CHAP 3&4

Balance of Payment
Corporate Governance Around
The World

Lecturer: Que Anh Nguyen

By Group 2
 CHAPTER 3
Balance of Payments
1. US current account deficit since the 1980s

• The main cause of deficit:

In the early 1980s, the U.S. current account began to run a deficit,
precipitating a persistent deficit in the account that followed. In which, there
are 2 main reasons leading to this deficit:

(i) a very high real interest rate in the U.S., which is due to ballooning
federal budget deficits, that kept the dollar strong, and

(ii) weak competition of the U.S. industries.

1. US current account deficit since the 1980s

• The main cause of deficit:

(i) a very high real interest rate in
the U.S., which is due to
ballooning federal budget deficits,
that kept the dollar strong
1. US current account deficit since the 1980s

• The main cause of deficit:

(ii) weak competition of the U.S.
industries.

The U.S merchandise trade deficit

soared to a record $107 .6 billion in
1984, 76 percent over the 1983
 (Patricia and Brian, 1985).
1. US current account deficit since the 1980s
• The consequences of continuous U.S. current account deficits

(i) Risk of depreciation:

Affects the value of US and foreign asset holdings, and if there are not enough
capital inflows to finance the deficit, the exchange rate will fall to reflect the
imbalance of foreign capital inflows , which in turn causes import inflation for
consumers and companies that depend on imported raw materials.

(ii) Adverse effects on certain industries

An increase in the exchange rate due to net inflows of foreign capital increases the
incentive to allocate resources from the production of domestically tradable goods to
the import of tradable goods abroad.
2. Japan's persistent current account surplus

The main cause for the Japan continuous current account surplus is the government applies
Mercantile Realism:

• This policy is applied to maximize exports and minimize imports for a

country.
• Protect the domestic industries against unfair trade practices (anti-
dumping, anti-subsidy).

Japan is desirable to have a constant current account surplus.

3. The balance of Payments Identity
The balance of payments (BOP) is the record of all international financial
transactions made by the residents of a country.
BCA = balance on the current account
BKA = balance on the capital account
BFA = balance on the financial account
BRA = balance on the reserve account.

              BCA + BKA + BFA + BRA = 0 ( 3.1)

BCA+ BKA + BFA = -BRA (3.2) 

BCA+ BFA = -BKA (3.3) 

 4. Example
(1) A Japanese insurance company purchases U.S. Treasury bonds and pays out of its bank account kept
in New York City.
    Cr Dr
Japanese insurance comp purchase US
+  
Treasury bonds  
Withdrawal from U.S. bank   -
 

(2) A U.S. citizen consume a meal at a restaurant in Paris and pays with her American Express card.

    Cr Dr

Deposit at U.S. bank +  

 
A U.S. citizen consumes a meal in Paris   -
 
 4. Example
(3) An Indian immigrant living in Los Angeles sends a check drawn on his L.A. bank account as
a gift to his parents living in Mumbai.
    Cr Dr

Receipt of the check by parent in Mumbai   +  

An Indian sends a check drawn on

    -
his L.A. bank account

(4) A U.S. computer programmer is hired by a British company for consulting and gets paid
from the U.S. bank account maintained by the British company

Cr Dr
   
British company is hired a U.S. computer
  +  
programmer

  Deposit at U.S. bank   -

5. PROBLEM: The
U.S. balance of
payments in 2017
(BEA, 2018)
 CHAPTER 4
Corporate Governance
Around The World
1. Agency problem
Agency conflicts arise

• When shareholders and management are unable to achieve an agreement on each

party's interests.
• When managers have control rights but insignificant cash flow rights. This wedge
between control and cash flow rights motivates managers to engage in self-dealings at
the expense of shareholders.
(1) The English common law
• There is no comprehensive synthesis of
laws and statutes.
• Judges have a huge role in shaping the
law (Berkeley, 2022).

(2) The French civil law 2. Differences between

• This is a comprehensive set of laws,
constantly updated with applicable laws in the protection of
procedures and appropriate penalties for
each offense.
• The judge has the power to apply only the investors rights.
provisions of the current code (Berkeley,
2022)
As a result, the English common law
is considered to provide the strongest
protection for investors, while the 2. Differences between
French civil law is the weakest.
laws in the protection of
investors rights.
 - In the late 1980s there was a series of sensational
business scandals in the United Kingdom. There was
3. The Cadbury particular public outrage at the plundering of pension
funds by Robert Maxwell, at the failure of auditors to
Committee and expose the impending bankruptcy of the Bank of Credit
and Commerce International, and at the apparently
undeserved high pay raises received by senior business
Corporate executives.
 
Governance - Cadbury Rules are guidelines or recommendations on
corporate governance that were specified by the UKs
Cadbury Committee.
Reform in UK
 - The report of the UKs Cadbury on Corporate
3. The Cadbury governance bordered on three major
recommendations, these are:
Committee and + The chairman of a company should be
separate from the CEO.
+ A minimum number of three non-executive
Corporate directors should be part of the company's board, two
of them should have no ties whatsoever with any
Governance executive.
+ An audit committee of the board should
Reform in UK composed of non-executive directors.
 What is Petrobras scandal?
• Formed in 1953, Petrobras is a pillar of the Brazilian economy, it
has a huge project to build 2 oil refineries, called Comperj. 
• Comperj is the  biggest petrochemical complex in Brazil. The
4. The Petrobras multibillion dollar project launched in 2008 and the plan to
open in 2011, and it became a symbol of the largest corruption
scandal in Brazil’s history. 
scandal • Hundereds of prominent Brazilians including CEos, member of
Congress and even a former president have been implicated.
Some of Brazil’s largest companies lost billions of dollars and the
country slid futher into recession. 
 How did the Petrobras scandal happen?

4. The Petrobras • Typically, engineering firms would compete for the

contract, driving down the price for Petrobras.
scandal
• But a group of these companies got together and formed
an agreement. Instead of competing against each other,
they cooperate to fix prices and take turns accepting
project.
4. The Petrobras
scandal
 How did the Petrobras scandal happen?

• The investigation revealed that cartel formed by Brazil's biggest

construction companies paid bribes to Petrobras directors and to

4. The Petrobras politicians and political parties tied to the designation of these directors in
order to win huge contracts the bribes were overpriced contract there was
no real competition between the construction companies and that allowed
scandal them to overcharge Petrobras and profit immensely.
• In return, the board of directors of Petrobras can receive 3% per
contracts. The original cost for Comperj was about $6billion.
• By 2015 Petrobras has paid at least $14 billion. They then money
laundered some of its profits through outside businesses, like the gas
station before paying bribes to Petrobrase executives and politicians.
How was it possible for the Investigate and discuss the role Study and discuss Italy’s
Parmalat manager to "cook the that international banks and corporate governance regime
books" and hide it for so long? auditors might have played in and its role in the failure of
Parmalat’s collapse. Parmalat.

5. Parmalat: Europe’s Enron

07
Parmalat Corporation:
• Parmalat is a huge Italian company specialized in dairy products.

The scandal:
• The collapse of Parmalat began in November when its auditor raised concerns
about a $135 million derivatives profit.
• On December 23rd, Italian authorities revealed that the corporation had used
dozens of offshore companies to report non-existent assets in order to offset
itself.
• Calisto Tanzi, the company's founder, and CEO, also embezzled about $ 800
million and was sentenced to ten years in prison.
Calisto Tanzi (1938-2022)
Founder – CEO of Parmalat Corp.

5. Parmalat: Europe’s Enron

How was it possible for the Parmalat manager to
"cook the books" and hide it for so long?
• The issue with Parmalat lied in the fact that it did
not have a reliable department responsible for
transparent accounting that could have stopped
the CFO's fraudulent activities.
• The combination of transparency-deficient
procedures and the absence of governmental
regulations to cover this issue allowed Parmalat to
cook the books.
5. Parmalat: Europe’s Enron
Investigate and discuss the role that international
banks and auditors might have played in
Parmalat’s collapse.
• Bank of America, Citicorp, and J.P. Morgan
assessed Parmalat bonds as solid financial paper
despite knowing, or should have known, that they
were worthless.
• External auditors at Parmalat failed to perform
their monitoring duties.
Study and discuss Italy’s corporate governance regime
and its role in the failure of Parmalat.
• The bulk of publicly traded companies are dominated
by significant controlling shareholders, many of whom
are founding families.
• The lack of an independent board of directors also
contributed to Parmalat's failure.

5. Parmalat: Europe’s Enron

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Thank for
listening