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The Politics of International Economic Relations: Session 7 5 December 2006

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Title: The Politics of International Economic Relations: Session 7 5 December 2006


1
The Politics of International Economic
Relations Session 75 December 2006
2
Evolution of the International Monetary and
Financial System
  • Financial and monetary order prior to WW2
  • Creation of the Bretton Woods Order Text
    Ikenberry
  • Bretton Woods Order
  • The 1970s crisis
  • From floating exchange rates to monetary unions
  • Contemporary issues of the financial and monetary
    system
  • US declining role?
  • International financial crises
  • Crises prevention and crises management

3
Financial and monetary order prior to WW2
  • Capital flows in late 19th century
  • Facilitated by integrated monetary regime (fixed
    exchange rate regime / gold standard)
  • Regional monetary unions (LMU and SMU) and
    imperial currency blocs
  • Prior to WW1 abandoning of gold standard
    (floating)
  • 1920s attempt to restore gold standard
  • 1930s financial crises (collapse of international
    lending and gold standard)
  • Collapse of US lending and Smoot-Hawley Tariff
    Act
  • Reintroduction of capital controls

4
Financial and monetary order prior to WW2
  • HST why did US not take on leadership?
  • Criticism
  • Overstatement of UK leadership in pre-1914 order
  • Cooperation between leading central banks
  • Domestic politics (e.g. balance of payments
    deficits deflationary policies (press wages
    and prices downwards))
  • instead depreciation of national currency

5
Creation of the Bretton Woods Order
  • Embedded Liberalism
  • US leadership (liberal multilateralism and New
    Deal politics)
  • Different kind of Gold Standard
  • Gold-Dollar standard (35 per ounce)
  • Adjustable Peg Exchange Rate Regime (Currency
    realignments)
  • Acceptance of capital controls (targeting
    speculative flows, protecting against capital
    flight)
  • Creation of IMF/World Bank (IMF lending
    -previously left to private banks WB long-term
    loans for reconstruction)

6
Explaining Order (Ikenberry)
  • Role of expert consensus
  • How to explain the agreement (power distribution,
    interests, which of the postwar orders to
    choose)
  • Hegemony, legitimacy?
  • What was the glue that held the Anglo-American
    coalition together?
  • Policy ideas inspired by Keynesianism embraced by
    British and US economists and policy specialists,
  • Ideas resonated well with the larger political
    environment
  • Not an epistemic community
  • Constitutional moment

7
The 1970s crisis
  • Breakdown of gold exchange standard
  • Triffin Dilemma (standard is unstable)
  • Liquidity expands by running US balance of
    payments deficit, undermining confidence in
    convertibility
  • (Special reserve currencies (e.g. special drawing
    rights))
  • 1971 end of US convertibility of US into gold
  • US financing through printing
  • Decision cut back printing vs. ending
    convertibility
  • End of benevolent hegemon? Declining hegemony?

8
The 1970s crisis
  • Collapse of adjustable peg exchange-rate regime
  • 1973 floating system (formalized in IMF in 1976)
  • Problems of speculative money, heightened capital
    mobility and reconsideration of merits of
    floating (ideas)

9
From floating exchange rates to monetary unions
  • Exchange Rate Management (Plaza Agreement)
  • 1980 Appreciation of US (large inflows, high
    interests rates, account deficit, protectionism)
  • Short G5 management to depreciate US
  • Creation of EURO
  • 1979 European Monetary System (mini Bretton
    Woods), adjustable peg system
  • 1988 capital controls eliminated, speculative
    attacks
  • 1992/3 currency crises (need to give up monetary
    policy)
  • Creation of monetary union (also role of
    neo-liberal ideas)
  • Limits on budget deficits and public debts
    (Maastricht Criteria)
  • Currency Unions elsewhere
  • CFA Franc Zone, Dollarization (Ecuador, El
    Salvador)
  • Cross-national regulatory coordination

10
Impossible Trinity
Capital Mobility
Since 1970s
Gold Standard
Bretton Woods
Autonomy of Monetary Policy
Fixed Exchange Rates
11
Contemporary issues of the financial and
monetary system
  • US declining global role? (EU, Japan,
    internally?)

12
International Financial Crises
  • Global financial panic of the late 1990s (e.g.
    Thailand)
  • In search for higher returns
  • Heavy borrowing debt in local currency
  • Confidence in countries ability to defend
    exchange rate
  • Speculations
  • Pull-back, liqudity crunch, currency devaluation
  • Central bank tries to defend, sells foreign
    currencies
  • Herding behaviour
  • Bank runs
  • IMF emergency funding borrowing with
    conditions attached
  • Political and social unrest
  • Spill-over contagion

13
Frequency of Financial Crises
  • Most damaging crises occur when banking system
    and currency markets simultaneously come under
    pressure

14
Frequency of Financial Crises
15
Crises Prevention and Crises Management
  • Crises prevention
  • Standards and well-functioning regulatory
    authorities (e.g. banking regulation, financial
    intermediaries)
  • Cross-national coordination (IMF, BIS, IOSCO,
    G7/G8, FSF, G20etc)
  • IMF early warning system
  • Moral hazard

16
Crises Prevention and Crises Management
  • Crisis management
  • Emergency lending
  • Debt rescheduling and restructuring
  • A new global architecture?
  • Unilateral
  • Multilateral
  • Supranational

17
Decision Making IMF/WB
  • Consensus
  • Shadow of Majorities (51, 66 or 85 is
    required)
  • Voting Power
  • US 16.83
  • Japan 6.04
  • Germany 5.90
  • France 4.87
  • United Kingdom 4.87
  • China 3.67
  • Saudi Arabia 3.17
  • Russian Federation 2.70

18
Voting power
19
IMF and WB as an IO
  • Woods 2005
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