UNIT TWO

MANAGEMENT OF INTERNATIONAL
AND REGIONAL TRADING BLOCKS&THEORIES ON IB

.
E.W.NGAO

BUSINESS
 1. Theory of Absolute Advantage

• The Scottish economist Adam Smith developed

the trade theory of absolute advantage in 1776. A
country that has an absolute advantage produces
greater output of a good or service than other
countries using the same amount of resources.
Smith stated that tariffs and quotas should not
restrict international trade; it should be allowed
to flow according to market forces.
• Contrary to mercantilism Smith argued that a
country should concentrate on production of
goods in which it holds an absolute advantage
 Absolute Advantage theory con’t
• No country would then need to produce all the
goods it consumed. The theory of absolute
advantage destroys the mercantilistic idea that
international trade is a zero-sum game. According
to the absolute advantage theory, international
trade is a positive-sum game, because there are
gains for both countries to an exchange. Unlike
mercantilism this theory measures the nation's
wealth by the living standards of its people and
not by gold and silver
 Absolute Advantage theory.
• There is a potential problem with absolute
advantage.
• If there is one country that does not have an
absolute advantage in the production of any
product, will there still be benefit to trade,
and will trade even occur? The answer may be
found in the extension of absolute advantage,
the theory of comparative advantage.
2. Theory of Comparative Advantage

• The most basic concept in the whole of

international trade theory is the principle of
comparative advantage, first introduced by
David Ricardo in 1817. It remains a major
influence on much international trade policy
and is therefore important in understanding
the modern global economy
 Comparative Advantage theory cont
• The principle of comparative advantage states
that a country should specialize in producing
and exporting those products in which is has a
comparative, or relative cost, advantage
compared with other countries and should
import those goods in which it has a
comparative disadvantage. Out of such
specialisation, it is argued, will accrue greater
benefit for all.
 Comparative advantage theory
• In this theory there are several assumptions
that limit the real-world application. The
assumption that countries are driven only by
the maximization of production and
consumption, and not by issues out of concern
for workers or consumers is a mistake
 3.Heckscher-Ohlin Theory

• In the early 1900s an international trade

theory called factor proportions theory
emerged by two Swedish economists, Eli
Heckscher and Bertil Ohlin. This theory is also
called the Heckscher-Ohlin theory. The
Heckscher-Ohlin theory stresses that countries
should produce and export goods that require
resources (factors) that are abundant and
import goods that require resources in short
supply.
 Heckscher-Ohlin theory
• This theory differs from the theories of
comparative advantage and absolute
advantage since these theory focuses on the
productivity of the production process for a
particular good. On the contrary, the
Heckscher-Ohlin theory states that a country
should specialise production and export using
the factors that are most abundant, and thus
the cheapest. Not produce, as earlier theories
stated, the goods it produces most efficiently.
 Heckscher-Ohlin theory
• The Heckscher-Ohlin theory is preferred to the
Ricardo theory by many economists, because it
makes fewer simplifying assumptions. In 1953,
Wassily Leontief published a study, where he
tested the validity of the Heckscher-Ohlin theory.
The study showed that the U.S was more
abundant in capital compared to other countries,
therefore the U.S would export capital- intensive
goods and import labour-intensive goods. Leontief
found out that the U.S's export was less capital
intensive than import.
 4.Product Life Cycle Theory

• Raymond Vernon developed the international

product life cycle theory in the 1960s. The
international product life cycle theory stresses
that a company will begin to export its product
and later take on foreign direct investment as the
product moves through its life cycle. Eventually a
country's export becomes its import. Although the
model is developed around the U.S, it can be
generalised and applied to any of the developed
and innovative markets of the world.
 Product life cycle
• The product life cycle theory was developed
during the 1960s and focused on the U.S since
most innovations came from that market.
• This was an applicable theory at that time
since the U.S dominated the world trade.
Today, the U.S is no longer the only innovator
of products in the world. Today companies
design new products and modify them much
quicker than before
 Product life cycle
• Companies are forced to introduce the
products in many different markets at the
same time to gain cost benefits before its
sales declines. The theory does not explain
trade patterns of today.
 5.Theory of Mercantilism

• According to Wild, 2000, the trade theory that

states that nations should accumulate financial
wealth, usually in the form of gold, by
encouraging exports and discouraging imports is
called mercantilism. According to this theory
other measures of countries' well being, such as
living standards or human development, are
irrelevant. Mainly Great Britain, France, the
Netherlands, Portugal and Spain used
mercantilism during the 1500s to the late 1700s.
 Mercantalistic theory con’t
• Mercantalistic countries practiced the
so-called zero-sum game,[ situation in which
one participant's gains result only from
another participant's equivalent losses. The
net change in total wealth among participants
is zero; the wealth is just shifted from one to
another.] which meant that world wealth is
limited and that countries only could increase
their share at expense of their neighbors.
 Mercantalistic theory
• The economic development was prevented
when the mercantilistic countries paid the
colonies little for export and charged them
high price for import.
• The main problem with mercantilism is that
all countries engaged in export but was
restricted from import, prevention from
development of international trade
 UNIT II
• IBM
MANAGEMENT OF INTERNATIONAL
AND REGIONAL
TRADING BLOCKS
 ECONOMIC INTEGRATION
• As the world is shrinking, because of faster and
cheaper transportation and communication,
companies are realizing that the global competition is
tremendous. In such a competitive scenario, countries
seek to integrate with each other to strengthen forces
that can help them face the challenges.
• Regional Economic Integration (RET) refers to the
political and economic agreement among countries to
give preference to member countries of the
agreement. For example, regional economic groups
might reduce tariffs for member countries while
keeping tariffs for non member countries
 TRADE BARRIERS
• Trade barriers may be (i) Tariff Barriers and (ii) Non Tariff Barriers or
protective barriers.
• i) TARIFF BARRIERS: Tariff barriers have been one of the classical methods
of regulating international trade.
• Tariffs are taxes on the imports.
• They aim at restricting the inward flow of goods from other countries to
protect the country's own industries by making the goods costlier in that
country.
• Some countries use this method of imposing tariffs and Customs duties to
balance its balance of trade.
• A nation may also use this method to influence the political and economic
policies of other countries.
• It may impose tariffs on certain imports from a particular country as a
protest against tariffs imposed by that country on its goods.
 Trade Barriers cont
• Specific Duties, imposed on the basis of per unit
of any identifiable characteristic of merchandise
such as per unit volume, weight, length, etc
• Ad valorem Tariffs based on the value of
imports& are charged in the form of specified
percentage of the value of goods. schedule
specify how the value of imported goods would
be arrived at. charge tariffs on the basis of CIF
cost or FOB cost mentioned in the invoice
 NON - TARIFF MEASURES (BARRIERS
• Quantity Restrictions, Quotas and Licensing Procedures:-
• Under quantity restriction, the maximum quantity of
different commodities which would be allowed to be
imported over a period of time from various countries is
fixed in advance.
• The quota fixed normally depends on the relations of the
two countries and the needs of the importing country.
Here, the Govt. is in a position to restrict the imports to a
desired level.
• Quotas are very often combined with licensing system to
regulate the flow of imports over the quota period as also
to allocate them between various importers and supplying
countries.
 Non-Tarrif Barriers
• Foreign Exchange Restrictions -Exchange control measures
are used widely by a number of developing countries to
regulate imports. An importer has to ensure that adequate
foreign exchange is available for imports by getting a
clearance from the exchange control authorities of the
country.
• Technical Regulations -Another measure to regulate the
imports is to impose certain standards of technical
production, technical specification, etc. The imported
commodity has to meet these specifications. Stringent
technical regulations and standards beyond international
norms, expensive testing and certification, and complicated
marking and packaging requirements
 Non –Tarrif Barriers cont
• Voluntary Export Restraint:
• The agreement on 'voluntary' export restraint is imposed on
the exporter under the threat of sanctions to limit the
export of certain goods in the importing country. Similarly,
establishment of minimum import prices should be strictly
observed by the exporting firms in contracts with the
importers of the country that has set such prices.
• In case of reduction of export prices below the minimum
price level, the importing country imposes anti-dumping
duty which could lead to withdrawal from the market.
Voluntary export restraints mostly affect trade in textiles,
footwear, dairy products, cars, machine tools, etc.
 Non Tarrif cont
• Local Content Requirement:-
• A local content requirement is an agreement between the exporting and the
importing country that the exporting country will use some amount or, content of
resources of the importing country in its process of production. If the exporting
country agrees to do that only then the importing country will import their goods.
• Embargo:- Embargo is a specific type of quota prohibiting trade. Like quotas,
embargoes may be imposed on imports, or exports of particular goods, regardless of
destinations, in respect of certain goods supplied to specific countries, or in respect
of all goods shipped to certain countries. Although the embargo is usually
introduced for political purposes, the consequences, in essence, could be economics
• Anti - Dumping
• Anti dumping is a new weapon in the trade war. Anti dumping is one policy which is
creating a non tariff barrier, hindering free trade.
• If a company exports a product at a price lower than the one charged in its home
market, it is said to be dumping
Difference between Tariff &Non-tariff
 Trade Bloc

• An agreement between states, regions, or countries, to reduce barriers to

trade between the participating regions Trading blocs are a form of
economic integration, and increasingly shape the pattern of world trade.
• Economic integration is the unification of economic policies between
different states through the partial or full abolition of tariff and non-tariff
restrictions on trade taking place among them prior to their integration
• The degree of economic integration can be categorized into five stages:
• Preferential trading area
• Free trade area,
• Customs union,
• Common market
• Economic union,
Advantages for members of trading blocs

• The main advantages for members of trading

blocs[this can be written for any trade bloc]
• Free trade practices
• Market access and trade creation.
• Trade creation and trade diversion
• Economies of scale
• lowering costs and lower prices for consumers.
• Jobs creation and employment opportunities
• Protection of individual interests of member
countries.
 Types of Economic Integration

• Four basic types of regional economic integration.

• Preferential Trade Areas (PTAs) exist when countries within a
geographical region agree to reduce or eliminate tariff barriers on selected
goods imported from other members of the area. This is often the first
small step towards the creation of a trading bloc
• Free Trade Area (FTA) - The goal of an FTA is to abolish all tariffs between
member countries. Free trade agreements usually begin modestly by
eliminating tariffs on goods that already have low tariffs, and there is
usually an implementation period during which all tariffs are eliminated on
all products. At the same time tariffs are being eliminated, the members
of the FTA might explore other forms of cooperation, such as the
reduction of nontariff barriers or trade in services and investment, but the
focus is clearly on tariffs. Additionaly, each member country maintains its
own external tariff against non-FTA countries. Preferential Trade Area
 Customs Union
• A customs union involves the removal of tariff barriers between members, plus the
acceptance of a common (unified) external tariff against non-members. This means
that members may negotiate as a single bloc with 3rd parties, such as with other
trading blocs, or with the WTO

• Along with eliminating internal tariffs, member countries levy a common external
tariff on goods being imported from non-members. For example, the North
American Free Trade.
• Agreement between Canada, the United States, and Mexico has eliminated tariffs on
trade among the three countries, but each country maintains a separate tariff with
the outside world. If a British company exports a product to the United States, it
likely will enter the country at a different tariff rate than if the product were
exported to Canada or Mexico because each NAFTA country can set its own external
rate.
• But if a U.S. company were to export a product to the United Kingdom and France,
two members of the EU, which is also a customs union, the product would enter
both countries at the same tariff rate.
 Common Market -

• A ‘common market’ is the significant step towards full

economic integration, and occurs when member countries
trade freely in all economic resources – not just tangible
goods.
• This means that all barriers to trade in goods, services,
capital, and labour are removed.
• Has all the elements of a customs union but it also allows
free mobility of production factors such as labour and
capital. Labour, is free to work in any country in the
common market without restriction. In the absence of the
common market arrangement, workers would have to apply
to immigration for a visa
 Economic Integration -
• Countries can create even greater social and
economic integration by adopting common
economic policies, such as fiscal or monetary
policies. For example, the EU has established a
common currency complete with a common
Central Bank. This level of cooperation creates
a degree of political integration among
member countries, which means they lose a
bit of their sovereignty.
 Impact of Integration

• Economic integration can affect member countries in social, cultural,

political, and economic ways. Multi National Enterprises are especially
concerned with the economic effects of integration. The position of tariff
and nontariff barriers disrupts the free flow of goods, affecting resource
allocation. Economic integration reduces or eliminates those barriers for
member countries.
• It produces both static effects and dynamic effects. Static effects are the
shifting of resources from inefficient to efficient companies as trade
barriers are removed.
• Dynamic effects are the overall growth in the market and the impact on a
company caused by expanding production and by the company’s ability to
achieve greater economies of scale. Static effects may develop when
either of the following two conditions occur :
•
 Impact of Integration con’t
• Trade Creation - Production shifts to more efficient
producers for reasons of comparative advantage, allowing
consumers access more goods at a lower price than would
have been possible without integration. Companies that are
protected in their domestic markets face real problems
when the barriers are eliminated and they then attempt to
compete with more efficient producers.
• The strategic implication is that companies that might not
have been able to export to another country - even though
they might be more efficient than producers in that country
- are now able to export when the barriers come down.
Thus, there will be more demand for their products, and the
demand for the protected, less efficient products will fall. .
 Impact of integration con’t
• Trade Diversion - Trade shifts to countries in the group at
the expense of trade with countries not in the group, even
though the nonmember companies might be more efficient
in the absence of trade barriers.
• Dynamic effects of integration occur when trade barriers
come down and the size of the market increases. Because
of the larger size of the market, companies can increase
their production, which will result in lower costs per unit,
resulting in economies of scale.
• Increase in efficiency due to increased competition. Many
MNEs grow through mergers and acquisitions to achieve
the size necessary to compete in the larger market as well
as the ability to use greater technology.
 Regional Trading Groups

• There are two ways to look at different trading groups : by

location and by type. There are major trading groups in
every region of the world. Each regional group fits into one
of the types free trade area, customs union, common
market, or economic integration, Most commonly found are
FTA or a customs union.
• Companies are interested in regional trading groups as it
gives them an opportunity explore their markets, access
new sources of raw materials, and new production
locations. The sections that follow will discuss the major
Regional Trading Groups and analyze thier purpose and
importance.
 The European Union
• It is the largest economic group . It began as a customs union, but
the formation of the European Parliament and the establishment
of a common currency, the euro, make the EU the most ambitious
regional trade group. The economic and human destruction
caused by World Word II made European political leaders realize
that greater cooperation among their countries would help
Europe’s recovery.
• Many organizations were formed, including The European
Economic Community (EEC), which eventually emerged as the
organization that would bring together the countries of Europe
into the most powerful trading bloc in the world. The EEC, later
called the European Community (EC), and finally the European
Union (EU), aimed to abolish internal tariffs in order to integrate
European markets and ensure economic cooperation and help
avoid further political conflict. members:
 Organizational Structure:
•
• The European Union includes many governing bodies,
among which are the European Commission, European
Council, European Parliament, and the European Court
of Justice. To be successful in Europe, a company
needs to understand the governance of the EU, as well
as the governance process of each of the individual
European countries in which it is investing or doing
business. Decide the parameters under which the
company must operate, so management needs to
understand the institutions and how they make
decisions that could affect corporate strategy.
 Structure of EU
• 1. European Commission - The Commission provides the EU’s
political leadership and direction. functions of the Commission :
• Initiating proposals for legislastion.
• Guardian of the treaties
• Manager and executor of Union policies and of international trade
relationship.
• The Commission manages the annual budget of the EU, manages
the EU, and negotiates trade agreements.

• 2. European Council - The Council is also known as the Council of

Ministers, which is composed of different ministers of the
member countries. However, this doesn’t mean that there is just
one member of the Council for each EU member country. There
are more than 25 different councils, such as Foreign Affairs,
Economy and Finance, and Agriculture.
 EU Structure
• European Parliament - The Parliament is composed of 626
members who are elected every five years, and its membership is
based on country population. The three major responsibilities of
the Parliament are legislative power, control over the budget, and
supervision of executive decisions. The Commission presents
community legislation to the Parliament. Parliament must approve
the legislation before submitting it to the Council for adoption.
• European Court of Justice - The Court of Justice ensures
consistent interpretation and application of EU treaties. Member
states, EC institutions, or individuals and companies may bring
cases to the Court. The Court of Justice is an appeals court for
individuals, firms, and organizations fined by the Commission for
infringing on Treaty Law. The Court of Justice is relevant to MNCs
because it deals mostly with economic matters.
 The Single European Market

• The E U has been moving toward a single market since the passage of
the Single European Act of 1987. The act includes the elimination of the
remaining barriers to a free market, such as customs posts, different
certification procedures, rates of value-added tax, and excise duties.
• European Union is today the leading player in international trade, ahead
of the United States and Japan. At a time of strong growth in
international trade, it accounts for a fifth of world trade.
• The Union’s influence on the international stage rests upon its ability to
negotiate with its trade partners as a single entity.

• The organizing countries focused mainly on economic integration and

left foreign policy to the individual countries. Realizing the benefits a
common foreign policy to EU, member countries began formalizing
objectives on armed conflicts, human rights, and other international
foreign policy issues in 1993. Progress in this area has been slow due to
differences in member opinion.
 Euro
• The EU nations signed the Treaty in 1992, which aimed to accomplish two goals :
political union and monetary union. The decision to move to a common currency in
Europe has eliminated currency as a barrier to trade.
• To replace each national currency with the euro, the countries had to convert their
economic policies first. Those that met the criteria are part of the European
Monetary Union (EMU).

• 11 of the 15 countries in the EU joined the EMU on Junary 1, 1999. Greece joined on
January 1, 2001. United Kingdom, Sweden, and Denmark later joined.
• The euro is being administered by the European Central Bank (ECB), established on
July 1, 1998. The ECB has been responsible for setting monetary policy and for
managing the exchange-rate system for all of Europe since January 1,1999.

• The EU has also signed numerous free trade agreements with other countries
around the world, making it the largest trading bloc in the world.
• This means that companies doing business in one EU country have access to a much
larger market than anywhere else in the world.
 Impact of EU on Corporate Strategy

• The EU is a tremendous market in terms of both population and

income, and so companies cannot ignore it. Merger and
acquisition activity has picked up in Europe. The market in Europe
is still considered fragmented and inefficient compared with the
United States, so mergers, takeovers and spinoffs will continue in
Europe for many years.
• U.S. companies are buying European companies to gain a market
presence and to get rid of competition.
• European firms are also acquiring other European firms to
improve their competitive advantage against U.S. companies and
to expand their market presence. A good example is the purchase
of Promodes Group, a French retailer, by Carrefour, another
French retailer.
 Impact
• That merger resulted in the creation of the number-one
retailer in Europe. Carrefour, in second place worldwide
behind Wal-Mart, is still larger than Wal-Mart in foreign
markets and is a formidable challenger to the number-one
retailer in the world.
• Europe is moving closer together through the euro and the
Single Market program, yet it is still not as homogeneous as
the U.S. market.
• Differences in languages, cultures, and governments still
splinter Europe, and the eventual addition of the 13 new
countries will create even more divisions in the market.
Thus, companies need to develop a pan-European strategy
without sacrificing diferent national strategies.
 The Future of EU

• Five fundamental shifts that have occurred in the EU that will dramatically
affect its future :
• A Change in the Franco-German Balance - France had always had political
control of the EU and could take the high road as a result of World War II.
However, Germany’s confidence has returned as a result of the
reunification of the East and West, and Germany is now the largest and
richest country in Europe. Germany may be the only country that can lead
Europe in the future.
• A sense that the EU should possess a capacity for collective military action
separate or separable from NATO - This was confirmed in the Kosova
confict in which the United States took control of a European conflict, and
it could be an issue in the war on terrorism.
• The introduction of the euro Currency 1999
• The weakening of the European Commission and the ascendancy of
national governments in controlling the destiny of the EU.
 NAFTA

• North American Free Trade Agreement (NAFTA) established a free-trade

zone in North America; it was signed in 1992 by Canada, Mexico, and the
United States and took effect on Jan. 1, 1994. NAFTA immediately lifted
tariffs on the majority of goods produced by the signatory nations. It also
calls for the gradual elimination of all trade barriers between these three
countries.
• Goals of the NAFTA
• to reduce barriers to trade
• to increase cooperation for improving working conditions in North
America
• to create an expanded and safe market for goods and services produced in
North America
• to establish clear and mutually advantageous trade rules
• to help develop and expand world trade and provide a catalyst to broader
international cooperation
 NAFTA structure

• Free Trade Commission: Made up of ministerial representatives

from the NAFTA partners.
• NAFTA Coordinators: Senior trade department officials
designated by each country.
• NAFTA Working Groups and Committees: Over 30 working groups
and committees have been established to facilitate trade and
investment and to ensure the effective implementation and
administration of NAFTA.
• NAFTA Secretariat : Made up of a “national section” from each
member country. Responsible for administering the dispute
settlement , Maintains a tri-national website containing
up-to-date information on past and current disputes.
• .
 NAFTA StructureCon’t
• Commission for Labor Cooperation : Created to
promote cooperation on labor matters among NAFTA
members and the effective enforcement of domestic
labor law. www.naalc.org.
• Commission for Environmental Cooperation :
Established to further cooperation among NAFTA
partners in implementing the environmental side
accord to NAFTA and to address environmental issues
of continental concern, with particular attention to the
environmental challenges and opportunities
presented by continent-wide free trade
World Trade Organization (W T O)
• World Trade Organization (W T O) : Location:
Geneva, Switzerland, Established: 1 January 1995, Created by:
Uruguay Round negotiations (1986-94) , Membership: 159
countries on 2 March 2013 , Budget: 197 million Swiss francs
for 2013, Secretariat staff: 640, Head: Director-General
• WTO is an organization comprising of developed, developing and
least developed countries, under the UN Umbrella, headquartered
in Geneva. Its aim is to promote trade amongst member nations,
especially after globalization of trade, arrange aid technically and
in other forms for growth of trade amongst member countries,
creating all possible facilitation measures. Main Functions of WTO
To facilitate the implementation, administration and further
operations of the agreement establishing the WTO.
 Objectives:

• 1. To improve the standard of living of people in the

member countries.
• 2. To ensure full employment and broad increase in
effective demand.
• 3. To enlarge production and trade of goods.
• 4. To increase the trade of services.
• 5. To ensure optimum utilization of world resources.
• 6. To protect the environment.
• 7. To accept the concept of sustainable development.
 Functions

• Administering WTO trade agreements

• Forum for trade negotiations
• Handling trade disputes
• Monitoring national trade policies
• Technical assistance and training for
developing countries
• Cooperation with other international
organizations
 Organizational structure

• Council for Trade in Goods : There are 11 committees

under the jurisdiction of the Goods Council each with a
specific task. All members of the WTO participate in the
committees. The Textiles Monitoring Body is separate from
the other committees but still under the jurisdiction of
Goods Council. The body has its own chairman and only 10
members. The body also has several groups relating to
textiles.
• Council for Trade-Related Aspects of Intellectual Property
Rights : Information on intellectual property in the WTO,
news and official records of the activities of the TRIPS
Council, and details of the WTO's work with other
international organizations in the field.
 Organizational Structure
• Council for Trade in Services: The Council for Trade in
Services operates under the guidance of the General
Council and is responsible for overseeing the
functioning of the General Agreement on Trade in
Services (GATS). It is open to all WTO members, and
can create subsidiary bodies as required.
• Trade Negotiations Committee: The Trade
Negotiations Committee (TNC) is the committee that
deals with the current trade talks round. The chair is
WTO's director-general. As of June 2012 the
committee was tasked with the Doha Development
Round
 World Bank
• The International Bank for Reconstruction and Development
(IBRD), commonly referred to as the World Bank, is an
international financial institution whose purposes include assisting
the development of its member nation’s territories, promoting
and supplementing private foreign investment and promoting
long-range balance growth in international trade.
• The World Bank was established in December 1945 at the United
Nations Monetary and Financial Conference in Bretton Woods,
New Hampshire.
• It opened for business in June 1946 and helped in the
reconstruction of nations devastated by World War II. Since 1960s
the World Bank has shifted its focus from the advanced
industrialized nations to developing third-world countries
 Organization Structure

• The organization of the bank consists of the Board of Governors, the Board of
Executive Directors and the Advisory Committee, the Loan Committee and the
president and other staff members.
• All the powers of the bank are vested in the Board of Governors which is the
supreme policy making body of the bank.
• The board consists of one Governor and one Alternative Governor appointed for five
years by each member country. Each Governor has the voting power which is related
to the financial contribution of the Government which he represents.
• The Board of Executive Directors consists of 21 members, 6 of them are appointed
by the six largest shareholders, namely the USA, the UK, West Germany, France,
Japan and India. The rest of the 15 members are elected by the remaining countries.
• Each Executive Director holds voting power in proportion to the shares held by his
Government. The board of Executive Directors meets regularly once a month to
carry on the routine working of the bank
• The president of the bank is pointed by the Board of Executive Directors.
He is the Chief Executive of the Bank and he is responsible for the conduct
of the day-to-day business of the bank. The Advisory committees
appointed by the Board of Directors.
• It consists of 7 members who are expects in different branches of banking.
There is also another body known as the Loan Committee. This committee
is consulted by the bank before any loan is extended to a member
country.

• Capital Resources of World Bank:

• The initial authorized capital of the World Bank was $ 10,000 million, The
authorized capital of the Bank has been increased from time to time with
the approval of member countries.
• On June 30, 1996, the authorized capital of the Bank was $ 188 billion out
of which $ 180.6 billion (96% of total authorized capital) was issued to
member countries in the form of shares.
 Objectives

• 1. To provide long-run capital to member countries for economic

reconstruction and development.
• 2. To induce long-run capital investment for assuring Balance of Payments
(BoP) equilibrium and balanced development of international trade.
• 3. To provide guarantee for loans granted to small and large units and
other projects of member countries.
• 4. To ensure the implementation of development projects so as to bring
about a smooth transference from a war-time to peace economy.
• 5. To promote capital investment in member countries by the following
ways;
• (a) To provide guarantee on private loans or capital investment.
• (b) If private capital is not available even after providing guarantee, then
IBRD provides loans for productive activities on considerate condition
 Functions
• World Bank is playing main role of providing loans for development works to member countries,
especially to underdeveloped countries. The World Bank provides long-term loans for various
development projects of 5 to 20 years duration.
• The main functions can be explained with the help of the following points:
• 1. World Bank provides various technical services to the member countries. For this purpose, the
Bank has established “The Economic Development Institute” and a Staff College in Washington.
• 2. Bank can grant loans to a member country up to 20% of its share in the paid-up capital.
• 3. The quantities of loans, interest rate and terms and conditions are determined by the Bank
itself.
• 4. Generally, Bank grants loans for a particular project duly submitted to the Bank by the member
country.
• 5. The debtor nation has to repay either in reserve currencies or in the currency in which the loan
was sanctioned.
• 6. Bank also provides loan to private investors belonging to member countries on its own
guarantee, but for this loan private investors have to seek prior permission from those counties
where this amount will be collected.
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• 4. Generally, Bank grants loans for a particular
project duly submitted to the Bank by the
member country.
• 5. The debtor nation has to repay either in reserve
currencies or in the currency in which the loan
was sanctioned.
• 6. Bank also provides loan to private investors
belonging to member countries on its own
guarantee, but for this loan private investors have
to seek prior permission from those counties
where this amount will be collected.