Efficient International Monetary System - Essay Example

EFFICIENT INTERNATIONAL MONETARY SYSTEM Introduction This paper will aim to enumerate the main criteria for an efficient and effective international monetary system. Furthermore, the role of the supranational organisations in achieving an efficient international monetary system would also be discussed. The international monetary system can be said to be "the institutional framework within which international payments are made, the movement of capital is accommodated and exchange rates among countries' currencies are determined" (International finance in practice). An ideal international monetary system should be able to ensure adjustment, liquidity, and confidence. A good international monetary system should also provide sufficient monetary reserves for world economy to support the growth of international trade and investment, on a global scale. At the start of the 21st century, governments of most transition and developing economies are still searching for solutions that are feasible for generation of revenue for their economies. The major environmental factors that currently determine the performance of these revenue administrations include weak administrative capacity, due to corruption, large informal sectors and globalization. International finance has specific formulation that is different from normal trade and commerce. It can be stated that there is high amount of risk involved in this context. Firstly the risk is probable in the context of exchange rates. Secondly the international political conditions may prove to be detrimental at times. Thirdly there is every chance of economic risk involved in the entire scenario. In contemporary economic scenario and in the context international monetary system the prevailing trend is expansion in the global market. Global market expansion is nothing but a concept of serving customers beyond the limits of domestic market and in economic scenario considered a key growth strategy. Global market expansion is a business reality that every company encounters at some point in its evolution. Under such circumstances every business venture must balance risk with rewards, the risks when expanding internationally can be less predictable and in the same way the rewards can be more elusive. It can well be stated that such a condition is highly desirable, for an efficient and effective international monetary system. Global expansion allows companies to replicate successful domestic strategies in international markets, potentially in markets with lower competitive intensity. Additionally "Global market expansion provide the companies large untapped markets, advantages of low labour costs, savings of shipping costs, speed and efficiency of delivery system, etc. and this is where an efficient and effective international monetary system becomes essential." (Fletcher, R. 2006 p. 188) The role of supranational organisations in achieving an efficient and effective international monetary system The international monetary system is composed of a core, "which has the exorbitant privilege of issuing the currency used as international reserves, and a periphery, which is committed to export led growth based on the maintenance of an undervalued exchange rate." (http://www.cairn.info/article.phpID_REVUE=ECOI&ID_NUMPUBLIE=ECOI_100&ID_ARTICLE=ECOI_100_0039) The IMF (International Monetary Fund) tells us that, taken together, all the developing economies had a current account that valued just a little over $640 billion, in the previous year. Obviously such a surplus in the current account is complemented by a shortage in the financial accounts. The shortage or deficit in the financial accounts in such a case will in fact be exactly equal to the net capital outflow from the developing countries to the industrial countries, thus this is the amount that we are looking for. As most will realize $640 billion is a huge amount, by all standards. Not long ago, even in 1996 (precisely 11 years back) the total current account balance of all the developing countries was a deficit of $80 billion! The deficit obviously represented the net capital that came in from the industrial economies. The $640 billion we are talking about emerged out of a few specific countries and not from a range of sources, like most of us might suppose. 17 of the developing economies we just described seem to be operating current account excess and together have a surplus of $710 billion. A good chunk of that $710 come from some the most celebrated oil-exporting Middle-Eastern countries and Russia, of course. The sudden surge in the surplus is not surprising especially if you take into consideration the fact that "oil prices have been rising steadily in the past few years and is most favourable for an efficient and effective international monetary system." (Lamb, D. 2004 p. 243-245) However, it should also be stated that the rest of the 131 developing economies our figures deal with therefore have a joint current account deficit of about $70 billion (which is therefore also their net capital inflow). This low figure might be misconstrued to mean that these economies have done little for themselves in the past 10 years, but this is not so, as even in early 1996 the joint current account deficit for these economies had been a little over $140 billion. The World Bank was opened in 1946 and even if not as influential as the IMF, the bank has also been quite controversial since inception. The World Bank has undergone some fundamental changes since the acceptance of its original agenda to promote the post-war recovery of Europe and Japan. "Its first loan was for $250 million to France in 1947. As it has added to its mandate, it spawned several new organizations to the original International Bank of Reconstruction and Development." (International Monetary Fund and World Bank) The International Development Association (IDA) is perhaps the most controversial additional arm of the World Bank. The IDA was created in 1960 to provide money to countries too poor to borrow from the World Bank's primary institution, the IBRD. IDA loans carry no interest rate, are very long term (35 to 50 years), a small yearly fee (.75 percent), and a ten year grace period. The United States has been the largest contributor to the IDA, providing more than $20 billion since 1960. The International Center for Settlement of Investment Disputes (the ICSID) was established in 1966 to promote increased private investment to the underdeveloped world. Similarly, the Multilateral Investment Guarantee Agency (the MIGA) was created in 1988 to reduce the risk faced by private global investors in poor countries. In addition to providing advice, MIGA insures and guarantees up to 90 percent of a project's investment. (International Monetary Fund and World Bank) The flow of capitals from the developing to the industrial economies might not be beneficial for the developing countries in the long run. In order to eradicate poverty and develop their economy at a faster rate, developing economies must take the initiative to augment their productivity. Such an improvement is possible due to the size of their labour force. However, to maximise the efficiency of the labour force, these developing countries will need capital. (Dos, M. 2005 p. 441-442) Inverting the flow of capital in order to assist economic growth in developing economies is essential for an efficient and effective international monetary system. This can be attained by formulating policies that will encourage the formation of capital for developing economies. Instead an inversion in the present direction of the capital flows would best be attained by means of policies that will help increase the formation of capital and thereby assist economic growth in the developing economy. These policies will not only develop the environment and make it ready for business investment but also help toughen up the country's feeble financial system, thereby ensuring that the capital the developing economies require in order to prosper continues to remain within the country and don't have to travel abroad in search of better investment opportunities under the parameters of an efficient and effective international monetary system. (King, H. 2005 p. 126) Conclusion With the continued spread of globalization, there is a new periphery, the emerging markets of Asia and Latin America, but the same old core, the United States, with the same tendency to live beyond its means. The main difference between now and then, aside from the names of the players, is the existence of a third bloc, Europe, which has neither the periphery's scope for catch-up nor the reserve-currency country's ability to live beyond its means, which is why it feels under pressure. This view yields strong predictions. It suggests that the current pattern of international settlements can be maintained indefinitely. (http://www.cairn.info/article.phpID_REVUE=ECOI&ID_NUMPUBLIE=ECOI_100&ID_ARTICLE=ECOI_100_0039) In this context of market induced economy that the issues of globalization and hybridization are essentially important. In this context it is important for the company to exhale into a powerful establishment by making the products both local and international at the same time. However, this blend should be better formulated for an enhanced and updated efficient and effective international monetary system and the fruits can be well utilized by the global community. Although the World Bank and IMF have been often too driven by U.S. foreign policy concerns, the influence of both these institutions has been widely overestimated, and in most part, both organisations have been given less credit than they should when they do things right. Despite the fact that mistakes have been made during the past five decades, and neither of these institutions has actually met the goals of their founders or the standards set by all of their critics, the World bank and the IMF have to continuously play the role of promoting economic stability and prosperity worldwide. Works Cited Dos, M. (2005) Future of Thought Process in Financial History. Alliance Publications Fletcher, R. (2006) Beliefs and Knowledge: Believing and Knowing. Howard & Price King, H. (2005) Fiscal Fitness Today. HBT & Brooks Ltd. Lamb, D. (2004) Cult to Culture: The Development of Civilization on the Strategic Strata. National Book Trust. http://www.cairn.info/article.phpID_REVUE=ECOI&ID_NUMPUBLIE=ECOI_100&I D_ARTICLE=ECOI_100_0039 International finance in practice International Monetary Fund and World Bank Das-Gupta, Arindam and Dilip Mookherjee (1998). 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Ebrill, Liam, Michael Keen, Jean-Paul Bodin and Victoria Summers, (2002) The Modern VAT, Washington: International Monetary Fund Read More