Month: December 2020

Management Notes

Income Statement, Features, Components, Example

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An income statement, also known as a profit and loss statement, is a financial document that summarizes a company’s revenues, expenses, and profits over a specific period, typically a quarter or year. It provides insights into a business’s operational performance, showcasing how much money was earned and spent during that period. The income statement typically includes revenue from sales, cost of goods sold (COGS), operating expenses, and net income. This statement is crucial for stakeholders, including investors and management, to assess profitability and make informed financial decisions.

Features of Income Statement:

  1. Revenue Recognition

Income statement begins with the total revenue generated from sales of goods or services. It follows the revenue recognition principle, ensuring that revenue is recorded when earned, regardless of when cash is received. This feature provides a clear picture of a company’s income generation activities.

  1. Expense Categorization

Expenses are categorized into various types, including cost of goods sold (COGS), operating expenses, and non-operating expenses. This categorization allows stakeholders to analyze the types of costs incurred in generating revenue, helping identify areas for cost control and operational efficiency.

  1. Gross Profit Calculation

Income statement calculates gross profit by subtracting the cost of goods sold from total revenue. This figure reflects the profitability of core business operations before accounting for other expenses. Gross profit helps assess how efficiently a company is producing and selling its products.

  1. Operating Income

Operating income is derived from subtracting operating expenses from gross profit. It indicates how much profit a company generates from its regular business operations, excluding non-operating income and expenses. This metric is essential for understanding the performance of the company’s core activities.

  1. Net Income or Loss

Income statement concludes with net income or loss, calculated by subtracting total expenses (including taxes and interest) from total revenue. This figure represents the company’s overall profitability for the period and is a critical indicator of financial performance, influencing investor decisions and business strategies.

  1. Time Period Specificity

Income statement covers a specific accounting period, such as a month, quarter, or year. This feature allows for comparative analysis over different periods, enabling stakeholders to assess trends in revenue, expenses, and profitability, thus informing future financial planning and decision-making.

Components of Income Statement:

  1. Revenue (Sales)

This is the total amount earned from selling goods or services before any expenses are deducted. It includes both cash and credit sales. Revenue is the starting point of the income statement and indicates the effectiveness of a company’s sales strategy.

  1. Cost of Goods Sold (COGS)

COGS represents the direct costs attributable to the production of goods sold during the period. This includes costs such as materials, labor, and overhead directly tied to production. It helps determine the gross profit by subtracting COGS from total revenue, indicating how efficiently a company is producing its products.

  1. Gross Profit

Gross profit is calculated by subtracting COGS from total revenue. It reflects the profitability of a company’s core business operations. A higher gross profit margin indicates better control over production costs relative to revenue.

  1. Operating Expenses

Operating expenses include all costs incurred in running the business that are not directly tied to production. This can include selling, general, and administrative expenses (SG&A), such as salaries, rent, utilities, and marketing costs. Operating expenses are deducted from gross profit to calculate operating income, providing insight into how efficiently a company is managing its overhead.

  1. Operating Income

Operating income is derived by subtracting operating expenses from gross profit. It reflects the profit generated from regular business operations. This metric indicates the company’s ability to generate profit from its core activities, excluding non-operating income and expenses.

  1. Other Income and Expenses

This section includes non-operating income (e.g., interest income, gains from asset sales) and non-operating expenses (e.g., interest expense, losses from asset sales). These items provide additional context to overall profitability, reflecting the impact of activities not directly related to the core business.

  1. Income Tax Expense

This represents the estimated taxes owed on the income generated during the period. It is based on the applicable tax rates and regulations. Accounting for income tax expense allows for a clearer understanding of net income after tax obligations.

  1. Net Income (Net Profit or Loss)

Net income is the final figure on the income statement, calculated by subtracting total expenses (including taxes) from total revenue. It represents the overall profitability of the company. Net income is a crucial indicator of a company’s financial health and performance, influencing investor decisions and management strategies.

Example of Income Statement:

Simple Income Statement presented in a table format for a fictional company, ABC Corporation, for the year ended December 31, 2024.

Income Statement For the Year Ended December 31, 2024
Revenue
Sales Revenue $500,000
Total Revenue $500,000
Cost of Goods Sold (COGS)
Opening Inventory $50,000
Add: Purchases $200,000
Less: Closing Inventory ($40,000)
Cost of Goods Sold $210,000
Gross Profit $290,000
Operating Expenses
Selling Expenses $50,000
Administrative Expenses $40,000
Depreciation Expense $20,000
Total Operating Expenses $110,000
Operating Income $180,000
Other Income and Expenses
Interest Income $5,000
Interest Expense ($10,000)
Total Other Income/Expenses ($5,000)
Income Before Tax $175,000
Income Tax Expense ($35,000)
Net Income $140,000

Explanation of Key Figures:

  • Total Revenue: The total sales generated by the company.
  • Cost of Goods Sold (COGS): Direct costs associated with the production of goods sold during the period.
  • Gross Profit: Revenue minus COGS, indicating profitability from core operations.
  • Operating Expenses: Costs incurred in running the business that are not directly tied to production.
  • Operating Income: Gross profit minus operating expenses, reflecting profit from core operations.
  • Other Income and Expenses: Non-operating items that affect overall profitability.
  • Net Income: The final profit after all expenses and taxes, representing the company’s overall profitability.
Management Notes

Bills book

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Known as a B/P book, bills payable book is a subsidiary or secondary book of accounting where all bills of exchange, which are payable by the business, are recorded. The total value of all the bills payable for an accounting period is transferred to the books of accounts.

Where the number of bills received or bills issued is large, it would lead to saving of time if, instead of journalizing each receipt of bill or issue of bill, we were to maintain suitable registers (or books) and record the transactions there. Two books would be required one for bills received and another for bills issued. The rulings for the two books are given below.

The book will be totaled monthly. In case of the Bills Receivable Book, the total of the amount column will be posted to the debit of the Bills Receivable Account. The accounts of the parties from whom the bills are received will be credited with the amounts appearing against their names.

In case of the Bills Payable Book, the total of the amount column will be posted to the credit of the Bills Payable Account and the accounts of the parties who drew the bills (or at whose request the bills were accepted) will be debited. It must be remembered that in the case of other transactions relating to bills, journal entries will have to be passed with the only exception of discounting.

When a bill is discounted, the entry will be made on the debit side of the Cash Book the amount received being entered in the bank column and the amount of the discount being entered in the discount column. In the case of endorsement in favour of a creditor or for dishonour, the entry concerned will be through the journal.

In a mid to large sized business where the number of bills exchanging hands is large in number, it is tough to journalize all bills drawn. All such bills are entered in an accounting ERP or a register depending on the business, furthermore, all these entries are transferred to the respective ledger accounts at a regular interval, often monthly.

A bill receivable for a “drawer” is a bill payable for a “drawee”. Bills payable account will usually have a credit balance, as it is supposed to be paid at maturity, it acts as a liability for the business. Generally, every bill has a 3-day grace period.

Sample Format of a B/P Book

The person, who draws the bill of exchange, is called a “drawer” and the customer, on whom it is drawn, is called a “drawee” or an “acceptor”.

 S. No. Date of Bill Bill No. Drawer Payee Terms Date of Maturity Amt. Remarks
                 

Management Notes

Double Entry System of Book-Keeping, Features, Example

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Double-entry System is an accounting method that requires every financial transaction to be recorded in at least two accounts, ensuring that the accounting equation (Assets = Liabilities + Equity) remains balanced. Each transaction involves a debit entry in one account and a corresponding credit entry in another, reflecting the dual effect of the transaction. This system enhances accuracy and accountability, making it easier to detect errors and fraud. It provides a comprehensive view of a company’s financial activities, facilitating effective financial reporting and decision-making.

Features of Double entry system:

  1. Dual Effect Principle

Every transaction in the double-entry system has a dual effect on the accounting equation. For instance, when a business makes a sale, it increases both its cash (or accounts receivable) and its revenue. This principle ensures that for every debit entry, there is an equal and corresponding credit entry, maintaining the balance of the accounts.

  1. Debits and Credits

The double-entry system uses two fundamental terms: debits and credits. A debit increases asset or expense accounts and decreases liability or equity accounts, while a credit does the opposite. This system helps in tracking how transactions affect different accounts, ensuring accurate financial reporting.

  1. Account Balance Maintenance

By recording each transaction in two accounts, the double-entry system helps maintain accurate account balances. This balance is crucial for preparing financial statements and ensuring that the financial position of the business is accurately reflected.

  1. Error Detection

The double-entry system enhances the ability to detect errors and discrepancies. Since every transaction has a corresponding entry, if the total debits do not equal the total credits, it indicates an error in the recording process. This feature aids accountants in identifying and correcting mistakes, ensuring the integrity of financial records.

  1. Comprehensive Financial Statements

This system facilitates the preparation of comprehensive financial statements, such as the balance sheet, income statement, and cash flow statement. By providing a complete view of all transactions, it allows for more detailed analysis of the company’s financial performance and position.

  1. Historical Record Keeping

The double-entry system provides a systematic way of maintaining historical records of all transactions. Each entry reflects the nature and effect of a transaction, allowing businesses to trace their financial history over time. This feature is essential for audits, tax preparation, and financial analysis.

  1. Flexibility and Adaptability

The double-entry system is flexible and can be adapted to various types of businesses, regardless of size or industry. It can accommodate different types of transactions and can be integrated with accounting software, making it suitable for modern business practices.

  1. Improved Accountability

By maintaining detailed records of all transactions, the double-entry system enhances accountability within the organization. It provides a clear audit trail, allowing stakeholders to track financial activities and hold individuals accountable for their financial decisions.

Example of Double entry System:

Date Transaction Description Account Title

Debit (Dr)

Credit (Cr)

 Explanation
YYYY-MM-DD Owner invests cash into the business Cash $10,000 – Increases cash and owner’s equity.
YYYY-MM-DD Purchase of equipment for cash Equipment $5,000 – Increases equipment and decreases cash.
YYYY-MM-DD Sale of goods for cash Cash $3,000 – Increases cash and sales revenue.
YYYY-MM-DD Payment to supplier for inventory purchased Accounts Payable – $2,000 Decreases accounts payable and cash.
YYYY-MM-DD Receipt of cash for services rendered Cash $1,500 – Increases cash and service revenue.
YYYY-MM-DD Accrual of salary expense Salary Expense $2,000 – Increases salary expense and accrues liability.
YYYY-MM-DD Payment of accrued salaries Salaries Payable $2,000 – Decreases salaries payable and cash.
YYYY-MM-DD Payment of utility bill Utilities Expense $300 – Increases utilities expense and decreases cash.
YYYY-MM-DD Sale of goods on credit Accounts Receivable $4,000 – Increases accounts receivable and sales revenue.
YYYY-MM-DD Collection from a customer on account Cash $1,000 – Increases cash and decreases accounts receivable.

Explanation of the Example Transactions:

  1. Owner’s Investment: When the owner invests cash, it increases both the cash account and the owner’s equity.
  2. Purchase of Equipment: Buying equipment increases the equipment account and decreases cash.
  3. Cash Sale: Cash received from sales increases the cash account and recognizes sales revenue.
  4. Payment to Supplier: Paying off accounts payable reduces liabilities and cash.
  5. Service Revenue: Cash received for services rendered increases cash and revenue.
  6. Accrual of Salaries: Salaries incurred but not yet paid increase salary expense and create a liability.
  7. Payment of Accrued Salaries: When salaries are paid, cash decreases, and the liability is cleared.
  8. Utility Payment: Paying the utility bill increases expenses and decreases cash.
  9. Sale on Credit: Sales made on credit create an account receivable, increasing both accounts receivable and revenue.
  10. Collection from Customer: Collecting from a customer decreases accounts receivable and increases cash.
Management Notes

Asian Infrastructure Investment Bank (AIIB) Objective, Functions, Features, Membership, Shareholding, Criticism

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The Asian Infrastructure Investment Bank (AIIB) is a multilateral development bank that aims to improve economic and social outcomes in Asia. The bank currently has 103 members as well as 21 prospective members from around the world. The bank started operation after the agreement entered into force on 25 December 2015, after ratifications were received from 10 member states holding a total number of 50% of the initial subscriptions of the Authorized Capital Stock.

The United Nations has addressed the launch of AIIB as having potential for “scaling up financing for sustainable development” and to improve the global economic governance. The starting capital of the bank was US$100 billion, equivalent to ​2⁄3 of the capital of the Asian Development Bank and about half that of the World Bank.

The bank was proposed by China in 2013 and the initiative was launched at a ceremony in Beijing in October 2014. It received the highest credit ratings from the three biggest rating agencies in the world, and is seen as a potential rival to the World Bank and IMF.

Objective

  • Promoting sustainable economic development, creating wealth and augmenting infrastructure connectivity in Asia by investing in infrastructure & other productive sectors.
  • Fostering regional partnership & cooperation to address developmental challenges by working in tandem with other bilateral and multilateral developmental institutions.
  • Enhancing investment in private & public capital for development purposes.
  • Using the resources at its disposal for funding development in the region, including projects that will contribute to the balanced economic growth of the region.
  • Promoting private investment in enterprises, activities and projects contributing to economic development in the region wherever private capital is not available.

Membership

The 57 Prospective Founding Members can become Founding Members through:

  • Signing the Articles of Agreement in 2015
  • Ratifying the Articles of Agreement in 2015 or 2016

All Prospective Founding Members have signed the Articles, 52 of which have ratified them, comprising 92% of the shares of all PFM. The formal actions towards becoming a Founding Member are shown below, as well as the percentage of the votes and of the shares, in the event all prospective founding states become parties, and no other members are accepted.

In March 2017, 13 other states were granted prospective membership: 5 regional (Afghanistan, Armenia, Fiji, Timor Leste and Hong Kong, China) and 8 non-regional: Belgium, Canada, Ethiopia, Hungary, Ireland, Peru, Sudan and Venezuela. In May 2017, 7 states were granted prospective membership: 3 regional (Bahrain, Cyprus, Samoa) and 4 non-regional (Bolivia, Chile, Greece, Romania). In June 2017, 3 other states were granted prospective membership: 1 regional (Tonga) and 2 non-regional (Argentina, Madagascar). In 2018, 7 other states were granted prospective membership: 1 regional (Lebanon) and 6 non-regional (Algeria, Ghana, Libya, Morocco, Serbia, Togo). In 2019, 7 other states were granted prospective membership: 7 non-regional (Djibouti, Rwanda, Benin, Côte d’Ivoire, Guinea, Tunisia, Uruguay). They become members after finishing their domestic procedures. As of 16 May 2020, the total number of countries approved for membership of AIIB is 103 (Regional Members: 45, Non-Regional Members: 38, Prospective Members: 20).

Significance of AIIB:

The United Nations has addressed the launch of AIIB as having potential for “scaling up financing for sustainable development” for the concern of global economic governance. The capital of the bank is $100 billion, equivalent to ​2⁄3 of the capital of the Asian Development Bank and about half that of the World Bank.

Various organs of AIIB:

Board of Governors: The Board of Governors consists of one Governor and one Alternate Governor appointed by each member country. Governors and Alternate Governors serve at the pleasure of the appointing member.

Board of Directors: Non-resident Board of Directors is responsible for the direction of the Bank’s general operations, exercising all powers delegated to it by the Board of Governors. This includes approving the Bank’s strategy, annual plan and budget; establishing policies; taking decisions concerning Bank operations; and supervising management and operation of the Bank and establishing an oversight mechanism.

International Advisory Panel: The Bank has established an International Advisory Panel (IAP) to support the President and Senior Management on the Bank’s strategies and policies as well as on general operational issues. The Panel meets in tandem with the Bank’s Annual Meeting, or as requested by the President. The President selects and appoints members of the IAP to two-year terms. Panelists receive a small honorarium and do not receive a salary. The Bank pays the costs associated with Panel meetings.

The Authorized Capital Stock of the bank is 100 billion US Dollars, divided into 1 million shares of 100 000 dollars each. Twenty percent are paid-in shares (and thus have to be transferred to the bank), and 80% are callable shares. The allocated shares are based on the size of each member country’s economy (calculated using GDP Nominal (60%) and GDP PPP (40%)), whether they are an Asian or Non-Asian Member, and the number of shares determines the fraction of authorized capital in the bank. Of the prospective founding members, three states decided not to subscribe to all allocated shares: Malaysia, Portugal and Singapore, resulting in 98% of available shares to be subscribed.

Three categories of votes exist: basic votes, share votes and Founding Member votes. The basic votes are equal for all members and constitute 12% of the total votes, while the share votes are equal to the number of shares. Each Founding Member furthermore gets 600 votes. An overview of the shares, assuming when all 57 Prospective Founding Members have become Founding Members is shown below (values in bold do not depend on the number of members):

Vote Type % of Total Votes Total Votes Vote per Member China
(Largest PFM)		 Maldives
(Smallest PFM)
Basic votes 12 138,510 2,430 2,430 2,430
Share votes 85 981,514 Varies 297,804 72
Founding Member votes 3 34,200 600 600 600
Total 100 1,154,224 varies 300,834 (26.1%) 3,102 (0.3%)

Criticism

One of the first criticisms that the AIIB faced was based not on the actions of the new institution itself but rather on general criticisms of China’s reputation regarding infrastructure projects infrastructure. Critics noted that Chinese infrastructure projects have a record of displacing local populations, damaging the environment, and corruption. Therefore, they feared that a Chinese led infrastructure bank would simply utilize foreign capital to fund reckless ventures that endanger locals to the benefit of their own interests. 

In discussing the AIIB during a joint press conference in 2015, Japanese Prime Minister Shinzo Abe and U.S. President Barack Obama echoed these worries, and also referenced the sustainability and transparency of the project despite repeated statements that they were not against the idea of a Chinese-led development bank. This criticism came from scepticism about the rigor of the not yet finalized guidelines that would regulate the organization’s operations in the future.

Another criticism came after other Western countries broke with the U.S. and joined the AIIB. U.S. critics accused European governments, especially the U.K., of ‘accommodating’ China. This fear was based on the ease with which the U.K. joined the AIIB. Unlike U.S. allies South Korea and Australia, the U.K. joined the AIIB without negotiating pre-conditions. In the eyes of U.S. critics, this suggested to the rest of the world that the U.K. was willing to recognize Chinese unilateral rule in the bank, and follow it too.

Management Notes

IMF Vs. IBRD

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IMF

The International Monetary Fund (IMF) is an international organization, headquartered in Washington, D.C., consisting of 190 countries working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world while periodically depending on the World Bank for its resources.

Formed in 1944 at the Bretton Woods Conference primarily by the ideas of Harry Dexter White and John Maynard Keynes, it came into formal existence in 1945 with 29 member countries and the goal of reconstructing the international payment system. It now plays a central role in the management of balance of payments difficulties and international financial crises. Countries contribute funds to a pool through a quota system from which countries experiencing balance of payments problems can borrow money. As of 2016, the fund had XDR 477 billion (about US$667 billion).

Through the fund and other activities such as the gathering of statistics and analysis, surveillance of its members’ economies, and the demand for particular policies, the IMF works to improve the economies of its member countries. The organization’s objectives stated in the Articles of Agreement are: to promote international monetary co-operation, international trade, high employment, exchange-rate stability, sustainable economic growth, and making resources available to member countries in financial difficulty. IMF funds come from two major sources: quotas and loans. Quotas, which are pooled funds of member nations, generate most IMF funds. The size of a member’s quota depends on its economic and financial importance in the world. Nations with larger economic importance have larger quotas. The quotas are increased periodically as a means of boosting the IMF’s resources in the form of special drawing rights.

According to the IMF itself, it works to foster global growth and economic stability by providing policy advice and financing the members by working with developing countries to help them achieve macroeconomic stability and reduce poverty. The rationale for this is that private international capital markets function imperfectly and many countries have limited access to financial markets. Such market imperfections, together with balance-of-payments financing, provide the justification for official financing, without which many countries could only correct large external payment imbalances through measures with adverse economic consequences. The IMF provides alternate sources of financing.

IBRD

The International Bank for Reconstruction and Development (IBRD) is an international financial institution, established in 1944 and headquartered in Washington, D.C., United States, that is the lending arm of World Bank Group. The IBRD offers loans to middle-income developing countries. The IBRD is the first of five member institutions that compose the World Bank Group. The initial mission of the IBRD in 1944, was to finance the reconstruction of European nations devastated by World War II. The IBRD and its concessional lending arm, the International Development Association (IDA), are collectively known as the World Bank as they share the same leadership and staff.

Following the reconstruction of Europe, the Bank’s mandate expanded to advancing worldwide economic development and eradicating poverty. The IBRD provides commercial-grade or concessional financing to sovereign states to fund projects that seek to improve transportation and infrastructure, education, domestic policy, environmental consciousness, energy investments, healthcare, access to food and potable water, and access to improved sanitation.

The IBRD is owned and governed by its 189 member states, with each country represented on the Board of Governors. The IBRD has its own executive leadership and staff which conduct its normal business operations. The Bank’s member governments are shareholders which contribute and have the right to vote on its matters. In addition to contributions from its member nations, the IBRD acquires most of its capital by borrowing on international capital markets through bond issues at a preferred rate because of its AAA credit rating.

IMF Vs. IBRD

  1. Purpose of Loan:

The main purpose of loan provided by I.M.F. is to promote exchange stability and to make the balance of payments deficits; where-as the I.B.R.D. provides loans to developing countries for reconstruction and development by facilitating the investment of capital for productive purpose mainly to develop the infrastructure for the development.

  1. Period of Loan:

The International Monetary Fund provides medium-term loans to the developing member countries for a period of ten years; where-as the World Bank offers long-term loans for developing countries for a period of fifty years.

  1. Terms of the Loan:

I.M.F. as a creditor institution has always insisted upon fulfilment of certain conditions by the debtor countries. Thus, I.M.F. loan is on stringent terms and it insists always on an agreed programme of action to eliminate within a reasonable time all the causes responsible for the dis-equilibrium in the balance of payments. There is no such conditionality clause in I.B.R.D. Loan.

  1. Levies service charges and high rate of interests:

The IMF advances loans to member countries and levies service charges at 0.5 per cent on purchase of currencies other than purchases from reserve bank tranche. In addition, fund levies charges on balances of member currencies determined every year. Loan from I.B.R.D. bears a high rate of interest. Its rate of interest is 1/2 to 1 per cent above the cost of borrowing during the preceding six months but is below the market rates.

  1. Parties of the Loan:

I.M.F. provides loans only to the governments of member countries which have subscribed their quota as fixed by the fund; from time to time in terms of S.D.Rs. (Special Drawing Rights) and members over currencies. No other party except the member Government is authorised to borrow from the fund.

The I.B.R.D. (World Bank) on the other hand may advance loans to Governments or to any of their political sub-divisions or even to private business or agricultural enterprises in the territories of members. If it is not a loan to the Government the Bank asks the member Government to guarantee the repayment of loan. But I.B.R.D. meets only the foreign exchange component-of the project.

  1. Borrowings not from Other Resources:

I.M.F. advances loans to member countries only out of the fund’s own resources. It does not borrow money from other sources. But I.B.R.D. lends fund directly either from its own resources or from the funds it borrows from the market. The I.B.R.D. may guarantee the loans advances by other or it may participate in loans whereas I.M.F. cannot do so.

It neither guarantees nor does it contribute to the capital of private or other institutions. Thus, these two international lending institutions aim at assisting the developing countries. IMF’s. main function is to stabilise the exchange value of currencies and meet the balance of payments problems whereas I.B.R.D. advances loans for the development program­mes in member countries mainly to develop infrastructural facilities. It lends to member country Governments or to any private firm on the guarantee of the Government of that country.

Management Notes

New Development Bank (NDB) Objective, Functions, Features, Membership, Shareholding, Criticism

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The New Development Bank (NDB), formerly referred to as the BRICS Development Bank, is a multilateral development bank established by the BRICS states (Brazil, Russia, India, China and South Africa). According to the Agreement on the NDB, “the Bank shall support public or private projects through loans, guarantees, equity participation and other financial instruments.” Moreover, the NDB “shall cooperate with international organizations and other financial entities, and provide technical assistance for projects to be supported by the Bank.”

The initial authorized capital of the bank is $100 billion divided into 1 million shares having a par value of $100,000 each. The initial subscribed capital of the NDB is $50 billion divided into paid-in shares ($10 billion) and callable shares ($40 billion). The initial subscribed capital of the bank was equally distributed among the founding members. The Agreement on the NDB specifies that every member will have one vote no one would have any veto powers.

NDB is currently headquartered in BRICS Tower (former Oriental Financial Centre) in Shanghai The bank is headquartered in Shanghai, China. The first regional office of the NDB is in Johannesburg, South Africa.

Objective

The bank aims to contribute to the development plans established nationally through projects that are socially, environmentally and economically sustainable. Taking this into account, the main objectives of the NDB can be summarized as follows

  • Promote infrastructure and sustainable development projects with a significant development impact in member countries.
  • Establish an extensive network of global partnerships with other multilateral development institutions and national development banks.
  • Build a balanced project portfolio giving a proper respect to their geographic location, financing requirements and other factors.

Functions

The New Development Bank will mobilise resources for infrastructure and sustainable development projects in BRICS and other emerging economies and developing countries, to supplement existing efforts of multilateral and regional financial institutions for global growth and development.

  • Fostering development of member countries
  • Supporting economic growth
  • Promoting competitiveness and facilitating job creation
  • Building a knowledge sharing platform among developing countries

Membership

The Agreement on the New Development Bank entered into force in July 2015, with the official declaration of all five states that have signed it. The five founding members of the Bank include Brazil, Russia, India, China and South Africa.

Bank’s Articles of Agreement specify that all members of the United Nations could be members of the bank, however the share of the BRICS nations can never be less than 55% of voting power.

Expanding the NDB’s membership is considered by some experts to be crucial to its long-term development by helping boost the bank’s business growth.

According to the Bank’s General Strategy: 2017–2021, the NDB plans to expand membership gradually so as not to overly strain its operational and decision-making capacity.

Shareholding

According to Articles of Agreement of the New Development Bank, the initial authorized capital of the bank is divided into 1 million shares, having a par value of $100,000. Each founding member of the bank has initially subscribed 100,000 shares, in a total of $10 billion, of which 20,000 shares correspond to paid-in capital, in a total of $2 billion and 80,000 shares correspond to callable capital, in a total of $8 billion.

Management Notes

Subsidiaries of World Bank

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It comprises two institutions: The International Bank for Reconstruction and Development (IBRD), and the International Development Association (IDA).

World Bank Group

The World Bank Group is an extended family of five international organizations, and the parent organization of the World Bank, the collective name given to the first two listed organizations, the IBRD and the IDA:

  • International Bank for Reconstruction and Development (IBRD)
  • International Development Association (IDA)
  • International Finance Corporation (IFC)
  • Multilateral Investment Guarantee Agency (MIGA)
  • International Centre for Settlement of Investment Disputes (ICSID)

The World Bank’s activities are focused on developing countries, in fields such as, human development (e.g., education, health), agriculture and rural development (e.g., irrigation, rural services), environmental protection (e.g. pollution reduction, establishing and enforcing regulations), infrastructure (e.g. loads, urban regeneration and electricity) and governance (e.g. anti-corruption, legal institutions development).

The IBRD and IDA provide loans at preferential rates to member countries, as well as grants to t e poorest countries. Loans or grants for specific projects are often linked to wider policy changes in the sector or the economy.

For example, a loan to improve coastal environmental management may be linked to development of new environment institutions at national and local levels and to implementation of new regulations to limit pollution. The activities of the IFC and MIGA include investment in the private sector and providing insurance respectively.

Organizational Structure:

Together with four affiliated agencies created between 1956 and 1988, the IBRD is part of the World Bank Group. The Group’s headquarters in Washington, D.C. It is an international organization owned by member governments; although it makes profits, these profits are used to support continued efforts in poverty reduction.

Technically the World Bank is part of the United Nations system, but its governance structure is different. Each institution in the World Bank Group is owned by its member governments, which subscribe to its basic share capital, with votes proportional to shareholding. Membership gives certain voting rights that are the same for all countries but there are also additional votes which depend on financial contributions to the organization.

As a result, the World Bank is controlled primarily by developed countries, while clients have almost exclusively been developing countries. Some critics argue that a different governance structure would take greater account of developing countries’ needs.

As of November 1, 2006, the United States held 16.4% of total votes, Japan 7.9%, Germany 4.5% and the United Kingdom and France each held 4.3%. As major decisions require an 85% super-majority, the US can block any such major change.

World Bank Group Agencies:

The World Bank Group consists of:

  1. The International Bank of Reconstruction and Development (IBRD), established in 1945, which provides debt financing on the basis of sovereign guarantees;
  2. The International Financial Corporation (IFC), established in 1956, which provides various forms of financing of without sovereign guarantees, primarily to the private sector;
  3. The International Development Association (IDA), established in 1960, which provides concessional financing (interest-free loans or grants), usually with sovereign guarantees;
  4. The Multilateral Investment Guarantee Agency (MIGA), established in 1988, which provides insurance against certain types of risks, including political risk, primarily to the private sector;
  5. The International Centre for Settlement of Investment Disputes (ICSID), established in 1966, which works with governments to reduce investment risk.

The term “World Bank” generally refers to the IBRD and IDA, whereas the World Bank Group is used to refer to the institutions collectively.

Governments can choose which of these agencies they sign up to individually. The IBRD has 185 member governments and other institutions have between 140 and 176 members. The institutions of the World Bank Group are all run by a Board of Governors meeting once a year. Each member country appoints a governor, generally its Minister of Finance.

On a daily basis the World Bank Group is run by a Board of 24 Executive Directors to whom the governors have delegated certain powers. Each Director represents either one country (for the largest countries), or a group of countries. Executive Directors are appointed by their respective governments or the constituencies.

The agencies of the World Bank are each governed by their Articles of Agreement that serve as the legal and institutional foundation for all of their work.

The Bank also serves as one of several implementing agencies for the UN Global Environment Facility (GEF).

Management Notes

Trans-Pacific Partnership (TPP) Objective, Functions, Features, Membership, Shareholding, Criticism

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The Trans-Pacific Partnership (TPP), also called the Trans-Pacific Partnership Agreement, was a proposed trade agreement between Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, Vietnam, and the United States signed on 4 February 2016. After the newly elected US president Donald Trump withdrew the US signature from TPP in January 2017, the agreement could not be ratified as required and did not enter into force. The remaining countries negotiated a new trade agreement called Comprehensive and Progressive Agreement for Trans-Pacific Partnership, which incorporates most of the provisions of the TPP and which entered into force on 30 December 2018.

The TPP began as an expansion of the Trans-Pacific Strategic Economic Partnership Agreement (TPSEP or P4) signed by Brunei, Chile, New Zealand and Singapore in 2005. Beginning in 2008, additional countries joined the discussion for a broader agreement: Australia, Canada, Japan, Malaysia, Mexico, Peru, the United States, and Vietnam, bringing the negotiating countries to twelve. In January 2017, the United States withdrew from the agreement. The other 11 TPP countries agreed in May 2017 to revive it and reached agreement in January 2018. In March 2018, the 11 countries signed the revised version of the agreement, called Comprehensive and Progressive Agreement for Trans-Pacific Partnership. After ratification by six of them (Australia, Canada, Japan, Mexico, New Zealand and Singapore), the agreement came into force for those countries on 30 December 2018.

The original TPP contained measures to lower both non-tariff and tariff barriers to trade, and establish an investor-state dispute settlement (ISDS) mechanism. The U.S. International Trade Commission, the Peterson Institute for International Economics, the World Bank and the Office of the Chief Economist at Global Affairs Canada found the final agreement would, if ratified, lead to net positive economic outcomes for all signatories, while an analysis using an alternative methodology by two Tufts University economists found the agreement would adversely affect the signatories. Many observers have argued the trade deal would have served a geopolitical purpose, namely to reduce the signatories’ dependence on Chinese trade and bring the signatories closer to the United States.

TPP Pros

The original TPP would have boosted U.S. exports and economic growth. This would have created more jobs and prosperity for the 12 countries involved. It would have increased exports by $305 billion per year by 2025.13 U.S. exports would increase by $123.5 billion. It would benefit the machinery, auto, plastics, and agriculture industries.

It would have increased exports by removing 18,000 tariffs placed on U.S. exports to the other countries. The United States has already withdrawn 80% of these tariffs on imports.14 The TPP would have evened the playing field.

The agreement would have added $223 billion a year to incomes of workers in all the countries, with $77 billion going to U.S. workers.

In 2017, the estimated trade value among all countries was $1.1 trillion.16 It would have been smaller than the TTIP.17 That’s the other large regional trade agreement being negotiated. It’s between the United States and the European Union. Talks went into limbo when Trump took office.18

Notably, the TPP excluded China. That was deliberate. It was meant to balance the trade dominance of both China and India in East Asia. The TPP would have given the United States an excuse to intervene in trade disputes in the oil-rich South China Sea. China has been beefing up its military to back its incursions in that area.

TPP Cons

Most of the gains in income would have gone to workers making more than $87,000 a year.19 Free trade agreements contribute to income inequality in high-wage countries. They promote cheaper goods from low-wage countries.

This would have been particularly true for the TPP because it protected patents and copyrights. Higher-paid owners of intellectual property would have received more of the income gains.

The agreement regarding patents would have reduced the availability of cheap generics. That could have raised the cost of many drugs. Competitive business pressures would have reduced the incentives in Asia to protect the environment. Last but not least, the trade agreement could have superseded financial regulations.

Membership

Twelve countries participated in negotiations for the TPP: the four parties to the 2005 Trans-Pacific Strategic Economic Partnership Agreement and eight additional countries. All twelve signed the TPP on 4 February 2016. The agreement would have entered into force after ratification by all signatories, if this had occurred within two years.

If the agreement had not been ratified by all before 4 February 2018, it would have entered into force after ratification by at least 6 states which together have a GDP of more than 85% of the GDP of all signatories. The withdrawal of the United States from the agreement in January 2017 effectively ended any prospect of the agreement entering into force. In response the remaining parties successfully negotiated a new version of the agreement that lacked the 85% GDP threshold, the CPTPP, which entered into force in December 2018.

Management Notes

Common Markets, Economic Unions, Monetary Unions

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Common Markets

A common market is a formal agreement where a group is formed among several countries in which each member country adopts a common external tariff. In a common market, countries also allow free trade and free movement of labor and capital among the members in the group. This trade arrangement is aimed at providing improved economic benefits to all the members of the common market.

Conditions Required to be Defined as a Common Market

To be defined as a common market, the following conditions must be satisfied:

  • Tariffs, quotas, and all barriers regarding importing and exporting goods and services among members of the common market are eliminated.
  • Common trade restrictions such as tariffs on other countries are adopted by all members of the common market.
  • Production factors such as labour and capital are able to move freely without restriction among member countries.

Benefits of a Common Market

  1. Free movement of people, goods, services, and capital

In addition to the removal of tariffs among member countries, the key benefits of a common market include the free movement of people, goods, services, and capital. Therefore, a common market is often regarded as a “single market” as it allows the free movement of production factors without the obstruction created by national borders.

  1. Efficiency in production

For an economy, a common market facilitates efficiency among members – factors of production become more efficiently allocated, resulting in stronger economic growth. As the market becomes more efficient, inefficient companies eventually shut down due to fiercer competition.

Companies that remain typically benefit from economies of scale and increased profitability, and innovate more to compete in a more intensely competitive landscape.

Costs of a Common Market

  1. Less competitive countries may suffer

The transition to a common market comes with a few drawbacks. For one, companies that have previously been protected and subsidized by the government may struggle to remain afloat in a more competitive landscape. The migration of production factors to other countries may hinder the economic growth of the country they leave and lead to increased unemployment there.

  1. Trade diversion

Trade diversion occurs when efficient non-members are crowded out of the common market. Furthermore, a country may exhibit depressed wages if it faces an influx of migration of production factors where supply exceeds demand.

List of Common Markets:

  1. Andean Community (CAN)
  2. Caribbean Community Single Market (CARICOM)
  3. Central American Common Market (CACM)
  4. Economic and Monetary Community of Central Africa (CEMAC)
  5. European Economic Area (EEA) between the European Countries (EC), Norway, Iceland and Liechtenstein

Proposed Common Markets:

  1. Eurasian Economic Community (EAEC)
  2. Southern African Development Community (SADC)
  3. Southern Common Market (SCM)
  4. ASEAN Economic Community (AEC)
  5. African Economic Community (AEC)
  6. Gulf Cooperation Council (GCC)
  7. vii. North American Union (NAU)
  8. viii. Economic Community of West African States (ECOWAS)
  9. Economic Community of Central African States (ECCAS)
  10. South Asia Free Trade Agreement (SAFTA)

Economic Unions

An economic union is a type of trade bloc which is composed of a common market with a customs union. The participant countries have both common policies on product regulation, freedom of movement of goods, services and the factors of production (capital and labour) and a common external trade policy. When an economic union involves unifying currency, it becomes an economic and monetary union.

Purposes for establishing an economic union normally include increasing economic efficiency and establishing closer political and cultural ties between the member countries. Economic union is established through trade pact.

Additionally, the autonomous and dependent territories, such as some of the EU member state special territories, are sometimes treated as separate customs territory from their mainland state or have varying arrangements of formal or de facto customs union, common market and currency union (or combinations thereof) with the mainland and in regards to third countries through the trade pacts signed by the mainland state.

Proposed

  • African Economic Community (AEC) – proposed for 2023
  • Andean Community (CAN)
  • Arab Customs Union and Common Market – proposed for 2020
  • CANZUK
  • Central American Common Market (CACM)
  • Closer Economic Relations of Australia and New Zealand
  • East African Community (EAC): Extension of existing customs union proposed in 2015
  • Economic Community of Central African States (ECCAS)
  • Economic Community of West African States (ECOWAS)
  • Southern African Development Community (SADC) – proposed in 2015
  • Union of South American Nations (USAN)

List of economic unions

  • CARICOM Single Market and Economy
  • Central American Common Market: Common market since 1960, customs union since 2004.
  • Eurasian Economic Union: Customs union since 2010, common market since 2012.
  • European Union: Economic union between all EU member states, but those of them inside the Eurozone are also part of an economic and monetary union.
  • Gulf Cooperation Council

Monetary Unions

A currency union (also known as monetary union) is an intergovernmental agreement that involves two or more states sharing the same currency. These states may not necessarily have any further integration (such as an economic and monetary union, which would have, in addition, a customs union and a single market).

There are three types of currency unions:

  • Informal: Unilateral adoption of a foreign currency.
  • Formal: Adoption of foreign currency by virtue of bilateral or multilateral agreement with the monetary authority, sometimes supplemented by issue of local currency in currency peg regime.
  • Formal with common policy: Establishment by multiple countries of a common monetary policy and monetary authority for their common currency.

The theory of the optimal currency area addresses the question of how to determine what geographical regions should share a currency in order to maximize economic efficiency.

Advantages

  • A currency union helps its members strengthen their competitiveness in a global scale and eliminate the exchange rate risk.
  • Transactions among member states can be processed faster and their costs decrease since fees to banks are lower.
  • Prices are more transparent and so are easier to compare, which enables fair competition.
  • The probability of a monetary crisis is lower. The more countries there are in the currency union, the more they are resistant to crisis.

Disadvantages

  • The member states lose their sovereignty in monetary policy decisions. There is usually an institution (such as a central bank) that takes care of the monetary policy making in the whole currency union.
  • The risk of asymmetric “shocks” may occur. The criteria set by the currency union are never perfect, so a group of countries might be substantially worse off while the others are booming.
  • Implementing a new currency causes high financial costs. Businesses and also single persons have to adapt to the new currency in their country, which includes costs for the businesses to prepare their management, employees, and they also need to inform their clients and process plenty of new data.
  • Unlimited capital movement may cause moving most resources to the more productive regions at the expense of the less productive regions. The more productive regions tend to attract more capital in goods and services, which might avoid the less productive regions.

Convergence and Divergence

Convergence in terms of macroeconomics means that countries have a similar economic behaviour (similar inflation rates and economic growth). It is easier to form a currency union for countries with more convergence as these countries have the same or at least very similar goals. The European Monetary Union (EMU) is a contemporary model for forming currency unions. Membership in the EMU requires that countries follow a strictly defined set of criteria (the member states are required to have specific rate of inflation, government deficit, government debt, long-term interest rates and exchange rate). Many other unions have adopted the view that convergence is necessary, so they now follow similar rules to aim the same direction.

Divergence is the exact opposite of convergence. Countries with different goals are very difficult to integrate in a single currency union. Their economic behaviour is completely different, which may lead to disagreements. Divergence is therefore not optimal for forming a currency union.

Management Notes

Customs and Monetary Unions

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A customs and monetary union are a type of trade bloc which is composed of a customs union and a currency union. The participant countries have both common external trade policy and share a single currency. Customs and monetary union are established through trade pact.

A customs union is a group of countries that abolish tariffs and import quotas between member nations and also adopt a common external tariff on imports from non-member countries. A monetary union is a group of countries that agree to share a common currency e.g., the Euro and operate with a common monetary and exchange rate policy.

Additionally, the autonomous and dependent territories, such as some of the EU member state special territories, are sometimes treated as separate customs territory from their mainland state or have varying arrangements of formal or de facto customs union, common market and currency union (or combinations thereof) with the mainland and in regards to third countries through the trade pacts signed by the mainland state.

Proposed

  • 2012 East African Community (EAC)
  • 2018 Common Market for Eastern and Southern Africa (COMESA)
  • Economic Community of Central African States (ECCAS)
  • Economic Community of West African States (ECOWAS)
  • Gulf Cooperation Council
  • 2023 African Economic Community (AEC)

List of customs and monetary unions

  • Economic and Monetary Union of the European Union (1999/2002) with the Euro for the Eurozone members
  • de facto San Marino – European Union
  • de facto Andorra – European Union
  • de facto Monaco – European Union
  • de facto Switzerland–Liechtenstein
  • de facto the OECS Eastern Caribbean Currency Union with the East Caribbean dollar in the CSME (2006)
  • Economic and Monetary Community of Central Africa (CEMAC)
  • West African Economic and Monetary Union (UEMOA)
  • de facto the Common Monetary Area (CMA) in the Southern Africa Customs Union (SACU)
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