The syllabus says
Financial flows: organisations
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what is the 'transfer of capital'?
Capital refers to wealth, in either money or assets. Therefore, capital can include cash, ownership of commodities, and shares in companies. This capital is transferred around the world through trade, remittances, aid, foreign direct investment, and other methods. This page is about the ways in which governments and trading organisations influence these transfers.
These transfers relate to the control of the economy, and from this, the ability of individuals and countries to spend money on what they believe are the most important things in life. This has led some to question whether the world is in fact ruled by an elite, who run global institutions that have grown in power to the extent that they are able to dictate economic policies to governments.
These transfers relate to the control of the economy, and from this, the ability of individuals and countries to spend money on what they believe are the most important things in life. This has led some to question whether the world is in fact ruled by an elite, who run global institutions that have grown in power to the extent that they are able to dictate economic policies to governments.
Governments
Governments of nation-states are the major stakeholders in the world economy. They have sovereign power to make laws that can fundamentally change the way the economic system works within their own borders. If groups of nations work together, such as in the European Union, they can significantly affect the ways in which capital is transferred around the world. The main ways in which they influence the transfer of capital are:
Ultimately, governments have the power to reject international agreements. Argentina defaulted on its debt several times since the beginning of the Argentinian Great Depression in 1998. And in Greece in January 2015, Syriza won the general election on a platform that stated clearly they would not continue with the repayment of over €283 billion in debt owed to European creditors (this doesn't include almost €40 billion owed to other creditors). The dominance of the nation-state is questioned as part of the Global Interactions unit in more detail here.
- Limiting free trade through setting tariffs, quotas and regulations on imports and exports
- Overseas Development Aid - giving aid as money directly from richer to poorer countries
- Internal policies that affect how capital is handled inside the borders of that country, but which influence it outside, such as regulating the ways in which non-governmental organisations (NGOs) like charities can spend money (e.g. the United States's Global Gag Rule which limited US government money for charities that offered abortion overseas; this rule was repealed by President Obama in 2009)
- Limiting inward migration, which reduces outward flows of remittances
- Tax laws, which can encourage companies to be headquartered in different countries to those in which they operate to avoid tax (e.g. Amazon avoiding UK corporation tax by basing itself in the low-tax environment of Luxembourg)
- Lobbying global trade talks (arguing for different rules in the global economic system), e.g. dropping third world debt or encouraging free trade
Ultimately, governments have the power to reject international agreements. Argentina defaulted on its debt several times since the beginning of the Argentinian Great Depression in 1998. And in Greece in January 2015, Syriza won the general election on a platform that stated clearly they would not continue with the repayment of over €283 billion in debt owed to European creditors (this doesn't include almost €40 billion owed to other creditors). The dominance of the nation-state is questioned as part of the Global Interactions unit in more detail here.
the World trade ORGANISATION (WTO)
History: The General Agreement on Tariffs and Trade (GATT)
After the Second World War it was recognised that protectionist policies (tariffs and quotas) that limited free trade had been one of the catalysts towards keeping nations separate, and therefore more likely to go to war. In Geneva in 1947, the General Agreement on Tariffs and Trade was signed between 23 countries. By 1994, the number of signatories had grown to 128.
The GATT was an agreement to encourage free trade by lowering trade barriers. It's important to note that it was an agreement, not a treaty. This meant it did not require the approval of the US Congress in order to come into effect - the President's signature was enough.
The GATT was an agreement to encourage free trade by lowering trade barriers. It's important to note that it was an agreement, not a treaty. This meant it did not require the approval of the US Congress in order to come into effect - the President's signature was enough.
The end of GATT
By 1994, it was recognised that the GATT was unworkable. Because it was an agreement, not a separate organisation, it could only be changed by the consent of all members. This meant marathon negotiations, which were generally known by the name of the first place where the discussions began. The "Uruguay Round" were trade talks that began in September 1986 and went on until 1994! Though this round of talks did bring about significant change, the decision was taken as part of these talks to create a new, permanent organisation, that would be able to make changes on its own without having the consent of every member. This was known as the World Trade Organisation, and came into being in 1995.
The World Trade Organisation
The WTO is an organisation that exists to promote free trade between members. The video to the right describes the history of the WTO and it's progress to date.
The main issue with the WTO is whether it benefits all members equally. If members cannot agree on the trade rules, the issue can be put to a vote, but in most situations a two thirds majority is accepted, so there could be a significant minority of countries that vote against the measure. |
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Trade talks: The Doha Round
As of 2015, the Doha round is technically still active; however, following the discussions which began among WTO members in 2001 in Doha, there has been no progress since 2008 and the Doha Round is effectively no longer a priority for many members, with them preferring to negotiate elsewhere such as the TIPP (see here, about halfway down the page). Even so, the negotiations continue amongst members and the WTO continues to actively encourage countries to work together in reducing limits on free trade.
the International Monetary fund (IMF)
History
The IMF's history starts at the 1944 Bretton Woods Agreement, when 44 of the Allied powers (including the UK, US, Russia and France) agreed to set up an organisation to ensure a stable economic climate. It does this by monitoring economic developments, lending money to countries that cannot pay debt, and providing policy (technical) assistance to those countries. These are described in more detail here.
What it does
In practice, the IMF's role is to create a stable world economic climate, and to organise financial assistance for countries that have a crisis in their balance of payments.
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The balance of payments is the difference between money coming in (earned from exports) and money going out (from buying imports). In most cases, the balance of payments includes the payment of debt to other countries. If a country cannot pay its debt, the IMF may act as an international bank that lends money to the country. This money comes from the 'quota' it gives to each member country. Each member of the IMF pays in a certain amount based on the size of their economy. This money is then lent to countries that need it.
A major issue with the IMF is that some believe it is there to serve the needs of the richest countries. This is partly because of two features of the organisation:
A major issue with the IMF is that some believe it is there to serve the needs of the richest countries. This is partly because of two features of the organisation:
- Voting rights (e.g. about changes to rules) are proportional to the quota that must be paid in. So, the US has the largest quota of around 17% of the IMF budget, but also has 17% of the votes. Since 85% of votes are needed to back a change, the USA has an effective veto over any policy it doesn't approve.
- The IMF has commonly insisted on Structural Adjustment Policies (SAPs) for countries that need its help. This means they are forced to alter the balance of their economy towards a free market economy with low government involvement. The aim of this policy is to return the country's economy to a strong position where it no longer needs the involvement of the IMF. SAPs have been criticised as reducing the money that can be spent on essential services such as healthcare and education.
the world bank
History
The World Bank was created at the same time as the IMF in 1944, but its full name is the International Bank for Reconstruction and Development. It originally focused on post-war reconstruction in countries that had no working economy to provide the money for this.
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What it does
It is different from the IMF in that it supports the investment projects going on within a country. Its website states the following:
The World Bank is a vital source of financial and technical assistance to developing countries around the world. We are not a bank in the ordinary sense but a unique partnership to reduce poverty and support development.
We provide low-interest loans, zero to low-interest credits, and grants to developing countries. These support a wide array of investments in such areas as education, health, public administration, [and[ infrastructure...
We offer support to developing countries through policy advice, research and analysis, and technical assistance.
The World Bank gets its money from issuing bonds. These bonds are bought by investors who are looking for a long term, secure investment. They trust that the World Bank will use the money to lend responsibly.
The World Bank has been criticised for not promoting sustainable growth:
The World Bank is a vital source of financial and technical assistance to developing countries around the world. We are not a bank in the ordinary sense but a unique partnership to reduce poverty and support development.
We provide low-interest loans, zero to low-interest credits, and grants to developing countries. These support a wide array of investments in such areas as education, health, public administration, [and[ infrastructure...
We offer support to developing countries through policy advice, research and analysis, and technical assistance.
The World Bank gets its money from issuing bonds. These bonds are bought by investors who are looking for a long term, secure investment. They trust that the World Bank will use the money to lend responsibly.
The World Bank has been criticised for not promoting sustainable growth:
- Free market policies encouraged by the World Bank are harmful to economic development (this is highly contestable)
- Assumes that poor countries must borrow from wealthier countries to develop - suggesting dependency and reliance
- Its income is almost entirely from investors in wealthy countries, so it supports the political ideology of those countries
- Loans provided in the 1980s were often used to pay off previous debt - i.e. a debt spiral
The International Development Association
The IDA is one of five World Bank institutions. It lends only to countries with a very low income, and these loans are interest free and over a very long period of time. The IDA is primarily used to provide money for social projects such as improving water supplies.
The World Bank today aims to support the ideals and programmes of the Millennium Development Goals and has set itself two goals:
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