Question 5: Compare and contrast one or more aspects of the Bretton Woods and post Bretton woods era. How and how far has power in the international political economy changed between this eras and with what effects? Program: Bsc International Business and Politics Course: Political International Economy Type of paper: final examination, home assignment Hugo VINCENT Hand-in date: Friday, the 19 th of december 2014 Number of words: 3025 Number of pages: 7 Number of characters: 18 923 Copenhagen Business School, 2014
There is no denying that economic difficulties experienced by one or more countries will have an impact over the world's financial and economic order and will inevitably lead to proposals for economic reforms. When it comes to financial difficulties, the need for change is even more important. Indeed, the rapidity and force with which financial and monetary market disturbances can spread between distant countries sugests that preventive measures taken by individual economies might not be enough to ensure stability, and stresses the relevance of a global reform. This paper will thus focus on one of the most relevant changes in international financial and monetary system, that is to say the Bretton Woods agreement, both analyzing the times when such treaty was in order and the era following its decline and leading to a new monetary order. Bretton woods refers to the international monetary system adopted in July 1944 that established rules for rebuilding the post war economic order. Driven by the idea that the competitive devaluations of curencies undertaken during the Great Depression era had negatively affected international trade, the main goal of the Bretton Woods treaty was to provide a framework so as to stabilize the World's financial system. Having established the need for a supranational power in terms of international political economy (more precisely through some form of world's economic, financial and monetary system), this paper will seek to analyze how said power has changed over the last decades. In other words, which actors should detain power in international political economy, and to which extent should such power influence the global order? In order to fully grasp this question, this paper will provide a reasoning based on the examples of both the Bretton woods and post Bretton Woods era. It will first establish a backround for the treaty, including the reasons for its existence and its establishement in itself. Later, it will analyse the Bretton Woods era from the point of vue of the monetary system as well as its institutions. It will then explain the decline of the Bretton Woods era together with a presentation of the new monetary system and its implications in global institutions. Finally, the paper will continue by analyzing the different actors in international political economy, pointing out the changes in power surrounding the two eras of monetary system. The following argumentation will lead to the conclusion that the repartition of power is more complex nowadays with the emergence of new actors. Following World War II, the biggest global economies wanted to recover from the damages caused by the worldwide conflict and thus avoiding another great depression. Therefore, delegates from 44 countries met in Bretton Woods (New hampshire, USA) in order to discuss a new financial and monetary order. Indeed, political and economic thinkers of this era understood that free trade enhances individual economic growth for countries, and the fact that financial issues during the
great depression lead to economic stagnation stressed out the need for monetary coordination. However at first, the means needed to achieve monetary order were different between two of the main actors: The United States represented by Harry Dexter White and Great Britain, whose interests were defended by John Maynard Keynes. Whereas White aimed for free trade based on a conservation of national currency with fixed exchange rates and gold as a world unit, Keynes argued that a new supranational money (the bancor) had to be created as a reference for national currencies to be based on. In the end it was the american ideas that prevailed, as Bretton Woods establihed a system based on a gold-dollar standard from which national currencies adapt their exchange rates (fixed exchange rates) and the création of new supranational financial institutions 1. As stated before, one of the main pillars of Bretton Woods is the establishement of a new monetary system which rests on a gold-dollar standard. This means that all countries were to maintain an exchange rate which would be based on the value of gold, the value of gold itself being determined in US dollars. The system was thus a fixed exchange rate regime, as the price of any national currency could only vary within a narrow range around their given price in terms of gold. Among the main objectives of the system, the most important were international trade, economic growth for every country, full employement and a stable balance of payments. In addition to the legal aspect that is the gold-dollar standard, Bretton woods also implied the use of capital controls so as to make currency speculation and moreover harmful capital flows less relevant in terms of their negative impacts on the economy 2. There is no denying that among the main actors in international political economy are are the States' governments. Indeed, they have an impact on the world's economic and financial conjecture through different policies. Under the Bretton Woods agreement however, their power is reduced as they cannot establish monetary policies. Finally in terms of State agency, that is to say the power to determine policy and shape the international realm 3, it can be concluded that the leading economies are, among others, Great Britain and most importantly the United States. Indeed, the monetary system was agreed upon the model given by the United States, which posessed at that time almost 70% of the world's gold. The other main pillar of the Bretton woods agreement is the creation of supranational institutions so as to ensure financial stability. On the one hand, an International Monetary fund was instored. Its main goal was to oversee the international monetary system in order to ensure exchange rate stability and encourage members to eliminate exchange restrictions that hinder trade. For this, it 1 French journal's website: Libération; article about the opposition between Keynes' and White's vision of Bretton Woods (economic section, 2008) http://www.liberation.fr/economie/2008/11/15/keynes-vs-white-deux-visions-unvainqueur_257066 2 Issues & actors in the global political economy, 2014 by André Broome ; page 158 3 Issues & actors in the global political economy, 2014 by André Broome ; page 49
made sure that States did not change their exchange rate, allthough it could give its agreement for countries to adjust them so as to correct a fundamental disequilibrium in the balance of payments. The international monetary fund added order by being the pillar of the financial and monetary system, in opposition to the informal agreements between national banks from different countries. On the other hand, a World Bank was created to provide support for countries undergoing post-war reconstruction. It is divided into two major branches, namely the IBRD (International Bank for Reconstruction and Development) which lent money to developing countries and the IDA (International Development association) which lent money to the poorest countries in the World. One of the most important aims of the supranational institutionalisation is the establishement of current account convertibility, described by André Broome as the liberalization of acces to foreign exchange to pay for trade of goods and services, overseas travel and interest and dividend payments 4. This led to a rapid growth of offshore currency markets which are more liberal (free from domestic interest rate regulation and other capital controls), thus giving more power to firms in the international political economy. Nonetheless, and despite the many positive points present in the Bretton Woods agreeement, which was a good solution to the international monetary regime, a collapse of the system could not be avoided. Indeed, due to 3 main factors, The fixed exchange rate regime ended in 1971. First of all, one of the weaknesses of such system was the dependence on the United States' ability to balance its liabilities compared to the gold stock. Indeed, They had an important deficit at the time, and there was a fear of a depreciation of the dollar due to greater liabilities than gold stock. In 1960 for instance, gold was sold in Great Britain for more than its original dollar price, putting the fixed exchange rate system under pressure. Secondly, there was a weakness in the balance of payments adjustment process. This was caused by the fact that deficits in the balance of payments was mostly dealt with input of money through credit instead of searching for a problem within the balance itself that could be fixed through financial and/or monetary policies. The issue here is that the Bretton Woods system imposed the same policies for all countries, whereas they can be different and thus need different policies. Finally, the last major weakness is the inability to control capital flows, even though it was originally one of the aims. Eventually, such weaknesses lead to the collapse of the fixed exchange rate system in 1971, and marked the begining of the post Bretton Woods era. The post Bretton Woods era, which begins in 1971, may alternatively be called the Washinton consensus, which was based on economic openness (both in terms of trade and 4 Issues & actors in the global political economy, 2014 by André Broome ; page 158
invesstment) as well as growth within domestic markets. Even though such idea was only established in 1989, it is often seen as taking its roots in the 1980', leaving the seventies to be a transitional period. The main difference with the Bretton Woods agreement is the passage from a State led to a market led system, even though paradoxally States have an enhanced power over international political economy as this paper will later argue. In this new system, State have moved towards a floating exchange rate regime, were exchange rates vary freely according to the market's supply and demand of foreign currency. Exchange rates are therefore very different between countries and at moments in time, and even though they cannot be controlled by states they can be influenced (negatively or positively) through financial and monetary policies. While the fixed exchange rates helped reduce inflation by reducing economic uncertainty, the new regime allowed domestic economies to adapt with more relevance to external economic conjecture and was therefore less affected by currency crisis. The financial aspect of the post Bretton Woods era can be explained through three main points, which were identified by Henri Bourginat and are usually known as the three Ds. The first aspect of financial liberalization is the derregulation of the market, which consists of a loosening or removal of national regulations over capital movement, including exchange prices and credit control 5. The aim of financial derregulation is to facilitate and enhance financial flows all over the world. The second aspect called decompartmentalization, and refers to a reconstruction of the banking sytem. Borders which used to segment the financial markets are abolished, namely separation between different domestic markets and separation between different types of markets (money market, bond market, foreign exchange market...) 6. Consequently, all financial market are interconnected and form a vast and global market which is broader, deeper and more accessible to all stakeholders seeking financing or invessting. Finally, disintermediation in financial markets may be the most important reform from the Bretton Woods era, as it gives more power to firms in international political economy through easier financing and therefore enhanced growth in a global market. Indeed, firms have now access to direct financing through actions and obligations instead of going through financial intermediaries 7. As this paper will later discuss, this reduces the influence of financial institutions while it implies the emergence of every non-elite every day actors. After having analyzed the characteristics of both the Bretton Woods and post Bretton woods eras, this paper will now compare and contrast their different aspects in terms of monetary systems and financial institutions. In fact, by opposing some of the most important criterias of each era, we 5 Website of the french senate, http://www.senat.fr/rap/r03-233/r03-23311.html 6 Website of the french senate, http://www.senat.fr/rap/r03-233/r03-23311.html 7 Website of the french senate, http://www.senat.fr/rap/r03-233/r03-23311.html
can better grasp the different actors as well as the change in power and influence in international political economy. From a monetary point of vue both eras are without a doubt very different, and can be considered to be the opposite from one another. Indeed, the Bretton Woods system imposes fixed exchange rates which are based on the value of gold (the value of gld being determined in dollars). It is thus a State oriented system, given the fact that governments must adapt their exchange rate in order to keep them stable compared to other exchange rates. In the post Bretton Woods era, however, the regime of floating exchange rates is based on the demand and supply of domestic currency and is consequently market oriented. This implies that there are more actors that have influence over the monetary conjecture, as for instance firms and everyday actors (which is not the case in Bretton Woods). Finally, there are less differences in terms of financial market and institutions, allthough the two eras can indeed be contrasted. During the Bretton Woods era, supranational institutions were established so as to regulate financial actions. After 1971 nevertheless, a liberalization of the financial market takes place with the three pillars previously discussed, leading to a more volatile financial market were new actors emerge and institutions have less power. This paper will now analyze the existing actors in the monetary and financial system so as to determine the changes in power in international political economy over the last decades. It will first focus on the role played by States, and more precisely the evolution of their power from Bretton Woods up to the present. On the one hand, their influence has been reduced over time as a consequence of the liberalization of both the monetary system and the financial market. This is due to the fact that the post Bretton Woods era has marked the begining of a new, more complex repartition of power in international polictical economy. Indeed, both because of the liberalization and globalization in the world, new forms of influence and actors have emerged, leaving States with less power of action and decison. As stated before, there has been a transition from a State led system to a market oriented order, which implies that it is more difficult for one actor to influence the whole system as a wider ammount of parameters controlled by different actors is to be taken into account. Nonetheless and paradoxically, States do have an increased power now compared to the Bretton Woods era, even though it is only from a monetary point of vue. Whereas the exchange rate of their domestic currency used to be fixed (only allowed to vary 10% from their original value), States can now affect it (positively or negatively) through financial and monetary policies (expansionary or contractionary). The second actor to be analyzed refers to the financial market and capital flows, as this paper will now focus on international organzations and more particularly financial institutions.
Established in the Bretton Woods agreement, financial institutions such as the International Monetary fund and the World Bank used to play a major part in international political economy. Indeed, their role was to help countries repair the damages cause by World War II through financing, giving out credit and loans. Consequently, they had a wide spread power given the fact that they were the most important source of financing fot countries. However, such influence has been reduced over time due to the liberalization of the financial markets. Reparation of the damages caused by war being completed, the economy does not only focusses on domestic growth, but also economic, social and financial prosperity on a worldwide scale. Globalization of the market for goods and services has led to an increased need of financing all over the globe, which does not necessarily need to be achieved through financial institutions. In fact, State and more importantly firms can now find capital directly in the financial market, for instance through the emission of actions. As a consequence, international organisations and financial institutions represent a smaller portion of the market for capital (as credits and loans are not the main form of financing), and therefore have less power. This also implies the emergence of new actors, which are a growing force in international political economy. Finally, this paper will show that new actors have emerged in the political and economical scene, participating in creating a much more complex repartition of power. Even though they may not seem as official or institutional as States, international organisations of banks, theses actors have had an increased role in the political and economic situation. On the one hand firms, and more particularly multinational firms have gained more power. First, because economics and politics are closely linked together, decisions taken by firms may impact the political scene. For instance, foreign direct invesstment in a poor country will not only help with domestic economic growth, but will also enhance the social and even maybe the political situation. Also, firms can impact exchange rates through their foreign direct invesstment, thus affecting the supply and demand for domestic currency. On the other hand, there has been an increased presence of everyday actors, defined by André Broome as non-elite actors in the global political economy 8. Their everyday behavior greatly impact the economic political and economic conjecture of different countries. For instance, if many individuals put their trust in a specific company, its valut will grow in the financial market. The analysis of the Bretton Woods and post Bretton Woods era thus far helps understanding the many actors present in the political and economic scene, together with a better understanding of the evolution their power throughout the years. Indeed, studying the world's monetary and financial system and its changes provides the tools to fully grasp which actors are the most influent. 8 Issues & actors in the global political economy, 2014 by André Broome ; page 125
Consequently, this paper will conclude by saying that liberalization of the markets and globalization around the world have lead to a more complex repartition of power, importantly caused by the emergence of new actors. In general, no participant in the world's political economy has as much influence over others, as it was for instance the case during the Bretton Woods era. Power is shared between more bodies, thus impeding a monopolistic force. Instead, we are in a market oriented world where everyone and everything has an impact on the political and economic conjecture. The classical forms of power in international political economy has seen their influence reduced (although not supressed), leaving a place for new actors such as for instance firms and individuals. However, there is no saying in wether this new system together with its repartition of power is the best, and it must not be omitted that the complexity of it may cause more instability. For instance, financial crisis have been more frequent and intense.
BIBLIOGRAPHY 1. French journal's website: Libération Article about the opposition between Keynes' and White's vision of Bretton Woods Economic section, 2008 http://www.liberation.fr/economie/2008/11/15/keynes-vs-white-deux-visions-unvainqueur_257066 2. Issues & actors in the global political economy, 2014 by André Broome Chapter 11, Global Money and National Currencies, page 158 3. Issues & actors in the global political economy, 2014 by André Broome Chapter 4, State actors, page 49 4. Issues & actors in the global political economy, 2014 by André Broome Chapter 11, Global Money and National Currencies, page 158 5. Website of the french senate http://www.senat.fr/rap/r03-233/r03-23311.html 6. Website of the french senate http://www.senat.fr/rap/r03-233/r03-23311.html 7. Website of the french senate http://www.senat.fr/rap/r03-233/r03-23311.html 8. Issues & actors in the global political economy, 2014 by André Broome Chapter 9, Everyday actors, page 125