How and why nations defer: Functions and forms of global monetary system - Iloka Benneth Chiemelie, Njoku Stanley

0.1 INTRODUCTION

The conflict of today’s western individualistic capitalism and democratic liberalism coupled with Islamic radicalism symbolises a gap between economist ideas that goals and methods to achieve them are universalistic in nature (Kiriyenko, 2002). Undoubtedly, a lot more needs to be done, to better understand world’s economic differences. Additionally, it has to reconcile paradigms and objectives to a world struggling to adapt regionalism and uniformity with national identity. And that is the main role globalization tends to play.

Globalization has been equated with democratization of growth in world’s economy, historic opportunity, which integrated the interest of the poor and rich nations. This new optimism, contrast with the 1980s pessimism when only one-eighth of the world developing countries could report economic and social growth. By the mid-1990s, the advancement in investment and international trade looked like concurring with the validity of neo-liberalism. The concept of openness through globalisation and regional integration became a new development paradigm.

Globalization has been interpreted differently by different people(Streeten, 20001). The 1998 winner of Nobel Prize in Economics, Amartya Sen, defined globalization as “the intensification of the interaction involving trade, migration and dissemination of knowledge that has shaped the progress of the world over millennia (Gerber, 2002, p.33). This definition did not give rise to much emotional reaction from development anti-internationalists, but the collateral dependency this has brought is not an issue for globalization itself.

The opinion on globalization in the development lobby had shifted from euphoria to ardent criticism in recent years. For instances, violent anti-globalists protested during the world trade December 1999 Seatle World Trade Organization meeting and  in  April 200 in Washington demanding a reform in International Monetary Fund and the World Bsnk.

Based on the theories above, the objectives of this paper has been developed into three sections: the first section is to determine why and how world nations differ, the second section will review the economics and politics of international investment and trade, while the third objective is understand the function and form of international monetary fund system. Thus, this research paper is divided into three parts. The first part is the introduction which shades light on the objectives of the research paper; the second section provides theoretical background on the objectives, while the final part (conclusion) summarizes the objectives

2.0 WHY AND HOW NATIONS DIFFER

Between panglossism and constructivism, the differences among nations either for, or against each other can be more valued or overwhelming in its positive or negative impact, otherwise referred to as socialism. Panglossism is the claim that we live in the best of all possible world; and that things cannot be other than they are now, for since things are made for a purpose, it follows the idea that everything is made for the best purpose (Voltaire, 1947, p.20). Unlike panglossisim, constructivism (constructivist rationalism) is of the idea that social institutes can serve for only the purposes they were designed to serve(Descartes, 1996).

In this paper, differences between countries will be compared with special reference to U.S.A, China, Britain and Japan, which could otherwise be referred as “trio continental comparison”. National differences are mainly measured in terms of culture, politics and economy.

2.1 HOW THEY DIFFER

2.1.1 SOCIO-CULTURAL DIFFERENCES

Cross-cultural researchers have designed different constructs to explain cultural differences in recent years. Among those frequently adopted is the dimension of individualism and collectivism. In this context, researchers studied the dichotomous construct and its effect not only at the cross-cultural level (etic), but also at the individual level (emic) (where idiocentricism represents individualism and allocentricism represents collectivism). This paper investigates some values at the values and lifestyle at the etic level – between two individualist cultures (Britain and USA) and two collectivist cultures (Japan and China).

2.1.1.1 LANGUAGES

Whereas American has no official language in the federal level, Britain has English as their official language, China has Chinese standard mandarin as their official language and Japanese is the official language of Japan.

2.1.1.2 RELIGION

In the US and Britain, the Protestantism is the main religion, while China mainly practices Buddhism, and like china, the main religion in Japan is Buddhism and Shintoism.

2.1.1.3 SPORTS

In the United States, the main sports includes baseball, basketball, American football and ice hockey, but soccer, cricket, equestrian and rugby are the main sports in the Britain. The most popular sports in china include Mah jong, Shanghai Solitaire, pai gow poker, weiqi and Chinese yo-yo, while samurai, baseball and soccer are the most common sports in Japan.

2.1.1.4 CUISINE

Dishes such as sushi, tempura and teriyaki are common in Japan, meanwhile, in the United States, the common dishes includes caeser salad, hamburger, fries, cake, steak, sandwich, and smoked baby back ribs. Sunday roast, Yorkshire pudding, gravy, fish and chips, pie, sausage and salads are the most common dishes in Britain. Chinese dishes includes Manchu han, noodles, rice and Chinese soup.

2.1.2 POLITICAL DIFFERENCES

The united state is a federal constitutional republic. The president of the united state is also the head of state and government (James et al., 2000). Power is shared between the president, congress and judiciary. Election takes form of a two party system of democratic and republican oppositions. The president heads the executive system and is independent of legislature. The senate and house or rep heads the legislative power, while the Supreme Court and lower federal courts exercises judicial power (their main function is interpret the constitution of the USA, and federal laws and regulations) (George et al., 2005).  

The political system of Great Britain takes the form of constitutional monarchy, where the monarch is the head of state and the prime minister of UK is the head of government. The government exercises executive powers, while legislative power is vested on both the government and the two parliamentary chambers (known as house of common and House of Lords).  The supreme court of the United Kingdom controls judicial power and is independent of both the executive and legislative bodies. UK has a multi-party system, but the conservative and labour party has been the driving force since the 1920s. Election is done by voting across Wales, England, Scotland and Ireland.

China’s political system is made of single-party socialist republic system. The constitution of the People’s Republic of China is stated in the Communist Party. The Communist Party of China, the Central People’s Government and their provincial as well as their local counterpart exercises state power within the People’s Republic of China. The level People’s Congresses oversee the election of members to Provincial People’s Congress and running of the local government. The Provincial People’s Government in turn elects members to the National People’s Congress (Yang, 2004).

The political system of Japan is conducted in the form a parliamentary representative democratic monarchy. The prime minister of Japan is the head of the government and Japan uses a multi-party system. The government exercises executive powers, while the legislative power is vested in the diet which comprises of the House of Representatives and house of the councillors. The only independent system in Japanese government is the judiciary.

2.1.3 ECONOMIC DIFFERENCES

Figure 1

From the figure (1) above, it is noticeable that USA has the highest return on GDP as of 2009, followed by Japan, then China and the lowest being the United Kingdom. This difference in economy is mainly pioneered by import and export activities within the countries compared.

Figure 2

Contrasting with figure (1), USA is the second highest exporter, and the largest importer, yet they have the highest GDP among the four nations. This is because GDP is calculated by the amount of income firms pay household and USA currently is the highest paying  nation in the world, with an average of 58,208 USD per annum per household (Mellor and Milyo, 2001).

2.2 WHY NATIONS DIFFER

2.2.1 LANGUAGE

In multilingual organization, language can be both a necessary communication tool and an obstacle to management activities (Gilsdorf, 1998; Victor, 1992). Hence, language can both enhance and slow down coordination, and manager’s ability to engage in international activities (Marschan-Piekkari et al., 1999a). This is one of the reasons why the four countries differ, because while Japan and China can make good use of their language to empower productivity in their countries, international trade could be impeded, thus giving USA and Britain a higher hand in international trade. Thus, this can result to differences in their economy because the use of English as a corporate language has been widespread (Dhir and Goke-Pariola, 2002).

2.2.2 ETHNICITY

In social anthropological theory, ethnicity is referred as relationship between groups which members may consider them as different; this group are normally ranked within the society of organization (Eriksen, 2002). Ethnicity is another reason why nations differ, this can be illustrated from limited cuisines in Japan and China which is an individualistic nation where most of them can be classified as either Japanese or Chinese and eat the same kind of food, as compared to USA and Britain with mixed ethnicity and different dishes.

3.0 REVIEWS ON ECONOMICS AND POLITICS OF INTERNATIONAL TRADE AND INVESTMENT

International trade and investment is specifically associated with globalization. This is the idea of free market and corporation between nations. In this paper, we will review the politics and economics of international trade and investment in three different forms. This includes the crises of development economic in the 1980s, the rise and fall of neo-liberalism and critique on globalization theories.

3.0.1 THE CRISIS OF DEVELOPMENT ECONOMICS IN THE 1980S

By the 1980s, to disbelieve of many economists, development has not materialized in the third world countries except in gulf nations. Even in countries with noticeable economic growth such as a Qatar and Kuwait, unemployment where still on the rise. Countries in the developing world saw a rise in poverty and inequality. In addition, western consumption and capital inflow threatened traditional sectors and existing power structures. Bruton (1985) stressed that this was one of the problems development economics was not ready to solve.

The disappointment of the 1980s evoked a debate between adherents of neo-classical model, for instance, Ian Little, Anne Kruger, Deepak Lall and others referred to as “the World Bank group”, and the Brandt Commission group (Stewart, 1987). They found a big shift in development economics, and this where mainly attributed to lack of standardized pricing in international market, and politicians where criticized in countries affected for being only concerned with their own political survival and government for representing small but influential pleasure groups (Balasubramanyam and Lall, 1991, p.12). The government became more of a problem than a solution, and economist argued for free, deregulated markets and limit to interventionism (Lall, 1983, p.109). 

Economist further asked what caused the dissatisfaction in the growing role of once an omnipotent government system across third world nations. They found the answers to include:

1. In many third world countries (poor nations), the government failed to address fundamental social-economic problems such as water supply, health, and education and this lead mistrust from citizens, which in turn resulted to high productivity and less distribution of goods for international trade and investment.
2. Foreign aids were said to benefit the ruling elites while ignoring the poor citizens.
3. The fragile political consensus in many African countries collapsed because government where not able to couple with national emergencies such as epidemics and ethnic strife.
4. Government’s inability to cope with poverty and catastrophes revived national and religious identities in the poorest Asian nations.

3.0.2 THE RISE AND FALL OF NEO-LIBERALISM

Latin America’s lost decade of 1980s revealed the negative sides of traditional development models. This was caused by mounting debt, inflation and poor growth and resulted in the death of the import substitution and independencia theory within the region. Meanwhile, the other side of the pacific such as Malaysia, Indonesia, and Singapore saw increase in export driven growth, inflow of technological and foreign direct investment, as well as fast industrialization, and this armed the liberal lobby, and this lead to the birth of the Washington consensus. The consensus is of the ideology that that open economy and free market supported development better than protectionism and state interventionism.

The Washington consensus dominated the theory and practices of economic development during the 19900s. This lead to tough fiscal and monetary policies, deregulation, capital flow and foreign trade liberalization, liberalization of interest rates, termination of government policies, moderate taxation, maintenance of low inflation and other factors that encouraged international trade and investment (Piasecki, 1998, pp. 39-51).

But, openness strategy implemented by the Washington consensus was found to have its limitations during the 1990s financial and currency consensus. The South East Asian currency crises of 1997-1998 showed that combination of fixed exchange rate and inflow of large foreign investment could be very risky for macroeconomic consistency. This resulted in economic overheating in Indonesia, Thailand, Singapore and Malaysia. It all started with currency overvaluation, demand-driven inflation, deficit of current account, outflow of currency reserves and ended with devaluation of currency and recession. This could have been avoided by currency refloating and a much tighter fiscal and monetary policies as researchers found out.

The consensus was also critiqued in post-communist states of East Central Europe too. Researchers found that they where relevant omission in the consensus and one of the basic lessons learned by countries pursuing large-scale privatization was the issue of competition. Nations that limited liberal reforms to exchange of state monopolies to market monopolies saw a fail in there market reforms. This is because many small-sized and medium-sized enterprises either disappeared or where not given any chance of growth during the large scale privatization (Stigiltz, 1998).

Another criticism to the Washington consensus was lack of effective legal institutional infrastructures. The case of Poland, Russia, and the Czech Republic proved that, large scale privatization requires a distinctive ad transparent body of law in addition to political will. Laws such as land deeds registry, tenant-owner laws, consistent contract laws, stock registry, and a valuation of loan collaterals makes the differences between success and failure of the market economies (de Soto, 1991). For instances, Hernando de Soto argued that the main cause of underdevelopment in Latin America is the absence of legal titles and land deeds to properties.

3.0.3 CRITIQUE OF GLOBALIZATION THEORIES

The relationships between development and globalization are neither integrated now straightforward and this paper will illustrate this with a nation-state and global corporation relationship.

1. In theory, it is stated that developing countries can make use of industrial and trade policies to be more or less welcoming to foreign direct investment, tourism services and capital etc in other to directly or indirectly shape their participation in global economic system. But in practice, developing countries where passive in structuring their participation in international trade and finance. The end decision and net economic effect of their openness to globalization was beyond their control and resulted in weaker bargaining power for nation-state during negotiation with global corporation.
2. Another theory stated that nation-state and global corporation should corporate in addressing social and environmental challenges that directly affect their foreign direct investments. In practice however, such open-handed multinationals moved their operations to South East Asia or China for example due to cost and market consideration as was the case in recent experience across Latin America.
3. In theory, globalisation opened new rooms for developing countries to create new jobs and expand exports. But in practice, competition lead to many developing countries to offer longer tax holidays, costly subsidies, and various incentives for multinationals, and this competition lead to reduced nte positive effects of globalization in developing countries.

Critics such as de Rivero, argued the key problem for the global economy to be associated with the depending gap between the more dynamic and complex world of international trade and investment, and relevant institutions capable of managing an effective control over those process (de Rivero, 2001, pp. 110-14). Severine Rugumanu concludes that the twenty-first century will see the African continent’s position in the world economy worsened, both in shot-rage and middle-range perspectives (Rugumanu, 2001, p.77).

4.0 FUNCTION AND FORM OF GLOBAL MONETARY SYSTEM

The IMF (International Monetary Fund) is the organisation that coordinates the international monetary system. When a nation joins the IMF, the country will be subject to economy and financial policies of the global community (Bordo and Kydland, 1995). And the country pledges to pursue policies that are enhances orderly economic growth, reasonable pricing stability, to provide the IMF with necessary data about their economy, and to avoid manipulation of the exchange rate for their own selfish gain. The IMF uses a surveillance approach to identify weakness in the economy of its member nations that could cause or are causing trouble (inflation) on the economy of other nations (McKinnon, 1993, pp. 6-10).

The IMF performs three basic activities to serve their member states, and these activities include:

1. To monitor national, global, and regional economic and financial developments and issuing advice to member nations on their economic policies.
2. To lend funds to member nations for solving specific economic problems and designing programs to prevent déjà vu in the economic platforms of their member nations; and
3.  To offer technical assistants as well training in their areas of expertise, for government and central bank officials.

Steve (200) defined the international monetary system as a set of set of nations that have and agree to set of rules, conventions and institutions that enable easy international trade and transaction. This they do by providing necessary data about their transactions with other nations across the globe. This surveillance takes two forms of country and global (Eichengreen, 1992).

4.1 FORM OF SURVEILLANCE AN OPERATION OF THE IMF

4.1.1 COUNTRY SURVEILLANCE

This is a regular (normally annual) set of comprehensive consultation with member nations, to discuss intended topics. This consultation is known as “Article IV consultations”, because it is contained in the Article IV of the International Monetary Fund’s Article of Agreement.  During this consultation, a team of IMF’s economists visit the respective nation to collect financial data and discuss the nation’s economic policies with the government and central bank (Fischer, 1984; Friedman and Schwartz, 1986). Their mission also includes discussions with business representatives, labour union, civil society and parliamentarians. The team then reports their findings to the IMF department, which them makes their report available to the IMF management for discussion. After discussion, the IMF issues a summary of their view to the government and the government then takes this into their economic policies. This summary is also posted at the IMF’s notice board and website.

4.1.2 GLOBAL SURVEILLANCE

This consists of reviews by the IMF’s executive son global economic trends and development issues.  The main issue here is based on global economic outlook and the world’s financial stability report (the financial stability report includes developments, prospects and issues related to policies in international financial market); both reports are usually publishes twice per annum (Obstfeld and Rogoff, 1995). Nevertheless, frequent discussions pertaining global economic and market developments are held by the executives.

To discuss international issues that affect the IMF and involves small countries, as well as providing relevant solutions to the issues, the IMF developed a new tool called the multilateral consultation in 2006 to bring small countries into a group. This also involves examination of policies pursued under regional arrangements such as currency unions – for instance, the euro area, the Economic Community of West African States (ECOWAS), the Central African Economic and Monetary Community, and the Eastern Caribbean Currency Union (McKinnon, 1993, p. 8).

4.2 FUNCTIONS AND OBJECTIVES OF THE IMF

4.2.1 CRISIS PREVENTION

This is the main objective of the IMF. Since the Mexican crisis of 1994-95 and the Asian crisis of 1997-98, efforts to help countries prevent financial crisis has been intensified by the IMF. It has revealed the necessity for nations to incorporate “shock absorbers” in their policies – such as multipurpose and efficient financial system, social safety nets, enough foreign exchange reserves, and fiscal policies that allows government to increase deficits during difficult times, if deemed necessary (Kenen et al., 1994, p. 1). The IMF also designed several initiatives to help government on this issue.

1. The IMF conducts in-depth assessment of countries’ financial sectors in collaboration with the World Bank, under the financial sector programs.
2. They developed international settlement measures, standardization and codification of goods in economic policy making, supervision and regulation of global fanatical sectors, and statistical collections and disseminations for currency in international trade under the General Data Dissemination System (GDDS).
3. A vulnerability indicator and early warning system was also developed by the IMF to alert countries at risk.
4. The IMF also stepped up efforts to promote good governance especially in financial and public sectors.
5. It also participates in international efforts for combating money laundering and the financing of terrorism.

4.2.2 CRISIS RESOLUTION

Melitz (1995), states that private flows are by far the greater part in international financial flows. Thus, pointing out the huge effect private sectors can play in preventing and resolving financial crises. Crisis can be prevented if the volatility of the private sectors is reduced through constant assessments and dialogue between the government of a nation and the private sectors.

To achieve this objects, the IMF strengthened their effort in market dialogue with business representatives, such as the establishment of the Capital Marketing Consultative Group in 2000 (Cesarano, 1997). This group provides necessary communication platform between international market participants (importers and exporters), the IMF and other members of the world economic system with market development measures and steps to improve the global financial system. Some of the norms includes in the groups policies has been come laws in UK and New York (Cesarano, 1998, p. 442).

4.2.3 PROVIDING FINANCIAL AIDS

Members of the IMF can turn to the IMF for financing if they have any balance f need – that is, if the country can’t find sufficient financing terms in the capital market to make payments international and maintain appropriate level of reserves. This does not make the IMF an aid agency or a development bank. Countries do not receive loans from the IMF –they “purchase” form exchange from the IMF’s reserve assets, paying with their own national currency (Krugman, 1993). They loan is considered repaid if the country (borrower) “repurchases” its currency from the IMF in exchange for reserve assets.

Most of the IMF’s lending fails into three different categories (Krugman, 1992):

1. Stand – By – Arrangements – these are designed to deal with basically with problems associated with short-term balance of payment problems. This is also the IMF’s largest loan category. The IMF introduced the Supplemental Reserve Facility in 1997 to provide large loans with very short maturities for nations in capital account crisis.
2. Extended Fund Facility – this provides countries with loans in relation to balance of payment resulted from structural problems that may take longer time to accomplish. This usually includes privatization of the public sector and labour market flexibility.
3. Poverty Reduction and Growth Facility – this provides concessional loans to the poorest member countries. Concessional loans carry a 0.5 percent interest rate and 10 years maturity period. The majority of IMF’s loans fall into this category. In 2005, the IMF established the Exogenous Shocks Facilityto provide loans for low income countries that are not receiving loans under the poverty reduction growth facilities and have a balance of payment beyond their control.

Apart from the above loans, the IMF also provides Emergency Assistance to countries suffering balance of payment problems due to natural disaster of military conflicts. Another facility is the Trade Integration Mechanism, which provides developing countries suffering from balance of payment due to multilateral trade liberalization, either because their earnings decline due to los of preferential access to certain markets or because elimination of agricultural subsidies results in prices for food imports to go down.

5.0 CONCLUSION

After reviewing the three topics as highlighted in the introduction, this research paper have provided relevant evidences for further research and guidelines for further reading. The research also illustrates findings in the three topics.

The first topics shows that they are main reasons how countries differ, this can be in terms of their languages, cuisines, cultures, or other socio-cultural factors. Apart from socio-cultural factors, politics and economics were also highlighted as the two other factors that leads to differences among nations.  The paper took a close analysis of two individualistic nations in the person of China and Japan and two collectivistic nations which are USA and the UK. Further findings revealed that these differences can be due to language or ethnicity as well as population which the paper stressed on in the first part of the body.

The second part of the body dealt a more deal and ideology to the politics and economics of the international trade. The findings where that less have be done as compared to the set objectives and politics can deal a great to a nation’s economic stability as seen in the case of the Asian crisis of 1997-98 where Singapore, Malaysia, Thailand and Indonesia where involved. Even when economics was given much room, they still appear to be some limitation as this was the case in Russia, Poland and the Czech Republic with regards to the Washington consensus of the 1980s.

The final section of the body, which was the form and function of the international monetary system, provided a direct and clear understand of how the international monetary system function, what are their main objectives and the measure taken to ensure that this objectives are meet to the maximum limit while preventing unwanted negative results both on a national and global level.

Thus, further researches related to the same topic can be conducted following the steps and theoretical evidences provides in the research paper. Even at that, being a secondary research paper provides a necessity for further and in-depth research on the same topic in other to come up with the most appropriate conclusions to the topic discussed above.  

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