EPFO APFC 2023 General Studies · Question 115 of 120

Correct — C, (c) Both 1 and 2. Both statements describe the financial dimension of globalization accurately, and neither contains any overstatement that would make it false. Statement 1 says that globalization has fuelled the spread of trans-border currencies, digital cash and global credit cards. Each of those three is a real and well-documented development. A trans-border currency is a national currency that circulates, is held and is used to settle transactions far outside the territory of the state that issues it: the United States dollar is the leading example, held as reserves by central banks everywhere, quoted as the price of oil and other commodities, and used directly as a means of payment in a number of countries; the euro plays a similar role in its neighbourhood. Deposits and loans denominated in one country's currency but booked in another country's banks are an entire market of their own. Digital cash is value held and transferred electronically rather than as notes and coin, and its spread from stored-value cards to mobile wallets and instant payment systems has been one of the defining monetary changes of the past three decades. Global credit cards are payment instruments issued under a handful of international card networks and accepted by merchants across borders, so that an instrument issued by a bank in one country settles a purchase in another. Statement 2 says that securities markets have gained a global dimension with the development of electronic round-the-world trading, and this too is accurate. Screen-based electronic trading replaced the trading floor on most major exchanges, and because the principal financial centres are spread across time zones, trading in globally held instruments runs almost continuously as Asian, European and American markets open in succession. Capital moves with it: foreign portfolio investors buy and sell on national exchanges, companies list their shares on more than one exchange, and depositary receipts allow a company to raise equity from investors abroad while the underlying shares remain with a custodian at home. India's own markets show all of this — screen-based trading replaced open outcry in the mid-1990s, foreign portfolio investment is now a standing feature of the equity market, and Indian companies have raised capital through American and Global Depositary Receipts. Since both statements are correct, the code that says so is option (c).

• (a)1 only — Accepting statement 1 while rejecting statement 2 means denying that securities markets have acquired a global dimension, and the denial is hard to sustain. The usual reasoning behind it is that stock exchanges are national institutions, licensed and regulated by national authorities, with listing rules and settlement systems of their own — all of which is true and none of which prevents the market from being global in its participants and its hours. Foreign portfolio investors trade on national exchanges; companies cross-list their securities on exchanges in more than one country; depositary receipt programmes let a company raise equity abroad against shares held by a custodian at home; and because London, New York, Tokyo, Singapore and Mumbai open in succession, an instrument held internationally is being priced somewhere for most of the twenty-four hours. Electronic trading is what made that possible, by removing the requirement that buyer and seller be physically present in the same room. The statement claims a global dimension, not the abolition of national markets.
• (b)2 only — Accepting statement 2 while rejecting statement 1 usually rests on a misreading of the phrase 'trans-border currencies'. Read as though it meant a single world currency, or a currency issued by some international authority, the statement looks plainly false, since no such currency exists in general circulation. But that is not what the term means. A trans-border currency is an ordinary national currency that has spread beyond the state that issues it — held as reserves, used to price internationally traded commodities, accepted as payment in third countries, and borrowed and lent in banking systems outside its home jurisdiction. On that reading the statement is straightforwardly true, and so are its other two limbs: digital cash and internationally accepted card networks are both ordinary features of modern payments. A second route to this option is doubting the phrase 'digital cash' as too dated or too loose; the term is used for electronically stored and transferred value generally, and its spread is not in question.
• (d)Neither 1 nor 2 — Rejecting both statements requires denying two of the most thoroughly documented features of contemporary finance at once, and it is the choice of a candidate who has decided that the statements sound like advocacy rather than description. They do read like a passage from a textbook chapter on globalization, and a healthy suspicion of sweeping claims is a good instinct in statement-set questions generally. But the instinct has to be checked against what the statements actually assert. Neither says that national currencies have disappeared, that all trading is electronic, or that capital moves entirely without restriction — India, for instance, still does not permit full convertibility of the rupee on the capital account. What they assert is that globalization has fuelled the spread of certain payment instruments and that securities markets have gained a global dimension. Both are modest claims about direction and both are correct.

Globalization is the growing interdependence of economies and societies across borders, and it is conventionally analysed in several dimensions: trade in goods and services, movement of capital, movement of labour, transfer of technology, and cultural and political integration. Its financial dimension is the one these statements address, and it has three visible components. The first is money itself becoming less tied to territory — national currencies circulating and being held far outside the issuing state, electronic value replacing notes and coin, and card networks and payment systems that settle a transaction wherever it occurs. The second is the integration of capital markets: cross-border portfolio investment, cross-listing of securities, depositary receipts, and electronic trading platforms that allow orders to be matched without regard to where the parties sit. The third is the growth of cross-border banking and of markets in instruments denominated in one country's currency but transacted in another's financial system. The enabling conditions were policy and technology together: the progressive liberalisation of capital accounts from the 1970s onwards, and the arrival of cheap computing and telecommunications. India's own opening began in earnest with the reforms of 1991, followed by the replacement of the Foreign Exchange Regulation Act by the Foreign Exchange Management Act in 1999, screen-based trading on the exchanges, and the admission of foreign institutional and portfolio investors. The process remains partial and deliberately so: the rupee is convertible on the current account but not fully on the capital account, which is the standing Indian qualification to any general statement about global finance.

The economy questions towards the end of this paper are drawn from the descriptive language of development and globalization rather than from technical economics, and this item is a clear example: the two statements read like sentences from a textbook chapter, and answering them requires recognising the vocabulary rather than modelling anything. That is worth knowing about how to prepare. The phrases that recur in such questions — trans-border currencies, digital cash, round-the-world trading, global value chains, footloose capital — are technical terms with settled meanings, and most wrong answers come from reading one of them in an everyday sense instead. Here the phrase at risk is 'trans-border currencies', which describes a national currency circulating beyond its home state and not a single global currency. The item also carries this paper's most-used option set, the code with one only, two only, both and neither, which appears on eleven of its questions. On a set of that kind the reliable routine is to decide each statement independently, write the two verdicts down and only then look for the matching code, because reading the options first invites the guess that a paper would not make both statements true. Two small points of printing: 'trans-border' and 'round-the-world' are broken across lines in the booklet, and the hyphens belong to the words rather than to the line breaks.

• A trans-border currency is a national currency held, circulated and used to settle transactions far outside the state that issues it. The United States dollar is the principal example — held as reserves worldwide, used to price internationally traded commodities and accepted as payment in a number of other countries — and the euro plays a comparable role in its region.
• Digital cash is value stored and transferred electronically rather than as notes and coin, and global credit cards are payment instruments issued under international card networks and accepted across borders. Both are ordinary features of modern payment systems and both spread with the liberalisation of cross-border financial activity.
• Securities markets acquired a global dimension through electronic trading, cross-listing, foreign portfolio investment and depositary receipts. Because the major financial centres lie in different time zones, trading in internationally held instruments runs almost continuously as Asian, European and American markets open in succession.
• Depositary receipts are the standard route by which a company raises equity abroad: the underlying shares are lodged with a custodian in the home country and a depositary bank abroad issues receipts against them to foreign investors. Indian companies have used American and Global Depositary Receipts for this purpose.
• India's financial opening is deliberately partial. The reforms of 1991, the replacement of the Foreign Exchange Regulation Act by the Foreign Exchange Management Act in 1999, screen-based trading on the exchanges and the admission of foreign portfolio investors all opened the market, but the rupee remains convertible on the current account and not fully convertible on the capital account.

• Reading 'trans-border currency' as a single world currency. The term describes an ordinary national currency circulating beyond its issuing state, and on that meaning the statement is plainly correct; on the other meaning it looks false, which is exactly how the mark is lost.
• Assuming that because exchanges are nationally licensed and regulated, securities markets cannot be global. National regulation and global participation coexist: foreign portfolio investors, cross-listing, depositary receipts and continuous round-the-world trading are all features of markets that remain nationally supervised.
• Rejecting a statement because it reads like advocacy. Neither statement claims that national currencies have vanished or that capital moves without restriction; both make modest claims about direction, and the modesty of the claim is what makes it correct.
• Choosing a code before evaluating the statements. On an eleven-question run of identical code options, the temptation is to reason about how many statements a paper is likely to make true; the only reliable method is to judge each statement on its own and then match the verdicts to a code.

Globalization appears in these papers as a descriptive rather than an analytical topic, and it comes in three recognisable forms. The commonest is a pair of statements about some aspect of it — finance, trade, technology, culture — with the four-option code, as here; the statements are usually drawn close to textbook wording and are usually both true, because the phenomena described are real and the difficulty lies in the vocabulary rather than in the claim. The second form asks what a named term means, where the terms tend to be the same handful: liberalisation, privatisation, globalization, outsourcing, capital account convertibility, foreign portfolio investment. The third asks about institutions and dates — which body does what, which reform came when, which agreement replaced which. All three reward a vocabulary list kept alongside a short chronology of India's own opening, and none of them rewards general reasoning about whether globalization is good or bad, which is never what is asked.

No directly related past PYQ was found.

• practice — not a real PYQ

  Which one of the following best describes a 'trans-border currency'?

  • (a)A single world currency issued by an international financial institution
  • (b)A national currency that is widely held and used outside the territory of the state that issues it
  • (c)A currency created by a central bank solely for the settlement of cross-border trade
  • (d)A unit of account used for barter between two countries without any money changing hands

  Answer(b) A national currency that is widely held and used outside the territory of the state that issues it — the United States dollar is the leading example, held as reserves by central banks worldwide, used to price internationally traded commodities and accepted as payment in several other countries. No single world currency of the kind described in the first option exists in general circulation, and mistaking the term for that is the usual error.

• practice — not a real PYQ

  Which one of the following instruments allows an Indian company to raise equity capital from investors outside India, with the underlying shares held by a custodian in India?

  • (a)Treasury bill
  • (b)Global Depositary Receipt
  • (c)Certificate of deposit
  • (d)Commercial paper

  Answer(b) Global Depositary Receipt — the company's shares are deposited with a domestic custodian, and a depositary bank abroad issues receipts against them which foreign investors buy and trade. A treasury bill is short-term government borrowing, a certificate of deposit is a negotiable receipt for a bank deposit and commercial paper is short-term unsecured corporate borrowing; none of the three raises equity or involves foreign investors as such.