lesson - 1 globalization of trade objectives of the lesson ...· meaning of globalization ... exim

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  • Lesson - 1

    Globalization of Trade

    Objectives of the Lesson:

    After studying this unit you should able to:

    Meaning of globalization

    Explain the Liberalized Foreign Investment Policy

    Discuss the New Global Economic War

    Explain the various International Financial Institution / Development

    Banks involved in global trade

    Structure of the Lesson:

    1.0 Introduction

    1.1 Liberalized Foreign Investment Policy

    1.2 New Global Economic War

    1.3 International Financial Institution / Development Banks

    1.3.1 International Monetary Fund (IMF)

    1.3.2 The International Finance Corporation (IFC)

    1.3.3 The World Bank

    1. 3. 4 The World Bank Groups

    1.3.5 Asian Development Bank

    1.0 Introduction

    Globalization of trade implies universalisation of the process of

    trade. In 1990, increased openness to international trade, under such

    headings as, outward orientation or trade liberalization has been

    advocated as an engine of economic growth and a road to

    development. The marginalization of Indian economy together with

    many other factors resulted in a severe balance of payment crisis. The

    foreign exchange reserves fell rapidly to less than three weeks of our

    imports needs. In order to overcome this situation, and boost up

  • exports, the Government initiated steps for the dismantling of

    restrictive policy instruments through reforms m trade, tariff, and

    exchange rate policies.

    After examining the list of imports and exports, the following

    corrections were made: gradual withdrawal of many of the quantitative

    restrictions on imports and exports, shifting of a significant number of

    items outside the purview of import licensing, considerable reduction

    in the level of tariff rates, Exim scrips devaluation of rupee, partial

    and later on full convertibility of rupee etc.

    1.1 Liberalized Foreign Investment Policy

    In June 1991, Indian government initiated programme of macro

    economic stabilization and structural adjustment supported by IMF

    and the World Bank. As part of this programme a new industrial policy was

    announced on July 24, 1991 in the Parliament, which has started the

    process of full-scale liberalization and intensified the process of integration

    of India with the global economy.

    A Foreign Investment Promotion Board (FIPB), authorized to

    provide a single window clearance as been set up. The existing

    companies are allowed to raise foreign equity levels to 51 per cent for

    proposed expansions in priority industries. The use of foreign brand

    names for goods manufactured by domestic industry, which was

    restricted, has also been liberalized. India became a signatory to the

    convention of MIGA for protection of foreign investments.

    Companies with more than 40 per cent of foreign equity are

    now treated on par with fully Indian owned companies. New sectors

    such as mining, banking, telecommunications, high-way construction,

    and management have been thrown Open to private, including foreign

    owned companies. The investment policy and the subsequent policy

  • amendments have liberalized the industrial policy regime in the

    country especially, as it applies to foreign direct investment beyond


    1.2 New Global Economic War

    After the Second War and the IMF par value system came into

    existence, we became part of the new world system. Countries had

    exchange control and various sorts of trade restrictions. It was after the

    Seventies that gradually a scheme of flexible exchange rates came into

    existence among leading developed countries. Gradually the developed

    countries started freeing their exchange rates and also moved towards

    their system off free trade.

    The World Trade Organization, of which we are a member, is

    now introducing all over the world a free trade system. After the

    advent of Economic Reforms from 1991-1992, we have moved over to

    currency, convertibility on current account. The importance of the

    World Bank as financier has diminished considerably. The world is

    now dependant on private capital imports. Even the role of the IMF

    has diminished with most countries adopting currency convertibility.

    Capital flows are moving on a large scale dependent on incentives.

    Most countries have lifted trade barriers and reduced import duties.

    The WTO is introducing system in which domestic subsidies

    have to be removed and uniform and low import duties have now to

    become the standard. There is no place for tariff barriers and non-tariff

    barriers are also now getting lifted. The worlds industries are now

    organized largely in terms of multinational corporations whose

    operations transcend many countries. International demonstration

    effects are working powerfully in determining the living styles in all


  • 1.3 International Financial Institution / Development Banks

    1.3.1 International Monetary Fund (IMF)

    This international monetary institution was established by 44

    nations under his Bretton Woods Agreement of July 1944. The main

    aim was to remove his economic failures of 1920s and 1930s. The

    attempts of many countries to return to old gold system after world war

    failed miserably. The world suppression of the thirties forced every

    country to abandon gold standard. This led to the adoption of purely

    nationalistic policies whereby almost every country imposed trade

    Restrictions, exchange control, and resorted to exchange depreciation in

    order to encourage its exports. This will lead to further spread of

    depression. It was against this background that 44 nations assembled at the

    United Nations monetary and financial conference at Breton woods,

    New Hampshire (USA) from 1st July to 22nd July 1944. Thus the IMF

    was established to promote economic and financial co-operation among

    the members in order to facilitate expansion and balanced growth of

    world trade. It started functioning from 1st march 1947.

    The fundamental purpose and objectives of the fund had been said

    down in Article of the original Articles of agreement and they have

    been upheld in the two amendments that were made in 1969 and 1978 to

    its basic charter. They provide the framework within which the fund

    functions they are as under:

    1. To promote the international monetary cooperation through a permanent

    institution. This can provide the machinery for consultation and collaboration

    in the international monetary problems.

    2. To facilitate the expansion and balanced growth, of international

    trade and to contribute promotion and maintenance of high levels of

  • employment and real income and to the development of the

    productive resources of all members.

    3. To promote exchange stability, to maintain orderly exchange

    arrangements among members, and to avoid competitive

    exchange, depreciation.

    4. To assist in the establishment of a multilateral system of

    payments in respect of current transactions between members and in

    the elimination of foreign exchange restrictions.

    5. To give confidence to members by making the general resources of

    the fund temporarily available to them under adequate safeguards

    thus, providing them with opportunity to correct adjustment in

    their balance of payments without resorting to measures destructive

    to national or international prosperity.

    Thus the role of IMF is mainly Two Fold: It is an organization

    to monitor the proper conduct of International monetary system


    IMF can by way of borrowing it can supplement its own resources. In

    the year 1962 a significant achievement can be made by way of entering into

    general Arrangement to borrow. Under this agreement ten industrialized

    countries agreed to send to IMF their own currencies up to the limit agreed.

    The ten countries known as group of 10 countries include Belgium, Canada,

    France, West Germany, Italy, Japan, Netherlands, Sweden, U. K, and U. S. It

    can borrow under this arrangement only when the funds are needed for a

    participant in the agreement was only four years. It was subsequently received

    periodically and the latest reward was made in 1984 in an expanded form.

    Switzerland also joined the arrangement with the group of so. The total

    commitment by these countries increased to USD 17.65 billion.

  • It provides temporary assistance to members to tide over the balance

    of payments deficits. When the country requires foreign exchange, it tenders

    its own currency t the IMF and gets the required foreign exchange. This is

    lower as Drawings from the ISSF. When the Balance of Payment position

    improves, it should repurchase its currency from the IMF and repay the

    foreign exchange.

    Compensatory financing facility was introduced in 1963 to provide

    reserves to countries that are heavily dependent on the export of primary

    products. It main purpose is to provide the needed foreign exchange to a

    country experiencing balance of payment deficit due to a temporary export

    shortfall caused by circumstances beyond the countries control. Under this

    scheme, funds equivalent to 100% of its quota can be draw by a country in

    addition to th