Does International Business need International Financial Institutions, such as the IMF, the World Bank and the EBRD? Give reasons to support your views. INTRODUCTION: International Financial Institutions (IFIs) are the financial institutions that are formed by a number of countries, to help countries from going through global economic crisis or financial turmoil.
These IFIs play a predominant role in ensuring that timely help is provided in the form of financial loans and, provide funding for government or private projects. Most importantly IFI’s such as World Bank and International Monetary Fund(IMF) help in providing better social and living conditions to the developing and undeveloped countries by providing long term funding, reducing global poverty and building economic infrastructure.
These IFIs generally help in maintaining macroeconomic stability in the countries by providing financial advice and funding. The recent globalisation and internationalisation of business has brought in equal number of problems as the benefits that it has reaped. However an important point made by many financial experts that all “global crisis” requires “global solutions” and hence proves the importance of international financial institutions and its role in international business environment.
The first International Financial Institutions were established as Bretton Woods Institutions that include World Bank and IMF, but due to rise in the growth of the international business environment, the need for more IFIs were required and consequently many IFIs were established such as EBRD, ADB etc which are formed based on specific objectives of their own framed agenda, most of these IFIs are multilateral development banks. Importance of International Financial Institutions in International Business
The International Monetary Fund (IMF) is an in international financial institution that has been established in the year 1944, its primary function is to manage the global financial system by stabilising the international exchange rates and to assist in revamping the international payment system. The IMF assists its member countries by providing loans in order to sort out the problems of balance of payments and to sustain economic growth.
International business can only prosper when all countries especially the developing and under developed countries have access to funds which help them to carry on trade and commerce, this is where IMF helps to solve their economic difficulties, because most developed countries and under developed countries have a very little access to global capital markets ( Morrison, 2009). IMF only sanctions loans when the concerned country is following in the right direction for economic reforms.
Loans from IMF provides the signal for potential investors from other countries to make an investment, thus IMF plays a larger role in facilitating international business. It also offers leveraged loans especially to the poorest countries, so that these countries can become economically competent to carry any form of trade in the global markets. IMF’s goal is to advocate international monetary collaboration, to contribute for international trade and help countries to use their resources efficiently so as to prosper and become economically stable.
The IMF’s funding comes from its financial exchange reserves from its financially strong member countries. The IMF places a lot of importance on a country’s social conditions before sanctioning loans or implementing any developmental programs, it emphasises lot on combating corruption as well as promoting a structured system for fair and transparent economy. This will ensure better international trade relations are established between countries. IMF provides for massive subsidised loans for the poorest developing countries.
It recognises the importance of development strategies and encourages its members to systematically evaluate the macroeconomic reforms and its impact on the social conditions and poverty levels. So at the basic level the IMF is trying to bring in development so that these developing or under developed countries can become economically more vibrant, which will attract international investment. The IMF plays a vital role in debt relief, as it has almost written off 55 billion US dollars from the poorest countries (Ghofrani, 2009)
Recently when Greece was severely hit by economic crisis, the European Union and the IMF has agreed to provide a bailout package to that country to manage the worsening debt situations. The IMF has approved a 30 billion Euro loan for Greece, so that it can handle the debt crisis, retrospect its growth prospects and modernise its economic structure. The IMF not only provides financial support but also helps in designing suitable strategies so that the money granted can be put to most efficient use (The Independent, 2010)
IMF played an important role in the Asian crisis, where it helped to establish a strategy for those countries which were under severe financial crisis. The IMF helped to liberalise the financial sector, by lowering restrictions on the capital. It helped in maintaining high domestic interest rates and linking the national currencies to the US dollar, so that foreign investors cannot worry about the currency risk (Alain, 2009)
Finally the IMF, plays a vital role in the matters of international financial dealings, it has an authority for enacting rules on exchange rates and controls, intergovernmental loans and such other financial transactions (Rugman and Collinson, 2009). The globalisation phenomenon has seen many risks and opportunities for international business. At the national level the countries should have a strong and stable social and financial system and at the global level the countries should establish strong international financial regulatory framework so as to face any challenges.
The role of World Bank in international business is a very important one; the World Bank ensures that the governments have open and transparent governance, efficient judiciary system and strong financial system. These actions help in reducing corruption, which is the most challenging problem in this century, if corruption is controlled, it will ensure good foreign and domestic investment and thus helps in increasing International Business (World Bank, 2010) World Bank helps in establishing structural and social reforms in developing and under developed countries.
Global poverty reduction is also one of the main agenda of the World Bank, because only when nations prosper, International Business can have a very positive role to play. The World Bank helps poor countries, by sanctioning long term loans, provide consultancy services on matters related to micro economic and macroeconomic policies, financial plans, provides assistance in frame working the country’s financial institutions and helps in regulating social and economic policies.
World Bank has contributed immensely to the growing needs of developing countries by assisting them in reducing their outstanding loans and bringing in foreign investment, these approaches by the World Bank has generally become apparent to tackle global financial crisis. The emphasis was to provide good guidelines and taking considerable measures at the same time providing greater coherence with the objectives pursued by global organisations such as UN and WTO. The World Bank has also pushed in over five billion US dollars to maintain its operating capital to help developing economies deal with poverty reduction.
Countries such as China, India and Brazil have been given a larger role to represent the World Bank. The World Bank has been constantly creating reforms that allow for more openness and divulgence of information and for improvements in managing risks and monitoring progress (The Economist, 2010) According to an article by Chan (2010) in The New York Times, the World Bank has made close to 105 billion US dollars in financial commitments since July 2008, corresponding to the severe global financial crisis.
This additional capital raised by the World Bank will help in continuing with its programs before the crisis further deepens. The World Bank is helping the poor, especially in the African continent by promoting global composite action on climatic changes, improving trade deficits, combating corruption, developing infrastructure and bringing in foreign investment. The World Bank has long been emphasising the importance of developing countries as most of the economic growth is mainly coming from these countries such as India and China.
The bank is not just doing the financing for charity or social development but this will help in building better international relations which will lead to a greater amount of international business. When the prospects of International Business was looking bleak, because of the global financial crisis, the G 20 group has assigned more responsibilities to the International Financial Institutes such as IMF and the World Bank when it comes in handling issues of developing countries, especially low income countries.
The World Bank and the IMF has increased the lending capacity to these countries by a very substantial amount. These IFIs, especially the World Bank and the IMF have increased its resources at disposal for these Low Income Countries by redesigning its policies so as to attend to the economical problems which arose because of the financial crisis.
The IMF was primarily intended to take control of the international monetary system, which actually helps the countries to overcome problems in balance of payments, the World Bank on the other hand focuses on development programs across the world. Both these organisations have consistently provided increased aid and development to the needy countries and bringing these countries into the global markets, like for example it helped Mexico in 1980 when it was in serious economic crisis, Mexico in 1995 and South East Asia in the late 1990s.
The World Bank on the other hand has provided financial support to social groups which are mostly very poor and are worst affected by the economic problems in under developed and developing countries. (BBC News, 2003) European Bank for Reconstruction and Development is established in 1991, its headquarters are located in London, and the primary purpose of its establishment is to help the former communist countries in becoming more open and economically more stable.
It helps in financing for banks, industries, businesses’ to grow further. It helps close to 30 countries in Central Europe and Central Asia, thus by bridging international business relations. It also assists the governments, in the process of privatisation and restructuring of government owned enterprises. The EBRD supports countries which have strong democratic values and encourages environmental protection and helps in the development of the economies of those countries which have good business prospects and privatisation activities.
In the present euro zone deficit, the EBRD has approved to help countries such as Kazakhstan, Montenegro by issuing them euro bonds, which will help them in consolidating their public sector and minimise their financial troubles (Silk Road Intelligencer, 2010) Regional development banks such as Asian Development Bank, African Development Bank, Inter-American Development Bank all cater to the needs of their own specific regions. These regional groupings of countries have established these international financial institutions keeping in mind the common interests and benefits that it can reap by working collectively.
In case of the Asian Development Bank( ADB) which was established in 1966, its goal is to advocate economic development in the Asian Continent by disbursing money by way of long term loans and providing technical assistance. The ADB is a multilateral financial institution which promotes international business among 67 countries, mostly from the Asian continent. The primary objective of the ADB is to eradicate poverty across Asia.
In Asia most of the countries are in the stage of development and economic liberalisation, therefore the ADB has been formed as a result of an agreement between its member countries so as to develop the whole region by increasing the quality of life to its citizens. The ADB was formed so as to keep the “Asian identity” as a primary driving force to inculcate growth and cooperation between its member countries. The ADB has also helped in fostering business ties among its member countries by way of bilateral agreements on the side lines of the ADB vision. The ADB raises its capital by bond issues in the global capital markets, it lso utilises the contribution from its member countries and the income generated from its lending activities. Funds raised by these activities accounts for almost three- fourths of its operating capital. The ADB has been instrumental in providing loans on project basis such as a major infrastructural project, agricultural development and other major business endeavours to its member countries. However apart from the assistance to the state owned enterprises or public projects, the ADB also provides direct help to private enterprises to develop the private sector as well.
All these cooperation and assistance among the member countries, working on the lines of the Asian Development Bank directly promotes international business. In principle, the objectives of all International Financial Institutions(IFIs)is to promote economic growth, poverty eradication, environment protection, international business promotion etc, these objectives are being achieved by these institutions by working with governments of concerned countries and its agencies.
The International Financial Institutions pursued these, with loans for public and private sector enterprises, technical assistance and lending based on the policies set up these IFIs. In these ever changing political and economic environments, the importance of IFIs in bringing in much needed financial help during economic crisis cannot be ruled out. This has been seen over the years, when IFIs such as World Bank, IMF, and EBRD etc have helped many countries to rework their economic policies and providing them with long term loans which have made them become economically more stable( Leslie and Philip, 2009).
The IFIs have also strengthened their role during financial turmoil, for example in countries such as Greece, Kazakhstan etc these institutions have contributed substantial relief packages by responding appropriately and on time. The International Financial Institutions are promoting international business by helping the governments of various countries to create market oriented growth conditions and by becoming principle investing institutions working alongside with private sector and thereby increasing private capital inflows.
Institutions such as World Bank, IMF etc have been consistently assisting macroeconomic stability and establishing the required physical, legal, social, technical and regulatory framework. These IFIs have realised the potential of the private sector in the economic growth and international trade and started to invest in projects which require international financing.
Like for example EBRD and the International Finance Corporation (IFC) are both investing heavily in pension fund management companies so that they can be professionally managed and the services can be provided internationally, likewise similar investments have been seen in the fields of insurance and mutual funds (Buiter and Lankes, 2002) IFI’s believe that a good market economy requires a well structured financial sector; hence the IFI’s tend to provide funding for development of local financial institutions with highly regulated frameworks so that at base level the financial sector is strong to attract more foreign investors.
International financial institutions such as EBRD and IMF help international banks in getting the political support from governments because of the good relationships they maintain with the governments and government agencies across the world, also EBRD and IMF provide short and medium term capital to local banks and also help in institutional development. The International Finance Corporation (IFC) is also a prominent International Financial Institution which aims to boost private sector investment in developing economies which helps in reducing poverty.
It uses private sector investment as a catalyst to make developed countries to invest in developing countries, which otherwise wouldn’t be possible. This way the IFC indirectly helps to build international ties among various countries. The IFC also helps in building physical, financial and technological infrastructure which helps in the market growth (IFC, 2010).
The International Financial Institutions promote various measures; to help the global markets function more competently, this is done by following increased administration and better supervision at the national level. It has become more transparent and open in terms of information disclosures such as data pertaining to loans and other financial sectors. The IMF and World Bank have strengthened the global financial systems by practicing methodical standards and by promoting compelling financial infrastructure. CONCLUSION: International Financial Institutes such as IMF and World Bank played a vital role in development of economies, especially in the developing countries where it provided not just loans, but also assisted them in designing economic policies, setting up good financial regulatory frameworks so that these countries can be in a position to rise up in the global markets and develop international business relations.
However these institutions were also under severe criticisms at some point or the other, the influence of Western interests and involvement of developed countries especially in all regulatory matters have caused many differences between developing and developed countries undermining the importance of these organisations. However compared to its set backs and backlashes, the International Financial Institutions have contributed a lot to all countries, including developed and developing countries by providing much needed finances and appropriate assistance when needed.
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Hamilton, Leslie & Webster, Philip (2009) The International Business Environment, Oxford University Press, USA Morrison, Janet (2009) International Business: Challenges in a Changing World, Palgrave Macmillan, China Rugman, Alan M & Collinson, Simon (2009) International Business, 5th edition, Pearson Education Limited, UK Verbeke, Alain (2009) International Business Strategy, Cambridge University Press, USA Wall, Stuart & Rees, Bronwen (2004) International Business, 2nd edition, Pearson Education Limited, UK
WEB REFERENCES BBC NEWS (2010) Explained: the IMF and World Bank http://news. bbc. co. uk/1/hi/business/95218. stm(accessed on 17/0510) Euro Dad (2009) http://www. eurodad. org/whatsnew/reports. aspx? id=4083(accessed on 17/0510) Ghofrani, A (2009) The role of international financial institutions in development and resolving crises http://www. presstv. ir/detail. aspx? id=92537§ionid=3510304(accessed on 17/0510)