Class 

Economic Rationales for Governmental Intervention

• unemployment
• protection of infant industry
• using intervention to increase industrialization
• economic relationships with other countries

Non-Economic Rationales for Governmental Intervention

• maintaining essential industries
• "unfriendly" countries
• maintaining spheres of influence
• preserving culture and national identity

Instruments of Trade Control

• Tariffs
• Non-tariff barriers 
• subsidies
• aid (loans and grants)
• customs valuation
• quotas
• "buy national" policies
• standards

Class 4
 
 
 
 
 
 
 
 
 
 
 
 

Class 4
 
 
 
 
 
 
 
 
 
 

Class 4

Class
5

www.oecd.org/about/general/index.htm
 The OECD groups 29 member countries in an organization that, most importantly,
provides governments a setting in which to discuss, develop and perfect economic and social policy. Parts of the OECD Secretariat collect data, monitor trends, analyse and forecast economic developments, while others research social changes or  evolving patterns in trade, environment, agriculture, technology, taxation and more.
 http://www.oecd.org/about/general/member-countries.htm
 

Canada's connections  to the OECD

The head of the OECD is a Canadian. Mr. Donald Johnston, a former Liberal cabinet minister was (in December 2000) reappointed to another 5 yr term as Secretary-General of the OECD.  Prime Minister Chretien made the announcement Dec 14th, 2000 saying "Johnston was the first non-European and first Canadian to head the group..."

Example of the OECD Reports and how they can provide helpful information:

Re: Agricultural Subsidies:

OECD Reports in 2001 that for every dollar the Canadian government subsidizes Canadian farmers, the U.S. government spends $2.25, the E.C. $2.65 and the Japanese government $3.

The conclusion is that Canadian farmers will have to spend more money to produce their agricultural products, therefore they need a higher price at which to sell, to recover costs. If the American farmers have higher subsidies, then they can sell products at a lower price which makes it more attractive for overseas customers to buy American farm products, compared to Canadians. Some Canadian politicians 9particularly those with rural constituents) will use this OECD information to argue with NAFTA administrators that American subsidies are unfair and therefore Canadians should be allowed to have import tariffs on American farm products coming into Canada - even if we have NAFTA

www.dfait-maeci.gc.ca/nafta-alena/menu-e.aspmain menu at the Cdn govt site
 
 

some of the American govt NAFTA sites www.customs.ustreas.gov/nafta/ U.S. govt NAFTA site  www.customs.ustreas.gov/nafta/history.htm  www.nafta-customs.org/english/english.htm

 www.worldbank.org/html/extdr/about

The World Bank is not one single entity but rather a group of five institutions
In their own words
"...the World Bank Group consists of five closely associated institutions: 

• IBRD - the International Bank for Reconstruction and Development 
• IDA -International Development Association 
• IFC - International Finance Corporation 
• MIGA - Multilateral Investment Guarantee Agency 
• ICSID - International Centre for Settlement of Investment Disputes "

"8. The World Bank's priorities have changed dramatically 
     In 1980, investment in the power sector accounted for 21 percent of Bank lending. Today, that
     figure is down to 2 percent. By contrast, lending for health, nutrition and education has expanded almost fivefold from 5 percent in 1980 to over 22 percent today."

Who is the World Bank - 8,634 Bank staff employed in Washington, DC and 2,679 people overseas
 

The best explanation of the IMF is the first paragraph on their "about.htm" page

"The IMF is 

• an international organization of 182 member countries, 
• established to promote international monetary cooperation, 
• exchange stability, 
• and orderly exchange arrangements; 
• to foster economic growth 
• and high levels of employment; 
• and to provide temporary financial assistance to countries 
• to help ease balance of payments adjustment."

The FAQs are very straightforward and you are encouraged to check this page and read the first ten
 www.imf.org/external/np/exr/faq/faqs.htm

Special Drawing Rights  SDR

" The bulk of the IMF’s resources derives from members’ subscriptions (called quotas) that are based on each member’s relative size in the world economy. Quotas determine the maximum amount of financial resources that a member is obligated to provide to the IMF, voting power in IMF decision-making, and a member’s share of Special Drawing Rights  (SDR) allocations (the international reserve asset created by the IMF). The  financial assistance a member may obtain from the IMF is also based on its  quota."

In what form does the SDR exist?

"Initially, the value of the SDR was defined in terms of one US-$, which in turn was defined in terms of an ounce of gold: $35/oz until 18-Dec-1971; Since July 1974 the SDR has been defined in terms of a basket of currencies. This basket consisted initially of 16 currencies and was reduced to 5 in 1981." [WTGR - it was further reduced to 4 currencies in 2000]
 http://pacific.commerce.ubc.ca/xr/SDR.html

The SDR is not physical money like gold or some other currency - it is a value unit composed of the
"weighted average of five [now 4] currencies"
These currencies that make up the SDR are

(5 currencies in the 1990's)                                      (changed to 4 currencies in the Millennium)
 

U.S. dollar Euro (Germany) Japanese Yen  Euro (France) British Pound

U.S. dollar $ Euro Japanese Yen ¥ British Pound £

Since 1981, the weight of each of these currencies has been changing every 5 years. The table below shows the weights for the present, and immediate past periods. 
 

New weighted values 1999 - 2005 ISO 4217 Currency Jan/99-Dec/00 Jan/01-Dec/05 Wgt. Value Wgt. Value USD US Dollar 39% $ 0.582 44% $ 0.5770 EUR Euroland Euro 32% E 0.3519 31% E 0.4260 JPY Japanese Yen 18% ¥ 27.2 14% ¥ 21.0 GBP British Pound 11% £ 0.1050 11% £ 0.0984

(the tables listed above come from the webpage of Prof. Werner Antweiler, UBC, Vancouver)
 http://pacific.commerce.ubc.ca/xr/SDR.html

The Dec 2000 press release on the IMF web site, explaining this,
[witiger added in the coloured lines for emphasis]

text says Page 345
"The IMF has a surveillance program where it monitors the economic policies of countries that would affect those countries exchange rates".

From the IMF website
 http://www.imf.org/external/np/exr/facts/banking.htm

"The IMF seeks to improve a country's macroeconomic environment and policies through a regular dialogue with its national authorities. As regards financial system surveillance in particular, the IMF,  in cooperation with other institutions and as part of its adaptation to the  demands of the global economy, is deepening its surveillance and emphasizing its quest for transparency by a further increase in the coverage of financial system issues. Such efforts are designed to lessen the frequency and diminish the intensity of financial system problems in the future, through better identifying financial system strengths as well as potential weaknesses  that could have major macroeconomic implications."

"Pakistan gets IMF bailout, but problems persist " is the title of an East-Asian newspaper story in Oct 2000  www.timesofindia.com/121000/12nbrs3.htm

This is a relatively short story but you only have to read the first four paragraphs to understand the great extent to which national government leaders are trying to accommodate IMF requirements in their national policy making.

In Pakistan in 1999, Nawaz Sharif was overthrown by General Pervez Musharraf.

Despite the fact that it was a military takeover the General has been quite aware of the power of the IMF in the context of his country's sovereignty and is doing his best to appease the IMF.

The article says "... The economic policies of the Musharraf government have focused on meeting the IMF conditions."

Pakistan has been trying hard to stay solvent, as a country and receiving money from the IMF has been key. 
"Finance Minister Shaukat Aziz announced a  $3.5 billion bailout package from the IMF to help keep Pakistan from defaulting on foreign debt repayment.  However, final approval from IMF is still awaited. "This could be a turning point for Pakistan's economy because  it is seen as validating the country's policies and building investor confidence," Aziz said about the deal." 

South Korea

A short page summarizing the Positive  & Negative Impact of the 1997 IMF bailout plan on South Korea
 http://www.fba.nus.edu.sg/student/bk3400/t2_9899_student/s_kor2_ae6/impact_imf.htm

Positive Impact 
"Since the implementation of the plan, Koreans have by and large engaged in less over-consumption and have been shifting towards the purchase of cheaper and domestically produced goods. Imports of foreign goods like automobiles and liquor have also fallen, which has helped alleviate their huge trade deficits." 
 
 

CNN reported the situation in South Korea in November 1997 saying
 www.cnn.com/WORLD/9711/22/s.korea.imf/

"South Korea announced it was asking the IMF  to organize a bailout package. In exchange, the IMF is likely to  order deep spending cuts, lower import tariffs, higher domestic  taxes, the elimination of shaky banks, and the forfeiture of some  national decision-making power to lenders"
. 
How did the situation develop in South Korea that required the IMF?

CNN says "the answer seemed to be unanimous: corrupt politicians and businessmen who wheeled and dealed during South Korea's boom years."

"South Korea's stunning economic growth rates -- averaging 8 percent annually over the past two decades -- were largely fueled by the fast expansion of a dozen family-controlled conglomerates.  Past military governments provided cheap loans, tax breaks and other benefits to help the corporate giants expand and mass-produce cars, television sets, microchips, petroleum products and other goods. The business groups account for half of South Korea's industrial output and lead its export-driven economy. They supply one-quarter of the world's computer memory chips and account for about 30 percent of the commercial shipbuilding orders.  The economic boom also had negative impacts, triggering unbridled land speculation and environmental exploitation. Bribes  to police and public officials became common.  The problems came to a head this year when the economy slowed down, sales dropped, and some of the weaker conglomerates went belly up, saddling banks with $26 billion in bad loans."

Russia and the IMF  www.cnn.com/WORLD/9611/21/russia.economy/

In November of 1996, the IMF sent people to Moscow "to assess whether to issue the November installment of a $10 billion loan to Russia. The IMF  is concerned about the country's low levels of tax revenue. "
 

"The Russian financial crisis demonstrates the failings of the IMF on several fronts:" 
 http://www.heritage.org/library/lecture/hl626.html
 

• "First, the IMF conducted an inadequate risk assessment concerning its loan beneficiary. .. The IMF's assessment overestimated the growth rate of Russia's GDP each year since 1994." - meaning they thought the Russians had more money to pay back, than they really would.
• Second, the IMF based its commitment to the lending package on a wager that the Russian government would put the appropriate policies in place--yet these were policies that Russia either could not or would not implement." - there are domestic political issues involved here which make it difficult for the Russians to do certain things to appease the IMF
• Finally, the IMF made deals with individuals, such as former Prime Minister Sergei Kirienko and debt negotiator Anatoly Chubais, who then disappeared from the political scene. This is as troubling for investors as it would be in the case of any large company that lost its top management immediately after securing a bank loan."

"Thus, the IMF failed to implement due diligence procedures and violated its fiduciary duty to its shareholders--the member governments that fund and support its lending policies--and the taxpayers who finance them."
 

Mexico  1995

"The financial crisis faced by Mexico in late 1994 and early 1995 produced a collapse in investors' confidence, making it impossible for the Mexican authorities to roll-over short-term, foreign-currency debt held by non-residents. To complicate matters, international reserves at the Bank of Mexico were insufficient to meet the demand of investors seeking to convert pesos into US dollars.In response to this crisis, a 48.8 billion dollar multilateral financial assistance package was negotiated by the Mexican authorities with those of the United States, the Bank of Canada, the International Monetary Fund and the Bank for International
Settlements (BIS). The purpose of the multilateral assistance package was to enable Mexico to overcome its short-term liquidity crisis and thus avoid defaulting on its debt obligations, and at the same time prevent the crisis from spreading to other emerging markets. The international response to Mexico's financial crisis was the largest multilateral economic assistance package ever extended to any single country."
 www.banxico.org.mx/gpublicaciones/mexicaneconomy/mexecon97/m97iii1.html

How did Mexico get help?

"IMF pledged up to 17.8 billion dollars in financial assistance in the form of a stand-by arrangement to be disbursed over an 18 month period. Additionally, the Bank of Canada pledged 1.5 billion Canadian dollars (approximately 1.1 billion US dollars)"
 

By Joseph Kahn, New York Times, October 21, 2000 
 http://www.globalpolicy.org/socecon/bwi-wto/imf/2000/1024jk.htm

"Study Says IMF's Hand Often Heavy"

Kahn writes an article based on a [2000] study of how the IMF made decisions on several countries. The study was done by Morris Goldstein, who is now an economist at the Institute for International Economics

Kahn writes "Terms for rescuing nations from economic oblivion around the world during the emerging-market financial crisis of the late 1990's, was often criticized as the International Monetary Fund's equivalent of imperial overstretch. Now a new study using the fund's own unpublished data suggests that the critique may have actually underestimated the fund's commandeering approach. 
 

Indonesia "Under heavy pressure from wealthy nations that control its policies, the fund demanded a king's ransom from Indonesia as the price for its $40 billion assistance package."

Kahn says "Indonesia was told to raise taxes on state-owned companies; cancel 12 road, bridge and port projects; remove protections on dairy farmers; and eliminate price controls on cement — part of a long list that at one point included 140 items, the  study shows.  The idea was to convert Mr. Suharto's Indonesia, which had a partly capitalist economy plagued by corruption,  into an open, competitive and stable free market economy. Even though few mainstream economists argue with  the goal, the methods are coming under new scrutiny. "I think it's clear that both the scope and the depth of the fund's conditions were excessive," said Morris Goldstein. Goldstein said that the recent push for radical overhauls of nations that borrow money has undermined the fund's reputation and strained its competence. "They clearly strayed outside their area of expertise," Mr. Goldstein said. "If a nation is so plagued with problems that it needs to make 140 changes before it can borrow, then maybe the fund should not lend." 
 

"If you are a Canadian business that has suppliers or customers outside of Canada, then you face foreign   exchange risk. If you have accounts payable in another currency and the Canadian dollar weakens by the time they come due, it will cost you more to pay those accounts than you had originally anticipated. If you have accounts receivable in another currency and the Canadian dollar strengthens by the time you collect them, then the funds you receive will be worth less than you had planned."
 www.tdbank.ca/business/foreign/info_foreign.html
. 
 

Class
6

The following points come from
www.witiger.com/powerpoints/intl~banking/INTL303chpt4.ppt
. 

• Relative inflation rates
• changes in inflation rates can affect international trade activity, which influences the demand and supply of currencies
• if inflation is high, price of products is rising fast and the economy will have a lot of money to buy foreign products
• if they buy foreign products, there is need for currencies other than the currency they have, so demand is high
• affects supply and demand for currency
• impacts international trade
• e.g., British inflation rises against US inflation
• British goods become more expensive relative to US
• decrease of US demand for pound sterling
• increase in British demand for “cheaper” US goods
• increase in British demand for $US
• increase in supply of pounds on sale for $US
• British pound declines in value against the $US
• Relative interest rates
• changes in relative interest rates affect investment in foreign securities, which influence the demand and supply of currencies
• Relative income levels
• if income in a country increases, globalization will increase demand for foreign products 
• demand for foreign products will increase demand for the currency of the countries where those products come from
• in the late 1980’s and early 1990’s, income levels in North America caused massive imports of Japanese consumer products, making the Japanese yen rise very high
• Government controls
• foreign exchange barriers
• repatriation restrictions
• foreign trade barriers
• central bank intervention
• intervention may affect inflation, interest rates and income levels
• Expectations
• e.g., news of potential increase in British inflation
• market expects decline in value of pound
• institutional traders sell pound sterling
• value of pound declines against the $US

Class
6

In the case of RBC - they have a portion of their page devoted to a short glossary of Foreign Exchange terms, which you can read at  www.royalbank.com/sme/guides/foreign_exchange/glossary.html RBC also have a short page with three examples of situations a company would be in that require using 4X instruments. They call this page grandly "Foreign Exchange Case Studies" You can view it at  www.royalbank.com/sme/guides/foreign_exchange/case_studies.html

Scotiabanks's website also has a glossary that gives 4X terms and their glossary is a bit more detailed and gives full explanations and examples strongly recommended reading  www.scotiafx.com/HedgingStrategies.htm

1. identify your exposure to foreign exchange fluctuations; 
2. quantify your exposure 
3. draft a possible foreign exchange exposure management strategy;
4. review the financial products available to support your strategy and what they cost
5. if the costs justify the rewards, implement your strategy; and
6. monitor and evaluate the performance of your foreign exchange risk management strategy. 

"Your Exposure to Foreign Exchange Risk"

• Sales and inventory 
• Capital equipment 
• Supplies and services
• Debt / lease costs
• Payroll 
• Payments to shareholders 
• Transfer payments 

Class
6

Spot refers to the price of one currency in terms of another.
if the price is in X country dollars = $1.00 US it is called a direct quote
if the price is 1 unit of xx country currency = amount in USD it is an indirect quote

"A spot price is quoted as a spread between the BID (level where the bank buys the underlying currency) and the OFFER (level where the bank sells the underlying currency). The underlying currency is the first one in the currency pair. For example, if USD/CAD is 1.5000 - 1.5010, Scotiabank buys USDs at 1.5000 against CAD and sells USDs at 1.5010."
 www.scotiafx.com/HedgingStrategies.htm#spot. 

 

.	The Spot Market is not always the best route  www.tdbank.ca/business/foreign/management/spot.html "Although the spot market lets your company buy or sell currency as you need it, spot exchange rate movements are highly unpredictable, even during a single trading day. Relying on the spot market for future foreign exchange is highly speculative. It can expose your company's cash flow to the risk of unfavourable changes in foreign currency values."
	Scotiabank has a similar description of the Spot Market, adding  www.scotiafx.com/HedgingStrategies.htm#spot "Advantages  Exporters benefit from domestic currency devaluation.  Importers benefit from domestic currency appreciation.  No transaction cost.  Simple/Easy to monitor changes in the market.  Disadvantages Exporters are vulnerable to domestic currency appreciation. Importers are vulnerable to domestic currency depreciation.  Monitoring is required in order to transact at a favorable rate"

Represents the bank's fee for service in effecting the currency exchange between two parties
If the currency is popular, and a lot of volume on both "sell" and "buy" side is required, the spread will be small because the bank does not have to worry about the risk of buying a currency because it can soon sell it
If the currency is not popular, or the volume on both "sell" and "buy" side is low, the bank will charge more for the transaction because it wants to cover any risk in holding the currency to long

The Bid / Ask Spread can be calculated = (ask price minus bid price)/ ask price

Class
6

• direct quotes (American Terms)
• direct quotes: number of domestic-currency units received for each foreign-currency unit
• example - direct quote for Cdn dollar re: US
• 1 $ USD = 1.5 $ CDN
• indirect quotes (European Terms)
• Indirect quotes: number of foreign-currency units received for each domestic-currency unit
• example - indirect quote for Cdn dollar re: US

1 $ CDN = .75 USD

these points come from
 www.witiger.com/powerpoints/intl~banking/INTL303chpt5currencyfutures.ppt

In "real life", hedging is like a contingency plan
I want to get a ride to the airport for a business trip, I’ll book an airline limo
Just in case the limo doesn’t come on time, I’ll hedge my risk by having my neighbour agree to drive me

• Buy a futures contract for a currency you need
• Done when you need to spend money in the future, and want to lock in the price because you are concerned it might rise to your disadvantage
• If you don’t need it,   your broker can sell it on the exchange
• Sell a futures contract for a currency you DO NOT need
• Done when you need to get rid of money in the future, and want to lock in the price because you are concerned it might rise to your disadvantage
• Again, if you don’t need it,   your broker can sell it on the exchange

• hedging by buying 90 day contracts
• e.g., a US firm orders Swiss products
• must pay SF750,000 upon delivery in 90 days
• US firm buys 90 day contract today
• locks in price to be paid for francs in 90 days 

Political forces are:

• nationalism
• terrorism
• traditional hostilities (Arab-Jew, Protestant Irish-Catholic Irish)
• unstable government (Indonesia, Mexico, Philippines)
• international organizations (influence of the IMF, World Bank)
• government owned business (Petrocanada, Aircanada, Canada Post)

(most countries have the government control postal service, the major airline etc.)

Capitalism
American practice of capitalism is much different than in Canada, which is much different than in Japan.

Socialism
 

Chapter 5

Class 6

It is the risk that politics in the host country will develop in a way which makes it difficult for you to profitably carry on your business. This risk can be divided into several threat levels.

• Interference with operations

Confiscation (they take a piece of equipment)

Expropriation (they take the whole company)

Nationalization (they take all the companies in a business sector)

• Economic instability, which effects production
• Currency Repatriation, not being able to get your money out
• Currency  Inconvertibility
• Contract Repudiation
• Political violence – loss of assets or income due to 
• war, 
• revolution, 
• insurrection or 
• politically motivated civil strife, 
• terrorism and sabotage
• K&R, kidnap & ransom, 
• extortion

Government
Resources

contingency 
planning 
& 
business 
continuity 
solutions

Government
Resources
 

Class 6
 
 
 
 
 
 
 
 
 

Government
Resources

contingency 
planning 
& 
business 
continuity 
solutions

Government
Resources
 
 
 
 
 

Government
Resources

contingency 
planning 
& 
business 
continuity 
solutions

Government
Resources

The screen capture above is from the web site of  CanadExport of the Dept. of Foreign Affairs.
It features an article written by Prof Richardson, for Dept. of Foreign Affairs publication, in 1998

In this article, Prof. Richardson says

"One consequence of government–private sector alliances’ stimulating exporting is that many Canadian  companies are doing business in farther reaches of the globe. However, some of the newer areas that are  being opened to international business are not as safe and free from risk as are more familiar markets and regions. Canadian companies should therefore plan for overseas security."

"...these newer areas can be rewarding for exporters, but Canadian companies need to exercise caution. ...Contingency plan one way to address risks"
 

Three main categories of risk which effect international business travellers

• unstable ethnic, religious and military conflicts;
• climatic extremes that threaten the health and safety of nonresident travellers
• topographical extremes that endanger personal safety, communications and transportation.

Contingency plans can cover such situations as: 

• medical trauma in remote areas and the subsequent evacuation and treatment; 
• theft of expensive equipment and recovery of important corporate data; 
• kidnapping situations; 
• violent robbery and assault of executives; 
• extortion and threats against company operations, offices and facilities; 
• security of communications and electronic countermeasures; 
• natural disasters, evacuation of personnel and recovery of equipment and property. 

• Register with the local Canadian embassy or consulate in the region. 
• Ensure that all at-risk personnel, and their support staff and team members, understand the action items they need to follow in contingency plans. 
• Invest in access to international security consultants and treat their services as part of your core resources. 
• Incorporate security considerations into your initial plans. 
• Identify security resources within your existing staff, including medical and first aid knowledge, language abilities, logistical and transportation expertise and so on. 
• Develop security strategies with other Canadian companies operating in similar regions and situations of risk, including strategies for joint evacuation, medical assistance, terrorism incidents and perimeter security. 

Security
Services
Companies

contingency 
planning 
& 
business 
continuity 
solutions

Security
Services
Companies
 

Class 6
 
 
 
 
 
 
 
 

Security
Services
Companies

contingency 
planning 
& 
business 
continuity 
solutions

Security
Services
Companies

Globe Risk, "There are many questions when it comes to contingency planning and crisis  management. Similar to an insurance policy, it prepares your company for any disasters it may encounter. Even more like an insurance policy, it can either be money wasted or well spent. When a crisis strikes your firm, it will be too late to find out. Then it will be up to legal teams representing damaged parties, injured employees and government  regulators to determine your liabilities. "

Country risk assessment / Political Risk Analysis , p. 321
- example of a political risk  rating system as used at Duke University
 - country risk analysis done for  all the countries of the world
 

Queen's links to political risk information  http://qsilver.queensu.ca/~comm375/buslinks.html

Canadian Security Intelligence Service commentary piece on  Single Issue Terrorism   www.csis-scrs.gc.ca/eng/comment/com74_e.html

Author, Dr. G. Davidson (Tim) Smith - examines extremist militancy encountered in North America and the United Kingdom