Financial and Commercial Relation Rules - Assignment Example

Section A Question 3: Financial and commercial relation rules with respect to monetary management among mid-20th century world's major industrial states were established by Bretton Woods system. This was the first order of its kind that governed independent nation-states' monetary relations. The historical context of Bretton Woods system was important because it was established while the World War II was still going on. It was during this period of unrest that from 44 allied nations 730 delegates gathered in Bretton Woods, New Hampshire, United States at the Mount Washington Hotel. This set the stage for what is popularly known as Bretton Woods Conference, and even referred to as United Nations Monetary and Financial Conference. The agreement was signed in July of 1944. This led to the making of International Monetary Fund (IMF) along with several systems of rules, procedures and institutions. This was also the time when International Bank for Reconstruction and Development or IBRD was formed; which is now part of World Bank Group. Following ratification by the desired number of participating countries, these organisations started operations in 1945. Bretton Woods systems imposed an obligation on each participating country to follow the monetary policy. This rule envisaged that every country’s exchange rate will be determined by its 'tie up' with respect to the U.S. dollar; a system in which IMF must be able to take care of imbalances of payments by 'bridging it'. A change occurred in August 1971 when convertibility of the United States dollars to gold was unilaterally terminated by the US. The result was that the dollar became a flat currency and Bretton Woods system came to an end (Lowrey, 2011). Popularly known as the Nixon shock, this action turned US dollar into a reserve currency, which is now used by many states. The ripple effect of this action was that other currencies that were till then fixed currencies became free-floating, like Great Britain Pounds. The Nixon shock, which was in fact the launch of New Economic Policy by President Richard Nixon on 15 August 1971, sounded Bretton Woods system's death knell. It is because this helped major currencies float instead of stay fixed in the market. Emerging difficulties in the United States economy are said to be the reason behind Nixon's decisions. The government had indulged in increased spending, primarily on two fronts. One was the Vietnam War and another President Johnson's urban development and public education that had went out of control and led to rampant inflation. United States' balance-of-trade position was worsened by this and the country was put in a very tight spot by competing nations as Germany and Japan, which were export-oriented nations. The stiffer competition was also posed by states that were recently industrialised like Taiwan and Korea. United States thought that Nixon shock was essential because its world industrial output had drastically fallen from what it was in 1945 to 1970s. In 1945, it was 50 percent and in 1970s it had fallen to 20 percent. USA's gold stocks were declining and the country was not able to maintain its dollar value. In 1945 its gold stocks were valued at $25 billion but by 1970 the value had plummeted to as low as $10 billion. Gilpin (1987; 140) has remarked that end of Bretton Woods was actually end of hegemonic power imposed by the United States. Ostensibly however, there are also scholars who believe that end of Bretton Woods was actually a display of US hegemony in its own right. It is because, as scholars argue, it was an act of a "predator hegemon" who wanted the system to be dismantled since it was no longer of any use to it. This was a long-drawn process that finally culminated in the making of "Washington consensus". Another cause thought to have led to the doom of Bretton Woods system was its "imposing" rules willing to control a capitalist market, which was, in reality, adding to the burden that it was already carrying. Capitalist system was not favoured by all countries, which led to subsequent contradictions in the system. The contradictions and the regulations on account of the capitalist background did not make a compatible twosome. Bretton Woods doom became inevitable (Palgrave.com, nd). Eichengreen and Bordo (1993; 615) have argued that contrary to what is believed the Bretton Wood system did not have a proper mechanism to handle the balance of payment issue. Giplin has added that Breton Woods was in reality a causality of American hegemony and reckless policies. There were fundamental differences between Western European countries and the USA. These nations wanted American hegemony to be curbed. America, as part of a smart move, let the doom of Bretton Woods take place so as to avoid getting restrained by other nations (Giplin, 1987; 140) Section B Question 6: Climate change is a problem waiting for markets to respond to. It is a problem that needs solutions on an urgent basis. These concerns evolved more rapidly during 1990s, a period during which climate change began to be seen through the prism of carbon markets. This resulted in wedlock between the two, but long before an adequate assessment of the match took place. As a result of this, emissions trading began to be seen as lone remedy to the international climate changes as an issue and thereby its solutions. But climate change, in what now appears, is an entirely different problem than emissions trading than what was previously thought of. In other words the alliance that was struck between economics of trading and climate change has resulted in wayward markets not ready to tackle the problem of climate change. There are numerous failures of coordination and the problem, according to Smith (1976; 690) is on account of a number of externalities. Smith called for government's intervention in handling the issue. Test determining limits of government's intervention were proposed but, as Madema (2003) states, could never be developed. This is because the markets that are supposed to handle the issue of climate change contain both private and public stakeholders and there is a clash in interests of both. Swisher and Masters (1989) have argued that in order to make markets capable of handling the issue it is important to use theory of emissions trading together with climate change. They have further argued that it was essential to come up with an international market mechanism that prioritises the importance and action of climate protection. "International carbon emissions offset", they opined, can be used as a currency. Victor (1991) has stated that inefficiency of markets to handle climate change can be, to some extent, mitigated by such a scheme. Forestry offsets have also been suggested to be added to such mechanism by Dudek and LeBanc (1990). Also another facet of the problem why markets are not fully equipped to handle the problem is because policy makers do not stay as much abreast with appropriate role of carbon markets internationally and if they do the outlook is not as broad as it should be. International policies in this regard need to be complementary, which will enable markets accept and handle only those problems in which their effectively is more than any other issue on hand. There are several camps which look into the issue of climate change and what retards markets from responding to these issues are that several incongruencies exist between each camp. It is important for future efforts to look beyond the surface so that restrictions markets are facing in addressing the issue are understood and tackled. This will make sure that markets are equipped well to address the problem of climate change. This is the only way for international markets to realise the benefits that they have long been promising on climate change. This also calls for introspection into the economic part of climate change, the spiralling costs of handling climate change is preventing some markets to act in a direction that begets positive results. For example, the case in point could be Australia, a country that will face enormous economic and human cost to handle climate change since its infrastructure is not as equipped to match the act demanded by the issue (The Climate Institute, 2012). A report made public by The Climate Institute has gathered data on physical consequences and impacts of climate change on various variables across the country, which includes electricity, property, rail, road and finance sectors. The report has assessed government's and businesses' preparedness to manage the forthcoming risks or current problems triggered by climate change while checking how the nation could improve its climate readiness. There are conservative estimates of annual cost imposed on Australian infrastructure by the unmitigated climate change. The costs were exponentially high in 2010 at $9 billion and estimates recorded then stated the same would rise in years to come. In global re-insurance markets Australia represents around 2 percent, but loses it has incurred during last 7 years are to the tune of 6 percent. This is because of extreme weather events like fires and floods. Arguably risks imposed by climate change are in full preparedness, but markets or infrastructure to handle the same is not. References Dudek, D. J. and LeBanc, A. (1990). Offsetting New CO2 Emissions: A Rational First Greenhouse Policy Step. Contemporary Economic Policy, 8(3):29–42. Eichengreen, V and Bordo, M (ed). (1993). A retrospective on the Bretton Woods system: Lessons for International Monetary Reform. Chicago; London. University of Chicago Press. Giplin, R. (1987). The political economy of international relations. New jersey. Princeton University Press. Lowrey, A. (2011). End the Fed? Actually, Maybe Not.. Available http://www.slate.com/articles/business/moneybox/2011/02/end_the_fed_actually_maybe_not.html. Accessed 03 November, 2013. Medema, S. G. (2003). The economic role of government in the history of economic thought. In Samuels, W. J., Biddle, J. E., and Davis, J. B., editors, A companion to the history of economic thought, chapter 27, pages 428–444. Blackwell Publishing. Palgrave.com. (nd). The collapse of Bretton Woods. Available http://www.palgrave.com/politics/global/students/casestudies/14039_89826_Ch19_GPI_BrettonWoods.pdf. Accessed 03 November, 2013. Smith, A. (1976). An Inquiry into the Nature and Causes of the Wealth of Nations. W. Strahan and T. Cadell, London. Swisher, J. N. and Masters, G. M. (1989). International carbon emission offsets: A tradeable currency for climate protection services. pages 154–159. The Climate Institute. (2012). Coming Ready or Not: Can Australia's infrastructure handle climate change? Available http://www.climateinstitute.org.au/articles/media-releases/coming-ready-or-not-can-australias-infrastructure-handle-climate-change.html. Accessed 03 November, 2013. Victor, D. (1991). Limits of market-based strategies for slowing global warming: The case of tradeable. Policy Sciences. Read More