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Financial Institutions PDF Print E-mail
Transnational Corporations as International Finance Institutions?
International Monetary System
What is an International Financial Institution - IFI
Bretton Woods - Origins
Bretton Woods - to Avoid another The Great Depression
Capitalism as the Bretton Woods Economic System
Bretton Wood Thinking: Economic Security leading to Peace
Chief  Features of the Bretton Wood's System
Chief Features of the Rebuilding an Economic System after the Great Depression
Monetary Rules for the 20th Century
Bretton Woods II
Calls for a New Bretton Woods
The Global Economic Crisis: Systemic Failures and Multilateral Remedies
Conditionality of International Finance Institutions and Accountability

Transnational Corporations as International Finance Institutions?

Because of tax-implications, some TNCs created a holding company that ‘holds’ the companies as seen from the perspective of a financial product and maintains a purely financial relationship with these. Such a holding company would then be considered an international financial institution. From General Electric’s GE Money (2009) website: For both consumers and commercial clients, GE Money offers smart, flexible products to do it all – whether it's personal funding for your home, car and retail purchases, or financing to operate and grow a business, or affordable financing options to offer your customers. GE Money has the solution that makes sense for you.

Instead of borrowing from banks TNCs can borrow from their own financial institution that will charge interest rates that return to the company enhancing the balance sheet. However, when TNCs borrow from ‘themselves’, itshould be understood that one way of getting cash is by selling ‘debt’ in the form of bonds and this was seen especially with General Motors. In the end, when the going got tough, the bondholder is offered $1 for the $10 invested and ultimately, in this case, the holder of bonds lost 90% of the capital they had invested.


International Monetary Systems

International Monetary Systems are sets of internationally agreed rules, conventions and practices that facilitate international trade, cross border investment and generally the reallocation of capital between nation states. The systems can grow organically as the collective result of numerous individual agreements between international economic actors spread over several decades. Alternatively, they can arise from a single architectural vision as happened at Bretton Woods in 1944.

What is an  International Financial Institutions - IFI ?

The best-known IFIs were established after World War II at Bretton Woods to assist in the reconstruction of Europe and provide mechanisms for international cooperation in managing the global financial system. They include the World Bank, the IMF, the International Finance Corporation, and other members of the World Bank Group.

 

Bretton Woods

Origins of Bretton Woods

The political basis for the Bretton Woods system was in the confluence of several key conditions: the shared experiences of the Great Depression, the concentration of power in a small number of states (further enhanced by the exclusion of a number of important nations because of the war), and the presence of a dominant power willing and able to assume a leadership role in global monetary affairs.

Bretton Woods - in order to avoid another Great Depression

With the experience of the Great Depression still fresh on their minds, the planners at Bretton Woods hoped to avoid a repeat of the debacle of the 1930s and public management of the economy had emerged as a primary activity of governments in the developed states. Employment, stability, and growth were now important subjects of public policy. In turn, the role of government in the national economy had become associated with the assumption by the state of the responsibility for assuring its citizens a degree of economic well-being. All the participating governments at Bretton Woods agreed that the monetary chaos of the interwar period had yielded several valuable lessons.

Capitalism as the Bretton Woods Economic System

A high level of agreement among the powerful on the goals and means of international economic management facilitated the decisions reached by the Bretton Woods Conference. The foundation of that agreement was a shared belief in capitalism. Although the developed countries' governments differed somewhat in the type of capitalism they preferred for their national economies (France, for example, preferred greater planning and state intervention, whereas the United States favored relatively limited state intervention), all relied primarily on market mechanisms and on private ownership.

Bretton Woods Thinking: Economic Security leading to Peace

To ensure economic stability and political peace, states agreed to cooperate to regulate the international economic system. The pillar of the U.S. vision of the postwar world was free trade. Free trade involved lowering tariffs and among other things a balance of trade favourable to the capitalist system.

Thus, the more developed market economies agreed with the U.S. vision of postwar international economic management, which was to be designed to create and maintain an effective international monetary system and foster the reduction of barriers to trade and capital flows.

Chief Features of the Brretton Woods' System

The Chief features of the Bretton Woods system were an obligation for each country to adopt a monetary policy that maintained the exchange rate of its currency within a fixed value—plus or minus one percent—in terms of gold and the ability of the IMF to bridge temporary imbalances of payments. In the face of increasing financial strain, when less than 27 years later the United States (Nixon) unilaterally terminated convertibility of the dollars to gold, the system collapsed in 1971. This action caused considerable financial stress in the world economy and created the unique situation whereby the United States dollar became the "reserve currency" for the states that had signed the agreement.

Chief Features of Rebuilding an Economic System after the Great Depression

Preparing to rebuild the international economic system as WWII was still raging, 730 delegates from all 44 Allied nations gathered at the Mount Washington Hotel in Bretton Woods (New Hampshire, USA) for the United Nations Monetary and Financial Conference. The delegates deliberated upon and signed the Bretton Woods Agreements during the first three weeks of July 1944.

Monetary Rules for the 20th Century

The Bretton Woods system was the first example of a fully negotiated monetary order intended to govern monetary relations among independent nation-states. Setting up a system of rules for commercial and financial relations among the world's major industrial states, institutions, and procedures to regulate the international monetary system, the planners at Bretton Woods established the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD), which today is part of the World Bank Group. These organizations became operational in 1945 after a sufficient number of countries had ratified the agreement.

Commencing operations on 25 June 1946, it approved its first loan on 9 May 1947 ($250M to France for postwar reconstruction, in real terms the largest loan issued by the Bank to date).

Bretton Woods II

The Bretton Wood system is generally considered to have broken down in the 1970s: crucial events being US President Nixon suspending the dollar’s convertibility into gold in 1971; the United states abandonment of Capital Controls in 1974; and Great Britain's ending of capital controls in 1979 which was swiftly copied by most other major economies.

From 2003, economists such as Michael P. Dooley, Peter M. Garber, and David Folkerts-Landau began writing papers[10] describing the spontaneous emergence of a new international system involving an interdependency between states with generally high savings in Asia lending and exporting to western states with generally high spending. The developing world as a whole stopped running current account deficits in 1999 [11] - widely seen as a response to unsympathetic treatment following the 1997 Asian Financial Crisis. The most striking example of east-west interdependency is the relationship between China and America, which Niall Ferguson calls Chimerica. From 2004, Dooley et al began using the term Bretton Woods II to describe this state of affairs, and continue to do so as late as 2009.[12]

However since at least 2007 those authors have also used the term to call for key international financial institutions like the IMF and World Bank to be revamped to meet the demands of the current age,[13] and from 2008 the terms Bretton Woods II and New Bretton Woods have increasingly been used in the later sense.

[11] Michael P. Dooley, David Folkerts-Landau, Peter Garber (September 2003). "An Essay on the Revived Bretton Woods System". National Bureau of Economic Research.

[12] Wolf, Martin (2009). "3". Fixing Global Finance. pp. 39.

[13] Michael P. Dooley, David Folkerts-Landau, Peter Garber (Feb 2009). "Bretton Woods II Still Defines the International Monetary System". National Bureau of Economic Research.

Calls for a New Bretton Woods

Following the Gobal Economic Crisis of 2008 the French President Nicolas Sarkozy, then also the President of the European Union, said on September 26, 2008 "We must rethink the financial system from scratch, as at Bretton Woods."

On October 13, 2008, British Prime Minister Gordon Brown said world leaders must meet to agree to a new economic system “to a new Bretton Woods, building a new international financial architecture for the years ahead” However, Brown's approach is quite different to the original Bretton Woods system, emphasising the continuation of globalization and free trade as opposed to a return to fixed exchange rates[16]

There have been tensions between Brown and Sarkozy, who argues that the "Anglo-Saxon" model of unrestrained markets has failed.[17] However European leaders were united in calling for a "Bretton Woods II" summit to redesign the world's financial architecture. [18]

There are also calls by major nations to create a new reserve currency and more decision-making power within international financial institutions. At the time of the first Bretton Woods meeting, Harry Dexter White, senior US Treasury Department official managed to ensure that the US had special veto powers over any major decision made by the International Monetary Fund (IMF) or the World Bank, meaning effectively that their "conditionalities" in the way of strict institutional reforms are never imposed. Furthermore, the IMF insists that the foreign exchange reserves maintained by other nations are held in the form of dollars, so no matter how much debt the US accumulates, its economy will not collapse.

The devaluation of the dollar has shrunk considerably foreign exchange reserves, especially those of developing countries.

The United Nations is convening a three-day summit of world leaders from 24 to 26 June 2009 at its New York Headquarters to assess the worst global economic downturn since the Great Depression and initiate a needed dialogue on the transformation of the international financial architecture, taking into account the needs and concerns of all Member States [19] Document A/63/838 contains the Recommendations of the Commission of Experts of the President of the General Assembly on Reforms of the International Monetary and Financial System.[20] Also available the draft Report related to the important June summit.

[16[Gordon Brown (October 13, 2008). "PM's Speech on the Global Economy". eGov monitor.

[17] James Kirkup, Bruno Waterfield (2008-10-17). "Gordon Brown's Bretton Woods summit call risks spat with Nicholas Sarkozy". The Daily Telegraph. Retrieved on 2008-11-16.

[18] "European call for 'Bretton Woods II'". Financial Times. 2008-10-16. Retrieved on 2009-03-17.

[19} http://www.un.org/ga/president/63/interactive/uneconference.shtml

The Global Economic Crisis: Systemic Failures and Multilateral Remedies (UNCTAD)- full Report (PDF)


Conditionality of International Finance Institutions and Accountability

Conditionality of the Bretton Woods International Finance Institutions (IFI) in 1999 imposed that the new regime in Niger must seek direct foreign investment and that Niger would not able to qualify for debt reduction unless it agreed to certain reforms, e.g. by adhering to free market economic principles. A programme was established for the privatisation of public enterprises with World Bank assistance. This program included the privatization of 12 enterprises, the liquidation of 3, and the restructuring of 8 others during the 1997-99 period. (12) Privatization of water, irrigation systems, electricity and telephonyfollowed. Debt relief was granted in 2004 (13)

IFIs stated that Niger’s uranium could only be harnessed by external private initiative. For this to happen Niger must offer concession licences for the exploration of around 70% of its uranium to private companies. These permits run for 25 years and can be renovated various times. It is known that the open pit mines have created environmental havoc, contaminated water and affected the health of countless people. Like TNCs and business, IFIs do not ratify any HR instruments.

Who is accountable for any adverse impacts when there is a conditionality related to Structural Adjustment Programmes by IFIs that imposes upon a country to open up to private foreign investment, mainly to TNCs, many from the extractive industry, who start exploiting a countries resources in a way that is not environmental, sustainable and breaches labour, human, social, economic, cultural and indigenous rights?

World Bank and Impact Assessments

Till 1989 the World Bank did not conduct its own environmental assessments and did not require assessments for every project that was proposed. Assessments were required only for a varying, small percentage of projects, with the environmental staff, in the early 1970s, sending check-off forms to the borrowers and, in the latter part of the period, sending more detailed documentation and suggestions for analysis.

During this same period, the Bank’s failure to adequately consider social environmental factors was most evident in the 1976 Indonesian Transmigration program (Transmigration V). This project was funded after the establishment of the Bank’s OESA (environmental) office in 1971. According to the Bank critic Le Prestre**, Transmigration V was the “largest resettlement program ever attempted... designed ultimately to transfer, over a period of twenty years, 65 million of the nation’s 165 million inhabitants from the overcrowded islands of Java, Bali, Madura, and Lombok...”. The objectives were: relief of the economic and social problems of the inner islands, reduction of unemployment on Java, relocation of manpower to the outer islands, the “strengthen[ing of] national unity through ethnic integration, and improve[ment of] the living standard of the poor” (Le Prestre, 175).

Putting aside the political aspects of such a project, it otherwise failed as the new settlements went out of control; local populations fought with the migrators and the tropical forest was devastated (destroying the lives of indigenous peoples). Also, “[s]ome settlements were established in inhospitable sites, and failures were common;” these concerns were noted by the Bank's environmental unit whose recommendations (to Bank management) and analyses were ignored (Le Prestre, 176). Funding continued through 1987, despite the problems noted and despite the Bank’s published stipulations (1982) concerning the treatment of groups to be resettled. (from Wiki http://en.wikipedia.org/wiki/World_Bank_Group)

Phillipe Le Prestre (1989). The World Bank and the Environmental Challenge. Susquehanna University Press. ISBN 0-941664-98-8

International Finance Institutions, the World Trade organisations,IAs and... Eco-Tourism

Eco-tourism is the fastest growing sector of the world’s largest service industry. Tourist services are traded through the World Trade Organisation (WTO) GATS and developing countries lacking the financial means to make offers themselves see these markets taken over by foreign companies who might impose a need for infrastructure before they can develop the services. With regards to Africa, many nations do not have the resources to build the infrastructure necessary for tourist development, e.g. flights, airports, transport (bus and train), electricity, telephony, IT services, hotel-, restaurant-, shopping/residential

construction-services, architectural, financial health/medical, legal, environmental and/or educational services. (all with HRIA, SIA, ESIA, HIA ramifications) They would need to appeal to IFIs or other financing solutions which would all have their rules and conditions.

Furthermore, such a developing country might not have comprehensive ESIAs, EIAs, HIAs nor legislation in place to safeguard its population and these weaknesses could provide companies with loopholes in this regards. It is important for ecotourism (through the GATS, WTO) to be well regulated and that sustainability, health (WHO) environmental (UNEP) IAs, workers (ILO), indigenous economic, social and cultural, gender and religious rights (OHCHR) be respected.

Possible issues: human and labour rights, the environment, health considerations (especially when remote indigenous settlements have not been exposed to people from other areas), gender issues, the disposal of waste, migrant workers, adequate housing, grazing rights, religious freedom (also related to food preparation, people should not be forced e.g. to prepare or eat pork when their culture dictates otherwise), use and ownership of land, use of natural resources, especially water… related to thematic Norms and Standard from UNEP, HRC, ILO, WHO, IMO, Basel Convention, IMO…

Why small issues might have great ramifications: Costa Rica was one of the first nations to engage in Eco-Tourism. Not only was it one of the pioneering models of the debt-for-nature swap (14) but other areas have also greatly benefited from it, e.g. their coffee production. With many more countries starting to produce coffee the Costa Rican brand started loosing its importance, however, Eco-tourism has changed this: with a yearly 22 million cups of coffee consumed by tourists alone, plus direct sales to tourists and through organised Coffee Connaisseurs Tours (15)

Darling Fonseca Marti http://www.wto.org/audio/forum06_num9.mp3 “TNCs and rich countries have the information related to iAs at hand, but not the poorer countries. Not only are IAs important, but we can generalise these studies and make negotiating results more equitable, eg by taking viables into account like poverty reduction.

How do you give an objective assessment that addresses both sides and are country specific? (eg bigger profits for one member might result in job-losses for another)

Availability of data is also important. Studies are costly and cumbersome. Most experts do not come from developing countries. Are these studies accessible to developing countries? Can IFIs be approached for funds or they have their own vested interests or impose their own experts to do IAs based on their methodologies and ideologies?” (16)

(14) http://forums.biodiv.org/forums/ShowPost.aspx?PostID=376

http://pubs.acs.org/cgi-bin/abstract.cgi/esthag/1989/23/i12/f-pdf/f_es00070a600.pdf?sessid=6006l3

(15) Eco Tourism in Costa Rica: http://www.american.edu/TED/costa-rica-tourism.htm

(16) Darling Fonseca Marti - http://www.wto.org/audio/forum06_num9.mp3
 

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