IDST 1001H Lecture Notes - Lecture 5: United Nations General Assembly, Sub-Saharan Africa, Monetarism
14 Jun 2018
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Structural Adjustment and Development Dilemmas, 1980-1995
• Post-war economic order based on comparative advantage
• Comparative advantage: if countries specialize in the production of the goods
and the services which they are relatively more cost effective at producing and
trade freely and openly with other countries, everyone will be better off
• After WWII all countries fixed their exchange rates against the US dollar
• Designed to make selling goods and services more predictable and easier
• In late 1960s as dependency theory emerged, fixing exchange rate unraveled because
Americans were fighting Vietnam war and started printing more money, causing prices to
go up
• Caused labour unrest and economic instability
• In early 70s Americans abandoned idea of fixed exchange rate system, creating
system we have today
• In 1970s it did not seem like Americans would win wars
• Blame for failure of economic policies in 50s and 60s was placed on the state
• Monetarism: idea in which inflation is caused simply by having too much money
in an economy
• Laissez-faire economics: governments leaving things alone, allowing individuals
to pursue own interests in unregulated markets (Milton Friedman)
• In 1970s not even aid in developing countries, and rich countries did not let developing
countries trade into them
• Non-aligned movement: in 60s and 70s, called for creation of new international
economic order, refusal to work with US or with Soviet Union
• 1973: Arab States invaded Israel, in wake of defeat of Arab States, oil was used as a
weapon against rest of the world by tripling oil prices in one day
• Created rises in import bills for countries that depended on oil
• In 1979, prices tripled again
• Led to debt crisis in Asia and Latin America
• Financial systems in Middle East were highly underdeveloped, so they
put their money from the oil rise in developed countries banks
• Banks had to lend the money out to make profit, however developed
countries were in recession, there were no profitable lending
opportunities, so they lent to developing countries
• Developing countries used these loans to buy goods from developed
countries
• In 1979, US federal reserve, to end inflation, under idea of monetarism,
increased interest rates to encourage people to save and not spend
• Developing countries could not afford to repay loans at the high interest
rates
• On August 19, 1982, Mexico announced they were defaulting on loans
and declaring bankruptcy
• In sub-Saharan Africa, governments and international organizations had lent
money, which were also tied to American interest rates, so these countries could
also not pay back loans
• Across developing world, countries faced balance of payment deficit (value of exports
greater than value of imports), and budget deficits (governments spend more than they
take in in taxes)
• Countries approached International Monetary Fund and World Bank for help
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• These are called Bretton Woods Institutions, because they were founded
in 1944 in Bretton Woods as part of a conference with purpose to discuss
shape of global economic order in aftermath of WWII
International Monetary Fund (IMF):
• Created to:
• Promote global corporation in monetary affairs, balanced growth between
countries of global trade
• To promote stability in exchange rates
• To promote macroeconomic stability
• Was supposed to operate under UN General Assembly but US treasury wanted it
independent of UN, which it is
• Has 189 members which pay a subscription (a quota) to organization
• Quota determines how much money IMF can use to promote macroeconomic
stability by lending money
• How much countries are lent is determined by how much they pay in
• Half of their 2600 staff are professional economists
• Permanent board members: US, UK, Germany, France, Japan, Saudi
Arabia, China
• Non-permanent board members: Sub-Saharan Africa,
• Voting rights are based on quota paid by countries, so rich countries have
61% of voting rights
• Christian Lagarde, current managing director of IMF
• When appointed, she wanted to change the way IMF operated
• Leading to 2008 fewer countries needed IMF and it appeared to be leading to
irrelevance
• Financial crisis in 2008 led to need of IMF by European countries
• In 2009 G20 agreed to refinance IMF
• Allowed IMF to monitor economies and financial systems around world more
closely
• Vast majority of IMF money does not go to developing countries, it goes to European
countries
• Global financial institution, not a development institution
• In wake of global financial crisis, IMF has questioned many of its beliefs, although
programs have not changed much
World Bank:
• Created for:
• Provide long-term finance at below market rates of interest to Western Europe so
it could rebuild in aftermath of WWII
• Was supposed to operate under UN General Assembly but US treasury vetoed, so it is
independent
• First loan to developing countries was in mid-1950s
• Has 189 members, and 10,000 staff
• Consists of 5 distinct organizations:
• International Bank for Reconstruction and Development (IBRD)
• Original World Bank
• International Development Association (IDA, 1960s)
• To provide interest-free loans and grants to poorest countries
• International Finance Corporation (IFC, 1956)
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
In late 1960s as dependency theory emerged, fixing exchange rate unraveled because. Americans were fighting vietnam war and started printing more money, causing prices to go up: caused labour unrest and economic instability. In early 70s americans abandoned idea of fixed exchange rate system, creating system we have today. Arabia, china: non-permanent board members: sub-saharan africa, voting rights are based on quota paid by countries, so rich countries have. In 2009 g20 agreed to refinance imf closely: vast majority of imf money does not go to developing countries, it goes to european countries, global financial institution, not a development institution. In wake of global financial crisis, imf has questioned many of its beliefs, although programs have not changed much. International bank for reconstruction and development (ibrd: original world bank. International development association (ida, 1960s: to provide interest-free loans and grants to poorest countries.
