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POLA83 Lec02 What is Globalization? Dimensions of Globalization

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Political Science

Week 2: What is Globalization? (2) Dimensions of Globalization Economic Dimension (is it just economic?): The Beginnings:  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 29 countries.  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?): o Particular:  to secure international monetary cooperation,  to stabilize currency exchange rates, and  to expand access to hard currencies (international liquidity) o Methods:  stability of currency exchange rates without backing currencies entirely with gold,  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  Protectionism  Duties  Tariffs o Economic, political and technical  Mercantilism 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 materials  Dumping  Price and labour costs o Institutions and Regulations  Financial stability  macro-economic level: IMF - administration of international monetary system  micro-economic level: WB – reconstruction and development  gold standard (US dollar)  International trade expansion  ITO  GATT 1947 o Aim: “controlled capitalism:” promotion of world trade, investment and economic growth  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 governments The IMF 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 term  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 problems. 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 countries 1. structured like a cooperative that is owned and operated for the
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