International Business in Changing World and IMF - Research Paper Example

IMF (International Monetary Fund) from 2007 to present Using international business perspective [Name] [School Affiliation] International business in changing world and IMF: The world is experiencing is huge shift in the form of breakdown of national economic barriers to form an integrated system of world economy where one national is dependent on another. Globalization has huge implications for companies as it can reduce the cost structure of the companies and bring in improvement in terms of quality of products. Globalization has helped in improving international trade and investment volume as more and more companies have entered in to global market and take the shape of multinational organizations. Earlier US companies used dominate in the field of international exports and FDI. But, with changing world scenario, various European countries, Japan as well as emerging economies like India, China, Korea, etc. have reduced the dominance of USA as they are following the same footprint (Hill, 2010). For example, share of FDI of the companies of developing world have increased from less than 1 percent in 1980 to as high as 15 percent in 2008, while the share of USA based companies have declined from near 40 percent in 1980 to 18 percent in 2008(approximately) (Hill, 2010). The political scenario has also changed in this changed economic situation. The political dominance of US is no under great threat in this increasing market economy. Many European countries that were Communist earlier and Some Asian countries have undertaken democratic politics and stressed on building free market economies. Hence, international businesses are getting more and more opportunities to enter these economies that have in turn strengthen these economies. (Hill, 2010) In this globalized world, importance of global institutions has increased significantly in maintaining order in various economical and political fields. IMF is one of such institutes which hold an important position in this changing economic and political environment. In fact, it is helping this process of change by its policies. IMF is responsible for maintaining order and stability in the international monetary system. The performance of international businesses to a large extent depends on the operation of international monetary system. If this system operates properly, then, the risks associated with international business operation reduce significantly. This paper will place its focus on some important issues relating to IMF policies and its scandals since 2007 as IMF activities is closely related to the performance of international businesses. (Hill, 2010) Issues and Problems with IMF since 2007: Since 2007, a number of issues relating to IMF activities is worth mentioning as this period corresponds to the recent global financial crisis that has essentially affected internal business. Some of these issues will be looked at in this section. Failure of IMF in the early detection of US sub-prime crisis in 2007: IMF is responsible for maintaining stability in the world monetary system and any kind of crisis that my take place in future so that international businesses become aware of that event and take required steps. But IMF is being blamed for its failure to predict the materialization and severity of the financial crisis that was creates in US (Bennet, 2008). The crisis first emerged in the sub-prime market of US. There was a bubble in the market in 2006 and 2007. The movements in this market were some early sign of the upcoming event of global financial crisis. But, the IMF failed to capture those signals in sub-prime market. It is now being said that lack of technical and analytical capacity of the IMF along with US’s unwillingness to implement surveillance of financial sector by IMF were responsible for IMF’s inability to detect the early signs of the crisis and predict its emergence and severity. (Bennet, 2008; Bossone, 2008b) Changing macroeconomic Policy under global financial crisis: Although IMF failed to predict the recent global financial crisis, but it has tried to rectify the situation by undertaking some monetary and fiscal policies. But, the major issues with these policies were that IMF has failed to come out of its tendency of making more than optimistic projection. In order to deal with the high level inflation of 2008, IMF adopted excessively restraining monetary and fiscal policies. IMF even undertook rigid monetary policies for countries with slowed rate of growth and adverse external shock. Apart from taking overly tight policies for the monetary systems of these countries, IMF should have predicted the inflation to be a temporary phenomenon. (Weisbrot, 2009) During recession, the IMF suggested pro-cyclical macroeconomic strategies for many developing nations in order to restore confidence by controlling their capital movement. But this kind of strategies is not justifiable when the IMF has the capacity to offer adequate fund to these economies in their effort to restore the financial situation. Actually, the IMF uses a double standard while suggesting economic policies and providing financial assistance. Since 2007, the IMF has encouraged developed countries to undertake expansionary fiscal measures and granted them significant loan, whereas it has suggested restrictive policies for developing countries and provided inadequate assistance to developing nations (Rosnick, 2009). This could be the result of the IMF’s concern regarding borrowing nation’s capability of repaying loans. The IMF can be criticized for being highly risk-averse. Since 2007, the greatest amount of loan in terms of total volume has been extended to Mexico and Greece both of which are developed nation. If one looks at these loans as a proportion of GDP of the respective countries, then Liberia and Iceland are the highest gainer both of which do not belong to the category of underdeveloped countries (Evans, 2011). IMF’s response to declining US dollar: The recent financial crisis has seen a significant drop in the value of US dollar which hurt the companies that conduct their international businesses using this currency. US dollar has lost its value significantly as a world currency. There has been a question over whether the world is heading towards a gold standard. IMF is responsible for maintain stability in world currency market. Seeing the turmoil in the global currency market, the IMF has undertaken a few steps. IMF has increased its gold reserves. At the end of March, 2011, the amount of gold holding of IMF stood at the level of 2,814.1 metric tons (IMF, 2011). However, the fund has imposed some strict restriction on its use. IMF has approved acceptance of gold in the form of payment by its member states, but it has strictly restrained itself from buying gold and involving in other types of transaction through gold. The IMF actually is not promoting the movement towards a gold standard, as the performance of this standard was extremely awful in past. (Owen, 2009; IMF, 2011). In its recent reports, IMF has provided an indication of replacing US dollar as the reserve currency of the world. It has also proposed to create SDR-denominated bonds for reducing dependence of Central banks of other countries on US Treasuries. According to IMF, SDRs would also help in preventing oil price hike that is a common phenomenon at the events of US dollar depreciation. However, it would not be quite easy for SDRs to replace dollar as dollar has been in power since a few decades and it is widely accepted as the most preferred currency of international transaction till now. (Toronto, 2009) Scandal in IMF: Recently, IMF has gone through a very critical phase and bad reputation on account of the scandal of its managing director, Dominique Strauss-Kahn. He was arrested in May, 2011 on account of attempted rape and sexual assault. This scandal has its importance in placing European control over IMF at high Risk. IMF has long been criticized for the dominance of European in its essential position. The arrest of the managing direction has once again out the European control over IMF on risk as many of its influential members states like USA, Canada, etc. are demanding a power shift. Many of the member states are now demanding a candidate for the post of emerging economies. If this happen, it would surely be a remarkable shift of power within the IMF which might have serious policy implications. (Dorsey, 2011) References: 1. Bennet, D. (2008. December 23). Blinsided by Crisis, Economists Rethink Profession along with Theories. International Herald Tribune. 2. Bossone, B. (2008b). IMF Corporate Governance and Surveillance: An Evaluation, BP/08/10. Washington, DC: Independent Evaluation Office of the IMF. 3. Evans, L. (2011, May 24). IMF loans: which country owes the most? Guadian.co.uk. Avaiable at http://www.guardian.co.uk/news/datablog/2011/may/24/imf-loans-dominique-strauss-kahn [accessed on 17th june, 2011] 4. Weisbrot, M. (2009). Empowering the IMF: Should Reform be a Requirement for Increasing the Fund’s Resources?” Center for Economic and Policy Research. Available at http://www.cepr.net/documents/publications/imf-reform-2009-04.pdf [ accessed on 17th 5. Rosnick, D.( 2009). Troubled Assets: The IMF’s Latest Projections for Economic Growth in the Western Hemisphere. Center for Economic and Policy Research, April. http://www.cepr.net/documents/publications/imf-projections-2009-04.pdf. 6. International Monetary Fund. (2011). Gold in the IMF. Available at: http://www.imf.org/external/np/exr/facts/gold.htm [accessed on 18th June, 2011]. 7. Dorsey, J. M. (2011). Strauss-Kahn scandal puts European control of the IMF at risk. Available at: http://english.alarabiya.net/articles/2011/05/17/149427.html [accessed on 18th June, 2011]. 8. Hill, C. W. L. (2010) 8th ed. International Business. McGraw-Hill/Irwin. 9. Owen, F. (2009). Replacingthe Dollar with Special Drawing Rights-Will It Work This Time? Available at http://findarticles.com/p/articles/mi_qa5294/is_20090301/ai_n32086230/pg_4/?tag=content;col1 [accessed on 17th June, 2011]. 10. Toronto,J. (2009). What Will be the Next World Reserve Currency? Available at http://www.marketoracle.co.uk/Article9780.html [accessed on 17th June, 2011] Read More