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e-book International Financial Integration: Competing Ideas and Policies in the Post-Bretton Woods Era

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That achieved political stability, but at the price of financial volatility generated by very large capital flows as oil producers deposited in large multinational banks their massive profits, which the banks then lent to countries to enable them to pay the higher oil price.

The IMF developed new financing facilities for developing economies hit by the higher oil prices and the recession they caused. But when bank-driven capital flows stopped—first for particular countries and then in a general Latin American debt crisis in —the IMF embarked on a new life.

Table of contents

No longer was it the overseer of fixed exchange rates; it morphed into a crisis manager, coordinating rescue operations that depended on IMF loans, country reform programs, and new money from the lending banks. Multilateralism was also at the core of managing a cautious, rule-bound, and fundamentally orderly transformation of formerly state-planned Soviet-style economies in the s. The s, and the evident failure of central planning, also marked a turning, in that multilateral institutions realized that in the middle of a complex political and social upheaval, it was important to speak to a wide range of interests: opposition parties, trade unions, civil society groups.

Other issues apart from purely economic ones started to be central to multilateral efforts, such as the quality and effectiveness of government and the level of corruption and transparency.

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The results of the changes are ambiguous: the surges of private capital flows contributed to substantial growth, a redistribution of the geographical focus of economic activity, and the lifting of billions of people out of extreme poverty. But capital-driven globalization was also volatile and unstable, and the resources of multilateral institutions appeared smaller in relation to world income, trade levels, and financial flows than in the earlier era see Chart 2.

The major intellectual challenges to reconfigured and decentralized multilateralism occurred with the Asian crisis in —98 and then, in a different form, in the response to the global financial crisis that began in and hit the old rich industrial countries, in particular Europe, especially hard. The outcome of the Asian crisis was interpreted widely in crisis countries, but also by some influential economists and theorists in the United States, as the imposition of US views and US interests.

1. Introduction

In one interpretation, the severity of the crisis that followed from a sudden stop of capital market flows, and the imposition of adjustment programs, allowed Western institutions to acquire significant holdings in a dynamic region at bargain basement prices. At the beginning of the crisis, Japan had pushed for an Asian Monetary Fund, but that idea was killed by US opposition. Some large Asian countries decided that they never again wanted to be dependent on the IMF and moved to self-insure by building up foreign exchange reserves—which required large current account surpluses.

The logic of this argument created a good cover story for a mercantilist export promotion drive that depended on countries holding down the value of their currencies by fixing or pegging their currencies, usually to the dollar. As current account imbalances soared, the structural flaw that had dominated the Bretton Woods negotiations reemerged: large current account surpluses, this time mainly for oil exporters and China, and, in a turned table, large deficits in the United States and some other industrial countries.

China also pushed for the creation of regional facilities to support countries with balance of payments and other problems—both as a version of the original Asian Monetary Fund proposal from the s and as a substitute for the global institutions. The Chiang Mai Initiative started in with a series of bilateral swap arrangements between 10 southeast Asian countries plus China, Japan, and South Korea that allowed a country in need of a foreign currency to borrow it from another member of the initiative though there have been no swaps yet.

The global crisis intensified the regional push: in the Chiang Mai arrangements were enhanced, and new institutions began, notably the New Development Bank popularly called the BRICS bank in and the Asia Infrastructure Investment Bank in Some lessons emerge from the increasingly decentralized governance of the international system. Each major challenge—the s inflation and oil price shocks and the recent global crisis—produced some new approaches to multilateral cooperation and coordination: the G5 in and the G20 advanced and emerging market economies in In each case, however, a productive initial meeting was followed by a process of routinization that sapped the urgency and the capacity to generate major breakthroughs and policy improvements.

Each big challenge also produced regional initiatives aimed at financial and economic governance.

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The European Monetary System, an attempt to build a regional Europeanized version of the Bretton Woods system, was a response to the currency chaos of the s. The Asian crisis led to a move for greater Asian integration. In Europe, the European Stability Mechanism, created in to fund EU interventions in member countries in crisis, is also likely to develop into a European Monetary Fund. The buildup of the proliferation of regional answers raises the question of how regional and global institutions can work together effectively.

One long-standing objection to a world based on regional arrangements was that it would be helpless in the face of impacts or spillovers from one area to another: the Asian crisis for instance spread to Russia and Brazil. Another problem involves countries on the periphery of regional blocs that feel increasingly vulnerable.

How then can nations coordinate the interaction between the provision of financial facilities—where regional resources are increasingly important—and the design of policy, which has global ramifications? There were three distinct ways multilateral governance institutions operated in the era of postwar stability.

The first was in a judicial or quasijudicial role in arbitrating disputes between countries. There are many cases that look as if they require arbitration: trade disputes and—often associated with trade disputes—whether currencies are unfairly valued to produce a subsidy for exporters.

Currency misalignment was a much more difficult issue for international settlement, and in the most important cases—with Japan in the s and China in the s—the IMF backed away from formal declarations that a currency was deliberately undervalued. The second style of multilateralism involved institutions acting as sources of private advice to governments on policy and on the interplay between policy in one country and in the rest of the world: explaining and analyzing feedback and spillovers and offering policy alternatives.


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That sort of consultation—rather than a formal arbitration procedure—was the main vehicle for discussion of currency undervaluation issues in the s. The essence of this kind of advice is that it is private.

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The outcome may be changes in behavior or policy but the outside world will not understand the reason or the logic that compels the better behavior. The third was as a public persuader with a public mission. There is increasing recognition of the limits of secret diplomacy and behind-the-scenes advice.

Societies cannot be moved without genuine consensus that they are moving in the right direction. The backlash against globalization is fed by a climate of suspicion: experts, economists, international institutions are not trusted.

evolving international monetary system | Cambridge Journal of Economics | Oxford Academic

During the s, the G20 and the IMF moved to public assessments of how policy spillovers affected the world—and in particular examined the multilateral dimensions of trade imbalances and their various causes, including monetary policy stances and structural and demographic developments. This public style of action looks more appropriate in an age of transparency—when information technology seems less secure, when secrets leak, when WikiLeaks flourish. Today it is unwise to assume that anything is secret. The accessibility of information presents a fundamental dilemma.

Policy advice is invariably quite complicated. Spillovers and feedback require a great deal of analysis and explanation and cannot easily be reduced to simple formulas. Should international institutions be more like judges, or priests and psychoanalysts, or persuaders? The traditional roles by themselves are no longer credible. But multilateral institutions will also find it impossible to take on all three roles simultaneously. Judges do not usually need to embark on long explanations as to why their rulings are correct. If they act as persuaders, maintaining a hyperactive Twitter account, they merely look self-interested and lose credibility.

It is easy to see why the institutions that built the stability of the post order might be despondent in the face of apparently insuperable challenges. It is hard to apply fundamental and widely shared principles such as human dignity and sustainability to the minutiae of policy. Log In Sign Up. Yrrek Neus. This effectively renders the dollar as the de facto reserve currency. However, the principal flaw inherent in the dollar- centred world manifests itself in an increasing incidence of credit-induced crises which imperils global economic stability. This essay will discuss why the dollar has gained dominance and how it has affected and shaped the global economy.

Its challenges will also be examined. Lastly, the trajectory of reforming the international monetary architecture will be evaluated. The dollar-centred international monetary landscape Over the course of monetary history, the international monetary system IMS has evolved into various forms, starting with the Silver Standard, the Gold Standard, the Bretton Woods system BW and more recently the Dollar Standard. As the global monetary architecture undergoes profound changes, it has demonstrated at least two facts.

Bretton Woods at 75 - Rethinking International Cooperation

First, almost every IMS has its own defects. Indeed, the way in which the dollar was enthroned was pure serendipity in that America as the military exporter at that time grew into the world creditor with enormous gold transferred from the war-ravaged Europe, positioning it to support the BW system Vasudevan At the turn of this historic event, the era of the gold standard was over. A lack of agreements on what the new IMS should be and the increasingly popular sentiment towards free market favoured the advent of floating currencies in a fiat money system Steil The dollar hegemony, however, remains unchallenged for a multitude of reasons.

Once the dollar was detached from gold, rapid trade growth is made feasible by a credit-based trade system. This is because awarding a fiat money the reserve status allows that country to finance its balance-of-payments deficits in the global capital market by extending mounting credit to its trading partners instead of paying finite gold Duncan To summarise, in a world led by a single national reserve currency and governments that can increase paper money supply with no obligations to redeem it lead to an exploding proliferation of global liquidity at an unprecedented pace during peacetime.

Vulnerabilities of the dollar standard: unsustainable US current account deficit In order to maintain competitive advantages, surplus countries usually are reluctant to convert their dollar receipts into their own currencies that would otherwise give rise to an appreciation against dollars. Rather, they would invest these receipts in the interest-bearing US assets, primarily sovereign debt Krugman Therefore, some of the excess credit remains in the system of surplus countries.


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  • Ultimately, the principal flaw stemming from the dollar standard is the absence of a built-in stabiliser that governs the correction of trade imbalances on the part of deficit countries Steil While it might precisely capture the global thrift phenomenon, it somehow departs from the idea that trade imbalances are largely determined by domestic factors and cannot be forced upon a country Duncan This is indeed what was mentioned earlier that the US overleveraging is largely a result of its choice to exploit the soft borrowing constraint. The dollar standard has, therefore, attracted sharp criticism among academics, sardonically coined as the dollar crisis.

    Its potential extent of damage provides strong ground for reforming the existing IMS. Contrary to the seemingly intuitive prediction of a sudden collapse in the dollar, there are reasons to believe that the dollar hegemony is here to stay in the short term. This starkly contrasted with what was observed in the Asian Financial Crises in Potent Alternatives Attention has long since focused on the possibility of another currency leadership. Specifically, the contentious rivals to the dollar include the euro, yen and renminbi. Cohen asserts that the weakening dollar do not imply the prospects of other currencies.