Chapter 8 International Economic Co-operation

[A]

International Monetary Fund (IMF)

The Bretton Woods Conference (1944) paved the way for the establishment of IMF. The fund came into existence in Dec 1945 with a modest membership of 44 nations. The number has gone up to 145 in 1990. The establishment of the IMF is a landmark in international monetary co-operation.

The purpose of IMF

1. To promote international monetary co-operation through a permanent institution which provides the machinery for consultation and collaboration on international monetary problems.

2. To facilitate smooth and stable growth of multilateral international trade.

3. To promote stability in exchange and to avoid competitive exchange depreciation.

4. To remove temporary disequilibrium in the balance of payment of member countries.

5. To assist in the establishment of a multilateral system of payments in respect of current transactions between members and in the elimination of foreign exchange restrictions, which obstructs the growth of world trade.

Organization

1. Every member country is required to subscribe to the capital of the fund at fixed quota.

2. USA, UK, China, France and India have the largest share in the initial capital, which is $8.5 billion.

3. The contribution of member countries was collected partly in gold and partly in domestic currency. A member country has to pay 25% of this quota in gold.

4. In 1969, IMF introduced a new currency called Special Drawing Rights (SDRs)

Management

1. The fund is carried by the Board of Executive Directors under the direction of Board of Governors and each member country deputing its governor to the Board of Governors.

2. The board of Executive Directors consists of 20 members of whom five are appointed by each of the five largest quota holding members. Rest of the members elects the remaining fifteen.

3. A managing director who is also the ‘chairman’ of the board heads the Board.

Functions of IMF

1. Short-term Credit Institutions – The fund serves as a short –term credit institution and assets to the country facing a temporary disequilibrium in its balance of payments. A temporary disequilibrium can be caused by crop failure or other natural calamities, which can be effectively overcome by the fund.

2. Adjustment by Consensus – In the absence of a forum like the IMF, the rivalries among different countries of the world would have caused a great damage to al the countries. The IMF no only maintains a reserve of currencies but also examines the accuracy or otherwise of the currency parties of the member countries.

3. Active dispensation of justice – The IMF helps to tide over the balance of payment deficit. It also asks the countries facing a balance of payment surplus to revalue their currencies.

4. Training and technical assistance – The fund provides technical assistance to member countries in the formulation and execution of general economic policies, fiscal as well as monetary policies. It also provides training either at its headquarter or by sending its representatives for a period up to six months in member countries.

5. Publication – The fund also brings out several publications for the benefit of all the member countries. The annual reports of the executive directors, balance of payment year book, the annual report of exchange restrictions, international financial news survey, international financial statistics, schedule of par values are some of the regular publication of the IMF.

Evaluation of IMF

A] Achievements

1. The fund has been useful as a short-term credit institution.

2. The fund’s technical advice and assistance programme has helped the members from the third World.

3. It has also provided assistance to many LDCs to strengthen their central banking and monetary systems.

4. It has co-operated with many international organizations, to promote economic development of many countries.

5. It has maintained a limited flexibility of exchange rates.

6. It has established various special funds like the compensatory financing fund for meeting fluctuations in exports earning, etc.

B] Failures

1. One serious charge against the IMF is that it has served as the Rich Nations Club.

2. Though it is a fact that the IMF has helped to reduce exchange rate fluctuations, the fact remains that the fund could not take effective steps to remove the scarcity of certain currencies.

3. In the field of liberalization of trade and international liquidity, the success that the fund has achieved, is very limited.

[B]

SOUTH ASIAN ASSOCIATION FOR REGIONAL CO-OPERATION (SAARC)

SAARC was established in December 1985. The member countries were Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan and Sri Lanka.

Objectives and Principles of SAARC

1. To promote the welfare of the people of South-Asia and to improve their quality of life.

2. To accelerate economic growth, social progress and cultural development in the region and to provide all individuals the opportunity to live in dignity and to realize their full potentials.

3. To promote and strengthen collective self-reliance among the countries of south Asia.

4. To contribute mutual trust, understanding nd appreciation of one another’s problems

5. To promote collaborations and mutual assistance in the economic, social, cultural, technical and scientific fields.

6. To strengthen co-operation with other developing countries.

7. To strengthen co-operation among themselves in international forums on matters of common interest.

8. To co-operate with international and regional organizations with similar aims and purposes.

The institutional framework of SAARC consist of four tiers.

1. Heads of State, as the highest decision making authority, meet once a year.

2. The Council of Foreign Ministers formulates policies for which they meet twice a year.

3. Standing Committee of foreign secretaries reviews the progress of SAARC activities, approves projects and finalizes programme including their financing.

4. Technical Committees are responsible for implementation, co-ordination and monitoring the programme, besides identifying new areas of co-operation.

India’s Trade with SAARC Countries

In the last few years,

India’s trade with SAARC countries has shown a considerable growth but the growth is not uniform in respect of all the countries.

Bangladesh accounts for more than half of India’s total exports to SAARC countries.

The imports from Bangladesh, which were limited earlier, have started growing in recent years.

In case of Pakistan, imports have shot-up signifying a better economic co-operation.

In case of Nepal also, India’s export surplus is diminishing and imports from Nepal are growing.

India’s trade relations with Bhutan are however declining.

In respect of Sri Lanka, India’s exports have continuously increased but the imports in money terms have remained stagnant.

Problems SAARC facing

1. Barriers to Trade – Larger economies like India, Pakistan, and Bangladesh have higher tariff rates than those of other smaller economies.

2. Discriminatory bi-lateral arrangements – Regional trade organizations are expected to have equitable terms amongst all member countries. However, their mutual relations have obviously governed bi-lateral trade relations between countries. e.g. Indo-Pak Trade.

3. Lack of information – There exists a considerable information gap reporting export potential, import requirements, domestic economic policies, business opportunities, infra-structural facilities, etc.

4. Problems of finance – There is lack of credit and finance to the exporters and importers.

5. Co-ordinating transport facilities – The transport and communication networks are not the same in all the member countries.

6. A matter of relations – For growth of regional trade, an atmosphere of mutual trust is required. In respect of SAARC, this condition does not obtain.

[C]

GENERAL AGREEMENT ON TARIFFS AND TRADE (GATT)

The agreement, which had the membership of 83 nations and coverage of four-fifth of the world trade, came into existence in 1947. In 1960 a provision was made for the creation of a board of representatives for the administration of the agreement. This board kept a watch so as to ensure that the conditions agreed upon by the member countries were observed. The General Agreement on Tariffs and Trade (GATT) is the first successful effort at increasing international co-operation in the field of trade aimed at removing trade barriers and laying down a cod of conduct for the member countries.

The main objectives of the GATT are as under:

1. World trade should be placed on a non-discriminatory footing.

2. Domestic industries may e protected by raising tariffs but no other commercial measures should be taken.

3. The international co-operation and consultations should aim at protecting theinterests of the member country.

4. The agreement should server as a frame for negotiations among the member countries, regarding tariffs and the removal of trade barriers.

Various rounds of discussions held from time to time on matters of trade and tariffs, settlements of complaints or disputes and encouragement of bilateral trade pacts are the characteristic features of this Agreement.

The developing countries have been given a special treatment in the GATT in as much as it allowed –

1. Uni-lateral facilities

2. Physical restrictions

3. Freedom of extending financial help for the growth of exports.

Even though GATT is called “Rich Nations’ Club” it is not denied the fact that the GATT has facilitate the growth of trade and has provided a forum for mutual consultations and settlement of disputes.

The Uruguay Round -

GATT works through periodical conferences. The eighth conference was held at the Punta del Estc in Uruguay. Hence this is known the Uruguay round. This round raised a number of controversial issues. It contained the mandate to have negotiations in fifteen areas; fourteen areas in respect of trade of goods forming part one of the mandate and trade in services forming the fifteenth area in part two which related to the trade in services. The new subjects like Trade Related Investment Measures (TRIMs) and Trade Related Intellectual Property Rights (TRIPs) and the entire part two related to trade in services were included in the agenda of GATT for the first time. But there was no unanimity among the participant countries and the Uruguay found itself in a deadlock. To overcome this difficulty, the Director General (D.G.) of GATT, Mr. Arthur Dunkel prepared a document and presented it before the member countries as a compromise solution. This document is known a Dunkel Proposals. By the end of 19*93 these proposals were passed as the Final Act and was signed by 117 nations including India, on April 15^th, 1994.

Effects of the Uruguay round agreement on the Indian economy –

1. Import Duties and Export Subsidies – India has promised reduce the basic duty by 30% within six years. Raw materials, intermediate goods and capital goods are covered by this provision. Countries like India ith a per capita income of below $1000 were exempted form the removal of such subsidies, this has not much impact on India’s exports.

2. TRIPs and the Indian economy – Because of the provisions of TRIPs, according to some critics, India was likely to face disastrous effects in respect of pharmaceuticals and agriculture. By its coverage the entire industrial and agricultural sectors and part of the biotechnology sector are covered under the patent provisions. Because the patent holder can challenge all price-centered measures this provision was feared to be disastrous for India.

3. Protection in Agriculture – The TRIPs text demands protection for microorganisms, non-biological and microbiological processes and plant varieties. India can provide for protection of plant varieties by patent or some other effective method after completing the first transitional ten years.

4. Possibility of bio-piracies – India is rich in herbal wealth and has inherited traditional wisdom regarding its use. This whole traditional knowledge is in danger of bio-piracy. Unless we are alert enough, foreign companies and multi-nationals will try to take patents of preparations based on Indian herbal wealth and wisdom.

5. TRIMs and its effects – The main provisions of TRIMs are as follows which have become harmful to Indian economy –

1. Removal of all restrictions on foreign investments

2. Non-discrimination between national and foreign companies

3. Opening all areas for foreign investment

4. No ceiling on equity participation by foreigners

5. Free imports of raw materials and components

6. No obligations regarding use of local material or export of out put

7. Removal of restriction on repatriation of dividend, interest and royalty

7. Effects on Textile – Certain proposals under this agreement aim at liberalizing the trade of textile and clothing. The liberalization is supposed to take place in a planned manner spread over ten years. The provisions of this move also are titled in favour of the developed countries. As a result, India’s most important sector is also likely to be in danger.

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[D]

WORLD TRADE ORGANIZATION (WTO)

GATT was converted form a provisional agreement into a formal international organization as the consequence of the Uruguay Round Agreement. This organization is called World Trade Organization, which became functional with effect from January 1, 1995. The General Council of WTO is in charge of its regular business while a ministerial conference meeting atleast once every two years gives direction to the working of WTO.

Principles of WTO –

1. Non-discrimination – this principle implies that all trading partners shall be granted the most favoured nation treatment and foreign goods, capital, services, trade marks, and patents are given the same treatment as is given to their national or domestic counterparts.

2. Freedom of trade – The most important and ultimate objective of WTO is progressive liberalization of trade so that there remain no barriers in the free flows of goods and services internationally.

3. Stability and predictability – The WTO is committed no to create or raise trade barriers arbitrarily.

4. Fair competition – The WTO system of trade, it is claimed aims at creating open fair and undistorted competition.

5. Cases of developing countries - In respect of developing countries, especially the least developed, is given more time to adjust and is given special privileges.

Functions of WTO –

1. Facilitating the implementation, administration and operation for the furthering of the objectives of multilateral trade agreements and providing the framework for such implementation and operation.

2. Providing a forum for negotiations among the members concerning their multilateral trade relations.

3. Administering the ‘Understanding on Rules And Procedures Governing the Settlement of Disputes’

4. Administering the Trade Review Mechanism.

5. Achieving greater global economic policy co-ordination in co-operation with such agencies as IMF, IBRD, etc.

Functions of General Council of WTO –

1. To supervise the operations of revised agreements relating to goods, services and TRIPs.

2. To act as the Dispute Settlement Body.

3. To serve as the Trade Review Mechanism.

4. To establish the three councils for goods, services and TRIPs as its own subsidiaries.

The agreements covered by WTO -

The WTO agreements are three in number. They are

1. General Agreement on Tariffs and Trade (GATT)

2. General Agreement on Trade in Services (GATS)

3. General Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPs)

These are followed by extra agreements and annexure dealing with special requirements of specific sectors like agriculture or textiles, etc. besides there are detailed and lengthy schedules of commitments made by individual countries allowing specific foreign product or services and access to their markets.

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[E]

EURO-DOLLAR MARKET AND EURO CURRENCY

During the periods when some strong national currency performed as an international currency, international liquidity was no problem and trade and transactions were facilitated. On the other hand, the absence fo such a strong currency or the fluctuations in the exchange rates of national currencies vis-à-vis (in comparison with) the strong currency has always created obstacles in the growth of trade.

Meaning and scope –

Eurodollars, in a narrow sense, are financial assets and liabilities denominated in US dollars but traded in Europe. The scope of the market, however, is not longer limited to Europe and the Eurodollar transactions are now held in its broader sense. Today, Eurodollar transactions are held in money markets other than the European markets and in currencies other than the US dollar. Today, the term euro-currency Market is in popular use, rather than the Eurodollar market. In the wider sense, the dollar deposits with banks in Montreal, Toronto, Singapore, Beirut, etc. are also Eurodollars, and so are the deposits denominated in European currencies in the money markets of USA and at the above centers. The term foreign currency market should be more appropriate to describe the expanding Eurodollar market of the present day.

Characteristic features of the market –

1. International market Sans (without) national Control – The Euro currency market is a international currency market and it is under no national control. In fact this market has emerged out of necessity and as the most important channel for mobilizing and developing funds at the international level.

2. Short-term money market – The deposits in this market are short-term deposits with maturity ranging from one day to several months. All these deposits are paid interest. The Eurodollars loans are short-term loans for a period less than or equal to three months.

3. A wholesale market – The Eurodollar is said to be a wholesale market because it deals with large sums of money in the form of Eurocurrencies.

4. A highly competitive and sensitive market – This market has undergone a qualitative growth and operational expansion because of its efficiency and competitiveness. Eurodollar market responds to the interest rate changes promptly by varying the supply of and the demand for funds.

Factors responsible for the growth of the Eurodollar Market –

1. The Suez Crisis – In 1956 during the Suez crisis, sterling credit facilities came under restriction. This crisis provided a stimulus to the growth of the Euro dollar market.

2. Exchange control relaxations and convertibility of currencies – After the process of the post-II war reconstruction got ell under way, the exchange controls came to be gradually relaxed. The stability of the exchange rate markets enabled the West European countries to resume currency convertibility. This gave a further motivation to the growth of the Eurodollar market.

3. The political factor- The cold war between the capitalist and the communist blocks of countries also contributed to the growth of the Euro market. A fear always creep around in the minds of banks that the dollar balances might be seized by the US if the cold war turned hot. This tendency served to supplement the dollar resources of the Euro market.

4. Deficits in the American Balance of Payment – Since 1950, the USA continuously experienced deficits, which went on increasing during the subsequent period. This was another important factor leading to the rapid growth of the Euro market.

5. The Regulation ‘Q’ – The regulations of the Federal Reserve System, which prohibited interest payment deposits for a period of less than 30 days greatly, contributed the fast growth of the Euro dollar market. This is because the Eurodollar market paid interest for less than 30 days also.

6. Innovations in Banking – The beginning of innovative banking in Europe and America attracted more and more customers encouraging the growth of the Euro market.

7. The Petrodollars – The flow of petrodollars, which resulted from OPEC’s hikes in oil prices since 1973, has been a significant source of the Eurodollar market.

8. The participants in the market – Participants in the Euro currency business include governments, international organization, commercial banks, central banks, the multinational corporations, export-import firms and trading firms and individuals also.