Topic One:

Globalization and Multi-National Corporation:

There are four factors that make international finance special:

1. Foreign currency risk –international finance requires dealings with foreign currencies. This
entails receiving foreign currency in future and paying for foreign currency this future dealing with
foreign currency expose an investor to currency risks potentially of advanced movements of
currency.

2. Market imperfections –various frictions and impediments e.g. protectionists legislation,

damping laws, trade restrictions and quarters may increase transaction cost of doing business or
investing overseas.

3. Political risks – the political climate can change and present international players with advise
political risk it may be hard to enforce a currency in foreign place

Foreign government have the right to regulate most of goods capital and people across their
boarders.

4. Expanded Opportunity –Multinational companies have accessed to large markets to buy or sell
products consequently investors across expanded sets of investments that can result in reduction
of risk exposure and or higher returns through international diversification.

Advantages of MNC’s for the host country:

MNC’s help the host country in the following ways

1. The investment level, employment level, and income level of the host country increases due to
the operation of MNC’s.

2. The industries of host country get latest technology from foreign countries through MNC’s.

3. The host country’s business also gets management expertise from MNC’s.

4. The domestic traders and market intermediaries of the host country gets increased business from
the operation of MNC’s.

5. MNC’s break protectionism, curb local monopolies, create competition among domestic
companies and thus enhance their competitiveness.

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6. Domestic industries can make use of R and D outcomes of MNC’s.

7. The host country can reduce imports and increase exports due to goods produced by MNC’s in
the host country. This helps to improve balance of payment.

8. Level of industrial and economic development increases due to the growth of MNC’s in the host
country.

Advantages of MNC’s for the home country:

MNC’s home country has the following advantages.

1. MNC’s create opportunities for marketing the products produced in the home country
throughout the world.

2. They create employment opportunities to the people of home country both at home and abroad.

3. It gives a boost to the industrial activities of home country.

4. MNC’s help to maintain favorable balance of payment of the home country in the long run.

5. Home country can also get the benefit of foreign culture brought by MNC’s.

Disadvantages of MNC’s for the host country:

1. MNC’s may transfer technology which has become outdated in the home country.

2. As MNC’s do not operate within the national autonomy, they may pose a threat to the economic
and political sovereignty of host countries.

3. MNC’s may kill the domestic industry by monopolizing the host country’s market.

4. In order to make profit, MNC’s may use natural resources of the home country indiscriminately
and cause depletion of the resources.

5. A large sums of money flows to foreign countries in terms of payments towards profits,
dividends and royalty.

Disadvantages of MNC’s for the home country:

1. MNC’s transfer the capital from the home country to various host countries causing unfavorable
balance of payment.

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2. MNC’s may not create employment opportunities to the people of home country if it adopts
geocentric approach.

3. As investments in foreign countries is more profitable, MNC’s may neglect the home countries
industrial and economic development.

Globalization:

Globalization means the speedup of movements and exchanges (of human beings, goods, and
services, capital, technologies or cultural practices) all over the planet. One of the effects of
globalization is that it promotes and increases interactions between different regions and
populations around the globe.

TYPES OF GLOBALIZATION

1. Political globalization

This refers to the amount of political co-operation that exists between different countries. This ties
in with the belief that “umbrella” global organizations are better placed than individual states to
prevent conflict. The League of Nations established after WW1 was certainly one of the pioneers
in this. Since then, global organizations such as the World Trade Organization (WTO), United
Nations (UN), and more regional organizations such as the EU have helped to increase the degree
of political globalization.

2. Social globalization

Social globalization refers to the sharing of ideas and information between and through different
countries.

In today’s world, the Internet and social media is at the heart of this. Good examples of social
globalization could include internationally popular films, books and TV series. The Harry Potter/
Twilight films and books have been successful all over the world, making the characters featured
globally recognizable. However, this cultural flow tends to flow from the Centre (i.e. from
developed countries such as the USA to less developed countries). Social globalization is often
criticized for eroding cultural differences.

3. Economic globalization

Economic globalization refers to the interconnectedness of economies through trade and the
exchange of resources. Effectively, therefore, no national economy really operates in isolation,

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which means national economies influence each other. This is clearly evidenced by global
recession from 2007 onwards. Economic globalization also means that there is a two-way structure
for technologies and resources. For example, countries like the USA will sell their technologies to
countries, which lack these, and natural resources from developing countries are sold to the
developed countries that need them.

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Factors Contributing Emergence of Globalized Financial Markets.

The rapid expansion and integration of world financial markets since the late 1970s can be
attributed to several factors. They include a worldwide move toward deregulation of financial
institutions and transactions; macroeconomic imbalances among countries, which have induced
capital flows; improved knowledge about market and economic conditions around the world; and
breakthroughs in information and communications technology that have increased exponentially
the capacity for handling large volumes.

1. DEREGULATION AND LIBERALIZATION OF FINANCIAL ACTIVITIES

The trend toward financial deregulation accelerated in the early 1970s, when the government
controls on financial activities that had been established in the 1950s and 1960s and earlier were
proving ineffective and causing serious inefficiencies in the allocation of capital and the operation
of monetary policy. The United States removed its last capital controls in 1973; Germany
significantly reduced its restrictions on capital movements in the 1970s; and the United Kingdom
dismantled its exchange controls in 1979, Japan in the early 1980s, and France and Italy in the late
1980s. Countries embraced deregulation because it was thought that free flows of capital would
open up both saving and investment opportunities for firms and individuals and better match the
changing needs of suppliers and users of funds, thereby facilitating the efficient allocation of
capital and promoting growth in income and output.

In the United States, the liberalization of domestic financial markets since the late 1970s has further
facilitated international capital flows. The phase-out of interest rate ceilings (Regulation Q), the
easing of portfolio restrictions on pension funds and insurance companies, and the removal of a
variety of restrictions on the permissible activities of banks have facilitated large transfers of
money, both within national borders and across them. The lowering of institutional barriers was
intended to allow firms and individuals to adjust their claims and liabilities with greater ease in
order to improve the liquidity of their portfolios and diversify.

2. MACROECONOMIC CONDITIONS

In an environment of deregulated and liberalized financial markets, international capital

movements have been driven mainly by economic fundamentals. The macroeconomic conditions
of various countries and their trade and tax policies, for example, affect the expected rates of return
on various investments in different markets. In the mid- to late 1970s, large capital flows resulted
from the recycling of the oil export surpluses of the Organization of Petroleum Exporting
Countries, many of them through international banks to sovereign borrowers in the developing
countries. During the late 1970s and early 1980s, there was considerable capital flight from many

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developing countries as uncompetitive interest rates and exchange rates, large fiscal deficits, and
high external debt burdens took a toll in those countries. Beginning in the early 1980s, large capital
inflows into the United States were an important source of financing for the sizable federal budget
deficits being incurred.

Differences in the mix of fiscal and monetary policies between the United States and other
industrial countries over the past decade have directly affected exchange rates for the dollar. The
large movements of the dollar against other major currencies since the 1980s, in turn, have
contributed to increases in sales and purchases of dollar-denominated securities and the expansion
of foreign-currency trading.

3. TECHNOLOGICAL INNOVATIONS

Technology is another force that has changed the operation and structure of international financial
markets. Information and telecommunications technologies have greatly increased the speed with
which information is processed and disseminated. Around the world, market participants are
bombarded with a plethora of information and a cacophony of opinions, reports, and rumors, much
of which is communicated by computers.

In addition, electronic trading has allowed orders to move across continents, directly from
customers to brokers and dealers. Automated trade execution and international clearing and
settlement have also encouraged cross-listing of securities and further integrated world financial
markets. Today, traders have access to instruments and overseas markets after U.S. trading hours
have ended. If they choose to, they can also "pass the book" to their affiliates in foreign markets,
who can continue trading in daylight hours overseas.

Automated trading execution systems provide a 24-hour trading market, allowing traders to enter
buy and sell orders that are automatically matched according to price and time preferences.

4. MACROECONOMIC POLICIES

Interest rates and the availability of capital in an industrial country are now much more influenced
than in the past by interest rates and credit availability in other countries. A corollary is that
monetary (and fiscal) developments in a major industrial country have larger macroeconomic
effects on other countries than they did when capital was less mobile internationally. A vivid
example was the effect in 1992 of high interest rates in Germany on other members of the European
Monetary System, as well as on other industrial countries, including the United States. The freer
flow-of-funds among countries does not necessarily bring their interest rates into line with one
another. Interest rates can differ among countries when there exists an expectation that exchange

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rates will change or when there is a premium related to other types of risk. Nonetheless, a change
in interest rates in a major industrial country can strongly affect both interest rates and exchange
rates in other countries.

The growth in cross-border deposits also has implications for monetary policies. When cross-
border deposits were small and relatively stable, they could be ignored when examining the
behavior of domestic monetary aggregates. In recent years, however, the growth in these deposits
has added to questions about the usefulness of monetary aggregates as indicators of the tightness
or slack of U.S. monetary conditions, in part because measures of U.S. monetary aggregates do
not fully capture deposits held by U.S.

2.Trade Liberalization

Trade liberalization involves removing barriers to trade between different countries and
encouraging free trade. Trade liberalization involves:

• Reducing tariffs
• Reducing/eliminating quotas
• Reducing non-tariff barriers.

Non-tariff barriers are factors that make trade difficult and expensive. For example, having specific
regulations on making goods can give an unfair advantage to domestic producers. Harmonizing
environmental and safety legislation makes it easier for international trade.

Advantages of Trade Liberalization

• Comparative advantage. Trade liberalization allows countries to specialize in producing

the goods and services where they have a comparative advantage (produce at lowest
opportunity cost). This enables a net gain in economic welfare.
• Lower prices. The removal of tariff barriers can lead to lower prices for consumers. E.g.
removing food tariffs in West would help reduce the global price of agricultural
commodities. This would be particularly a benefit for countries who are importers of food.

• Increased competition. Trade liberalization means firms will face greater competition
from abroad. This should act as a spur to increase efficiency and cut costs, or it may act as
an incentive for an economy to shift resources into new industries where they can maintain
a competitive advantage. For example, trade liberalization has been a factor in encouraging
the UK to concentrate less on manufacturing and more on the service sector.
• Economies of scale. Trade liberalization enables greater specialization. Economies
concentrate on producing particular goods. This can enable big efficiency savings from
economies of scale.

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 • Inward investment. If a country liberalizes its trade, it will make the country more
attractive for inward investment. For example, former Soviet countries who liberalize trade
will attract foreign multinationals who can produce and sell closer to these new emerging
markets. Inward investment leads to capital inflows but also helps the economy through
diffusion of more technology, management techniques and knowledge.

Problems of Trade Liberalization

• Structural unemployment. Trade liberalization often leads to a shift in the balance of an

economy. Some industries grow, some decline. Therefore, there may often be structural
unemployment from certain industries closing. Trade liberalization can often be painful in
the short run, as some industries and some workers suffer from the decline in uncompetitive
firms. Though net economic welfare improves, it can be difficult to compensate those
workers who lose out to international competition.
• Environmental costs. Trade liberalization could lead to greater exploitation of the
environment, e.g. greater production of raw materials, trading toxic waste to countries with
lower environmental laws.
• Infant-industry argument. Trade liberalization may be damaging for developing
economies who cannot compete against free trade. The infant industry argument suggests
that trade protection is justified to help developing economies diversify and develop new
industries. Most economies had a period of trade protectionism. It is unfair to insist that
developing economies cannot use some tariff protectionism. Because of this argument,
some argue that trade liberalization often benefits developed countries more than
developing countries.

. 3. ECONOMIC INTERGRATION-REGIONAL BLOCKS IN AFRICA

Economic integration is an arrangement among nations that typically includes the reduction or
elimination of trade barriers and the coordination of monetary and fiscal policies. Economic
integration aims to reduce costs for both consumers and producers and to increase trade between
the countries involved in the agreement.

Economic integration is sometimes referred to as regional integration as it often occurs among

neighboring nations

1. The Economic Community of West African States (ECOWAS)

This is made up of fifteen member countries that are located in the Western African region. These
countries have both cultural and geopolitical ties and shared common economic interest. The
Atlantic Ocean forms the western as well as the southern borders of the West African region. The
northern border is the Sahara Desert, with the Ranishanu Bend generally considered the

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northernmost part of the region. The eastern border lies between the Benue Trough, and a line
running from Mount Cameroon to Lake Chad.
ECOWAS countries The history of the Economic Community of West African States began on
28th of May 1975. On this date, the heads of fifteen independent countries created a united space
to aid the development of their respective regions. They signed a treaty which eventually became
what we know today as ECOWAS. These countries were: Togo; Senegal; Sierra Leone; Nigeria;
Niger; Mali; Liberia; Guinea Bissau; Guinea; Ghana; The Gambia; Cote d’Ivoire; Cape Verde;
Burkina Faso;
AIMS AND OBJECTIVES OF ECOWAS
1. Promotion of Cooperation and development this is an important objective for the countries who
are in the ECOWAS system. The development is not limited by the economic abilities of the
region. It also includes social contacts between the representatives of various nations, religious
groups, etc. They cooperate to foster development in these states. Interesting facts to know about
current chairman of ECOWAS the cooperation also includes special offers for the members of the
community. The fifteen African countries share business strategies and technologies to boost their
economies. They also compete with each other to get the best results. This can foster the diplomatic
and economic relations between the countries.
2. Harmonization of Agricultural, Economic, Monetary and Industrial Policies One of the
objectives of ECOWAS is to create a united policy which can satisfy the unique needs of every
country member. It eliminates misunderstanding between country-members. At the same time, it
provides the general requirements and standards for policies in Industrial, Monetary, Economic
and Agricultural areas.
3. Abolition of trade restrictions and Customs Duties One of the greatest objectives for ECOWAS
is to destroy boundaries to assist in the development of the countries within the zone. It creates
additional protection for goods which are created within throne. That way, manufacturers are more
protected and have better opportunities to sell these products. Customers can also benefit from this
option as the price of goods becomes cheaper. What has ECOWAS done for you since its
establishment?
4. Establishment of Common Fund This is another great opportunity offered by ECOWAS! A
common fund provides better security options for countries within the union. It also helps facilitate
the cooperation between the countries. In addition, it serves as a security measure or compensation
to help any of the countries that needs assistance. The Common Fund is another great option for
the development of all countries within the union
5. Implementation of Infrastructural Schemes The joint development means joint infrastructure
schemes, like communication, transport, energy, etc. Therefore, the development of standards of
all country-members in the community can be realized. Conclusion one of the main ideas for
creating ECOWAS is to provide cooperation within countries. ECOWAS offers a lot of benefits
and opportunities for its members. Its main goal is to bring countries in the region together and
foster peace to aid development.

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2. The Intergovernmental Authority on Development (IGAD) in Eastern Africa was created in
1996 to supersede the Intergovernmental Authority on Drought and Development (IGADD) which
was founded in 1986. The recurring and severe droughts and other natural disasters between 1974
and 1984 caused widespread famine, ecological degradation and economic hardship in the Eastern
Africa region. Although individual countries made substantial efforts to cope with the situation
and received generous support from the international community, the magnitude and extent of
the problem argued strongly for a regional approach to supplement national efforts.

In 1983 and 1984, six countries in the Horn of Africa - Djibouti, Ethiopia, Kenya, Somalia, Sudan
and Uganda - took action through the United Nations to establish an intergovernmental body for
development and drought control in their region. The Assembly of Heads of State and Government
met in Djibouti in January 1986 to sign the Agreement which officially launched IGADD with
Headquarters in Djibouti. The State of Eritrea became the seventh member after attaining
independence in 1993.

In April 1995 in Addis Ababa, the Assembly of Heads of State and Government made a
Declaration to revitalize IGADD and expand cooperation among member states. On 21 March
1996 in Nairobi the Assembly of Heads of State and Government signed 'Letter of Instrument to
Amend the IGADD Charter / Agreement" establishing the revitalized IGAD with a new name "
The Intergovernmental Authority on Development". The Revitalized IGAD, with expanded areas
of regional cooperation and a new organizational structure, was launched by the IGAD Assembly
of Heads of State and Government on 25 November 1996 in Djibouti, the Republic of Djibouti.

Aims and Objectives

As stipulated in Article 7 of the Agreement Establishing IGAD, the aims of IGAD include:

• Promote joint development strategies and gradually harmonize macro-economic policies

and programmes in the social, technological and scientific fields;
• Harmonize policies with regard to trade, customs, transport, communications, agriculture,
and natural resources and environment, and promote free movement of goods, services,
and people within the region.
• Create an enabling environment for foreign, cross-border and domestic trade and
investment;
• Initiate and promote programmes and projects to achieve regional food security and
sustainable development of natural resources and environmental protection, and encourage
and assist efforts of Member States to collectively combat drought and other natural and
man-made disasters and their consequences;

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 • Develop and improve a coordinated and complementary infrastructure, in the areas of
transport, telecommunications and energy in the region;
• Promote peace and stability in the region and create mechanisms within the region for the
prevention, management and resolution of inter-State and intra-State conflicts through
dialogue;
• Mobilize resources for the implementation of emergency, short-term, medium-term and
long-term programmes within the framework of regional cooperation;
• Facilitate, promote and strengthen cooperation in research development and application in
science and technology.
• Provide capacity building and training at regional and national levels; and
• Generate and disseminate development information in the region

3.The Common Market for Eastern and Southern Africa (COMESA)

This is the largest regional economic organization in Africa, with 19 member states and a
population of about 390 million.

COMESA has a free trade area, with 19 member states, and launched a customs union in 2009.

COMESA countries include: Burundi Comoros, D.R. Congo, Djibouti, Egypt, Eritrea, Ethiopia,
Kenya, Libya Madagascar, Malawi, Mauritius, Rwanda, Seychelles, Sudan, Swaziland, Uganda
Zambia, Zimbabwe

Objectives of COMESA

• Understand the aims, functions, and institutions of the Common Market for Eastern and
Southern Africa (COMESA)
• To know the economy of the COMESA region
• To analyze the steps of the COMESA integration process: free-trade area, customs union,
common market and economic community
• To evaluate the benefits for the COMESA member countries
• To know the COMESA Trade Facilitation and transport programs
• To analyze the role of the affiliated institutions: PTA Bank, COMESA Reinsurance
Company, ACA
• To learn about the Nile Basin Initiative, Indian Ocean Commission and Economic
Community of the Great Lakes Region

4. The Arab Maghreb Union (AMU)

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This is a trade agreement aiming for economic and future political unity among Arab countries of
the Maghreb in North Africa. Its members are the nations of Algeria, Libya, Mauritania, Morocco
and Tunisia.

5. The Community of Sahel-Saharan States (CEN-SAD)

It was established on 4 February 1998, following the Conference of Leaders and Heads of States
held in Tripoli, Libya. CEN-SAD became a regional economic community during the thirty-sixth
ordinary session of the Conference of Heads of State and Government of the Organization of
African Unity, held in Lomé, Togo, from 4 to 12 July 2000. CEN-SAD gained the observer status
at the General Assembly under resolution 56/92, and thereafter, initiated cooperation agreements
with numerous regional and international organizations with the purpose of consolidating
collective work in the political, cultural, economic and social fields.

Since the extraordinary session of the Conference of Heads of State and Government held in
N’Djamena, Chad in February 2013 whose main purpose was to endorse the restructuring and the
revival of the Community, CEN-SAD approved a new Treaty prepared from the revision of the
first Treaty that established the Community.

The member States of CEN-SAD are: Benin, Burkina Faso, Central African Republic, Chad, the
Comoros, Côte d’Ivoire, Djibouti, Egypt, Eritrea, the Gambia, Ghana, Guinea-Bissau, Libya, Mali,
Mauritania, Morocco, Niger, Nigeria, Senegal, Sierra Leone, Somalia, the Sudan, Togo and
Tunisia.

6.The East African Community (EAC)

It is a regional intergovernmental organization of 6 Partner States: Republics of Burundi, Kenya,

Rwanda, South Sudan, the United Republic of Tanzania, and the Republic of Uganda, with its
headquarters in Arusha, Tanzania

THE SELECTED REGIONAL BLOCKS IN WOLRD

1. The North American Free Trade Agreement (NAFTA) is a treaty entered into by the United
States, Canada, and Mexico; it went into effect on January 1, 1994. (Free trade had existed between
the U.S. and Canada since 1989; NAFTA broadened that arrangement.) On that day, the three
countries became the largest free market in the world; the combined economies of the three nations
at that time measured $6 trillion and directly affected more than 365 million people. NAFTA was
created to eliminate tariff barriers to agricultural, manufacturing, and services; to remove
investment restrictions; and to protect intellectual property rights. This was to be done while also
addressing environmental and labor concerns (although many observers charge that the three
governments have been lax in ensuring environmental and labor safeguards since the agreement

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went into effect). Small businesses were among those that were expected to benefit the most from
the lowering of trade barriers since it would make doing business in Mexico and Canada less
expensive and would reduce the red tape needed to import or export goods.

Highlights of NAFTA included:

1.Tariff elimination for qualifying products. Before NAFTA, tariffs of 30 percent or higher on
export goods to Mexico were common, as were long delays caused by paperwork. Additionally,
Mexican tariffs on U.S.-made products were, on average, 250 percent higher than U.S. duties on
Mexican products. NAFTA addressed this imbalance by phasing out tariffs over 15 years.
Approximately 50 percent of the tariffs were abolished immediately when the agreement took
effect, and the remaining tariffs were targeted for gradual elimination. Among the areas
specifically covered by NAFTA are construction, engineering, accounting, advertising,
consulting/management, architecture, health-care management, commercial education, and
tourism.

2.Elimination of nontariff barriers by 2008. This includes opening the border and interior of
Mexico to U.S. truckers and streamlining border processing and licensing requirements. Nontariff
barriers were the biggest obstacle to conducting business in Mexico that small exporters faced.

3.Establishment of standards. The three NAFTA countries agreed to toughen health, safety, and
industrial standards to the highest existing standards among the three countries (which were always
U.S. or Canadian). Also, national standards could no longer be used as a barrier to free trade. The
speed of export-product inspections and certifications was also improved.

4.Supplemental agreements. To ease concerns that Mexico's low wage scale would cause U.S.
companies to shift production to that country, and to ensure that Mexico's increasing
industrialization would not lead to rampant pollution, special side agreements were included in
NAFTA. Under those agreements, the three countries agreed to establish commissions to handle
labor and environmental issues. The commissions have the power to impose steep fines against
any of the three governments that failed to impose its laws consistently. Environmental and labor
groups from both the United States and Canada, however, have repeatedly charged that the
regulations and guidelines detailed in these supplemental agreements have not been enforced.

5.Tariff reduction for motor vehicles and auto parts and automobile rules of origin.

6.Expanded telecommunications trade.

7.Reduced textile and apparel barriers.

8. More free trade in agriculture. Mexican import licenses were immediately abolished, with most
additional tariffs phased out over a 10-year period.
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9. Expanded trade in financial services.

10. Opening of insurance markets.

11.Expanded the rights of American firms to make bids on Mexican and Canadian government
procurement contracts.

2. General Agreement on Tariff and Trade (GATT)

The World Bank recommended the establishment of an International Trade Organization (ITO).
Instead of ITO, General Agreement on Tariff and Trade (GATT) was formed in 1948.

Objectives of GATT

The General Agreement on Tariff and Trade was a multilateral treaty that laid down rules for
conducting international trade. The preamble to the GATT can be linked to its objectives.

1. To raise the standard of living of the people,

2. To ensure full employment and a large and steadily growing volume of real income and effective
demand.

3. To tap the use of the resources of the world fully.

4. To expand overall production capacity and international trade.

Principles of GATT

For the realization of the above mentioned objectives, GATT adopted the following principles.

1. Non Discrimination,
2. Protection through tariffs,
3. A stable basis of trade, and;
4. Consultation

1. Non Discrimination

The international trade should be conducted on the basis of nondiscrimination. No member country
shall discriminate between the members of GATT in the conduct of international trade. On this
basis, the principle “Most favored Nation” (MFN) was enunciated. This means that “each nation
shall be treated as good as the most favored nation”. All contracting parties should regard others

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as most favorable while applying and administering import and export duties and charges. As far
as quantitative restrictions are concerned, they should be administered without favor.

Exceptions to the principle of non-discrimination: However, certain exceptions to this basic

rule are to be allowed. There is no objection to form free trade areas or custom unions. Such
integration should facilitate consistent trade between the constituent territories. They should not
raise barriers to the trade of other parties. GATT allows its members to follow measures to counter
dumping and export subsidies. However, such measures should be applied only to offending
countries.

2. Protection through tariffs only

GATT rules prohibit quantitative restrictions. Domestic industries should be protected only
through customs tariffs. Restrictions on trade should be limited to the less rigid tariffs.

3. A stable basis of trade

GATT seeks to provide a stable and predictable basis for trade. It binds the tariff levels negotiated
among the contracting countries. Binding of tariffs prevents the unilateral increase in tariffs, But
still there is a provision for renegotiation of bound tariffs. A return to higher tariffs is discouraged
by the requirement that any increase is to be compensated for.

4. Consultation

The member countries should consult one another on trade matters and problems. The members
who feel aggrieved that their rights under GATT are withheld can call for a fair settlement. Panels
of independent experts have been formed under the GATT council. Panel members are drawn from
countries which have no direct interest in the disputes under investigation. They look into the trade
disputes among members. The panel procedure aims at mutually satisfactory settlement among
members.

The African Growth and Opportunity Act (AGOA)

The African Growth and Opportunity Act (AGOA) is a United States Trade Act, enacted on 18
May 2000 as Public Law 106 of the 200th Congress. AGOA has since been renewed to 2025. The
legislation significantly enhances market access to the US for qualifying Sub-Saharan African
(SSA) countries. Qualification for AGOA preferences is based on a set of conditions contained in
the AGOA legislation. In order to qualify and remain eligible for AGOA, each country must be
working to improve its rule of law, human rights, and respect for core labor standards.

The Act originally covered the 8-year period from October 2000 to September 2008, but legislative
amendments signed into law by US President George Bush in July 2004 served to extend AGOA

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to 2015. At the same time, a special dispensation relating to apparel was extended by three years
to 2007; but in December 2006 these were extended to 2012.

In 2007, the apparel “abundant supply” provisions were enacted, although these were repealed
again in 2009.

Their intention was to set requirements for local textile fabric sourcing where it was considered
that sufficient quantities were available in AGOA-eligible countries; third country fabric (the
provisions related only to denim initially) would thus first have to be sourced locally or regionally
before third country imports could be utilized for onward exports of denim garments.

A subsequent legislative revision in September 2012 extended the apparel provisions to the end of
2015 to coincide with the current expiry of the AGOA legislation. After completing its initial 15-
year period of validity, the AGOA legislation was extended on 29 June 2015 by a further 10 years,
to 2025.

4. Privatization

It involves selling state-owned assets to the private sector. It is argued the private sector tends to
run a business more efficiently because of the profit motive. However, critics argue private firms
can exploit their monopoly power and ignore wider social costs. Privatization is often achieved
through listing the new private company on the stock market. In the 1980s and 1990s, the UK
privatized many previously state-owned industries such as BP, BT, British Airways, electricity
companies, gas companies and rail network.

Potential benefits of privatization:

1. Improved efficiency

The main argument for privatization is that private companies have a profit incentive to cut costs
and be more efficient. If you work for a government run industry managers do not usually share
in any profits. However, a private firm is interested in making a profit, and so it is more likely to
cut costs and be efficient. Since privatization, companies such as BT, and British Airways have
shown degrees of improved efficiency and higher profitability.

2. Lack of political interference

It is argued governments make poor economic managers. They are motivated by political pressures
rather than sound economic and business sense. For example, a state enterprise may employ
surplus workers which is inefficient. The government may be reluctant to get rid of the workers
because of the negative publicity involved in job losses. Therefore, state-owned enterprises often
employ too many workers increasing inefficiency.

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3. Short term view

A government many think only in terms of the next election. Therefore, they may be unwilling to
invest in infrastructure improvements which will benefit the firm in the long term because they are
more concerned about projects that give a benefit before the election. It is easier to cut public
sector investment than frontline services like healthcare.

4. Shareholders

It is argued that a private firm has pressure from shareholders to perform efficiently. If the firm is
inefficient then the firm could be subject to a takeover. A state-owned firm doesn’t have this
pressure and so it is easier for them to be inefficient.

5. Increased competition

Often privatization of state-owned monopolies occurs alongside deregulation – i.e. policies to

allow more firms to enter the industry and increase the competitiveness of the market. It is this
increase in competition that can be the greatest spur to improvements in efficiency. For example,
there is now more competition in telecoms and distribution of gas and electricity.

• However, privatization doesn’t necessarily increase competition; it depends on the nature

of the market. E.g. there is no competition in tap water because it is a natural monopoly.
There is also very little competition within the rail industry.

6. Government will raise revenue from the sale

Selling state-owned assets to the private sector raised significant sums for the UK government in
the 1980s. However, this is a one-off benefit. It also means we lose out on future dividends from
the profits of public companies.

1 Public interest

There are many industries which perform an important public service, e.g., health care, education
and public transport. In these industries, the profit motive shouldn’t be the primary objective of
firms and the industry. For example, in the case of health care, it is feared privatizing health care
would mean a greater priority is given to profit rather than patient care. Also, in an industry like
health care, arguably we don’t need a profit motive to improve standards. When doctors treat
patients, they are unlikely to try harder if they get a bonus.

3. Government loses out on potential dividends.

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Many of the privatized companies in the UK are quite profitable. This means the government
misses out on their dividends, instead going to wealthy shareholders.

4. Problem of regulating private monopolies.

Privatization creates private monopolies, such as the water companies and rail companies. These
need regulating to prevent abuse of monopoly power. Therefore, there is still need for government
regulation, similar to under state ownership.

5. Fragmentation of industries

In the UK, rail privatization led to breaking up the rail network into infrastructure and train
operating companies. This led to areas where it was unclear who had responsibility. For example,
the Hatfield rail crash was blamed on no one taking responsibility for safety. Different rail
companies have increased the complexity of rail tickets.

6. Short-termism of firms

As well as the government being motivated by short term pressures, this is something private firms
may do as well. To please shareholders, they may seek to increase short term profits and avoid
investing in long term projects. For example, the UK is suffering from a lack of investment in new
energy sources; the privatized companies are trying to make use of existing plants rather than
invest in new ones.

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