Growth of World Trade and World Output

0200400600800

100012001400160018002000

1950 1960 1970 1980 1990 1997

TradeGDP Volume

1950=100

Figure 1.1

1-6

Impact of GATT Tariff Rates

05

101520253035404550

1913 1950 1990 2000

France

Germany

Italy

Japan

Holland

Sweden

Britain

United States

Average Tariff Rates on Manufactured Products % of Value

Table 1.1

1-7

Table 1-1 in text

The Shrinking Globe

1500 -1840 1850 - 1930 1950s 1960s

Best average speed ofhorse-drawn coachesand sailing ships, 10mph.

Steam locomotivesaverage 65 mph.Steamships average36 mph.

Propelleraircraft300 - 400mph.

Jetpassengeraircraft,500 - 700mph.

© 1-8

Figure 1.2

CountryShare of World

Output 1963

Share of World

Output 1996

Share of World

Exports 1997United States 40.3% 20.8% 12.6%Japan 5.5% 8.3% 7.76%Germany 9.7% 4.8% 9.9%France 6.3% 3.5% 5.46%United Kingdom 6.5% 3.2% 4.94%Italy 3.4% 3.2% 4.76%Canada 3% 1.7% 3.81%China NA 11.3% 2.85%S. Korea NA 1.7% 2.45%

The Changing Pattern of World Output and Trade

1-9

Table 1.2

Percentage Share of Total FDI Stock1980-1996

0

5

10

15

20

25

30

35

40

45

50

USA UK JPN GER FR Neth ODC DlvngEcon

1980

19851990

19941996

1-10

Figure 1.3

FDI Inflows1980-1996

0

50

100

150

200

250

300

350

400

1985-90

1991 1992 1993 1994 1995 1996 1997

World

Dev Ctry

Dlvg Ctry

USA

China

$B

1-11Figure 1.4

Growth of FDI, World Trade and World Output

0

200

400

600

800

1000

1200

84 85 86 87 88 89 90 91 92 93 94 95 96 97 98

FDI

World Trade

World Output

6-6

Figure 6.2

Increase in the Number of Bilateral Trade Treaties

0

200

400

600

800

1000

1200

1400

1993 1995 1998

Treaties

Countries

6-8

45

40

35

30

25

20

15

10

5

00 5 10 15 20 25 30 35 40 45 50

Turkey

Ecuador

Poland

ColombiaChina

Portugal

Great Britain

United States

Japan

Growth in moneysupply,1985 -1989 %

Consumer prices, 1984 - 1989 (%)

9-20

The Gold Standard• Roots in old mercantile trade.

• Inconvenient to ship gold, changed to paper - redeemable for gold.

• Want to achieve ‘balance-of-trade equilibrium

Japan USA

Trade

Gold

10-1

Between the Wars

• Post WWI, war heavy expenditures affected the value of dollars against gold

• US raised dollars to gold from $20.67 to $35 per ounce.

• Other countries followed suit and devalued their currencies.

10-2

Bretton Woods

• In 1944, 44 countries met in New Hampshire

• Countries agreed to peg their currencies to US$ which was convertible to gold at $35/oz.

• Agreed not to engage in competitive devaluations for trade purposes and defend their currencies.

• Weak currencies could be devalued up to 10% w/o approval.

• IMF and World Bank created.

10-3

IMF• Created to police monetary system by ensuring

maintenance of the fixed-exchange rate.

• Promote int’l monetary cooperation and facilitate growth of int’l trade.

• Wanted to avoid prewar problems, so – Created lending facilities to help countries with trade

deficits.• Persistent borrowings leads to IMF control of a country’s

economic policy.

– Created adjustable parities.

10-5

Sources of Funds

• 182 nations pay into fund according to the size of their economy.

• Funds remain their property.

• Borrower repays loan in 1 to 5 years, with interest.

• No nation has ever defaulted; some are given extensions.

10-7

Membership in the IMF

• Open to any country willing to agree to its rules and regulations.

• Must pay a deposit (quota)

• Quota size reflects global importance of a nation’s economy.

• Quota determines voting powers.

© 10-8

Largest Contributors

18.3

5.7 5.7 5.1 5.1

0

5

10

15

20

US Germany Japan Britain France

USGermanyJapanBritainFrance

10-9

Largest Borrowers

4

11 11.6

21

0

5

10

15

20

25

Thailand Russia Indonesia S. Korea

Thailand

Russia

Indonesia

S. Korea

10-10

$ Billion

(International Bank for Reconstruction and Development)

• Created to fund EUROPE’s reconstruction and help 3rd world countries.

• Overshadowed by Marshall Plan, so bank looked to 3rd world.

• Looked at public sector projects.

• Country borrows money raised by WB bond sales.

• International Development Agency created to help poorest countries.

10-11

What Happened After Bretton Woods?

• Under BW, US required to deliver 1oz of gold to any IMF member that gave US Treasury $35.00.

• 1958 -1971 US ran accumulated deficit of $56 billion.

• US gold reserves shrank from $34.8 billion to $12.2 billion.

• Liabilities to foreign central banks increased from $13.6 billion to $62.2 billion.

10-12

Collapse of the Fixed Exchange System

• August 8, 1971, Nixon left gold standard?

• March 19, 1972, Japan and most of Europe floated their currencies.

• Fully collapsed in 1973.– LBJ policies and Vietnam.

• Floating currencies considered to be a temporary fix.– Still going on today.

10-13

Floating Exchange Rates

• Jamaica Agreement, 1976.

• Floating rates acceptable.– Based primarily on supply/demand.– Managed float involves gov’t

manipulation in currency markets.

• Gold abandoned as reserve asset.

• IMF quotas increased, now $180B

10-15

Managed Currency Floats

• 1985: ‘Group of 5’ met at Plaza Hotel in NY and agreed on ‘right’ level for US dollar.

• G5 became G7 (now G8). Seeks to stabilize exchange rates.

• Difficult due to growth of Fx market.– Annual volume up from $18 billion in 1979 to

$1.5 trillion today.

10-16

Floating

• Monetary policy autonomy

• Trade balance adjustments.

10-17

Fixed

• Monetary discipline.

• Speculation.

• Uncertainty.

• Trade balance adjustments.

10-18

Exchange Rate Regimes• Pegged Exchange Rates.

– Peg own currency to a major currency ($).– Popular among smaller nations.– Evidence of moderation of inflation.

• Currency Boards.– Country commits to converting domestic currency on

demand into another currency at a fixed exchange rate.

– Country holds foreign currency reserves equal to 100% of domestic currency issued.

10-19

How IMF Members Determine Exchange Values

0

5

10

15

20

25

30

35

40

45

50 Peg to $

Peg to FFr

Pegged to OtherCurrencyMovement Related toOther CurrencyFree Float

Managed Float

Other

Inflexible

Somewhat Flexible

Flexible

10-20

Figure 10.2

Post-Bretton Woods Financial Crises

• Currency crises:– when a speculative attack on a currency’s exchange value

results in a sharp depreciation of the currency’s value or forces authorities to defend the currency.

• Banking crises:– Loss of confidence in the banking system leading to a run on

the banks.

• Foreign debt crises:– When a country cannot service its foreign debt obligations.

10-21

Crises Have Common Underlying Causes

• Common causes:– High inflation– Widening current account deficit– Excessive expansion of domestic borrowing– Asset price inflation

10-22

Incidence of Currency Crises1975-1997

00.050.1

0.150.2

0.250.3

0.350.4

0.450.5

1975 77 79 81 83 85 87 89 91 93 95 97

Industrial

Emerging Market

Number of Currency Crises per Country

10-23Figure 10.3a

Incidence of Banking Crises 1975-1997

0

0.02

0.04

0.06

0.08

0.1

0.12

0.14

0.16

0.18

0.2

75 77 79 81 83 85 87 89 91 93 95 97

Industrial

Emerging Market

Number of Banking Crises per Country

10-24Figure 10.3b

IMF Policy Prescriptions

• “One size fits all” prescription for countries.• Rescue efforts exacerbate the ‘moral

hazard’ problem.• Too powerful without accountability.

10-34

Impact on the Countries

• Currency devaluation.

• Declining investment.

• Rising prices.

• Rising unemployment.

• Rising poverty.

• Rising resentment?

10-35

Investment Impacts• Loss of investment confidence.

• Deflation of asset values.

• Substantial corporate debt burdens.

• Reversal of capital flows– Decline in access to operating cash.

• Declines in domestic demand.– Compression of intra regional trade.

10-36