GLOBAL FINANCIAL INSTITUTION – INTERNATIONAL MONETARY FUND (IMF)

Broadly speaking, the International Monetary Fund (IMF) is an organization which consists of 188 countries working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world. Besides, the IMF provides policy advice and financing to its members in economic difficulties and also works with developing nations to help them achieve macroeconomic stability. Helping a nation that can benefit from globalization while avoiding potential downsides such as massive movements of capital and abrupt shifts in comparative advantage, including labor, trade and tax policies are the important tasks for the IMF. Hence, the IMF supports its membership by providing:

1. Policy advice to governments and central banks based on analysis of economic trends and cross-country experiences.

2. Research, statistics, forecasts, and analysis based on tracking of global, regional, and individual economies and markets.

3. Loans to help countries overcome economic difficulties and fight poverty, mostly in developing countries.

4. Technical assistance and training to help countries improve the management of their economies.

Furthermore, one of the main goals of the IMF as a global financial institution is to ensure the stability of the international monetary and financial system by working together to help resolve crises with its member countries to promote growth and alleviate poverty. As the institution has three main tasks at its disposal to carry out its mandate which are surveillance, lending, technical assistance and training, these functions are underpinned by its research and statistics.

Within the realm of surveillance, for example, the IMF promotes economic stability and global growth by encouraging countries to adopt sound economic and financial policies. In order to do this, the institution regularly monitors global, regional, and national economic developments. As it also seeks to assess the impact of the policies of individual countries on other economies, the process of monitoring and discussing countries’ economic and financial policies is known as bilateral surveillance.

On a regular basis (usually, once every year), the IMF conducts in depth appraisals of each member country’s economic situation by discussing with the country’s authorities and the policies that are most conducive to a stable and prosperous economy; drawing on experience across its membership. At this stage, the member countries may agree to publish the IMF’s assessment of their economies along with the vast majority of countries opting to do so.

Meanwhile, when it comes to addressing how the IMF performs its mandate as a global financing provider, the institution essentially renders its member countries the breathing room that they need to correct their balance of payments problems. A policy program supported by financing, technically speaking, is designed by the national authorities in close cooperation with the IMF. Although continued financial support is conditional on the effective implementation of this program, however, the IMF lending instruments were improved further to provide flexible crisis prevention tools to a broad range of its members with sound fundamentals, policies, and institutional policy frameworks. Whatever it is, the IMF in the most recent years has not only doubled its lending access limits, but also has boosted its financing support to the world’s poorer countries, with the loans provided at a concessional interest rate.

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INTERNATIONAL MONETARY SYSTEM – THE GOLD EXCHANGE STANDARD

Historically, some of the remaining silver standard countries began to peg their silver coin units to the gold standards of the United Kingdom or the USA towards the end of 19th century. The British India in 1898, for example, pegged the silver rupee to the pound sterling at a fixed rate of 1s 4d, while the Straits Settlements in 1906 adopted a gold exchange standard against the pound sterling with the silver Straits dollar being fixed at 2s 4d. Similarly, the Philippines also pegged the silver peso to the U.S. dollar at 50 cents where their move to hedge their currency was assisted by the passage of the Philippines Coinage Act by the United States Congress in March 1903.

When adopting the gold exchange standard, many European nations changed the name of their currency from Daler (Sweden and Denmark) or Gulden (Austria-Hungary) to Crown, since the former names were traditionally associated with silver coins and the latter with gold coins. Perhaps, the success of the gold exchange standard at the time practically depended on a parallel development that emerged out of the mechanisms that the industrializing countries used to manage the gold standard. As this monetary system differed from the gold standard in that international reserve which consists of both gold and convertible currencies, it made the said development to function with less gold.

Moreover, the mechanisms for settlement of foreign exchange holdings had evolved throughout the Europe with the development of financial markets and central banks. A government (in this case, the treasury or central bank) bought and sold foreign exchange in transactions with its own private sector; becoming the creditor by drawing down or building up its own holdings of foreign exchange. Because of the fact that those convertible currencies tend to be invested in interest-bearing financial assets, the gold exchange standard which adopted the above mechanism for the settlement of foreign exchange holdings allowed for growth over an increase of gold production.

Last but not least, following the breakdown of the Bretton Woods system, the international monetary system reverted to a more decentralized market-based model where major countries such as United Kingdom, USA, France, Germany, Japan floated their exchange rates, made their currencies convertible, and gradually liberalized capital flows. What’s more, several emerging countries in recent years apart from those dominant players also had adopted similar policies after experiencing the difficulties of managing pegged exchange rate regimes with increasingly open capital accounts.

An exchange-rate regime in the history of global finance, theoretically speaking, is defined as the way of an authority manages its currency in relation to other currencies and the foreign exchange market. The basic types of policies implemented in the pegged exchange-rate regimes are firstly, a floating exchange rate where the market dictates movements in the exchange rate; secondly, a fixed exchange rate where a central bank keeps the rate from deviating too far from a target value which ties the currency to another currency. Because of the obstacles of dealing with pegged exchange rate regimes, the decision or the move to apply a more decentralized market-based model has increased government’s control of domestic monetary policies and inflation, accelerated the development of domestic financial sectors and ultimately, boosted the overall performance of economic growth in a nation.

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THE HISTORY AND THE SCOPE OF GLOBAL FINANCE

When it comes to understanding what global finance is, it is basically the branch of financial economics broadly concerned with monetary and macroeconomic interrelations between two or more countries. As it examines the dynamics of the global financial system, international monetary systems, balance of payments, exchange rates, foreign direct investments, and how these elements relate to international trade, the global finance is sometimes referred to as multinational finance which is additionally concerned with the matters of international financial management. Therefore, both investors and multinational corporations in any cases must assess and manage some of the international risks involved such as political risk, transaction and foreign exchange risk, also economic and translation exposure.

To start off the above topic, it is necessary to have a quick grasp of international financial management so that we can get a better overview of what global finance is all about. By definition, international financial management is a term that grew out of the need for individuals and organizations to consider the implications of financial decisions due to numerous cross-border transactions, which are prevalently occurred or commonly executed in the world economy as of today. Such a decision-making in international financial management must account for potential impacts related to various capital structures, approaches to risk management, and how to best leverage taxation systems.

Currency exchange rates and differing methods to determine price of assets in addition can have a major impact on the bottom line in international financial management. As such, the topic accounts for the structure of the currency exchange system and how to determine asset prices in a global setting is practically concerned with how different currencies impact the prices on stock markets. Overall, the main goal of international financial management is to create the most possible amount of wealth for shareholders and this includes suppliers, vendors, employees and end customers who all must be observed from financial perspectives when considering any cross-border transactions.

Historically, the GATT (General Agreement on Tariffs and Trade) which was signed in 1947 by approximately 23 countries was a treaty aimed to minimize barriers to international trade by eliminating or reducing quotas, tariffs, and subsidies. This treaty at the beginning of its establishment was intended to boost economic recovery after World War II. Due to the fact that the GATT mostly dealt with trade in goods or tangible products, the creation of World Trade Organization or known as "WTO" by its acronym on January 1^st 1995 marked the biggest reform of the aforementioned treaty which covers trade in services and intellectual property. As a result, the financial participation of both exporters and importers along with the myriads of international transactions flowed significantly since the establishment of WTO (World Trade Organization).

On the other hand, proper management of international finances can help an organization or institution in achieving same efficiency and effectiveness in all markets. And of course, there are reasons as to why companies would like to invest capital in overseas markets such as the efficiency of production cost, the opportunity to broaden markets and diversify business units, the possibility of earning higher returns, and so on. Thus, below here is the scope of global finance which can be conceptually distinct but identifiable.

1. International Financial Economics: It is concerned with causes and effects of financial flows among nations, application of macroeconomic theory and policy to the global economy.

2. International Financial Management: It is concerned with how individual economic units, especially Multinational Corporations (MNCs) coping with the complex financial environment of international business.

3. International Financial Markets: It is concerned with international financial instruments such as Foreign Direct Investment (FDI), foreign exchange markets, international banking, international securities markets, financial derivatives, and so forth.

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DEFINING THE MEANING OF GLOBALIZATION

Broadly speaking, the process of globalization is an inevitable phenomenon in human history which has been bringing the world closer through the exchange of goods, products, information, jobs, knowledge and culture. In fact, what is unique from this phenomenon of globalization is the emergence of a modern form of international trade in recent decades, which is aided by the pace and scope of worldwide integration resulting from the unparalleled advancements, as well as the reductions in the cost of technology, communications, science, transport, and industry. As a result, the global markets have become more intertwined and the production process has been made far more efficient by the option to create "world competitive products" whose components are made in different locations along with the ability to ship information and advertise those products easily from one country to the next, whereby locating the manufacturing process is becoming less expensive and this in turn has changed the pattern of overall productions and consumptions across the globe.

First of all, globalization in theory is the process of international integration arising from the interchange of world views, products, ideas, and other aspects of culture. To put it in simple terms, globalization actually refers to processes that promote world-wide exchanges of national and cultural resources, including a string of technological advancements in transportations, telecommunication infrastructures, and the rise of the internet which have become the major factors of globalization; resulting in generating further interdependence of economic, and cultural activities. Although several scholars place the origins of globalization in modern times, there are others who trace its history long before the European age of discovery and voyages to the New World (some even trace the origins to the third millennium BCE since the beginning of the 20^th century where the pace of globalization has intensified at a rapid rate, especially during the Post War era).

Second of all, the International Monetary Fund (IMF) in the year of 2000 identified four basic aspects of globalization, in which they are trade and transactions, capital and investment movements, migration or the movement of people, and the dissemination of knowledge. What’s more, such environmental challenges as climate change, cross-boundary water or air pollution, and over-fishing of the ocean are linked with globalization where its processes affect business and work organization, economics, socio-cultural resources, and the natural environment.

Globalization, in addition to the above subject matter, can also be defined as the process of change to increase interconnectedness and interdependence among countries and economies; bringing the world closer through better world-wide communication, transport and trade links. Hence, this process is not only changing the world dramatically and quickly, but also affecting economic, social, political and cultural aspects of life.

Meanwhile, globalization is manifested in these four interrelated developments:

1. The increase of international exchange of goods and services despite all the restrictions therein.

2. The internalization of production and real investments.

3. The increase of integration of financial markets.

4. The relatively high degree of policy convergence or joint agreement among countries.

The statistical evidence on these developments is arguably impressive. In the trade area, for example, the ratio of international trade to the GDP of all countries has been practically more than doubled over the last two decades. Although trade at this stage has substantially outpaced the growth of the GDP in all facets, however, the major new phenomenon is seemingly placed within the size of services in total trade, particularly in the financial services. After all, globalization encompasses some key dimensions such as helping local businesses to plan and expand globally, sourcing the factors of production (e.g. raw materials, components, machinery, technology, finance) which can be obtained from the best source anywhere in the world, basing the product development and product planning on the global market considerations, and so forth.

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AN OVERVIEW OF GLOBAL FINANCIAL SYSTEM

Prior to fathoming the general overview of global financial system, one must have a better grasp of what financial system is. By definition, a financial system is a set of institutions such as banks, insurance companies, and stock exchanges that permit the exchange of funds. As it exists on a firm, regional, and global level, the financial system also includes sets of rules and practices that borrowers and lenders use to decide which projects get financed, who finances projects, and the terms of financial deals. When we look at from the international perspectives, the global financial system is the worldwide framework of legal agreements, institutions, both formal and informal economic action that together facilitates international flows of capital for the purposes of investment and trade financing. Hence, the borrowers, lenders, and investors exchange current funds to finance projects, either for consumption or productive investments, and to pursue a return on their financial assets.

Broadly speaking, the global financial system has changed significantly following the financial crisis that took place somewhere between 2007 and 2008. Such developing countries have seen a decline in their net financial flows due to the collapse of the international banking sector, which was further exacerbated by weak growth prospects in key emerging markets and low commodity prices from 2014 until 2015. While countries in East and South Asia continue to be major recipients of global financial flows, they have also become major providers for other developing countries in particular. Thus, public financial flows which derive from the assistance of overseas development and multilateral lending have further exhibited strong growth following the above financial crisis; mitigating the decline in private flows.

Moreover, the global financial system involves a multitude of players from small individual investors to colossal corporations and governing bodies where each has a role to play. The systemic importance of the global financial system stems largely from its multiple roles through:

1. Regulating and Facilitating Transactions: The system helps to regulate and facilitate the exchange of money and assets globally.

2. Allocation of Resources: The system helps in the allocation of resources by channeling funds from those who have surplus capital (savers) to those who are in need of capital (borrowers).

3. Risk Management: The system allows for the management and diversification of risks which are associated with cross-border financial activities.

Aside from the aforementioned roles, questioning how the global financial system works are practically anchored in exchanges between buyers and sellers within markets, underpinned by financial institutions, and regulated by international laws. It is a system of endless cycles of lending and borrowing, buying and selling, and risk management. When it comes to the operation of global financial markets, it is literally founded on the principles of supply and demand. The amount of capital/equity in the form of money or assets, for example, flows from places where it is abundant to places where it is scarce. As a result, this flow is facilitated by financial markets which include:

- Stock Market: it is where the shares of publicly-held companies are issued and traded.

- Foreign Exchange Markets (Forex): it is where currencies are traded (e.g. US Dollar, UK Pound, Japanese Yen, and so on).

- Commodity Markets: it is where goods such as gold, oil, and wheat are traded.

- Bond Markets: it is where debt securities are traded.

Above all, each financial market operates under a system called "price determination" – a concept by which the price of an asset is set based on the amount of supply (sellers) and the level of demand (buyers) factors.

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