SThe Effects of IMF, WB, and the UN - Essay Example

The effects of IMF, WB, and the UN on international business The IMF, WB, and the UN – all US-dominated international organisations and established in response to the challenge posed by WW-II, play major roles in the affairs of the world, especially international business mainly in terms of funding both for national governments and multinational enterprises (MNE). Knowing the wisdom of the saying that “He, who holds the purse, holds the power,” many believed that these international organisations are so powerful not only to influence but more so to determine development strategies, consequentially, the direction of international business. However, others deem otherwise. The super accumulation of profits by MNEs made them so powerful, to push shifts in the development strategies of governments and international institutions, specifically, international financial institutions (IFIs). Whichever way shows direct inter-relationship between these international organisations and the international business. It is this relationship that concerns this paper. A. The International Monetary Fund, World Bank and the United Nations: Composition, roles and functions Believing that the main reasons for the two succeeding world wars were due to national economic disparities and trade conflict, and that unrestricted fair trade would bring about equal opportunity for the economic development of nation-states thereby eliminating the reasons for war (Hull, 1948, p. 81), developed nations concurred to John Maynard Keynes’ neo-liberal model of development: a liberal international economic system coupled with government intervention (Stewart, 1987, p. 465). The necessity of an international body to regulate international trade and international business was acknowledged – without a high degree of economic cooperation among powerful nations economic conflict will certainly recur that most likely will heighten into a fiercer military war. (Polard, 1985, p. 8) Within these premises, the United Nations Monetary and Financial Conference, more known as the Bretton Woods Conference, held on July1-22, 1944 and attended by 730 delegates from 44 allied nations (Halm, 1945, p. 5; ‘Bretton Woods Conference’ 2007, p. 7057), agreed to establish the IMF and the International Bank for Reconstruction and Development (IBRD) known today as the World Bank (WB) to preclude similar depression experienced in 1930: “massive unemployment, escalating tariffs, and collapsing commodity prices” (Stewart, 1987, p. 465). Specifically, the IMF was a mutual agreement of the member countries to ensure the stability of currencies by circumventing protective exchange practices and to provide pre-conditioned short-term liquidity or balance of payment assistance to indebted members, while the WB was meant to make loans and guarantees to members devastated by WWII in aid for reconstruction and economic development. (Mikesell, 2000, p. 404) The International Monetary Fund Since its formal inception in 1945, the IMF, a specialised agency of the UN (‘International Monetary Fund’ 2007, p. 23955) that centres on international monetary cooperation, begun operation with only 39 members on May 1946, in Washington, D.C. (Fieleke, 1994, p. 17) Now, it has 185 member-countries represented through a quota system with the member-country’s economy size measured vis-à-vis world’s economy. The member’s quota determines its financial and organisational relationship to IMF: subscriptions (member’s maximum contribution); voting power (larger share, larger voting power) – Until today, the U.S. remains the largest vote (371, 743 votes representing almost 17% of the total votes) compared with Palau’s almost unheard vote (281 votes equals to 0.01% of the total); financial access (the access limit); and Special Drawing Rights allocation (an international reserve asset). (‘IMF’ 2008) Evidently, the quota system has strengthened the control of developed countries over the poor member countries contrary to IMF’s stated purposes set forth in its Articles of Agreement: to promote international monetary cooperation, guarantee global financial stability, smooth the progress of international trade, campaign for high employment and sustainable economic progress, and lessen poverty. (Fieleke, 1994, p. 17) With the unprecedented surge in cross-border financial flows, which resulted to global crisis, hitting most hardly the poor countries, the IMF (2008) saw the need to adapt through the following measures: “enhancing its lending facilities, strengthening the monitoring of global, regional, and country economies, helping resolve global economic imbalances, analyzing capital market developments, assessing financial sector vulnerabilities, working to cut poverty, improving IMF governance, greater accountability and transparency.” Through its key functions – surveillance, technical assistance and of course lending, the IMF assists its member countries especially those with balance of payment deficits employ economic policies which IMF finds sound and appropriate. (Ibid) In fact, IMF even took on the role of a ‘bailout orchestrator’ forcing debtors to enter into agreement with private foreign creditors which eventual cost is passed on the local taxpayers. (Calomiris et al., 1999, p. 90) The World Bank The WB composed of the IBRD and the International Development Association (IDA) is another UN specialised agency. Simultaneous with IMF, it was formally organised in 1945 upon ratification of the agreement by 28 countries. Now, it has 185 members belonging also to IMF. Similar to IMF, WB votes are determined by capital subscription to which the US, Germany, Japan, Great Britain, and France are the five largest. (‘IBRD’ 2007, p. 23936) Aside from IBRD and IDA, three more organisations compose the WB group: the International Finance Corporation (IFC) – encourages investments from private sectors, the Multilateral Investment Guarantee Agency (MIGA) – insures investors in and creditors to developing countries from political risk, and the International Centre for Settlement of Investment Disputes (ICSID) – resolves disagreements on investments between foreign investors and the host country. (‘World Bank Globalization and International business’ n.d.) Functioning by its founding charter, the WB is characterised as follows: It is a ‘government-oriented institution’ lending only to governments (Miller-Adams, 1999, p.5 ) but in practice, even to private investors guaranteed by governments purposely to facilitate productive economic activity that would encourage foreign trade and unburden international debt (‘International Bank for Reconstruction and Development’ 2007, p.23936); it maintains to be apolitical allowing it to cut across divergent political regimes; it is a ‘mover of money’ measuring its success on the frequency and amount it loans to member countries; it’s organizationally ‘centralised and hierarchical’ wherein 85% of its staff members are Washington-based with the remaining few 15% dispersed in developing countries; primarily, it is a ‘technocracy’ relying heavily on ‘economists, financial experts, and those with other specialized skills’. (Miller-Adams, 1999, p. 5) For over sixty years, the WB has surmounted turbulent times due to its flexibility (Morris, 1963, p. 226) enabling it to redefine itself (Caufield, 1996, p. 2). For the last decades of the twentieth century, the WB has evolved partly due to the rapid far-reaching changes in the WB loan-recipient developing countries and also due to continuing changing views about economic development wherein today, the essentiality of a “strong private sector, the participation of civil society, and capable and committed government” to create a revitalised economic progress and to reduce poverty in developing countries is recognised. (Miller-Adams, 1999, pp. 1-2) The United Nations The UN has a noble beginning – cooperation among nations regardless of ideology “to save succeeding generations from the scourge of war” (‘The United Nations for a Better World’ 1985, p. 17) which today is seemingly eroded. Conceptualised by the US State Department in 1939 and coined by the late US President Roosevelt in 1941, UN was initially used officially in the signing of 26 states on the Declaration by the UN, vowing to pursue global peace collectively. (‘United Nations’ 2007, p. 49361) On June 26, 1945 after WWII, the UN Charter was signed in San Francisco, U.S.A. in replacement to the League of Nations that was created after WWI (Holmes, 1993, p. 349). Since then, the world has never been the same, consequentially UN’s basic thrust and emphasis. For decades the UN has persistently worked towards averting and restraining wars by providing governments the venue to sort out differences and resolve problems as a “family of nations.” (‘The United Nations for a Better World’ 1985, p. 17) However it has gained wide criticisms in the conduct of its operations. The Washington Times (2003, p. A18) noted that in dealing with the political and economic matters in post-Saddam Iraq, the UN specifically the Security Council has been dysfunctional and counterproductive in promoting international security and safety that even its very creator the U.S. cannot entrust the safeguarding of its national-security interest upon UN’s Security Council. But more largely it has advocated social progress and human development (‘The United Nations for a Better World’ 1985, p. 17) by providing aids through development programs via its ‘principal humanitarian agencies in particular the World Health Organisation, the World Food Program, and UNICEF’ (The Washington Times, 2003, p. A18). Being its specialized agencies, the UN also serves as a checking mechanism for the IMF and WB, criticising and curbing their programs along human development. “Human development is fundamentally about freedom, enhancing peoples choices, and raising their level of well-being” (Sen, 1999, qtd. in Ginkel et al. 2002, p. 2). Today, in response to the challenges of globalisation, the UN Millenium Report illustrated the UN’s significant actions to link the “three key international agendas – security, development and environment … as expressed in terms of basic freedoms from fear and want and a sustainable future” (Ginkel et al. 2002, p. 20), thus its call for “globalisation with a human face contributing to a better life in a safer world for all” (p. 21). Above all, it should also be reckoned that the UN is not simply a venue for “interstate cooperation, but also an institutional embodiment of an ‘international community,’ independent of the states that compose it” (Cronin, 2002, p. 53) from which its tension between intergovernmentalism and transnationalism arise whenever the states conflict with the broader community resulting to its paralysis. (Ibid) B. The International business: Nature, types and operations Generally, any business venture can be done inside and outside one’s country and once the business is transacted within or between two or more independent countries that becomes international business (Farmer & Richman, 1966, pp. 13, 19), which has been referred to in many terms, but the most commonly used is the multinational corporations or enterprises (MNC/E’s). Although some confused it with foreign direct investments (FDI), they are two different terms. The MNEs regardless of their size have to utilize foreign direct investment (FDI) to be able to broaden their reach across borders. (Wilkins, 2001, p. 5) Thus, FDI is a necessary activity of MNEs. It is not unusual to see companies investing more in countries that could offer maximum opportunity for business and profit because the underlying reason companies extend abroad is no other than maximum super profit. According to Farmer and Richman (1996, pp. 33-36) the following factors commonly influence enterprises’ choice of location for their business activity abroad: GNP per capita, rate of GNP growth per capita, total GNP, political ideology, resource patterns, and degree of competition. However, MNEs organise and manage their business differently from which they can be differentiated. Of particular importance is who manages their enterprises in a foreign country – foreigners or locals, because managing a business implies significant economic and political power making it a controversial issue that most host countries are suspicious of foreign-owned and -managed MNEs and are too hesitant to permit them own business extensively. Based on this, international enterprises may be categorised according to those without foreign management such as: “import, export, portfolio investment, licensing, contracting, and turnkey projects;” and those involving direct foreign management or ‘exported management’ such as: “sole direct foreign investment, joint ventures, and international services” (Ibid, pp. 19-27). Recent global developments have provided added venues for international business to enter foreign markets like the cross-border mergers and acquisition which since mid-1980s have been more utilised by MNEs in entering foreign markets (see illustration below) compared with FDI which was popularly used in 1950s-1960’s. (‘International Labour Organization’ n.d.) Moreover, MNE operation today is characterised by intra-firm trade which role is considered critical because it may help MNEs in two ways: cost reduction through good distribution or input acquisition abroad, or global production process integration. Compared with trade between unrelated enterprises, intra-firm trade could more positively respond to sudden or severe changes in economic conditions in the sense that it could be more protected from competition in certain markets, from changes in market mechanisms like prices, and exchange rates, or from changes in general economic conditions. Also, transfer pricing governing intra-firm trade may be an additional advantage. (Ibid) Aside from these, intra-firms today have what they call cross-border agreements which importantly supplements their traditional FDI actions, with the breadth of the agreement becoming ever wider and more extensive including “arrangements for joint ventures, licensing, subcontracting, franchising, marketing, manufacturing, research and development (R&D), and exploration agreements’ which may or may not be equity-based” (UNCTAD, World Investment Report 1997, qtd. in Ibid). C. The IMF, WB and the UN in relation to international business: Effects and implications To the poor people of the world, the IMF-WB – the economic architect of the profit-oriented MNEs or TNCs and the UN – the territorial ground worker of the international business are the culprits to their miseries. To these pro-monopoly capital international organisations, “development is largely a matter of poor people in rich countries giving money to rich people in poor countries” (Caufield, 1996, p. 338). Largely dominated by Western developed nations, these international organisations, are perceived to be controlled by elite economic institutions and has been believed as agents of global capital (Greider, 2000, p. 15) or the international business. Specifically, the IMF-WB “has taken a leading role in promoting policies of openness and liberalization as means to foster growth and poverty reduction” (Culpeper, 2002, p. 16). But evidently, these policies instead aggravate inequalities (p. 25) with the rich nations becoming richer, while the poor nations becoming poorer, and alarmingly, with the MNEs/TNCs growing much bigger than the economies of developed nations and richer than the combined economies of poor nations. It is also noteworthy that one of the remarkable characteristic of global economy today is the sale of state-owned assets — privatisation. Majority of these happened in low- and middle-income country-IMF borrowers. Propelled by the economic theory that “privatisation increases productivity, efficiency, and output” (Brune, Garrett & Kogut, 2004, p. 195) the IMF made privatisation of government assets conditionality for loans. This alone paved the way for private market forces to take control of basic public services. IMF’s long-term intention to attain social and political stability in Asia is driven by the fervent desire of the MNEs/TNCs to whom the IMF-WB is a ‘police force.’ These actually are the two prerequisites: social and political stability that the IMF-WB provides to international business because these are the determinant factors as to the MNEs/TNCs’ geo-economic strategies, especially in matters to where their new plants and subsidiary company be best located. (McFarlane, 2001, p. 214) It is in this premise that the international peace-keeping function of the UN is suited for international business. As the “most powerful multilateral peacekeeping body,” cognizant of the political dynamics of the international state system the UN can effectively resolve international conflicts (Holmes, 1993, p. 339) thereby providing the international business the favourable political and economic climate. This explains why the UN is always visible in territories warring against the US, because this super power among the triad-power (Us-Germany-japan) war nations in which it has economic interest. However, Krol (2001, p. 32) argued that the IMF in fact deters free capital flow, which restricts market forces to further business thus making them more vulnerable to crisis. In his view, the private market is sufficiently more capable than the IMF to provide incentives for reform and work out debt repayments. He furthered that the best way to alleviate world poor’s standard of living is to leave fund use to the discretion of the international capital markets and not to be controlled by IFIs which although politically advantageous is harmful to the global economy. Indeed these three international multilateral organisations have served their initial purpose – to advance the US-designed Liberal International Economic Order (LIEO) at the end of WWII but evidently has become counterproductive because they are increasingly becoming transmitter of a ‘new dirigisme’ (Lal, 2005, p. 517) which implicitly is harmful to international business. The effects of the IMF, WB and the UN on the international business in the context of a globalizing world could then be summarized as follows: 1. The IMF, WB, and the UN in the conduct of their roles are acting as quasi-government of the world, with the US dominating the vote making these three international organisations an extension of its political and economic power thereby favouring its interest; despite the IMF-WB’s projection that they are just “neutral ‘referees’… merely ‘holding the ring’ for business competition and industrial conflict” (Eaton, 1951, qtd. in McFarlane, p. 218) most believe otherwise; 2. Created to promote an international liberal economic order, these three international organisations act in support of the international business by providing the necessary social and political stability, by laying down the legal requirements for their operation, and by promoting the doctrines of free-flow of capital; 3. The excessive exercise of the control power of these three international organisations, which actually is reflective of US protectionism, is becoming counterproductive to the market forces; 4. The three international organisations reinvents themselves or modify their strategies as to which is most profitable to the global market. 5. The creation of the three international institutions ensures the US global interest. D. Conclusion and recommendations First, to transact business internationally is a positive human endeavour that would bring about social and economic progress thereby human development. However, monopoly in business will negate all that is positive in this human endeavour causing more harm than progress. According to Chossudovsky (1998, p. 293) the late 2oth century is the ‘globalization of poverty’ that has started in the third world corresponding to the assault of the debt crisis. Second, to deny the necessity of international organisations in regulating global trading among countries and MNEs, especially in an ever globalizing world, is hypocritical, but to fully believe that free trade is genuinely possible in an unequal playing field is obtuse, especially so if major international organisations are dominated by and act as quasi-instruments of monopoly capitalists to their own advantage, most especially of the US. Thus to make international organisation truly progressive, nation-states should be allowed first to attain their political and economic independence to enable them to truly compete in the global market. Third, by nature these three organisations are undoubtedly international organisations for the international business greatly dominated by the powerful developed countries who are also the decision-makers of these very institutions. The three international organisations are not what they claim to be. They are a negation of themselves. They promote neo-liberalism to the expediency of the powerful nations, yet promote protectionism if more advantageous to the developed nations. These international organisations should overhaul their selves from their composition, nature, ideology, policy and programs with the genuine search for genuine economic development and progress. Unless this can be done, it would be much better for them to close down. Works Cited Anon (2007). Bretton Woods Conference. The Columbia Encyclopedia, Sixth Edition, 7057 ----------------. The International Monetary Fund. The Columbia Encyclopedia, Sixth Edition, 23955. ----------------. International Bank for Reconstruction and Development. The Columbia Encyclopedia, Sixth Edition, 23936. ----------------. United Nations. The Columbia Encyclopedia, Sixth Edition, 49361 Brune, Nancy, Garrett, Geoffrey and Kogut, Bruce. (2004). The International Monetary Fund and the Global Spread of Privatization. IMF Staff Papers, 51 (2): 195+. 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