Global Economic Institutions & Trade Dynamics Explained

BRICS: Formation & Core Pillars

Introduction to BRICS

BRICS is a group of five major emerging economies—Brazil, Russia, India, China, and South Africa. Established in 2009 (South Africa joined in 2010), BRICS aims to foster cooperation in economic, political, and cultural fields among developing nations and to create a multipolar world order.

Main Pillars of BRICS

• Political and Security Cooperation

  Promotes peace, security, and development.

  • Supports a multipolar world and democratic global governance.
  • Opposes terrorism and promotes UN reforms to make global institutions more representative.

• Economic and Financial Cooperation

  Focuses on trade, investment, infrastructure, and sustainable development.

  • Created the New Development Bank (NDB) to fund development projects.
  • Supports reform of international financial institutions like the IMF and World Bank.

• Cultural and People-to-People Exchange

  Promotes academic, cultural, youth, and sports exchanges.

  • Builds mutual trust and deeper cultural understanding between member countries.
  • Organizes BRICS film festivals, youth forums, and educational programs.

• Science, Technology, and Innovation (STI)

  Encourages joint research and technology transfer.

  • Cooperates in fields like renewable energy, space technology, and medicine.
  • Focuses on digital economy, AI, and cybersecurity.

• Sustainable Development and Climate Change

  Promotes green economy, climate resilience, and environmental protection.

  • Supports the Paris Agreement and works toward SDGs (Sustainable Development Goals).
  • Enhances cooperation on water, food security, and clean energy.

World Trade Organization (WTO): Role in Global Trade

Introduction to the WTO

The World Trade Organization (WTO), established in 1995, is the only international body that deals with the global rules of trade between nations. It replaced the General Agreement on Tariffs and Trade (GATT) and aims to promote free and fair trade globally.

Key Roles of the WTO in International Trade

• Promoting Free Trade

  Encourages reduction of trade barriers such as tariffs, quotas, and subsidies.

  • Promotes smooth and predictable trade flows by enforcing trade agreements.

• Dispute Settlement Mechanism

  Provides a legal and institutional framework for resolving trade disputes among member countries.

  • Ensures that disputes are settled fairly and promptly.

• Trade Negotiations

  Organizes multilateral trade negotiations (Rounds) to update trade rules.

  • Notable rounds include the Doha Development Round, which focused on development concerns.

• Global Trade Monitoring

  Monitors trade policies of member countries through the Trade Policy Review Mechanism (TPRM).

  • Enhances transparency and accountability.

• Capacity Building for Developing Nations

  Offers technical assistance and training programs to developing and least-developed countries.

  • Supports integration of these countries into the global trading system.

• Standardization of Trade Practices

  Works with other international organizations to develop harmonized standards in product safety, intellectual property, etc.

  • Ensures fairness and consistency in global trade practices.

World Bank: Impact on Developing Economies

Introduction to the World Bank

The World Bank, established in 1944, is a vital international financial institution that provides loans, grants, and technical assistance to developing countries. Its primary goal is to reduce poverty and promote sustainable economic development.

Role of the World Bank in Developing Countries

• Financial Assistance

  Offers long-term loans at low or no interest through arms like the International Development Association (IDA).

  • Provides project-based financing for sectors such as infrastructure, health, and education.

• Technical Assistance and Policy Advice

  Helps countries with policy formulation, institutional reform, and capacity building.

  • Provides expert advice on economic planning and management.

• Infrastructure Development

  Supports projects in transportation, energy, water supply, and telecommunication.

  • Enhances connectivity and efficiency, leading to better productivity and trade.

• Education and Health

  Funds programs for universal education, vocational training, and teacher training.

  • Improves public health systems, including access to clean water and disease control.

• Agriculture and Rural Development

  Invests in irrigation, crop diversification, and market access for farmers.

  • Focuses on poverty reduction in rural and agrarian economies.

Importance of the World Bank

• Promotes Economic Stability: Helps countries manage debt and build strong economic foundations.
• Reduces Inequality: Targets marginalized groups with inclusive development programs.
• Attracts Private Investment: Projects backed by the World Bank often attract international investors.
• Strengthens Governance: Promotes transparency, anti-corruption efforts, and the rule of law.
• Global Partnerships: Collaborates with governments, NGOs, and other institutions for broader impact.

International Monetary Fund (IMF): Structure & Functions

Introduction to the IMF

The International Monetary Fund (IMF), founded in 1944 and operational since 1945, is an international organization headquartered in Washington, D.C. It was created to promote global monetary cooperation, ensure financial stability, and facilitate balanced economic growth among member countries.

Organization of the IMF

• Board of Governors

  The highest decision-making body.

  • Comprises one governor from each of the 190+ member countries, usually the finance minister or central bank governor.

• Executive Board

  Consists of 24 Executive Directors representing groups of countries.

  • Oversees the daily operations and implements policies.

• Managing Director

  Head of the IMF, appointed by the Executive Board.

  • Serves a 5-year renewable term and is responsible for overall functioning.

• Special Drawing Rights (SDRs)

  An artificial currency used for IMF transactions.

  • Allocated to member countries as part of their foreign exchange reserves.

Functions of the IMF

• Promoting International Monetary Cooperation

  Acts as a platform for dialogue and coordination among member countries.

  • Encourages exchange rate stability and balanced economic growth.

• Financial Assistance

  Provides short- and medium-term loans to countries facing balance of payments crises.

  • Popular lending programs include Stand-By Arrangements (SBA) and Extended Fund Facility (EFF).

• Surveillance and Monitoring

  Regularly monitors the global economy and provides analysis through the World Economic Outlook and Country Reports.

  • Offers policy advice to prevent future economic crises.

• Capacity Development

  Trains officials in macroeconomic policy, fiscal management, banking regulation, etc.

  • Provides technical assistance to strengthen financial institutions.

• Exchange Rate Stability

  Encourages a stable exchange rate system to avoid competitive devaluations.

  • Allows flexibility under certain economic conditions.

• Poverty Reduction and Growth

  Supports low-income countries through concessional loans via the Poverty Reduction and Growth Trust (PRGT).

  • Aligns with broader UN goals for sustainable development.

SAARC: Objectives & Functions for Regional Cooperation

Introduction to SAARC

The South Asian Association for Regional Cooperation (SAARC) was established in 1985 to promote regional integration and cooperation among South Asian nations. The member countries include Afghanistan, Bangladesh, Bhutan, India, Maldives, Nepal, Pakistan, and Sri Lanka.

Objectives of SAARC

• Promote Welfare: Improve the quality of life of people in the region.
• Accelerate Economic Growth: Strengthen collective self-reliance.
• Promote Regional Integration: Foster mutual trust and understanding.
• Enhance Collaboration: In socio-cultural, technical, and scientific fields.
• Respect Sovereignty: Avoid interference in internal matters.
• Support International Goals: Work with international institutions and align with UN objectives.

Functions of SAARC

• Facilitating Regional Projects: Promotes joint ventures in education, health, agriculture, etc.
• Economic Cooperation: Works toward creating free trade zones (SAFTA – South Asian Free Trade Area).
• Cultural Exchange: Encourages people-to-people contact and cultural ties.
• Disaster Management: Coordinates emergency responses to natural calamities.
• Policy Formulation: Develops and implements regional policies.
• Organizing Summits: Annual meetings to address regional and global challenges.
• Creating Institutions: Establishes regional centers like the SAARC Development Fund and SAARC Agriculture Centre.

Key Economic Concepts & Global Organizations

Balance of Payment (BoP)

Current and Capital Account of Balance of Payment

The Balance of Payment (BoP) is a record of all economic transactions between residents of a country and the rest of the world.

• Current Account

  Records trade in goods and services. Includes exports, imports, income (like interest & dividends), and current transfers (like foreign aid).

  • A surplus means the country earns more from exports than it spends on imports.

• Capital Account

  Records financial transactions that affect a country’s assets and liabilities.

  • Includes foreign direct investments, portfolio investments, loans, and banking capital.
  • Reflects changes in ownership of national assets.

Disequilibrium in Balance of Payment (BoP)

Meaning of Disequilibrium

Disequilibrium in the Balance of Payment refers to a situation where the total inflows (receipts) and outflows (payments) of foreign exchange are not equal. A deficit occurs when outflows exceed inflows, while a surplus occurs when inflows exceed outflows.

Types of Disequilibrium

• Balance of Trade Disequilibrium: Due to excess imports over exports.
• Capital Account Disequilibrium: Due to large capital inflows/outflows.
• Monetary Disequilibrium: Arises from inflation or deflation.
• Structural Disequilibrium: Due to underdeveloped production or outdated technology.

Causes of Disequilibrium

• High imports and low exports.
• Rising foreign debt.
• Unfavorable exchange rates.
• High inflation.
• Political instability.

Eurodollar Market

The Eurodollar Market refers to the market where U.S. dollars are deposited in banks outside the United States, especially in Europe. These dollars are called Eurodollars.

• The market started after World War II and is not regulated by the U.S. Federal Reserve.
• It allows borrowers to access U.S. dollars outside the U.S.
• Helps global trade and investments due to its liquidity and flexibility.

Foreign Direct Investment (FDI)

FDI refers to investment by a company or individual in one country into business interests located in another country.

• Can be through setting up a subsidiary, joint venture, or acquiring a company abroad.
• Involves long-term interest and control in foreign enterprises.
• Benefits: technology transfer, employment generation, economic development.
• Example: A U.S. company opening a factory in India.

World Bank (Definition)

The World Bank is an international financial institution that provides loans and grants to the governments of poorer countries for the purpose of pursuing development projects.

• Established in 1944 as part of the Bretton Woods system.
• Consists mainly of two institutions:
  1. International Bank for Reconstruction and Development (IBRD)
  2. International Development Association (IDA)
• Aims to reduce poverty and support economic development.
• Provides funding for infrastructure, education, health, agriculture, and governance.
• Headquartered in Washington D.C., USA.

BRICS (Definition)

BRICS is an acronym for five major emerging national economies: Brazil, Russia, India, China, and South Africa.

• Initially known as BRIC until South Africa joined in 2010.
• Aims to promote peace, development, and cooperation among member nations.
• Focuses on economic growth, reforming global financial institutions, and mutual investment.
• BRICS has established its own financial institution called the New Development Bank (NDB).
• Represents a large portion of the world’s population and GDP.

World Trade Organization (WTO) Definition

The WTO is an international organization established on January 1, 1995, replacing the General Agreement on Tariffs and Trade (GATT). It aims to promote free and fair trade among nations and resolve trade disputes.

Objectives of WTO

• Promote free and fair international trade.
• Provide a platform for trade negotiations.
• Settle trade disputes among member countries.
• Enhance transparency and predictability in trade policies.
• Assist developing countries in trade policy issues.

Functions of WTO

• Trade Negotiations: Acts as a forum for negotiating trade agreements.
• Dispute Settlement: Provides a legal framework to resolve disputes through the Dispute Settlement Body.
• Monitoring: Monitors trade policies through periodic reviews.
• Capacity Building: Provides technical assistance and training to developing countries.
• Enforcement of Agreements: Ensures compliance with WTO agreements.

Determination of Foreign Exchange Rate

Meaning of Foreign Exchange Rate

The foreign exchange rate is the rate at which one currency can be exchanged for another. It is determined by the interaction of demand and supply in the foreign exchange market.

Methods of Determination

• Floating Exchange Rate System

  Determined by market forces (demand and supply).

  • No government intervention.
  • Example: US Dollar – Indian Rupee in open market.

• Fixed Exchange Rate System

  Fixed by the government or central bank.

  • Maintained through intervention.

• Managed Float System

  Mixture of both floating and fixed.

  • Market forces work within a band set by the central bank.

Factors Influencing Exchange Rate

• Inflation rate.
• Interest rate.
• Trade balance.
• Political stability.
• Speculation.
• Central bank interventions.