MS34B, UWI Mona, Department of Management Studies International Business Management (MS34B) International Financial and Monetary Systems Facilitator: Densil A. Williams

MS34B, UWI Mona, Department of Management Studies Contents Composition of the Monetary System: National vs International Governing Institutions - Bank - Fund Institutional Challenges International Capital Markets

MS34B, UWI Mona, Department of Management Studies Composition of Monetary Systems : National vs. International National Monetary SystemInternational Monetary System Central Bank- e.g BOJIMF, BIS Commercial Banks- e.g NCB, Scotia, Pan CaribbeanInternational Operations of Commercial Banks- HSBC, Citi Bank Development Banking Activity – e.g. DBJWorld Bank Group (MIGA, IFC,FIAS etc.) Regional Development Banks e.g. IADB,CDB, ADB- African Development Bank etc.

MS34B, UWI Mona, Department of Management Studies International Institutions The World Bank Group World Bank International Finance Corporation Multilateral Investment Guarantee Agency Foreign Investment Advisory Service- ICSID

MS34B, UWI Mona, Department of Management Studies The World Bank Genesis: o 1944 Bretton Woods Conference o Initially involved in reconstruction of post WWII Europe. Present Role: o Development: Lending money to developing countries (IBRD and IDA funding). o Movement from Project Lending to Non- Project Lending.

MS34B, UWI Mona, Department of Management Studies Reforms Recommended by WB i.e. Structural Adjustment Programme Reduce budget deficits Privatise state owned companies Liberalise trade by decreasing tariffs and other import barriers Reform tax system to increase the incentive for productive activity and to increase tax collections Allow price to reflect market mechanism by removing government subsidies and price controls. Float exchange rate

MS34B, UWI Mona, Department of Management Studies Other Institutions in WB Group International Finance Corporation o Promote development of private institutions in LDCs by lending and purchasing equity in private firms in LDCs. o Also, assists LDC firms to obtain financing. Multilateral Investment Guarantee Agency o Mandated to promote economic development by encouraging FDI flows to LDCs. o Thus, provides insurance and policy advice services. o Gives consultancy advice to members to enhance their investment climate and promote specific investment opportunities.

MS34B, UWI Mona, Department of Management Studies Other Institutions in WB Group Foreign Investment Advisory Service o Emerged from IFC’s Development Department o Joint Venture between WB, IFC and MIGA. o Provides policy advice in areas of legal reform, investment policy, investment promotion programs to LDCs interested in attracting FDI.

MS34B, UWI Mona, Department of Management Studies International Monetary Fund Genesis: o 1944 Bretton Woods Conference. Early Objectives: o Monitor international monetary systems. o Be a banker to the world’s Central Bank. Activities pre-1970s. Managed fixed exchange rate system System collapsed in the 1970s Birth of Floating Exchange Rate.

MS34B, UWI Mona, Department of Management Studies International Monetary Fund (cont’d) Present Role: o Lender of last resort to LDCs suffering from B.O.P difficulties. o Different forms of lending: Compensatory Financing Facility; Oil Facility; and Extended Fund Facility. o The implementation of Stablisation Programmes (currency devaluations, decreases in government budgets, and elimination of government subsidy programmes).

MS34B, UWI Mona, Department of Management Studies Institutional Challenges Increased need for funds to end financial crisis around the world. More measured policies to deal with new economic challenges that have not being experienced to date.

MS34B, UWI Mona, Department of Management Studies Institutional Challenges Conflict between institutions’ developmental vs commercial roles. Criticisms: Imposing austerity Duplication of functions Assumption that principal constraint facing LDCs is an absence of capital and inappropriate macroeconomic policy. Adjustments without human face

MS34B, UWI Mona, Department of Management Studies The International Capital Market A capital market is a system that allocates financial resources (debt and equity) to their most efficient uses. It provides a mechanism through which borrowers and investors can carry out their activities most efficiently. The market consists of individuals, companies, financial institutions and governments that invest and borrow.

MS34B, UWI Mona, Department of Management Studies The International Capital Market The International Capital Market (ICM) differs from National Capital Market in that the former deals with transactions across national boundaries while the later is confined to national boundaries. Large international banks play a critical role in the ICM by gathering the excess cash from investors and channel it to borrowers across the globe.

MS34B, UWI Mona, Department of Management Studies The International Capital Market This activity is particularly important to firms in countries with small or developing capital markets as it expands the supply of money from which they can borrow. This expanded supply of money also reduces the cost of money to borrowers.

MS34B, UWI Mona, Department of Management Studies The International Capital Market Factors expanding the ICM Information Technology: Electronic trading after the close of daily trade facilitates faster response time and reduce cost of communicating. This thus facilitates greater participation in the market. Investors and Borrowers can now respond faster to breaking news on the ICM.

MS34B, UWI Mona, Department of Management Studies The International Capital Market Deregulation: This has increased competition, lowered the cost of financial transactions and opened many national markets to global investments and borrowing. Financial Instruments: Greater competition leads to more innovative financial instruments. This results in the repackaging of hard to trade financial assets into more liquid and marketable financial instruments (securities).

MS34B, UWI Mona, Department of Management Studies The International Capital Market E.g. Some agencies (General National Mortgage Association in the US) guarantee mortgage against default and pool them as assets. They then sell securities in capital markets that are backed by these mortgages.

MS34B, UWI Mona, Department of Management Studies Components of the International Capital Markets International Bond Market: consists of all bonds sold by companies, governments and other organizations outside their national boundaries. Large international investment banks such as Barclays Capital, Citi Bank etc. typically manage the sale of these bonds for corporate and government clients.

MS34B, UWI Mona, Department of Management Studies Components of the International Capital Markets International Equity Market: consists of all stocks bought and sold outside the issuer’s home country. Large international companies generally list on several national stock exchanges. Stock exchange listing the greatest number of international companies are: London, New York, Frankfurt E.g. of Caribbean Companies listing on International exchange : Sagicor of Barbados on the LSE

MS34B, UWI Mona, Department of Management Studies Components of the International Capital Markets Eurocurrency Market: consists of currencies that are banked outside their countries of origin. E.g. US$ deposited in Jamaican banks are called Eurodollars, £ deposited in US banks are called Europounds etc. The market that these currencies are traded in is called the Eurocurrency market The LIBOR is the rate offered to large investors for Eurocurrency.

MS34B, UWI Mona, Department of Management Studies Concluding Remarks This lecture outlined how the world’s financial system is organized and governed. It is important that managers in developing countries have an understanding of these issues as they will eventually affect the competitiveness of the enterprises that they operate.

Concluding Remarks Further, the enabling environment in which these enterprises operate is heavily shaped by the policies of supra-national institutions thus, the long term survival of these enterprises rests on the critical understanding of the policies espoused by these supra-national institutions. Therefore, the challenges that confront these institutions will have tremendous implications for the way we do business in the developing world. MS34B, UWI, Mona, Mona School of Business and Management