TCW Topic 3 Reviewer

Role of international financial institutions in creating a global economy

The goal of policies is to restore market confidence. Normally we assume that an exchange rate devaluation will make exporting more attractive. But if a crisis leads to corporate failures which cascade to bankruptcies of financial institutions.

The state banks may carry with them an implicit guarantee for depositors. A government announcement that it will not guarantee the private banks can easily generate a run on the private banks, especially if the government shuts down some banks but leaves doubts about the health of some of the remaining banks.

The challenges of restructuring the banking system are

As important as strengthening the financial sector is, that alone will not suffice. At the onset, governments should correct the tax, regulatory, and banking practices that encouraged the high debt-equity ratios.

Creating a robust policy regime that minimizes the long-term consequences of the inevitable fluctuations in economic activity, including preventing crises and setting up mechanisms for orderly workouts when they do occur.

In a world where private-to-private capital flows are increasingly important, we will need to recognize that monitoring and surveillance are going to be especially challenging.

A development institution, not a crisis fighter. It focuses on project lending and structural reforms that enhance long-run development and poverty alleviation.

Three periods of Global Corporations

East India Company (English East India Company - 1600–1708) is the governor and a Company of Merchants of London Trading into the East Indies or (1708– 1873) United Company of Merchants of England Trading to the East Indies.

The economic & political media used for first time “Imperialism” terminology for period of U.S. and Spanish war (1898).

The international company’s birth from 1900 especially after Security and Exchange organization (SEC) was founded in 1933 and law of establishment investing companies in 1940 in United States.

Different types of Corporations

Importers and exporters but no investment outside home country

Invested in and present in many companies. Market products and Services to each individual local market.

They have investment in other countries, but do not have coordinated product offerings in each country. They are more focused on adapting their products and services to each individual local market

They are more complex organizations which have invested in foreign operations, have a central corporate facility but give decision making, research and development, and marketing powers to each individual market.

The great merit of a market economy is that dispersed information is aggregated through prices and the incentives they create for behavior, without the need for any centralized collection of information or planning.