1. Lecture 07:
International economic
institutions

2. International economic
institutions
• The international economy before 1945
• Rebuilding the International Economy after
1945: Bretton Woods
• The Bretton Woods institutions (the
International Monetary Fund, the World Bank)
• Controversy: the Washington Consensus
• IR theories and the international economy
• Globalisation

3. The international economy,
1870-1914
• The first era of globalisation
• The rapid growth of international trade
• Relative economic stability
• The central role of Britain and the Bank
of England
• The Gold Standard and monetary
stability

4. Britain and the International
Economy, 1870-1914
• London as the biggest source of capital
for investment
• Britain as a major importer of raw
material and foodstuffs
• The Bank of England and the
maintenance of the Gold Standard
• Britain’s vested interest in supporting
international economic stability

5. The First World War
• 10 million killed, another 10 million die
in flu pandemic of 1918
• The first industrial war – all major
economies put on a war footing
• Severe disruption of international trade
patterns
• Britain, France and Germany
weakened; only the USA emerges
stronger

6. The 1920s
• Post-war reconstruction proves
expensive and slow
• Painful adjustment to new borders and
new realities
• Mutual distrust hinders economic
cooperation
• Problems of war debts (Allies to the
USA) and war reparations

7. Rebuilding the international
economy
• Attempts to rebuild the Gold Standard
• Britain, the London capital markets and
the Bank of England all weakened
• The United States – the world’s leading
economic power, showed little interest
in the international economy; was willing
to provide short-term loans only

8. The Great Depression and after
• In response to the crisis, governments
followed “beggar-thy-neighbour” policies
• Competitive devaluations – making
currencies cheaper to compete for exports
• Tariff barriers to discourage imports
• Restrictions on foreign currency flows
• Bilateral trade agreements
• Autarky – economic self-sufficiency

9. The collapse of world trade
• The value of world trade fell by two-thirds
between 1929 and 1933
• Economic consequences: the collapse of
industries; long-term mass unemployment
• Social and political consequences: social
unrest; political radicalisation and the rise of
extremist parties

10. Wartime discussions
• After 1941, the British and Americans
discussed the future of the International
Economy
• Two major visions of the future, represented
by the US Treasury Department White Plan
and the UK’s John Maynard Keynes
• The US vision prevailed

11. The International Monetary
Fund
• Created to build a framework for
international economic cooperation
• Designed specifically to avoid a
repetition of the disastrous policies that
had contributed to the economic
collapse of the 1930s

12. Initial aims
• To oversee the international monetary
system – the system of exchange rates
and international payments
• To ensure exchange rate stability and to
promote the ending of exchange rate
restrictions

13. The ‘Bretton Woods system’
• Members of the new IMF agreed to
keep their exchange rates pegged to
the US dollar (the US dollar was pegged
to gold)
• Exchange rates could be adjusted to
correct a “fundamental disequilibrium”,
but only with the agreement of the IMF

14. Marshall Aid
• From 1948, the United States Marshall
Plan gave Western Europe $13bn to
guarantee recovery and to speed up the
move towards the Bretton Woods system
• Stalin refused Marshall Aid for the Soviet
Union and its satellites in Eastern Europe
• The international economy flourished as
the world’s largest economy began to play
a central role

15. A stable system
• The Bretton Woods system could not work
fully until 1958, after the economic recovery
of Western Europe was complete
• The system worked until 1971, when the
USA suspended convertibility into gold
• Dollar gold standard abandoned in 1973

16. A return to instability
• Exchange rates have floated since 1973
• The oil shocks of 1973 and 1979
• The sovereign debt crisis of the 1980s
• The global financial crisis of 2008

17. The IMF’s role
• The IMF’s main function is to provide
temporary loans to help countries cope
with liquidity crises (usually as a result
of Balance-of-Payments problems)
• It can be controversial: it usually insists
on tight monetary policies and austerity
programmes as the price of assistance

18. The World Bank
• The other main creation of Bretton Woods
• Began life as the International Bank for
Reconstruction and Development –
designed to help countries rebuild after the
most devastating war in history
• Specialises in long-term loans for
infrastructure and strategic projects

19. More controversy
• The World Bank is also controversial for insisting
on orthodox economic policies as the price of its
assistance
• Such policies have often yielded mixed results
• Joseph E Stiglitz, Senior Vice President at the
World Bank (1997-2000) and Nobel Laureate
(2001) was fired for criticising the policies of the
World Bank and the IMF

20. The Washington Consensus
• A term coined in 1990 to describe the
package of measures the IMF and World
Bank were recommending to Latin American
countries at the time
• The term has become controversial: its
creator – John Williamson – has argued that
these are not simply neoliberal ideas

21. The Washington Consensus (2)
• Fiscal discipline
• A redirection of public expenditure priorities toward fields offering
both high economic returns and the potential to improve income
distribution, such as primary health care, primary education, and
infrastructure
• Tax reform (to lower marginal rates and broaden the tax base)
• Interest rate liberalisation
• A competitive exchange rate
• Trade liberalisation
• Liberalisation of inflows of foreign direct investment
• Privatisation
• Deregulation (to abolish barriers to entry and exit)
• Secure property rights

22. A recent example: the IMF and
Romania
• In February 2012, the Romanian government
resigned following massive protests
• Romania took a $26bn from the IMF, EU and
the World Bank in 2009
• In 2010, the government cut salaries of public
sector workers by 25% and raised indirect
taxation
• The deregulation of Romania’s utility markets
means prices will reach international levels
although income is far lower

23. The ITO/ GATT/ WTO
• The International Trade Organization was another
body conceived at Bretton Woods
• It was designed to liberalise trade by reducing
barriers to trade
• Was never realised; instead, its functions were
assumed by the General Agreement on Trade and
Tariffs (1947)
• The GATT was replaced by the World Trade
Organization in 1995
• The WTO administers trade agreements, deals with
trade disputes and provides technical training and
assistance for developing countries

24. Other bodies – the G20
• Since 2009, the finance ministers and central
bank governors of 19 leading economies have
held regular summits to discuss the
international financial system
• Representatives of the European Union,
International Monetary Fund and World Bank
also take part
• The G20 has replaced groupings (the Group of
Six, the G7, the G8 – all representing
developed countries) that had held occasional
meetings since 1975

25. Economic liberalism
• Liberalism assumes that free trade and the
movement of goods (such as products) will
lead to more investment in developing
countries (e.g. multinational companies
may set up factories in developing
countries where labour is cheap)
• For Liberals, each country can exploit its
own comparative advantages
(specialisation).

26. The mercantilist/realist
tradition
• States decide what happens in the economic area
(the IMF, etc, isn’t so important)
• States will naturally seek to maximise their wealth
(and their economic power)
• The most powerful states will decide trade and
other economic rules and enforce them
• Fairness is not the issue in an economic system. It
is more about states making sure they have the
economic power to protect their national interests
and sovereignty
• Financial and economic institutions will reflect the
interests of strong or dominant states

27. Marxists and the international
economy
• Capitalism – rather than states – is the main
force
• There is an inequality between ‘core’
(industrialised countries) and periphery
developing countries
• The economic system favours the core
countries and works against developing
countries
• Wallerstein’s World-Systems Analysis is the
most developed summary of these arguments

28. Globalisation and the state
• Is globalisation weakening the power of the
state? The globalists claim:
• States are losing control of economic policy
• Governments find it difficult to control or
regulate trade, capital and investment
• International businesses are sometimes setting
their own rules and demanding things from
governments (such as lower corporation tax)
• Businesses often threaten to go to other
countries if a government refuses to give them
concessions or follow ‘liberal’ economic policies