INTERNATIONAL MONETARY SYSTEM
The international monetary system (IMS) refers to the customs, rules, instruments, facilities, and organisations facilitating international (external) payments. Sometimes the IMS is also referred to as an international monetary order or regime.
- Adjustment : It refers to the process by which the balance-of-payment (BoP) crises of the nations of the world (or the member nations) are corrected. A good IMS tries to minimise the cost of BoP and time for adjustment for the nations.
- Liquidity : It refers to the amount of foreign currency reserves available to settle the BoP crises of the nations. A good IMS maintains as much foreign reserves to mitigate such crises of the nations without any inflationary pressures on the nations.
- Confidence : It refers to the faith the nations of the world should show that the adjustment mechanism of the IMS is working adequately and that foreign reserves will retain their absolute and relative values. This confidence is based on the transparent knowledge information about the IMS.
BRETTON WOODS DEVELOPMENT
- As the powerful nations of the world were hopeful of a new and more stable world order with the emergence of the UNO, on the contrary, they were also anxious for a more homogenous world financial order, after the Second World War.
- The representatives of the USA, the UK and 42 other (total 44 countries) nations met at Bretton Woods, New Hampshire, USA in July 1944 to decide a new international monetary system.
- The International Monetary Fund (IMF) and the World Bank (with its first group-institution IBRD) were set up together—popularly called as the Bretton Woods' twins —both having their headquarters in Washington DC, USA.
INTERNATIONAL MONETARY FUND
The International Monetary Fund (IMF] came up in 1944 whose Articles came
into force on the 27 December, 1945 with the main functions as exchange rate
regulation, purchasing short-term foreign currency liabilities of the member
nations from around the world, allotting special drawing rights (SDRs) to the
member nations and the most important one as the bailor to the member
economies in the situation of any BoP crisis.
The main functions of the IMF are as given below:
- To facilitate international monetary cooperation
- To promote exchange rate stability and orderly exchange arrangements.
- To assist in the establishment of a multilateral system of payments and the elimination of foreign exchange restrictions;
- To assist member countries by temporarily providing financial resources to correct maladjustment in their balance of payments (BoPs).
- The International Bank for Reconstruction and Development is the oldest of the WB institutions which started functioning (1945) in the area of reconstruction of the war-ravaged regions (World War II) and later for the development of the middle-income and credit-worthy poorer economies of the world.
- Human development was the main focus of the developmental lending with a very low interest rate (1.55 per cent per annum)—the areas of focus being agriculture, irrigation, urban development, healthcare, family welfare, dairy development, etc. It commenced lending for India in 1949.
- The International Development Agency (IDA) which is also known as the soft window of the WB was set up in 1960 with the basic aim of developing infrastructural support among the member nations, long-term lending for the development of economic services.
- Its loans, known as credits are extended mainly to economies with less than $895 per capita income. The credits are for a period of 35-40 years, interest-free, except for a small charge to cover administrative costs.
- The International Finance Corporation (IFC) was set up in 1956 which is also known as the private arm of the WB. It lends money to private sector companies of its member nations.
- The interest rate charged is commercial but comparatively low. There are many attractive features of IFC's lending.
- It finances and provides advice for private-public ventures and projects in partnership with private investors and, through its advisory work, helps governments of the member nations to create conditions that stimulate the flow of both domestic and foreign private savings and investment.
The Multilateral Investment Guarantee Agency (MIGA), set up in 1988 encourages foreign investment in developing economies by offering insurance (guarantees) to foreign private investors against loss caused by non-commercial (i.e., political) risks, such as currency transfer, expropriation, war and civil disturbance. It also provides technical assistance to help countries disseminate information on investment opportunities.
- The International Centre for Settlement of Investment Disputes (ICSID), set up in 1966 is an investment dispute settlement body whose decisions are binding on the parties.
- It was established under the 1966 Convention on the Settlement of Investment Disputes between States and Nationals of Other States.
- Though recourse to the centre is voluntary, but once the parties have agreed to arbitration, they cannot withdraw their consent unilaterally.
- It settles the investment disputes arising between the investing foreign companies and the host countries where the investments have been done.
ASIAN DEVELOPMENT BANK
- Set up in 1966 with 31 founding members (India being one of them), today (by March 2017) it has grown to encompass 67 members—of which 48 are from Asia and Pacific and 19 from outside. It has its headquarters situated at Manila, Philippines.
- The purpose of the Bank is to foster economic growth and co-operation in the region of Asia and the Far East and to contribute to economic development of the developing member countries, collectively and individually
- The Bank has extended technical assistance to India in addition to loans from its OCR window. The technical assistance provided include support for institutional strengthening, effective project implementation and policy reforms as well as for project preparation.
- India holds the position of Executive Director on the Board of Directors of the Bank—its constituency comprises India, Bangladesh, Bhutan, Lao PDR and Tajikistan. The Finance Minister is India's Governor on the Board of Governors of the Asian Development Bank and Secretary (EA) is the Alternate Governor.
- The roots of the Organisation for Economic Co-operation and Development (OECD), Paris, go back to the rubble of Europe after World War II.
- The Organisation for European Economic Cooperation (OEEC) was established in 1947 to run the US-financed Marshall Plan for reconstruction of a continent ravaged by war. By making individual governments recognise the interdependence of their economies, it paved the way for a new era of cooperation that was to change the face of Europe.
- OECD member countries worldwide regularly turn to one another to identify problems, discuss and analyse them, and promote policies to solve them.
- There are many countries that a few decades ago were still only minor players on the world stage—China, India and Brazil have emerged as new economic giants. Most of the countries that formed part of the former Soviet bloc have either joined the OECD or adopted its standards and principles to achieve the common goals.
WORLD TRADE ORGANIZATION (WTO)
- The World Trade Organization (WTO] came into being as a result of the evolution of the multilateral trading system starting with the establishment of the General Agreement on Tariffs and Trade (GATT) in 1947.
- The protracted Uruguay Round negotiations spanning the period 1986-1994, which resulted in the establishment of the WTO, substantially extended the reach of multilateral rules and disciplines related to trade in goods, and introduced multilateral rules applicable to trade in agriculture (Agreement on Agriculture), trade in services (General Agreement on Trade in Services—GATS) as well as Trade Related Intellectual Property Rights (TRIPS).
- A separate understanding on WTO dispute settlement mechanism (DSU) and trade policy review mechanism (TPRM) was also agreed upon.
NAIROBI NEGOTIATIONS & INDIA
- The WTO held its 10th Ministerial Conference in Nairobi, Kenya during 15-19 December 2015. This was the first such meeting to be hosted by an African nation.
- The outcomes of the Conference, referred to as the Nairobi Package, are as given below :
- He Nairobi Declaration reflects divergence amongst the WTO membership on the relevance of reaffirming the Doha Development Agenda (DDA) as the basis of future negotiations.
- Doha Round appeared in doubt, India sought and succeeded in obtaining a re-affirmative Ministerial Decision on Public Stockholding for Food Security Purposes honouring both the Bali Ministerial and General Council Decisions.
- A large group of developing countries has long been seeking an SSM (Special Safeguard Mechanism) for agricultural products. In order to ensure that this issue remains on the agenda of future discussion in the WTO, India negotiated a Ministerial Decision which recognizes that developing countries will have the right to have recourse to an SSM as envisaged in the mandate.
- It was also agreed to the elimination of agricultural export subsidies subject to the preservation of special and differential treatment for developing countries such as a longer phase-out period for transportation and marketing export subsidies for exporting agricultural products.
- One of the Decisions adopted extends the relevant provision to prevent 'ever-greening' of patents in the pharmaceuticals sector. This decision would help in maintaining an affordable and accessible supply of generic medicines.
BUENOS AIRES CONFERENCE AND INDIA
- The 11th Ministerial Conference (MC11) of World Trade Organisation [WTO] which took place in Buenos Aires, Argentina (10-13 December, 2017) ended without a Ministerial Declaration or any substantive outcome, though the unanimous view was that it was extremely well-conducted with complete openness and transparency and the process afforded everyone ample opportunity to express their views.
- In the run-up to MC11, decisions were expected on a permanent solution on food security and other agriculture issues. Unfortunately, the strong position of one of the member (the USA) against agricultural reforms based on current WTO mandates and rules, led to a deadlock without any outcome on agriculture or even a work programme for the next two years.
- Some of the other decisions that were taken included a Work Programme on disciplines on Fisheries Subsidies with a view to arriving at a decision by MC12.
- On new issues like investment facilitation, MSMEs, gender and trade, which lacked a mandate or consensus, Ministerial Decisions were not taken forward.
- India stood firm during the Conference on its stand on the fundamental principles of the WTO, including multilateralism, rule-based consensual decision-making, an independent and credible dispute resolution and appellate process, the centrality of development, which underlies the Doha Development Agenda (DDA), and special and differential treatment for all developing countries.
INDIA AND WTO
- India has been always in favour of a multilaterally trading world and effective and transparent dispute settlement arrangement in the WTO.
- In mid-May (13-14 May) 2019, India hosted a WTO Ministerial Meeting of Trade Ministers in New Delhi on the concerns of the 16 developing and 6 least developed countries. An outcome document was released in the meeting, which lays out priorities for developing countries in various areas and envisages addressing the challenges being faced by the Dispute Settlement system of the WTO.S India has submitted a paper in the General Council meeting of the WTO, spelling out the following major priorities that are required to be taken into consideration while undertaking reforms in the WTO—
(a) Preservation of core principles of the Multilateral Trading System,
(b) Safeguarding special and differential treatment provisions,
(c) Resolution of the Appellate Body crisis,
(d) Addressing unilateral actions and continuation of negotiations in mandated areas, among others.
- The twelfth Ministerial Conference of the WTO (MC12) is scheduled to be held in June 2020 in Nur-Sultan, Kazakhstan. Discussions for an outcome at MC12 are underway at various informal Ministerial meetings and regular meetings at the WTO.
TRADE FACILITATION BY INDIA
- Trade facilitation has been a highly contentious issue related to the multilateral trade and was always prioritised in the WTO negotiations by the member nations.
- The Trade Facilitation Agreement (TFA) agreed upon by the WTO was ratified by India in April 2016.
- For its implementation a National Committee on Trade Facilitation (NCTF) was also set up by the Government.
- In order to achieve cargo release time targets, India undertook a national level Time Release Study (TRS) for the first time in 2019 across multiple locations covering seaports, Inland Container Depots (ICDs), air cargo complex and integrated check posts.
- The intended objectives of the TRS was to assess impact of extant measures to reduce release time, examine extant procedures, technologies and infrastructure and administrative concerns and thereby identify manual processes and physical touch points, bottlenecks and inefficiencies (by stakeholders) to bring down the overall release time.
- The Fortaleza Declaration of heads of state (late July 2014) from Brazil, Russia, India, China, and South Africa (the BRICS countries) is another such attempt—creation of a BRICS Bank i.e., New Development Bank (NDB).
- Major highlights about the bank are given :
(i) The bank will have initial subscribed capital of $50 billion—equally shared by the five nations.
(ii) The capital base is to be used for funding infrastructure and 'sustainable development' projects in the BRICS countries initially.
(iii) Other low and middle-income countries will be able get funding as time progresses.
(iv) A Contingent Reserve Arrangement (CRA) of $100 billion is to be also created to provide additional liquidity protection to member-nations during balance of payments problems.
(v) The CRA is being funded 41 per cent by China, 18 per cent each from Brazil, India, and Russia, and 5 per cent from South Africa.
(vi) CRA, according to the Declaration, is 'a framework for the provision of currency swaps in response to actual or potential short-term balance of payments pressures.'
(vii) The BRICS bank development comes at a time when reforms at the Bretton Woods institutions fail to fructify for one reason or the other and with the US and European nations still not reconciled to concede BRICS nations a greater voice in the governance structure of the Bretton-Woods institutions.
(viii) The BRICS-sponsored development bank is not an isolated and unique initiative. Similar initiatives had sprung up in the past to blunt the might of Bretton-Woods twin.
(ix) Development Bank of Latin America (created by Andean nations) in the 1960s, the Chiang Mai Initiative in early 2000s (of 10 ASEAN nations plus China, South Korea and Japan) to establish a network of bilateral currency swap pacts in the wake of Asian currency crisis, and the establishment of the Bank of South by Latin American countries in 2009 were the result of escalating dissatisfaction with the US-dominated IMF and World Rank.
ASIAN INFRASTRUCTURE INVESTMENT BANK
- The Asian Infrastructure Investment Bank [AIIB] was officially launched in 2014 by China with 21 Asian nations as the founding members. By March 2019, the bank had a total of 93 members from across the world (inclusive of the 23 prospective members).
- Still, the USA, Japan and Canada have not joined it rather the experts suggested them to support it especially when the existing mechanism (the World Bank and Asian Development Bank) is not able to cater to the infrastructural needs of the continent.
- The AIIB is aimed at providing finance to infrastructure projects in the Asia region, as a multilateral institution.
- It is planned to operate broadly in the same manner as existing multilateral development banks (MDBs) such as the World Bank and the Asian Development Bank (ADB).
- While much of the debate is centred on whether the AIIB will complement or compete with existing organisations, it is intended to be more a commercial bank—with nations as shareholders, than a purely development aid institution.
- The AIIB will start with an authorised capital base of US$ 1 billion to be 1 enhanced to US $ 100 billion.
- Size of the AIIB : Based on the lending capital ratios of the World Bank and European Development Bank —the AIIB could extend loans for infrastructure spending at around 100 per cent to 175 per cent of its subscribed capital. This would mean having outstanding loans of up to $US175 billion.
- India & AIIB : India is one of the 21 founding members of the bank and is believed to benefit maximum from it. India holds 8.6794 per cent of its shares (with a total investment of US$ 8.3673 billion) and avails a 7.614 per cent voting rights (with a total of 86,214 shares) in it. India's shareholding is the second highest after China which holds 30.8913 per cent shares.
REFORMING IMF & WB
Reforms in the IMF :
- Increasing its resource base so that it is able to help out (bail out in case of balance of payment situations) nations in times of crisis. G20 wishes to increase its resources from the current level of US$250 billion to US$750 billion.
- Merit-based selection of the head of the IMF, irrespective of nationality.
- Eliminating the veto of the U.S. in key decisions.
- Broadening the application of double-majority voting as a way to increase the role of smaller members.
- Revising the rule of quota and vote distribution to reflect accurately and fairly the current and future economic weight of the members.
- Transforming its Board of Directors from a bureaucratic body to a high-level policy decision-making forum of ministers.
Reforms in the WB :
- Need of Shareholders to replenish the capital base for 'soft' loans (while the IDA disburses interest-free the IBRD disburses concessional loans to the eligible member nations and in recent years the WB has faced a resource crunch as several developed countries, especially the USA, proposed fund cuts).
- Merit-based selection of the World Bank president—without regard to nationality.
- Revamping of shareholdings and voting rights in the executive boards (to give a greater voice to emerging market economies and to borrowers).
- Overhauling its operational modalities (so that it can react with less bureaucratic and time-consuming burdens to the legitimate needs of its borrowers).