Economic and financial flows in a globalised world (The balance of…
Economic and financial flows in a globalised world
International financial institutions
Play an important enabling function for the global economic system
Established by countries to ensure mechanisms for international financial cooperation
Providing financial support (grants and loans) or economic and social development activities in developing countries.
Two key institutions
International Monetary Fund (IMF)
Conceived at a United Nations (UN) conference in Bretton Woods, New Hampshire, United States of America, in July 1944.
Founding countries sought to build a framework for economic cooperation to avoid a repetition of the competitive devaluations that had contributed to the Great Depression of the 1930s.
Competitive devaluations are made by countries that reduce the value of their exchange rates to make their exports cheaper in order to gain a competitive advantage over other countries.
Primary purpose is to ensure the stability of the international monetary system
The system of exchange rates and international payments that enables countries (and their citizens) to transact with each other.
The mandate was updated in 2012 to include macroeconomic and financial sector issues that have an effect of global stability
The 'lender of last resort'
Was established in 1944
Has HQ in Washington DC and more than 10,000 employees in more than 120 offices worldwide
Has 189 member countries, like a cooperative (shareholders)
Members are shareholders and are represented by a Board of Governors, who are the ultimate policymakers at the World Bank
The World Bank Group has set two goals for the world to achieve by 2030
End extreme poverty by decreasing the percentage of people living on less than US$1.90 a day to no more than 3%
Promote shared prosperity by fostering the income growth of the bottom 40% for every country
The balance of payments (BOP)
An economic indicator that tracks all transactions between, individuals, firms or government bodies of a given country and the rest of the world during a certain period of time (1/4 of a year or 1 year)
There are 3 main parts
The current account
Registers payments for imports (M) and exports (X) for trade in goods and/or services, plus incomes (Y) and transfers of money to and from abroad made by individuals (remittances).
The capital account
Records all transfers to and from abroad
EG - this may involve a German firm building a factory in Brazil. This is counted as a credit on the Brazilian capital account.
The financial account
Records financial inflows and also covers claims on or liabilities to non-residents, specifically with regard to financial assets
Includes direct investments, portfolio investments and reserve assets
Reserve assets - are currencies, commodities or other financial capital held by monetary authorities such as central banks
The whole account must balance (just as it would a financial statement)
This is a technical requirement, so surpluses or deficits can be
recorded on any specific part of the account
Can help us understand the comparative position of a country in relation to others
A country with a large current account deficit is a country that is borrowing money to purchase goods and services produced outside the country
The existence of these relationships can lead to global imbalances between countries
Global imbalances are reflected in large and persistent deficits or surpluses in the current, capital and/or financial account balance
Current account deficits are not harmful per se or undesirable as they allow for the inter temporal smoothing of saving and investment needs across the global economy
If large imbalance persist for an extended period of time they could pose systemic problems, including the risk of disruptive adjustments
This may pose threats to the stability of the global economy
Reducing excessive global imbalances and maintaining current and capital account balance at sustainable levels has long been at the heart of the global economic policy agenda
The adjustment of global imbalances can be left to market forces and/or corrected by government actions
EG - by influencing the exchange rate or by stimulating export industries
What should countries do to have current account surpluses?
Countries that have a current account surplus overall export more than they import in goods and/or services traded
Net exports (X-M) is -ve
They have incomes and transfers of money from abroad that exceed the amount of money paid or transferred to foreign markets
Surplus countries include
China & other emerging Asian markets
The oil producing countries
Why could having more ‘surplus countries’ be negative for the overall economy?
May oblige the deficit countries to borrow and/or sell assets and this would eventually lead them to reduce their spending
Surplus countries may fail to spend their collective
incomes on either consumption or investment goods 'oversavers'
This may freeze or reduce their AD = reduced GDP = recession
The inflation rate should ideally be 2% and global imbalances should be limited in time and in their amount, otherwise they could seriously damage the economy of some countries (typically the deficit countries) and/or may decrease the circulation of money (when surplus countries don’t reinvest their surpluses) = negative effect on the economy
Foreign direct investments (FDI)
a form of investment made by companies (for example, multinationals) that establish plants and offices in other countries in order to produce or to sell their products and services in countries around the world
The concept of multinationals
companies that have operations in at least two
They are very important actors s in the global economy, but their
role could be quite controversial
The 500 largest multinationals account for about 25% of world production and 50% of the world trade
Aimed at securing operational control and they should be distinguished from portfolio investments (PIs)
PIs are whereby financial assets are bought and sold
Individuals or even companies make financial investments in other countries eg buying shares rather than setting up their own manufacturing plant, a distribution channel or stores.
They represent an important element of the global trade
environment and they are particularly critical for some countries
a serious threat to the basic structure of the fundamental values and norms of a system, which under time pressure and highly uncertain circumstances necessitates making vital decisions
A threat to the foundation on which a system is built
A sense of urgency that something needs to be done as quickly as possible
Transfer pricing occurs when the parties establish a price for the transaction
happens when two companies that are part of the same multinational group trade with each other