International-Economic-Relations-Session-7.ppt

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International-Economic-Relations-Session-7.ppt

  1. 1. The Politics of International Economic Relations : Session 7 5 December 2006
  2. 2. Evolution of the International Monetary and Financial System <ul><li>Financial and monetary order prior to WW2 </li></ul><ul><li>Creation of the Bretton Woods Order: Text Ikenberry </li></ul><ul><li>Bretton Woods Order </li></ul><ul><li>The 1970s crisis </li></ul><ul><li>From floating exchange rates to monetary unions </li></ul><ul><li>Contemporary issues of the financial and monetary system </li></ul><ul><ul><li>US$ declining role? </li></ul></ul><ul><ul><li>International financial crises </li></ul></ul><ul><ul><li>Crises prevention and crises management </li></ul></ul>
  3. 3. Financial and monetary order prior to WW2 <ul><li>Capital flows in late 19 th century </li></ul><ul><li>Facilitated by integrated monetary regime (fixed exchange rate regime / gold standard) </li></ul><ul><li>Regional monetary unions (LMU and SMU) and imperial currency blocs </li></ul><ul><li>Prior to WW1: abandoning of gold standard (floating) </li></ul><ul><li>1920s attempt to restore gold standard </li></ul><ul><li>1930s financial crises (collapse of international lending and gold standard) </li></ul><ul><li>Collapse of US lending and Smoot-Hawley Tariff Act </li></ul><ul><li>Reintroduction of capital controls </li></ul>
  4. 4. Financial and monetary order prior to WW2 <ul><li>HST: why did US not take on leadership? </li></ul><ul><li>Criticism: </li></ul><ul><ul><li>Overstatement of UK leadership in pre-1914 order </li></ul></ul><ul><ul><li>Cooperation between leading central banks </li></ul></ul><ul><ul><li>Domestic politics (e.g. balance of payments deficits deflationary policies (press wages and prices downwards)) </li></ul></ul><ul><ul><li>instead depreciation of national currency </li></ul></ul>
  5. 5. Creation of the Bretton Woods Order <ul><li>Embedded Liberalism </li></ul><ul><ul><li>US leadership (liberal multilateralism and New Deal politics) </li></ul></ul><ul><li>Different kind of Gold Standard </li></ul><ul><ul><li>Gold-Dollar standard ($35 per ounce) </li></ul></ul><ul><ul><li>Adjustable Peg Exchange Rate Regime (Currency realignments) </li></ul></ul><ul><ul><li>Acceptance of capital controls (targeting speculative flows, protecting against capital flight) </li></ul></ul><ul><li>Creation of IMF/World Bank (IMF: lending -previously left to private banks; WB: long-term loans for reconstruction) </li></ul>
  6. 6. Explaining Order (Ikenberry) <ul><li>Role of expert consensus </li></ul><ul><li>How to explain the agreement (power distribution, interests, which of the postwar “orders” to choose) </li></ul><ul><li>Hegemony, legitimacy? </li></ul><ul><li>What was the glue that held the Anglo-American coalition together? </li></ul><ul><li>Policy ideas inspired by Keynesianism embraced by British and US economists and policy specialists, </li></ul><ul><li>Ideas resonated well with the larger political environment </li></ul><ul><li>Not an epistemic community </li></ul><ul><li>Constitutional moment </li></ul>
  7. 7. The 1970s crisis <ul><li>Breakdown of gold exchange standard </li></ul><ul><li>Triffin Dilemma (standard is unstable) </li></ul><ul><ul><li>Liquidity expands by running US balance of payments deficit, undermining confidence in $ convertibility </li></ul></ul><ul><ul><li>(Special reserve currencies (e.g. special drawing rights)) </li></ul></ul><ul><li>1971 end of US convertibility of US$ into gold </li></ul><ul><li>US financing through printing $ </li></ul><ul><li>Decision: cut back printing vs. ending convertibility </li></ul><ul><li>End of benevolent hegemon? Declining hegemony? </li></ul>
  8. 8. The 1970s crisis <ul><li>Collapse of adjustable peg exchange-rate regime </li></ul><ul><li>1973 floating system (formalized in IMF in 1976) </li></ul><ul><li>Problems of speculative money, heightened capital mobility and reconsideration of merits of floating (ideas) </li></ul>
  9. 9. From floating exchange rates to monetary unions <ul><li>Exchange Rate Management (Plaza Agreement) </li></ul><ul><ul><li>1980 Appreciation of US$ (large inflows, high interests rates, account deficit, protectionism) </li></ul></ul><ul><ul><li>Short G5 management to depreciate US$ </li></ul></ul><ul><li>Creation of EURO </li></ul><ul><ul><li>1979 European Monetary System (mini Bretton Woods), adjustable peg system </li></ul></ul><ul><ul><li>1988 capital controls eliminated, speculative attacks </li></ul></ul><ul><ul><li>1992/3 currency crises (need to give up monetary policy) </li></ul></ul><ul><ul><li>Creation of monetary union (also role of neo-liberal ideas) </li></ul></ul><ul><ul><li>Limits on budget deficits and public debts (Maastricht Criteria) </li></ul></ul><ul><li>Currency Unions elsewhere </li></ul><ul><ul><li>CFA Franc Zone, Dollarization (Ecuador, El Salvador) </li></ul></ul><ul><li>Cross-national regulatory coordination </li></ul>
  10. 10. Impossible Trinity Capital Mobility Fixed Exchange Rates Autonomy of Monetary Policy Gold Standard Since 1970s Bretton Woods
  11. 11. Contemporary issues of the financial and monetary system <ul><li>US$ declining global role? (EU, Japan, internally?) </li></ul>
  12. 12. International Financial Crises <ul><li>Global financial panic of the late 1990s (e.g. Thailand) </li></ul><ul><li>In search for higher returns </li></ul><ul><li>Heavy borrowing – debt in local currency </li></ul><ul><li>Confidence in countries ability to defend exchange rate </li></ul><ul><li>Speculations </li></ul><ul><li>Pull-back, liqudity crunch, currency devaluation </li></ul><ul><li>Central bank tries to „defend“, sells foreign currencies </li></ul><ul><li>Herding behaviour </li></ul><ul><li>Bank runs </li></ul><ul><li>IMF: emergency funding – borrowing with conditions attached </li></ul><ul><li>Political and social unrest </li></ul><ul><li>Spill-over – contagion </li></ul>
  13. 13. Frequency of Financial Crises <ul><li>Most damaging crises occur when banking system and currency markets simultaneously come under pressure </li></ul>
  14. 14. Frequency of Financial Crises
  15. 15. Crises Prevention and Crises Management <ul><li>Crises prevention: </li></ul><ul><li>Standards and well-functioning regulatory authorities (e.g. banking regulation, financial intermediaries) </li></ul><ul><li>Cross-national coordination (IMF, BIS, IOSCO, G7/G8, FSF, G20etc…) </li></ul><ul><li>IMF: early warning system </li></ul><ul><li>Moral hazard </li></ul>
  16. 16. Crises Prevention and Crises Management <ul><li>Crisis management: </li></ul><ul><ul><li>Emergency lending </li></ul></ul><ul><ul><li>Debt rescheduling and restructuring </li></ul></ul><ul><ul><li>A new global architecture? </li></ul></ul><ul><ul><li>Unilateral </li></ul></ul><ul><ul><li>Multilateral </li></ul></ul><ul><ul><li>Supranational </li></ul></ul>
  17. 17. Decision Making IMF/WB <ul><li>Consensus </li></ul><ul><li>Shadow of Majorities (51%, 66% or 85% is required) </li></ul><ul><li>Voting Power </li></ul><ul><li>US 16.83 </li></ul><ul><li>Japan 6.04 </li></ul><ul><li>Germany 5.90 </li></ul><ul><li>France 4.87 </li></ul><ul><li>United Kingdom 4.87 </li></ul><ul><li>China 3.67 </li></ul><ul><li>Saudi Arabia 3.17 </li></ul><ul><li>Russian Federation 2.70 </li></ul>
  18. 18. Voting power
  19. 19. IMF and WB as an IO <ul><li>Woods 2005 </li></ul>

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