International Monetary Fund (IMF)

Since its creation during the post-Great Depression era, the International Monetary Fund (IMF) has been a prominent figure in global finance. With the objective of promoting global currency and economic stability, it influences financial governance worldwide.

Creation At Bretton Woods

In July 1944, delegates from 44 countries met at the United Nations Monetary and Financial Conference in Bretton Woods, New Hampshire. They investigated the pressing issues of the day, such as exchange rate stability and exploding international debt. At Bretton Woods, the concept of the IMF was developed as a solution to these challenges and then introduced to the world.

Since then, the IMF has been a prominent figure in crisis resolution and global economic management. From the end of the Bretton Woods System in 1971 to the Global Financial Crisis of 2008, the IMF has influenced the policies of countries around the globe.

The IMF’s Form And Function

The IMF is an international organisation that aspires to promote financial stability, economic growth and cooperation among its members. Headquartered in Washington D.C., it is made up of 189 member countries.

The policy-making body of the IMF is the Board of Governors, which is commissioned with ensuring the structure and function of the IMF remains uncompromised. It is made up of one representative and alternate from each member country.

The self-stated mission of the IMF is multi-fold and is as follows:

In an attempt to address issues such as global poverty and sustainable economic growth, the IMF performs several core functions on a routine basis:

The primary objective served by each of these functions is crisis aversion. By monitoring, advising and extending credit, the IMF aspires to reduce systemic risks facing member nations while promoting broad-based economic health.

IMF: Membership And Quotas

The IMF has extended membership to countries in every geographic locale. Whether a nation has a developing economy or is an established economic superpower, it may seek membership.

In order to gain and maintain acceptance by the IMF, a country must satisfy the following ongoing requirements:

In respect of their SDR qualifications, larger countries receive larger quotas while smaller members are allocated smaller quotas in the much the same fashion. The IMF uses quotas to determine benefits and obligations designated for member nations. This is accomplished in several ways:

The IMF quota system is designed to ensure that member countries are treated fairly and receive any assistance that may be needed. In this fashion, an economic superpower such as the U.S. or U.K. is able to secure ample resources in a similar manner as those in smaller, developing nations.

Summary

Since its inception, the IMF has been an integral part of the global monetary and financial system. Through monitoring, extending credit and educating member nations, the IMF has built a truly international body representing 189 of the 195 officially recognised countries.

However, the IMF is also a controversial figure. High-profile partnerships with member nations such as Iceland and Greece have prompted voracious debate over the role of international lending in contemporary finance. Concerns pertaining to the negative impacts of globalisation, as well as nation building, are frequently cited by critics. In addition, widespread criticisms of the quota and SDR system have been prevalent over the course of its history.

In spite of its detractors, the IMF is a viable entity. Given the levels of membership and resources, it is poised to remain at the forefront of global finance for decades to come.

Category: Global Economies

What Is An Interest Rate?

An interest rate is the percentage of the principal loan that borrows pay to lenders for borrowing assets.

An interest rate is basically the cost for leasing cash, goods or assets like automobiles. Depending on the risk associated with the borrower, the interest rate could be low or high. Interest rates are often use to control economic activities, such as inflation and unemployment. Central banks lower the interest rate level when investment and consumption is desired, and raise to avoid economic bubbles. In the forex market, some traders use a strategy that involves selling currencies with low interest rates and buy currencies with high interest rates.

Category: Global Economies

What is Opec?

OPEC stands for the Organisation of the Petroleum Exporting Countries, which is a cartel of some of the largest oil-producing nations in the world. In its early years, OPEC was able to a large degree dictate the world price of oil, making it a major political and economic player.

However, over the past several decades, the group has lost a lot of its market and political power due to the following issues:

OPEC was created in September 1960 at the Baghdad Conference in Iraq. The five founding members were Iran, Iraq, Kuwait, Saudi Arabia and Venezuela.[1]

They were subsequently joined by Qatar (1961), Libya (1962), the United Arab Emirates (1967), Algeria (1969), Nigeria (1971), Angola (2007) and Equatorial Guinea (2017). Ecuador, which joined in 1973, suspended its membership in December 1992 then rejoined in 2007. Gabon, which joined in 1975, quit 20 years later but then rejoined in 2016. Indonesia, which joined in 1962, suspended its membership in January 2009, reactivated it in January 2016, but then suspended its membership once again later that same year. As a result, the group had 14 members as of April 2018.[2]

According to its Statute, “any country with a substantial net export of crude petroleum, which has fundamentally similar interests to those of Member Countries, may become a Full Member of the organisation, if accepted by a majority of three-fourths of Full Members, including the concurring votes of all Founder Members.”[2]

OPEC’s Mission

The group’s mission “is to coordinate and unify the petroleum policies of its Member Countries and ensure the stabilisation of oil markets in order to secure an efficient, economic and regular supply of petroleum to consumers, a steady income to producers and a fair return on capital for those investing in the petroleum industry.”[3]

Although no European countries are members of OPEC, the group’s headquarters are in Vienna, where it moved in 1965 after spending its first five years in Geneva.[1]

According to OPEC, the group’s members hold 81.5% of the world’s proven crude oil reserves (i.e., petroleum in the ground) as of 2016, or an estimated 1.2 trillion barrels.[4] The lion’s share of that, or about two-thirds of OPEC’s total proven reserves, is in the Middle East.

Among individual countries:

Many of the world’s biggest oil producers have never belonged to OPEC, including Canada, China, Mexico, Norway, Oman, Russia, and the U.S. Many of them have responded to OPEC’s attempts to control world oil prices by exploring for and pumping more oil themselves and achieving greater market share and energy independence, which has greatly diminished OPEC’s power.[5]

Oil Power

As described on its website, OPEC was founded “at a time of transition in the international economic and political landscape, with extensive decolonisation and the birth of many new independent states in the developing world.”[1] The world oil market was then dominated by the so-called Seven Sisters, which are the large, Western-based, privately-owned multinational companies such as Royal Dutch Shell and Exxon.

In 1968, OPEC adopted a “Declaratory Statement of Petroleum Policy in Member Countries” that “emphasized the inalienable right of all countries to exercise permanent sovereignty over their natural resources in the interest of their national development.”[1]

In other words, OPEC members wanted to have greater say in how their oil wealth was exploited and keep more of the proceeds for themselves. It did not take long for OPEC to start flexing its muscles.

The Oil Weapon

Throughout the 1960s, the world price of oil was largely stable, if decreasing slightly year by year. But things changed in 1973, when the cartel lowered production and raised oil prices by 70%, and then by an additional 130% following the outbreak of the Yom Kippur War. The goal was to punish countries, notably the U.S. and the Netherlands, for supporting Israel in its war with Egypt. From 1973 to 1980, the price of oil skyrocketed, which also increased the political and economic power of OPEC and its member nations.[6]

By the end of the 1970s, the price of oil had jumped from about US$20 a barrel (adjusted for inflation) before the embargo to more than US$120.[7]

Internal Squabbling and War

During the next decade, oil prices plunged back to where they were before the oil embargo. There were, however, varying moments of volatility.

In 1979, for example, the Shah of Iran was toppled by Islamic revolutionaries, who then held 52 Americans captive for more than a year. This created a short-lived runup in oil prices, and was followed by a nearly decade-long war between Iran and Iraq. Given that they’re two of OPEC’s founding members, the squabble led to interrupted supplies from the Middle East.[6]

However, that gap was quickly filled by new oil discoveries and exploration from non-OPEC sources, chiefly North Sea oil from Norway and the U.K. and Alaskan oil from the U.S. Eventually, this created a glut of oil in world markets and a plunging price. The decade largely ended OPEC’s presumed ability to control the market.[6]

Compared to the previous two decades, oil prices were relatively stable in the 1990s expect for a short-lived spike in prices following Iraq’s invasion of Kuwait, in which one OPEC member invaded another by force. But prices stabilised following the U.S.-led intervention to drive Iraq out of Kuwait.[6]

OPEC’s ability to control oil prices since its heyday in the 1970s has diminished largely due to the rest of the world becoming less dependent on OPEC-generated oil, owing to a variety of factors including new sources of petroleum and conservation efforts. OPEC has tried to control the price of oil by increasing or decreasing production, but the organisation has often had difficulty with controlling the behaviour of its member nations.

For example, severe economic conditions at various times in Iran, Iraq, Libya and Venezuela in have often led those countries, among others, to cheat on their production quotas. The belief was that it was in their own national interest to sell as much oil as possible to generate revenue, even if that went against OPEC policy to limit their production. As a result, OPEC’s effectiveness as a genuine cartel is not what it used to be.[8]

That’s largely because its market share has fallen. According to the U.S. Energy Information Administration, four of the top six oil producers in the world are non-OPEC countries with Russia as number one, the U.S. in third, and China and Canada fifth and sixth, respectively. Saudi Arabia is number two and Iraq is number four.[9]

Summary

The Organisation of the Petroleum Exporting Countries was created in 1960 by some of the world ‘s largest oil-producing nations in order to safeguard their oil wealth and better manage the price and market for crude oil. The cartel’s member countries control more than 80% of the world’s proven oil reserves.

The group reached the height of its market power in the 1970s as it withheld oil from the market and raised prices during the Yom Kippur War. Since then the group has lost a lot of its market influence as other countries have found new sources of oil or cut back on oil usage, while internal disagreements among its members has hurt the group’s ability to control production and prices.

Category: Global Economies

What is The G20?

In a similar vein as the International Monetary Fund (IMF) and World Bank, the Group of 20 (G20) is an international financial authority. However, instead of engaging in lending or the provision of financial assistance to member nations, the G20 is a consortium tasked with addressing the premier global economic challenges of the day.

Composition And Mission

The G20 is made up of the world’s economic superpowers, financial leaders and developing nations. As a whole, G20 members represent every continent (except Antarctica), two-thirds of the world’s population and 85% of global economic output. The G20 is officially made up of 19 member nations, the European Union (EU) and permanent guest country Spain. Below is a list of the individual member nations by region:

*Featured EU economies, with the United Kingdom scheduled to depart in March 2019

While the G20 has no permanent headquarters or physical residence, its bodies convene on a regional basis throughout the year. Serving as a non-partisan and independent think tank, the G20’s formal mission statement is as follows:[2]

  1. “Act as a facilitator and mediator for expert discourse, with focus on innovation-driven communication.”
  2. “Initiate and coordinate communication between governments, business, academia and youth, in an effort to create a sustainable win-win situation for all involved.”

History

The creation of the G20 dates back to the late 1990s and a decision to expand the existing Group of Seven (G7). Citing a need to “broaden the dialogue on key economic and financial policy issues” while “promoting co-operation and achieve sustainable global economic growth for all,”[3] acting G7 ministers sought to extend the reach of group. The result was the inclusion of the world’s most influential economies, both advanced and emerging.

One of the inspirations behind the G20’s foundation was the framework put forth by the Bretton Woods Accords. In December 1999, acting G7 heads summoned “counterparts from a number of systemically important countries from regions around the world” to Berlin, Germany.[4] Their task was to engage challenges facing the international economic and financial environment, and the invitees included leading global powers and developing nations. In addition, the meeting in Berlin featured representatives from several Bretton Woods holdovers such as the IMF and World Bank.

One of the G20’s founding principles was to recognise the growing importance of developing nations and foster full integration of the global economy. These objectives were outlined in the G20’s mandate:[3]

Over the roughly two decades of its existence, the G20 has made special accommodation in times of extraordinary trials.

While the accomplishments of the G20 are often lauded as being a calming influence in the world of finance, they do not come without criticism. Detractors deem efforts as being “exclusive,” arguing that the G20 has strengthened the power of corporations, ignored climate change, turned a blind eye to social injustice and been tolerant of authoritarian regimes.[7] These claims have been put forth periodically by leading opposition bodies such as Greenpeace and Oxfam Germany. Subsequently, organised protests are commonplace for the annual Leaders’ Summit, with one of the largest in history occurring in 2017 at Hamburg, Germany.

Form And Function

Over the course of each calendar year, the G20 carries out an extensive agenda. More than 50 regional conferences of member representatives, known as “sherpas,” are held to address any pressing issues stemming from global finance. The focus of these meetings is categorised as adhering to one of two “tracks”:

Each year, a select member nation is given the opportunity to act as president of the G20. To ensure a seamless execution of the annual agenda, the acting presidency works in tandem with the previous and succeeding administrations. This collective is referred to as the “troika.”

Upon the year’s work being completed, the annual Leaders’ Summit is held to issue the G20’s joint declaration. The troika works together to ensure the consistency of the Leaders’ Summit and to promote the official agenda of the meeting.

The G20 Leaders Summit

A key function of the G20 is the annual Leaders Summit where heads of state, central bankers and various civil and business leaders are invited to share ideas regarding global economic health. It is held over a two-day period and is the culmination of the year’s work. Following the Leaders Summit, the G20 issues a formal statement regarding its official recommendations crafted throughout the year.

The inaugural Leaders Summit was held in 2008 in Washington D.C., United States. Since that time, the periodic meeting has been held in various international locales:

YearLocation
2008Washington D.C., United States
2009London, United Kingdom
2009Pittsburgh, United States
2010Toronto, Canada
2010Seoul, Korea
2011Cannes, France
2012Los Cabos, Mexico
2013St. Petersburg, Russia
2014Brisbane, Australia
2015Antalya, Turkey
2016Hangzhou, China
2017Hamburg, Germany

The 2018 Leaders Summit was held from 30 November to 1 December in Buenos Aires, Argentina, and more than 5,000 delegates participated in more than 100 meetings focused on industry and finance.

Future venues are announced ahead of time, in a similar fashion to those of the Olympic Games. G20 Member nations rotate the honor of entertaining the Leaders’ Summit, and host cities are nominated by leadership of the president nation. For 2019, Japan was nominated to host the summit, and in 2020 the duty falls to Saudi Arabia.[12]

The annual G20 Leaders’ Summit is attended by the most powerful heads of state and business in the world. Often, news breaking from the conference enhances the pricing volatility in equities, futures and currency markets.

Summary

While not an official regulatory body, the G20 has formidable power when it comes to international finance. Its agenda often leads to reform, defining the path of the global economic and monetary systems. In times of prosperity or crisis, the G20 is viewed as a pillar of the world’s financial community and a premier decision making body.

Category: Global Economies