Bretton Woods and the International Institutions (chap 5) Flashcards
Economics institutions since WW2 :
- International Monetary Fund (IMF) , Bretton Woods system
- World Bank , Bretton Woods system
- General Agreement on Tariffs and Trade (GATT)
- World Trade Organization
who and where created the Bretton Woods Systems?
- The allied governments at Bretton Woods, New Hampshire (1944)
what is the Bretton Woods Systems?
- A system of fixed but adjustable exchange rats and created the IMF and World Bank
- it was design to prevent other Great Depression
what economics problem were present in the 1930s?
- Capitals Controls
- Reduction trade barriers.
- Stable exchange rate
- Institution to provide credit
why they need Capitals Controls ? (economies 1930’s)
- To prevent a collapse of aggregate demand
why they need Reduction of trade barriers ? (economies 1930’s)
- To prevent a collapse of international trade
why they need Stable exchange rate? (economies 1930’s)
- To prevent a collapse of international monetary system
why they need Institution to provide credit ? (economies 1930’s)
- To prevent a collapse of international lending
Solution to the need of reduction of trade barriers ? (economies 1930’s)
- General Agreement on Tariffs and trade (GATT)
- at first negotiations to reduce trade restriction had limited success but it lead to the creation of GATT.
Solution to the need of Capitals Controls ? (economies 1930’s)
- Bretton Woods system
- it enable government to adopt expansionary fiscal policies without needing to worry about the effects in internationals markets
Solution to the need of Stable exchange rate? (economies 1930’s)
- Bretton Woods system , The creation of the IMF (international Monetary Fund)
- to keep exchange rates stable
- to provide short- term credit
Solution to the need of an institution to provide credit ? (economies 1930’s)
- Bretton Woods system
- International Monetary Fund (IMF) —-short term credit
- World Bank —- long-term credit for post war reconstruction
functions of the International Monetary Fund (IMF)?
- leads foreign currencies to its members
IMF reserves : $ 316 million but capital flow is $ 1.2 trillion per day , - Policed a system of fixed exchange rates (Bretton Woods system ) until 1971
what system was use after the fall of the gold standard in the Bretton Woods System ?
- An adjustable peg system, and gold-dollar standard
- It was a compromise system , all currencies were pegged to the U.S dollar but could devalue and revalue their currencies , U.S dollar was pegged to gold.
when and why Bretton Woods System failed ?
In 1973 :
- Exchange rate adjustment became too infrequent.
- the Bretton Woods System lost flexibility originally intended - U.S inflation in the 1960s = dollar glut (excess)
- countries became less willing to accept U.S dollars as an international medium of exchange
after the failure of Bretton Woods System, what happens with IMF and World Bank ?
- they continuo to function (1973) and their importance increase grew because they first to call in case of a financial crisis
How does the IMF get funds its needs ?
-Each member country is assigned a quota based on size of its economy and share of the world trade
what is the Quotas in IMF?
- Borrow size (that can receive)
- quantity of votes in the IMF
what is Supermajority in IMF?
85% is Supermajority
- the US has 18%
- It is called “ a rich country club “ since the rich countries dominate in voting power
but it is usually the poor countries which need the IMF assistance
what is IMF conditionality ?
- The IMF charges a low interest rate but imposes conditions on loans
- These conditions are intended to prevent recurrence problems
- but are often accused of being harsh and ideological
Original name of The World Bank ?
- it is the INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT (IBRD)
- now the IBRD is part of the World Bank
what is the propose of the World bank ?( before and now)
- provide long term loans for war devastated countries
2. after ww2, it provides aid to less development countries
what is the role of international institutions? and why they do exist ?
- they reduced uncertainty
- but they cost countries : national sovereignty
what conditions the IMF imposes in new loans?
typically :
- reduced government spending
- increased taxes
- higher interest rates
- devaluation of currency
- privatization ,
- deregulation
why can we not rely on the market to create order and reduce uncertainty? (simple version)
because order and certainty are “public goods”
- they are non-excludable: very country get it benefits
- they are non-rivial: use by one country foes not reduce what is available to others
why do we need international institutions for this purpose ?
-it avoided the “free rider” problem , everyone else wait for some else to provide help
why it was easy to have consensus in the early years of internationals institutions?
- General agreement ( Keynesian Consensus)
- full employment should be the priority - easy to achieve tariff reductions, while avoiding contentious issues
- all nations had closed markets in 1945
- it was design by small number of countries and the U.S bear a large part of the cost
what trend change in the 1980 in the consensus of the international institutions ?
- The U.S focused on national interests
- the Cold War ended - International Organizations are bigger and more diverse
if a country want to join the GATT, what it have to agree ?
- Principle of “ Non-discrimination “
- “Most favoured Nation” clause (MFN)
- all member were entitle to receive the same tariff cuts
- There were exceptions that allow the Free trade agreement
what was the intention of General Agreement on Tariffs and trade (GATT) ?
- it was intended to be temporary until the International Trade Organization (world trade organization) was set up
- it actually took 50 years, they fulfil their function in trade negotiations(reducing tariffs and quotas on trade on manufactures)
what was the original name of the world bank?
- Bank of Reconstruction and development
