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									1. Discuss the role of International Monetary Fund and World Bank in world finance. Briefly

discuss the successes and failures of these organizations.


International Monetary Fund:

The role of IMF would be:

      Promotion of global monetary cooperation

      Impetus to the expansion and balanced growth of global trade

      Imparting stability to currencies

      Providing assistance in the establishment of a multilateral system of payments

      Making the general resources available for the time being to its members facing balance

       of payments crisis under adequate safeguards

      To reduce the duration and mitigate the degree of disequilibrium in the international

       balances of payments of members.

IMF had its share of successes and failures. Its successes cited are:

      IMF and sister World Bank have led to more systematic trade liberalization than bilateral

       or multilateral negotiations could ever achieve.

      IMF financing and conditions have primarily provided support for the dramatic changes

       in Russia's economy to transit from a state-dominated hyperinflating economy to


      The IMF has promoted interests of member countries by supporting stabilization in

       Poland and other Central European nations. The spread of the Mexican financial crisis

       has been stopped through substantial support for Argentina, and supporting reform in the

       states of the former Soviet Union.
       Global security has been enhanced by the IMF's success in pursuading program countries

        to reduce defence spending, from an average of more than 5 percent in 1990 to around 2

        percent of gross domestic product by 1996.

Its failures are cited as follows:

       Conditionalities, or the economic performance targets established as a precondition for

        IMF loans, it is claimed, retarded social stability and hence constrained the stated goals of

        the IMF, while Structural Adjustment Programs lead to an increase in poverty in recipient


       Currency devaluation was suggested by the IMF to the poor nations with plunging

        economies. Supply-side economists stated that these Keynesian IMF policies were

        destructive to economic prosperity. (Ref: Wikipedia under criticisms)

       Overall the IMF success record is perceived as limited by the critics. Since 1980 critics

        claim that most of the Fund's members have experienced a banking collapse, and the

        GDP has been reduced by 4% or more, far more than at any time in Post-Depression


The following are some of the specific cases of failure as cited by the critics:

       Pre 1973, IMF supervised system of fixed exchange rates with dollar as reserve currency

        considering dollar to be a low inflation currency. But this failed when US increased

        social and defense spending in 1960s without increasing taxes.

       In Argentina, IMF while fixing the exchange rate too high, made its exports too

        expensive resulting in a trade deficit. With no recourse to earn foreign exchange to

        service debts, its foreign debts sky rocketed to 50% of GDP by 2001. Devaluation

        caused bankruptcies and as a sequel 20% unemployment.
      In Brazil, $41 billion loan program as a preventive led to huge $20 billion capital flight.

       Interest rates rose to very high levels leading to massive loan defaults, bankruptcies and

       bank failures. Unemployment hovered around 17%.

      In Mexico, the IMF programs are said to have caused an economic depression, pushing

       millions of farmers out of agriculture, bankrupting thousands of small businesses, and

       with drastic job losses and decline in wages.( Ref:

      In Tanzania, IMF programs were focused to reorient agricultural production toward

       exports. This reportedly brought about augmenting rural poverty, income inequality and

       environmental degradation.. Food security, housing conditions and primary-school

       enrollment fell while malnutrition and infant mortality were on the rise. (Ref:

The World Bank:

       The role of the World Bank was to help the developing countries in areas such as human

development, agriculture and rural development, environmental protection, infrastructure, and

governance. The World Bank provides loans at preferential rates to member countries, as well as

grants to the poorest countries. Loans or grants for specific projects are often linked to wider

policy changes in the economy or sector thereof. (Wikipedia: World Bank Group)

The successes: (Ref: Rob Weekes)

      The Bank has been successful in its growing role in the spheres of biodiversity, ozone

       depletion, narcotics, crime, corruption, and post conflict reconstruction..

      Its emphasis on economic development over other social values has helped the countries.

       The „Washington consensus‟ reached in the early 1980s following the debt repayment

       crisis in Latin America requires that loans are offered with a precondition that
       government commits to economic reform. The liberalization of capital markets, the

       adoption of realistic exchange rates, and tax reform does assist the impoverished of any


      World Bank‟s strategy for financing the loans is very efficient. Member countries

       purchase shares in IBRD but pay to the Bank only 7% of the cost of shares. 93% is

       classified as „callable‟ as a promise to pay if necessary. World Bank would therefore

       raise the vast majority of money required for its operations from international capital

       markets due to these contingent liabilities for donors. The reduced cost of the shares and

       the capacity of the Bank to raise commercial finance would make its reliance on

       contributions of donor countries lower guaranteeing that the capital contribution expected

       of the donor countries remain reasonable.

      The Bank discourages irresponsible fiscal policies of developing countries. Since the

       mid-1990s, members have to comply with codes of „best practice‟ to receive loans. Thus,

       it is mandatory for developing countries to institute systems of banking regulation and

       supervision, corporate governance and accounting that facilitate repayment of the loans

       and the attraction of foreign direct investment.

Failures: (Ref: Rob Weekes,

      The public infrastructure projects funded by the IBRD have consistently been recognized

       as unmitigated disasters. Cases in point, Brazil‟s Polonoroeste road-building project,

       which set a portion of the Amazon rainforest on fire; the Sardar Sarovar dam project in

       India, which displaced 240,000 Indians; the Singrauli coal projects also in India spawned

       wide spread protest. Internal reports suggest that one-third of World Bank financed

       projects are failing.
      The World Bank investment policy has strengthened some of the corrupt, inefficient and

       antidemocratic regimes of many developing countries. The Bank has shown willingness

       to deal directly with almost any government not withstanding their human rights record.

      The Bank follows a risky loan strategy. Donor countries are able to make triennial

       contributions without a mandate to underwrite the 93% potential additional cost of each

       share. The default of Mexico on repayment of its debts in 1982 indicates the weakness of

       the loan strategy. Only 3% of the Bank portfolio is set aside to protect against the loss of

       revenue from defaulting debtors.

      The contribution of donor countries to the World Bank is a poor investment. A US

       Treasury study showed that US companies in fact received only $0.23 in procurement for

       every dollar paid into IDA. In 1997, this prompted the US to refuse to provide its

       assessed contribution to IDA. The inefficiency of the World Bank infrastructure shows

       that the US companies could receive a better financial return and have a more instant

       impact upon local development by direct investment in the developing countries.

2. What factors appear to affect the extension of push and pull policies in global market?


       Push policies view demand as foreseeable. They deal with uncertainty by tightening

controls. The range of resources available to the participants is constrained. They dictate the

action of the participants. The producers are treated as passive consumers whose needs can be

anticipated and shaped by centralized decision makers.

       Pull policies in contrast view demand as highly uncertain. Instead of dealing with

uncertainty by tightening controls, pull policies would address immediate needs by expanding

opportunities for local participants—employees and customers alike—to use their creativity. To
exploit the opportunities that uncertainty presents, pull policies help people come together and

innovate by drawing on a growing array of specialized and distributed resources. Pull policies

give even people on the periphery the tools and resources (including connections to other people)

needed to take the initiative and to address opportunities creatively as they arise. Pull policies

treat people as networked creators even when they actually are customers purchasing goods and

services. Pull platforms harness their participants' passion, commitment, and desire to learn,

thereby creating communities that can improvise and innovate rapidly.

The benefits of pull policies are as follows:

    Enhanced innovation,

    Increased opportunity for collaboration, Closer relationships with customers and suppliers

    More rapid feedback, richer reflection on the results of distributed experimentation, and

     greater scalability,

    Most importantly, they help companies to secure deeper sources of competitive advantage

     at a time when the traditional sources are disappearing.

       Pull platforms and push programs are not mutually exclusive. Li & Fung's global process

network is a highly flexible pull platform, for example, yet many apparel producers participating

in it organize their own resources in the traditional top-down way. Amazon and eBay use pull

models to help consumers gain access to books produced by traditional push programs, but pull

distribution systems are now creating opportunities to reconfigure the production process

through publishing on demand.
3. Discuss the pros and cons of the bush doctrine, has this doctrine led to more peaceful

   relationship between countries? If yes, why,? if not. Why?


           The Bush Doctrine is a phrase used to describe various related foreign policy principles

   of George W.Bush, the president of the United States.. The phrase initially described the policy

   that the United States had the right to aggressively secure itself from countries that harbor or give

   aid to terrorist groups. This was used to justify the US invasion of Afghanistan. Later the

   doctrine included additional elements, including the controversial policy of Preventive War,

   which meant that the United States should depose foreign regimes that represented a potential or

   perceived threat to the security of the United States, even if that threat was not immediate; a

   policy of spreading US-style democracy around the world, especially in the Middle East, as a

   strategy for combating terrorism; and a willingness to pursue U.S. military interests in a

   unilateral way. (Ref; Wikipedia)

   Pros: (Ref: Deliberating in a democracy)

          The doctrine polarizes the domestic forces.

          The United States is not threatened by conventional warfare but by weapons of mass

           destruction that can be easily carried, hidden, and used without warning. Faced with

           instant threats, the United States cannot let its enemies strike first.

          The United States is in a unique position in the world; therefore, pre-emption should be a

           tool unique to American foreign policy. Other countries should not use pre-emption as an

           excuse for aggression. But the action of the US would be just and clear.
      United Nations can not be the custodian for the security of Americans. UN includes

       many countries which are antagonistic to the US interests. In such a situation US should

       act alone to protect its citizens and interests.

      US reserves the right to work with other like- minded countries in pursuit..

      The best way to fight enemies is to seek their friendship. Bad governments breed anger

       and unhappiness, which can lead to wars.

      Spreading freedom around the world will give hope to people, which makes the world

       safer. Experience with Japan and Germany after World War II shows democracy can

       grow in previously dictatorial regimes.

Cons(Ref: Deliberating in a democracy;

      It could lead to other states to pursue the production of Weapons of Mass Destruction or

       terrorism. (wikipedia)

      Every country has the right to attack an enemy who is threatening an immediate attack.

       But it is illogical to grant the right to attack because another country might become a

       threat in the future.

      The Bush Doctrine would escalate international chaos and give rise to frequent wars.

      The difference between pre-emptive and preventive wars is glossed over. The Doctrine

       sets a bad precedent by approving preventive war. The United States will find it

       increasingly difficult to stop attacks by other countries when it claims the right to wage

       war preventively.
      Though the United States is a strong nation, it must work with other nations in areas such

       as curbing drug trafficking etc. apart from terrorism.. Cooperation would not be possible

       through domination.

      The United States does not have the right to impose its way of life and culture on other

       countries. The people should chose their way of life.

       After several years of following Bush doctrine, anti-Americanism is high and criticism of

the Bush Doctrine is widespread. The policy has estranged the allies of the United States. But

the following facts highlight the failure of the doctrine:

      The elections in Iraq and Afghanistan have not prevented rising violence in either place;

      The revolution in Lebanon has led not to stability but to serious internal strife and

       Hizballah's attacks on Israel

      Libya‟s disarmament seems to have resulted more from enduring international sanctions

       than from the Bush Doctrine

      The steps toward democracy elsewhere in the world have gone nowhere

       It can be concluded that Bush Doctrine has not led to more peaceful relationship between

countries but has escalated tension among the countries.

4. The concept of comparative advantage is one of the most powerful in all of economic theory.

Explain why this is true. What do these concepts show. What is its implication for international

and international trade.


       David Ricardo, the proponent of the concept explained through an example involving

England and Portugal. Portugal can produce both wine and cloth with less labor than it would
take England to produce the same quantities. The relative costs of producing those two goods are

different in the two countries. In England while it is hard to produce wine, it is only moderately

difficult to produce cloth. In Portugal both are easy to produce. Therefore while it is cheaper to

produce cloth in Portugal than England, it is cheaper still for Portugal to produce excess wine,

and trade that for English cloth. Conversely England benefits from this trade because its cost for

producing cloth has not changed but it can now get wine at a lower price, closer to the cost of

cloth. It can be concluded that each country can gain by specializing in the good that it has

comparative advantage in and trading that good for the other.

       The theory of comparative advantage is the foundation of global trade resulting in a win-

win situation to both the partners in trade.

       The concept of comparative advantage was first conceived in the context of international

trade. The corollary to this concept is that the Nations that tried to be self-sufficient would

impoverish their citizens by trying to produce goods for themselves at a higher relative cost than

could their trading partners. Instead, they could enrich their citizens by allowing them to trade

for what they couldn‟t produce efficiently themselves.

       What was key to Ricardo‟s insight was that a country could actually be better than a

trading partner at producing both, for example, cotton and wine, but that it still made sense for

them to specialize in the one of the two they were better at in comparison to that trading partner.

That is where the “comparative” in comparative advantage comes from: by specializing in the

one of the two that it is comparatively better at, each country can consume what it wishes and

trade the surplus for the other country‟s surplus. Specialization and exchange enables countries

to consume more than they would be able to if each tried to do both themselves. The same logic
applies when there are a larger number of traders. Free trade between nations enhances the well-

being of all who trade.

       Even within a country, a region can have comparative advantage over other regions. For

instance Detroit is the hub for automobile manufacture in the US. This region will be a host to a

cluster of related industries imparting comparative advantage to the automobile industry.

       Production by comparative advantage also promotes peace among nations and also in

human interactions. Specialization leads to interdependence. A consumer is dependent on the

grocer‟s specialization. Students rely on the specialization of the teacher. These

interdependencies discourage confrontation. In the larger context, the countries will eschew

conflict and pave way for peaceful coexistence.

5. What role do MNC‟s play in International relations?


       The economic role of multinational corporations (MNCs) is to be a conduit for physical

and financial capital to countries with capital shortages. As a consequence, wealth is created,

which results in job creation. The resultant tax revenues from MNC‟s income will enable

developing countries to improve their infrastructures and to strengthen their human capital. By

improving the efficiency of capital flows, MNCs reduce world poverty levels and provide a

positive externality encouraging countries to cooperate and to seek peaceful solutions to external

and internal conflicts.

       MNCs have weathered constructive competition, which has compelled MNCs to provide

the world with an immense diversity of high-quality and low-priced products. Competition

delivers mutually beneficial gains from exchange and promotes the collaborative effort of all
nations to produce commodities efficiently. Free markets protect consumers from prolonged

abuses by government-sponsored monopolies and cartels.

       MNCs have been the driving force in the spread of “green” technologies and in creating

markets for “green products.”1 Market incentives (e.g., the threat of liability, consumer boycotts,

and the negative impact on reputation) have forced firms to monitor their foreign affiliates for

their compliance with high environmental standards. Several studies confirm foreign affiliates

having higher environmental standards than their domestic counterparts. The efforts have also

been initiated by MNCs to assist domestic suppliers (“regardless of ownership”) to qualify for

eco-labeling and to meet the ISO 1400 certification-environmental standards. MNCs have

advanced several programs (e.g., Global Environmental Management Initiative, Caux Round

Table, and the Global Sullivan Principles) to establish industry codes dedicated to achieving high

levels of social responsibility

       MNCs have created employment in developing countries. MNCs were not only

responsible for direct job creation but also for the creation of equal number of jobs indirectly

through multiplier efforts. Indirect job creation is estimated, by the UN, to be 3 to 7 times the

jobs directly generated by MNCs respectively in the manufacturing and food industries.

       The presence of MNCs has also contributed to the increase in education, nutrition and

standard of living in the developing countries.

       The role of MNCs can not be overemphasized — they have provided developing

countries with much needed capital, jobs, and environmentally friendly technologies. Through

free market initiatives, MNCs create wealth, which provides the income flow necessary for
welfare improvements. If the desire of developing countries is to escape severe conditions of

poverty, they need to privatize, deregulate, protect private property rights, and establish a rule of

law — the MNCs will then provide the capital.

6. Discuss the relationship between economies of scale, International trade, foreign policy and

economic integration. Are these related. If so how if not why not.


       A larger business is often able to deliver value at lower costs than a smaller one, other

things being equal. The phenomenon that results in cost reduction with increase in scale of

operations is called the economy of scale.

       The economies of scale stem from many factors. The relative importance depends on the

industry in question. Common economies of scale include:

      Amortising administrative overheads over a bigger operation

      purchasing volumes to get better deals from suppliers

      Expansion of facilities to get lower costs per unit produced

       Economies of scale are often the claimed justification for mergers and acquisitions and


       Since economies of scale are about obtaining lower unit cost due to higher volume,

market size is the key. If a firm is located in a small country of the size of Japan, domestic

market would not suffice to generate adequate demand to harness of economies of scale in some

industries. They have to fan out to the rest of the world to obtain adequate volume. Unless there

is a conducive international trade regime, firms foray into a foreign country would be stymied by

the entry regulatory barriers of that country. Therefore International trade policies and foreign
policies are intertwined with the firms‟ pursuit of economies of scale. Realizing a win-win

opportunity in market expansion, countries now resort to economic integration. Formation of

EU, NAFTA, ASEAN etc. are the result of such economic integration initiatives by nations.

Brown, John S. & Hagel, John. (2005, August). From push to pull: The next frontier of

       innovation . Retrieved November 17, 2008, from The McKinsey Quarterly Web site:


Bush Doctrine. (2008). In Wikipedia, the free encyclopedia [Web]. Wikimedia Foundation, Inc.

       Retrieved November 18, 2008, from

International Monetary Fund. (2008). In Wikipedia, the free encyclopedia [Web]. Wikimedia

       Foundation, Inc. Retrieved November 18, 2008, from

International Monetary Fund: The Role of the IMF and IMF History. (2004). Retrieved

       November 17, 2008, Web site:

Mulligan, Robert F. (2002, November 18). The IMF: Successes and Failures. Retrieved

       November 17, 2008, Web site:

Quinlivan, Gary. (n.d.). Sustainable Development: The Role of Multinational Corporations.

       Retrieved November 17, 2008, Web site:

Summers, Lawrence (1998, March 27). Why America Needs the IMF. Retrieved November 17,

      2008, from International Monetary Fund Web site:

Weekes, Rob (2005, June 21). World Bank: Success or Failure? Retrieved November 17, 2008,

      from International Debate Education Association Web site:

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