Bretton Woods, New Hampshire
1 - 22 July 1944
United Nations Monetary and Financial Conference
730 delegates from all 45 Allied nations
Famous participant: John Maynard Keynes
Purpose: finance the rebuilding of Europe after the devastation of WWII
Results:
1. Foundation of
World Bank (1945)
+ International Monetary Fund (1946)
(IMF)
2. Plan to establish an
International Trade Organisation
ITO
Origin of the 3 main institutions that govern globalization!
3. The Bretton Woods System of fixed exchange rates
Par (equal) value system: USA defined the value of the dollar in terms of gold
One ounce of gold = $ 35
Guarantee: US government will always exchange gold for dollars at that rate
All other members had to define the exchange value of their money in terms of gold
or in terms of the U.S. dollar, and they guaranteed the convertibility of their own currencies
into dollars at a fixed exchange rate.
Fixed exchange rate system
(Gold exchange standard with the US dollar as key currency)
Changes of the exchange rates (parity) could only be made with the consent of the IMF
Member countries had to maintain their parity by buying and selling foreign currency,
usually US dollars
Great advantage: Currencies were kept stable and predictable
Good for international traders and investors
Growth of international trade
The World Bank (Group)
Headquarters: Washington, DC
President: Robert B. Zoellick
Today: Group of 5 international organizations (agencies):
- the International Bank for Reconstruction and Development, established in 1945
- the International Finance Corporation, established in 1956
- the International Development Association, established in 1960
- the International Centre for Settlement of Investment Disputes, estd. in 1966
- the Multilateral Investment Guarantee Agency, established in 1988
Purpose: - economic development and poverty reduction
- encouraging and safeguarding international investment
provision of finance and advice to other countries
Governments can choose which of these agencies
they sign up to individually
IBRD: 184 members
Organisational structure
Board of governors
(1 governor and 1 alternate governor
from each member country, which
appoints them)
Executive Board
President
all directors
appointed by
their respective
governments
+ 23 other executive directors
various departments
usually the ministers of
finance or governors
of the central banks
by tradition
a US national
five of them represent
individual countries
(USA, GB, F, G, Japan),
the other 19 represent
groups of countries
Member governments subscribe to the basic share capital of the World Bank,
with votes proportional to shareholding
Result: the World Bank is controlled primarily by developed countries,
while clients have almost exclusively been developing countries
Total votes, as of 1 November, 2004:
USA: 16.4%
Japan: 7.9%
Germany: 4.5%
United Kingdom: 4.3%
France: 4.3%
Major decisions require an 85% majority!
Main goals of the World Bank nowadays:
- fight poverty and improve the living standards of people in the developing world
Measures:
Provision of long-term loans, grants and technical assistance
Areas:
- health and education
- environmental projects
- improvement of infrastructure (dams, roads etc.)
- economic development
Focus nowadays on support for small scale local enterprises,
Rather than on measures for aggregate economic growth
New attitude:
Clean water, education, and sustainable development are essential to economic growth
Heavy investment in such projects
The International Monetary Fund
Headquarters: Washington, D.C
Background: Situation in the 1930s
Great depression
unprecedented rates of unemployment
1/4 of the US workforce was unemployed
Monetary restrictions of international trade, because
Many countries didn't have enough foreign currency (e.g. because of trade deficits)
Some countries' central banks didn't exchange
enough money into foreign currency
Some countries hoarded gold
and money that could be converted into gold
Result:
not enough foreign currency
available for
growing international trade
Competitive devaluations
Countries made their currencies cheaper in order to export more goods
Other countries retaliated
Original purpose of the IMF: Prevention of another global depression
1. by stimulating demand to ensure economic growth and stability
Keynes: "In the long run we're all dead!"
- Free markets can't always regulate themselves
(Classical theory: economic disruptions are only temporary!)
free markets can lead to massive long-term unemployment
unemployment is the result of a lack of sufficient aggregate demand!
In this case governments must stimulate demand:
- by increasing public expenditures and/or
- by cutting taxes
Role of the IMF: Provision of money/loans for "deficit spending"
+ pressure on member countries to act along these lines
2. by improving restrictive monetary practices
Objectives: - unrestricted conversion from one currency into another
- stabilization of the value for each currency,
- elimination of restrictions and practices like competitive devaluations
Belief: Need for collective action at the global level for economic stability!
Excursus:
Keynes: The state should play an active role in the economy
Expansionary economic policy:
Contractionary economic policy:
Government:
- increase of public expenditure
(state expenditures)
- lower taxes
- less public expenditure
(cutting of deficits)
- higher taxes
Central Bank:
- lower interest rates
- higher interest rates
Stimulation of demand
Economic growth
(expansion)
Dangers: - inflation
- governments don't repay
their debts in better times
Less demand
Less economic growth
(contraction)
Organisational structure
Board of governors
(1 governor and 1 alternate governor
from each member country, which
appoints them)
Executive Board
Chairperson
Dominique
Strauss-Kahn
+ 23 other members
usually the ministers of
finance or governors
of the central banks
by tradition
a non-US national
five of them represent
individual countries
(USA, GB, F, G, Japan),
the other 19 represent
groups of countries
various departments
http://www.imf.org/external/np/sec/memdir/eds.htm
Quotas and voting
Members in May 1946: 39
Members today: 184
Each member country contributes a certain sum of money
(quota subscription)
Purposes:
- pool of money (2001: $269 bn) from which members
can borrow when they are in financial difficulties
determined by the IMF itself
on the basis of the country's wealth
and economic performance
(reviewed every five years)
- basis for how much a member country can borrow
- determine the voting power of a country
USA 17,1%
Japan 6,1%
Germany 6%
G8 states
Major decisions require an 85% majority!
France 5%
GB 5%
Italy 3,3%
Canada 3%
Russia 2,8%
80 poorest countries together 10%
The collapse of the Bretton Woods System
Growing world trade
Growing demand for money for transaction purposes
not enough gold and dollars available!
1971: USA stopped guarantee to convert dollars into gold
1973: free exchange rates
(floating)
Exchange rates (prices of currencies) are now a result
of market forces on capital markets for most countries
IMF lost a great part of its purpose
New field of activities, e.g.
- The IMF now tries to influence the market forces (economic policies)
that determine the exchange rate
- evaluate member countries' economic performances
Three main functions of the IMF today:
1. Surveillance (supervision):
- Examination of all aspects of any member's economy that are relevant
for that member's exchange rate
- Evaluation of member countries' overall economic performance
more influence on members' economic policies
periodic consultations in the member country
Belief: strong and consistent domestic economic policies
will lead to stable exchange rates and a growing and prosperous world economy
2. Financial assistance:
- The IMF lends money to member countries with payment problems
Potential borrower must present a plan of reforms, which usually includes:
- reduction of public expenditure
- tight monetary policy
- privatization of industries
3. Technical assistance:
for members who need expertise in central banking and public finance etc.
e.g. developing countries, Russia
A critical view on IMF policies:
Funds are only provided if countries engage in contractory and neo-liberal policies
Neo-liberal policy: - less state intervention: free markets can regulate things better
- privatization of nationalized industries
- austerity: reduction of debts by reducing public spending
- market liberalization: free trade and free flow of capital
Attraction of foreign investment
Advantages: - MNCs bring expertise and access to foreign markets
- MNCs have better access to sources of finance
- new employment possibilities
Negative results: - Industries in poor countries often can't compete with imported goods,
which are sometimes even subsidised.
local industries go bankrupt, foreign MNCs take over
- high interest rates and other contractory measures
lead to slow economic growth
- free capital markets: local banks go bankrupt, small businesses
and farmers can't get any more loans
- not enough money for health, education and a social safety net
The IMF's most important macroeconomic goal: low inflation
(due to its focus on monetary problems)
Less important: unemployment, distribution of income and wealth, education, health
Newest tendency:
More attention on help for the poor, health and education and "good governance"
Suggestions for a better policy:
Take it slowly!
A functioning market system requires:
- clear property rights and the courts to enforce them
- competition and information
can't be established overnight
Successful East Asian countries: - dropped protective barriers slowly and carefully
- state investments for enterprises
- joint-venture companies
China has only just started to dismantle trade barriers after 20 successful years
Development also requires a transformation of society, e.g.
- Education: All countries which have invested in universal primary education
(including girls) have done better
- Help for the poor (safety net)
important to avoid riots and upheaval
- Land reform: In many developing countries a few rich people own most of the land
- Fight against corruption
What the h… is the difference?
World Bank
- assists developing countries through
long-term financing
of development projects and programs
IMF
- oversees the international monetary system
- evaluation of member countries'
economic performance
- acquires most of its financial resources by
borrowing on the international bond market
- promotes exchange stability and orderly
exchange relations among its
member countries
- staff of 7,000 drawn from
184 member countries
- assists all members - both industrial and
developing countries by providing
short- to medium-term credits
- draws its financial resources principally
from the quota subscriptions
of its member countries
- staff of 2,300 drawn from
184 member countries