Lecture 07:International economic

institutions

International economic institutions

• The international economy before 1945• Rebuilding the International Economy after

1945: Bretton Woods• The Bretton Woods institutions (the

International Monetary Fund, the World Bank)• Controversy: the Washington Consensus• IR theories and the international economy• Globalisation

The international economy, 1870-1914

• The first era of globalisation• The rapid growth of international trade• Relative economic stability• The central role of Britain and the Bank

of England• The Gold Standard and monetary

stability

Britain and the International Economy, 1870-1914

• London as the biggest source of capital for investment

• Britain as a major importer of raw material and foodstuffs

• The Bank of England and the maintenance of the Gold Standard

• Britain’s vested interest in supporting international economic stability

The First World War

• 10 million killed, another 10 million die in flu pandemic of 1918

• The first industrial war – all major economies put on a war footing

• Severe disruption of international trade patterns

• Britain, France and Germany weakened; only the USA emerges stronger

The 1920s

• Post-war reconstruction proves expensive and slow

• Painful adjustment to new borders and new realities

• Mutual distrust hinders economic cooperation

• Problems of war debts (Allies to the USA) and war reparations

Rebuilding the international economy

• Attempts to rebuild the Gold Standard• Britain, the London capital markets and

the Bank of England all weakened• The United States – the world’s leading

economic power, showed little interest in the international economy; was willing to provide short-term loans only

The Great Depression and after• In response to the crisis, governments

followed “beggar-thy-neighbour” policies• Competitive devaluations – making

currencies cheaper to compete for exports• Tariff barriers to discourage imports• Restrictions on foreign currency flows• Bilateral trade agreements• Autarky – economic self-sufficiency

The collapse of world trade

• The value of world trade fell by two-thirds between 1929 and 1933

• Economic consequences: the collapse of industries; long-term mass unemployment

• Social and political consequences: social unrest; political radicalisation and the rise of extremist parties

Wartime discussions

• After 1941, the British and Americans discussed the future of the International Economy

• Two major visions of the future, represented by the US Treasury Department White Plan and the UK’s John Maynard Keynes

• The US vision prevailed

The International Monetary Fund

• Created to build a framework for international economic cooperation

• Designed specifically to avoid a repetition of the disastrous policies that had contributed to the economic collapse of the 1930s

Initial aims

• To oversee the international monetary system – the system of exchange rates and international payments

• To ensure exchange rate stability and to promote the ending of exchange rate restrictions

The ‘Bretton Woods system’

• Members of the new IMF agreed to keep their exchange rates pegged to the US dollar (the US dollar was pegged to gold)

• Exchange rates could be adjusted to correct a “fundamental disequilibrium”, but only with the agreement of the IMF

Marshall Aid• From 1948, the United States Marshall

Plan gave Western Europe $13bn to guarantee recovery and to speed up the move towards the Bretton Woods system

• Stalin refused Marshall Aid for the Soviet Union and its satellites in Eastern Europe

• The international economy flourished as the world’s largest economy began to play a central role

A stable system

• The Bretton Woods system could not work fully until 1958, after the economic recovery of Western Europe was complete

• The system worked until 1971, when the USA suspended convertibility into gold

• Dollar gold standard abandoned in 1973

A return to instability

• Exchange rates have floated since 1973• The oil shocks of 1973 and 1979• The sovereign debt crisis of the 1980s• The global financial crisis of 2008

The IMF’s role

• The IMF’s main function is to provide temporary loans to help countries cope with liquidity crises (usually as a result of Balance-of-Payments problems)

• It can be controversial: it usually insists on tight monetary policies and austerity programmes as the price of assistance

The World Bank

• The other main creation of Bretton Woods• Began life as the International Bank for

Reconstruction and Development – designed to help countries rebuild after the most devastating war in history

• Specialises in long-term loans for infrastructure and strategic projects

More controversy

• The World Bank is also controversial for insisting on orthodox economic policies as the price of its assistance

• Such policies have often yielded mixed results• Joseph E Stiglitz, Senior Vice President at the

World Bank (1997-2000) and Nobel Laureate (2001) was fired for criticising the policies of the World Bank and the IMF

The Washington Consensus

• A term coined in 1990 to describe the package of measures the IMF and World Bank were recommending to Latin American countries at the time

• The term has become controversial: its creator – John Williamson – has argued that these are not simply neoliberal ideas

The Washington Consensus (2)• Fiscal discipline • A redirection of public expenditure priorities toward fields offering

both high economic returns and the potential to improve income distribution, such as primary health care, primary education, and infrastructure

• Tax reform (to lower marginal rates and broaden the tax base) • Interest rate liberalisation • A competitive exchange rate • Trade liberalisation • Liberalisation of inflows of foreign direct investment • Privatisation • Deregulation (to abolish barriers to entry and exit) • Secure property rights

A recent example: the IMF and Romania

• In February 2012, the Romanian government resigned following massive protests

• Romania took a $26bn from the IMF, EU and the World Bank in 2009

• In 2010, the government cut salaries of public sector workers by 25% and raised indirect taxation

• The deregulation of Romania’s utility markets means prices will reach international levels although income is far lower

The ITO/ GATT/ WTO

• The International Trade Organization was another body conceived at Bretton Woods

• It was designed to liberalise trade by reducing barriers to trade

• Was never realised; instead, its functions were assumed by the General Agreement on Trade and Tariffs (1947)

• The GATT was replaced by the World Trade Organization in 1995

• The WTO administers trade agreements, deals with trade disputes and provides technical training and assistance for developing countries

Other bodies – the G20

• Since 2009, the finance ministers and central bank governors of 19 leading economies have held regular summits to discuss the international financial system

• Representatives of the European Union, International Monetary Fund and World Bank also take part

• The G20 has replaced groupings (the Group of Six, the G7, the G8 – all representing developed countries) that had held occasional meetings since 1975

Economic liberalism

• Liberalism assumes that free trade and the movement of goods (such as products) will lead to more investment in developing countries (e.g. multinational companies may set up factories in developing countries where labour is cheap)

• For Liberals, each country can exploit its own comparative advantages (specialisation).

The mercantilist/realist tradition

• States decide what happens in the economic area (the IMF, etc, isn’t so important)

• States will naturally seek to maximise their wealth (and their economic power)

• The most powerful states will decide trade and other economic rules and enforce them

• Fairness is not the issue in an economic system. It is more about states making sure they have the economic power to protect their national interests and sovereignty

• Financial and economic institutions will reflect the interests of strong or dominant states

Marxists and the international economy

• Capitalism – rather than states – is the main force

• There is an inequality between ‘core’ (industrialised countries) and periphery developing countries

• The economic system favours the core countries and works against developing countries

• Wallerstein’s World-Systems Analysis is the most developed summary of these arguments

Globalisation and the state• Is globalisation weakening the power of the state?

The globalists claim: • States are losing control of economic policy• Governments find it difficult to control or regulate

trade, capital and investment• International businesses are sometimes setting

their own rules and demanding things from governments (such as lower corporation tax)

• Businesses often threaten to go to other countries if a government refuses to give them concessions or follow ‘liberal’ economic policies