Growth of World Trade and
World Output
2000
1800
1600
1400
1200
1000
800
600
400
200
0
1950=100
Trade
GDP Volume
1950
1960
1970
1980
1990
1997
Figure 1.1
1-6
Impact of GATT Tariff Rates
Average Tariff Rates on Manufactured Products % of Value
50
45
40
35
30
25
20
15
10
5
0
France
Germany
Italy
Japan
Holland
Sweden
Britain
United States
1913
1950
1990
2000
Table 1-1 in text
Table 1.1
1-7
The Shrinking Globe
Figure 1.2
1500 -1840
Best average speed of
horse-drawn coaches
and sailing ships, 10
mph.
©
1850 - 1930
1950s
Propeller
Steam locomotives aircraft
average 65 mph.
300 - 400
Steamships average mph.
36 mph.
1960s
Jet
passenger
aircraft,
500 - 700
mph.
1-8
The Changing Pattern of World Output and
Trade
Country
United States
Japan
Germany
France
United Kingdom
Italy
Canada
China
S. Korea
Share of World Share of World Share of World
Output 1963 Output 1996
Exports 1997
40.3%
20.8%
12.6%
5.5%
8.3%
7.76%
9.7%
4.8%
9.9%
6.3%
3.5%
5.46%
6.5%
3.2%
4.94%
3.4%
3.2%
4.76%
3%
1.7%
3.81%
NA
11.3%
2.85%
NA
1.7%
2.45%
Table 1.2
1-9
Percentage Share of Total FDI Stock
1980-1996
50
45
40
1980
1985
1990
1994
1996
35
30
25
20
15
10
5
0
USA
UK
Figure 1.3
JPN
GER
FR
Neth
ODC
Dlvng
Econ
1-10
FDI Inflows
1980-1996
$B
400
350
300
World
250
Dev Ctry
200
Dlvg Ctry
150
USA
100
China
50
0
1985- 1991 1992
90
1993 1994
1995 1996
1997
Figure 1.4
1-11
Growth of FDI, World Trade and
World Output
1200
1000
800
FDI
World Trade
World Output
600
400
200
0
84 85 86 87 88 89 90 91 92 93 94 95 96 97 98
Figure 6.2
6-6
Increase in the Number of
Bilateral Trade Treaties
1400
1200
1000
800
Treaties
Countries
600
400
200
0
1993
1995
1998
6-8
45
Turkey
40
Growth
in money
supply,
1985 1989 %
35
Colombia
China
30
25
Portugal
20
Ecuador
Poland
Great Britain
15
United States
10
Japan
5
0
0
5
10
15 20 25 30 35 40 45 50
Consumer prices, 1984 - 1989 (%)
9-20
The Gold Standard
• Roots in old mercantile trade.
• Inconvenient to ship gold, changed to paper
- redeemable for gold.
• Want to achieve ‘balance-of-trade equilibrium
Japan
USA
10-1
Between the Wars
• Post WWI, war heavy expenditures affected
the value of dollars against gold
• US raised dollars to gold from
$20.67 to $35 per ounce.
• Other countries followed suit and devalued
their currencies.
10-2
Bretton Woods
• In 1944, 44 countries met in New Hampshire
• Countries agreed to peg their currencies to US$
which was convertible to gold at $35/oz.
• Agreed not to engage in competitive devaluations
for trade purposes and defend their currencies.
• Weak currencies could be devalued up to 10% w/o
approval.
• IMF and World Bank created.
10-3
IMF
• Created to police monetary system by ensuring
maintenance of the fixed-exchange rate.
• Promote int’l monetary cooperation and facilitate
growth of int’l trade.
• Wanted to avoid prewar problems, so
– Created lending facilities to help countries with trade
deficits.
• Persistent borrowings leads to IMF control of a country’s
economic policy.
– Created adjustable parities.
10-5
Sources of Funds
• 182 nations pay into fund according to the
size of their economy.
• Funds remain their property.
• Borrower repays loan in 1 to 5 years, with
interest.
• No nation has ever defaulted; some are
given extensions.
10-7
Membership in the IMF
• Open to any country willing to agree to its
rules and regulations.
• Must pay a deposit (quota)
• Quota size reflects global importance of a
nation’s economy.
• Quota determines voting powers.
©
10-8
Largest Contributors
18.3
20
15
10
5.7
5.7
5.1
5.1
5
US
Germany
Japan
Britain
France
0
US
Germany
Japan
Britain
France
10-9
Largest Borrowers
$ Billion
25
21
20
15
11
Thailand
Russia
Indonesia
S. Korea
11.6
10
4
5
0
Thailand
Russia
Indonesia
S. Korea
10-10
(International Bank for Reconstruction and Development)
• Created to fund EUROPE’s reconstruction and help
3rd world countries.
• Overshadowed by Marshall Plan, so bank looked to
3rd world.
• Looked at public sector projects.
• Country borrows money raised
by WB bond sales.
• International Development Agency
created to help poorest countries.
10-11
What Happened After
Bretton Woods?
• Under BW, US required to deliver 1oz of gold to
any IMF member that gave US Treasury $35.00.
• 1958 -1971 US ran accumulated deficit of $56
billion.
• US gold reserves shrank from $34.8 billion to
$12.2 billion.
• Liabilities to foreign central banks increased
from $13.6 billion to $62.2 billion.
10-12
Collapse of the Fixed Exchange
System
• August 8, 1971, Nixon left gold standard?
• March 19, 1972, Japan and most of Europe
floated their currencies.
• Fully collapsed in 1973.
– LBJ policies and Vietnam.
• Floating currencies considered
to be a temporary fix.
– Still going on today.
10-13
Floating Exchange Rates
• Jamaica Agreement, 1976.
• Floating rates acceptable.
– Based primarily on supply/demand.
– Managed float involves gov’t
manipulation in currency markets.
• Gold abandoned as reserve asset.
• IMF quotas increased, now $180B
10-15
Managed Currency Floats
• 1985: ‘Group of 5’ met at Plaza Hotel in
NY and agreed on ‘right’ level for US
dollar.
• G5 became G7 (now G8). Seeks to stabilize
exchange rates.
• Difficult due to growth of Fx market.
– Annual volume up from $18 billion in 1979 to
$1.5 trillion today.
10-16
Floating
• Monetary policy autonomy
• Trade balance adjustments.
10-17
Fixed
•
•
•
•
Monetary discipline.
Speculation.
Uncertainty.
Trade balance adjustments.
10-18
Exchange Rate Regimes
• Pegged Exchange Rates.
– Peg own currency to a major currency ($).
– Popular among smaller nations.
– Evidence of moderation of inflation.
• Currency Boards.
– Country commits to converting domestic currency on
demand into another currency at a fixed exchange
rate.
– Country holds foreign currency reserves equal to
100% of domestic currency issued.
10-19
How IMF Members Determine
Exchange Values
Inflexible
50
45
Somewhat
Flexible
40
Flexible
30
35
25
20
Peg to $
Peg to FFr
Pegged to Other
Currency
Movement Related to
Other Currency
Free Float
15
10
Figure 10.2
5
0
Managed Float
Other
10-20
Post-Bretton Woods Financial
Crises
• Currency crises:
– when a speculative attack on a currency’s exchange value
results in a sharp depreciation of the currency’s value or
forces authorities to defend the currency.
• Banking crises:
– Loss of confidence in the banking system leading to a run on
the banks.
• Foreign debt crises:
– When a country cannot service its foreign debt obligations.
10-21
Crises Have Common
Underlying Causes
• Common causes:
–
–
–
–
High inflation
Widening current account deficit
Excessive expansion of domestic borrowing
Asset price inflation
10-22
Incidence of Currency Crises
1975-1997
Number of Currency Crises per Country
Industrial
97
95
93
91
89
87
85
83
81
79
77
Emerging Market
1975
0.5
0.45
0.4
0.35
0.3
0.25
0.2
0.15
0.1
0.05
0
Figure 10.3a
10-23
Incidence of Banking Crises
1975-1997
Number of Banking Crises per Country
Industrial
Figure 10.3b
97
95
93
91
89
87
85
83
81
79
77
Emerging Market
75
0.2
0.18
0.16
0.14
0.12
0.1
0.08
0.06
0.04
0.02
0
10-24
IMF Policy Prescriptions
• “One size fits all” prescription for
countries.
• Rescue efforts exacerbate the
‘moral hazard’ problem.
• Too powerful without
accountability.
10-34
Impact on the Countries
•
•
•
•
•
•
Currency devaluation.
Declining investment.
Rising prices.
Rising unemployment.
Rising poverty.
Rising resentment?
10-35
Investment Impacts
•
•
•
•
Loss of investment confidence.
Deflation of asset values.
Substantial corporate debt burdens.
Reversal of capital flows
– Decline in access to operating cash.
• Declines in domestic demand.
– Compression of intra regional trade.
10-36