The World Economic Governance on trial since 1944

Key Questions• Who/What are the actors in global

economic governance, and what are their goals?

• How has the West built the foundation for world economic governance?

• How has the idea of global economic governance evolved since 1945?

• How efficient are the different systems in place?

World trade – of growing importance

PreviewIntroductionI. The Need for a World Economic

GovernanceII. Governance dictated by a bipolar

worldIII. Towards a Genuine World Economic

Governance (since 1995)IV. Economic Governance: a southern

perspective

IntroductionThe acceleration of globalization in the

20th century has caused economies to become more interdependent.

Organizing globalization by a world governance assumes that economic actors agree.

The Actors of World Governance

World Governance

International Institutions(IMF, World Bank, WTO, the UN…)

Defenders of private

interests(TNCs,

various lobby groups)

NGOs and citizen

associations

States (G8, G20, G77…)

and Associations of

States (EU, NAFTA…)

Timeline 1914 – 2016World Economic Governance

World Economic

Governance since 1944

AustraliaSwitzerland

IndiaBelgium

The NetherlandsRussia

CanadaSaudi Arabia

ItalyChina

UKFrance

GermanyJapan

United States

0 2 4 6 8 10 12 14 16 18

The Great Powers of the IMF (2007)

The 15 largest Shareholders, in %

Source: IMF

The 1st five shareholder powers elect 5 members to the Board of DirectorsChina, Saudi Arabia and Russia elect 1 member to the Board of Directors

How do these countries compare with those that control the IMF?

Main IMF Borrowers

Mexico

South Korea

Russia

Brazil

Argentina

The UKIndia

Indonesia

Philippines

Thailan

dTurke

y

Pakist

an0

4

8

12

16

20

Amount borrowed from the IMF from 1947-2000

(in billions of dollars)

TimelineThe Creation of

Governance Institutions

World Economic Governance and

Global CrisesWorld Economic

Governance Tested during the Cold War

(1944 – 1991)

1941: Atlantic Charter 1950: Communist Poland leaves the IMF

1944: Bretton Woods Agreement

1963: Cuba leaves the IMF and the World Bank

1947: GATT Agreement 1973: 1st Petroleum Crisis1971: End of the Gold exchange standard

1982: Mexican Debt Crisis

1975: Creation of the G6

Economic Governance and the Rise of

Financial Globalization(1992-2010)

1992: Russia joins the IMF

1997: Asian Monetary Crisis

1995: WTO is founded 1998: Russian Financial Crisis

2001: China enters the WTO

2008: World Financial Crisis

2008: 1st G20 summit

I. The Need for a World Economic Governance

• World monetary crisis of 1930’scurrency wars (competitive

devaluation)protectionism

• paved the way for FDR to foster economic cooperation between allies• International Conference at Bretton Woods 1944

Video: Bretton Woods

International Monetary

Conference 1’20

A. 2 opposing visions of world economic order: Keynes (UK) vs. White (US)

a. Keynes = genuine world economic governance, responsible for international monetary policy

b. White = return to Gold Exchange standard with dollar replacing the pound sterling

British economist • his ideas have fundamentally affected the theory and practice of modern macroeconomics, • widely considered to the most influential economist of the 20th century. • state intervention was necessary to moderate "boom and bust" cycles of economic activity.• advocated use of fiscal and monetary measures to mitigate the adverse effects of economic recessions and depressions• adopted by leading Western economies after WWII1950s and 1960s the success of Keynesian economics resulted in almost all capitalist governments adopting its policy recommendations

John Maynard Keynes

"His* radical idea that governments should spend money they don't have may have saved capitalism.” source: 1999, Time magazine

*John Maynard Keynes

B. New Institutions Created:• IMF (International Monetary Fund)• World Bank

Both bodies are multilateral, financed by all member countries but dominated by the U.S. (veto power on all decisions)

The IMF• Headquarters = Washington, D.C. • Aims:– foster global monetary cooperation, – secure financial stability, – facilitate international trade, – promote high employment and sustainable

economic growth, – reduce poverty around the world.

II. Governance dictated by a bipolar world

A. Universal governance questioned by the Cold War

• USSR rejected IMF & World Bank• USA rejected idea of a world trade

organization• Marshall Plan replaced other bodies to

rebuild Western Europe• Soviet satellites left Bretton Woods

institutions to join the Comecon (Council for Mutual Economic Assistance)

B. Limits of the System• International Monetary System led to

permanent deficit in US balance of payments, unsustainable over long term

• In 1965, de Gaulle requested the conversion of France’s dollars into gold

• Nixon suspended convertibility of dollar into gold – Bretton Woods system collapsed in 1971

US President Nixon

Video: in 1971 Nixon ends International Monetary system Bretton Woods 4’05

C. The World Economic Governance Body faces the crisis of the 1970’s

• Since March 1973, the floating exchange rate has been followed and formally recognized.

• Nations still need international reserves in order to intervene in foreign exchange markets to balance short-run fluctuations in exchange rates.

• The prevailing exchange rate regime is in fact often considered as a revival of the Bretton Woods policies, namely Bretton Woods II

The U.S. and Bretton Woods II

• US Department of Treasury has released Treasury Bonds

• The Federal Reserve has increased money in circulation

• Has allowed the U.S. to play with the dollar exchange rates which remains the main international currency

• This economic policy has enabled the U.S. to finance their ever growing public debt and trade deficit

Video: Crash Course Chapter 9 A Brief History of US Money

Consequences of Monetary policy

A Weak Currency

A Strong Currency

Pros Favors Foreign Trade (exports)

Limits inflation and favors foreign investment

Cons Slows down economy (less FDI)

Penalizes foreign trade (exports)

Foreign Holders of US Treasury Bonds(US Foreign debt) in billions of dollars

Country 2010 2012 2013Mainland China 844 1220 1269Japan 804 1111 1183Caribbean Banking Centers (tax havens)

165 268 291

Belgium 139 357Brazil 158 253 245Oil Exporters 223 262 238Taiwan 129 195 182Switzerland 195 175The UK 362 133 164Hong Kong 141 142 159The EU 704

Source: U.S. Department of the Treasury/Federal Reserve Board February 18, 2014

US Foreign Debt

Faced with the difficulties to raise the debt ceiling without the agreement of Republican Congress members, Barack Obama created the ”Debt Reduction Supercommittee” in August 2011 which was composed of elected Republicans and Democrats. This committee was in charge of finding a political consensus around the necessary measures to take in order to bring the U.S. out of the economic slump.

Who Shrank The Superpower?

The Next President will inherit an America with a great deal less economic and strategic influence than it had eight years ago. And China isn’t the half of it.By Parag Khanna

Audio: Radio Open Source: Who Shrank the Superpower? Parag Khanna

Part 1 Sum-up• In what ways are international

governance bodies controlled by the U.S.?

• In what ways is the decline of U.S. hegemony reflected in world governance?

HomeworkReading Material

Optional articles to read on blog:– FDR on IMF to Congress– John Maynard Keynes– Keynes vs. White at Bretton Woods– High Price of the cheap dollar– It’s China’s World, we’re just living in it