Indian IT companies can also leverage their skill sets to provide fintech solutions to global financial customers. Financial risk management services, insurance, natural disaster modelling and underwriting are examples of high value add services performed within India for a global audience. Healthcare & Tourism The current contribution of the healthcare industry is over $ 110 bn and is expected to touch $ 280 bn by 2020. Availability of world - class medical facilities, skilled doctors, technicians and pharmaceuticals are some of our advantages. With digital communication and interfaces, diagnostic medicine can also be tapped into as a service for global customers. Similarly, for tourism, India is renowned for its places of natural beauty and historical significance. Tourism presently contributes $ 47 bn to the country’s GD, compared with $ 115 bn for China. Thus, tourism has exponential possibilities to boost the Indian services sector in the next decade. To attract significant revenues, improved customer experience (medical or tourism) is the key factor that will determine its future growth. In this context, government initiatives such as e - Visas, better infrastructure facilities, safety, connectivity etc. are enablers in the right direction. Space India captured the world's attention last February when it broke the record for launching the most number of satellites into space. Moreover, this was done at a fraction of the cost incurred by other space powers. Indian services in the space domain, with proven expertise in multiple launch technologies, provide it with a significant advantage over its peers in the global space transportation industry. Our launch capabilities have a near 100% track record. Many countries are actively looking to piggyback on India’s launch facilities. This demonstrates great potential. The government is actively proving its ability, but more can be done to build capacity in military and non - military space applications. In this context, public - private participation is key to ensure the flow of capital, as well as to strengthen competencies in this area. Logistics & Transportation India’s natural coastline and vast river network give it a competitive edge in providing transportation and logistics services, both domestically and internationally. These can be classified into ports and ports services, warehousing, Trans - shipment services, e - logistics, inland waterways for freight and passengers, expressways and dedicated freight corridors. India’s logistics service sector itself is expected to grow from $ 115 bn to $ 360 bn by 2032. India should closely look into the development of the service industry, given the potential and need for sustained large scale investment. Investments typically have a long gestation period. 201 CU IDOL SELF LEARNING MATERIAL (SLM)
However, once the infrastructure is created, linkages to the rest of the economy provide significant multiplier effects. For example, the Mumbai - Pune expressway and the development of service industries in Pune. Other services Media & Entertainment (animation, gaming, dubbing), Education (online platforms such as MOOC), and Sports (IPL, IFL, Sports Management), Legal/ Paralegal services, Risk management and advisory functions, etc. are areas that can lead to an immense contribution of service industry in the Indian economy. Top 10 service sector companies in India are Reliance Industries, HDFC Bank, ICICI Bank, HDFC, Tata Consultancy Services, Larsen & Toubro, State Bank of India, NTPC, Kotak Mahindra Bank, and Axis Bank. 9.5 RECENT INVESTMENTS IN THE SERVICE SECTOR Of late, the government’s efforts in improving ease of doing business and relaxing regulatory norms have resulted in increasing FDI into the country. The following examples demonstrate the strong linkages that FDI has in unleashing the potential, as well as propelling the growth of the services sector in India: Connecting Gujarat and Maharashtra, India’s first bullet train has potential similar to that of the Mumbai - Pune expressway, but on a larger scale. Manufacturing of Rafale jets in India - Building large highway systems in India (expressways and freight corridors), inland waterways (Jalmarg Vikas project), port modernization and new port development (Sagarmala project)-Amazon India expanding its logistics footprint - Creation of a Taiwanese tech park in Karnataka -A dedicated fund of $ 693mn, which will be utilized to support sectoral undertakings under the Champion Services Sectors Initiative. These include IT and ITeS, Tourism and Hospitality Services, Medical Value Travel, Transport and Logistics Services, Accounting and Finance Services, Audio Visual Services, Legal Services, Communication Services, Construction and Related Engineering Services, Environmental Services, Financial Services and Education Services. Future Prospects of The Service Sector In India The service sector in India has the highest employment elasticity among all sectors. Thus, it has the potential for huge growth as well as the capability to deliver highly productive jobs - leading to revenue generation. To address the challenge of job creation, the Skill India program aims to achieve its target of skilling up - skilling 400 million people by 2022. It aims to do this mainly by fostering private sector initiatives in skill development programs, and by providing them with the necessary funding. Similarly, the Make in India program - while attempting to bolster the manufacturing sector - will cause a multiplier effect in adding to the portfolio of the Service Sector. In this context, 202 CU IDOL SELF LEARNING MATERIAL (SLM)
the Startup India initiative is a key enabler for both the manufacturing as well as service industry in India - by offering to support innovative startups. 9.6 LABOR MIGRATION IN GLOBALIZATION An international migrant worker is defined by the 1990 UN International Convention on the Protection of the Rights of all Migrant Workers and Members of their families as “a person who is to be engaged, is engaged or has been engaged in remunerated activity in a State of which he or she is not a national. Globalization and labor migration from the Philippines accelerated almost at the same time. Three revolutions contributed to Filipino labor migration phenomenon:communication technology, economic integration and widening demographic divide between developed and developing regions. Globalization Cause Migration Economic Globalization encourages free trade agreements between countries, multinational corporations, and the free flow of goods across the world. All these rapid increases in trans- national flow of capital, trade and technology have marked its effects on international migration as well. Globalization Affect Migrant Workers Globalization generates intense competition for labor that has had a profound effect in both developed and developing countries. ... This is especially true as the informal sector or \"underground economy\" has expanded in wealthy countries, providing increased risks and rewards for immigrants. Globalization is clearly contributing to increased integration of labor markets and closing the wage gap between workers in advanced and developing economies, especially through the spread of technology. It also plays a part in increasing domestic income inequality. The migration can be permanent, semi-permanent, seasonal or circular. The challenges faced by the migrant labour includes their inability to cope up with the diversity of culture, language, access to identity documentation, social entitlements, social and political exclusion, housing and exploitation. Labour migrants Employment is the single biggest determinant of - have the most positive impact on the public purse. Migrants - net fiscal contribution. Migration - boosts the working-age population. Migrants arrive with skills and contribute to human capital development of receiving countries. Types of Migration Migration is of the following types: 203 CU IDOL SELF LEARNING MATERIAL (SLM)
Immigration and Emigration:When people from one country move permanently to another country, for example, if people from India move to America, then for America, it is termed as Immigration, whereas for India it is termed as Emigration. In-migration and Out-migration: In-migration means migration occurring within an area only, while out-migration means migration out of the area. Both types of migration are called internal migration occurring within the country. Migration from Bihar to Bengal is in-migration for Bengal, while it is out- migration for Bihar. Gross and Net Migration: During any time period, the total number of persons coming in the country and the total number of people going out of the country for residing is called gross migration. The difference between the total number of persons coming to reside in a country and going out of the country for residing during any time period is termed as net migration. Internal Migration and External Migration: Internal migration means the movement of people in different states and regions within a country from one place to another. On the other hand, external or international migration refers to the movement of people from one country to another for permanent settlement. Concepts Relating to Migration: The following concepts are used in migration: Migration Stream: Migration stream means the total number of people migrating from one region to another or from one country to another for residing during a time period. It is, in fact, related to the movement of people from a common area of origin to a common area of a destination. For example, migration of Indians to America during a time interval. Migration Interval: Migration may occur continuously over a period of time. But to measure it correctly, the data should be divided into intervals of one to five or more years. The division relating to a particular period is known as migration interval. Place of Origin and Place of Destination: The place which people leave is the place of origin and the person is called an out-migrant. On the other hand, the place of destination is the place where the person moves and the person is called an in-migrant. Migrant: 204 CU IDOL SELF LEARNING MATERIAL (SLM)
Migrant is the labour which moves to some region or country for short periods of time, say several months or a few years. It is regarded as a secondary labour force. 9.7 EFFECTS OF MIGRATION Internal migration affects the place where from people migrate and the place to which they migrate. When the migrants move from rural to urban areas, they have both positive and negative effects on the society and economy. Effects on Rural Areas: Migration affects rural areas (the place of origin) in the following ways: Economic Effects: When population migrates from rural areas, it reduces the pressure of population on land, the per worker output and productivity on land increases and so does per capita income. Thus, family income rises which encourages farmers to adopt better means of production thereby increasing farm produce. Those who migrate to urban areas are mostly in the age group of 18-40 years. They live alone, work and earn and remit their savings to their homes at villages. Such remittances further increase rural incomes which are utilized to make improvements on farms which further raise their incomes. This particularly happens in the case of emigrants to foreign countries who remit large sums at home. Moreover, when these migrants return to their villages occasionally, they try to raise the consumption and living standards by bringing new ideas and goods to their homes. Modern household gadgets and other products like TV, fridge, motorcycles, etc. have entered in the majority of rural areas of India were larger remittances flow from urban areas. Further, with the migration of working age persons to urban areas the number of farm workers is reduced. This leads to employment of underemployed family members on the farm such as women, older persons and even juveniles. Further, out-migration widens inequalities of income and wealth in rural area families which receive large remittances, and their incomes rise. They make improvements on their farms which raise productivity and production. These further increase their incomes. Some even buy other farmlands. Thus, such families become richer as compared to others, thereby widening inequalities. Demographic Effects: Migration reduces population growth in rural areas. Separation from wives for long periods and the use of contraceptives help control population growth. When very young males migrate to urban areas, they are so influenced by the urban life that they do not like to marry at an early age. 205 CU IDOL SELF LEARNING MATERIAL (SLM)
Their aim is to earn more, settle in any vocation or job and then marry. Living in urban areas makes the migrants health conscious. Consequently, they emphasize on the importance of health care, and cleanliness which reduces fertility and mortality rates. Social Effects: Migration also affects the social set-up of rural communities. It weakens the joint family system if the migrants settle permanently in urban areas. With intermingling of the migrants with people of different castes and regions in cities, they bring new values and attitudes which gradually change old values and customs of ruralities. Women play a greater role in the social set-up of the rural life with men having migrated to towns. Effects on Urban Areas: Migration affects urban areas (or the place of destination) in the following ways: Demographic Effects: Migration increases the population of the working class in urban areas. But the majority of migrants are young men between the ages of 15 to 24 years who are unwed. Others above this age group come alone leaving their families at home. This tendency keeps fertility at a lower level than in rural areas. Even those who settle permanently with their spouses favour small number of children due to high costs of rearing them. The other factor responsible for low fertility rate is the availability of better medical and family planning facilities in urban areas. Economic Effects: The effects of migration on income and employment in urban areas are varied depending upon the type of migrants. Usually, the migrants are unskilled and find jobs of street hawkers, shoeshine boys, carpenters, masons, tailors, rickshaw pullers, cooks and other tradesmen, etc. These are “informal sector” activities which are low paying. But, according to the ILO, the evidence suggests that the bulk of employment in the informal sector is economically efficient and profit-making. Thus, such migrants earn enough to spend and remit to their homes. Other migrants who are educated up to the secondary level find jobs as shop helpers, assistants, taxi drivers, repairing machines and consumer durables, marketing goods and in other informal activities that are small in scale, labour intensive and unregulated. Their earnings are sufficient to bring them in the category of a common urbanite with an income level higher than the unskilled workers. Another class of migrants that is very small is of those who come for higher education in colleges and institutes to towns. They find good job in the “formal sector”, get good salaries, and follow a good standard of living. These are the persons who remit large sums to their homes and help in modernizing the rural scenario. 206 CU IDOL SELF LEARNING MATERIAL (SLM)
Adverse Effects of Rural-Urban Migration: Migration from rural to urban areas has a number of adverse effects. Towns and cities in which the migrants settle, face innumerable problems. There is the prolific growth of huge slums and shantytowns. These settlements and huge neighborhoods have no access to municipal services such as clean and running water, public services, electricity, and sewage system. There is acute housing shortage. The city transport system is unable the meet the demand of the growing population. There are air and noise pollutions, and increased crime and congestion. The costs of providing facilities are too high to be met, despite the best intentions of the local bodies.Besides, there is massive underemployment and unemployment in towns and cities. Men and women are found selling bananas, groundnuts, balloons and other cheap products on pavements and in streets. Many work as shoeshines, parking helpers, porters, etc. Thus, urban migration increases the growth rate of job seekers relative to its population growth, thereby raising urban supply of labour. On the demand side, there are no enough jobs available for the ruralities in the formal urban sector for the uneducated and unskilled rural migrants. Consequently, this rapid increase in labour supply and the lack of demand for such labour lead to chronic and increasing urban unemployment and underemployment. 9.8 SUMMARY The negative Effects of Globalization on Indian Industry are that with the coming of technology the number of labours required decreased, and this resulted in many people being removed from their jobs. The challenges faced by the migrant labour includes their inability to cope up with the diversity of culture, language, access to identity documentation, social entitlements, social and political exclusion, housing and exploitation. Urban migration increases the growth rate of job seekers relative to its population growth, thereby raising urban supply of labour. Outsourcing is difficult to implement, and the failure rate of outsourcing relationships remains high Increase in labour supply and the lack of demand for such labour lead to chronic and increasing urban unemployment and underemployment. 9.9 KEYWORDS Migrant Labour, casual and unskilled workers who move about systematically from one region to another offering their services on a temporary, usually seasonal, basis. 207 CU IDOL SELF LEARNING MATERIAL (SLM)
Outsourcing is an agreement in which one company hires another company to be responsible for a planned or existing activity that is or could be done internally, and sometimes involves transferring employees and assets from one firm to another. Labour Flows: The movement of people across international borders in the form of immigration, international student flows, business travel, and tourism is referred to as labour flows 9.10 LEARNING ACTIVITES 1. What are the effects of Globalization in Indian industry? ___________________________________________________________________________ ___________________________________________________________________________ 2. State the problems of industrialisation in India? ___________________________________________________________________________ ___________________________________________________________________________ 3. List the recent trends in service sectors? ___________________________________________________________________________ ___________________________________________________________________________ 4. Which is the fastest growing service sector in the Indian economy? ___________________________________________________________________________ ___________________________________________________________________________ 5. State the reason for investments service sector in India? ___________________________________________________________________________ ___________________________________________________________________________ 9.11 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. Write down the obstacles of industrialisation in India? 2. What are the activities comprising the service sector? 3. Discuss the contributions of the service sector to India’s growth and development 4. What is regional Imbalances? 5. List the initiatives of government in the growth of manufacturing sector? 6. Find out the reasons for outsourcing? 208 CU IDOL SELF LEARNING MATERIAL (SLM)
7. How does Globalization cause migration? 8. How does Globalization affect migrant workers? Long Questions 1. Explain the leading industrial sector in India? 2. Explain industrial sector growth in India? 3. Explain the impact of Globalization on industrial sector. 4. Explain the impact of service sector in Indian economy? 5. What are government initiatives taken for the development of service sector in India? 6. Explain the pros and cons of Outsourcing? B. Multiple Choice Questions 1. The sector not benefited by the policy of Globalization a. Agricultural sector b. Manufacturing sector c. Service sector d. All of these 2. Fair Globalization refers to ensuring benefits to: a. Labourers b. Producers c. Consumers d. All of these 3. Which of the following factors has not facilitated Globalization? a. Technology b. Liberalization of trade c. WTO d. Nationalisation of banks 4. An annual summary of a country's international economic and financial transactions is a. The capital account. 209 CU IDOL SELF LEARNING MATERIAL (SLM)
b. The international balance of payments statement. c. Thelong-term current account. d. The trade account. 5.__________ relates to the movement of people from a common area of origin to a common area of a destination a. Migration stream b. Migration Flow c. Immigration d. None of these Answers 1-a, 2-d, 3-d. 4-d, 5-a 9.12 REFERENCES References books Rohini Acharya, Regional Trade Agreements and the Multilateral Trading System, Cambridge University Press, 2016 Robert E. Looney, Handbook of International Trade Agreements, Taylor & Francis, 2018 Textbook References David A. Lynch, Trade and Globalization - An Introduction to Regional Trade Agreements, Rowman & Littlefield Publishers, 2010 B O Sodersten and Geoffrey Reed, International Economics, Macmillan Press, 3rd Edition,1994 Websites https://www.sociologydiscussion.com/communication/migration/migration-meaning- types-and-effects/3112 https://www.cio.com/article/2439495/outsourcing-outsourcing-definition-and solutions.html 210 CU IDOL SELF LEARNING MATERIAL (SLM)
UNIT - 10: GLOBAL INSTITUTIONS STRUCTURE 10.0 Learning Objectives 10.1 Introduction 10.2 World Bank Group 10.3 UNCTAD 10.4 World Trade Organisation – WTO 10.5 Summary 10.6 Keywords 10.7 Learning Activity 10.8 Unit End Questions 10.9 References 10.0 LEARNING OBJECTIVES After studying this unit, you will be able to: Define Global Institutions Explain the World Bank Group Describe the functions of UNCTAD Discuss the achievements of UNCTAD Explain the objectives of WTO 10.1INTRODUCTION World Bank An international organization dedicated to providing financing, advice and research to developing nations to aid their economic advancement. Existence of World Bank The World Bank was created at the end of World War II as a result of many European and Asian countries needing financing to fund reconstruction efforts. The Bank is successful in providing financing for these devastated (destroyed) countries.
The International Bank for Reconstruction and Development was the first “Multilateral Development Bank.” beforeWorld War II had ended. Harry Dexter White and John Maynard Keynes conceptualized an international institution to stabilize exchange rates and provide a source of financing for reconstruction and development among countries ravaged by the war. What is Bretton Woods Conference? The Bretton Woods Conference was held from the 1st to 22nd of July, 1944. Contained 730 delegates from all 44 Allied nations in Bretton Woods To regulate the international monetary and financial order after the conclusion of World War II. Created two major institutions: World bank : (long term loan for distressed economy andmember countries ) IMF: (grants the short term loans to develop the cyclical disturbance in economy.) Progress 1. The newbankreceivedmostofitsfundsfromtheNewYorkinvestmentcommunity 2. The bank made its first, general reconstruction loans to France ($250 million – largest ever), the Netherlands, Denmark, and Luxembourg in 1947. 3. The bank’s first bond offering abroad, worth £5 million, came in London in 1951 4. China used IDA loans for agriculture and education projects while oil wells were financed with IBRD loans. 5. It helped resolve the Indus water dispute between India and Pakistan. 10.2 WORLD BANK GROUP The World Bank Group The World Bank is among the world's leading development institutions with a mission to fight poverty and improve living standards for people in the developing world by promoting sustainable development through loans, guarantees, risk management products, and (non- lending) analytic and advisory services. The World Bank is one of the United Nations' specialized agencies. The member countries are jointly responsible for how the institution is financed and how its money is spent. The World Bank concentrates its efforts on reaching the Millennium Development Goals aimed at sustainable poverty reduction. 212 CU IDOL SELF LEARNING MATERIAL (SLM)
Fig 10.1 World Bank Group The World Bank Group consists of: The International Bank of Reconstruction and Development (IBRD) IBRD was established in 1945 and has 188 members at present. IBRD aims to reduce poverty in middle-income countries and creditworthy poorer countries by promoting sustainable development, through loans, guarantees, and non-lending services, which include analytical and advisory services. The IBRD is owned by the member countries whose voting power is linked to its capital subscription based on the country's relative economic strength. The International Development Association (IDA) IDA was established in 1960 and currently has 172 members. IDA is the concessional arm of the World Bank and plays a key role in supporting the Bank's poverty reduction mission. IDA assistance is focused on the world's 79 poorest countries, to which it provides interest-free loans (known as 'credits') and other non-lending services. International Finance Corporation (IFC) Established in 1956, IFC is owned by 184 member countries, a group that collectively determines the policies. It works in more than 100 developing countries allowing companies and financial institutions in emerging markets to create jobs, generate tax revenues, improve corporate governance and environmental performance, and contribute to their local communities. Multilateral Investment Guarantee Agency (MIGA) 213 CU IDOL SELF LEARNING MATERIAL (SLM)
On April 12, 1988, an international convention established MIGA as the newest member of the World Bank Group. The agency opened for business as a legally separate and financially independent entity and has 179 countries in membership. MIGA was created to complement public and private sources of investment insurance against non-commercial risks in developing countries. MIGA’s multilateral character and joint sponsorship by developed and developing countries were seen as significantly enhancing confidence among cross-border investors. The mission is to promote foreign direct investment (FDI) into developing countries to help support economic growth, reduce poverty, and improve people's lives. International Centre for Settlement of Investment Disputes (ICSID) ICSID is an autonomous international institution established under the Convention on the Settlement of Investment Disputes between States and Nationals of Other States (the ICSID or the Washington Convention) with over one hundred and forty member States. The Convention sets forth ICSID's mandate, organization and core functions. The primary purpose of ICSID is to provide facilities for conciliation and arbitration of international investment disputes. Boards of Executive Directors The World Bank Group has four Boards of Executive Directors representing the four institutions of the World Bank Group: International Bank for Reconstruction and Development (IBRD), International Development Agency (IDA), International Finance Corporation (IFC) and Multilateral Investment Guarantee Agency (MIGA). Executive Directors serving on these Boards are usually the same. The Boards of Executive Directors are responsible for the conduct of the general operations of the World Bank Group and exercise all the powers delegated to them by the Board of Governors under the Articles of Agreement. The Boards are composed of 24 Executive Directors, who are appointed or elected by member countries or by groups of countries, and the President, who serves as its chairman. 10.3 UNCTAD Introduction UNCTAD is a body of United Nations and established in 1964 on the demand of the developing or less developed countries to get the obstacles to the trade removed so that they may get more to boost their exports and discuss the problems of developing countries relating to their economic development. Although most of the developing nations were joined the GATT, insisting more required than the application of the favored national principle and the more reduction in tariff. They generally complained that in spite of the best endeavor to reduce or even eliminate trade barriers, the attempt has generally benefited the developed nations of the world. Because the prices of manufactured goods they had to import from 214 CU IDOL SELF LEARNING MATERIAL (SLM)
developed nations were high whereas the price of the primary commodities that they produce for export were low. Thus, frustrating their efforts to achieve rapid growth. IMF also failed to handle the peculiar problems of the developing countries. These problems paved way for the information of UNCTAD. Presently it is the only body where developing, developed as well as centrally planned countries. Aims of UNCTAD The main purposes of UNCTAD are as follows: 1. Prevailing upon the developed countries in to progressively reducing and eliminating trade barriers and other restrictions which seriously limit trade with developing nations. In effect, it has been working on getting preferential terms of trade for the products of developing countries. While they are exported to developed nations. 2. Formation of principles and policies in international trade and other related fields covering all aspects of development including trade, transport, finance and technology. 3. Negotiations for multilateral trade agreement. Functions Of UNCTAD The main purpose of creating UNCTAD was to promote speedy development of the underdeveloped countries by solving the problems of the sluggish expansion of their export trade, deficits in their external balance of payments and excessive burden of foreign debt etc. The principal functions of the UNCTAD are as stated below: 1. To promote international trade, especially with a view to accelerating the economic development of underdeveloped countries, particularly trade between countries with different systems of economic and social organisation taking into account the functions performed by the existing international organisations. 2. To formulate the principles and polices of international trade the related problems of economic development. 3. To make proposal for putting the said principles and policies into effect and to take such other steps within its competence as may be relevant to this end. 4. To review and facilitate the co-ordination of activities of other institutions within the United Nations systems in the field of international trade and related problems of economic development and in this regard to cooperate with the general assembly and the economic and social council in respect of the performance of their chartered responsibilities. 5. To be available as a centre for harmonising the trade related development policies of government and regional economic grouping in pursuance of Article 7 of the United Nations Charter. 215 CU IDOL SELF LEARNING MATERIAL (SLM)
Basic Principles of UNCTAD UNCTAD’S action program and priorities have been laid down in the various recommendations adopted by the first conference in 1964. These recommendations are based on the following basic principles. Every country has the sovereign right freely to dispose of its natural resources Economic relations between countries There shall be no discrimination on the basis of difference in socio-economic systems. A review of the functioning of UNCTAD Eight functions have been held under UNCTAD Given important role of primary commodities and natural resources for developing countries It also took effort to stabilize and expand the export earning of these countries. In the process (UNCTAD) adopted a group approach to negotiations with (OCED) countries And developing countries coming together under the age of group 77 to co-ordinate their positions. China formed a separate group. Role of UNCTAD Despite the debates and disagreements (UNCTAD) played a key roll The generalized system of preferences (GSP) A maritime shipping code Special international programs to help least developed countries and international aid targets. During the break down of Bretton wood system, oil price shocks, inflation and accumulation of debt by developing countries (UNICTAD) became a central forum for debates between the north and south. UNCTAD I 1964 GENEVA To adopt a new international division of labour and make the external sector conductive to the developing countries. To improve invisible trade of developing countries through development of shipping, tourism, etc. 216 CU IDOL SELF LEARNING MATERIAL (SLM)
Each developed countries contributes 1% of their income to the developing countries. UNCTAD II 1968 NEW DELHI To reappraise the economic situation and it’s implementing the recommendation of UNCTAD I. Problems and measures of economic integration and trade and development among developing countries. Special measures for economic and social upliftment of the last developed among the developing nations. UNCTAD III 1972 SANTIAGO Changes in shipping freight (i.e. 1/3 of total deficit in the balance of payment of L.D.C’s was due to high shipping freights. Promotion to world trade New structure of world shipping in which the merchant marine of developing countries play an increasing and substantial role. UNCTAD IV 1976 NAIROBI Helping the poor countries by the developed countries. Some kind of taxes may be disposed by the advanced nations to raise funds. UNCTAD V 1979 MANILA 150 member countries were participated in this conference. No concrete resolution was passed but having some future consideration on monetary reforms. UNCTAD 1983 BELGRADE Attainment of new international economic order. Monetary issues such as adequacy of fund resources, conditionality etc were discussed. Developed countries insisted on Liberalizations of trade policies by the developing nations UNCTAD VII 1987 GENEVA The developed countries express their desire to provide debt relief to the poor countries. UNCTAD VIII 1992 COLOMBIA 217 CU IDOL SELF LEARNING MATERIAL (SLM)
170 member countries agreed on board features of revitalising UNCTAD and to make it more effective in dealing with development related issues. It has agreed to create Trade and Development Board (TDB). Establishment of five ad hoc (created for a particular purpose only) group to support the committee & TDB. UNCTAD IX 1996 MIDRAND UNCTAD IX met at Midrand in South Africa in 1996 in which it discussed issues pertaining to WTO, sustainable development and debt relief to developing nations. UNCTAD X 2000 BANGKOK (THAILAND) The effective integration of all countries in the international trading system. Improving supply capabilities. Overcoming the debt problem. Strengthening the commitment to social development. Ensuring women´s political, economic and social participation. Generating adequate financial flows for development. Undertaking institutional reforms. Reducing financial volatility. Focusing on central problems of acute poverty and growing inequality within and among nations; and, Supporting knowledge-based development as a necessary element for effective participation of developing countries in the world economy. UNCTAD XI 2004 SAU PAULO, BRAZIL The effective integration of all countries in the international trading system. Improving supply capabilities. Overcoming the debt problem. Strengthening the commitment to social development. Ensuring women´s political, economic and social participation. Generating adequate financial flows for development. Undertaking institutional reforms. Reducing financial volatility. 218 CU IDOL SELF LEARNING MATERIAL (SLM)
Focusing on central problems of acute poverty and growing inequality within and among nations UNCTAD XII 2008 ACCRA, GHANA Food prices increases Diversification and value added Increasing the level of investment in technology and infrastructure Equitable distribution of rents: Harnessing development gains from windfall incomes Human resource development: Ensuring a stable macroeconomic framework Food safety and health standards 10.4 WORLD TRADE ORGANISATION (WTO) Introduction The WTO is the successor to the GATT. It was a forum where the member countries met once in a decade in order to discuss and solve world trade problems. On the other hand, the WTO is a permanent organization for world trade. It has a legal status. It enjoys the same privileges and immunities which the IMF and the World Bank enjoy. It includes the following: 1. The GATT (as modified by the Uruguay Round) 2. All agreements and arrangements concluded under the GATT, and 3. The complete results of the Uruguay Round. As on January1, 1995, there were only 77 member countries of the WTO, which has increased to 128 by 2001. India is one of the founder members of WTO. There are total of 153 member countries in WTO. Structure of WTO The Ministerial Conference composed of representatives of all the members, who meet at least once in every two years, heads the structure of the WTO. It carries out the functions of the WTO by taking necessary actions to this effect. It has the General council, which consists of Representatives of all the members to oversee the operations of the WTO agreement and Ministerial Decisions on a regular basis. It also acts as a dispute settlement body and a trade policy review body, each of which having its own Chairman. 219 CU IDOL SELF LEARNING MATERIAL (SLM)
Under the General Council, the various councils such as the Council for Trade in Goods, the Council for Trade in Service and the Council for Trade Related aspects of Intellectual Property Rights (TRIPS) are operating. These councils have their subsidiary bodies. The councils and subsidiaries bodies meet so as to carry out their respective functions. Besides the above, the committee on trade and development, the committee on balance of payment restriction and the committee on budget, finance and administration are also functioning to carry out the functions assigned to thereby the WTO agreement, the multilateral trade agreements and any additional function assigned to them by the General Council. The Director General heads the Secretariat of the WTO. The Ministerial Conference appoints the Director General and also sets out his powers, duties and condition of service and term of office. He is appointed for a period of four years. He has four deputies from various member states. The Director General appoints the staff members of the Secretariat. He also determines their duties and conditions of service as per the regulations adopted by the Ministerial Conference. The Director General presents the annual budget estimates and the financial statements of WTO, to the committee on budget, finance and administration. On receipt of those estimates and financial statements, the committee, review them and makes recommendations to the General Council for the final approval. The General Council adopts the annual budget estimates and financial statements by a two-third majority. The rules and practices of the GATT regulate the financial aspects as to the scale of contributions and the budget. The WTO follows the practice of decision making by consonants, as followed under the GATT 1947. In case a decision cannot be arrived at by Consensus, the matter at issue is decided by two-third majority voting based on “one country – one vote”. But in the case of interpretation of the provisions of the agreements and waiver of a members obligations, three- fourth majority decides it. However, amendments relating to General principle like MFN all members must approve treatment. Objectives of WTO The preamble to the WTO mentions the following as its objectives: 1. To conduct its relation in the field of trade and economic endeavour in such a manner to raise standard of living. 2. To allow for the optimal use of the world’s resources in accordance with the objective of sustainable development, seeking vote (a) to protect and preserve the environment (b) to enhance the means for doing so in a manner consistent with respective needs and concerns at different levels of economic development. 220 CU IDOL SELF LEARNING MATERIAL (SLM)
3. To make positive efforts designed to ensure that developing countries, especially the lease developed among them, secure a share in the growth in international trade commensurate with the needs of their economic development. 4. To achieve the objectives by entering into reciprocal and mutually advantages arrangements directed towards substantial reduction of tariffs and other barriers to trade and the elimination of discriminatory treatment in international trade relations. 5. To develop an integrated more viable and durable multilateral trade system encompassing the GATT, the results of the past liberalization efforts, and all the results of the Uruguay Round of multilateral trade negotiations. 6. To ensure linkages between trade policies, environmental policies and sustainable development. 221 CU IDOL SELF LEARNING MATERIAL (SLM)
Fig 10.2 Objectives of WTO FUNCTIONS OF WTO The functions of WTO are as follows: 1. Facilitating the implementation, administration and operation of the objectives of the agreement and of the multilateral trade agreement. 222 CU IDOL SELF LEARNING MATERIAL (SLM)
2. Providing the framework for the implementation, administration and operation of the plurilateral trade agreement regarding trade in civil aircraft, Government procurement, trade in dairy products and bovine meat. 3. Providing the forum for negotiations among its members regarding their multilateral trade relations in matters connected with the agreement and framework for the implementation of the results of such negotiations, as decided by the Ministerial Conference. 4. Administering the understanding on rules and procedures governing the settlement of dispute of the agreement. 5. Cooperating with the IMF and the World Bank and its affiliated agencies in order to achieve greater coherence in global economic policy making. Principles of WTO WTO works according to the following principles: 1. Trade without Discrimination: This principle covers the following two points: Most-Favoured Nation (MFN) - Treating other People Equally: Under the WTO agreements countries cannot normally discriminate between their trading partners. Grant someone a special favour and you have to do the same for all other WTO members. In general, MFN means that every time a country lowers a trade barrier or opens up a market, it has to do so for the same goods or services from all its trading partners – whether rich or poor, weak or strong. National Treatment – Treating Foreigners and Locals Equally: Imported and locally- produced goods should be treated equally – atleast after the foreign goods have entered the market. The same should apply to foreign and domestic services, and to foreign and local trademarks, copy rights and patents. 2. Free Trade – Gradually, through Negotiations: Lowering trade barriers is one of the most obvious means of encouraging trade. The barriers concerned include customs duties (or tariffs) and measures such as import bans or quotas that restrict quantities selectively. Opening markets can be beneficial, but it also requires adjustment.The WTO agreements allow countries to introduce changes gradually, through “Progressive Liberalization ”. 3. Predictability – through Binding and Transparency: Sometimes, promising not to raise a trade barrier can be as important as lowering one, because the promise gives businesses a clearer view of their future opportunities. The multilateral trading system is an attempt by governments to make the business environment stable and predictable. 4. Promoting Fair Competition: Many of the other WTO agreements aim to support fair competition – e.g., in agriculture, intellectual property, services. The agreement on government procurement (a “Plurilateral” agreement because it is signed by only a few 223 CU IDOL SELF LEARNING MATERIAL (SLM)
WTO members) extends competition rules to purchases by thousands of government entities in many countries. And so on. 5. Encouraging Development and Economic Reform: The WTO system contributes to development. On the other hand, developing countries need flexibility in the time they take to implement the system’s agreements. And the agreements themselves inherit the earlier provisions of GATT that allow for special assistance and trade concessions for developing countries. Working of WTO: WTO working can be discussed under two heads as shown below: 2. Ministers through meetings 3. Working through dispute settlement board Ministers through meetings: Its first biennial Ministerial Meeting was held at Suntec City in Singapore during December 9 to 13, 1996. The Ministers of member countries adopted a consensus declaration reaffirming their faith in the multilateral trading system as the means to promote free trade all over the world. In the declaration, they renewed their commitment to the following: a. A fair, equitable and more open rule-based systems. b. Progressive liberalization and elimination of tariffs and non-tariffs barriers to trade in goods. c. Progressive liberalization of trade in services. d. Rejection of all forms of protectionism. e. Elimination of discriminatory treatment in international trade relations. f. Integration of developing and least developed countries and economics in transition in to the multilateral systems. g. The maximum possible level of transparency. The Ministers discussed some new issues of trade like competition policy, labour standards, multilateral investment, agreement and Government Procurement. Working through dispute settlement board The dispute settlement board of the WTO has been actively functioning. So far more than 100 disputed have been brought to it. Of them many have been settled by it. All member countries have appreciated the WTO for its transparent dispute settlement process and procedures. During the Doha round, the US Government blamed Brazil and India for being inflexible and the EU for impeding agricultural imports. The then President of Brazil Luiz Inacio Lula da silva, responded to their criticisms by arguing that progress would only be achieved if the 224 CU IDOL SELF LEARNING MATERIAL (SLM)
richest countries made deeper cuts in agricultural subsidies and further open their markets for agricultural goods. Impact of WTO: The WTO is an organization that intends to supervise and liberalize international trade. The global business environment is very significantly influenced by the WTO principles and agreements. Till the date, there are various international regulatory authorities operating in the world trade in order to maintain a smooth system of international business. WTO is one of the leading international trade regulatory organization’s which have its so far positive as well as negative impact on the international business. Positive Impact of WTO: WTO helps member states in various ways, and this enables them to reap benefits such as: 1. Promotes Peace Within Nations: Peace is partly an outcome of two of the most fundamental principle of the trading system; helping trade flow smoothly and providing countries with a constructive and fair outlet for dealing with disputes over trade issues. Peace creates international confidence and cooperation that the WTO creates and reinforces. 2. Disputes are Handled Constructively: As trade expands in volume, in the numbers of products traded and in the number of countries and company trading, there is a greater chance that disputes will arise. WTO helps to resolve these disputes peacefully and constructively. If this could be left to the member states, the dispute may lead to serious conflict, but lot of trade tension is reduced by organisation such as WTO. 3. Rules Make Life Easier for All: WTO system is based on rules rather than power and this makes life easier for all trading nations. WTO reduces some inequalities giving smaller countries more voice and at the same time freeing the major powers from the complexity of having to negotiate trade agreements with each of the member states. 4. Free Trade Cuts the Cost of Living: Protectionism is expensive, it raises prices, and WTO lowers trade barriers through negotiation and applies the principle of non- discrimination. The result is reduced costs of production (because imports used in production are cheaper) and reduced prices of finished goods and services, and ultimately a lower cost of living. 5. It provides more Choice of Products and Qualities: It gives consumer more choice and a broader range of qualities to choose from. 6. Trade Raises Income:Through WTO barriers are lowered and this increases imports and exports thus earning the country foreign exchange, thus raising the country’s income. 225 CU IDOL SELF LEARNING MATERIAL (SLM)
7. Trade Stimulates Economic Growth: Withupward trend economic growth, jobs can be created, and this can be enhanced by WTO through careful policy making and powers of free trade. 8. Basic Principles Make Life More Efficient: The basic principles make the system economically more efficient, and they cut costs. Many benefits of the trading system are as a result of essential principle at the heart of the WTO system, and they make life simpler for the enterprises directly involved in International Business and for the producers of goods/services. Such principles include non-discrimination, transparency, increased certainty about trading conditions, etc., together they make trading simpler, cutting company costs and increasing confidence in the future and this in turn means more job opportunities and better goods and services for consumers. 9. Governments are shielded from Lobbying:WTO system shields the government from narrow interest. Government is better placed to defend themselves against lobbying from marrow interest groups by focussing on trade-offs that are made in the interests of everyone in the economy. 10. System Encourages Good Governance: The WTO system encourage good government. The WTO rules discourage a range of unwise policies and the commitment made to liberalise a sector of trade becomes difficult to reverse. These rules reduce opportunities for corruption. Negative Impact of WTO: In spite of having a great importance in cooperating and integrating world trade WTO has negative impact as: 1. Fundamentally Undemocratic: The policies of the WTO impact all aspects of society and the planet, but it is not a democratic, transparent institution. The WTO rules are written by and for corporations with inside access to the negotiations. For Example, the US Trade Representative gets heavy input for negotiations from 17 “Industry Sector Advisory Committees”. Citizen input by consumer, environmental, human rights and labour organisations is consistently ignored. Even simple requests for information are denied, and the proceedings are held in secret. 2. Tramples Labour and Human Rights: WTO rules put the “rights” of corporations to profit over human and labour rights. The WTO encourages a ‘race to the bottom’ in wages by pitting workers against each other rather than promoting internationally recognised labour standards. The WTO has ruled that it is illegal for a government to ban a product based on the way it is produced, such as with child labour. It has also ruled that governments cannot take into account “non-commercial values” such as Burma when making purchasing decisions. 226 CU IDOL SELF LEARNING MATERIAL (SLM)
3. Increasing Inequality: Free Trade is not working for the majority of the world. During the most recent period of rapid growth in global trade and investment (1960 to 1998) inequality worsened both internationally and within countries. The UN Development Program reports that the richest 20% of the world’s population consume 86% of the world’s resources while the poorest 80% consume just 14%. WTO rules have hastened these trends by opening up countries to foreign investment and thereby making it easier for production to go where the labour is cheapest and most easily exploited and environmental costs are low. 4. Hurts Poor, Small Countries in Favour of Rich Powerful Nations: The WTO supposedly operates on a consensus basis, with equal decision-making power for all. In reality, many important decisions get made in a process whereby poor countries negotiators are not even invited to closed door meetings and then agreements are announced that poor countries didn’t even know were being discussed. Many countries do not even have enough trade personnel to participate in all the negotiations or to even have a permanent representative at the WTO. This severely disadvantages poor countries from representing their interests. Likewise, many countries are too poor to defend themselves from WTO challenges from the rich countries and change their laws rather than pay for their own defence. 5. Undermines Local Level Decision Making and National Sovereignty: TheWTO’s “Most Favoured Nations” provision requires all WTO member countries to treat each other equally and to treat all corporations from these countries equally regardless of their track record. Local policies aimed at rewarding companies who hire local residents, use domestic materials, or adopt environmentally sound practices are essentially illegal under the WTO. Developing countries ae prohibited from creating local laws that developed countries once pursued, such as protecting new domestic industries until they can be internationally competitive. 10.5 SUMMARY An International Organization dedicated to providing financing, advice and research to developing nations to aid their economic advancement. India is the single largest borrower of World Bank and International Development Agency. WTO ensure linkages between trade policies, environmental policies and sustainable development. In terms of WTO principle relating to tariff “ceiling-binding”, the Uruguay Round has been successful in increasing binding commitments by both developed and developing countries. 227 CU IDOL SELF LEARNING MATERIAL (SLM)
The 9th round of multilateral trade negotiations started in 2001 and continues today. 10.6 KEYWORDS World Bank is an international organization dedicated to providing financing, advice and research to developing nations to aid theireconomic advancement. UNCTAD is a forum to discuss the problems of developing countries relating to their economic development. Most Favoured Nations means that every time a country lowers a trade barrier or opens up a market, it has to do so for the same goods or services from all its trading partners – whether rich or poor, weak or strong. 10.7 LEARNING ACTIVITY 1. What have been the objectives of World Bank? ___________________________________________________________________________ ___________________________________________________________________________ 2. What are the two subsidiaries of the World Bank? ___________________________________________________________________________ ___________________________________________________________________________ 3. What are the objectives of WTO? ___________________________________________________________________________ ___________________________________________________________________________ 4. What is UNCTAD? ___________________________________________________________________________ ___________________________________________________________________________ 5. What are the objectives of UNCTAD? ___________________________________________________________________________ ___________________________________________________________________________ 10.8 UNIT END QUESTIONS 228 A. Descriptive Questions Short Questions 1. Explain the functions of UNCTAD? CU IDOL SELF LEARNING MATERIAL (SLM)
2. Discuss the structure of WTO? 229 3. List out the functions of WTO? 4. What are the various agreements that are entered into at Uruguay Round? 5. State the role of UNCTAD? Long Questions 1. Describe UNCTAD functions and achievements? 2. Distinguish between GATT and WTO? 3. Write about the lending and other activities of the World Bank? 4. Explain the agreement established by the WTO briefly? 5. Critically appraise the Uruguay Round and WTO Agreement? 6. Describe briefly the working of WTO? B. Multiple Choice Questions 1. The main role of the World Bank is a. To be a forum for trade and liberalization. b. To assist countries in development. c. To facilitate private investment around the world. d. All of the options given are correct 2. The World Bank has its headquarters in _____________. a. Paris b. Hague c. New York d. Washington, DC 3. The bank provides loans only to members for the purpose of? a. To bridge the deficit in annual budget b. To check the balance of payments c. Financing specific project d. All of these CU IDOL SELF LEARNING MATERIAL (SLM)
4. Which of the following statements is not correct? a. Both the IMF & IBRD have headquarters in Washington b. ICSID is the constituent organisation of the World Bank Group c. IBRD is known as World Bank also d. India’s vote share in the International Monetary Fund is 10% 5. Which of the following is not the function of the World Bank? a. To provide long term loan to the member countries b. To provide loan to private investors belonging to member countries on its own guarantee c. To ensure exchange rate stability d. To provides loan mainly for productive activities 6. Which of the following institutions is not part of the World Bank community? a. IBRD b. WTO c. IDA d. IFC 7. What is the other name of World Bank? a. International Monetary Fund b. Global Bank c. UN bank d. International Bank for Development 8. The first conference of UNCTAD was held at 230 a. London b. Netherlands c. Geneva d. Tokyo CU IDOL SELF LEARNING MATERIAL (SLM)
9. Among the following options, which one is not the objective of the WTO? a. To protect environment b. To improve the balance of payment situation of the member countries c. To improve the standard of living of people of the member countries d. To enlarge production and trade of goods Answers 1-b, 2-d, 3-c, 4-d, 5-c, 6-b, 7-d, 8-c, 9-b 10.9 REFERENCES References books Pawan Kumar Oberoi, International Trade, Global Academic Publishers & Distributors (2nd Edition), 2015 Textbook references Robert J. Carbaugh, International Economics, Thomson – Southwestern, 9th Edition, 2004 Jessie Poon and David L Rigby, International Trade: The Basics, Routledge, 2017 Websites https://unctad.org/system/files/official-document/edmmisc17rev1_en.pdf https://www.slideshare.net/SRJCHOWRASIA/unctad-1 231 CU IDOL SELF LEARNING MATERIAL (SLM)
UNIT - 11: FINANCIAL GLOBALIZATION STRUCTURE 11.0 Learning Objectives 11.1 Introduction 11.2 Definition of Financial Globalization 11.3 Main Agents Financial Globalization 11.4 Views on Financial Globalization 11.5 Footloose 11.6 Capital Control 11.7 Case Studies of Capital Controls 11.8 Summary 11.9 Keywords 11.10 Learning Activity 11.11 Unit End Questions 11.12 References 11.0 LEARNING OBJECTIVES After studying this unit, you will be able to: Understand meaning of Financial Globalisation Explain the agents of Financial Globalisation Describe the concept of Footloose Explain the concept of Capital control 11.1 INTRODUCTION Meaning of Financial Globalization: Financial Globalizationis an aggregate concept that refers to increasing global linkages created through cross- border financial flows. Financial integration refers to an individual country's linkages to international capital markets Examples of Financial Globalization: 1. J.P. Morgan Chase & Co - is American multinational investment bank that operates in more than 100 countries.
2. The European Union - technological progress, lower transport costs and policy liberalization in the European Union and elsewhere have led to increasing trade and financial flows between countries. 11.2 DEFINITION OF FINANCIAL GLOBALIZATION Financial Globalization can be defined as the movement of investments and financial services across international borders. Examples include purchasing bonds issued by a foreign corporation or government, trading domestic equities on an international trading platform after domestic exchanges have closed and borrowing money denominated in a foreign currency 11.3 MAIN AGENTS’ FINANCIAL GLOBALIZATION There are four main agents of financial Globalization: 1. Governments, 2. Borrowers, 3. Investors, and 4. Financial institutions. Each of them is helping countries become more financially integrated. Governments are one of the main agents of financial Globalization. Governments allow Globalization by liberalizing restrictions on the domestic financial sector and the capital account of the balance of payments. In the past, governments used to regulate the domestic financial sector by restricting the allocation of credit through controls on prices and quantities. Governments also imposed several constraints on cross-country capital movements. The list of instruments used to restrict the capital account is rather extensive, including restrictions on foreign exchange transactions, derivative transactions, lending and borrowing activities by banks and corporations, and the participation of foreign investors in the local financial system. Borrowers and investors, including households and firms, have also become main agents of financial Globalization. By borrowing abroad, firms and individuals can relax their financial constrains to smooth consumption and investment. Firms can expand their financing alternatives by raising funds directly through bonds and equity issues in international markets and thereby reducing the cost of capital, expanding their investor base, and increasing liquidity. More financing alternatives help foreign investors overcome direct and indirect investment barriers. International investors, as argued in Obstfeld (1994) and Tesar and Werner (1998), have taken advantage of financial Globalization to achieve cross-country risk diversification. 233 CU IDOL SELF LEARNING MATERIAL (SLM)
Financial institutions, through the internationalization of financial services, are also a major driving force of financial Globalization. As discussed by the International Monetary Fund (2000), changes at the global level and changes in both developed and developing countries explain the role of financial institutions as a force of Globalization. At a global level, the gains in information technology have diminished the importance of geography, allowing international corporations to service several markets from one location. In developed countries, increased competition has led banks and other nonbank financial firms to look for expanding their market shares into new businesses and markets, attracting customers from other countries, what allows them to diversify risk. Decreasing costs due to deregulation and technical improvements were accompanied by more competition. Moreover, the liberalization of the regulatory systems has opened the door for international firms to participate in local markets. Macroeconomic stabilization, better business environment, and stronger fundamentals in emerging markets ensured a more attractive climate for foreign investment. 11.4 VIEWS ON FINANCIAL GLOBALIZATION Economists view financial Globalization as the outcome of market forces – at a time of growing international trade, the demand for dollar deposits and loans increased. The theoretical argument put forward in this paper is that financial Globalization requires more than negative integration. Benefits of financial Globalization Three benefits to financial Globalization include 1. Improved access to capital markets for firms in developing nations, 2. A more efficient allocation of global financial resources and 3. The opportunity for greater investment diversification. Issues of Financial Globalization Since the 1980s, the world has witnessed a process of unprecedented financial Globalization as illustrated, for example, by the significant increase of capital flows that has occurred both in the advanced and in the emerging economies. In addition, in recent years, along with the acceleration of financial flows, there have been a series of notable changes that force us to think about the challenges that this new phase of financial Globalization will bring. A natural starting point is to consider what the benefits of greater global financial integration are. In general, financial Globalization brings important benefits for economic activity. Specifically, in addition to supporting international trade, greater financial openness contributes to making the global allocation of capital more efficient, while also providing opportunities to diversify risks and obtain greater returns. The increase in international trade that has occurred in recent years, therefore, has continued to favour the expansion of financial Globalization. Nevertheless, this has been accompanied by two very noticeable changes, 234 CU IDOL SELF LEARNING MATERIAL (SLM)
which have bolstered it even more: the growing interconnection of monetary policy at the global level and the emergence of truly global financial institutions. Both innovations have introduced complexity in the way financial Globalization operates. Thus, and in relation to the first of these developments, as a result of the changes in monetary policy in the context of advanced countries’ response to the Great Recession (with the extension of monetary expansion to new heights with few historical precedents), spillovers between the main central banks and those in the periphery have increased. One of the consequences of this dynamic is that it limits the ability of the monetary authorities of smaller economies to implement a monetary policy consistent with their domestic needs. As such, when global financial conditions become more accommodative, for example following an interest rate cut by the US Fed, there tend to be significant capital inflows in economies with a more restrictive monetary policy. These capital inflows can lead to a loosening of the country’s financial conditions beyond what is desirable and, thus, to an overheating of the economy and macro financial imbalances. The fear, expressed on numerous occasions by the Bank for International Settlements (BIS), is that this transmission mechanism is particularly relevant at the current juncture, given that the non-conventional monetary policy measures implemented by the central banks of the major advanced economies since the financial crisis have generated an important abundance of liquidity at the global level, which has been directed towards other economies in search of higher returns. Now that the monetary policy stance of the major central banks is starting to change, with the process of monetary normalization underway in the US and Europe, some emerging economies could run into trouble if this process is not carried out very gradually. The greater protagonist of the global financial institutions is the second of the key developments of the current phase of financial Globalization. These global financial institutions operate in many countries of the world through branches and subsidiaries. Through this international presence, they are able to obtain resources in the major global financial centres with more favourable credit conditions, since they can obtain financing directly from the central bank and issue financial instruments to private investors at a lower cost, as well as being able to distribute these resources in other economies or provide liquidity to other banks through the interbank market. Thus, the monetary policy implemented by the main central banks affects the supply of credit and, since these institutions sometimes take on global risks, this contributes to the transmission of the financial conditions of the major advanced economies to all other countries. The consequences of these institutional changes are multiple, but the two main ones refer to the greater degree of synchronization of capital movements and the expansion of the use of «strong currencies. The first of these concerns is directly derived from the change in monetary policy and the greater importance of its global spillovers. Thus, in recent years, what is referred to in the literature as the global financial cycle has taken on greater 235 CU IDOL SELF LEARNING MATERIAL (SLM)
importance? Although coming up with an empirical estimate of the extent of the phenomenon is not easy, there is evidence that the common - or global - factor which determines the evolution of the global flows of capital is important and that it also extends to aspects such as the dynamics of the returns of assets exposed to global risks. A second consequence is the change in the use of global currencies – particularly the US dollar – as a means of payment throughout the world and as a source of financing. This is largely the result of the incentives that access to abundant international financing and attractive financial conditions (in particular, a low interest rate) offers to borrowers. This dynamic contributes to the «strong currencies» playing a central role in the determination of the financial conditions of other countries. Furthermore, since the monetary authorities, including those that issue these currencies, tend to focus on the domestic conditions when implementing their policies, they may end up favouring an increase in macro financial imbalances beyond their borders if the economic cycles of these countries do not coincide. Thus, when there are sharp increases in a country’s debt through financing in strong foreign currencies - with more favourable financial conditions -, this practice leads to the borrower taking on a foreign exchange rate risk from which it can scarcely be protected. In fact, in recent years, in a context of ultra-accommodative monetary policies in the advanced countries, this exposure appears to have increased considerably. In particular, credit denominated in dollars of the non-financial sector in emerging markets has doubled in just eight years. Furthermore, according to data from the BIS, credit denominated in euros to non- residents has increased by 34% in the last four years, reaching 3.1 trillion euros. It is therefore not surprising that, now that the major central banks have begun to change the tone of their monetary policy and the emerging currencies have depreciated significantly, the exchange rate risk is one of the major risks faced by many emerging countries. Given the institutional changes and their potential consequences, it seems clear that in order to take advantage of the benefits of financial Globalization, it is important to have the necessary tools to be able to mitigate the risks we have spelled out. To this end, it is essential for countries to implement domestic policies that improve their ability to absorb shocks, make it less susceptible to global factors and prevent the accumulation of macro financial imbalances. These policies include prudential policies, which can help to safeguard financial stability by increasing the robustness of the financial sector and reduce the procyclicality of credit flows. It is also essential for there to be effective international cooperation that complements the domestic policies and helps to manage the risks associated with greater financial interconnectedness at a global level. To this end, a consolidated, global regulatory and macro financial supervisory framework should be established to help prevent future crises. It is also increasingly necessary to improve international coordination on economic policy, and on monetary policy in particular. 236 CU IDOL SELF LEARNING MATERIAL (SLM)
Since the 2008 financial crisis, considerable efforts have been made in both directions. For example, regulatory reforms have been introduced that focus on increasing the resilience of banks that operate at the international level, which are a key element of global financial intermediation. Attempts have also been made to improve the cooperation of macroeconomic and financial policies at the global level in response to the financial crisis. In any case, there is a lot of room for further discussion and evaluation of the effects of the monetary and macro financial policies of the major global financial centres in other countries. This could be done through an institution such as the IMF or the BIS, which could facilitate greater coordination between the major central banks. In short, financial Globalization has become an important pillar in the development of the global economy, but it must be supported by a regulatory framework and by policies that help to contain the risks inherent to this increased interconnection. 11.5 FOOTLOOSE Footloose means having no ties or free to move about. Meaning of Footloose Capital Footloose capital skips from place to place. It goes where the best opportunities for profit are – the best mix of state subsidy, docile workers (skilled or unskilled), access to raw materials etc. Footloose industry is a general term for an industry that can be placed and located at any location without effect from factors of production such as resources, land, labour, and capital. These industries often have spatially fixed costs, which mean that the costs of the products do not change despite where the product is assembled. Diamonds, computer chips, and mobile manufacturing are some examples of footloose industries. These are generally non-polluting industries. Non-footloose industries generally require raw material availability within a time limit to make products. Sugar industry, jute industry and tea industry are the examples of non- footloose industries. Footloose industries can also refer to the processing of products that are neither weight- gaining, nor weight-losing, and face significant transportation costs. An example of a footloose processing industry is honey. The weight of the raw honey and wax is the same as the finishing product. So, whether the honey is processed near the source of the raw materials or at the location of the final product demand, the transportation costs are the same. 237 CU IDOL SELF LEARNING MATERIAL (SLM)
11.6 CAPITAL CONTROL Capital control represents any measure taken by a government, central bank, or other regulatory body to limit the flow of foreign capital in and out of the domestic economy. These controls include taxes, tariffs, legislation, volume restrictions, and market-based forces. Capital controls are residency-based measures such as transaction taxes, other limits, or outright prohibitions that a nation's government can use to regulate flows from capital markets into and out of the country's capital account. These measures may be economy-wide, sector-specific (usually the financial sector), or industry specific (for example, \"strategic\" industries). They may apply to all flows or may differentiate by type or duration of the flow (debt, equity, direct investment; short-term vs. medium- and long-term). What are Capital Controls? Capital controls are when the governments of nations restrict the inflow and outflow of capital into the economy. In a free market economy, there should be and would be no borders. However, this is not the case in reality. Countries want to ensure that their economies stay relatively stable in the long run. Some economies, therefore, impose some form of capital controls. The majority of the economies in the western developed world do not impose capital controls. Instead, economic movement of capital is left to the free will of the markets. However, this is not the case all over the world as a wide variety of capital controls can be found in different countries. Examples of capital controls Capital controls include taxes, tariffs, legislation, volume restrictions, and market-based forces. Capital controls can affect many asset classes such as equities, bonds, and foreign exchange trades. Types of Capital Controls Minimum Stay Requirements: A lot of countries have a sort of lock in period when it comes to capital investments. This means that they allow free movement of capital in and out of the country. However, there should be a certain time gap between the inward movement and the outward movement. This is called as a lock in period or as a minimum stay requirement. Limitations: Some countries limit the amount of money that every entity can remit out of the country. Since the limitations are based on the number of entities, this provides an incentive for companies to form several legal entities and evade the law! 238 CU IDOL SELF LEARNING MATERIAL (SLM)
Caps on Asset Sales: In many countries certain groups of assets are classified as strategic. These assets are then not sold to foreigners. Such economies allow free movement of capital in and out of the economy but not in certain sectors. For instance, Canadians have protected their agricultural investments. Foreigners are free to invest in other sectors of the economy but not in agriculture. Limit the Currency Trading: Some countries want to limit the amount of foreign currency that is available for trading in the Forex market at any given point of time. This is because they want to maintain currency pegs i.e. fixed exchange rates. This helps them plan their economic activity better especially if they are an export oriented economy. Changing forex rates means that their competitiveness in the international market changes every minute. Capital controls are an effective way to avoid this issue! Benefits of Capital Controls Implementing capital controls makes the economy stable. Stability must not be confused with growth here! Capital inflows restrict the inflow of funds into the economy. They do so by scaring the fly by night investors out of the market. Only investors that see long term potential in a country will invest their own money even after capital controls are in place. Thus, since there is a smaller inflow of funds, the outflow is almost negligible. Nearly all the funds that come in the country stay for a long duration of time. Hence, both the upside and downside are bound by a limited range. The biggest benefit of capital controls is that it prevents overheating in economies. This means that it prevents investors from pumping and dumping an economy. Investors cannot flood the economy with funds drive up output and prices and then suddenly leave causing everything to crash! Till domestic investors do not become strong enough to compete with foreign capital, some form of capital controls needs to be in place. Downside of Capital Controls There are many economists that oppose capital controls as well. This is because they believe that it is against the functioning of a free market economy. Anything which is against the functioning of a free market economy cannot sustain for long. As a result, capital controls lead to evasion and corruption on a large scale. Companies that want to take their money out of the country do so by any means. There are illegal channels. Also, often they are helped by bureaucrats who help them draft the right import invoice or the right accounting entry which would evade the long arm of the law. Hence, capital control turns out to be a wasteful long and arduous exercise that is often based on political reasons than sound economic ones! 239 CU IDOL SELF LEARNING MATERIAL (SLM)
11.7 CASE STUDIES OF CAPITAL CONTROLS Economists often point to the Chinese implementation of capital controls to show the success story. The Chinese economy has flourished for more than three decades, and capital controls were fully present during that period. China is now gradually opening up its economy after the domestic sector has become equally strong. Malaysia also benefitted from capital controls during the economic debacle of 1998. Since money could not leave the country as fast as it could leave Thailand and Vietnam, Malaysia got some more valuable time to deal with the conflict. The opposite case has happened in India. The Indian economy was reeling during the period when capital controls were imposed. Post-1991, these controls were lifted, and the Indian economy started booming during that phase. Today, India is amongst the fastest growing countries in the world! To sum it up, there are arguments both for and against capital controls. Whether such controls are suitable for an economy, depend upon the particular situation, and a generalization would be incorrect. 11.8 SUMMARY Financial Globalization can be defined as the movement of investments and financial services across international borders. International investors have taken advantage of financial Globalization to achieve cross-country risk diversification. Economists view financial Globalization as the outcome of market forces – at a time of growing international trade, the demand for dollar deposits and loans increased. The liberalization of the regulatory systems has opened the door for international firms to participate in local markets. Macroeconomic stabilization, better business environment, and stronger fundamentals in emerging markets ensured a more attractive climate for foreign investment. Footloose industry is a general term for an industry that can be placed and located at any location without effect from factors of production such as resources, land, labour, and capital. The majority of the economies in the western developed world do not impose capital controls. Instead, economic movement of capital is left to the free will of the markets. 240 CU IDOL SELF LEARNING MATERIAL (SLM)
11.9 KEYWORDS Financial Globalization can be defined as the movement of investments and financial services across international borders. Footloose Capital skips from place to place. It goes where the best opportunities for profit are – the best mix of state subsidy, docile workers (skilled or unskilled), access to raw materials etc. Capital Controls are when the governments of nations restrict the inflow and outflow of capital into the economy. 11.10 LEARNING ACTIVITY 1. List the features of Transnational Corporations? ___________________________________________________________________________ ___________________________________________________________________________ 2. List the benefits of financial Globalization? ___________________________________________________________________________ ___________________________________________________________________________ 11.11 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. Define Financial Globalization? 2. Explain the issues of financialGlobalization? 3. Explain the agents of financial Globalization? 4. State the benefits of Capital Controls? 5. What is meant by Footloose Capital? Long Questions 1. Explain the views of financial Globalization? 2. Discuss footloose Capital in detail? 3. Explain the different types of Capital Controls? B. Multiple Choice Questions 1. The first phase of Globalization started around 1870 and ended with 241 CU IDOL SELF LEARNING MATERIAL (SLM)
a. World War I b. World War II c. The Establishment of GATT d. In 1913 when GDP was High 2. Globalization has improved in the living structure of a. All the people b. Workers in developing countries c. People in developed countries d. None of these. 3. The Globalization of business activities have _________ the complexity as well as the importance of the financial managers’ duties. a. Increased b. Decreased c. Ignored d. Vanished 4. The following three aspects of a monetary system are jointly incompatible: monetary policy independence; (A) _______ exchange rates; and (B) _______ a. floating; (B) capital controls b. floating; (B) free capital mobility c. fixed; (B) capital controls d. fixed; (B) free capital mobility Answers 242 1-a, 2-a, 3-a. 4-d, 11.12 REFERENCES References books Jason H. Cardwell, Financial Globalization , Nova Science Publishers, 2010 CU IDOL SELF LEARNING MATERIAL (SLM)
Pawan Kumar Oberoi, International Trade, Global Academic Publishers & Distributors (2nd Edition), 2015 Textbook references Michael B. Devereux, Financial Globalization and Emerging Market Portfolios, Institute for Monetary and Economic Studies, Bank of Japan, 2007 Robert J. Carbaugh, International Economics, Thomson – Southwestern, 9th Edition, 2004 B O Sodersten and Geoffrey Reed, International Economics, Macmillan Press, 3rd Edition,1994 Websites https://www.researchgate.net/profile/Sergio- Schmukler/publication/239922690_Benefits_and_Risks_of_Financial_Globalization _Challenges_for_Developing_Countries/links/02e7e5328c80e3678a000000/Benefits- and-Risks-of-Financial-Globalization -Challenges-for-Developing-Countries.pdf https://www.imf.org/external/pubs/nft/op/220/index.htm https://www.caixabankresearch.com/en/economics-markets/financial- markets/challenges-financial-Globalization 243 CU IDOL SELF LEARNING MATERIAL (SLM)
UNIT - 12: INDIAN MULTINATIONAL CORPORATIONS STRUCTURE 12.0 Learning Objectives 12.1 Introduction 12.2 Meaning of Multinational Corporation 12.3 Types of Multinational Corporation 12.4 Basic Organizational Structures of Multinational Corporations 12.5 MNCs in India 12.6 Summary 12.7 Keywords 12.8 Learning Activity 12.9 Unit End Questions 12.10 References 12.0 LEARNING OBJECTIVES After studying this unit, you will be able to: Explain Multinational Corporations Explain structure of Multinational Corporations Understand MNC’s in India 12.1 INTROUDCTION Multinational Corporation – Concept “The multinational is a business unit which operates simultaneously in different parts of the world. In some cases the manufacturing unit may be in one country, while the marketing and investment may be in other countries. In other cases all the business operations are carried out in different countries, with the strategic headquarters in any part of the world.” For example, the Manhattan based company, Colgate Palmolive Inc., which manufactures and markets dental care, health care, hair care and skin care products, in more than 120 countries. Procter and Gamble, based in Cincinnati also has similar product lines and operates in more than 150 countries.
12.2 MEANING OF MULTINATIONAL CORPORATION A multinational corporation (MNC) or transnational corporation (TNC), also called multinational enter-prise (MNE), is a corporation or an enterprise that manages production or delivers services in more than one country. It can also be referred as an international corporation. The International Labour Organization (ILO) has defined an MNC as a corporation which has its man-agement headquarters in one country known as the home country and operates in several other countries known as host countries. Definition of Multinational Corporation Leonard Gomes also defined MNCs as “a corporation that controls production facilities in more than one country and such facilities having been acquired through the process of foreign direct investment. Firms that participate in international business, however large, they may be, soley by exporting or by licensing technology are not multinational enterprises.” Multinational Corporation can be defined as a corporation that produces goods or services in several countries and manages its global activities from organizational headquarter located in one country. Characteristics of Multinational Corporation: MNCs will always look out for opportunities. They carry out risk analysis and send their personnel to learn and understand the business climate. They develop expertise in understanding the culture, politics, economy and legal aspects of the country that they are planning to enter. They look at the global, rather than only local potential. The essential element that distinguishes the true multinational is its commitment to manufacturing, marketing, developing R&D, and financing opportunities throughout the world, rather than just thinking of the domestic situation. Some of characteristics of MNCs are: Mode of Transfer: An MNC has considerable freedom in selecting the financial channels through which funds or profits or both are moved. For example, patents and trademarks can be sold outright or transferred in return through contractual binding or royalty payments. Similarly, the MNC can move profits and cash from one unit to another by adjusting transfer prices on intercompany sales and purchases of goods and services. MNCs can use these various channels, singly or in combination, to transfer funds internationally, depending on the specific circumstances encountered. 245 CU IDOL SELF LEARNING MATERIAL (SLM)
Timing Flexibility: Some of the internationally generated financial claims require a fixed payment schedule; others can be accelerated or delayed. MNCs can extend trade credit to their other subsidiaries through open account terms, say from 90 to 180 days. This gives a major leverage to financial status. In addition, the timing for payment of fees and royalties may be modified when all parties to the agreement are related. Value: By shifting profits from high-tax to low-tax nations, MNCs can reduce their global tax payments. In addition, they can transfer funds among their various units, which allow them to circumvent currency controls and other regulations and to tap previously inaccessible investment and financing opportunities. 12.3 TYPES OF MULTINATIONAL CORPORATION The multinational corporations may be divided into seven categories depending upon their activities. They may be colonial companies, resource-based companies, public utilities companies, manufacturing company’s service institutions, licensing and turnkey projects. Their brief description is as follows: Colonial Companies- Colonial companies are those companies which are established to procure raw materials for the parental office at native country. They monopolies the purchasing of raw materials. They have rights to operate in different countries. East India Company’s name can be cited in this respect. Resource Based Companies- It is the second category of multinationals. These companies purchase raw resources from several countries. They do not believe in exploitation and purchasing of mineral resources. Many developed and developing countries have propagated such types of companies. Public Utility Companies-The public utility companies are established to help the people of the country. The companies enjoy the position of natural monopoly. The multinational in public utility concerns do not remain longer because of nationalism. Manufacturing Companies-The manufacturing companies are engaged in several manufacturing processes. They produce qualitative and quantitative goods in a huge quantity. They invest adequate capital in foreign countries to get higher rate of return. Whenever multinationals or MNCs are referred they indicate to manufacturing companies. Service Institutions- They know the service technology and provide suitable and sufficient services to the people of the countries where they are established. Banking, Insurance, Hotels, Airways, etc., are the several examples of such companies. 246 CU IDOL SELF LEARNING MATERIAL (SLM)
Licensing-The multinationals grant licenses to some domestic companies to use their trademarks and technical know-how. The license is granted to exploit potential market in the host countries who pay license fees annually to the multinationals to use their know-how for a fixed period. The license fee may be in lump sum to purchase the know-how. Turnkey Project -Turnkey project is taken up by the multinationals to complete a specific job within a fixed period. The contract for a turnkey project is made on open tender or on the basis of cost plus fee for the services. There may be limit on the total cost. If the multinational exceeds the cost, it has to bear the excess cost. 12.4 BASIC ORGANIZATIONAL STRUCTURES OF MNC’S Initial Division Structures Export arrangement a. Common among manufacturing firms, especially those with technologically advanced products ● On-site manufacturing operations a. In response to local governments when sales increase b. Need to reduce transportation cost ● Subsidiary a. Common for finance-related businesses or other operations that require onsite presence from start Fig 12.1 Organizational Structure of MNC 247 CU IDOL SELF LEARNING MATERIAL (SLM)
● International Division Structure Structural arrangement that handles all international operations out of a division created for this purpose a. Assures international focus receives top management attention b. Unified approach to international operations c. Often adopted by firms still in developmental states of international business operations d. Separates domestic from international managers (not good) e. May find it difficult to think and act strategically, or to allocate resources on a global basis Fig 12.2 International Division Structure Global Structural Arrangements Global Product Division Structural arrangement in which domestic divisions are given worldwide responsibility for product groups a. Global product divisions operate as profit centres b. Helps manage product, technology, customer diversity c. Ability to cater to local needs 248 CU IDOL SELF LEARNING MATERIAL (SLM)
d. Marketing, production and finance coordinated on product-by- product global basis e. Duplication of facilities and staff personnel within divisions f. Division manager may pursue currently attractive geographic prospects and neglect others with long-term potential g. Division managers may spend too much time tapping local rather than international markets Fig 12.3 Global Product Division Global Area Division Structure under which global operations organized on geographic basis a. International operations put on same level as domestic b. Global division mangers responsible for all business operations in designated geographic area c. Often used by firms in mature businesses with narrow product lines d. Firm is able to reduce cost per unit and price competitively by manufacturing in a region e. Difficult to reconcile a product emphasis with geographic orientation f. New R&D efforts often ignored because divisions are selling in mature market 249 CU IDOL SELF LEARNING MATERIAL (SLM)
Global Functional Division Structure 1. Structure that organizes worldwide operations primarily based on function and secondarily on product a. Approach not used except by extractive companies such as oil and mining b. Favoured only by firms needing tight, centralized coordination and control of integrated production processes and firms involved in transporting products and raw materials between geographic areas c. Emphasizes functional expertise, centralized control, relatively lean managerial staff d. Coordination of manufacturing and marketing often difficult e. Managing multiple product lines can be very challenging because of separation of production and marketing into different departments. Fig 12.4Global Functional Division Structure Mixed Organizational Structures Structure is a combination of global product, area, or functional arrangements ● Allows organization to create specific type of design that best meets its needs ● As matrix design’s complexity increases, coordinating personnel and getting everyone to work toward common goals often become difficult ● Too many groups to their own way 250 CU IDOL SELF LEARNING MATERIAL (SLM)
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