Bretton Woods and the International Institutions (chap 5)

Question 1

Economics institutions since WW2 :

Answer 1

• International Monetary Fund (IMF) , Bretton Woods system
• World Bank , Bretton Woods system
• General Agreement on Tariffs and Trade (GATT)
• World Trade Organization

Question 2

who and where created the Bretton Woods Systems?

Answer 2

• The allied governments at Bretton Woods, New Hampshire (1944)

Question 3

what is the Bretton Woods Systems?

Answer 3

• A system of fixed but adjustable exchange rats and created the IMF and World Bank
• it was design to prevent other Great Depression

Question 4

what economics problem were present in the 1930s?

Answer 4

1. Capitals Controls
2. Reduction trade barriers.
3. Stable exchange rate
4. Institution to provide credit

Question 5

why they need Capitals Controls ? (economies 1930’s)

Answer 5

• To prevent a collapse of aggregate demand

Question 6

why they need Reduction of trade barriers ? (economies 1930’s)

Answer 6

• To prevent a collapse of international trade

Question 7

why they need Stable exchange rate? (economies 1930’s)

Answer 7

• To prevent a collapse of international monetary system

Question 8

why they need Institution to provide credit ? (economies 1930’s)

Answer 8

• To prevent a collapse of international lending

Question 9

Solution to the need of reduction of trade barriers ? (economies 1930’s)

Answer 9

• 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.

Question 10

Solution to the need of Capitals Controls ? (economies 1930’s)

Answer 10

• Bretton Woods system
• it enable government to adopt expansionary fiscal policies without needing to worry about the effects in internationals markets

Question 11

Solution to the need of Stable exchange rate? (economies 1930’s)

Answer 11

• Bretton Woods system , The creation of the IMF (international Monetary Fund)
• to keep exchange rates stable
• to provide short- term credit

Question 12

Solution to the need of an institution to provide credit ? (economies 1930’s)

Answer 12

• • Bretton Woods system
• International Monetary Fund (IMF) —-short term credit
• World Bank —- long-term credit for post war reconstruction

Question 13

functions of the International Monetary Fund (IMF)?

Answer 13

1. leads foreign currencies to its members
   IMF reserves : $ 316 million but capital flow is $ 1.2 trillion per day ,
2. Policed a system of fixed exchange rates (Bretton Woods system ) until 1971

Question 14

what system was use after the fall of the gold standard in the Bretton Woods System ?

Answer 14

• 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.

Question 15

when and why Bretton Woods System failed ?

Answer 15

In 1973 :

1. Exchange rate adjustment became too infrequent.
   - the Bretton Woods System lost flexibility originally intended
2. U.S inflation in the 1960s = dollar glut (excess)
   - countries became less willing to accept U.S dollars as an international medium of exchange

Question 16

after the failure of Bretton Woods System, what happens with IMF and World Bank ?

Answer 16

• they continuo to function (1973) and their importance increase grew because they first to call in case of a financial crisis

Question 17

How does the IMF get funds its needs ?

Answer 17

-Each member country is assigned a quota based on size of its economy and share of the world trade

Question 18

what is the Quotas in IMF?

Answer 18

• Borrow size (that can receive)

- quantity of votes in the IMF

Question 19

what is Supermajority in IMF?

Answer 19

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

Question 20

what is IMF conditionality ?

Answer 20

• 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

Question 21

Original name of The World Bank ?

Answer 21

• it is the INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT (IBRD)
• now the IBRD is part of the World Bank

Question 22

what is the propose of the World bank ?( before and now)

Answer 22

1. provide long term loans for war devastated countries

2. after ww2, it provides aid to less development countries

Question 23

what is the role of international institutions? and why they do exist ?

Answer 23

• they reduced uncertainty

- but they cost countries : national sovereignty

Question 24

what conditions the IMF imposes in new loans?

Answer 24

typically :

• reduced government spending
• increased taxes
• higher interest rates
• devaluation of currency
• privatization ,
• deregulation

Question 25

why can we not rely on the market to create order and reduce uncertainty? (simple version)

Answer 25

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

Question 26

why do we need international institutions for this purpose ?

Answer 26

-it avoided the “free rider” problem , everyone else wait for some else to provide help

Question 27

why it was easy to have consensus in the early years of internationals institutions?

Answer 27

1. General agreement ( Keynesian Consensus)
   - full employment should be the priority
2. 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

Question 28

what trend change in the 1980 in the consensus of the international institutions ?

Answer 28

1. The U.S focused on national interests
   - the Cold War ended
2. International Organizations are bigger and more diverse

Question 29

if a country want to join the GATT, what it have to agree ?

Answer 29

1. Principle of “ Non-discrimination “
2. “Most favoured Nation” clause (MFN)
   - all member were entitle to receive the same tariff cuts
   - There were exceptions that allow the Free trade agreement

Question 30

what was the intention of General Agreement on Tariffs and trade (GATT) ?

Answer 30

• 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)

Question 31

what was the original name of the world bank?

Answer 31

• Bank of Reconstruction and development