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Bretton Woods Agreement
Welcome friends. Welcome to the course of International Business. In the last lecture,we had discussed about the export promotional measures. And for example, we talkedabout the export promotion schemes right, how the government tries to undertake variousschemes, like the duty drawback scheme, export finance scheme.And then we talked about you know the various organizations involved in the exportpromotion in the India. For example, the IIFT for example, the (Refer Time: 01:00), andthen the DGFT right. So, we talked about the various organizations and various schemesin the last lecture.Today we will talk about the different institutions the economic institutions in theinternational scenario which are involved in international trade; not only in trade, butalso they have a large influence on the monetary and economic condition of a countryright. So, they are not exactly a part of the international business scene, but they have aimportance on the economy as a whole.(Refer Slide Time: 01:37)For example, let us talk start with the first one as it says almost every country exportsand imports products to benefit from the growing international trade. The growth of tradecan be increased, if the countries follow some common rules right, regulations, andstandards related to the imports and exports, so that is the reason why the World TradeOrganization tries to talk more about globalization. So, that you know and liberization,so that the economies open up more and then they would all be benefited.So, in order to have those growth in trade and business, some rules and regulations arespecified. These rules and regulations are set by various international economicinstitutions right.This institutions aim to provide a level playing field, so that nobody takes advantage of itneither strong countries take at exploit the weaker ones which is generally the fear foragainst globalization right that large strong countries will take more advantage, and theweaker countries will get exploited that is the fear right, and develop economiccooperation right.(Refer Slide Time: 02:41)(Refer Slide Time: 02:47)So, among when we talk about this economic institutions, so the major internationaleconomic institutions, we will start today when we talk about it we will first talk aboutbefore we get into any you know institution for that, we will talk about the Bretton’sWood agreement and system right. What is this Bretton Woods agreement, and why itwe are discussing today?This is an agreement which was negotiated during the World War II time right as youcan see during the World War II. And it was established as a new international monetarysystem for creating an efficient foreign exchange system right, preventing competitivedevaluations of currencies, and promoting international economic growth. So, after theWorld War what happened was many economies had got affected.So, some of the elide you know countries they wanted to come together, and there were44 nations in together as you can see here also. So, 44 nations who came together to setup a monetary system right, and they felt this monetary system would help in smoothtransaction of business and trade.So, it was held in Bretton Woods right, and 730 delegates came here which is also calledas Bretton Woods conference right. Largely influenced by this Bretton Woods agreementwas largely influenced by two people right, the ideas of one was John Maynard Keynes –his idea, and the other was the chief international economist of the US treasurydepartment Harry Dexter White right. These two people had a significant influence inmaking this Bretton Woods agreement system.What was Keynes you know thought? Keynes had desire to establish a powerful globalcentral bank which would be called as the Clearing Union, and it would issue a newinternational reserve currency called the banker. This is what Keynes had wanted. On theother hand, why it is envisioned a modest lending fund and a greater role for the USdollar right? So, instead of creating a new currency and all that like the banker whichKeynes was thinking, so White thought, we will be more of a creator lending fund right.In the end, what happened, the adopted plan took ideas from both, and but it was moreleaning towards White’s plan, that means, a new currency was not adopted, but more of afunding approach was made right. Under this agreement, the US dollar would be peggedto the value of gold right.What was the condition? The US dollar and that is at that time if I am not wrong 35dollars right was were pegged against 1 ounce of gold, 1 ounce of gold right during thestart. And then the other currencies would be pegged against the US dollars value right.So, this is how it went. So, the gold, the gold was pegged you know the dollars waspegged against the gold, and the other currencies were pegged against the US dollarright.But this came to effectively if you know this systems started you know although in 44you know in 1944 they joined. It effectively started working in you know in 1958 right.But in the early 70s when Nixon came into power and was the President of America,Richard Nixon, very famous for the water you know get scandal right announced that theUS would no longer exchange gold for US currency right, so that is where the BrettonWoods agreement came to a stop.But this great you know agreement or you can say this you know initiative which wastaken had a wonderful influence because they created two institutions out of it one as youknow very popularly called the IMF – International Monetary Fund which grants shortterm loans to develop the cyclical disturbance and economy, we will deal with it later on.And then the World Bank which gives long term loans for distressed economy right. So,this is how the whole things started.So, now, let us move to the first one the two bodies after the Bretton Woods agreementwas over in 70s. So, when the IMF was built, what is this IMF and how what is its majorrules.(Refer Slide Time: 07:10)The IMF was to promote international monetary cooperation right, the whole idea was topromote international monetary cooperation. And it has played a vital role in maintainingglobal economic stability and ensuring broadly shared prosperity. So, it talks aboutprosperity as a shared principal, so everybody grows.It is an organization as of today with 189 countries working to foster, so these are someof the you know major in objectives of the IMF to foster global monetary cooperation,secure financial stability, facilitate international trade, promote high employment, andsustainable economic growth, and reduce poverty around the world. So, these are someof the objectives of the IMF right.The IMF’s another the purpose was to monitor exchange rates, and identify nations thatneeded global monetary support. So, suppose some country was in a monetary distress ora fiscal problem. So, it was IMF, it is IMF who goes into the as a savior right. It aims topromote the global economic growth and financial stability, encourage internationaltrade, and reduce poverty as I have written already.It is based in Washington DC, and 189 members are there. So, these member countrieshave representation on the IMFs executive board in proportion, this is very important.The member countries, so there are 189. These member countries have representation onthe IMFs executive board in proportion to its financial importance in the global trade orsomething right, so that the most powerful countries in the global economy have themost voting power right ok.(Refer Slide Time: 08:58)Now, let us deal with the role of IMF. So, let us discuss in detail. So, the first prominentI know role is that it plays the role of economic surveillance. Now, what is it mean? Inorder to maintain stability and prevent crisis in the international monetary system, so youmust have heard of several crises which have happened in the past for example 29 therewas a great depression, 2008 there was a you know the subprime crisis.So, in 29, IMF was not there obviously, but the point is whenever there was a crisis aneconomic crisis around, the world 1980-99 Southeast Asian crisis was there. So,whenever such crises have occurred, the IMF immediately comes to the rescue of thesenations right.So, in order to maintain stability and prevent crisis in the international monetary system,the IMF monitors member countries policies as well as national, regional, and globaleconomy, and financial developments through a formal system known as surveillance.What its saying it creates a formal system to keep in check the policies of the variouscountries, the regions and the global economy as a whole.It employs a number of economists right to track the health of its member countries. So,there are 189 member countries. So, it employs a large number of economists to take youknow to keep track of the health economic health of these countries right. Thediscussions focus on economic policies like exchange rate, monetary policies,fiscal policy, regulatory policies, in addition to the macroeconomic structural reforms.Now, what do you mean by structural reforms? Structural reforms are basically the youknow the let us say the banking reforms, or you know the kind of policies which are havea structural effect right, or makes a structural change. So, for example, what are the BFCpolicy, what are the bank policies, how do govern banks, so these are things, and otherpolicies contributing to a nation’s stability and growth.It also provides periodic assessments of the global prospects in its World EconomicOutlook, of financial markets in its Global Financial Stability Report, of public financedevelopments in Fiscal Monitor, and of external positions of the largest economies in itsExternal Sector Report, in addition to a series of regional economic outlooks right. So,this is the first role of the IMF.(Refer Slide Time: 11:23)So, let us look at a case which I have brought. So, how Vietnam is a classic case whichin the 1980s or early 80s, it went through a very difficult time right this country, one ofthe world’s poorest was still recovering from the decades of war Vietnam, US-Vietnamwar. I think it is very popular.So, most of the people might have heard the Vietnam War right. So, it was stillrecovering from the war. Its centrally planned economy was unable to deliver basicconsumer goods. So, the country was in a bad state. Inflation was running at 400 percent.The cities were regularly darkened by power cuts. So, these were very bad scene.Things began to change around 1986, with the start of an ambitious program known asDoi Moi, or renovation in their language. Within a few years, Vietnam people hadtelevision sets, washing machines, consumer goods right which develop, and people youknow there were lot number of businesses springing up, the private enterprise flourished,and forest foreign investment flowed in.Vietnam is started to travel abroad, and you know joined the global economy. How ithappened? Advisers from the IMF helped Vietnam improve public administration, taxpolicy, central banking, and statistics gathering. IMF assessments of the economy helpedVietnam improve its credit rating also which drew foreign investment.And one of the you know the in this remarkable journey, it from a low to middle incomestatus 40 million people were lifted out of poverty right. So, Vietnam’s remarkablejourney it says from low to middle income status lifted 40 million people right out ofpoverty between 93 and 2014 right, almost in a span of 21 years.In this time span, the poverty rate dropped to 14 percent from 60 percent almost.Vietnam is are now better educated and expect to live longer, these are all indicators of agood economy also. So, almost every household has electricity, up from less than half in1993 right.In 1980s, the country was in dire economic states as I said. Job number, job number 1was to stabilize you know what the IMF had to do was to stabilize the economy whichmeant easing price controls, raising interest rates, limiting subsidies to inefficient stateowned enterprises, and devaluing the Vietnam currency. So, these are some of theproblems.So, the IMF had to take care of these problems, stabilize the economy, may ease theprice controls right, raise the interest rates were rising, so that had to be controlled;subsidies where too much so that has to be again, and the Vietnam currency wasdevaluating, so the dong is basically right. All these things have to be taken care of right.(Refer Slide Time: 14:28)So, the country transformed with the help of the support of you know the organizationslike the Asian Development Bank, the World Bank and the IMF right. Finally, Vietnamswent through a very good time and it was able to attract companies like South Korea’s,Samsung and all these kind of good companies, and in fact the local companies inVietnam also are doing pretty well today right. So, you can see a sea change thathappened just because of a good you know intervention of the IMF in case of Vietnamright.(Refer Slide Time: 15:04)Second you know role of the IMF is to assist in financial assistance or lending, now whatdoes it mean. The IMF assists countries hit by crisis, so if there is a country hit by crisisit provides financial support; to create breathing room as the implement adjustmentpolicies to restore economic stability and growth. It also provides precautionaryfinancing to help prevent and ensure against crisis.So, it provides finance against when in different kind of situations, suppose there is aserious you know balance of payment crisis or sometimes due to some trade reforms; thecountry is going through some trade reforms and in and therefore, it is you know it hasbeen because of some certain reasons, it has lost you know its ability to earn currency orrevenue. So, all these time in this such situations the IMF comes and supports it for atime period right.The IMF provides financial support for balance of payment needs upon request by itsmember countries. Unlike the development banks, the IMF does not lend; this is thedifference what you can understand for specific projects.So, IMF and the suppose for the example the World Bank, the difference is that the IMFdoes not lend for specific projects right. Following such a request, an IMF staff teamholds discussion with the government to assess the economic and financial situations,and size and the size of the country’s, overall financing needs and agree upon theappropriate policy response right.So, it is basically what it tries it is strike; it works like a elder brother, who tries tounderstand the countries problem and tries to correct its problem with the help of its youknow economists who have the knowledge about the particular country x, y or z right.So, the largest borrowers has been like Argentina, Ukraine, Greece, Egypt and just someof the precautionary loans which have been given to Mexico, Colombia, Morocco.(Refer Slide Time: 17:09)Now, what how does the IMF give loan basically right. So, the IMF is basically quotabasedinstitution. Now, what is this quota? So, when a country joins to the IMF itbecomes a member country, it contributes a certain sum of money right which is calledas a quota right. So, and this quota is broadly based on its relative size in the globaleconomy; so it is not same for everybody, it depends on the on your international sizebasically trade size, right.Quotas are the building blocks of the IMFs financial and governance structure. Anindividual member country, member countries quota broadly reflects its relative positionin the world economy as I said. And quotas are determined denominated sorry, in SDRsbasically Special Drawing Rights which is the IMFs unit of account. As of today, thecombined total quotas value is 477 billion or in terms of SDR or US 661 billion whichyou can take right.Now, these are some of the multiple roles of quotas which have been shown in thediagrammatic form you can see for example, quotas determine the maximum amount offinancial resources, a member is obliged to provide to the IMF right. Quotas are a keydeterminant of the voting power right, the maximum amount of financing a member canobtain from the IMF is based on its quota. Quotas determine a members share in ageneral allocation of the SDRs – Special Drawing Rights, right.(Refer Slide Time: 18:46)What is this SDR? It is an international reserve asset, the special drawing right is aninternational reserve asset created by the IMF in 69. To supplement its member countriesofficial reserves right. So, far SDR 204.2 billion equivalent to 291 billion US dollarshave been allocated to its members including 182.6 million allocated only in 2009 duringthe global financial crisis which is largely called as the subprime crisis also.The value of the SDR is based on a basket of five currencies, it was earlier 4, the fifthone has been recently is recently going to be added; the US dollar, the euro, the Chinese;this one is the recent one the Chinese renminbi right, the Japanese yen, and the Britishpound sterling right.So, this is how the percentage of the SDR count goes right in the SDR basket, the basketconsists of so this 5; so US dollar 41.73, euro 30, the Chinese one or renminbi 10.92,Japanese 8.33, British pound 8.09. The value of the SDR is determined daily and basedon fluctuations in the value of the currencies in the basket.(Refer Slide Time: 20:11)So, this is how it has been used till now allocated till now right that you can see later onalso.(Refer Slide Time: 20:15)Another case we will talk about. So, this was a case which happened in Ireland. So,Ireland is economy is largely you know employment is largely driven by constructionindustry. Its housing market was booming in 1987 to 2007, so you can understand this isthe same period we were talking about the great the severe financial crisis whichhappened in 2000 around 8.So, but the extended boom times when you know during this time 87-2007, the countrywas doing pretty good right. It was one of the very good economies, but when you are ina good time you know the things tend to go wrong from there. So, what happened withthe extended boom times gave rise to private exuberance.So, people started spending money matched by complacency among banks, banks werecomplacent and they were not working efficiently and regulators. Making fertile groundfor risky speculation, now they started making risky speculations which they werethinking nothing would go wrong, because in good times people are people generallythink that nothing will go wrong; this is something like a you know we say, this is an youknow psychological effect that we have that nothing would happen to me or nothingwould go wrong with me right, so this is what happens.So, there was rising incomes and cheap credit, but in the Decade ending in 2007 whenproperty values more than quadrupled right, swelling government revenue andgenerating income for everyone from bricklayers to bankers, but that is where that timecame and now the economy started going in the other side the on the bad side. Theconstruction industry which accounted for more than 12 percent of the employeeemployment crumbled.Hardly any work was to be found in Ireland, unemployment soared and since the greatdepression gripped the country in 2000, uh 1929, since then this was the now the secondthe biggest you know thing that had affected them.Almost 300000 people or one in every seven workers lost their jobs by the end of 2010.After a difficult period of adjustment the Irish economy started growing again, theemployment rate fell to less than 7 percent by 2017 from a peak 15 percent in 2011, sothat is not a small size it is a huge size right.The countries remarkable recovery story of cooperation between the Irish governmentand the IMF and the European Union. Ireland was swept in the global financial crisisright as we have seen, but its problems actually were home grown that means, theproblems came from their own country right.So, what was the problem. So, for example what did the IMF do and its returned toeconomic health required homegrown solutions. So, what did they do, restructuring ofbanks was done; putting government finances back on an even keel and working out at amountain of bad debts, so all these things had to be corrected first.So, the IMF and the EU provided loans and advice; so loans is only one thing whichpeople thing there is the loan, but more than the loan the advice is equally importantright; but the Irish government took up you know was in the driver seat and took thecharge right.In November 2010, Irish government sought help from the European Union and the IMF.Together they provided loans totaling 67.5 billion Euros equal to 40 percent of Ireland’seconomy, to be paid out over the next 3 years right. And by the end of 2012, the secondyear of the program right the Irish economy began to turn around. So, it was a againsomewhat dark time to a positive side they moved right.(Refer Slide Time: 24:03)Now, what are the IMF lending facilities some of the we will discuss some of the lendingfacilities right. So, the first one we will start by is called the Stand-By Arrangement –SBA, what does it mean; The SBA framework allows the fund to respond quickly tocountries external financing needs, and to support policies designed to help them emergefrom crisis and restore sustainable growth.All member countries facing external financing problem needs are eligible for SBAssubject to the IMF policies, and then the country repays the money over such some timeperiod right. So, this is generally given this is a kind when it is given when the country isgoing through some kind of financial crisis.The second is flexible credit line; this is for countries with very strong fundamentals, thisis this has this was started very recently. So, of policies and track records of policyimplementation, it has no ongoing conditions and no caps; there is no restriction on thesize of the credit line, so that is why it becomes very important that this flexible creditline is given flexible and there is another called precautionary also credit line which isgiven just as an invest insurance, basically kind of insurance right; to countries with verystrong fundamentals and policies.Then comes the RFI which says, the rapid financing instrument. It provides rapidfinancial assistance which is available to all the member countries facing an urgentbalance of payment problem, so this is also in all these things most of the points it is thebalance of payment crisis right.Now, this is arising from commodity price shocks, natural disasters may be, post-conflictsituations some warlike situations, and emerging emergencies resulting from fragility.So, the RFI replaced the IMFs previous policy that covered Emergency Natural DisasterAssistance – ENDA, and Emergency Post Conflict Assistance – EPCA; so this was youknow replaced with the rapid financing instrument, ok.The next one is called EFF – Extended Fund Facility. When a country faces seriousmidterm balance of payment problem because of structural weaknesses, so structural arehome grown problems. Generally the problems which because of some policy wrongpolicies, so you know banking crisis are happening, financial institutions are not doingwell, you know everything is going wrong right.One bank after the other is falling that request time to address, now this problem willrequire time to address structural problems cannot be corrected very soon. So, the IMFcan assist with the adjustment process under an extended fund facility compared toassistance provided under the stand-by arrangement right, this one.Assistance under an extended arrangement features longer program engagement, to helpcountries implement mid-term structural reforms. So, since these are structural reformsand it would take time, it would not be cannot be done easily. So, these loans are giventhese facilities are given keeping that in mind generally for a long-term period. And alonger repayment period up to 4 and a half to 10 years is kept in mind right by the IMF.(Refer Slide Time: 27:24)Another one is a trade integration mechanism which allows the IMF to provide loansunder one of its facilities to a developing country, whose balance of payment is sufferingbecause of multilateral trade liberalization.Now, you must have heard about trade liberalization; so either because of its exportearnings decline when it loses preferential access right, so some countries have lost thepreferential access. There was a for example, the multi fiber agreement; so somecountries were getting preferential access, then it was stopped right at one point of time.So, when you lose such kind of sudden advantages, so you get do not get an advantage orother preferential access to certain markets or in sometimes, because the prices offood imports go up when agriculture subsidies are completely eliminated; so now theWTO pressurizes to eliminate the subsidies. So, in such conditions this to support thecountries which have suddenly come to a shock because of such kind of changes in the inthe mechanism, so the IMF also gives loan right or money.Three member countries such as Bangladesh, the Dominican Republic, and the Republicof Madagascar have so far requested and obtained support in accordance with theTIM(trade integration mechanism), ok. There are three other types of loans also given bythe you know this is for generally for the low income nations, these three as you thesethree for the low income countries, this is generally given.This was created under the new Poverty Reduction in Growth Trust – PRGT for the lowI have written, low economic economies low income economies. The extended creditfacility, the rapid credit facility, and the standby credit facility. So, these are some newkind of loans which have been made by the IMF to take care of the low economiccountries right.So, we will stop it here today because of the paucity of time. So, we will continue fromhere in the next section right, right then.So, thank you very much.