Week 2: What is Globalization? (2) Dimensions of Globalization
Economic Dimension (is it just economic?):
Bretton Woods System 1944:
It was founded at the Bretton Woods Conference in 1944.
Bretton Woods was attended by 44 countries; they drafted the Articles of Agreement, signed by
The purpose of the conference:
o General: To avoid another world war; to prevent another Great Depression (severe
economic downturn and a terrible social crisis, 1929-1939); to influence the business
cycle –recession-boom-recession-…, in other words, periodic fluctuation in the rate of
economic activity (measured by the levels of production and employment); AND to keep
the world stable, Bretton Woods created an international monetary system. It purpose
was (still is?):
to secure international monetary cooperation,
to stabilize currency exchange rates, and
to expand access to hard currencies (international liquidity)
stability of currency exchange rates without backing currencies entirely with
reduction in the frequency and severity of balance-of-payments deficits (when
more foreign currency leaves a country than enters it),
elimination of mercantilist trade policies, such as competitive devaluations and
foreign exchange restrictions—all while substantially preserving each country's
ability to pursue independent economic policies
o Context: the whole world with binding of international economic activities against
o Economic, political and technical
MERCANTILISM was economic theory and practice in Europe (16th -18th cent.) aiming
at enhancing the power of the state by implementing economic regulation of a
country’s economy at the expense of rival countries. Mercantilism was sort of like an
economic version of political absolute power. HENCE, gold and other precious metals
could not leave a country; subsequently it was deemed necessary for a country to have
mines or obtain gold by trade. HENCE, colonies were to be “dumping” markets for the
1 mother country’s industrial production and, at the same time, a supplier of raw
Price and labour costs
o Institutions and Regulations
macro-economic level: IMF - administration of international monetary
micro-economic level: WB – reconstruction and development
gold standard (US dollar)
International trade expansion
o Aim: “controlled capitalism:” promotion of world trade, investment and economic
Inter-national (or inter-state) cooperation among SOVEREIGN state
Richer help poorer state
Those in need of help are helped
Those countries that had a moderated balance-of-payments deficit were to
finance it by borrowing from the IMF instead of using mercantilism:
devaluation, deflationary policies, etc.
All of the above is based on rules and regulations created and executed by
was established on December 27, 1945. It is located in Washington, D.C.
Organization of IMF
The IMF is headed by a board of governors; each governor represents one of the organization's
approximately 180 member states.
The governors, i.e. finance ministers or central bank directors, attend annual meetings.
The IMF’s operations are administered by an executive board; it consists of 24 executive
directors who meet at least three times a week.
8 directors represent China, France, Germany, Japan, Russia, Saudi Arabia, the United Kingdom,
and the United States.
16 directors represent the rest of the members.
The board is chaired by a managing director appointed by the board for a renewable five-year
A member contributes a sum of money called quota subscription
o The richer the member the larger the quota
The quotas are pooled into a fund. The fund is used to lend money.
The US is the biggest contributor (it has the biggest quota subscription); HENCE
The US has biggest influence in the IMF
Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States have almost
50 percent of the quotas and, HENCE of total votes.
2 Operation of IMF
To stabilize currency exchange rates:
Each member declared the value of its currency to the US, which, in turn, was pegged to gold
(the gold standard)
The exchange rate of a country could only go 1 percent of the declared value.
However, in August 1971 President Nixon ended this system of pegged exchange rates by
refusing to sell gold to other governments at the stipulated price.
Since then members have been permitted to choose various methods to determine the
exchange rate such as free float – supply and demand
After losing its authority to regulate currency exchange rates, the IMF shifted its focus to loaning
money to developing countries. This is its role today, more or less.
To finance the balance-of-payments deficits
Members with balance-of-payments deficits may borrow money in foreign currencies. They
must repay the money with interest by purchasing with their own currencies the foreign
currencies held by the IMF.
Each member may immediately borrow up to 25 percent of its quota in this way.
The amounts available for purchase are denominated in Special Drawing Rights (SDRs), whose
value is calculated daily as a weighted average of four currencies: the U.S. dollar, the Euro, the
Japanese yen, and the British pound sterling.
Additional loans are available for members with financial difficulties that require them to
borrow more than 25 percent of their quotas.
The IMF uses an analytic framework known as financial programming, which was first fully
formulated by IMF staff economist Jacques Polak in 1957. The programming is to determine the
amount of the loan and the macroeconomic adjustments and structural reforms needed to
reestablish the country's balance-of-payments equilibrium.
The Fund has several financing programs, or facilities, for providing these loans, including a
standby arrangement, which makes short-term assistance available to countries experiencing
temporary or cyclical balance-of-payments deficits.
Each of these loans is accompanied by a “letter of intent” that specifies the macroeconomic
adjustments and structural reforms required by the IMF as conditions for assistance.
Typical loan conditionality requires borrowing governments to reduce budget deficits and rates
of money growth; to eliminate monopolies, price controls, interest rate ceilings, and subsidies;
to deregulate selected industries, particularly the banking sector; to lower tariffs and eliminate
quotas; to remove export barriers; to maintain adequate international currency reserves; and to
devalue their currencies if faced with fundamental balance-of-payments deficits.
To advise borrowing governments
The IMF consults annually with each member government. -- “Article IV Consultations.”
The IMF attempts to assess each country's economic health and to forestall future financial
3 The IMF also operates the IMF Institute, a department that provides training in macroeconomic analysis
and policy formulation for officials of member countries.
The World Bank
1. It is a source of financial and technical assistance to developing countries.
2. It is not a bank in the common sense.
a. It is made up of five constituent institutions
b. three of them are auxiliary (technical) in nature:
i. the International Finance Corporation (IFC), the Multilateral Investment
Guarantee Agency (MIGA), and the International Centre for Settlement of
Investment Disputes (ICSID)
c. two of them are development institutions owned by 186 member countries
i. the International Bank for Reconstruction and Development (IBRD) and
ii. the International Development Association (IDA).
d. Each of these two institutions play a different but collaborative role
i. IBRD, established in 1944, focuses on middle income and creditworthy poor
1. structured like a cooperative that is owned and operated for the