Bill Gates once quoted, "Never before in history has innovation offered promise of so much, to so many in so short a time." We cannot give an emphatic opinion about which perspective Bill Gates was mentioning, but at this hour it is of sheer worthiness to quote him because it totally blends in with what this world is witnessing at this era of global change! Change is inevitable in life. But a change such as "financial globalization" is undoubtedly of another dimension of change and innovation. It is of no fun to write about such in-depth and complicated issues without quoting from famous people. There are two folds of globalization. For example "It has been said that arguing against globalization is like arguing against the laws of gravity", as quoted by Kofi Annan gives a more inevitable and positive notion on globalization, where as Barak Obama talks about the limitations of globalization is his saying "Instead of having a set of policies that are equipping people for the globalization of the economy, we have policies that are accelerating the most destructive trends of the global economy". The main material of this essay is to scheme through if not go into the roots, about the impact of financial globalisation and innovation on the roles and policies of international financial institutions- particularly IMF; International Monetary Fund, and The European Investment Bank.
It is of utter and absolute importance to define each term of the research topic first. The topic goes "The impact of financial globalisation and innovation on the roles and policies of international financial institutions: a study of two IFI, where we have chosen IMF and the European Investment bank." Each of these underlined phrases needs to be defined to give us a clearer view of what we are talking about. Firstly what we refer to "impact" is "the change or influence" that financial globalization will bring upon our selected IFIs. Then again, what "financial globalization" implicates is vast. Firstly, globalization is like a corporate one-dish party. Everyone is gathering together at a dinning and presenting their signature dish. There are exotic cuisines from all around the world. Every passes on their dishes and others try it out. Globalization is hence the process of making it easier for corporations around the world to come at a settlement and trade with each other or taking the whole world an one unit ; this is what we meant by "corporate dinner party". Now, one-dish party with signature dish from across the world and that everyone passes it along refers to the merging or coming together of Multinationals and offering their unique service. Moreover, "financial globalization" is just this scenario with "signature dishes" referring to financial instruments like shares, bonds, government securities, loan documents etc. It is the emergence of worldwide financial markets and better access to external financing for borrowers. "Innovation" simply reflects the technological breakthrough and the electronic money transfer system which makes transaction easy and less messy. Furthermore, "role and policies" are straightforward terms used to mean the responsibilities that IFIs have to take to make globalization a success and how they should reform their systems of conduct to adapt to the changing circumstance of the changing world order. The governing structure of the international financial institutions should reflect the changes in the world economy, increasing the voice and representation of emerging economies and developing countries. Then, we move on to "International Financial Institutions". International financial institutions, or IFIs, refers to, institutions that provides financial services and encompasses a broad range of organizations that deal with the management of money or acting as financial intermediaries, for its clients or members, that have been established (or chartered) by more than one country, and hence are subjects of international law. Their owners or shareholders are generally national governments, although other international institutions and other organisations occasionally figure as shareholders. Among these organizations are credit unions, banks, credit card companies, insurance companies, consumer finance companies, stock brokerages, investment funds and some government sponsored enterprises. Lastly, the chosen IFIS are IMF; International Monetary Fund, and The European Investment Bank. To wrap up this huge paragraph, it to say we will be seeing how their responsibilities are to adapt to changing business systems.
The rationale behind selecting these two IFIs is that they both share the most intriguing history of the world we live in, the history that someway or the other has effected every business way. Hence, it is important to discuss their history briefly to get a clearly understanding of the roles and policies under taken by these IFIs. Firstly we will be talking about the history of IMF. The IMF was created to promote international monetary cooperation; to facilitate the expansion and balanced growth of international trade; to promote exchange stability; to assist in the establishment of a multilateral system of payments; to make its general resources temporarily available to its members experiencing balance of payments difficulties under adequate safeguards; and to shorten the duration and lessen the degree of disequilibrium in the international balances of payments of members.
The early years of the 20th century witnessed the 'Great Depression' of the 1930s and the two World Wars. The name given to it totally rationalized what curse and depression it brought up on the world economy. This resulted in the collapse of the total global economic system, thereby affecting international trade. As a result, all the countries were reeling with unemployment and plummeting living standards. A meeting of 730 delegates, from the 44 allied nations, was held in Bretton Woods, New Hampshire, United States. The main issue was regulation of the post-war international monetary and financial order. The U.S. delegation wanted a bank-like institution, from where the member countries could borrow money, which would have to be repaid in time. Finally, the U.S. view was accepted. During the Bretton Woods Conference, agreements were signed to establish the International Monetary Fund (IMF). Countries seeking membership of the IMF have to deposit a particular amount as subscription fee to the fund and has to comply with the stipulated conditions. The other sources of income are loan repayments from debtor countries, gold reserves and requested resources from its shareholders. This amount is used by the IMF in providing financial assistance. Since its inception, the IMF has provided financial aid to various countries facing economic problems. The organization still adheres to its objectives and tries to bring about a positive change in the global economic scenario.
(Source: http://www.cftech.com/BrainBank/FINANCE/IMFHistory.html)
Similarly, The European Investment Bank shares the same history. On 1989, the fall of Berlin Wall or Iron curtain marked the decline of Communism followed by Eastern Europe. This marked the opening of great market lied there in Central and Eastern Europe and 250 million consumers. Industries flourished and theories of comparative advantage came into play. Western Europe has technology and capital where as astern Europe had cheap resources and labour. According to imperfect market theory these factors of production cannot be moved so trade must take place. Slowly the world saw the formation of EU and the opening borders decreased exchange rate risk making MNC's ecstatic. Eastern Europe was under communism and there was a vast unexplored market area that got utilized and capitalized. The term, 'European Union' was introduced by the Maastricht Treaty in November 1993. The Single European Act set out the timetable for the creation of the Single Market by 1993. The creation of the Single Market brought about the world's largest trading area and the free movement of goods, capital, people and services. It took time for the member states to remove all barriers to trade and turn their 'common market'. Then in 1 January, 199 EURO-The single currency was inaugurated!
Viktor Klima, Social Democrat Chancellor of Austria quoted that, "A signal must be sent ... that a single market and a single currency is not the end of the EU journey." Because then came The European Investment Bank. As the 'Bank of the European Union', the EIB's mission is to make a difference to the future of Europe and its partners by supporting sound investments which further EU policy goals. The European Investment Bank is the European Union's long-term lending institution established in 1958 under the Treaty of Rome. As the primary financial arm of the European Union, the European Investment Bank (EIB) is also the world's largest bank and the world's largest lender, topping even such better-known institutions as the World Bank and the International Monetary Fund.
Moving forward, after discussing the terms of the essay topic, the history of IMF and EIB, it is the next step to discuss the roles and policies of these two IFIs and the loopholes that exist. Then we talk about how financial globalization is affecting these roles and policies.
Firstly, let's take IMF. The work of the IMF is of three main types. Surveillance involves the monitoring of economic and financial developments, and the provision of policy advice, aimed especially at crisis-prevention. The IMF also lends to countries with balance of payments difficulties, to provide temporary financing and to support policies aimed at correcting the underlying problems; loans to low-income countries are also aimed especially at poverty reduction. Third, the IMF provides countries with technical assistance and training in its areas of expertise. Supporting all three of these activities is IMF work in economic research and statistics. In recent years, as part of its efforts to strengthen the international financial system, and to enhance its effectiveness at preventing and resolving crises, the IMF has applied both its surveillance and technical assistance work to the development of standards and codes of good practice in its areas of responsibility, and to the strengthening of financial sectors. The IMF also plays an important role in fight against money-laundering and terrorism.
(Source: http://www.imf.org/external/work.htm)
Now, let's look into the problems regarding the process and especially the policy substance or content of IMF conditionality. It must be recognized by the IMF that the major problem with its conditionality is that the policies associated with it are seen to be inappropriate and harmful. The present system of managing crises by the IMF has many asymmetries and flaws.
(a) Absence of debt resolution system puts debtor country at losing end
At present, debtor countries are at losing end. They are not organized among themselves, and are often caught in a crisis without enough time or sufficient knowledge to think and plan properly. In contrast, creditors and creditor countries are well organized among themselves, and they organize to obtain maximum return for their loans.
(b) Flawed Process in IMF conditionality
In relation to the IMF's loan conditionality and the ownership question, there are a number of issues. First are the "process" issues. Although letters of intent are signed by the recipient country's government, it is well known that in most cases the conditions are in the main established by the Fund and recipient countries do not have significant leeway or space to successfully negotiate to remove or to really reshape most conditions.
(c) Content and Quality of IMF Policies: Indicators and Types of Problems
Second are the issues relating to the content and quality of the policies themselves. IMF conditionality policies have come under severe criticism for at least three reasons:
(i) that there has been "over-reach" in that the conditions widened in range through time to include "structural policies" not needed for managing the crisis;
(ii) that the policies in the core economic and financial areas of IMF competence have also been inappropriate as they were contractionary and did not generate growth; and
(iii) that the policies were designed in ways insensitive to social impacts, and the burden of adjustment fell heavily on the poor and at the expense of social and public services.
(d) Scope of conditionality too broad
The scope of IMF policy conditions has been increasing through the years and has become far too broad. Many of the conditions were not relevant or critical to the causes or the management of the crisis the countries found themselves in.
(e) In areas of its core competence, there are also serious problems with IMF policies
This review should be made in respect of government budget and expenditure, money supply, interest rate, exchange rate, and the degree of capital account openers and regulation, in the periods prior to crisis (to prevent one) and during crisis (to manage it).
(f) IMF policies badly designed from the social development perspective
The IMF has also been heavily criticized, especially by civil society, for the inappropriate design of their policies from the viewpoint of social impact, including reducing access of the public to basic services, and increasing the incidence of poverty.
(Source: http://www.twnside.org.sg/title/geseries4.htm)
Now, we talk about the impact of these roles and policies on IMF. If financial globalization boosts innovation, this helps to explain the empirical evidence that indicates that increased financial integration conditionally raises the level of productivity and long-run living standards. Our analysis finds that, conditional on the level of development, more integrated economies do exhibit higher levels of innovation activity but that the impact differs across equity-type and debt-type dimensions of international financial integration. Moreover, the gains from equity-type integration kick in at relatively low income levels, whereas the gains from debt-type integration are only found for high-income countries. The impact is that the IMF must recognize this and have an action plan (or at least be part of a coordinated action plan) that:
(i) regulates global capital flows, through international regulations or through currency transaction taxes;
(ii) establishes surveillance mechanisms and disciplines on countries that are major sources of credit so that the authorities in these countries monitor and regulate the behaviors and flows emanating from their capital markets and institutional sources of funds;
(iii) Provides warnings for developing countries of the potential hazards of accepting different types of capital inflows and provides guidelines on the judicious and careful use of the various kinds of funds;
(iv) Educates members and the public on how capital markets work and establishes surveillance and accountability mechanisms to guide and regulate the workings of the markets;
(v) appreciates and advises countries on the functions and selective uses of capital controls at national level, and helps them establish the capacity to introduce or maintain such controls;
(vi) identifies and curbs the use and abuse of financial instruments and methods that manipulate prices, currencies and markets, and prevents the development of new manipulative or destabilising instruments and methods;
(vii) stabilises exchange rates at international and national levels, which could include mechanisms to stabilise the three major currencies, and measures that can provide more stability and more accurate pricing of currencies of developing countries;
(viii) provides sufficient liquidity and credit to developing countries to finance development.
The prevention of crises through a more stable global financial order is more beneficial and cost effective than allowing the continuation of a fundamentally unstable and crisis-prone system which would then throw up the need of frequent bail-outs with accompanying conditionality.
(Source: http://www.twnside.org.sg/title/geseries4.htm)
After discussing the topic from IMF's perspective it is important to bring EIB under the limelight. It is technically called "EIB job Families".
Economic advice: Roles in this family provide economic expertise on specific micro or macro economic topics to produce studies and reports and/or supporting the core operational processes.
Lending: Roles in this family operate in the core lending process including interaction with the customers and/or credit risk analysis. Some roles are focused on the financial monitoring of signed lending operations. Others are orientated towards the ex-post evaluation of the Bank's lending activity.
Technical Advice: Roles in this family provide sector and technical expertise to the organization and perform technical analysis in support of the lending process. Some roles are primarily focused on the physical monitoring of projects financed by the Bank.
Finance: The family includes roles which directly operate the funding, hedging and disbursement processes or contribute to the elaboration of financial risk policies and monitor related risk exposures.
Legal Services: These roles provide the legal services required by the Bank on issues in various domains relevant to its activities and legally protect the Bank.
Human Resources: Roles in this family provide professional human resources services in support of the Bank's staffing needs, management of pay and benefits, performance management, training and career development programs.
Planning, Reporting & Control: The family groups all the roles that contribute either to internal financial effectiveness and clarity or to internal coordination and planning; they focus on one or more of the following areas: Financial Accounting (e.g. preparation of reports on the Bank's financial position); Internal controls (e.g. internal audit, operational risks management); Planning, budgeting and reporting (e.g. preparation, management and monitoring of the corporate planning and budgeting processes); Coordination and resource management in a specific directorate or department.
Information Technology: Roles in this family are characterized by the predominance of IT knowledge or business domain knowledge and cover a range of tasks including conceptualization, design, development, implementation, upgrading, maintenance or management of IT systems and tools.
Corporate: The family includes roles supporting the decision making process of the governing bodies or the relations of EIB with other institutions and the positioning of the Bank as an international organization.
Specialized services: The family includes different professions focusing on delivering specific services to the organization (e.g. Linguistic Services, Information Management, and Facilities Management).
(Source: http://www.eib.org/about/strategy/index.htm)
Now, the problem with EIB arises when we look at the foundation of its history. EIB is the Bank of European Union. What we are seeing is that The European Union is dying -- not a dramatic or sudden death, but one so slow and steady that we may look across the Atlantic one day soon and realize that the project of European integration that we've taken for granted over the past half-century is no more. Europe's decline is partly economic. The financial crisis has taken a painful toll on many E.U. members, and high national debts and the uncertain health of the continent's banks may mean more trouble ahead. For many Europeans, that greater good no longer seems to matter. They wonder what the union is delivering for them, and they ask whether it is worth the trouble. Countries are becoming bankrupt like Ireland, Spain, Greece etc and affecting higher powers like Germany and France. The single currency first seemed rational but due to dollarization, and due to pegging of non-dollar currency with dollar, all is demeaning EURO. The after math is the fall of EU will automatically cause the fall of EIB!
Moreover, now, we talk about the impact of these roles and policies on EIB. Being an EU institution, the EIB is expected to contribute to the goals of the Union with its specific means and tools. At the same time the changes of mandate should be built on the accumulated experience and on the understanding that the profile of the EIB as a top rated investment bank should not be jeopardized. The EIB finances innovative technologies, products and services across all industries, up to the stage of commercial market launch, including prototyping and demonstration plants, up until first commercialization. The impact on EIB is that EIB should support the access to basic and broadband telecommunication services and the necessary investments for backhaul services.
In information and communication technology (ICT) that should be given priority:
Filling the broadband gap across European regions and supporting competitive suppliers.
Projects that further strengthen and accelerate the diffusion of information, knowledge and innovation, for example next generation access - fibre to the home, mobile broadband - and satellite communication.
The Bank supports the diffusion of ICT applications in e services both in the public and private sector, such as e-government, e-business, e-learning and e-health. To promote the widespread adoption of ICT, it finances the development of innovative software and multimedia content.
The EIB also finances film and audiovisual projects. Special emphasis is placed on smaller projects financed through intermediary banks.
In order to develop new business, the Bank maintains close working relationships with relevant European Technology Platforms and Joint Technology Initiatives.
The Bank proposes a variety of loan instruments to cater for the broad range of innovative investments. The EIB-European Commission Risk Sharing Finance Facility should particularly be suitable for higher risk and reward research, development and innovation. A key challenge for the EU going forward will be making best use of tight resources. As the European Commission says in its Europe 2020 Strategy for smart sustainable and inclusive growth, budget consolidation programmes should prioritise growth-enhancing items, such as education and skills, R&D and innovation and investment in networks. The European Investment Bank stands ready to help the EU to leverage its limited resources and make the 2020 Strategy a success.
(Source: http://www.innovationeu.org/news/innovation-eu-vol2-1/0278-european-investment-bank---funding-the-future.html)
As we started with quotations, we will end with one as well. "Globalization has changed us into a company that searches the world, not just to sell or to source, but to find intellectual capital - the world's best talents and greatest ideas, " is a famous quotation by . What we have seen in this essay is that what IMF and EIB are doing is noble. The current policies they have are good but they need to be changed and are already influence by the financial globalization because of a quotation by Jimmy Carter, " Globalization, as defined by rich people like us, is a very nice thing... you are talking about the Internet, you are talking about cell phones, you are talking about computers. This doesn't affect two-thirds of the people of the world. The term globalization means that the whole world is at stake, and that policy should b in such a way as to benefit all the stakeholders, as in all the countries.
The impact of financial globalisation and innovation on the roles and policies IMF and the EIB should reflect the unanimity and harmony of having a corporate one dish party, without U.S.A and EU choosing that dishes others will bring, since IMF is not suppose to be an USA oriented organization and EIB is not to be EU biased; in this era of financial globalization.
**Word count including the referencing and headline 3700**
