • As trade flows have generally grown faster than income since the Second World War, countries’ openness and their exposure to external developments have increased; • Global trade collapsed in the global crisis of 2008-2009, recovery remains unfinished and uneven; the global crisis appears to have left a marked impact on the dynamism of global trade; • The global crisis has also brought the long-run trend of rising global integration through trade to a halt, at least temporarily; • The global crisis and uneven trade recovery have reinforced the ongoing shift in balance in the world economy, featuring the relative decline of developed countries; 1/29/2015 Kartikeya Singh 6
  7. 7. World Trade in Goods and Services – Major trends and Developments; • The shifting global balance is also visible in the changing distribution of exports by destination, featuring the rising importance of trade among developing countries; • The rise in South-South trade has been especially pronounced in East Asia; • LDCs have generally participated in these trends to a lesser extent but recovered some lost ground in recent years; • Related to commodity price developments; many countries have experienced sizeable terms-of-trade changes since 2002, with both winners (especially oil and metal exporters) and losers (especially food-deficit countries) among developing countries including LDCs; • Global governance reform needs to make further progress.1/29/2015 Kartikeya Singh 7
  8. 8. World Trade in Goods and Services – Major trends and Developments; • Removal of Tariff and Non-Tariff barriers • Transfer of technology leads to increased production • Increase in interdependence of countries. • International trade after WWII entered a long period of record expansion with world merchandise exports rising by more than 8% during 1950-70 • Trade growth slowed down after two oil shocks • 1990s trade expanded again more rapidly, partly driven by innovations in the information technology(IT) sector. • Despite the small contraction of trade caused by the dotcom crisis in 2001, the average expansion of world merchandise exports continued to be high.1/29/2015 Kartikeya Singh 8
  9. 9. World Trade in Goods and Services – Major trends and Developments; 1/29/2015 Kartikeya Singh 9 path=/Dashboards/MAPS&file=Map.wcdf&bookmarkState={%22impl%22: %22client%22,%22params%22:{%22langParam%22:%22en%22}}
  10. 10. Development Time Economic Political Technological 1940 •GATT 1947 •Bretton Woods System – IMF and World Bank 1945 •United Nation 1945 •Decolonisation Started(1948-1962) •First nylon Stalking •Discovery of Large oil field in middle east 1950 •European Commission 1957 •European Free Trade Association •Major Currency became convertible •Koreon War 1950 •Suez Crisis 1956 •Decolonisation of Africa Started •Increased Oil use from middle east, •‘Just in Time’ production implemented in Toyota •Increased use of jet engines 1/29/2015 Kartikeya Singh 10
  11. 11. Development Time Economic Political Technological 1960 •Foundation of OPEC-Oil producing and Exporting Countries – 1960 •Kennedy round – 1964- 1969 •More emphasis on export development in European region •Erection of Berlin Wall(1961) •Green Revolution •First high speed train system •Increased use of containerization in ocean transport. 1970 and 80s •Tokyo round GATT- 1973 •Oil price shocks •China Economic Reform 1978 EU was enlarged to 9 members and then to 12members •IBM introduced first personal computer 1981 •Microsoft Windows Introduced 1985 1/29/2015 Kartikeya Singh 11
  12. 12. Development Time Economic Political Technological 1990s •Indian Economic reforms 1991 •NAFTA – 1994 •Asian Financial Crisis •WTO – 1995 •Adoption of Euro 11 countries •Dissolution of Soviet Union 1991 leads to 13 independent states •Mobile usage on surge 2000 •China joins WTO 2001 •Enlargement of EU to 27 members •Sea transport increase multifold. 1/29/2015 Kartikeya Singh 12
  13. 13. Framework for Understanding International Business Environment Micro Environment • Customer • Competitor • Suppliers • Marketing Intermediaries • Democratic Macro Environment • Economic • Political and Legal • Socio Cultural • Demographic • Natural • Physical and Technological • International 1/29/2015 Kartikeya Singh 13
  14. 14. Legal Framework of International Business - • Ex ----- • Media advertising is not permitted in Libya • European countries restrain the use of children in commercial advertisements • In a number of countries, including India, the advertisement of alcoholic liquor is prohibited • “cigarette smoking is injurious to health” • In countries like Germany, product comparison advertisements and the use of superlatives like ‘best’ or ‘excellent’ in advertisements is not allowed • ‘caveat emptor’ or ‘let the buyer beware’ • MRTP act 1/29/2015 Kartikeya Singh 14
  15. 15. Legal Framework of International Business - Nature and Complexities; code and common laws and their implications to Business; • There is no comprehensive system of laws or regulations for guiding business transactions between two countries. • The legal environment consists of laws and policies from all countries engaged in international commercial activity. • Early trade customs centered around the law of the sea and provided, among other things, for rights of shipping in foreign ports, salvage rights, and freedom of passage. • During the Middle Ages, international principles embodied in the lex mercatoria (law merchant) governed commercial transactions throughout Europe. • Although laws governing international transactions were more extensive in some countries than others, the customs and codes of conduct created a workable legal structure for the protection and encouragement of international transactions. • The international commerce codes in use today in much of Europe and in the United States are derived in part from those old codes.1/29/2015 Kartikeya Singh 15
  16. 16. Sources of International Law - • The main sources of international commercial law are the laws of individual countries, the laws embodied in trade agreements between or among countries, and the rules enacted by a worldwide or regional organization— such as the United Nations or the European Union • The International Court of Justice, • International arbitration, or • The courts of an individual country 1/29/2015 Kartikeya Singh 16
  17. 17. Sources of International Law • UNO • WTO • Import policy • Taxes on Import • Import control – The Department of Commerce, the International Trade Administration (ITA),and the International Trade Commission (ITC) have certain abilities to restrict foreign imports. • Export Regulation and Promotion 1/29/2015 Kartikeya Singh 17
  18. 18. International Contract • The basis for any international agreement is the contract between parties. International contracts often involve parties from differing cultural backgrounds who do not know each other well at the outset of negotiations a) Cultural Aspect b) Financial Aspect c) Exchange Market d) Financial Instruments Used in International Contracts e) Movement of Monetary Profits 1/29/2015 Kartikeya Singh 18
  19. 19. Financial Instruments Used in International Contracts • Bill of exchange – sight bill – time bill • Letter of credit (Revocable/Irrevocable) – certificate of origin, – an export license, – a certificate of inspection, – a bill of lading, – a commercial invoice 1/29/2015 Kartikeya Singh 19
  20. 20. International Contract I. Payment clauses II. Choice of Language Clause III. Force Majeure Clause IV. Forum Selection and Choice-of-Law Clauses. V. UN Convention on Contracts VI. Loss of Investment VII. Nationalization. VIII.Insuring against Risk of Loss 1/29/2015 Kartikeya Singh 20
  21. 21. International Sales Agreements Content of the pro-forma Parties to the contract  Write the exact references of contracting parties along with, if posible, the name of respective representatives of the two companies. The aim  To prepare a detailed description of the product or service, with all the technical aspects and the details of packing (volume, weight, and packing) Transport Modalities  To determine the Incoterm, transport mode and the precised period required for delivery Price  The price must be detailled (unit price, etc), fime, final, in order to avoid misunderstanding. The buyer and the seller must define at this point of time the mode and period of settlement of bills. 1/29/2015 Kartikeya Singh 21
  22. 22. General Condition of Sales CLAUSES Parties to the contract  Identifying parties to the contract (buyer/seller) : Name of the companyies their Head Offices addresses detailed addresses and the name of respective representatives. Nature of the contract  Defining aim of the contract (product or service)  Describing technical aspects, quantity, volume, weight and eventually mode of packing, as the buyer can communicate his requirements. Prices and modes of payment  Specifying price in Dinar or foreign exchange (risk of exchange rate being included)  Price is accompanied by the term determining distribution of expenses on transport, custom duty, insurance and the time of transfer of property.  The price of merchandise will be defined (unit price and total price).  Provide for a code of settlement which gives a maximum security to the seller.  Down payment of advances guaranteeing the order.  In case of documentary credit, the seller notes the opening demand  In fine, if law permits, a cause for reservation of propriety can be inserted into the contract. 1/29/2015 Kartikeya Singh 22
  23. 23. General Condition of Sales 1/29/2015 Kartikeya Singh 23 CLAUSES Modalities of transport  Specifying the mode of transport consistant with nature of merchandise, destination and security.  Depending on the Incoterm, respective obligations of the contracting parties are stated. Modalities of delivery  Specifying date, place of loading and delivery.  Defining details according to the date of contract coming into force : respect for delivery period is one of the major obligations of the seller. One must provide and impose in advance penulties for delay. Force majeure  Indicating the force majeure for unforeseeable events. In principle, one should avoid accepting the case of force majeure resorted to by the seller to the extent to which he does not impose it. Guarantees  Defining the obligations of the two parties in regard to guarantee. Eg : guarantee of restoring advance for the seller. Jurisdiction in case of legal dispute  Specifying the law applicable to the settlement of legal disputes. Language  Specifying language of the contract, which must be mastered by both the parties. However, attention has to be paid to the problems of translations.
  24. 24. Unit –II ( 8 sessions) 1/29/2015 Kartikeya Singh 24
  25. 25. Unit II 1. Global Trading Environment: 2. Liberalization of World Trade. FDI and their Impact on the Economy, 3. Multinationals and their Economic Impact; 4. Political and Legal Impact of Multinational Corporations; 5. Strategies for Dealing with Multinationals; 6. Technology Transfer – Importance and Types, 7. Issues in Transfer of Technology to Developing Countries. 1/29/2015 Kartikeya Singh 25
  26. 26. 1.Global Trading Environment • Economic Integration is proceeding across the world at an unprecedented pace. • Globalization has brought enormous benefits to many countries and citizens. • The first part of Globalization process started around mid 19th century and ended with the commencement of World war 1st. • The second part began in the aftermath of World war II and continues today. • In both these episodes of Globalization, rapid trade and output growth went together with major shifts in the relative size of economies involved. • One valuable lesson from history is that globalization has not been a smooth process. 1/29/2015 Kartikeya Singh 26
  27. 27. 1.Global Trading Environment World 1850-1913 1913-1950 1950-73 1974-2007 Population Growth 0.8 1.7 1.9 1.6 GDP Growth 2.1 3.8 5.1 2.9 Per capita 1.3 2.0 3.1 1.2 Trade Growth 6.2 8.2 5 Migration 17.9 50.1 12.7 37.4 FDI as % of GDP(World) 5.2 25.6(2006) 1/29/2015 Kartikeya Singh 27
  28. 28. 1.Global Trading Environment Value Annual Percentage 2007(Billion Dollars) 2007(annual percentage change) Merchandise 13570 15 Commercial Services 3260 18 1/29/2015 Kartikeya Singh 28
  29. 29. 1.Global Trading Environment • Regional Integration Agreement and Trade(RIAs) – Regional Trading Blocks – Free trade zone. External tariff policy remains. – Custom Unions – common external Tariffs. – Elimination of tariffs on trade between the member states, – Different trade partners receive different treatment. – Members of RTA liberalize trade on reciprocal and preferential basis. 1/29/2015 Kartikeya Singh 29
  30. 30. 1.Global Trading Environment • Economic Effects of RIAs – Try to eliminate preferential trade arrangement – Trade Creation • Import from country A increases with member country B without reducing it import with other countries. – Trade Diversion • Preferably imports expensive goods. – Transfers. • Occurs between the members country • Positive transfer and negative transfer. 1/29/2015 Kartikeya Singh 30
  31. 31. Round Participants Key Achievements 1947 23 Tariff reduction 1949 13 Tariff reduction 1951 37 Tariff reduction 1956 26 Tariff reduction 1960-61, “Dillon Round” 26 Tariff reduction 1964-67,”Kennedy Round” 62 Tariff reduction, agreement on anti- dumping practices 1973-79,”Tokyo Round” 102 Tariff reduction, elimination of non-tariff barriers, “framework”agreements 1986-94,”Uruguay Round” 123 Tariff reduction, agreement to eliminate quotas in agriculture, agreement on intellectual property, agreement on dispute settlement, integration of textile and apparel products into the agreement, creation of the World Trade Organization (WTO) 2001-present “Doha Round” 146 Dubbed the “Development Round,” these negotiations focus on agriculture, trade of services, market access, intellectual property rights, investment, competition, transparency in government procurement, trade facilitation, and WTO rules, and have so far been characterized by conflict between developed and developing countries 1/29/2015 Kartikeya Singh 31
  32. 32. Foreign Direct Investment • Why is FDI increasing? • Why do firms choose FDI over exporting or licensing to enter a foreign market? • Why are certain locations attractive for FDI? • How does political ideology influence government policy over FDI? • From a host or source country perspective, what are FDI’s costs and benefits? • How can governments restrict/encourage FDI? 1/29/2015 Kartikeya Singh 32
  33. 33. FDI • Foreign direct investment (FDI) happens when a firm invests directly in facilities in a foreign country • A firm that engages in FDI becomes a multinational enterprise (MNE) – Multinational = “more than one country” 1/29/2015 Kartikeya Singh 33
  34. 34. FDI • Involves ownership of entity abroad for – production – Marketing/service – R&D – Raw materials or other resource access • Parent has direct managerial control – The degree of direct managerial control depends on the extent of ownership of the foreign entity and on other contractual terms of the FDI – No managerial involvement = portfolio investment 1/29/2015 Kartikeya Singh 34
  35. 35. FDI • FDI forms – Purchase of existing assets • Quick entry, local market know-how, local financing may be possible, eliminate competitor, – New investment • No local entity exists or is available for sale, local financial incentives may encourage, no inherited problems, long lead time to generation of sales or other desired outcome – Participation in an international joint- venture • Shared ownership with local and/or other non- local partner 1/29/2015 Kartikeya Singh 35
  36. 36. FDI • FDI – FDI - 100% ownership – FDI < 100% ownership, International Joint Venture • Majority, Equal Share, Minority Participation • Strategic Alliances (non-equity) • Franchising • Licensing • Exports – Direct vs Indirect 1/29/2015 Kartikeya Singh 36
  37. 37. Franchising Licensing Governed by: Securities law Contract law Registration: Required Not required Territorial rights: Offered to franchisee Not offered; licensee can sell similar licenses and products in same area Support and training: Provided by franchiser Not provided Royalty payments: Yes Yes Use of trademark/logo: Logo and trademark retained by franchiser and used by franchisee Can be licensed Examples: McDonalds, Subway, 7-11, Dunkin Donuts Microsoft Office control: Franchiser exercise control over franchisee. licensor does not have control over licensee 1/29/2015 Kartikeya Singh 37
  38. 38. Why FDI? • FDI over exporting – High transportation costs, trade barriers • FDI over licensing or franchising – Need to retain strategic control – Need to protect technological know-how – Capabilities not suitable for licensing/franchising 1/29/2015 Kartikeya Singh 38
  39. 39. Multinational Organization and its Impact • A multinational corporation (MNC) or multinational enterprise (MNE) is a corporation that is registered in more than one country or that has operations in more than one country. It is a large corporation which both produces and sells goods or services in various countries. It can also be referred to as an international corporation. 1/29/2015 Kartikeya Singh 39
  40. 40. Multinational Organization and its Impact Advantages • Improving the balance of payments • Providing employment • Source of tax revenue • Technology transfer • Increasing choice • National reputation • Technology transfer Disadvantages • Environmental impact • Uncertainty • Increased competition • Crowding out • Influence and political pressure • Transfer pricing • Low-skilled employment • Health and safety • Export of Profits • Cultural and social impact 1/29/2015 Kartikeya Singh 40
  41. 41. Acquisition • Acquisition refers to the process of acquiring a company at a price called the acquisition price or acquisition premium. The price is paid in terms of cash or acquiring company's shares or both. –friendly acquisition and –hostile acquisition 1/29/2015 Kartikeya Singh 41
  42. 42. Merger • The combining of two or more companies, generally by offering the stockholders of one company securities in the acquiring company in exchange for the surrender of their stock. • Basically, when two companies become one. This decision is usually mutual between both firms. 1/29/2015 Kartikeya Singh 42
  43. 43. Joint Venture • Joint venture, commonly known as JV, is a contractual arrangement between two or more parties who agree to come together to undertake a business project. All the parties contribute capital and share profits and losses in a decided ratio. • Joint ventures are a type of partnership that is always executed through a written contract known as a joint venture agreement (JVA). These contracts are registered and are legally binding on the parties. • Moreover, they are temporary in nature because they are executed for a definite period of time to accomplish a specific purpose. The contract automatically dissolves after the expiry of the decided time period. 1/29/2015 Kartikeya Singh 43
  44. 44. Amalgamation • Amalgamation is an arrangement where two or more companies consolidate their business to form a new firm, or become a subsidiary of any one of the company. • For practical purposes, the terms amalgamation and merger are used interchangeably. • Merger involves the fusion of two or more companies into a single company where the identity of some of the companies gets dissolved. On the other hand, amalgamation involves dissolving the entities of amalgamating companies and forming a new company having a separate legal entity. 1/29/2015 Kartikeya Singh 44
  45. 45. Merger vs Acquisition Merger Acquisition Merger is considered to be a process when two or more companies come together to expand their business operations. In such a case the deal gets finalized on friendly terms and both the companies share equal profits in the newly created entity. When one company takes over the other and rules all its business operations, it is known as acquisitions. merger two companies of same size combine to increase their strength and financial gains along with breaking the trade barriers in an acquisition usually two companies of different sizes come together to combat the challenges of downturn 1/29/2015 Kartikeya Singh 45
  46. 46. • Tata Steel’s mega takeover of European steel major Corus for $12.2 billion. The biggest ever for an Indian company. This is the first big thing which marked the arrival of India Inc on the global stage. The next big thing everyone is talking about is Tata Nano. • Vodafone’s purchase of 52% stake in Hutch Essar for about $10 billion. Essar group still holds 32% in the Joint venture. • Hindalco of Aditya Birla group’s acquisition of Novellis for $6 billion. • Ranbaxy’s sale to Japan’s Daiichi for $4.5 billion. Sing brothers sold the company to Daiichi and since then there is no real good news coming out of Ranbaxy. • ONGC acquisition of Russia based Imperial Energy for $2.8 billion. This marked the turn around of India’s hunt for natural reserves to compete with China. • NTT DoCoMo-Tata Tele services deal for $2.7 billion. The second biggest telecom deal after the Vodafone. Reliance MTN deal if went through would have been a good addition to the list. • HDFC Bank acquisition of Centurion Bank of Punjab for $2.4 billion. • Tata Motors acquisition of luxury car maker Jaguar Land Rover for $2.3 billion. This could probably the most ambitious deal after the Ranbaxy one. It certainly landed Tata Motors into lot of trouble. • Wind Energy premier Suzlon Energy’s acquistion of RePower for $1.7 billion. • Reliance Industries taking over Reliance Petroleum Limited (RPL) for 8500 crores or $1.6 billion. 1/29/2015 Kartikeya Singh 46
  47. 47. 5. Political and Legal Impact of Multinational • They integrate the economy • Try to give a unified platform for the trade • Integral part of World economy. • After WTO and different Regional Outfits countries started making rules and regulations to suit multinational organization • Regional blocks also started merging with each other so that entire world may become a uniform platform for the trade. • Funds move majorly moves from developed to developed countries but due to its importance political and legal framework are changing with a fast pace. • Open Gate policy in case of India is a practical example for it. • Barriers (tariff and non tariff) are being reduced in phase wise manner to give more benefit to the multinationals 1/29/2015 Kartikeya Singh 47
  48. 48. SWOT Analysis of MNC Strengths • Low Cost • Well Developed Infrastructure Weakness • Location is often very distant • Lack of Transportation facilities • Relative Inflexibility Opportunities • Leverage Government • Create the necessary infrastructure • Attract new industries Threats • Emergence of Private companies • Establishment of monopoly
  49. 49. 6. Strategies for Dealing with Multinationals 1/29/2015 Kartikeya Singh 49
  50. 50. 1/29/2015 Kartikeya Singh 50 EXHIBIT 6.1 MULTINATIONAL STRATEGY CONTENT Content Transnational International Multidomestic Regional Worldwide markets Yes Yes No No Worldwide location of separate value chain activities Yes No No No Global products Yes Yes No No Global marketing Yes Yes No No Global competitive moves Resources from any country used to attack or defend Attacks and defenses in all countries - resources HQ No, competitive moves planned and financed by country units No, but resources from region can be used
  51. 51. 7. Technology Transfer – Importance and Types, • … is composed of a systematically developed set of information, skills, and processes that are needed to create, develop, and innovate products and services 1/29/2015 Kartikeya Singh 51
  52. 52. 7. Technology Transfer – Importance and Types, • Product-embodied technologies are transferred by transferring the physical product itself • Process-embodied technology is concerned with blueprint or patent rights of the actual scientific processes and engineering details from the developer to another • Person-embodied technology is concerned with creating continuous dialogue between the supplier and the recipient organizations pertaining to the intrinsic nature, 1/29/2015 Kartikeya Singh 52
  53. 53. 7. Technology Transfer – Importance and Types, • Factors Influencing Technology Transfer – Similar language – Common ancestry and shared history – Physical proximity – Technical competence of the workforce – The complexity of the technology at the time of transfer – The number of successful prior transfers1/29/2015 Kartikeya Singh 53
  54. 54. 7. Technology Transfer – Importance and Types, • Factors Causing Difficulty in Technology Transfer. – Differences in strategic thinking – Characteristics of the technology involved – Differences in organizational and corporate cultures – Differences in societal cultures 1/29/2015 Kartikeya Singh 54
  55. 55. End of Unit II 1/29/2015 Kartikeya Singh 55
  56. 56. Unit III (8 Sessions) 1/29/2015 Kartikeya Singh 56
  57. 57. Unit III 1. International Financial Environment: a) Foreign Investment – Types and Flows; 2. Monetary System- a) Exchange Rate Mechanism and Arrangements, b) Movements in Foreign Exchange Rates and Impact on Trade and Investment Flows, Global Capital Markets. 1/29/2015 Kartikeya Singh 57
  58. 58. 1.International Financial Environment: a). Foreign Investment – Types and Flows; • New market access is also another major reason to invest in a foreign country. At some stage, export of product or service reaches a critical mass of amount and cost where foreign production or location begins to be more cost effective. Any decision on investing is thus a combination of a number of key factors including: • assessment of internal resources, • competitiveness, • market analysis • market expectations. 1/29/2015 Kartikeya Singh 58
  59. 59. 1.International Financial Environment: a). Foreign Investment – Types and Flows; – Resources: Availability and therefore exploitation of resources in the host country. – Markets: FDI largely flows to the countries which have large markets with comparatively good infrastructure and political stability. – Efficiency: Low cost of production, derived from cheap labor is the driving force of many FDIs in developing countries. – Rate of interest: Difference in the rate of interest acts as a stimuli to attracting foreign investment. Capital has a tendency to move from a country with a low rate of interest to a country where interest rate is higher. – Profitability: Private foreign capital is largely influenced by the profit motive. It is attracted to countries where the return on investment is higher. – Economic conditions: Economic conditions particularly market potential and infrastructural facilities influence foreign investment. – Government Policies and Political Factors: Policies encouraging FIIS and FDIs and a stable Government largely encourages the movement of foreign capital into the country 1/29/2015 Kartikeya Singh 59
  60. 60. 1.International Financial Environment: a). Foreign Investment – Types and Flows; • Why is FDI important for any consideration of going global? • The simple answer is that making a direct foreign investment allows companies to accomplish several tasks: • Avoiding foreign government pressure for local production. • Circumventing trade barriers, hidden and otherwise. • Making the move from domestic export sales to a locally-based national sales office. • Capability to increase total production capacity. • Opportunities for co-production, joint ventures with local partners, joint marketing arrangements, licensing, etc; 1/29/2015 Kartikeya Singh 60
  61. 61. 1.International Financial Environment: a). Foreign Investment – Types and Flows; • Licensing and technology transfer. • Reciprocal distribution agreements. • Joint venture and other hybrid strategic alliances. • Portfolio investment. 1/29/2015 Kartikeya Singh 61
  62. 62. 1.International Financial Environment: a). Foreign Investment – Types and Flows; • Significance of Foreign Investment • Foreign capital facilitates essential imports required for carrying out development programmes, like capital goods, know-how, raw materials and other inputs and even consumer goods which might not be indigenously available. • When export earnings are insufficient to finance vital imports, foreign capital could reduce the foreign exchange gap. • Foreign investment may also increase the country’s exports and reduce the import requirements if such investments take place in export oriented and import competing industries. • As long as foreign investment raises productivity, it would benefit domestic labor in the form of increased real wages, consumers in case if foreign investment is cost reducing in a particular industry, the consumers might gain through lower product prices; government if the increase in production and foreign trade increases the fiscal revenue of the government. 1/29/2015 Kartikeya Singh 62
  63. 63. 1.International Financial Environment: a). Foreign Investment – Types and Flows; • Helps increase the investment level and thereby the income and employment in the host country. • It facilitates transfer of technology to the recipient country, • It may kindle a managerial revolution in the recipient country through professional management and employment of highly sophisticated management techniques. • Foreign capital may enable the country to increase its exports and reduce import requirements. • Foreign investment might stimulate domestic enterprises to perform better and increase competition and break domestic monopolies. 1/29/2015 Kartikeya Singh 63
  64. 64. 1.International Financial Environment: a). Foreign Investment – Types and Flows; • Criticism against Foreign Capital • Foreign capital tends to flow to the high profit areas rather than to the priority sectors. • Technology imported might not be adapted to the needs of the customers. • MNCs could undermine economic autonomy and control and their activities might not be in favor of national interests. • Foreign investment could have unfavorable effect on the Balance of Payments of a country if the outflow is higher due to payment of royalty etc. • Foreign investors at times engage in unfair practices and unethical trade practices. • Foreign investment could result in minimizing / eliminating competition and facilitate creation of monopolistic structure 1/29/2015 Kartikeya Singh 64
  65. 65. 2. Monetary System- International monetary systems over two centuries Date System Reserve assets Leaders 1803–1873 Bimetallism Gold, silver France, UK 1873–1914 Gold standard Gold, pound UK 1914–1924 Anchored dollar standard Gold, dollar US, UK, France 1924–1933 Gold standard Gold, dollar, pound US, UK, France 1933–1971 Anchored dollar standard Gold, dollar US, G-10 1971–1973 Dollar standard Dollar US 1973–1985 Flexible exchange rates Dollar, mark, pound US, Germany, Japan 1985–1999 Managed exchange rates Dollar, mark, yen US, G7, IMF 1999- Dollar, euro Dollar, euro, yen US, Eurozone, IMF1/29/2015 Kartikeya Singh 65
  66. 66. 2. Monetary System- 1/29/2015 Kartikeya Singh 66 Competing ideas for the next international monetary system System Reserve assets Leaders Flexible exchange rates Dollar, euro, renminbi US, Eurozone, China Special drawing rights standard SDR US, G-20, IMF Gold standard Gold, dollar US Delhi Declaration Currency basket BRICS
  67. 67. 2. Monetary System- a. Exchange Rate Mechanism and Arrangements  What is Exchange Rate ?  Exchange Rate is a rate at which one currency can be exchanged into another currency. In other words it is value one currency in terms of other. say: US $ 1 = Rs.61.5 This rate is the conversion rate of every US $ 1 to Rs. 61.5 1/29/2015 Kartikeya Singh 67
  68. 68. History • In 1821-1914Most of the World's currencies were redeemable into gold. (i.e. you could "cash in" your paper notes for predefined weights of gold coin). • Britain was the first to officially adopt this system in 1821 and was followed by other key countries during 1870s. • The result was a global economy connected by the common use of gold as money. • Close to the end of World War II, the Bretton Woods Agreement was signed. Since the impact of the Great Depression was still fresh in the minds of the policymakers, they wanted to shun all possibilities of a similar fiasco. The Bretton Woods Agreement founded a system of fixed exchange rates in which the currencies of all countries were pegged to the US dollar, which in turn was based on the gold standard. • By 1970, the existing exchange rate system was already under threat. The Nixon-led US government suspended the convertibility of the national currency into gold. The supply of the US dollar had exceeded its demand. • In 1971, the Smithsonian Agreement was signed. For the first time in exchange rate history, the market forces of supply and demand began to determine the exchange rate.
  69. 69. Three main categories of exchange rate regimes 1. Flexible Exchange Rate Systems 2. Managed Floating 3. Fixed Exchange-rate System
  70. 70. Flexible Exchange Rate Systems • The value of the currency is determined by the market, ex. by the interactions of thousands of banks, firms and other institutions seeking to buy and sell currency for purposes of transactions • So higher demand for a currency, all else equal, would lead to an appreciation of the currency. Lower demand, all else equal, would lead to a depreciation of the currency. An increase in the supply of a currency, all else equal, will lead to a depreciation of that currency while a decrease in supply, all else equal, will lead to an appreciation. • Most countries have flexible exchange rate systems: the U.S., Canada, Australia, Britain, and the European Monetary Union.
  71. 71. Managed Floating • A floating exchange rate in which a government intervenes at some frequency to change the direction of the float by buying or selling currencies. Often, the local government makes this intervention, but this is not always the case. For example, in 1994, the American government bought large quantities of Mexican pesos to stop the rapid loss of the peso's value. • The central bank does not have an explicit set value for the currency; it also doesn’t allow the market to freely determine the value of the currency. • Example: Suppose that Thailand had a managed floating rate system and that the Thai central bank wants to keep the value of the Baht close to 25 Baht/$. In a managed floating regime, the Thai central bank is willing to tolerate small fluctuations in the exchange rate (say from 24.75 to 25.25) without getting involved in the market.
  72. 72. Fixed Exchange-rate System • A system whereby the exchange rates of the member countries were fixed against the U.S. dollar, with the dollar in turn worth a fixed amount of gold. • Governments try to keep the value of their currencies constant against one another. • A country’s government decides the worth of its currency in terms of either a fixed weight of gold, a fixed amount of another currency or a basket of other currencies. • The central bank of a country remains committed at all times to buy and sell its currency at a fixed price. • The central bank provides foreign currency needed to finance payments imbalances.
  73. 73. De Facto Classification of Exchange Rate Regimes and Monetary Policy Frameworks (IMF, 2008) 1. Exchange Arrangements with No Separate Legal Tender 2. Currency Board Arrangements 3. Other Conventional Fixed Peg Arrangements 4. Pegged Exchange Rates within Horizontal Bands 5. Crawling Pegs 6. Exchange Rates within Crawling Bands 7. Managed Floating with No Predetermined Path for the Exchange Rate 8. Independently Floating
  74. 74. Exchange Arrangements with No Separate Legal Tender • The currency of another country circulates as the sole legal tender (formal dollarization) • The member belongs to a monetary or currency union in which the same legal tender is shared by the members of the union. • It implies the complete surrender of the monetary authorities' independent control over domestic monetary policy. 1. Exchange Arrangements with No Separate Legal Tender 2. Currency Board Arrangements 3. Other Conventional Fixed Peg Arrangements 4. Pegged Exchange Rates within Horizontal Bands 5. Crawling Pegs 6. Exchange Rates within Crawling Bands 7. Managed Floating with No Predetermined Path for the Exchange Rate 8. Independently Floating
  75. 75. Currency Board Arrangements • Based on an explicit legislative commitment to exchange domestic currency for a specified foreign currency at a fixed exchange rate, combined with restrictions on the issuing authority to ensure the fulfillment of its legal obligation. • Domestic currency will be issued only against foreign exchange and that it remains fully backed by foreign assets, eliminating traditional central bank functions, such as monetary control and lender-of-last-resort, and leaving little scope for discretionary monetary policy. • Some flexibility may still be afforded, depending on how strict the banking rules of the currency board arrangement. 1. Exchange Arrangements with No Separate Legal Tender 2. Currency Board Arrangements 3. Other Conventional Fixed Peg Arrangements 4. Pegged Exchange Rates within Horizontal Bands 5. Crawling Pegs 6. Exchange Rates within Crawling Bands 7. Managed Floating with No Predetermined Path for the Exchange Rate 8. Independently Floating
  76. 76. Other Conventional Fixed Peg Arrangements • The country (formally or de facto) pegs its currency at a fixed rate to another currency or a basket of currencies, where the basket is formed from the currencies of major trading or financial partners and weights reflect the geographical distribution of trade, services, or capital flows. • The currency composites can also be standardized, as in the case of the SDR. There is no commitment to keep the parity irrevocably. The exchange rate may fluctuate within narrow margins of less than ±1 percent around a central rate-or the maximum and minimum value of the exchange rate may remain within a narrow margin of 2 percent-for at least three months. • The monetary authority stands ready to maintain the fixed parity through direct intervention (i.e., via sale/purchase of foreign exchange in the market) or indirect intervention (e.g., via aggressive use of interest rate policy, imposition of foreign exchange regulations, exercise of moral suasion that constrains foreign exchange activity, or through intervention by other public institutions). • Flexibility of monetary policy, though limited, is greater than in the case of exchange arrangements with no separate legal tender and currency boards because traditional central banking functions are still possible, and the monetary authority can adjust the level of the exchange rate, although relatively infrequently. 1. Exchange Arrangements with No Separate Legal Tender 2. Currency Board Arrangements 3. Other Conventional Fixed Peg Arrangements 4. Pegged Exchange Rates within Horizontal Bands 5. Crawling Pegs 6. Exchange Rates within Crawling Bands 7. Managed Floating with No Predetermined Path for the Exchange Rate 8. Independently Floating
  77. 77. Pegged Exchange Rates within Horizontal Bands • The value of the currency is maintained within certain margins of fluctuation of at least ±1 percent around a fixed central rate or the margin between the maximum and minimum value of the exchange rate exceeds 2 percent. • It also includes arrangements of countries in the exchange rate mechanism (ERM) of the European Monetary System (EMS) that was replaced with the ERM II on January 1, 1999. • There is a limited degree of monetary policy discretion, depending on the band width. 1. Exchange Arrangements with No Separate Legal Tender 2. Currency Board Arrangements 3. Other Conventional Fixed Peg Arrangements 4. Pegged Exchange Rates within Horizontal Bands 5. Crawling Pegs 6. Exchange Rates within Crawling Bands 7. Managed Floating with No Predetermined Path for the Exchange Rate 8. Independently Floating
  78. 78. Crawling Pegs • The currency is adjusted periodically in small amounts at a fixed rate or in response to changes in selective quantitative indicators, such as past inflation differentials vis-à-vis major trading partners, differentials between the inflation target and expected inflation in major trading partners, and so forth. • The rate of crawl can be set to generate inflation- adjusted changes in the exchange rate (backward looking), or set at a preannounced fixed rate and/or below the projected inflation differentials (forward looking). • Maintaining a crawling peg imposes constraints on monetary policy in a manner similar to a fixed peg system. 1. Exchange Arrangements with No Separate Legal Tender 2. Currency Board Arrangements 3. Other Conventional Fixed Peg Arrangements 4. Pegged Exchange Rates within Horizontal Bands 5. Crawling Pegs 6. Exchange Rates within Crawling Bands 7. Managed Floating with No Predetermined Path for the Exchange Rate 8. Independently Floating
  79. 79. Exchange Rates within Crawling Bands • The currency is maintained within certain fluctuation margins of at least ±1 percent around a central rate-or the margin between the maximum and minimum value of the exchange rate exceeds 2 percent-and the central rate or margins are adjusted periodically at a fixed rate or in response to changes in selective quantitative indicators. • The degree of exchange rate flexibility is a function of the band width. Bands are either symmetric around a crawling central parity or widen gradually with an asymmetric choice of the crawl of upper and lower bands (in the latter case, there may be no preannounced central rate). • The commitment to maintain the exchange rate within the band imposes constraints on monetary policy, with the degree of policy independence being a function of the band width. 1. Exchange Arrangements with No Separate Legal Tender 2. Currency Board Arrangements 3. Other Conventional Fixed Peg Arrangements 4. Pegged Exchange Rates within Horizontal Bands 5. Crawling Pegs 6. Exchange Rates within Crawling Bands 7. Managed Floating with No Predetermined Path for the Exchange Rate 8. Independently Floating
  80. 80. Managed Floating with No Predetermined Path for the Exchange Rate • The monetary authority attempts to influence the exchange rate without having a specific exchange rate path or target. • Indicators for managing the rate are broadly judgmental (e.g., balance of payments position, international reserves, parallel market developments), and adjustments may not be automatic. Intervention may be direct or indirect. 1. Exchange Arrangements with No Separate Legal Tender 2. Currency Board Arrangements 3. Other Conventional Fixed Peg Arrangements 4. Pegged Exchange Rates within Horizontal Bands 5. Crawling Pegs 6. Exchange Rates within Crawling Bands 7. Managed Floating with No Predetermined Path for the Exchange Rate 8. Independently Floating
  81. 81. Independently Floating The exchange rate is market-determined, with any official foreign exchange market intervention aimed at moderating the rate of change and preventing undue fluctuations in the exchange rate, rather than at establishing a level for it. 1. Exchange Arrangements with No Separate Legal Tender 2. Currency Board Arrangements 3. Other Conventional Fixed Peg Arrangements 4. Pegged Exchange Rates within Horizontal Bands 5. Crawling Pegs 6. Exchange Rates within Crawling Bands 7. Managed Floating with No Predetermined Path for the Exchange Rate 8. Independently Floating
  82. 82. Movements in Foreign Exchange Rates and Impact on Trade and Investment Flows, Global Capital Markets • Foreign exchange trading increased by 20% between April 2007 and April 2010 and has more than doubled since 2004. • The increase in turnover is due to a number of factors: the growing importance of foreign exchange as an asset class, the increased trading activity of high-frequency traders, and the emergence of retail investors as an important market segment. • The growth of electronic execution and the diverse selection of execution venues has lowered transaction costs, increased market liquidity, and attracted greater participation from many customer types. • In particular, electronic trading via online portals has made it easier for retail traders to trade in the foreign exchange market. By 2010, retail trading is estimated to account for up to 10% of spot turnover, or $150 billion per day (see retail foreign exchange platform). 1/29/2015 Kartikeya Singh 82
  83. 83. •End of Unit III 1/29/2015 Kartikeya Singh 83
  84. 84. Syllabus Unit III • International Economic Institutions: – IMF, – World Bank, – MIGA, – UNCTAD and – WTO; – ATC, – GSP and – International Commodity Agreements. 1/29/2015 Kartikeya Singh 84
  85. 85. a.IMF • The International Monetary Fund (IMF) is an international organization that was initiated in 1944 at the Breton Woods Conference and formally created in 1945 by 29 member countries • Countries contribute money to a pool through a quota system from which countries with payment imbalances can borrow funds temporarily. • Members – 188 countries • Head quarter – Washington DC. • Managing Director - Christine Lagarde 1/29/2015 Kartikeya Singh 85
  86. 86. a.IMF • Promote international monetary cooperation through a permanent institution • Provides the machinery for consultation and collaboration on international monetary problems • To facilitate the expansion and balanced growth of international trade • To contribute to the promotion and maintenance of high levels of employment and real income and to the development of the productive resources of all members as primary objectives of economic policy • To promote exchange stability • To maintain orderly exchange arrangements among members, and to avoid competitive exchange depreciation 1/29/2015 Kartikeya Singh 86
  87. 87. a.IMF • The Functions of the IMF a) Surveillance (like a doctor) – Gathering data and assessing economic policies of countries b) Technical Assistance (like a teacher) – Strengthening human skills and institutional capacity of countries c) Financial Assistance (like a banker) – Lending to countries to support reforms 1/29/2015 Kartikeya Singh 87
  88. 88. a.IMF a) Surveillance • Surveillance over Members’ Economic Policies • countries agree to pursue economic policies that are consistent with the objectives of the IMF. • The Articles of Agreement confer on the IMF the legal authority to oversee compliance by members with this obligation • IMF is “the only organization that has a mandate to examine on a regular basis the economic • circumstances of virtually every country in the world.” 1/29/2015 Kartikeya Singh 88
  89. 89. a.IMF b) Technical Assistance • Strengthening human skills and institutional capacity of countries • Helps members in strengthening their policy formulation and implementation, and the legal, institutional, and market frameworks within which they operate. • It also constitutes an important complement to IMF surveillance and lending operations in member countries. 1/29/2015 Kartikeya Singh 89
  90. 90. a.IMF c) Financial Assistance (like a banker) • Lending to countries to support reforms • Improving financial sector surveillance. • Development of standards and codes of good practice. • Enhancement of transparency in the IMF and its member countries. • Involvement of the private sector in crisis resolution 1/29/2015 Kartikeya Singh 90
  91. 91. Organization
  92. 92. a.IMF Organization of IMF • The Board of Governors, the highest decision- making body of the IMF, consists of one governor and one alternate governor for each member country. • The governor is appointed by the member country and is usually the minister of finance or the governor of the central bank. • Board of Governors decide on major policy issues • All powers of the IMF are vested in the Board of Governors. • Day-to-day decision making is taken by – Executive Governors 1/29/2015 Kartikeya Singh 92
  93. 93. a.IMF Quotas & subscriptions • Quota subscriptions generate most of the IMF's financial resources. • Each member country of the IMF is assigned a quota, based broadly on its relative size in the world economy. • A member's quota determines its maximum financial commitment to the IMF and its voting power, and has a bearing on its access to IMF financing. 1/29/2015 Kartikeya Singh 93
  94. 94. • A new country is assigned an initial quota in the same range as the quotas of existing members • The quota formula is a weighted average of GDP (weight of 50 percent), openness (30 percent), economic variability (15 percent), and international reserves (5 percent ) • For this purpose, GDP is measured as a blend of GDP based on a market exchange rates (weight of 60 percent) and on PPP exchange rates (40 percent). • Quotas are denominated in Special Drawing Rights (SDRs) • The formula also includes a “compression factor” that reduces the dispersion in calculated quota shares across members. 1/29/2015 Kartikeya Singh 94
  95. 95. a.IMF Quotas & subscriptions • A new country is assigned an initial quota in the same range as the quotas of existing members • The quota formula is a weighted average of GDP (weight of 50 percent), openness (30 percent), economic variability (15 percent), and international reserves (5 percent ) • Quotas are denominated in Special Drawing Rights (SDRs) 1/29/2015 Kartikeya Singh 95
  96. 96. a.IMF Special Drawing Rights • The SDR is an international reserve asset, created by the IMF in 1969 to supplement its member countries' official reserves. • Its value is based on a basket of four key international currencies, and SDRs can be exchanged for freely usable currencies. • With a general SDR allocation that took effect on August 28 and a special allocation on September 9, 2009, the amount of SDRs increased from SDR 21.4 billion to SDR 204.1 billion (currently equivalent to about $324 billion).1/29/2015 Kartikeya Singh 96 1st January 1, 2011 the weigtage to these currencies in SDR Euro 37.4% Japanese yen 9.4% Pound Sterling 11.3% US dollar 41.9% 100%
  97. 97. a.IMF Special Drawing Rights • The value of the SDR was initially defined as equivalent to 0.888671 grams of fine gold. • the SDR was redefined as a basket of currencies, today consisting of the euro, Japanese yen, pound sterling, and U.S. dollar. • The U.S. dollar-value of the SDR is posted daily on the IMF's website. • It is calculated as the sum of specific amounts of the four currencies valued in U.S. dollars, on the basis of exchange rates quoted at noon each day in the London market. 1/29/2015 Kartikeya Singh 97
  98. 98. The World Bank • IBRD & IDA : Working for a World Free of Poverty
  99. 99. Bretton Woods • In response to post-war reconstruction and to discuss the future of international economic cooperation • In July of 1944, representatives from countries met at Bretton Woods, New Hampshire. • Creation of two institutions, 1.International Monetary Fund (IMF) 2.International Bank for Reconstruction and Development; a.k.a. the “World Bank.”
  100. 100. The World Bank • The Bank’s initial goal was to assist in the reconstruction of post-war Europe • Now, the Bank makes development loans to developing countries – Goal is to reduce poverty by financing and assisting in numerous projects such as healthcare, education, infrastructure, communications, and other like projects
  101. 101. The World Bank Group 1. International Bank for Reconstruction and Development (IBRD) – Est. 1946, “aims to reduce poverty in middle-income and creditworthy poorer countries by promoting sustainable development through loans, guarantees, risk management products, and analytical and advisory services” 2. International Development Association (IDA) – Est.1960, interest free loans and grants 3. International Finance Corporation (IFC) – Est.1956, Private sector arm of the World Bank 4. Multilateral Investment Guarantee Agency (MIGA) – Est.1988, Promotes Foreign Direct Investment in developing countries 5. International Centre for Settlement of Investment Disputes (ICSID) – Est. 1966, facilitate the settlement of investment disputes between governments and foreign investors
  102. 102. Structure of the World Bank • Headquartered in Washington D.C. • Over 100 offices all over the world • 185 member countries • Membership of the IMF is required • 5 Largest shareholders: France, Germany, Japan, UK, and US
  103. 103. Board of Governors • Made of up representatives from member countries – Typically, the representatives are ministers of finance or ministers of development • Meet annually to review policies and review membership • Ultimate policy makers • Elect a Board of Directors every 2 years
  104. 104. Board of Directors • 24 members of the Board (5 from the largest shareholders, 19 to cover the remaining geography) • President of the World Bank serves as the Chairman of the Board • General operations • Meet twice a week • According to the Charter, the member with the greatest # of shares, chooses the president. • The president is, traditionally, a U.S. citizen and is the chairman of the Board.
  105. 105. 1. Increasing Political Accountability • Political accountability refers to the constraints placed on the behavior of public officials by organizations and constituencies with the power to apply sanctions on them. As political accountability increases, the costs to public officials of taking decisions that benefit their private interests at the expense of the broader public interest also increase, thus working as a deterrent/disincentive to corrupt practices. Accountability rests largely on the effectiveness of the sanctions and the capacity of accountability institutions to monitor the actions, decisions, and private interests of public officials.
  106. 106. 2. Strengthening Civil Society Participation • As stakeholders in good governance and institutions mediating between the state and the public, the organizations that comprise “civil society” – citizen groups, nongovernmental organizations, trade unions, business associations, think tanks, academia, religious organizations and last but not least media – can have an important role to play in constraining corruption. This is true at the country level as well as internationally.
  107. 107. 3. Creating a Competitive Private Sector • The degree to which powerful elites influence decisions and policy-making of the state (state capture) constraints the implementation of a fair, competitive, honest and transparent private sector and thus hinders broad-based economic development. The ability of powerful economic interests to capture the state can be constrained by: – Economic policy liberalization – Enhancing greater competition – Regulatory reform – Good corporate governance – Promoting business associations, trade unions, and concerned parties – Transnational cooperation
  108. 108. 4. Institutional Restraints on Power • The institutional design of the state can be an important mechanism in checking corruption. Of particular importance is the effective development of institutional restraints within the state which is most effectively achieved through some degree of separation of powers and establishment of cross cutting oversight responsibilities among state institutions. Effective constraints by state institutions on each other can diminish opportunities for the abuse of power and penalize abuses if they occur.
  109. 109. 5. Improving Public Sector Management • The fifth building block of an anti-corruption strategy consists of reforms in the internal management of public resources and administration to reduce opportunities and incentives for corruption. Reforming public sector management and public finance requires: – A meritoric civil service with monetized, adequate pay – Enhancing transparency and accountability in budget management. – Enhancing transparency and accountability in tax and customs – Policy reforms in sectoral service delivery – Decentralization with accountability
  110. 110. The Wolfowitz Scandal • In 2005, Paul Wolfowitz was appointed by the Bush administration to head the World Bank Group. • “0% tolerance for corruption • On May 18, 2007, Paul Wolfowitz, the president of the World Bank retired. • Prior to his appointment as president of the World Bank, Wolfowitz had dated Shaha Riza, a World Bank employee.
  111. 111. What’s Next for the World Bank?
  112. 112. Millennium Development Goals Targets and Goals set for 2015 1. Reducing Poverty and Hunger—global poverty is projected to fall to 12 percent 2. Educating All Children—ensure that all children complete primary education. 3. Empowering Women—eliminate gender disparity in primary and secondary education. 4. Saving Children—reduce the under 5 mortality rate. “Millennium Development Goals”
  113. 113. Millennium Development Goals 5. Caring for Mothers—reduce the maternal mortality rate. 6. Combating Diseases—such as AIDS/HIV, Tuberculosis, malaria, and other major diseases. 7. Using Resources Wisely—improvements in slum dwellings, create sustainable access to drinking water, and sustainable access to basic sanitation. 8. Working Together—make available technological advancements in information and communication. Allow affordable access to essential drugs in developing countries. Address the particular need of developing countries. “Millennium Development Goals”
  114. 114. The International Monetary Fund and the World Bank at a Glance •International Monetary Fund oversees the international monetary system •promotes exchange stability and orderly exchange relations among its member countries •assists all members--both industrial and developing countries--that find themselves in temporary balance of payments difficulties by providing short- to medium-term credits •supplements the currency reserves of its members through the allocation of SDRs (special drawing rights); to date SDR 21.4 billion has been issued to member countries in proportion to their quotas •draws its financial resources principally from the quota subscriptions of its member countries •has at its disposal fully paid-in quotas now totaling SDR 145 billion (about $215 billion) •has a staff of 2,300 drawn from 188 member countries •World Bank seeks to promote the economic development of the world's poorer countries •assists developing countries through long-term financing of development projects and programs •provides to the poorest developing countries whose per capita GNP is less than $865 a year special financial assistance through the International Development Association (IDA) •encourages private enterprises in developing countries through its affiliate, the International Finance Corporation (IFC) •acquires most of its financial resources by borrowing on the international bond market •has an authorized capital of $184 billion, of which members pay in about 10 percent •has a staff of 7,000 drawn from 188 member countries 1/29/2015 Kartikeya Singh 114
  115. 115. 1.c.MIGA • The Multilateral Investment Guarantee Agency (MIGA) is an international financial institution which offers political risk insurance guarantees. Such guarantees help investors protect foreign direct investments against political and non- commercial risks in developing countries 1/29/2015 Kartikeya Singh 115
  116. 116. Governance • MIGA is governed by its Council of Governors which represents its member countries. • The Council of Governors holds corporate authority, but primarily delegates such powers to MIGA's Board of Directors. • The Board of Directors consists of 25 directors and votes on matters brought before MIGA. • Each director's vote is weighted in accordance with the total share capital of the member nations that director represents. • MIGA's board is stationed at its Washington, D.C. headquarters where it meets regularly and oversees the agency's activities. • The agency's Executive Vice President directs its overall strategy and manages its daily operations. • As of 15 July 2013, Keiko Hondai serves as Executive Vice President of MIGA. 1/29/2015 Kartikeya Singh 116
  117. 117. Membership • MIGA is owned by its 179 member governments, consisting of 152 developing and 25 industrialized countries. • The members are composed of 178 United Nations member states plus Kosovo. Membership in MIGA is available only to countries who are members of the World Bank, particularly the International Bank for Reconstruction and Development. • As of 2013, the nine World Bank member states that are not MIGA members are Bhutan, Brunei, Burma, Kiribati,Marshall Islands, San Marino, Somalia, Tonga, and Tuvalu. (The UN states that are non-members of the World Bank, and thus MIGA, are Andorra, Cuba, Liechtenstein, Monaco, Nauru, and North Korea.) The Holy See and Palestineare also non-MIGA members. 1/29/2015 Kartikeya Singh 117
  118. 118. Investment guarantees • MIGA offers insurance to cover five types of non-commercial risks: – Currency inconvertibility and transfer restriction; – Government expropriation; – War, – Terrorism, and – Civil disturbance; – Breaches of contract; 1/29/2015 Kartikeya Singh 118
  119. 119. UNCTAD(United Nations Conference on Trade and Development) • The United Nations Conference on Trade and Development (UNCTAD) was established in 1964 as a permanent intergovernmental body. It is the principal organ of the United Nations General Assembly dealing with trade, investment, and development issues. • The organization's goals are to "maximize the trade, investment and development opportunities of developing countries and assist them in their efforts to integrate into the world economy on an equitable basis.” • The creation of the conference was based on concerns of developing countries over the international market, multi-national corporations, and great disparity between developed nations and developing nations.1/29/2015 Kartikeya Singh 119
  120. 120. UNCTAD(United Nations Conference on Trade and Development) • Acronyms UNCTAD • Established1964 • Headquarters Geneva, Switzerland • Website : • In the 1970s and 1980s, UNCTAD was closely associated with the idea of a New International Economic Order (NIEO). • Currently 194 members. 1/29/2015 Kartikeya Singh 120
  121. 121. UNCTAD(United Nations Conference on Trade and Development) • The primary objective of the UNCTAD is to formulate policies relating to all aspects of development including trade, aid, transport, finance and technology. • The conference ordinarily meets once in four years. • The first conference took place in Geneva in 1964, • second in New Delhi in 1968, • the third in Santiago in 1972, • fourth in Nairobi in 1976, • the fifth in Manila in 1979, • the sixth in Belgrade in 1983, • the seventh in Geneva in 1987, • the eighth in Cartagena in 1992 and • the ninth at Johannesburg (South Africa) in 1996. The permanent secretariat is in Geneva. 1/29/2015 Kartikeya Singh 121
  122. 122. UNCTAD • Currently, UNCTAD has 194 member states and is headquartered in Geneva, Switzerland. • UNCTAD has 400 staff members and an bi-annual (2010–2011) regular budget of $138 million in core expenditures and $72 million in extra-budgetary technical assistance funds. • It is a member of the United Nations Development Group. There are non- governmental organizations participating in the activities of UNCTAD. 1/29/2015 Kartikeya Singh 122
  123. 123. GATT – General agreement on Tariff and Trade. • The prolonged recession before the World war II in the west was due to the decades of protectionism followed by the industrialized countries. This led to conduct of negotiations in 1947 among 23 countries in order to prevent the protectionist policies and to revive the economies from the recession. These negotiations of the conferences resulted in the General Agreement on Tariffs and Trade (GATT) among the participating countries. Thus GATT has its origin in 1947 at the conference of Geneva. 1/29/2015 Kartikeya Singh
  124. 124. GATT – General agreement on Tariff and Trade. • The birth of GATT • 30th October 1947, the General Agreement of Tariffs and Trade was signed by 23 countries. 1947 • 1st January 1948 • GAAT Came into force1948 • Second Round at Annecy, France. • Exchanged some 5000 tariff concessions.1949 1/29/2015 Kartikeya Singh
  125. 125. GATT – General agreement on Tariff and Trade. • Third Round at Torquay U K • The contracting parties exchanged some 8700 concessions. 1950 • Fourth Round at Geneva, Switzerland. • Got some $ 2.5 billion worth of tariff reduction. 195 6 • Fifth Round, Dillon round • Tariff concessions worth $4.9 billion of world trade 19 6 0 1/29/2015 Kartikeya Singh
  126. 126. GATT – General agreement on Tariff and Trade. • Short term arrangement • Covering cotton textile(Exception)19 6 1 • Kennedy round, Fifth round. • Trade negotiation was formally opened. 19 6 4 • A new chapter, Sixth round. • Many newly independent countries participated in the agreement. 19 6 5 1/29/2015 Kartikeya Singh
  127. 127. GATT – General agreement on Tariff and Trade. • The Tokyo round, Seventh round • Comprehensive body covering tariff and non tariff matter 1973 • The arrangement regarding International Trade in textile. • Known as Multifibre arrangement(MFA) 1974 • Uruguay Round, Eighth round. • Went upto 7 and half years. 1986 1/29/2015 Kartikeya Singh
  128. 128. GATT – General agreement on Tariff and Trade. • Successful conclusion of the Uruguay round • 15th December 1993. Geneva, Switzerland 1993 • The final act of U rugway round signed • Marrakesh, Morocco, 15 April 1994 1994 • World Trade Organisation came into force. 1st January 1995. • Geneva was accepted as headquarter. 1995 1/29/2015 Kartikeya Singh
  129. 129. URUGUAY ROUND AND ARTHUR DUNKEL PROPOSAL 1/29/2015 Kartikeya Singh
  130. 130. Uruguay Round Package • The draft proposals proposed by Arthur Dunkel in the Uruguay Round of GATT include 1. Market Access. 2. Agriculture. 3. Trade Related Intellectual Property Rights(TRIPs). 4. Trade Related Investment Measures (TRIMs) 5. Trade in Services. 6. Textile. 7. Institutional Matter. 1/29/2015 Kartikeya Singh
  131. 131. Uruguay Round Package – 1.Market Access – Arthur Dunkel suggested that the Government control in marketing activities and operation will have to be slackened. The member Governments will have to abolish the barriers related to the market access. – First, Both developing and developed countries agreed to significantly increase their share of industrial product imports. – Second, The average tariff on developed countries’ imports of industrial products was cut by 40 per cent on imports from all sources, and by 37 per cent on imports from developing countries. – Third, substantial progress was made with regard to non-tariff barriers 1/29/2015 Kartikeya Singh
  132. 132. Uruguay Round Package – 2. Agriculture  Member Government are suggested to reduce the subsidy on fertilizers, seeds and other inputs and eliminate the administered pricing in respect to agricultural sector.  The proposal include :-  How a country can remove his subsidy in different phases.  A supplementary agreement on the modalities by which subsidy would be removed.  A decision on application of sanitary and phycosanitary measures and  A declaration on measures to assist for food importing countries. 1/29/2015 Kartikeya Singh
  133. 133. Uruguay Round Package – 2. Agriculture 1/29/2015 Kartikeya Singh Amber box Blue box Green box Total Aggregate Measurement of Support (AMS) De Minimis –Minimum Limit 5% - Developed Countries 10% - Developing Countries
  134. 134. Uruguay Round Package - 3. TRIPs Trade Related Intellectual Property Rights • Dunkel proposal regarding trade intellectual property rights (TRIPs) in respect of business and commerce include : – Protection of patents – 20 years – Copy rights – 50 years – Design – 10 years – Trade Marks – 7 years – Trade Secrets - 1/29/2015 Kartikeya Singh
  135. 135. Uruguay Round Package – 4. TRIMS - Trade Related Investment Measures – Abolition of Restrictions imposed on foreign capital. – Offering equal rights to the foreign investor equal to those of the domestic investor. – No restriction on investment – No limitations or ceiling on the quantum of foreign investment. – Granting of permission without restrictions to import raw materials and other companies. – No force on the foreign investors to use total products or materials. 1/29/2015 Kartikeya Singh
  136. 136. Uruguay Round Package – 5. Trade in Services. • Trade in services like, insurance, travel, tourism, hotel, banking, maritime, transportation, mobility of human resources etc. have been included in the proposal • GATS – General agreement in Trade in services provides a multilateral framework of principles and services. • GATS governs trade in services. 1/29/2015 Kartikeya Singh
  137. 137. Uruguay Round Package – 6. Textile. • An attempt was made to re-integrate textile into GATT in order to do away with Multi Fiber Arrangement.(MBA). • Textile was included in Dunkel Proposal • Developed countries dismantled the import quotas on garment and textile from 1st January, 2005. • Strategies for Textile firms. – Product Specialization – Cross-border cooperation – Improve sourcing skills – Focus on higher value products – More flexible rules of origin – Interregional Cooperation – Creation of Conducive Environment. 1/29/2015 Kartikeya Singh
  138. 138. Uruguay Round Package – 7. Institutional Matter. • It handles the grievances of two participating nations. • Try to remove barriers to trade • Try to implement guidelines of the WTO/GATT. • Takes care of the breach of the law. 1/29/2015 Kartikeya Singh
  139. 139. 1/29/2015 Kartikeya Singh Ministerial Conference General Council Dispute Settlement Body CT in Goods CT in Services CT in Intellectual rights Director General Secretariat of the WTO Trade Policy Review Body Committee for trade and development Committee on balance of payment C. On Budget Finance
  140. 140. WTO – 1st Ministerial Conference • Singapore, 9th December, 1996.(128 countries) • Reaffirmation of International labour organisation work. • Rejected the use of labour standards for projectionist purposes. • Understanding of dispute settlement procedure. • Work group for conducting a study on transparency in government procurement practices, • Establish a working group to examine the relation between trade and investment. • Organise a meeting with UNCTAD(UN conference on trade development), to help developing countries. • Talks related to TRIMs 1/29/2015 Kartikeya Singh
  141. 141. WTO – 2nd Ministerial Conference • Geneva, 18th May, 1998 (132 countries) – Setting up of a mechanism to ensure full and faithful implementation of existing multilateral agreements. – Rejection of projectionist measures and accepting for open and transparent rule- based trading system. 1/29/2015 Kartikeya Singh
  142. 142. WTO – 3rd Ministerial Conference • Seattle, 3rd December, 1999, (135 countries). – This meeting was a failure. – Dispute erupted on transparency and imposition of the views of the rich countries. – Major contention was of exploitation. – Protestors called it a “wrong trade organisation”. – Reason for the failure:- • American reluctance on inclusion of labour standards • European Union was reluctant to liberalise agriculture. 1/29/2015 Kartikeya Singh
  143. 143. WTO – 4th Ministerial Conference • Doha, Qatar, 9-13 November, 2001,(142 countries). • Declaration included : – Reduction in Industrial tariffs – Phasing out of agriculture export subsidies. – Promoting the trade in services – Providing special and differential treatment for developing countries. – Negotiations on setting up a multilateral agreement on transparency in government procurement. – Negotiations to further expedite movement, release and clearance of goods. 1/29/2015 Kartikeya Singh
  144. 144. WTO – 5th Ministerial Conference • Cancun, Mexico, 10 to 14 September 2003, – TRIPS and public health – Geographical indications in general – Geographical indications: the multilateral register for wines and spirits – Geographical indications: extending the “higher level of protection” beyond wines and spirits – Reviews of TRIPS provisions. – Non-violation complaints. – Technology transfer 1/29/2015 Kartikeya Singh
  145. 145. WTO – 6th Ministerial Conference • Hong Kong on December – 13-18, 2005. 1/29/2015 Kartikeya Singh
  146. 146. WTO and the India. • A growth Story…. • Please see the text box….. 1/29/2015 Kartikeya Singh
  147. 147. WTO and India • Favorable Impact :- a) Increase in export earnings • Growth in merchandise exports. • Growth in Service exports. b) Agricultural Export c) Textile and clothing d) Foreign Direct Investment e) Multilateral rule and discipline. 1/29/2015 Kartikeya Singh
  148. 148. WTO and India • Unfavorable Impact :- I. TRIPS  Pharma companies  Agricultural output.  Micro ornanism II. TRIMS III. GATS. IV. Trade and Non-Tariff Barrier V. LDC Exports.. 1/29/2015 Kartikeya Singh
  149. 149. WTO and Anti Dumping Measures. • Dumping :- The sale of goods abroad at a price which is lower than the selling price of same goods at the same time in the same circumstances at home, taking account of difference in transport costs. • Dumping means selling the product at below the on going market price and or at the price below the cost of production.1/29/2015 Kartikeya Singh
  150. 150. Impact of Globalisation • See the text box…. 1/29/2015 Kartikeya Singh
  151. 151. WTO members.. • List of WTO Members(see the text box). 1/29/2015 Kartikeya Singh
  152. 152. List of developing countries 1. Afghanistan 2. Albania 3. Algeria 4. American Samoa 5. Angola 6. Antigua and Barbuda 7. Argentina 8. Armenia 9. Azerbaijan 10. Bangladesh 11. Belarus 12. Belize 13. Benin 14. Bhutan 15. Bolivia 16. Bosnia-Herzegovina 17. Botswana 18. Brazil 19. Bulgaria 20. Burkina Faso 21. Burundi 22. Cambodia 23. Cameroon 24. Cape Verde 25. Central African Republic 26. Chad 27. Chile 28. China 29. Colombia 30. Comoros 1. Congo, Dem. Rep. 2. Congo, Rep. 3. Costa Rica 4. Cote d'Ivoire 5. Croatia 6. Cuba 7. Djibouti 8. Dominica 9. Dominican Republic 10. Ecuador 11. Egypt 12. El Salvador 13. Eritrea 14. Ethiopia 15. Fiji 16. Gabon 17. Gambia 18. Georgia Republic 19. Ghana 20. Grenada 21. Guatemala 22. Guinea 23. Guinea-Bissau 24. Guyana 25. Haiti 26. Honduras 27. India 28. Indonesia 29. Iran 30. Iraq 1. Jamaica 2. Jordan 3. Kazakhstan 4. Kenya 5. Kiribati 6. Korea, Dem. Rep. 7. Kyrgyzstan 8. Laos 9. Latvia 10. Lebanon 11. Lesotho 12. Liberia 13. Libya 14. Lithuania 15. Macedonia 16. Madagascar 17. Malawi 18. Malaysia 19. Maldives 20. Mali 21. Marshall Islands 22. Mauritania 23. Mauritius 24. Mayotte 25. Mexico 26. Micronesia 27. Moldova 28. Mongolia 29. Montenegro 30. Morocco 1. Mozambique 2. Myanmar 3. Namibia 4. Nepal 5. Nicaragua 6. Niger 7. Nigeria 8. Pakistan 9. Palau 10. Panama 11. Papua New Guinea 12. Paraguay 13. Peru 14. Philippines 15. Poland 16. Romania 17. Russia 18. Rwanda 19. Saint Kitts and Nevis 20. Saint Lucia 21. Saint Vincent 22. Samoa 23. Sao Tome and Principe 24. Senegal 25. Serbia 26. Seychelles 27. Sierra Leone 28. Solomon Islands 29. Somalia 30. South Africa 31. Sri-Lanka 32. Sudan 33. Suriname 34. Swaziland 35. Syria 36. Tajikistan 37. Tanzania 38. Thailand 39. Timor 40. Togo 41. Tonga 42. Trinidad and Tobago 43. Tunisia 44. Turkey 45. Turkmenistan 46. Tuvalu 47. Uganda 48. Ukraine 49. Uruguay 50. Uzbekistan 51. Vanuatu 52. Venezuela 53. Vietnam 54. Yemen 55. Zambia 56. Zimbabwe 1/29/2015 Kartikeya Singh
  153. 153. Generalized System of Preferences • The Generalized System of Preferences, or GSP, is a formal system of exemption from the more general rules of the World Trade Organization (WTO), (formerly, the General Agreement on Tariffs and Trade or GATT). • Specifically, it's a system of exemption from the most favored nation principle (MFN) that obliges WTO member countries to treat the imports of all other WTO member countries no worse than they treat the imports of their "most favored" trading partner. • In essence, MFN requires WTO member countries to treat imports coming from all other WTO member countries equally, that is, by imposing equal tariffs on them, etc. 1/29/2015 Kartikeya Singh 153
  154. 154. h.International commodity agreement • An international commodity agreement is an undertaking by a group of countries to stabilize trade, supplies, and prices of a commodity for the benefit of participating countries. • An agreement usually involves a consensus on quantities traded, prices, and stock management. A number of international commodity agreements serve solely as forums for information exchange, analysis, and policy discussion. • USTR leads United States participation in two commodity trade agreements: – the International Tropical Timber Agreement and – the International Coffee Agreement (ICA). Both agreements establish inter governmental organizations with governing councils . 1/29/2015 Kartikeya Singh 154
  155. 155. •End of Unit IV 1/29/2015 Kartikeya Singh 155
  156. 156. Syllabus of Unit V • Regional Economic Groups – EU, – NAFTA, – ASEAN, – SAFTA and other Regional Economic Groupings. 1/29/2015 Kartikeya Singh 156
  157. 157. The European Union (EU) The World’s Strongest Supranational Organization
  158. 158. What is it? • The European Union (EU) is a family of democratic European countries, committed to working together for peace and prosperity. • It is not a State intended to replace existing states, but it does represent a greater compromise of sovereignty than any other international organization. • The EU is unique; its Member States have set up common institutions to which they delegate some of their sovereignty so that decisions on specific matters of joint interest can be made democratically at European level. • This pooling of sovereignty is also called "European integration"
  159. 159. European Coal and Steel Community • Founded in 1951 (Treaty of Paris) • Purpose was to reduce potential for conflict between the member states by pooling vital resources • Fore-runner of the EEC, EC, and EU
  160. 160. History of the EU • The historical roots of the European Union lie in the Second World War. – Idea of European integration conceived to prevent such killing and destruction from ever happening again – First proposed by the French Foreign Minister Robert Schuman in a speech on May 9, 1950. This date, the "birthday" of what is now the EU, is celebrated annually as Europe Day • Phases of growth – Initially, the European Economic Community (EEC) consisted of just six countries: Belgium, Germany, France, Italy, Luxembourg and the Netherlands (1958) – European Communities (EC) (1967) – Denmark, Ireland and the United Kingdom joined in 1973 – Greece in 1981 – Spain and Portugal in 1986 – European Union (EU) (after 1992) (Maastricht Treaty) – Austria, Finland and Sweden in 1995 – Largest enlargement took place with 10 new countries joining May 9, 2004
  161. 161. Creation of the EU
  162. 162. GROWTH OF THE EU
  163. 163. GROWTH OF THE EU Admission of Romania and Bulgaria 2007 Major debates about Turkey Croatia and Macedonia are new candidates
  164. 164. CORE ? ?
  166. 166. How does it work? • There are five EU institutions, each playing a specific role: – European Parliament (one of two legislative bodies in the EU; elected by the peoples of the Member States) – Council of the European Union (EU’s highest Legislative Body; has legislative initiative; is made up of representatives appointed by member states according to a population-based allotment) – European Commission (EU’s executive body; one commissioner per country appointed by each government) – Court of Justice (ensures compliance with the EU laws) – Court of Auditors (manages the EU budget) • These are flanked by five other important bodies: – European Economic and Social Committee (expresses the opinions of organized civil society on economic and social issues) – Committee of the Regions (expresses the opinions of regional and local authorities) – European Central Bank (responsible for monetary policy and managing the euro) – European Ombudsman (deals with citizens' complaints about maladministration by any EU institution or body) – European Investment Bank (helps achieve EU objectives by financing investment projects)
  167. 167. The Euro • The Treaty of Rome (1957) – Declared a common market as a European objective – Aim: increase economic prosperity and contribute to "an ever closer union among the peoples of Europe" • The Single European Act (1986) and the Treaty on European Union (1992) built on this – introduced Economic and Monetary Union (EMU) – laid the foundations for a single currency – name “Euro” was selected in 1995 – in January 1999, the exchange rates of the participating currencies were irrevocably set and Euro area Member States began implementing a common monetary policy – in January 2002, 12 States in the EU introduced
  168. 168. The Eurozone • Coins and banknotes 1st used Jan 1, 2002 • Cyprus sheduled to join in 2008 • Slovakia scheduled to join in 2009 • Estonia scheduled to join in 2010 • Sweden is technically obliged to join but the EU has made public that they will not enforce this with regard to Sweden • Britain and Denmark have a “derogation” releasing them from having to join
  169. 169. Impact of the Eurozone • What impact do you think the Eurozone has on cultural diffusion? • What impact do you think the Eurozone has on economic development? • Why are some countries avoiding joining?
  170. 170. A strong currency!
  171. 171. Why have bills different sizes & colors? What values are reflected in these “artifacts” that are not found in American money?
  172. 172. What about Switzerland? • Swiss are traditionally suspicious of other countries • Swiss tradition of neutrality (WWI & WWII) – self-imposed – permanent – armed • In some ways Switzerland is like the US – Nationalistic government not interested in ceding sovereignty – Economic policies are currently designed to protect local industries (esp. agriculture) from foreign competition • Initial cost of joining EU (progressive financial redistribution policy would cost the Swiss) • Switzerland has embarked on a policy of building bilateral agreements with the EU
  173. 173. Costs of staying out • Export problems – Access to EU markets is not guaranteed • Inflation problems – Europeans nervous about the Euro due to expansion of the EU invest in Swiss Francs, inflating the value of the currency and inhibiting Swiss exports • Capital flight – High construction costs, expensive labor, and skill shortages already make investment in Switzerland unattractive – Several multinational corporations, such as Roche, Sulzer and Alusuisse, have frozen planned investment projects in Switzerland – Large Swiss companies, including Nestle, are shifting activities out of Switzerland in fear of discrimination by other nations – Already four out of five employees of the top 15 Swiss companies work in other countries • Scientific information lag – EU scientific exchange programs accept Swiss citizens only if they fail to fill such exchanges with persons from EU countries • Accumulated bilateral agreements and cooperation may create de-facto incorporation in the EU for Switzerland
  174. 174. The EU in comparative perspective
  175. 175. US dominates entertainment industry in Europe Cultural hegemony?
  176. 176. SUMMARY • The European Union is the strongest supranational organization in the world – shared currency & financial management – legislative, judicial, and executive bodies – regulatory and planning bodies • The EU is growing geographically, and its growth suggests a core-domain model – core and domain are borne out by distribution of income • The EU does not appeal to all Europeans (at least not yet) – small states in particular seem skeptical • Roughly comparable to the US in some ways – population slightly larger than that of the US – somewhat more densely settled than the US – economy is at least as strong as the American economy – other social statistics (e.g. literacy, infant mortality & homicide) are as good or better than the US
  177. 177. NAFTA, the North American Free Trade Agreement, was signed by the United States, Canada, and Mexico. •NAFTA was signed in 1993 and went into effect on January 1, 1994. •While some tariffs were eliminated immediately, others would take anywhere from 5-15 years to be eliminated.
  178. 178. NAFTA was written to create a Free Trade Area in North America. • “Free Trade” means that countries may freely trade goods with each other without having to pay a tariff (tax) on those goods. • In other words, “free trade” means no trade barriers.
  179. 179. The purpose of the agreement is to:  Allow free movement of goods and services among the countries.  Promote competition in the free trade areas.  Protect the property rights of people and businesses in each country.  Be able to resolve problems that arise among the countries.  Encourage cooperation among countries.
  180. 180. Most economists agree that the agreement has been good for the countries involved.
  181. 181. • Free trade increases sales and profits for Mexico, Canada and the U.S.A., thus strengthening their economies. • Lack of tariffs has allowed Mexico to sell its goods in the USA and Canada at lower prices. This makes Mexican products more competitive in these markets and increases Mexico’s profits as it tries to develop its economy. • Free trade is an opportunity for the U.S. to provide financial help to Mexico by making jobs available in factories located there.
  182. 182. a. “NAFTA Members Prepare for Picnic!” b. “NAFTA Members Graciously Share Business Ventures!” c. “NAFTA Members Cover Up Conspiracy!” d. “NAFTA Members Vie For Business!”
  183. 183. • Free trade has caused more U.S. jobs losses than gains, especially for higher-wage jobs. ›Factories, called Maquiladoras, are built on the Mexican border and workers are hired there to make goods at a much lower wage than workers would be paid in the U.S.A.
  184. 184. • Minimum Wage Mexico - $3.40 per day vs. US - $5.15 per hour • Example: Hourly compensation costs for production workers in manufacturing Mexico - $1.21 vs US - $17.70 • (Global Trade Watch, The NAFTA Index, October 1, 1998)
  185. 185. • These factories make many types of products.
  186. 186. • 3 Day Blinds • 20th Century Plastics • Acer Peripherals • Bali Company, Inc. • Bayer Corp./Medsep • BMW • Canon Business Machines • Casio Manufacturing • Chrysler • Daewoo • Eastman Kodak/Verbatim • Eberhard-Faber • Eli Lilly Corporation • Ericsson • Fisher Price • Ford • Foster Grant Corporation • General Electric Company • JVC • GM • Hasbro • Hewlett Packard • Hitachi Home Electronics •Honda •Honeywell, Inc. •Hughes Aircraft •Hyundai Precision America •IBM •Matsushita •Mattel •Maxell Corporation •Mercedes Benz •Mitsubishi Electronics Corp. •Motorola •Nissan •Philips •Pioneer Speakers •Samsonite Corporation •Samsung •Sanyo North America •Sony Electronics •Tiffany •Toshiba •VW •Xerox •Zenith
  187. 187. United States • They can move their factories to Mexico and ship the goods to the US with no tariffs. • They would not have to pay the workers in Mexico as much as in the United States. • They would be able to sell their product for cheaper, but still make a good profit • Many American factory workers lose their jobs because the owners move the factories to Mexico. American factory workers cannot move to Mexico to keep their jobs. • Goods made in Mexico would cost a lot less because labor is cheaper there. Mexico • They would not like foreign owned factories because they would create competition and hurt Mexican owned businesses. • Maquiladoras would provide jobs for Mexicans, but the profit made by maquiladoras would go back into the US economy, not into Mexico’s • It would provide a job in a country where there are not enough jobs • However, the wages are very low and the working conditions are not good • Building factories creates pollution. An environmentalist would want to make sure that Mexico had laws to protect the environment. Good or Bad?
  188. 188. Disadvantages • Some economists argue that NAFTA has been beneficial to business owners and elites in all three countries, but has had negative impacts on farmers in Mexico who saw food prices fall based on cheap imports from U.S. agribusiness and negative impacts on U.S. workers in manufacturing and assembly industries who lost jobs.
  189. 189. Disadvantages  Other economists believe that NAFTA has not been sufficient (or worked fast enough) to produce economic convergence, nor to substantially reduce poverty rates.  In addition, some have suggested that in order to fully benefit from the agreement, Mexico must invest more in education and promote innovation in infrastructure and agriculture.
  190. 190. Disadvantages • Since labor is cheaper in Mexico, many U.S. manufacturing industries moved part of their production from high-cost states to Mexico. • Between 1994 and 2002, the U.S. lost approximately 1.7 million jobs while gaining only 794,000 for a net loss of 879,000 jobs. • These industries included, but were not limited to Agri-businesses.
  191. 191. Disadvantages • NAFTA expanded the maquiladora program, in which U.S.-owned companies employed Mexican workers near the border to cheaply assemble products for export to the U.S. • According to The Continental Social Alliance, these workers have; “no labor rights or health protections, workdays can stretch 12 hours or more, and if you are a woman, you could be forced to take a pregnancy
  192. 192. Advantages • In 2007, Canada and Mexico were, respectively, the first and second largest export markets for U.S. agricultural products. • Exports to the two markets combined were greater than exports to the next six largest markets combined.
  193. 193. Advantages • Agricultural trade increased in both directions(U.S.-Mexico) under NAFTA from $7.3 billion in 1994 to $20.1 billion in 2006. • This was an approximately 300% increase in economic activity: Or 25% year over year growth (12 years).
  194. 194. Advantages • From 1992-2007, the value of U.S. agricultural exports worldwide climbed 65%. • Over that same period, U.S. farm and food exports to Mexico and Canada grew by 156%.
  195. 195. Advantages • NAFTA expanded the maquiladora program, which enabled U.S.-owned companies to employ Mexican workers near the border. • This allowed for more efficient assembly of manufactured goods and in turn, increased exports to the U.S. • This increased Mexico’s labor force by 30%
  196. 196. Association of Southeast Asian Nations
  197. 197. ESTABLISHMENT AND MEMBERSHIP The Association of Southeast Asian Nations or ASEAN was established on 8 August 1967 in Bangkok by the five original Member Countries, namely, Indonesia, Malaysia, Philippines, Singapore, and Thailand. Brunei Darussalam joined on 8 January 1984 Vietnam on 28 July 1995 Laos and Myanmar on 23 July 1997 Cambodia on 30 April 1999 The ASEAN region has a population of about 500 million, A total area of 4.5 million square kilometers A combined gross domestic product of US$737 billion A total trade of US$ 720 billion.
  198. 198. The Establishment of ASEAN Bangkok, 8 August 1967
  199. 199. Goals of ASEAN • To accelerate the economic growth, social progress and cultural development in the region through joint endeavors; and • To promote regional peace and stability through abiding respect for justice and the rule of law.
  200. 200. Political Objective : Promoting Peace & Stability • Through political dialogue and confidence building, no tension has escalated into armed confrontation among ASEAN members since its establishment more than three decades ago.
  201. 201. ECONOMIC AND FUNCTIONAL COOPERATION • When ASEAN was established, trade among the Member Countries was insignificant • Thus, some of the earliest economic cooperation schemes of ASEAN were aimed at addressing this situation • The Framework Agreement on Enhancing Economic Cooperation was adopted at the Fourth ASEAN Summit in Singapore in 1992, which included the launching of a scheme toward an ASEAN Free Trade Area or AFTA.