International Financial Management Assessment
International Financial Management Assessment
International Monetary Fund (IMF) is an international financial organization that works closely with member countries to foster global monetary cooperation, facilitate international trade, secure financial stability, reduce poverty and promote high employment and stable economic growths. Together with the World Bank, IMF was formed in 1944 during the Bretton Woods Conference, though it formally came into existence in 1945. The organization is headquartered in Washington DC. Member countries contribute funds to the IMF’s financial pool, and any country that experiences difficulties in its balance of payment can borrow the money (Conway 2006).
Macroeconomic stabilization for poverty reduction: One of the IMF’s major focuses is to assist developing countries in developing macroeconomic policies that can ensure macroeconomic stabilization. In this way, the developing countries can achieve economic growths. This has indeed been taken by previous IMF heads like Fischer as the prerequisite for poverty reduction and alienation. IMF has therefore advised developing countries in measures such as those aimed in reducing inflation. It has been found empirically that escalating inflation levels made the poor poorer. However, although the advice of macroeconomic stabilization is welcome, it cannot be sufficient in ensuring economic growth and poverty reduction. The country has to undertake some progressive measures such as labor market liberalization, human capital investment and agricultural market liberalization, in addition to macroeconomic stabilization (Conway 2006).
Policy reforms for economic growth: The other function of the IMF to developing countries has been helping in formulating policy reforms. The IMF oversees members’ economic policies and suggests those that can accelerate economic growths. These policies can be suggested to a panel of countries or to an individual country. Individual country or groups of countries in given economic regions or income groups have been examined on income-inequality, poverty and inflation for favorable advice to be rendered (Conway 2006).
Identification and management of financial crises: IMF has had instruments for identifying and managing financial crises. During a period of relative stability, the organization has maintained surveillance on member countries and recommended any policy reform that may be needed. Although the information on policy reforms is not usually accompanied by packages of technical assistance, they are useful in that they help members to participate well in financial markets. In case a financial crisis is experienced, IMF has responded by helping poor countries in reducing financial difficulties and panics. In this regard, the organization has been instrumental in advancing finance credits if a country meets certain policy-reform conditions. Such financial aids have been issued in tranches depending on the country’s level of risks to pay and adhere to the IMF formulated conditions. However, most analysts, as are former IMF senior staffs such as Fischer, have expressed that more reforms are needed at the IMF to service financial difficulties that developing countries usually endure. These difficulties have included but not limited to volatile capital flows and too much contagion on the IMF system itself. IMF has however noted that it responds by advising countries through their central banks to keep foreign exchange reserves, increase prudential supervisions and surveillance of leveraged firms (Conway 2006).
Predicting and preventing financial crises: All countries that subscribe to “Article IV” of the IMF are expected to consult with IMF staff about economic statuses of their countries so that necessary parts of their economic information can be analyzed to devise early warning systems. The organization also uses various literatures supporting its programs to project likely levels of economic phenomena. Both cases, however, will depend on how countries cooperate: some countries have been noted to avoid cooperating with IMF staffs in revealing their data. Moreover, there are evidences that some of the IMF’s projections have not been accurate (Conway 2006).
Provision of information on capital flow: It has been the function of the IMF to issue publications of information regarding capital flows in developing countries. This also includes spreads in returns that are accompanied with them. In this way, too, it has been urging countries to liberalize their trading capital accounts. Several IMF publications have provided important information regarding benefits of liberalizing capital accounts and the economy in general (Conway 2006).
IMF as the Lender of the Last Resort: IMF has in most cases acted as the international lender of the last resort. It has been IMF’s wish to be the lender of the last resort so long as the lending will not interfere with the general equilibrium. As part of the initial Bretton Woods development agenda, the IMF begun by lending with moral respects; this was noted by relatively low interest rates at 0.5%. However, such moral respects reduced, especially during Asia crisis, due the fact that IMF became more precautionary to reduce monetary dangers associated with international finance crises. In this way, the organization introduced the Supplemental Reserve Facility and the Contingent Credit Line Facility in 1997 and 1998 respectively. The facilities embody reforms that are meant to reduce hazards associated with moral risks (Conway 2006).
What Critics Say:
Critics have noted that IMF espouses deficiencies in controlling ensuing financial crises. For instance, during the Asia crises, it was noted that IMF could not provide sufficient funds, but kept on insisting on market reforms, which exacerbated the situation even further. Such insistence deepened loss of investor confidences in Asian economies. Moreover, despite the austerity and stiff handedness, the organization has been noted to be not caring about how countries meet specific thresholds to qualify for credit. Some heavily indebted countries have always increasingly become indebted due to the IMF’s increased debt situations. Importantly, the organization has not been valuing outcomes of credits of long term structural transformation against long-term developments of a country. As Stiglitz notes, the IMF has not done what it is supposed to be actually doing: it has not provided adequate and relevant advices and enough funds for countries in economic downturn to rebound. In alleviating poverty in developing countries, some empirical studies found that although the IMF programs reduced the pace of poor people from plunging into poverty traps, they also increased the rate at which such people exited the traps. Some studies have concurred that although positive effects of the IMF programs could be long-lasting, they are dissipating in future. Most analysts have called the IMF phenomenon, an “infant mortality”; although the government’s budget may be supplemented by the IMF’s funds, they are not significant in creating greater social effects (Conway 2006).
What Proponents Note about IMF Success:
Although renowned economic commentators such as Stiglitz and others have doubted effectiveness of the IMF’s lending programs, proponents still concur that they are useful in moderating financial crises. Economic research studies have indicated that least developed countries usually participate in the IMF programs to profit from concessional lending accompanied with technical assistances from both IMF and World Bank. The loans only carry a low annual interest of 0.5%. In this way, the countries are determined to involve in long term relationships with both institutions as development partners. Empirical works have also shown that IMF funded programs have tended to reduce current account deficits and inflation. Although growth rates and the ratio of investments to GDP may decline in the first year, they would rise in the second year (Conway 2006).
Bargaining Model and the Law of Comparative Advantage
In Economics, the notion of comparative advantage refers to the ability by one entity to produce a particular commodity at lower opportunity cost or marginal cost over another entity. At international level, even if a country may be well off to produce all the commodities in trade more efficiently, gaining absolute advantage, over the other, they can still trade with each other so long as they have different efficiencies in their production and distribution (Doh, Mc Guire and Ozaki 2015). Bargaining on the other hand is the process by which two or more parties negotiate over a portion of some good or money and the exact nature of transaction itself. In economics the problem of bargaining has been analyzed utmost under game theory. Rubinstein’s structured of non-cooperative theory of bargaining outlines that bargaining begins and proceeds when individuals make alternating offers to each other. The process has to continue until they reach an agreement. It is also important to note that since the proposer is likely to get surplus or large part of the deal, he is likely to structure the bargain proposal with a view to maximizing it. Such a party usually has issue salience, stronger resources, greater coercive powers and weaker constraints (Muthoo 2001; Tallman 2010).
According to the traditional bargaining model of multinational corporations (MNC), higher bargaining power are usually determined by factors such as technology, product differentiation, expertise, product diversity, worldwide market coverage, larger capital and potentiality of home country . On other hand, host country (HC) and its firms may be advantageous in home market, natural resources, government incentives and success in local labor. Although the MNC advancing Feral Investment (FDI) in host country may be more powerful at the beginning of the investment, the bargain is expected to obsolesce, because an opportunistic HC government may take advantage of the resources and nationalize them. Moreover, overtime, it is expected that there will be technological spillovers and general economic developments that will encourage other firms to enter the market. As already indicated, the party that has greater issue salience, stronger resources, greater coercive powers and weaker constraints is likely to structure and lead the bargaining process. Likewise in the comparative advantage theory, it is a country that is better off in producing certain goods and services efficiently that experiences comparative advantage. In this regard, some economic analysts have noted political roles of multinational corporation business abroad. Multinational enterprises- host country (MNC-HC) bargaining is now undertaken by respective political governments. Governments that are endowed with production of certain goods and services have been seen bargaining for their MNCs abroad, in other countries that do not have comparative advantages in producing the same goods and services. It is by this reason that the MNC-HC bargaining has been regarded as a practical implementation of the law of comparative advantage (Eden and Molot 2002; Vivoda 2016).
MNC nation negotiations are usually bi-national. For sentence, if there are two countries endowed with productions of different products, negotiations regarding finding their markets between them will occur between their governments. If a government owned MNC typically deals in oil industry, it will have to be assisted to get markets abroad in countries that do not traditionally deal in oil industry by the government. Such a country can therefore makes a deal with a country that produces white-goods only. The MNC that produces white goods only will find new markets in the oil producing country. The two nations will experience foreign direct investments flowing amongst themselves due to their political agreement (Kincaid and Portes 2014).
Comparative advantage theory also governs the place of production process depending on labor resources. Top MNC have typically been seeking human resource abroad. Compared to developed countries, an MNC can produce certain goods or service in developing countries with less unit cost. Labor in developing country is comparatively cheaper, and hence foreign firms from developed countries can produce cheaply to make more profits. From 2000s, for instance, MNC from the United States began cutting jobs, for the purpose of hiring individuals abroad. Jobs are now going to India, Brazil, China, Mexico and other countries. In such countries, there are remarkably lower levels of salaries that are attracting bigger companies. Such destinations become quite attractive to firms that involve in high labor intensive productions. If a country has higher unemployment levels, the MNC will out rightly have better ratings in bargaining. The public will always be against the government that seems to alienate or jeopardize one of largest employers in the country, regardless of the corporation’s nationality (Eden and Molot 2002).
The other aspect of implementing the doctrine of comparative advantage in MNC-HC bargaining is the comparative power between the MNC’s country and the host country. Multinational corporations from powerful nations usually have large firm-specific resources that can ensure sustainable advantages when it comes to bargaining power. Some authors have in fact noted that developing countries usually take MNC’s FDI as blessings; FDI is regarded by economist as an engine for economic growth. Developing countries have strong believes that FDI from developed countries would raise the living standard of their people. Since the MNCs from developed worlds will be running the structure of bargaining, they will introduce new trade conducts and customs. They can introduce derivative market and hedging strategies, to “insure” themselves against the likely risks on the market. Courtesy of their higher managerial skills and economies of scale, the multinational organization will always reap highly in less developed countries (Austin 2012; Li et al. 2013).
The other key factor that illustrates MNC-HC bargaining as an implementation of the doctrine of comparative advantage is the host country’s resources. If the host country has abundant raw materials that are scarcely available in other parts of the earth, it will be evident that it will have more bargaining powers than those of foreign owned MNC. MNCs from countries that are not endowed with such minerals will not have higher bargaining powers. However, most literatures have argued that for a host country to be more advantaged in bargaining, the resources should be location-bound assets; they should not be available anywhere, or should not tend to migrate to other geo-spatial areas. The resources should not also have any direct substitutes, and they should be hard to be imitated. Importantly, firms in the host country should pursue very meaningful economic interests to diminish threats that may be posed by foreign firms. The government of the host country can enhance this through efficiency-enhancing investments and legal systems that bear environmental regulatory frameworks (Bakir 2015).
On the MNC side, technology can play a big role in the MNC-HC comparative notion of bargaining. As one of the reason why multi-national company will have a bargaining advantage, technology will be a major determinant in the outcomes of bargaining. The bargaining power of an MNC has been correlated well with the technology of MNC’s home country. Thus, during bargaining, the host country and the MNC’s executive will evaluate the level of managerial and technological capabilities of both countries. Comparable higher capabilities for the MNC’s home country will improve its rating in bargaining with the host country. Conversely, comparable lower rating will just lower the MNC’s capabilities in bargaining. The other comparative advantage related to this is the MNC’s product differentiation and advertising intensity. An MNC with strong and relevant product differentiation and advertising intensity to the target audience worldwide will have a higher bargaining power. MNCs from higher developed countries depict such features compared to those from developing countries. Strong and relevant product differentiation and advertising intensity serve as barriers to entry for new businesses in the market. In case there are no competitors in the host country, the MNC may get an opportunity to initiate and maintain a monopoly. Other literatures have argued that incase the brands of the MNC become popular and most preferred, the government could jeopardize itself if it makes moves that are perceived to alienate the MNC. A country that enjoys market or export potentials has always been preferred by foreign investors. If a country is conscious about its more strategic locations to the outside market, it will have its bargaining power increased. Any Investor intending to invest there will experience his ratings reduced due to the expected competitions from other MNCs(Eden and Molot 2002).
The other bargaining power may comparatively be determined in relation to sunken capital costs. Analysts agree that although capital is source of bargaining power when it is just to be invested, its power diminishes after investment. Huge amount of sunken capital is relatively immobile; this becomes hostage value to a host country. Similar investment will lead to the host country having large amounts of capital within its borders. When that becomes the case, it is the host country that will have more bargaining power than MNCs. However, this may be affected by factors such as the extent of mobility of the company assets. For instance, for a manufacturing MNC whose assets can easily be moved, it may just maintain its bargaining power above that of the country (Cohen and Lipson 2009; Eden and Molot 2002).
Importantly, any factors that can boost or jeopardize comparative arrangements between two countries can also jeopardize any bargaining arrangement between the MNC from one of the countries with the other as a host country. For instance, political disputes between two countries will render comparative economic arrangements impossible. Despite the lack of contractual commitment, business between the two countries will be legally outlawed and physically destroyed. Similarly, since countries belong to different multilateral trade organizations, their trading activities may be affected by contractual terms of those organizations. Comparative terms between nations may be jeopardized by the fact that such organizations may determine sanctions, tariffs or embargos on other nations. This may affect any MNC-HC arrangements (Eden and Molot 2002).
List of References
Austin, J E 2012, Managing in Developing Countries: Strategic Analysis and Operating Techniques, Hoboken, NJ: Simon and Schuster.
Bakir, C 2015, Bargaining with multinationals: why state capacity matters, New Political Economy, 20(1).
Cohen, B and Lipson, C 2009, Issues and Agents in International Political Economy, Cambridge, MA: MIT.
Conway, P 2006, The International Monetary Fund in a time of crisis: A review of Stanley Fischer’s IMF essays from a time of crisis: The international financial system, stabilization, and development, Journal of Economic Literature, XLIV, pp. 115-144.
Eden, L and Molot, M A 2002, Insiders, outsiders and host country bargains, Journal of International Management, 8(2002).
Doh, J, Mc Guire, S and Ozaki, T 2015, Global governance and international nonmarket strategies: Introduction to the special issue, Journal of World Business, 50(2).
Kincaid, A D and Portes, A 2014, Comparative National Development: Society and Economy in the New Global Order, New York: UNC Press Books.
Li, J et al. 2013, The obsolescing 'bargaining model'? MNC-host developing country, Global Strategy Journal, 3(4).
Muthoo, A 2001, The economics of bargaining, EOLSS.
Tallman, S 2010, Global Strategy, New York: John Wiley & Sons.
Vivoda, V 2016, Bargaining Model for the International Oil Industry, Sydney: Griffith University.
