UNIT – III

Foreign Exchange
Determination Systems
&international institutions
 BASIC CONCEPTS RELATING TO FOREIGN
EXCHANGE
 Foreign currency means currency other than Indian currency
 Exchange rate is price of one country’s currency expressed in another
country currency. Ex: Rs 63 for one USD
 Major currencies of world are: USD, Euro, Yen and Pound
 Foreign exchange, (Forex) is the conversion of one country's currency into
that of another that involves foreign exchange risk. In a free economy, a
country's currency is valued according to factors of supply and demand.
Currency's value can be pegged to another country's currency, such as the
U.S. dollar, or even to a basket of currencies.
 Conversion of currency done either spot or forward through banks who deal
in Forex
 Spot market handled for current transactions on daily basis
 Forward market deals with transactions for future delivery and rate . Forward
rates are quoted as premium or discount over spot rate.
 Foreign exchange market is a global decentralized market for trading of
currencies. Large international banks are participants in this market.
PURCHASING POWER PARITY THEORY (PPP)
 As per this theory when exchange rates are fluctuating in
nature, the rate of exchange b/w 2 currencies in long run will be
fixed by their respective purchasing powers in their own nation
 PPP means price of goods that is charged in one country must
be equal to the one charged for the same goods in another
country, being exchanged at the current rate which is known as
law of one price
 For example, Let's say that a pair of shoes costs Rs 3600 in
India. Then it should cost $60 in America when the exchange
rate is 60 between the dollar and the rupee.
 This theory applicable to movable goods and do not consider
transportation cost and assume there are competitive market for
the goods in both countries
 BALANCE OF PAYMENT THEORY (BOP)
 BOP is the record of all economic transactions b/w residents of a country and
rest of the world over a period of time (includes import, export, finance transfer)
 Transactions recorded into current a/c, capital a/c transactions, financial a/a and
central bank transactions.
 It is also called the demand and supply theory of exchange rate.
 The rate of exchange in the forex market is determined by the balance of
payments, in the sense demand and supply of foreign exchange in the market.
 If the demand for a country's currency falls at a given rate of exchange, we can
speak of a deficit in its balance of payments, when it rises it is surplus in its BOP
 Any deficit or surplus in the balance of payments causes changes in the demand
and supply of foreign exchange and thus leads to fluctuations in the exchange
rate
 The country’s BOP is said to be surplus, when export and sale of bond is more
than payments for import and purchase of bonds. When there is deficit in the
BOP the debits will exceed the credits (or the demand for foreign exchange), the
rate of exchange will rise
 PARTICIPANTS IN FOREX MARKET
 All scheduled commercial banks are dealers
 Reserve bank of India

 Corporate Treasuries

 Inter bank Brokerage Houses

 Government

 Resident Indians

 Non residents

 Exchange companies

 Money changers
 ROLE OF RBI IN FOREX MARKET

 They manage the exchange rate mechanism

 Regulate interbank forex transactions and monitor foreign
exchange risk of the banks
 Keep the exchange rate stable

 Manage and maintain country’s foreign exchange reserves

 They impose foreign exchange exposure limits on banks

 The limits are tied up with the paid up capital of the bank
TREASURY OPERATIONS AT RESERVE BANK OF INDIA (RBI)

 Central banks have treasuries to implement objectives

through exchange rate and interest rate
 Money market looked after by securities department

 There is linkage between money market and exchange

market
 Dealing room cater to the forex market only

 Finally dealing room and securities department were

merged to form EDMD to from first treasury of RBI
 NATURE OF FOREX

 It is volatile, affected by speculator and hedger

 Forex affected by demand and supply
 Forex affected by balance of payment-surplus and deficit
 Forex affected by economic stability of the country
 Forex affected by inflation rate
 Forex affected by fiscal policy of government
 Forex affected by political conditions of the country
 Forex affected by rate of interest
 Forex can be quoted directly or indirectly
 Spot and forward exchange rates are different
 TOP TEN CURRENCY TRADERS
 Deutsche Bank
 Citi bank

 Barclays investment bank

 UBS AG

 HSBC

 JP Morgan

 Royal Bank of Scotland

 Credit Suisse

 Morgan Stanley

 Goldman Sachs
 VARIOUS TYPES OF EXCHANGE RATE REGIME
 Fixed exchange rate system: It offer greater certainty for EXIM. Exchange rate
for currency fixed by government. It ensures stability in foreign trade through
the government maintaining huge reserves of foreign currencies
 Value of currency fixed in terms of external standard like gold, silver, other
country currencies and precious metal. When value of domestic currency is tied
is tied to value of another currency, it is known as Pegging.
 Flexible exchange rate system: It is a system where currency rate determined
by forces of demand and supply of different currencies in Forex market. No
official intervention in the market. It is also known as floating exchange rate.
 Managed floating rate system: foreign ex rate determined by market forces and
central bank influences ex rate through intervention in Forex market. It is a
hybrid type of exchange rate and central bank maintains reserve of Forex to
ensure that Forex rate stays with in target value. It is known as Dirty floating.
 Swap rate system: swap is a contract to buy an amount of currency and
simultaneously resell same amount of currency at an agreed rate to the same
counter party
 FACTORS AFFECTING EXCHANGE RATES
 Inflation rate: Changes in relative inflation b/w 2countries affect exchange rate.
When domestic inflation rate is less than foreign country, domestic currency is
stronger than foreign country .
 Interest rates: real interest rate must be same in every country, country with
higher interest rate have higher inflation.
 International trade balance: Deficit in international trade balance is increasing
with negative impact on USD & LE (Legal Egyptian currency)
 Foreign currency supply: Decline in foreign currency from tourism and money
transfer will put pressure on LE
 Net international reserve: when it is declining it decreases ability to maintain
constant rates
 Technical factors; seasonal demand for currencies, strengthening of currencies
also affect exchange rates.
 DETERMINANTS OF EXCHANGE RATE
 Interest rate: when there is increase in interest rate in domestic market ,
there will be increase in investment causing decrease in demand for foreign
currency and increase in supply of foreign currency
 Inflation rate: when inflation increases there is less demand for local goods
and more demand for foreign goods. ( increase demand for foreign currency).
 Government budget ( deficit or surplus): when government budget is
deficit ,the market react negatively, this result in change in value of currency.
 Political conditions: Internal and international political conditions have
effect on currency rate.
 Setting equilibrium exchange rates (EER): the quantity of supply and
demand of foreign currency is in equilibrium. Ex: demand for German goods
by America and vice versa. EER occurs when quantity supplied equals
quantity demanded of foreign currency at a special price.
 Economic growth: strong economic growth attract investments causing
decrease in demand for foreign currency and increase in supply of foreign
currency
 HISTORY OF INDIAN RUPEES EXCHANGE RATES
 In 1978 the government allowed banks to trade Forex with one another.
 Today over 70% of the trading in foreign exchange continues to take place in the interbank market
 The market consists of over 90 Authorized Dealers
 The foreign exchange market is the most liquid financial market in the world. Traders include large banks, central
banks, institutional investors, currency speculators, corporations, governments, other financial institutions and
retail investors.
 Trading is regulated by the Foreign Exchange Dealers Association of India (FEDAI), a self regulatory association
of dealers.
 Since 2001, clearing and settlement functions in the foreign exchange market are largely carried out by the
Clearing Corporation of India Limited (CCIL)
 There is a shift from one way nominal movement over nineties to two way with low volatility implying tightly
managed exchange rate to greater volatility and nominal movement after global crisis.
 Real effective exchange effective was established after double devaluation
 Higher Indian inflation led to reserve accumulation
 In 2003-04 turnover in Indian Forex market was 175 billion USD and increased to 359 billion USD in 2005-06.
 In 2003 for the first time volatility accompanied appreciation
 Trading in foreign exchange markets averaged $5.3 trillion per day in April 2013.
 Foreign exchange swaps were the most actively traded instruments in April 2013, at $2.2 trillion per day, followed
by spot trading at $2.0 trillion.
 METHODS OF QUOTATION
 Method – I  Method – II
 One Orange = Rs 2  Rs. 10 = 5 Oranges

 One Apple = Rs 2.50  Rs. 10 = 4 Apples

Price under both the methods is the same though expressed differently

Method - I Method - II
DIRECT(FC fixed) INDIRECT( HC fixed)
USD 1 = Rs 45.18 Rs 100 = USD 2.2133
GBP 1 = Rs.85.99 Rs 100 = GBP 1.1629
EUR 1 = Rs 57.92 Rs 100 = EUR 1.7265

With Effect from 02.08.1993, all exchanges are quoted in Direct Method
 UNDERSTANDING TWO WAY EXCHANGE QUOTES
In Forex markets , there are two way quotes i.e.
both buying and selling rates are given.
 1 USD = INR 45.16/ 18

 BUYING RATE $/RE = RE 45.16

 SELLING RATE $/RE = RE 45.18

In the abovementioned quote,

lowest is market buying rate and highest is market selling rate.
 UNDERSTANDING EXCHANGE RATES

 Dollar/SwissFrancs -- USD/CHF
 Note the order of the currencies

 “USD” comes before the “CHF”

 The
first currency($) - Base currency
 Second currency (CHF) - Terms currency

 It is important to remember that Bid & Offer in trading

always refers to the BASE CURRENCY.
 INTERNATIONAL INSTITUTIONS

 UNCTAD- United Nations Conference on Trade and development

 IMF – International Monetary Fund

 WB - World bank

 IBRD- International Bank for Reconstruction and Development

 WTO – World Trade Organisation

 TRIPS – Trade Related aspects of Intellectual Property Rights

 TRIMS – Trade Related Investment Measures

 GATS – General agreement on Trade in Services

 MFA – Multi Fiber arrangement

 AOA – Agreement on agriculture

 HISTORY OF UNITED NATIONS CONFERENCE
ON TRADE AND DEVELOPMENT (UNCTAD)
 Developing counties to find a suitable place in global trade called for a conference to solve
their problems, first conference was institutionalized.
 The first United Nations Conference on Trade and Development (UNCTAD) was held in
Geneva in 1964. The conference was institutionalized to meet every four years. Trade and
development Board has 3 commissions that meet once in year. They are Commission on :
Trade in goods and services, Investment & technology related issues, for enterprise that
facilitates business & development. As on 2011 there were 194 members.
 In Phase1 ( 1960-70) International commodity agreement was framed to stabilize prices of
export products. Rules for control of restrictive business practices framed.
 In Phase II (1980) faced changing political and economic environment, many developing
countries faced debt crisis leading to high rate of inflation. Economic interdependence
increased. In 1989 the Agreement on the Global System of Trade Preferences among
Developing Countries (GSTP) came into force. It provided for the granting of tariff as well
as non-tariff preferences among its members.
 In Phase II: (1990 till date) The conclusion of the Uruguay Round of trade negotiations
under the GATT resulted in the establishment of the World Trade Organization in 1995,
which led to a strengthening of the legal framework governing international trade.
UNCTAD highlighted the need for a differentiated approach to the problems of
developing countries. Its tenth conference, held in Bangkok in February 2000, adopted a
political declaration – "The Spirit of Bangkok"
 FEATURES OF UNCTAD
 UNCTAD is the principal organ of the United Nations General Assembly dealing with
trade, investment, and development issues.
 The organization's goals are to: "maximize the trade, investment and development
opportunities of developing countries and assist them in their efforts to integrate into the
world economy on an equitable basis.
 The objective of UNCTAD is to formulate policies relating to development of trade, aid,
transport, finance , offer technical assistance to developing countries
 As of October 2012, 194 states are UNCTAD members.
 It aimed at the identification of measures to improve the efficiency of international trade
transaction and provide a favourable international transport and trade-related
environment.
 Reflection on development is at the heart of UNCTAD’s work. It produces often-
innovative analyses that form the basis for recommendations to economic policymakers.
The aim is to help them take informed decisions and promote the macroeconomic
policies best suited to ending global economic inequalities and to generating people-
centred sustainable development.
 UNCTAD is also a forum where representatives of all countries can freely engage in
dialogue and discuss ways to establish a better balance in the global economy.
 FUNCTIONS OF UNCTAD
 To undertake research, policy analysis and data collection for the debates of experts
 To provide technical assistance to developing countries
 To promote international trade between developed and developing countries with a
view to accelerate economic development. Assist developing countries in trade
negotiation, provide information on trade environment and advice to meet
competition
 (ii) To formulate principles and policies on international trade and related problems of
economic development. Do investment analysis, develop technology up gradation and
promote MSME’s.
 (iii) To make proposals for putting its principles and policies into effect, and negotiate
trade agreements. Speedup customs clearance procedures, installed computerized
cargo tracking system and offer training in all areas of international trade.
 (iv) To review and facilitate the coordination of activities of the other U.N. institutions
in the field of international trade.
 (v) To function as a centre for a harmonious trade and related documents in
development policies of governments. Provide computer based debt management and
help countries to manage their external debt.
 ADVANTAGES OF UNCTAD
 UNCTAD’s contribute to international debate on the consequences of globalization for
developing countries.
 Analyzes debt issues of member countries and advice them
 Provides developing countries with technical assistance on the management of public
debt
 Supports the participation of developing countries in international trade and international
trade negotiations on an equitable basis
 Assist on issues related to competition policy and consumer protection
 Focuses on the contribution of the commodity sector to development, advocating
diversification and risk management.
 UNCTAD offers member States expertise on all issues related to investment and
enterprise development.
 Conducts cutting-edge research and analysis in the field of investment for sustainable
development
 Informs policymakers about the structure and evolution of foreign direct investment in
the world, and outlines the main trends in investment
 Provides technical assistance to enable beneficiary countries to attract investment
ORGANISATION STRUCTURE OF INTER NATIONAL
MONETARY FUND(IMF)
Board of Governors

Executive Board

Managing Director

Deputy Managing
Director

Interim Committee

Development
committee
 FEATURES OF IMF
 During world war II many countries were in great depression. Countries were trying to
reconstruct, develop world trade that declined and improve the standard of living of
their people.
 Need for an institution to oversee international monetary system, system of exchange
rates and international payments was felt.
 IMF was conceived in July 1944. 45 countries met in Bretton Wood town in US and
agreed for framing IMF. It began its operation in 1947.
 With its near-global membership of 188 countries, the IMF is uniquely placed to help
member governments take advantage of the opportunities—and manage the
challenges—posed by globalization and economic development more generally.
 The IMF provides policy advice and financing to members in economic difficulties and
also works with developing nations to help them achieve macroeconomic stability and
reduce poverty.
 Marked by massive movements of capital and abrupt shifts in comparative
advantage, globalization affects countries' policy choices in many areas, including
labor, trade, and tax policies. Helping a country benefit from globalization while
avoiding potential downsides is an important task for the IMF.
 ROLE (OBJECTIVES) OF IMF
 To avoid competitive devaluation and exchange control
 Maintain currency convertibility with stable exchange rates
 Develop multilateral trade and payments
 To promote international monetary cooperation and offer consultation for the problems
 Facilitate expansion of balanced growth in global trade, maintain high levels of
employment and income to all its members
 Provide exchange stability and avoid competitive exchange depreciation.
 To give confidence to members by making funds available to them
 Reduce the period and degree of disequilibrium in international Balance of payments of
members
 Assist establishment of multilateral system of payments regarding current transactions
b/w members
 Elimination of foreign exchange transactions that hamper the growth of world trade
 It has three main tools at its disposal to carry out its mandate: surveillance, technical
assistance and training and lending. These functions are underpinned by the IMF’s
research and statistics.
 MAIN TOOLS OF IMF

 Surveillance: The IMF promotes economic stability and global growth by encouraging
countries to adopt sound economic and financial policies through monitoring global, regional,
and national economic developments which is termed as bilateral surveillance. On a regular
basis, once in a year IMF conducts in depth appraisals of each member country’s economic
situation. IMF also carries out extensive analysis of global and regional economic trends,
known as multilateral surveillance. Its key outputs are three semiannual publications,
the World Economic Outlook, the Global Financial Stability Report, and the Fiscal Monitor.
IMF agreed to enhance multilateral, financial, and bilateral surveillance.
 Technical assistance and training: IMF offers technical assistance and training in 4 areas
like monetary and financial policies, fiscal policy and management compilation, management
dissemination and improvement of statistical data; and economic and financial legislation.
 Lending: IMF financing provides member countries the breathing room they need to correct
balance of payments problems. Continued financial support is conditional on the effective
implementation of this program. In the most recent reforms, IMF lending instruments were
improved further to provide flexible crisis prevention tools to a broad range of members with
sound policy frameworks. In low-income countries, the IMF has doubled loan access limits
and is boosting its lending with loans at a concessional interest rate.
 FUNCTIONS OF IMF
 IMFD determine and adjust the rate of exchange
 It reduces tariffs and other trade restrictions by member countries
 They provide technical assistance to members regarding monetary and fiscal policies
 It provides short term financial assistance to members to get rid of balance of payment
problems
 They are the reservoir of currencies of member countries and lend other currencies to
their members
 They are the lending institutions of foreign currencies
 It alter par value of member country’s currency to improve their BOP position
 They offer internal consultancy
 They conduct research studies and publish the reports
 It conducts short term training courses on fiscal, monetary and BOP for employees of
member countries through central bank service department, Fiscal affairs department,
Bureau of statistics and IMF Institute
 ADVANTAGES OF MEMBERSHIP OF IMF
 IMF offer financial assistance to member countries through
loans
 They help member countries during foreign exchange crisis

 Members of IMF can become of the member of World bank

 Economic consultation offered to member countries

 Provide advice to member countries on adopting policies that

will help them prevent financial crisis, achieve macroeconomic
stability
 IMF assist in accelerating economic growth and alleviate
poverty
 Render financial assistance to reduce BOP problems
 WORLD BANK GROUP
 IBRD- International Bank for Reconstruction and Development: It was
established in 1946 to reduce poverty among poor countries by promoting
sustainable development through loans, guarantees, risk management and
advisory services .
 IDA- International development Association: established in 1960 and offer
interest free loans and grants
 IFC- International finance corporation: It is a private sector that assist world
bank and established in 1956
 MIGA- Multilateral investment Guarantee agency: It promotes foreign
direct investment to developing countries and established in 1988
 ICSID- International centre for settlement of Investment disputes: It
facilitates the settlement of investment disputes b/w governments and foreign
investors and was established in 1966
 FEATURES OF INTERNATIONAL BANK
FOR RECONSTRUCTION AND DEVELOPMENT
 It was founded in 1944 to help Europe recover from World War II.
 International Bank for Reconstruction and Development (IBRD) is one of
five institutions that make up the World Bank Group.
 IBRD is the part of the World Bank (IBRD/IDA) that works with middle-
income and creditworthy poorer countries to promote sustainable, equitable
and job-creating growth, reduce poverty and address issues of regional and
global importance.
 IBRD is structured something like a cooperative and operated for the benefit
of its 187 member countries.
 Deliver flexible, timely and tailored financial products, knowledge and
technical services, and strategic advice helps its members achieve results.
 Through the World Bank Treasury, IBRD clients also have access to capital
on favorable terms in larger volumes, with longer maturities, and in a more
sustainable manner than world financial markets typically provide
 ROLE OF IBRD
 The voting power is linked to members' capital subscriptions, which in
turn are based on each country's relative economic strength.
 It is not a profit-maximizing organization but has earned a net income
every year since 1948.
 Source of funds: paid-in capital, capital market borrowings, repayments on
earlier loans, retained earnings
 Aims to reduce poverty in poor countries
 It raises funds from the world financial markets
 Lend to countries with high pr capita income
 It earns income from the returns on its equity and a small margin from
their lending
 They get money through sale of bonds in international capital markets and
members subscription to its capital stock
IBRD- INTERNATIONAL BANK FOR RECONSTRUCTION
AND DEVELOPMENT

 IBRD was established in 1945

 provides loans and development assistance to middle-income
countries and creditworthy countries.
 voting power is linked to members' capital subscriptions, which
in turn are based on each country's relative economic strength.
 It is not a profit-maximizing organization but has earned a net
income every year since 1948.
 181 member countries (shares allocated to each member reflect
its quota in the IMF, i.e. the country’s relative economic strength
in the world economy) have registered under IBRD
IDA- INTERNATIONAL DEVELOPMENT ASSOCIATION

 provides long-term loans at zero interest to the poorest of the

developing countries.
 supports efficient and effective programs to reduce poverty and
improve the quality of life in its poorest member countries.
 helps build the human capital, policies, institutions, and physical
infrastructure needed to bring about equitable and sustainable growth.
 IDA's goal is to reduce the disparities across and within countries, to
bring more people into the mainstream, and to promote equitable access
to the benefits of development.
 established in 1960, includes 160 member
 Source of funds: Contributions from governments, transfers from
IBRD profits, repayments on earlier IDA credits.
IFC- INTERNATIONAL FINANCE CORPORATION
 IFC shares the primary objective of all Bank Group institutions:
to improve the quality of the lives of people in its developing
member countries.
 finances and provides advice for private sector ventures and
projects in developing countries in partnership with private
investors and, through its advisory work, helps governments
create conditions that stimulate the flow of both domestic and
foreign private savings and investment.
 promotes economic development by encouraging the growth of
productive enterprise and efficient capital markets in its member
countries.
 established in 1956, includes 174 members
 Source of Funds: Member capital, borrowings from capital
markets (80%) and IBRD (20%)
MIGA- MULTILATERAL INVESTMENT GUARANTEE AGENCY
 encourages the flow of foreign direct investment to its
developing member countries.
 facilitates investment primarily by providing investment
guarantees against noncommercial risks (currency transfer,
expropriation, and war, for example).
 provides technical assistance to help countries disseminate
information on investment opportunities, and to build capacity
for investment promotion.
 MIGA has its own operating and legal staff and is legally and
financially a separate entity from the World Bank, on which it
draws, however, for certain services.
 established in 1988, has 149 members
 Source of Funds: Member capital
ICSID- INTERNATIONAL CENTRE FOR SETTLEMENT OF
INVESTMENT
 provides facilities for the settlement, by conciliation or arbitration, of
investment disputes between member countries and nationals of other
member countries.
 provisions referring to arbitration under the auspices of ICSID are a
common feature of international investment contracts, investment laws,
and bilateral and multilateral investment treaties.
 an autonomous international organization with close links with the World
Bank. All of its members are also members of the Bank. Unless a
government makes a contrary designation, its Governor for the Bank sits
ex officio on ICSID's Administrative Council. Established in 1966, has
131 members.
 The expenses of the ICSID Secretariat are financed out of the Bank's
budget, although the costs of individual proceedings are borne by the
parties involved.
 FEATURES OF WORLD BANK
 It was established in 1944 in Bretton wood conference to support reconstruction in Europe after world
war II
 It is headquartered in Washington DC
 Jim yong kim is the President of the world bank
 188 countries are members in world bank
 It is one of the world’s largest sources of funding for the developing countries
 Its main focus is to help poor people and poor countries
 They use the resources to help developing countries to reduce poverty, increase economic growth and
improve their standard of living
 Assists developing countries through long-term financing of development projects and programs
 Provides to the poorest developing countries whose per capita GNP is less than $400 a year special
financial assistance through the International Development Association (IDA)
 Encourages private enterprises in developing countries through its affiliate, the International Finance
Corporation (IFC)
 Acquires most of its financial resources by borrowing on the international bond market
 Has an authorized capital of $95 billion, of which members pay in about 9 percent
 Has a staff of 6,500 from over 100 member countries
 WORLD BANK GROUP
 IBRD- International Bank for Reconstruction and Development: It was
established in 1946 to reduce poverty among poor countries by promoting
sustainable development through loans, guarantees, risk management and
advisory services .
 IDA- International development Association: established in 1960 and offer
interest free loans and grants
 IFC- International finance corporation: It is a private sector that assist world
bank and established in 1956
 MIGA- Multilateral investment Guarantee agency: It promotes foreign
direct investment to developing countries and established in 1988
 ICSID- International centre for settlement of Investment disputes: It
facilitates the settlement of investment disputes b/w governments and foreign
investors and was established in 1966
 ROLE OF WORLD BANK
 Reconstruction and development
 Promotion of investment

 Promote balanced growth of international trade

 Arranging loans through other channels for priority

 Assist in creating infrastructure

 Develop financial system

 Combat corruption

 Help in capacity building- offer advisory services & global

learning network
 Offer advisory services

 Grants offered to relieve debt burden of poor countries, improve

sanitation & water supplies, support vaccination program
 FUNCTIONS OF WORLD BANK

 Grant reconstruction loans to war devastated countries

 Provide loans to agriculture, irrigation, power, transport, health,
water supply and education
 Promote foreign investments by guaranteeing loans by other
organizations
 Encouraging industrial development of underdeveloped
countries by promoting economic reforms
 Providing economical, technical and monetary advice to
member countries for specific projects
 ADVANTAGES OF WORLD BANK
 It provides huge fund for education
 It supports in reducing poverty in poor countries

 It provides fund for biodiversity projects

 It helps to bring clean water, electricity and transport to poor

people
 It helps in controlling emerging conflicts

 It provides long term loan for promoting balanced economic

development
 Assist in projects like healthcare, infrastructure, education and
communication
GAIN TO INDIA DUE TO ASSISTANCE FROM WORLD BANK
 I -Revolution in :
 Telecommunication sector

 Information technology

 Better options in consumer goods

 II- Expansion of following service sectors:

 Banking

 Insurance

 Telecommunication
GENERAL AGREEMENT ON TRADEAND TARIFF
(GATT)
 GATT established in 1948
 It is a multilateral agreement signed by member countries
 India was one of the founder member of GATT
 The main objective of GATT is to bring economic prosperity by liberalizing
international trade
 It aims for substantial reduction of tariffs and other trade barriers, and
elimination of preferences on mutually advanced basis
 Change in tariff can be done only after consulting other parties to agreement
 Tariff level was brought down from 40% to 3% in 1986
 GATT was transformed into World Trade Organisation (WTO) with effect
from 1995
 PRINCIPLES OF GATT

Non discrimination: This principle requires that no member country shall

discriminate b/w members of GATT in the conduct of international trade. To
ensure non discrimination GATT apply principle of most favoured nation
(MFN) to all import and export duties. Certain exception to this principle were
allowed.
Prohibition of quantitative restrictions: GATT sought to prohibit quantitative
restrictions as far as possible and limit restrictions to less rigid tariff.
Exceptions were granted to countries confronted with balance of payment
difficulties.
Consultations: It provides forum for consultation to resolve disagreements.
 OBJECTIVES OF GATT

 To raise standard of living

 To ensure full employment

 To develop full use of resources of the world

 To expand production and international trade

URUGUAY ROUND—THE 8TH ROUND
URUGUAY ROUND—THE 8TH ROUND

 123 participating countries.

 Most difficult—and most ambitious—among all rounds
of negotiation.
 Lasted almost 8 years (1986-1994, in effect since 1995):
the longest round.
 Created the WTO in 1995.
 Ultimately, very successful.
 Uruguay Round—Outcomes
 Manufactured goods’ further liberalization:
 Cap on developed countries’ average tariff: not higher than 4%.
 Overall, tariffs reduced by more than 30%.
 Additional tariffs ‘bound.’
 Extended GATT scope to many new areas:
 Agriculture.
 Textiles.
 Services (banking, insurance, telecommunications, transportation
etc.): GATS.
 Intellectual property (copyrights, patents, trademarks): TRIPS.
 Strengthened GATT dispute settlement procedures.
 Agriculture
 Maindifficulty. Ultimately, plan to progressively
reduce subsidies was approved.

Textiles
 Planto progressively reduce and eliminate the
current quota system.

TRIPS
 Agreement to provide enhanced protection to
intellectual property.
 DIFFERENCE B/W GATT AND WTO
 It is a set of rules and
multilateral agreement
 It was designed to establish
international trade organisation
 It was applied on a provisional
basis
 Its rules are applicable to trade
in goods
 It was a multilateral instrument,
and plurilateral agreements
added later
 Dispute settlement system was
not faster
 It is a permanent
institution
 It is established to serve
its own purposes
 Its activities are
permanent
 Rules applicable to trade
in goods & services
 Its agreements are
multilateral
 Dispute settlement
system is faster
 WTO REPLACES GATT
 Formal, legally constituted organization
 Oversees trade treaties negotiated in the Uruguay Round:
GATS, TRIPS, TRIMS along with GATT
 Meets at least every 2 years
 Dispute settlements (DS) more binding and timely: member
states use DS process more then with GATT
 Greater effort to integrate LDCs and transition economies
 More involvement with Non governmental Organizations and
civil society groups

1995
 EVOLUTION OF THE WTO
Predecessor of the WTO – The GATT ‘47
 The General Agreement on Tariffs and Trade (GATT) 1947 -the first
major effort to establish international rules governing trade in goods.
 Though initially conceived as a provisional legal instrument, it
endured for almost 50 years.
 It functioned without a formal organisational framework to oversee
its implementation as the proposed International Trade Organisation
(ITO) never came into being
 GATT’s primary focus was the reciprocal reduction of tariffs which
later expanded to other trade related areas.
 In the years leading up to the Uruguay Round, GATT expanded its
competence through several rounds of trade negotiations which
witnessed the formulation of complex legal instruments on specific
aspects of trade, particularly disciplines on the use of non tariff
barriers.
 THE URUGUAY ROUND (1986-1994)

 The results of the Uruguay Round (UR) were signed in Marrakech,

Morocco on 15 April 1994 .
 The WTO came into being on 1 January 1995 by virtue of the
Agreement establishing the WTO.
 The scope of the multilateral trading system was broadened from trade in
goods (GATT) to encompass trade in services (GATS) and trade related
aspects of intellectual property rights (TRIPS).
 It was a rule-based global trading system complete with its own dispute
resolution procedures .
 The “Single Undertaking” concept
The multilateral trade agreements under the WTO system are treated as a
single undertaking which means that every member state of the WTO is a
party to every one of these agreements and must implement them
accordingly.
 WORLD TRADE ORGANISATION (WTO)
 World trade organisation (WTO) came into existence in 1995. It was the out come of
Uruguay round of GATT negotiations. WTO is an extension of GATT
 There were 3 trade agreements of GATT. They are WTO, GATS (General agreement on
trade in services) and TRIMS(Trade related aspects of Intellectual property rights).
 WTO is a full-fledged permanent institution established to serve its own purpose
 There are 161 countries as members in WTO and it is located at Geneva
 The WTO's current Director-General is Roberto Azevêdo
 WTO is member driven with decisions taken by agreement among all members and
deals with rules of trade b/w nations at a global level.
 It deals with agriculture, textile, banking, telecommunication, product safety, food
sanitation regulations and intellectual property
 Objectives of WTO are : raising standard of living , introduce sustainable development
and promote trade
 ORGANISATION STRUCTURE

Ministerial conference

General council

Council for trade in Council for IPR in Council for trade in

goods trade services

Committee on
Committee Committee council for council for Trade
trade &
on budget on BOP services Goods related IPR
development
council
 FUNCTIONS OF WTO
 Acting as a forum for multilateral trade negotiations
 Seeking to resolve trade disputes
 Acting as a watch dog of international trade
 Maintaining trade related database
 Cooperating with other international institutions involved in global economic policy making
 Acting as a management consultant for world trade
 Technical assistance and training for developing countries
 They seek to reform trade in agriculture
 Regulate food safety, plant and animal health
 Integrate textile and clothing sector
 Deal with trade related intellectual property rights
 Manage effectively TRIMS ( Trade related investment measures)
 No discrimination or favour regarding customs duty among member countries. It is termed as
principle of Most favoured nation(MFN)
 Free trade through negotiations by lowering trade barriers (tariffs, & quota)
 Multilateral trading system create a stable and predictable business environment
 MOST FAVOURED NATION

Art. 1 of GATT embodies the MFN rule. At its simplest, it requires any
favourable treatment granted to a product originating in or destined for any
other country, to be accorded immediately and unconditionally to the like
product originating in or destined for the territories of all other member states.

E.g. Spanish coffee case: Spain applied a higher duty on the types of coffee
imported from Brazil while applying a lower duty on other coffees considered
to be ‘like products’. The Panel considered this to be a breach of its GATT
MFN obligation.
 There are permitted exceptions to the MFN rule:

for e.g. free trade areas/customs unions and preferential systems.

 ADVANTAGES OF WTO
 WTO helps to promote peace in trade
 Disputes are handled constructively
 It allows free trade
 Due to free trade cost if living gets reduced
 WTO helps to give more choice to customers with wide range of qualities to
choose
 Trade raises their income
 increase in income leads to economic growth, which increases employment
opportunity
 Member countries trade flourish, standard of living increases
 Protects intellectual property rights (IPR) of the member countries
 Multilateral rules and disciplines relating to antidumping and subsidies
safeguard trade
 Trade without discrimination helps developing countries to increase their
marketability
 WTO AGREEMENTS

 General Agreements on Trade and tariff (GATT)

 General Agreements on Trade in Services(GATS)

 Trade related aspects of Intellectual property rights ( TRIPS)

 Trade related Investment measures (TRIMS)

 Agreements related to Agriculture

 Agreements 0n health & Safety measures

 WTO CURRENT STRUCTURE
Intellectual
Goods Services property Disputes

Basic Dispute
principles
GATT GATS TRIPS settlement

Additional Other goods Services

agreements and
details annexes
annexes

Market access Countries’ Countries’

commitments schedules of schedules of
commitments commitments
WTO DISPUTE SETTLEMENT—THE PROCESS
 If a member believes their rights under the agreements are
being infringed, it should bring the case to the WTO—instead
of acting unilaterally.

 Initially, governments try to settle their differences through

consultation.
 If the case is not settled during the consultation period, a
stage-by-stage procedure is initiated.
 A panel of independent experts, judging each case based on
interpretations of the agreements and individual countries’
commitments, makes the final ruling.
 Governments can appeal after the final ruling.
 WTO DISPUTE SETTLEMENT:
IMPROVEMENTS OVER OLDER SYSTEM
 Details the procedures and the timetable to be
followed in resolving disputes.
 Rulings harder to block.
 Rulings are automatically adopted unless there is a
consensus to reject a ruling.
 Stricter limits for the length of time a case should
take to be settled.
 In normal cases, settlement should take less than a
year; if the case is appealed, less than 15 months.
WTO DISPUTE SETTLEMENT—THE OUTCOMES

 From1995 to 2004, 324 disputes were taken to the WTO.

[GATT (1947-94 ): around 300.]

 About 15% of the cases are resolved ‘out of court.’

 Most others resolved after formal dispute resolution

procedures were adopted.

 Typically,
involved parties have abided by the WTO
recommendations.
 INTRODUCTION

 Brief history of Intellectual Property Rights (IPRs)

 Intellectual property rights are the rights given to persons over

63
the creations of their minds. They usually give the creator an
exclusive right over the use of his/her creation for a certain
period of time
 Linkage between Intellectual Property (IP) and trade: broadly
through following two premises:
(I) Widespread piracy, counterfeiting and infringements of
intellectual property rights constituted a barrier to trade
(II) IPRs transfer agreements
TRADE RELATED INTELLECTUAL PROPERTY
RIGHTS (TRIPS)

 TRIPS agreement lays down norms and standards for 7 types of

intellectual property:
 Copy rights

 Trademarks

 Geographical indications

 Industrial design

 Patents

 Undisclosed information

 Layout design of integrated circuits

 SCHEME OF TRIPS

 Agreement of TRIPS divided into 5 parts:

 Part 1 : Set general principles and objectives of TRIPS

 Part 2 : Provide minimum standard that each country must provide for
various intellectual properties

 Part 3: Establish extensive procedures to ensure that IPR are enforced

within each member state border

 Part 4: Set forth requirements of the acquisition and maintenance of IPR

and related inter parties procedures

 Part 5: integrate TRIPS into the disputed prevention and settlement

mechanism of WTO
 TYPES OF IPRS:
COPYRIGHT AND RELATED RIGHTS

 Copyright grants exclusive rights to the creator of original

scientific, artistic and literary works

66
 It relates to novel, poem, story, book and lyric.

 Countries to confine limitations or exceptions to exclusive

rights to certain special cases which do not conflict with
exploitation of the work and not prejudicial to right holder

 Ex: chetan Bhagat novel 5 point some one taken as 3 Idiots for
which he claimed his right.
 GEOGRAPHICAL INDICATIONS (GIS)
 GIs are denominations that identify a good as originating in a region or locality,
where the reputation and quality of good is essentially attributable to its

67
geographical origin (for example: Darjeeling tea of India)

 TRIPS prohibits the use of GIs in such a way as to cause deception and provides
for injunctive relief, refusal of trademark registration, etc

 Exceptions such as Countries are not obliged to bring a geographical indication

under protection, where it has become a generic term for describing the product
in question

 It helps producers to build reputation and fix premium price.

 It helps consumers to identify quality product

 TRADEMARK
 Trademark protects any word (m), symbol(apple products), logo or slogan(
just do it – Nike),sound(motorola mobile), design used to identify, distinguish
or indicate the source of goods or services

68
 Includes trade dress (the total image and overall appearance of a product) and
product configuration (the shape if non functional)

 The purpose is to safeguard the integrity of products and to prevent product

confusion and unfair competition and promote loyalty

 The term of protection (initial registration and each renewal of registration of

a trademark shall be for a term of no less than 7 years)

 Generic terms, descriptive terms, deceptive terms and official emblem not
used for trade mark
 INDUSTRIAL DESIGNS
 Protects the artistic aspect (namely, texture, pattern, shape) of an object instead of the
technical features to make product attractive, inc demand and strengthen brand name

 The term of protection (amount to at least 10 years)

69
They specialise in automobile, furniture, house hold products and medical equipments
etc

 The third party is prohibited from making, selling or importing articles bearing a
design which is a copy of the protected design, when such acts are undertaken for
commercial purposes

 Exception: optional mandate, if introduced then such exceptions do not unreasonably

conflict with the normal exploitation of protected industrial designs and do not
unreasonably prejudice the legitimate interests of the owner of the protected design

 Ex: Sweden designer developed shower which recycle water, help to save 90% water
 PATENTS
 It is a right exclude others from making, using or selling one’s invention

 It relates to a process, machine, manufacturing method, ornaments, new

variety of plant or improvement in a product

70
 Invention to be novel, useful and non-obvious

SWEDEN CO Ericssion hold patent for tech used in mobile, filed case on
Micromax for using their tech, for which penalty of 1% on SP paid to
Sweden Co.

 Inventions necessary ‘to protect ordre public or morality; including to protect

human, animal or plant life or health or to avoid serious prejudice to the
environment…’

 Ex: Basmati rice patent right given by US to Rice tech inc, now objected by
 LAYOUT-DESIGNS OF INTEGRATED CIRCUITS AND
TRADE SECRETS

 It refers to mask works (topographies) of the integrated circuits, the stencils

71
used to etch or encode an electrical circuit on a semiconductor chip

 Protection conferred to “original” layout-design/topographies

 Exclusive rights include the right of reproduction and the right of importation,
sale and other distribution for commercial purposes

 The term of protection (ten years form the date of first commercial
exploitation)
 PROTECTION OF UNDISCLOSED INFORMATION

 The protection must apply to information that is secret, that has

72
commercial value because it is secret and that has been subject to
reasonable steps to keep it secret

 Trade secrets consist of formulae, patterns, process or compilation of

information. (for example the formula for a sports drink)

 In most countries, they are not subject to registration but are protected
through laws against unfair competition
 REMEDIES TO OWNERS UNDER IPR ACT

 Civil Criminal Administrative

 Injunction Cognizable offence

 Claim for damages Imprison for 3 years
 Rendition of acc of profit Fine up to 2 lakhs
 OBJECTIVES OF TRIPS

 To reduce distortions and impediments to international trade and take into

account the need to promote competent as well as adequate protection of IPRs

 To ensure that measures and procedures to enforce IPRs do not themselves

74
become barriers to legitimate trade

 To reduce tensions by reaching strengthened commitment to resolve disputes on

trade-related IP issues through multilateral procedures

 To establish a mutually supportive relationship between the World Trade

Organisation (WTO) and World Intellectual Property Organisation (WIPO)
 TRIPS COUNCIL: CURRENT ISSUES
n Public health
nFinding a solution for countries with no or insufficient
manufacturing capacity in the pharmaceutical sector to make effective
use of compulsory licensing (Decision of 6 December 2005; IP/C/41)
n Geographical indications
n multilateral register for GIs for wines and spirits
n discussions on "extension“
n „clawback“ proposal by the EC in Agriculture
n Biotechnology/traditional knowledge/biodiversity
ndiscuss the relationship between the Convention on Biological
Diversity (CBD) and the TRIPS Agreement
n Introduction of a disclosure requirement for patent applicants
proposed by Brasil, India and others.
 RULES MADE BY TRIPS

 Copyrights terms must extend to 50 years after the death of the author

 Copyright must be granted automatically through registrations and system

of renewal

 Computer programmes must be regarded as literary works under copyright

law

 Patents must be granted to all field of technology and must be enforceable

for at least 20 years

 Many of the patent and trademark provisions were imported from the Paris
convention
 FEATURES OF TRADE RELATED INVESTMENT
MEASURES (TRIMS)
 TRIMS agreement signed end of Uruguay round
 It relates to agreement that violate national treatment and quantitative restrictions
 It focus on restrictions imposed by the government in respect of foreign
investment in the country.
 Offering equal rights to foreign investor as those of domestic investor
 No restrictions on any area of investment
 Only developing countries notify TRIMS.
 No ceiling on quantum of foreign investment
 FDI in the form of share/ debenture / assets / bond
 No force on foreign investors to use total products
 Restriction on repatriation of dividend, interest and royalty will be removed
 FEMA control value of share pricing
 FDI received in Automatic route and Government route
 When investment made through government route it is approved by FIPB- foreign
investmebnt promotion board
 FDI LIMIT
 FDI not allowed:  74% FDI limit- 8 sectors:
 Atomic energy  Airport, Diamond mine
 Explosives  Internet service provider
 Gambling  Satellite
 Cigarette manufacture  Private bank, Coal mine
 Chit funds  51% FDI limit:
 Agriculture (with exceptions)  Trading & multi brand retail
 100% FDI- 28 sectors:  49% FDI limit:
 Advertisement  Airlines, Defence, Insurance
 Power plant setting  26% FDI limit:
 Oil refining  FM Radio, Print media
 Tourism  20%FDI limit:
 Films  Public sector banks
 SEZ
 Gold mining
GENERAL AGREEMENT ON TRADE IN SERVICES (GATS)

 It lays down rules and disciplines covering multilateral international trade in

services.
 The Agreement came into effect in 1995 and is part and parcel of the WTO
agreements.
 Provides for Most favoured nation and national treatment
 It includes business and communication services like Constructional and
engineering, Distribution, Education, Environmental, health, Financial,
Tourism and travel, Recreational, cultural and sporting and Transport
services
 As services are normally intangible protection cannot be provided through
border measures. Services are normally protected through domestic
regulations on FDI, and participation of foreign suppliers to domestic
industries.
 MFN requires equal and consistent treatment of all foreign trading partners
 National Treatment requires equal treatment for foreign providers and
domestic providers.
CASES SPECIFIC TO THESE AGREEMENTS
 Case study: TRIPS
 EU & Member countries – seizure of generic drugs in transit

 Case study: TRIMS

 India measures affecting Automotive industry

 Case study: GATS

 Tourism in Egypt
 MULTI FIBRE ARRANGEMENT (MFA)
 It governed world trade in textiles and garments from 1974 to 2004, expired in 2005

 At the General agreement on Tariffs and Trade (GATT) Uruguay round, it was
decided to bring the textile trade under the jurisdiction of the world trade
organisation

 It imposed quotas to export by developing countries to developed nations

 Bangladesh was expected to suffer the most from the ending of the MFA, as it was
expected to face more competition, particularly from China

 MFA was introduced in 1974 as a short-term measure intended to allow developed

countries to adjust to imports from the developing world.

 In 2005, textile and clothing exports from China to the West grew by 100% in many
items, leading the US and EU to cite China's WTO accession agreement allowing
them to restrict the rate of growth to 7.5% per year until 2008.
AGREEMENT ON AGRICULTURE (AOA)
 It was established to market, support and protect agriculture marketing
 They are committed to domestic support, market access and export
subsidies
 AOA ignored the realities of global agricultural markets
 In Uruguay round textile trade brought under WTO. Ex: EU imported textile
from Bangladesh
 Textile came under GATT
 Developing countries textile production cost less due to less labour cost –
wanted to promote developing countries
 It reinforced industrial agriculture at the expense of sustainable agriculture
 Agricultural subsides have affected developing country farmers by denying
access to rich markets and allowing farmers from rich countries to sell in
developing countries at suppressed prices
 Subsidies excluded from those appearing in blue box (to be reduced –R&D)
and green box (permitted - PDS) has to be reassessed
 GLOBAL
Global Food
Availability
Trade
National Net National Food

NATIONAL
Imports of Food Production
Growth,
Employment Government
Distribution, Revenues
National Food Poverty
Availability

HOUSEHOLD AND INDIVIDUAL

Household
Incomes
Household Food
Access

Other Basic Needs and

Food Security Care Health

Page 83
Nonnecessities

INDIVIDUAL
Nutrition
Security
PILLARS OF AGRICULTURE ON AGREEMENT

Market Domestic Export

Access support competition

•Amber Box: more

production- Less subsidy
•Blue Box: limited
•Reduce Tariff Reduce quantity
Production - limit subsidy
•Fix Quota Reduce value
• Green box:Minimum
production – free subsidy.
Research & training given to
farmers
 PRE‐BRETTON WOODS PERIODS
 Until World War- I & beyond major Industrialized nations of the world traded
under, a fixed exchange system, Gold Standard.
• Under this system, each nation defined its currency in terms of gold.
• ‘Money’ issued by member countries had to be backed by reserves of gold.
• Gold would act as an automatic adjustment, flowing in & out of countries &
automatic altering the gold reserves of that country if imbalances in trade occur.
 Exchange rate between nations = $ 200/10grms of gold
 ----------------------------- = $ 0.1 Rs . or 1$= Rs60
 Rs. 12000/10grms of gold
• Under the Gold Standard, Money Supply was directly linked to the stock of
Monetary Gold.
• Gold Standard could not with stand abnormal periods like war & depression.
 HISTORY OF THE INTERNATIONAL MONETARY SYSTEM
 The (classical) gold standard system (1876-1913)
 “Rules of the game” were simple: each country sets the rate at which its currency

3-86
could be converted to a weight of gold, or said to set the par value for its
currency in terms of gold
 Since each government agreed to buy or sell gold with anyone at its
announced rate, so exchange rates between currencies were in effect
“fixed”
 Maintaining adequate reserves of gold to back its currency’s value was very
important for a country under this system
 The system implicitly limits the rate at which any individual country
could expand its monetary supply
 Any growth in the amount of money was limited to the rate at which official
authorities could acquire addition gold
HISTORICAL EVENTS PRECEDING THE BRETTON WOODS SYSTEM

1930s: Shared experiences of the Great Depression

 Deflation and competitive devaluations → dropping national
income, shrinking demand, mass unemployment, decline in world

87
trade
 Trade and exchange rate controls

Early 1940s: Developing a new monetary system

 Acknowledged need for a stable international monetary system

 A small number of states holding political power →

easier to negotiate
 Two major powers: Great Britain and the U.S.A.

 Leadership role of the U.S.

 ESTABLISHING OF THE BRETTON WOODS SYSTEM

In the first three weeks of July 1944,

delegates from 45 nations gathered
at the United Nations Monetary and
Financial Conference in Bretton
Woods, New Hampshire.

Goal:
To establish a postwar international monetary system of convertible
currencies, fixed exchange rates and free trade.

But!
Different preferences 2 rival plans
88
 ESTABLISHING OF THE BRETTON WOODS SYSTEM
I. The Keynes Plan: (Great Britain)
Goals: - world trade expansion
- international liquidity
- protection of the domestic economy from foreign
disturbances
Essence:
 Pound holders lost confidence in pounds and began converting their pound to
gold  a run on British gold reserves
 1931 Britain was forced to abandon the gold standard
 Focus on adjustment of real economy → wide fluctuation band
 Focus on world trade expansion and international liquidity “Bancor”
with nominal value fixed in terms of gold
 Surplus nations (U.S.A): credit balances earning interest
 Deficit nations (GB): overdrafts bearing interest to surplus nations
 Assigned quota determines the limit on resources to obtain, if over
quoted → penalties: devaluation, capital control
89
 ESTABLISHING OF THE BRETTON WOODS SYSTEM
II. The White Plan: (U.S.A) Goal: Exchange rate stability
Essence:
 There was 15% drop in US gold holdings
 1933: US left the gold standard.
 1934: US returned to the gold standard
- Focus on purchasing power of currencies → deviations from parity
only in case of fundamental imbalances
- Deficit nations: draw resources by selling their own currency for
that of other members
- Establishment of stabilizing bond → IMF, IBRD
Penalties: appropriate domestic policies & exchange controls
Compromise between I and II = BW Agreement
90
 ESTABLISHING OF THE BRETTON WOODS SYSTEM

b) Bretton Woods institutions:

IMF
Major functions:
1. Regulatory (administering the rules governing
currency values and convertibility)
2. Financial (supplying supplementary liquidity) H. D. White &
3. Consultative (providing a forum for cooperation J. M. Keynes, 1946
among governments)
IBRD
- Fighting poverty
- Improving living standards in the developing
countries
ITO → GATT → WTO
91
 BRETTON WEED CONFERENCE
 It is known as UN ,monetary and financial conference
 It regulated international monetary and financial position
 During conference they formed IBRD & IMF
 Exchange rate fixed
 Encouraged open market
 Promoted FDI and reduced barriers in trade
 Bank for international settlement dissolved
 Formed WTO
 Gold standard abolished
 Fixed exchange rates were set
 Exchange rates fixed using USdollar as reserve currency
 ESTABLISHING OF THE BRETTON WOODS SYSTEM

Classical gold standard vs. Floating exchange rates

 Exchange rate stability  Monetary sovereignty

 Long-run price stability  Insulation from foreign shocks

 Destabilization and free rider
 Loss of national
problems
monetary authority
 Lack of disciplining effects of
fixed exchange rate regimes
The Bretton Woods System –
an attempt to combine the advantages of both systems
93
Question: Is it theoretically possible?
 BRETTON WOODS AGREEMENT
 1. International Monetary Fund (IMF) to lend FX to any member whose supply
of FX had become scarce. To help the countries facing difficulty like deficit,
tight monetary policy and employment decreased.
Lending would be conditional on the member’s pursuit of economic policies
that IMF would think appropriate (IMF Conditionality).
 2. The US dollar would be designed as a reserve currency, and other nations
would maintain their FX reserves in the form of dollars.
 3. Each country fixed its ex rate against the dollar and the value of dollar is
defined by the official gold price $35 per ounce (Gold Exchange Standard).
 4. A Fund member could change its par value only with Fund approval and only
if the country’s BOP was in “fundamental disequilibrium”.
 5. Countries would have to make a payment (subscription) of gold and currency
to the IMF in order to become a member.
 6. Fixed ex rate system imposes restriction on monetary policy of countries.
Floating ex rates were regarded as a cause of speculative instability.
DECLINE AND FALL OF THE BRETTON WOODS SYSTEM
 1958-65: Private capital outflows from US
 1965-68: Johnson Administration. The bad US macroeconomic policy package
caused considerable damage to the US economy and the int’l monetary system.
 Involvement in the Vietnam conflict
 1971: US deficit  massive private purchase of DM  Bundesbank ( Germany)
intervened in FX market by buying huge amount of dollars, then it gave up and
allowed the DM to float.
 August 1, 1971: Nixon’s announcement
 Stop to sell gold for dollars to foreign central banks
 10% tax on all imports until revaluation of each country’s currency against the
dollars
 Freeze on prices and wages.
 ASSIGNMENTS

 Monetary and Exchange rate policies in India

 Globalization and impact of trade through international
institutions
 The conflict between free trade on industrial goods and
services
 Retention of protectionism on farm subsidies to domestic
agricultural sector
 Support of international liberalization of fair trade on
agricultural products remain the major obstacles in the
Doha Development Round.