International Economic Environment

and evolution of International

Financial Institutions.
World War II – 1939 to 1945
• The WW2 began with invasion of
Poland by Germany on
01.09.1939.
• Almost entire Europe was
conquered by Germany in 1941.
• Britain and the C’wealth remained
the only major force continuing
the fight against the Axis.
• In December 1941, Japan, which
had already been at war with
China since 1937, and which aimed
to establish a dominance over East
Asia and South East Asia, attacked
the Pearl Harbor in US.
• The next day the United States
declared war on Japan resulting in
their entry into World War II.
• For six months, the United States
had made use of intense strategic
fire-bombing of 67 Japanese cities.
• The U.S. dropped the nuclear
weapon on the city of Hiroshima
on Monday, August 6, 1945,
followed by the detonation of "Fat
Man" over Nagasaki on August 9.
• Six days after the detonation over
Nagasaki, on August 15, Japan
announced its surrender ending
WW2
The Bretton Woods Conference - 1944
• The BWC was a gathering of 730 delegates from all
44 Allied nations.
• The conference was held from 1-22 July 1944, when
the agreements were signed to set up the
International Bank for Reconstruction and
Development (IBRD), the General Agreement on
Tariffs and Trade (GATT), and the International
Monetary Fund (IMF).
• As a result of the conference, the Bretton Woods
system of exchange rate management was set up,
which remained in place until the early 1970s.
General Agreement on Tariffs and Trade
• The General Agreement on Tariffs and Trade
(GATT) was negotiated during the UN Conference
on Trade and Employment and was the outcome of
the failure of negotiating governments to create
the International Trade Organization (ITO).

• GATT was formed in 1949 and lasted until 1993,

when it was replaced by the World Trade
Organization in 1995.

• The original GATT text (GATT 1947) is still in

effect under the WTO framework, subject to the
modifications of GATT 1994.
 NAME. DATE. NO. OF ACHIEVMENTS.
COUNTRIES

Geneva 1947 23 Signing of GATT, 45000

tariff concessions affecting
$10 billion of trade
Annecy 1949 13 Countries exchanged some
5000 tariff concessions

Torquay 1950 38 Countries exchanged 8700

tariff concessions, cutting
the 1948 tariff levels by
25%
Geneva 1956 26 $2.5 billion in tariff
II reductions and admission
of Japan.
 NAME. DATE. NO. OF ACHIEVMENTS.
COUNTRIES

Dillon 1960 26 Tariff concessions worth

$4.9 billion of world trade

Kennedy 1964 62 Tariff concessions worth

$40 billion of world trade

Tokyo 1973 102 Tariff reductions worth

more than $300 billion
dollars achieved
 NAME. DATE. NO. OF ACHIEVMENTS.
COUNTR
IES

Uruguay 1986 123 The round led to the creation of

WTO, and extended the range of
trade negotiations, leading to
major reductions in tariffs (about
40%) and agricultural subsidies, an
agreement to allow full access for
textiles and clothing from
developing countries, and an
extension of IPR.

Doha 2001 141 Tariffs, non-tariff measures,

agriculture, labor standards,
environment, competition,
investment, transparency, patents,
etc.
World Trade Organization
• The WTO came into existence in 1995 as a
successor to GATT.

• It has more than 150 member countries and other

30 countries are negotiating membership.

• WTO agreements have been ratified in all member

countries’ parliaments.
Functions of WTO
• Facilitate the implementation, administration and
operation of the Trade Agreements.

• Forum for further negotiations.

• Settlement of disputes among member countries.

• Periodic reviews of trading policies of members.

• Provide assistance to developing countries through

technical assistance and training programs.
• Protection of intellectual property rights (IPR).

• Covers the procedural aspects of export-import

such as import restrictions, customs valuation,
pre-shipment inspection, etc.

• Impose discipline on pricing issues.

• Every decision made by WTO is binding on all

member countries.
Basic Principles of WTO
 Trade without discrimination

• Most Favored Nation (MFN) treatment –

Countries cannot normally discriminate between
their trading partners. If a country grants
someone a special favor then it has to do the
same to all member countries.
• National Treatment – Imported and locally
produced goods should be treated equally. At
least after the foreign goods have entered the
market.
 Moving towards free markets
• Lowering trade barriers to encourage
international trade.
• Since GATT’s creation focus is on lowering
tariffs.
• Developing countries are given more time.
Predictability of IM environment.

• Ensure that ad hoc restrictions are not imposed

and tariffs are not increased (Tariff Binding).
• Stability gives clearer view to businesses.
 Promoting fair competition
• WTO is described as “free trade” institution
which is not entirely correct.
• Tariffs and other forms of protection are allowed
in certain circumstances.
• It is a system of rules to promote open, fair and
undistorted competition.
Tariffication of Non Tariff Barriers.
• In Uruguay round members agreed to replace
Quotas, Licensing and other restrictive measures
with Tariffs and further reduce them.
• Developed countries – 36% in six years.
• Developing countries – 24% in Ten years.
Structure and Levels of WTO
 Structure .

• Umbrella Agreement – which established WTO

lays down the basic principles.
• Agreements on broad areas covered – GATT for
goods, GATS for services and TRIPS for
intellectual property rights.
• Dispute settlement.
• Review of governments’ trade policies
 Levels .
• Ministerial Conference – Top most level- Meets
at least once in two years.
• General Council – Day to day handling of
activities. Consists of General Council, Dispute
settlement body, Trade policy review body- All
reporting to Ministerial Conference.
• Council For Trade – Reporting to General
Council – Consisting of Trade in Goods Council,
Trade in Services Council, Trade Related
Intellectual Property Rights ( TRIPS).
• Subsidiary Bodies – Dispute Settlement Bodies.
The World Bank Group.
• IBRD – International Bank for
Reconstruction and Development.
• Established in 1945 and has presently 184
members.
• Objective is reduce poverty in creditworthy poor
countries through loans, advisory and analytical
services.
• Cumulative lending of around 500 billion
Dollars.
• India is one of the founder members and also
one of the highest borrowers.
• IDA – International Development
Association.
• Established in 1960 and has presently 165
members.
• Objective is provide highly concessional (Interest
free) financing to world’s 81 poorest countries.
• Cumulative lending of around 151 billion Dollars.
• India, Bangladesh, Congo and Uganda are major
borrowers.
• The Term “World Bank” collectively
refers to IBRD and IDA only
• IFC – International Finance Corporation.
• Established in 1956 and has presently 176
members.
• Objective is promote economic development
through private sector lending.
• It invests in sustainable private enterprises in
developing countries without govt. guarantees.
• It provides finance in markets deemed too risky
by commercial financers.
• It implements corporate governance,
environmental and social welfare in projects.
• MIGA – Multilateral Investment
Guarantee Agency.
• Established in 1988 and has presently 164
members.
• It promotes FDI in developing countries by
proving guarantees against non commercial risks
like war, civil disturbance, breach of contract,
etc.
• It provides comprehensive investment insurance
worldwide.
• It has committed guarantees worth 394 billion
dollars.
• ICSID – International Centre for
Settlement of Investment Disputes.
• Established in 1966 under the convention of
settlement of investment disputes.
• Its basic objective is to establish institutional
mechanism to settle investment disputes
between governments and foreign investors.
International Monetary Fund (IMF).
• The IMF was conceived in 1944 during the
Bretton Woods conference. Its objectives are:

1. Promote international monetary cooperation

2. Expansion and balanced growth of international
trade.
3. Promote exchange stability.
4. Establishment of multilateral system of
payments.
5. Making its resources available to countries
experiencing BOP difficulties.
• The IMF performs the following 3 functions to
achieve its objectives:
1. Surveillance – Macro economic situation in
countries which includes govt. spending, output,
employment, inflation, BOP, etc.
2.Technical Assistance – Offered free of charge
to member countries. It includes training in
Fiscal policy, Monetary and Exchange rate
policies.
3.Special Drawing Rights (SDR) – It is an
international reserve asset also known as “paper
gold”. SDR of 29 billion dollars were allocated to
needy members in 1981.