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IBM week 4 revision

The document outlines key definitions and components of international financial and monetary systems, including the roles of the World Bank and IMF. It highlights the structure of national versus international monetary systems, the impact of global financial institutions on developing countries, and the challenges faced in the international capital markets. The conclusion emphasizes the importance of understanding these dynamics for effective management in developing economies.

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3 views

IBM week 4 revision

The document outlines key definitions and components of international financial and monetary systems, including the roles of the World Bank and IMF. It highlights the structure of national versus international monetary systems, the impact of global financial institutions on developing countries, and the challenges faced in the international capital markets. The conclusion emphasizes the importance of understanding these dynamics for effective management in developing economies.

Uploaded by

fithealthyme101
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Summary: International Financial and Monetary

Systems
Key Definitions

1. Monetary System – A structure through which money is created, distributed,


and managed at both national and international levels.
2. International Financial System – The global framework of financial
institutions and regulations that facilitate cross-border capital flows,
investments, and monetary transactions.
3. Exchange Rate System – The mechanism determining the value of one
currency relative to another, such as fixed, floating, or managed exchange
rates.
4. International Capital Market – A network of financial institutions and
markets that facilitate the movement of capital (debt and equity) across
national borders.
5. Structural Adjustment Programs (SAPs) – Economic policies imposed by
the World Bank and IMF aimed at stabilizing economies in developing nations
through fiscal discipline, privatization, and deregulation.

1. Composition of Monetary Systems: National vs. International

National Monetary System

 Managed by central banks, such as the Bank of Jamaica (BOJ).


 Commercial banks play a role in credit creation and financial services (e.g.,
NCB, Scotia).
 Development banks like Development Bank of Jamaica (DBJ) provide long-
term financing for businesses and infrastructure projects.

International Monetary System

 Includes institutions like the International Monetary Fund (IMF) and the
Bank for International Settlements (BIS).
 Commercial banks operate globally (e.g., HSBC, Citi Bank).
 Development financing is provided by the World Bank Group, Inter-
American Development Bank (IADB), and other regional banks.

2. Governing Institutions

The World Bank Group

 Origin: Established at the 1944 Bretton Woods Conference to aid post-


WWII reconstruction.
 Current Role: Provides loans and grants to developing nations to support
infrastructure, health, education, and economic reforms.
Key Components of the World Bank Group

1. International Finance Corporation (IFC) – Supports private sector growth


in developing countries through investments and loans.
2. Multilateral Investment Guarantee Agency (MIGA) – Encourages Foreign
Direct Investment (FDI) by offering political risk insurance.
3. Foreign Investment Advisory Service (FIAS) – Provides policy advice to
governments on attracting investment.

Structural Adjustment Programs (SAPs) by the World Bank

 Reduce budget deficits.


 Privatize state-owned enterprises.
 Liberalize trade by lowering tariffs.
 Reform tax systems.
 Allow currency exchange rates to float.

The International Monetary Fund (IMF)

 Origin: Also founded at the 1944 Bretton Woods Conference.


 Original Role:

o Monitor international monetary systems.


o Act as a global lender to central banks.
o Maintain fixed exchange rate stability (until the 1970s).

 Current Role:

o Acts as a lender of last resort to countries facing balance of payments


crises.
o Implements Stabilization Programs that often include currency
devaluations, austerity measures, and fiscal reforms.
o Provides different lending programs like the Compensatory
Financing Facility, Oil Facility, and Extended Fund Facility.

3. Institutional Challenges

 Rising demand for financial resources to prevent global economic crises.


 Conflicts between developmental and commercial roles of financial
institutions.
 Criticism of austerity measures imposed by the IMF and World Bank:

o Harsh economic conditions in borrowing countries.


o Assumption that economic problems are due to a lack of capital.
o Policies that sometimes neglect social welfare ("adjustments without a
human face").

 Duplication of functions between different global financial bodies.


4. International Capital Markets

 A system for allocating financial resources globally, including debt and


equity markets.
 Key players: Individuals, corporations, financial institutions, and
governments.
 Benefits:

o Helps firms in developing nations access global finance.


o Reduces borrowing costs by expanding the pool of available capital.

Key Factors Driving Expansion

1. Information Technology – Enables instant transactions, faster decision-


making, and more participation.
2. Deregulation – Increases competition, lowers transaction costs, and opens
markets for investment.
3. Financial Innovation – Introduction of complex financial instruments (e.g.,
securitization of mortgage-backed securities).

5. Components of International Capital Markets

1. International Bond Market – Includes bonds issued by companies and


governments outside their national borders.

o Large banks like Barclays and Citi Bank manage bond sales.

2. International Equity Market – Stocks traded outside the issuing company’s


home country.

o Large companies list on multiple exchanges (e.g., London, New York,


Frankfurt).
o Example: Sagicor of Barbados listed on the London Stock
Exchange (LSE).

3. Eurocurrency Market – Deposits held in a currency outside its country of


origin.

o Example: US dollars in Jamaican banks = Eurodollars, British


pounds in US banks = Europounds.
o London Interbank Offered Rate (LIBOR) sets lending rates in this
market.

6. Impact of Global Financial Institutions on Developing Countries

Positive Impacts:

o Access to funding for infrastructure, health, and education.


o Financial stability through IMF programs.
o Increased foreign investment due to World Bank and MIGA
initiatives.

Negative Impacts:

o Debt burden from high-interest loans.


o Austerity measures that reduce public spending on health and
education.
o Exchange rate fluctuations affecting economic stability.

Conclusion

The international financial and monetary system plays a crucial role in stabilizing
economies, promoting trade, and facilitating investment. While institutions like
the IMF, World Bank, and global capital markets provide essential financial
resources, they also pose challenges related to debt, austerity, and economic
sovereignty. Managers in developing countries must understand these global financial
dynamics to enhance competitiveness, mitigate risks, and navigate policy changes
effectively.

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