CHAPTER 3: MARKET INTEGRATION

Lesson 6:
1. INTRODUCTION
2. INTERNATIONAL FINANCIAL INSTITUTIONS
• THE BRETTON WOODS SYSTEM
• THE GENERAL AGREEMENT on TARIFFS and TRADE (GATT) and THE
WORLD TRADE ORGANIZATION (WTO)
• THE INTERNATIONAL MONETARY FUND (IMF) AND THE WORLD BANK
• THE ORGANIZATION FOR ECONOMIC COOPERATION and
DEVELOPMENT (OECD), THE ORGANIZATION OF PETROLEUM
EXPORTING COUNTRIES (OPEC), and THE EUROPEAN UNION (EU)
• NORTH AMERICAN FREE TRADE AGREEMENT (NAFTA)
Objectives:
1. Explain the role of international financial institutions in the
creation of a global economy;
2. Narrate a short story of global market integration in the
twentieth century; and
3. Identify the attributes of global corporations.
What is a market?
 Markets are composed of:
 Buyers
 Sellers
 Institutions and infrastructure
 Others behind the scenes: importers, processors, storage owners,
wholesalers, credit suppliers, government officials and policies
 Markets are where buyers and sellers come together to obtain
information and exchange commodities.
 A commodity is something tangible, that has value and can be
exchanged.
 A market chain includes all levels of the market and actors that
have a role in the distribution and transformation of the
commodity.
Why are markets important?
Why are markets important?
 Markets are a part of everyone’s lives
 Most people – especially the poor – rely on markets to provide food, essential
goods and services
 Markets also provide access to paid work and mechanisms for selling commodities
and services
 Strengthening markets can improve everyone’s lives and livelihoods
 Harming markets can have serious negative impacts, particularly on the poor
 Important to understand markets, so we know if our programs are strengthening
or harming markets
Think of a product. Try to
identify its market chain (the
flow of its process in the
market)
 Customer

Retailer

Wholesaler

Processor In a Market Chain

commodities flow
Farmer from producers to
consumers
Types of Markets
Along a market chain, each trader buys and sells at different
prices.

Source: FEWs (2008) Market Analysis and Assessment. Lesson 1, p. 5

 The Market Chain
& Business Support Services

Consumption

Retailing

Trading Research
Transportation
Processing
Govt. policy regulation

Communications
Trading
Production input supply
- - Post-harvest
handling Tech. & business training & assistance

Production Financial services

Market information and intelligence
Commodity Supply Chain

Intermediary
“wholesale” prices paid
Farmgate Retail prices
between brokers,
prices*
aggregators,
wholesalers

*USDA refers to wholesale prices as “producer prices.” USDA does

not require the collection of farmgate prices.
Market Definitions

Source: FEWs (2008) Market Analysis and Assessment. Lesson 1, p. 12

 Market Characteristics and Efficiency
 A market is said to be functioning well when goods flow into the market in times
of deficit and out in times of surplus, via private trading.
 A market is said to be functioning inefficiently when the costs of moving
commodities in and out of markets are greater than the marginal profit received to do
so.
 Relative functioning of a market depends on:
 Number, size, independence of buyers and sellers
 Formation of prices
 Availability of information on prices and costs
 Ease of entry and exit
 Reliability of contract enforcement
 Integration across markets
 Institutional framework (infrastructure, government policies, etc)
Market Integration
 Markets are integrated when price shocks from one geographic market
are transmitted to other markets through the trading of goods.
 When markets are integrated, the supply of food adjusts spatially to meet
demands.
 In integrated markets, an increase in prices due to a large local
purchase of food would signal traders to bring in more supply, bringing
prices back down.
 If market integration is poor due to weak information and infrastructure
and high transport and marketing costs, supply will not flow into the
market, increasing prices for the population. In such cases, the local
procurement of food can have significant effects on local prices.
So what is Integration? According to Ulrich Koester;
 It simply means that it is the process of
combining different national economies
to build larger economic regions. These
are the connection, arrangement and
agreement between nations and
institutions to create a bigger and
stronger union.
INTERNATIONAL FINANCIAL INSTITUTIONS
What is International Financial Institutions?
Some examples are World Bank, Asian Development Bank,
Islamic Development Bank. Each of these international
banks has their own goal for the global economy. Each
one of them greatly affect the growth of the world’s
economy, like in the phrase saying “When the American
sneezes, the rest of the world catches a cold” but always
remember this only applies to those high income countries,
for instance would Philippines affect the global market if it
will suffer from financial crisis? I would rather say not, but if
China, Russia or America is suffering from a financial
dilemma the answer is definitely yes.
The following are financial
institutions and economic
organizations that made countries
even closer together, at least,
when it comes to trade.
a. THE BRETTON WOODS SYSTEM
It was established after the Second World War, to create a
new world financial system to avoid lack of cooperation
among nations, political stability, and economic turmoil. It
focuses on the reduction of barriers to trade and free flow
of money and ensures global financial stability. Americans
played the biggest role in the Bretton Woods System
among the 44 delegates who joined the conference of
establishing the Bretton Woods System, since USA holds 2/3
of the gold reserves after the war. Central Bank of each
country was also established during this period and also
World Bank and International Monetary Fund (IMF) are
founded.
 Representatives of leading nations in
Brief History Bretton Woods, New Hampshire 1944

 Nations attempted to
revive gold standard
after World War I
 Gold standard was
adopted by US in
1919 (1879)
 Dropped it 1933
 Returned to it in 1934
 During that year, the
US raised the dollar
of gold from $20.67
to $35 ounce
Brief History (continued)

 By 1932, France and the United States Held

more than 70% of gold.
 Other countries on gold standard engage in
domestic asset sale and raise interest rate.
 Worldwide monetary contraction along with New
York stock market crash=deep global recession!
 Reconstruction, development, and growth of
post-war economies become critical.
 July 1944, representatives draft and sign the
Articles of Agreement of the International
Monetary Fund.
 Fixed exchange rates against the US dollar
and an unvarying dollar price of gold-$35
ounce.
 It was a gold exchange standard, with the
dollar as its principal reserve currency.
 Member countries could sell dollars to the
Federal Reserve for gold at the official price.
 GOALS
 Fix exchange rate to the dollar=>which was
tied into gold.
 Eliminate uncertainties in international
transactions =>to promote the expansion of
international trade and investment.
What was the Bretton Wood
System?
Why did it fail? Purchases
16

 Government 14

spending 12
Purchases
increased 10

(military 8
purchases and
other 6

government 4

spending) 2

 No increases in 0
taxes. 64 65 66 67 68 69 70 71 72
 Inflation rate (percent per year)
8

4
Inflation

0
64 65 66 67 68 69 70 71 72
 Current account surplus ($billion)

Inflation

0
64 65 66 67 68 69 70 71 72

-2

-4

-6
 London gold market raises red flags.
 Speculators began buying gold in anticipation
of a rise in dollar price.
 Central banks announced the creation of the
two-tier system.
 This was a TURNING POINT for the BWS,
since it made the official price of gold a
mythical device for central banks to square
accounts among each other.
 US entered into a recession in 1970
 Markets believed that to counter the
recession, the US had to devalue their
currency
b. THE GENERAL AGREEMENT on
TARIFFS and TRADE (GATT) and
THE WORLD TRADE
ORGANIZATION (WTO)
 These entities are created to manage global trade
among nation and to formulate rules that will help the
proper flow of trade within the globe. However, there are
still some negative impact brought by these entities like less
limitations among countries in terms of trading, mass
productions of product which resulted to pollutions that
weakened the environment and also weak countries are
having difficulties competing around the world with richer
countries which causes unemployment for smaller
countries.
 GATT or General Agreement on Tariffs and
Trade was established in 1947. Due to the
effect of the Bretton Woods System, GATT was
created to concentrate on trade goods
through multinational trade agreements
conducted in many “rounds” of negotiation.
Round 8
 The WTO or World Trade Organization is an
independent multilateral organization that became
responsible for trade in services, non-tariff-related
barriers to trade, and other broader areas of trade
liberalization. The headquarters of WTO is located at
Geneva, Switzerland with 152 member states as of
2008. The general idea where the WTO is based was
that of neoliberalism. This means that by reducing or
eliminating barriers, all nations will benefit.
c. THE INTERNATIONAL MONETARY
FUND (IMF) AND THE WORLD BANK
 In the end of World War II, the economic stability
and political stability of the world became
ambiguous. The economy started to rise again. The
WORLD BANK and INTERNATIONAL MONETARY FUND
helped the world to get up again. Their clients are
not individual persons, instead they cater countries
who are having problems with their financial status.
The IMF’s main objective is to assist countries
which were in trouble looking for financial aids
due to economic crisis. IMF’s serves as lending
center of countries meaning they lend cash to
countries to help them with their struggles.
Unlike with the World Bank, it aims to eradicate
poverty around the globe. It funded projects of a
certain country which would help to achieve their
goals. Mainly the investment of a country in
education to help their citizens became well-
educated and competitive to other countries.
These two institutions have helped a
lot of countries to get back on their
feet, along with this they also helped
some corrupt political leaders and
sometimes they are having problems
in collecting back their money.
 International
Monetary Fund
 What IMF do
The IMF promotes international monetary
cooperation and exchange rate stability,
facilitates the balanced growth of
international trade, and provides
resources to help members in balance of
payments difficulties or to assist with
poverty reduction.

INTERNATIONAL MONETARY FUND

 Membership
The IMF has 186 member countries. It is a
specialized agency of the United Nations
but has its own charter, governing
structure, and finances. Its members are
represented through their relative size in
the global economy.

INTERNATIONAL MONETARY FUND

 How IMF do it
Through its economic surveillance, the IMF
keeps track of the economic health of its
member countries, alerting them to risks on
the horizon and providing policy advice. It
also lends to countries in difficulty, and
provides technical assistance and training to
help countries improve economic
management. This work is backed by IMF
research and statistics.

INTERNATIONAL MONETARY FUND

 The IMF works with other international
organizations[Collaborating with
others]to promote growth and poverty
reduction.

INTERNATIONAL MONETARY FUND

 The IMF supports its membership by
providing:

 policy advice to governments and central

banks based on analysis of economic trends
and cross-country experiences;

 research, statistics, forecasts, and analysis

based on tracking of global, regional, and
individual economies and markets;

 loans to help countries overcome economic

difficulties;

Key IMF activities

 concessional loans to fight poverty in
developing countries; and
 technical assistance and training to help
countries improve the management of
their economies.
 Enhancing IMF lending facilities
 Strengthening the monitoring of global,
regional, and country economies
 Helping resolve global economic
imbalances
 Analyzing capital market developments
 Assessing financial sector vulnerabilities
 Working to cut poverty.
 Improving IMF governance
 Greater accountability and transparency

Objectives
 Surveillance
 The IMF promotes economic stability and
global growth by encouraging countries to
adopt sound economic and financial
policies. To do this, it regularly monitors
global, regional, and national economic
developments. It also seeks to assess the
impact of the policies of individual
countries on other economies.

Functions
 Technical assistance and training

IMF offers technical assistance and

training to help member countries
strengthen their capacity to design and
implement effective policies. Technical
assistance is offered in several areas,
including fiscal policy, monetary and
exchange rate policies, banking and
financial system supervision and
regulation, and statistics.

Functions
 Lending

 Research and data

Functions
 The WTO was established on 01/01/1995.

 Moto : “Strengthen the world economy

and lead to more trade, investment,
employment and income growth
throughout the world.”

 It is the successor to the GATT.

World Trade Organizations

Raising the Standard of living of the people.

Providing Employment.

Expanding Trade and Commerce.

Optimum utilization of the resources.

Sustainable Development of the countries.

Objectives
THE WORLD BANK GROUP: AN INTRODUCTION TO ITS
COMPOSITION, FUNCTIONS, SUCCESSES AND FAILURES
 WHAT IS THE WORLD BANK?
World Bank (often referred to by employees and
others as simply "the Bank") is an internationally
supported bank that provides financial and
technical assistance to developing countries for
development programs (e.g. bridges, roads,
schools, etc.) with the stated goal of reducing
poverty. It was formally established on December
27, 1945.
 WORLD BANK ADMINISTRATIVE
STRUCTURE
The World Bank is governed by several bodies:
Board of governors

Executive Directors

President
 MISSION OF THE WORLD BANK
The central mission of the World Bank is the alleviation of
poverty, defined as 1) lack of resources, 2) sense of
powerlessness and 3) the absence of basic security.
The latter two are exacerbated when a nation's law and justice
institutions perform poorly and the rule of law is weak or
nonexistent.
In this regard, the elite can often use wealth or connections to
cushion themselves from the impact of a poorly performing
legal system. But, these alternatives are not open to the poor.
They are rather the ones most vulnerable when the rule of law
is absent.
Another mission is to provide loans, policy advice, technical
assistance and knowledge sharing
 FUNCTIONS OR ACTIVITIES OF THE WORLD BANK
• Build capacity – Strengthening governments and educating government
officials
• Infrastructure creation – implementation of legal and judicial systems for
the encouragement of business, the protection of individual and property
rights and the honoring of contracts
• Development of Financial Systems – the establishment of strong systems
capable of supporting endeavors from micro credit – Support for
countries' efforts at eradicating corruption
• Research, Consultancy and Training - the World Bank provides platform
for research on development issues, consultancy and conduct training
programs
 AREAS OF OPERATION
The World Bank is active in the following areas
Agriculture and Rural Development Macroeconomic and Economic Growth
Conflict and Development Mining
Development Operations and Activities Poverty Reduction
Economic Policy Poverty
Education Private Sector
Energy Public Sector Governance
Environment Rural Development
Financial Sector Social Development
Gender Social Protection
Governance Trade
Health, Nutrition and Population Transport
Industry Urban Development
Information and Communication Technologies Water Resources
Information, Computing and Telecommunications Water Supply and Sanitation
Law and Justice
International Economics and Trade
Labor and Social Protections
 WORLD BANK COMPOSITION
The World Bank consists of five closely
associated institutions, all owned by member
countries that carry ultimate decision-making
power. Each institution plays a distinct role in
the mission to fight poverty and improve living
standards for people in the developing world.
The term “world Bank Group” encampasses all
five institutions, IBRD, IDA, IFC, MIGA and ICSID.
The term “World Bank” refers specifically to two
of the five, IBRD and IDA.
 INTERNATIONAL BANK FOR RECONSTRUCTION AND
DEVELOPMENT (IBRD)

The IBRD aims to reduce poverty in middle-income

and creditworthy poorer countries by promoting
sustainable development through loans, guarantees,
risk management products, and analytical and
advisory services. Established in 1944 as the original
institution of the World Bank Group, IBRD is
structured like a cooperative that is owned and
operated for the benefit of its 185 member countries.
 IBRD LENDING CRITERIA
The IBRD lends mainly to middle-income
countries (MIC) using funds borrowed at
commercial rates in world capital markets.
Most IBRD borrowers have annual per capita
income levels well below the $5,280 ceiling
on eligibility. IBRD loans are repayable over
a 10–20-year period at interest rates slightly
higher than those the Bank pays to borrow
funds.
 THE INTERNATIONAL DEVELOPMENT ASSOCIATION (IDA)

The IDA is the part of the World Bank that helps the world’s
poorest countries. Established in 1960, IDA aims to reduce
poverty by providing interest-free credits and grants for
programs that boost economic growth, reduce inequalities and
improve people’s living conditions.

IDA complements the World Bank’s other lending arm–the

IBRD–which serves middle-income countries with capital
investment and advisory services. IBRD and IDA share the same
staff and headquarters and evaluate projects with the same
rigorous standards.
 IDA FUNDING PURPOSES
• Debt burden relief in the most indebted and
poverty struck countries
• Amelioration of sanitation and water supply
• Support of vaccination and immunization
programs for the reduction of communicable
diseases such as malaria
• Combating the HIV/AIDS pandemic
• Support civil society organizations
• Creating initiatives for the reduction of
greenhouse gases
 IDA LENDING CRITERIA
The IDA makes loans to the world's poorest
countries, that is to those with annual per capita
income levels well below the $885 ceiling for
eligibility. IDA loans are funded with money
contributed by donor countries. IDA lends without
interest charges, with a 10-year grace period and
principal repayments stretching thereafter over 20–
30 years (depending on the situation.) The borrower
pays a three-fourth of 1% service charge to IDA,
which the World Bank uses to cover IDA
administrative costs.
 INTERNATIONAL FUND FOR CONSTRUCTION (IFC)

IFC fosters sustainable economic growth in developing

countries by financing private sector investment, mobilizing
capital in the international financial markets, and providing
advisory services to businesses and governments.
IFC helps companies and financial institutions in
emerging markets create jobs, generate tax revenues,
improve corporate governance and environmental
performance, and contribute to their local
communities. The goal is to improve lives, especially
for the people who most need the benefits of growth.
MULTILATERAL INVESTMENT GUARANTEE AGENCY (MIGA)

MIGA provides investment guarantees for

projects in a wide variety of sectors,
covering all regions of the world. MIGA's
mission is to spur developmentally
sustainable foreign direct investment to
help create jobs, promote economic
growth, and reduce poverty in its
developing member countries
INTERNATIONAL CENTER FOR SETTLEMENT OF INVESTMENT
DISPUTES (ICSID)
ICSID is an autonomous international institution
established under the Convention on the
Settlement of Investment Disputes between States
and Nationals of Other States with over one
hundred and forty member States. The Convention
sets forth ICSID's mandate, organization and core
functions. The primary purpose of ICSID is to
provide facilities for conciliation and arbitration
of international investment disputes.
 INTERNATIONAL MONETARY FUND (IMF)
• The IMF was created in 1944, with a goal to stabilize
exchange rates and supervise the reconstruction of the
world's international payment system. Countries contribute to
a pool of resources which could be borrowed from, on a
temporary basis, by countries with external payment
imbalances.
• The IMF describes itself as "an organization of 185 countries
(Montenegro being the 185th, as of January 18, 2007),
working to foster global monetary cooperation, secure
financial stability, facilitate international trade, promote
high employment and sustainable economic growth, and
reduce poverty
d. THE ORGANIZATION FOR ECONOMIC
COOPERATION and DEVELOPMENT (OECD), THE
ORGANIZATION OF PETROLEUM EXPORTING
COUNTRIES (OPEC), and THE EUROPEAN UNION
(EU)
 Why do these two institutions keep on
helping underprivileged countries? What
do they get in return of their help? Is there
any impact in the world economy when
they help these countries?
The richest countries in the world have a club or
organization which was established in 1961. They
named it as the Organization for Economic
Cooperation and Development. At present OECD is
trying to shape the international policies through its
activity, from publishing papers and data base and
assessing the academic performance of students
from various countries and many more.
.
 The Organizations of Petroleum Exporting Countries in 1960 was
originally composed by Kingdom of Saudi Arabia, Iraq, Kuwait,
Iran, and Venezuela but today United Arab Emirates, Algeria,
Libya, Qatar, Nigeria, and Indonesia are included as members.
OPEC was established because members of petroleum exporting
countries wanted to increase the price of oil, because in the past it
has a really low price compare at the present and had failed in
keeping up with inflation. Today the most important export
product in the world is oil. Almost all of the factories, machineries
and other equipment used in production are being powered by
petroleum.
3 Facts about European Union
If you wanted to be part of the European Union you must
pay a membership fee. After being a member your citizens
are automatically EU Citizens which means you can cross
all borders of the EU without needing a passport.
There are 28 states inside the European Union, all of these
states use a common currency which is euro, however,
Western European nations, like the Great Britain, Sweden,
and Denmark still used their own currency even if they are
part of the EU.
e. NORTH AMERICAN FREE TRADE
AGREEMENT (NAFTA)
 NAFTA was created in January 1, 1994 between
UNITED STATES, MEXICO and CANADA. Before only
Canada and the United States have this agreement
in 1989. This is free trade agreement between the
three nations, they removed barriers in terms of
trading so there is a free flow of trading among
them.
 Due to the reductions of barriers between these three
countries, manufacturing jobs transferred to the least
developed country which is Mexico because the cost of
production is less expensive in Mexico which causes loss of
jobs for the Canadians and Americans. However business in
developed countries made a fortune with this and became
richer because they save more in the production cost. That
is why NAFTA has its negative and positive impact within
the economic development of these three countries.