International Financial Management
This article focuses on the growth and change that has occurred in the national and international financial systems. During the Post War period, many countries had the opportunity to experience economic growth, low unemployment and gradual deregulation in their respective financial markets. As a result, there was an emergence of the European Union, the North America Free Trade Agreement, the Asia Pacific Economic Cooperation, the World Bank and the International Monetary Fund to assist in the management and establishment of the financial architecture for the 21st century. The article includes an exploration of the international monetary system and how it works.
Keywords Asia Pacific Economic Cooperation; Bank of International Settlements; Basel Committee on Banking Supervision; European Union; G-10 Group; International Monetary Fund; International Monetary System; North America Free Trade Agreement; World Bank
Finance: International Financial Management
There was much growth and change in national and international financial systems in the 20th century. During the Post War period, many countries had the opportunity to experience economic growth, low unemployment and gradual deregulation in their respective financial markets. Positive steps were taken to change the way business was done through acts such as the emergence of the European Union, the North American Free Trade Agreement and the Asia Pacific Economic Cooperation. In addition, international institutions such as the World Bank, the International Monetary Fund and the Bank for International Settlements have assisted in the management of the changes that have occurred in the international financial arena. All of the efforts mentioned above have been an attempt to produce a sound international financial system that will be able to sustain over the years. "The financial system in the 21st century should provide a financial environment that is conducive to further global financial integration as well as better macroeconomic coordination" (Moshirian, 2002, p. 274).
There are some key issues that may have an effect on the international financial system. Therefore, it is imperative that all of the organizations and initiatives listed above come together in order to create an international financial architecture.
"Globalization and increasing interdependence amongst all the nations of the world have allowed people to have a better understanding of key factors which affect the welfare and interest of all people and nations and their absence could harm both developed and developing countries. Some of these issues are sustainable development, world peace and security, sound global environmental policies, international trade, stable monetary systems, sound financial institutions, universal education and health, sound and all embracing technological changes and effective and universally accessible telecommunication" (Moshirian, 2002, p. 276).
The establishment of the International Monetary Fund and the World Bank is probably one of the most important success stories for international economic cooperation. During the last sixty years, there have been many changes in terms of the political and economic climate on a global level, which have caused the world's top international financial institutions to shift in terms of how they operate their businesses. Given the number of financial crises that have surfaced during the last ten years, many scholars and practitioners in the field have called for a reform in how the international financial system is structured. These crises have exposed the weaknesses that are in the international financial system and have highlighted the fact that globalization has pros (benefits) and cons (risks).
The new international financial architecture (NIFA) was created by the G-7 countries due to the growing volatility in developing countries. Some key components of the NIFA include: The G-20, the Financial Stability Forum and the Reports on Observance of Standards and Codes, the latter involving areas such as corporate governance (Soederberg, 2002). The purpose of the architecture is to offer governments, businesses and individuals a mechanism (i.e. institutions, markets) to conduct economic and financial activities. The goal is to create an environment that:
- Strengthens and stabilizes the international financial system
- Minimizes the world's exposure to financial crises
Some advances have been made in order to reach these goals. The International Monetary Fund (IMF) has been instrumental in making some of these goals become a reality. According to the IMF's fact sheet (2000), some of the major accomplishments include:
- Increase in availability of information from governments and other institutions to the general public
- Increase in the implementation of codes of good practices that are necessary for a health economy
- The creation of the Contingent Credit Lines
IMF is working diligently to provide continuous improvement in practices that affect many sectors. For example, this body continues to:
- Encourage members to release public information notices, which describe the IMF Executive Board's assessment of a country's economy and policies
- Encourage members to release details of policies the member will follow to restore economic stability under its IMF-supported program
- Help countries implement guidelines, such as the Reports on the Observance of Standards and Codes, that will assess a country's progress in practicing internationally recognized standards and codes
- Address gaps in regulatory standards through the Basle Committee on Banking Supervision
- Encourage members to put procedures in place when they are not experiencing any problems so that they are not responding to a crisis; the opportunity to be proactive versus reactive
- Help countries assess their external vulnerabilities and to choose the appropriate exchange rate regimes
International Monetary System
The international monetary system is needed in order to define a common standard of value for the world's currencies. During the late 19th and early 20th century, the gold standard became the first international monetary system. "It has often been assumed in the international political economy literature that the classical gold standard of the late 19th century represented a turning point in monetary history because it marked the end wherein states manipulated their currency to increase their revenues" (Knafo, 2006, p. 78). One of the advantages of this type of system is that gold has a stabilizing influence. However, a disadvantage of the system is that it lacks liquidity. In addition, if there was an unexplainable increase in the supply of gold, prices could rise abruptly. Due to the large number of disadvantages, the international gold standard failed in 1914 and was replaced by the gold bullion standard during the 1920s. However, the gold bullion standard ceased to be used in the 1930s.
The gold-exchange standard was used to conduct international trade during the period after World War II. This system encouraged countries to set the value of their currency to some foreign currency, which was set and redeemed in gold. Many countries set their currencies to the dollar and maintained dollar reserves in the United States. The United States was seen as the leading country for currency. It was at the 1944 Bretton Woods International conference that a system of fixed exchange rates was...
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