Role of the World Trade Organization and International Monetary Fund in the Global Business - Case Study Example

Role of the WTO and the IMF in the Global Business Number Submitted Executive Summary The report discusses the roles of World Trade Organization and International Monetary Fund. It also point out the impacts, both positive and negative on the global economy. Introduction: introduces the two institutions, WTO and IMF. There date they were formed, and the reason for formation of the two institutions. Discussion: The discussion is centred in role of the two institutions, and their impacts on global economy both positive and negative impacts. Recommendation: the report recommends steps that should be taken by states and more by developing countries to reduce negative impacts by WTO/IMF on their economy and society. Conclusion: the report concludes by pointing out the benefits and detriments brought by WTO and IMF states globally. Introduction International Monitory Fund (IMF) and World Trade Organization (WTO) are some important institutions formed immediately after World War II. They have played a significant role in establishing global trade. WTO was formed in January 1995 and its predecessor being General Agreement on Tariffs and Trade (GATT). GATT was formed after Second World War. The main idea behind the formation of WTO was supervision and Liberalization of international trade. On the other hand, International Monetary Fund (IMF) was formed with the aim of promoting international economic cooperation. IMF was formed in 1944 at the conference held in the United States; another main role of formation was to provide loans to the members. The loan provision to members of IMF was meant to boost trade between countries or achieve balance of payments. While WTO has increased access to international markets, IMF has assisted some countries achieve positive balances of payment. However, many have criticized the two institutions. For example, IMF has been criticized for formulation policies that make it difficult for some countries to access IMF loan. This report explains the role of WTO and IMF. It also explains the impacts of the two institutions have had on global businesses. Discussion The Role of IMF According to Morrison (2011), IMF and the World Bank are two institutions formed to provide funds. The two institutions are also called Bretton Woods Institutions because they were formed in Bretton Woods. The main aims of formation of IMF are to foster international monetary cooperation and expand international trade. The two objectives that led to the formation of IMF go on to remove the inequities that exist between members’ balance of payment. The goals that led to the formation of the institution are to be met by promoting exchange stability, maintenance of systematic exchange arrangements and circumvention of competitive exchange depreciation. In addition, IMF also promotes the economy of the member states by providing funds for disposal and the funds assist states facing financial crisis. Internal Monetary Fund also provides assistance temporarily to countries (members) that tries to keep their currencies stable in times of financial downfalls. In addition, the institution assists states that have structural trade problems. This only happens when the states having structural trade problem seek help from the institution. However, the author noted that the institution could not save the country facing huge and continuous (Ramakrishnan & Zalduendo, 2006). Here are main objectives of IMF. The institution promotes international monetary cooperation; this is achieved consultation by the institution. To smoothen the expansion and balanced growth of international trade, and contributes to international trade, as such, it promotes and maintain the level of employment. The institution promotes exchange stability and it oversees orderly exchange arrangement between member states. The institution also helps in establishment of the multilateral system of payment, as such, IMF assist in the removal of foreign exchange depreciation. The institution provides temporary funds to member states that meet specific terms. In this sense, the member states can make some adjustments relating to their balance of payments (Hajdini, 2010). Financial assistance by IMF The mentioned above are some objectives of IMF, the member states, however, obtain funds from the institution based on the amount they had contributed earlier. The members are expected to contribute a specific amount of quota to IMF. A country like the U.S. obtains a large amount of loan from IMF because of huge contributions they make to the institution. States that go for funds in the institutions do so when they are unable to make international debts. The institution goes beyond some roles known to perform, for example, they assist countries in debts by training some the government officials. As such, the official from the governments are provided with training that assist in macroeconomic management, reforming tax systems and improvement of central banking and financial system. IMF has done a lot to many of its members; the institution is beneficial to some countries. However, based on research, there are many negative impacts of IMF in the global economy (Hajdini, 2010). Negative Impacts of IMF Creation of Modern Colonialism IMF among other global institution such as WTO has led to the increase in global inequality in terms of economy. Environmental degradation is also blamed on those international institutions. For example, studies by Global Exchange reveal that IMF together with WTO forces some countries to pay back loan by trimming their spending on health and education. IMF and WTO policies also require their member states that pay back loan to eliminate subsidies on foodstuffs and transport system. As such, the country is left poorer because the population cannot afford to obtain basic needs such as food. The state cannot provide better education and health to the population, as such; the country is left with sick population that cannot perform to improve the economy. The study also reveals that IMF and WTO make currencies of some of the borrowers valueless. As such, the state finds their exports cheaper and imports expensive. They are forced to privatize some of the state’s assets or freeze wages with effort of sustaining the state’s economy. Some of the mentioned difficulties brought IMF and WTO to the borrowers have increased poverty and hindered the development. They have also made it difficult for some countries to have international investors establish industries. This goes to harm the population since chances of industries developing is close to zero. Wealthy Countries Benefit As mentioned earlier on the report, each country contributes a specific amount of quota to the IMF. The amount contributed determines the amount of loans a state can borrow. Advanced economies access more funds than less developed countries. As such, it is clear that, IMF serve advanced economies much better than developing countries. Additionally, a state that contributes more funds to the institution has more power to make changes on the policies governing the institutions. This clearly indicates that less developed countries cannot make any changes in the policies. For example, developed countries like the U.S. Japan, Germany, the UK and France are the largest shareholders of the institution. Those states have more power to make decisions because, decisions made is determined by the amount of shares held by the shareholder in the institution. Role of WTO World trade organization has done a lot since its inception in 1995. The institution has expanded its regulation of trade to almost 140 countries. As such, its regulation and policies concerning trade has affected many lives. Some countries have found the institution beneficial to their economy. However, others have found it difficult to cope with policies of the institution. Because of this, the institution has been criticized in areas of trade policy. WTO was created in 1995 as a predecessor of GATT, which was formed after the Second World War. Unlike the GATT, WTO was created on stronger legal footing. The organizational structure evidences this and the ministerial conference held after every two years. WTO is obligated to resolve trade disputes, unlike the GATT, which had no legal grounds of settling trade dispute. The WTO can solve issues of trade between countries, for example, a state that suffers from trade issues brought forward by another country can seek help from WTO. As such, the institution is the only body globally that deals with rules governing trade among states. Here are the roles of WTO; Oversee the administration agreements made at the Uruguay Round Reduction of non-tariff measures and implementation of tariff cuts is also under WTO supervision. It also examines foreign trade policies of the member states and sees that the policies are adhered to in accordance with WTO policies. Settle trade disputes between countries Advice member states on issues regarding the development of the world economy The institution also provides a platform for member states to negotiate with each other on issues relating to trade. Right from the start of GATT/WTO, the members of the institutions have to provide equal treatment to the other members and to avoid discriminating between locally made products and imported. It also provides a chance in which a state may negotiate over the access to the international market. The institution also interprets the access of the international market as a significant relationship between domestic and imported products. The relationship between the two states involves the reduction of tariffs that govern the importation of products. As such, it alters the relationship between the products brought to the country and exported products (Verger, 2009). Many countries have had huge benefits from WTO, some have, however, criticized the institution for the creation of “Trade” that only benefits advanced economies. India is among some countries that have benefited immensely from WTO. Proponents argue that India have had huge benefits from the institutions. Here are the advantages of WTO to state of India. Benefits of WTO The institution has encouraged free trade; India is one among 149 members of WTO. Because of this, the institution has increased foreign trade between India and the member states. It is also because the institution assists in the removal of trade tariffs and non-tariffs barriers that hinders trade between different states. The results are access to the vast market by Indian government. The institution also encourages states to remove subsidies on some products; this is mostly done in advanced economies. The removal of subsidies increases the demand of products from developing countries especially agricultural products. A state like India that produces plenty of agricultural products benefits from WTO policies that relates to imports of agricultural products. The institution also recommends the removal of duties relating to the importation of agricultural products. The institution has also encouraged foreign direct investments because the member states are required to remove barriers that discourage foreign investors. This has seen many multinational companies bringing their businesses to India and other member states. Increase in the level of FDI and multinational companies increase the economy of the country. It also increases the level of employment. World trade organization has increase access of advanced technology in many countries. The fact is that the institution increases foreign investments and foreign trade. International companies invest in other countries and so they introduce new technology in member states. The institution has also encouraged multilateral trade, which is a trade between many countries. Previously before the inception of WTO, trades were mostly conducted between two countries, trade was bilateral. However, after the agreement by the member states, the institution has encouraged trade between many countries (Jain, Khanna & Vir n.d). Negative Impacts of WTO on the Global Economy Some countries remain unsafe Despite the view by some advocates of WTO that it encourages free trade and leads to global business understanding, the institutions seem to benefits a few individual states. The fact is that the institution is mainly dominated by advanced economies because they themselves make policies that favor them (Fernando, 2011). The Institution Abuses Labor and Human Rights WTO encourages some companies to operate in some countries without taking into account labor rights. The institution also discourages governments from taking legal action against companies that produce products and services in a specific manner that hinders the reputation of the state. It is noted above that WTO promotes free trade and access of free market by multinational companies. It is this free access that leads to abuse of human/labour rights by multinational companies (Cherunilam, 1988). For example, Nike is one among many multinational companies that has been criticized for employing child labour. Nike operates in Pakistan where most laborers are children. The products made by the company are exported to countries like the United States. Despite the existence of labour laws in the country, the state has done less to combat child labour. Advanced economies like the U.S. however, prosecute any person found to practice child labour. Nonetheless, WTO/GATT does not allow member states like the U.S. to prosecute multinational companies exporting products made by children (TED Case Studies). Destruction of the Environment The institution is used by some firms to destroy environments in some countries that have been seen as barriers to trade. Trade and environment are closely related, that is, easy access to markets that have less stringent laws on environmental destruction leads to environmental degradation. WTO has, however, done little to address cases of environmental destruction by companies operating overseas (Fernando, 2011). The institution also encourages inequality The free trade according to World Trade Organization has not been working at all in many countries. The fact is that close to 80% of the world resources go to only 20% of the world population. The rest is taken by 80% of the population. The institution has made it worst by opening borders and allowing multinational companies to access cheap labor in developing countries. This has led to exploitation of some laborers in member states; it has also led to the destruction of the environment (Fernando, 2011). Recommendation The two institutions should draft clear policies that serve both advanced and developing countries. The meeting held by the institutions should include all the member states. The institution should not favor states based on the contribution of funds. They should also consider less developed countries because they have more problems. On the other hand, it is seen from the report that developing countries are more affected by the impacts of the two institutions far more than advanced economies. For example, developing countries have weak laws to address cases such as human rights violations or child labor. Developing countries should have laws that address such cases or they should seek help from developed countries. Developing countries should also work together in fighting policies that seem to favor advanced economies. This can be done by developing countries first before seeking help from institutions such as the IMF. Conclusion Many people agree that IMF and WTO have done a lot to improve economy in many countries globally. On the other hand, the two institutions and some like them have been criticized for using their powers to undermine other nations. They have also been blamed for only serving developed countries and formulating policies that favor advanced economies. Despite all that, the results of WTO/IMF are clear to every person globally. For example, companies from advanced economies have had chance to expand their operations to low developed countries. Conversely, developing countries are able to export their products to advanced economies because policies formulated by WTO give them a chance to do so. References Cherunilam (1988).International Economics 5e. New Delhi: Tata McGraw-Hill Education Fernando, A.C. (2011). Business Environment. India Pearson Education India. Global exchange. Top Ten Reasons to Oppose the IMF. Retrieved from http://www.globalexchange.org/resources/wbimf/oppose Hajdini, I. (2010). The role of the IMF in general and its role in Kosova: IMFs Role in Kosova. USA: GRIN Verlag. Jain, TR, Khanna, OP & Sen, Vir. Development and environmental Economics and international Trade. New Delhi: FK Publications. Morrison, J. (2011). The Global Business Environment: Meeting the Challenges. New York: Palgrave Macmillan. Ramakrishnan, U & Zalduendo, J. (2006). The Role of IMF Support in Crisis Prevention (EPub). New York: International Monetary Fund. TED Case Studies. NIKE: Nike Shoes and Child Labour in Pakistan. Retrieved from http://www1.american.edu/ted/nike.htm Verger, A. (2009). WTO/GATS and the Global Politics of Higher Education. New York: Routledge Read More