System of Bretton Woods - Assignment Example

International relations and the Bretton Woods system Background The world’s economic s and framework can betraced back to several decades ago in the planning of a new economic order that took place towards the end of the Second World War. Policy makers from 44 countries came together in New Hampshire, at the Bretton Woods resort for the United Nations financial and monetary conference to come up with ways of resolving two serious issues. First agenda was to come up with ways to prevent the great depression of the 1930’s from occurring again. The great depression can be defined as the global economic fall that followed the crash of the stock market in October 1929 at the US Wall Street (Lamy 349). The economic ripple effects were felt around the world which had already been deeply interconnected through trade and foreign direct investments. Second on the agenda was to rebuild the war torn economies of Europe. They were setting in motion plans to rebuild global capitalism in the midst of Second World War. Bretton Woods is the very first example of a completely negotiated order in the history of the world meant to govern monetary relations among independent nation states. Three institutions were planned with the aim of promoting a new world economic order through setting up of a system of rules and procedures in an effort to regulate international political economy. The institutions that were established were, the International Monetary Fund (IMF) which was set up to ensure a stable exchange rate and provide assistance to countries facing temporary economic crisis in their balance of payments. The second institution was the International Bank for Reconstruction and Development (IBRD), later changed in to the World Bank whose aim was to enable private reconstruction and investment in Europe. The bank was also charged with the responsibility of aiding development in other countries which is the main reason for its existence to date. Thirdly, the general agreement on tariffs and trade (GATT), signed in 1947 which forged ahead to become the forum for negotiation on trade liberalisation and the reduction of trade barriers (Lamy 350). The key characteristics of Bretton Woods system were, first, each country was obliged to maintain the exchange rates for its currency within a fixed value. Second, IMF assistance to bridge temporary payment imbalances. Faced by increasing strain, the system collapsed eventually in 1971 as a result of US’s suspension of convertibility to gold, from dollars. In spite of the demise of the system, the World Bank and IMF continue to play important roles in the world’s economy today (Lamy 362). Is it time to entirely transform rather than merely reform the institutions that were originally a part of the Bretton Woods system? Reforming the institutions established by the Bretton Woods system is a necessary step rather than transforming them altogether. This is because these institutions were set up with an aim of developing nations and improving the world’s economy. Reforms should be put in place for example in the IMF, as the current international economic environment is significantly hopeful than ever before. An overwhelming majority of most countries live in some form of market economy therefore the industrial world has a rare advantage of growth and low inflation. The IMF played a pivotal role in the transformation of the former communist economies and the debt crisis in the 1980’s. As such, scholars posit that radical changes such as total transformation may be in bad taste or not desirable. Therefore, what is needed are reforms (Steil 14). However, some argue that transformation is of essence in IMF since there is an evident gulf between reality and the rhetoric of its role. With the collapse of Bretton Woods in the 1970’s, the growth of capital markets have rendered the institution impotent in developed countries. The richest economies in the world do not borrow from the institution nor do they require its policy advice. Its role in the developing world is also unclear since it has been unable to avert crisis for example in Mexico, it was unable to foresee the Mexican debacle (Zoellick 4). In the poorest economies, IMF has become an institute of development with a very thin micro economic focus. Subsequently, there are no clear goals of the created institutions since there is an overlap of roles. This is evidence enough that the economic institutions need to be transformed where they can be useful to all economies with clear goals and policies (Steil 19). If the current Millennium Development Goals Campaign fails, should the global leaders consider an alternative to the current system? Millennium Development Goals are set targets with an aim of addressing extreme poverty, disease, inadequate housing, education, gender equality among others including basic human rights and health. Significant change has been felt the world over due to improvement in some of the mentioned sectors but there is a disparity in the countries and especially in the Sub-Saharan Africa where poverty levels and disease have reached crisis proportion but an improvement in the levels of enrolment of primary education has gone up. MDG’s are meant to be met by 2015. With only a small window of time remaining, the campaigns might fail when the time elapses and the budget for these MDG’s is cut short. Therefore, global leaders and especially those in the developing nations need to come up with new alternatives to minimize the crisis being faced by their countries (McArthur 2). There should be a new way of financing their budgets rather than relying on foreign aid. Currently, most poor countries rely on foreign aid to fully support their budget. World leaders should agree on cutting aid so as to encourage the developing nations to be independent even if the MDG’s were to fail or their time elapses. Other forms of dealing with crisis such as poverty is encouraging job creation rather than solely depending on employment for sustainability since people are exposed to education. Other self sustaining alternatives should be considered if the current MDG’s campaigns fail. The IMF should also seize to design policies based on working with others and better macroeconomic frameworks to accommodate increased resources (McArthur 3). Should the global south have a greater voice in the policies of the World Bank? Despite the significant growth in Africa’s economy, African countries are not fairly represented in the global summit and the World Bank. Africa is part of the global south countries with only one representation in the G-20 summit which is by South Africa. It is necessary for global south countries to have a greater voice in the G-20 summit as well as the World Bank since they are the hardest hit especially when it comes to poverty levels that hinder development. As such, more and better policies should be directed towards these countries if they are to achieve further development. The summit first of all cannot talk about the global south as crucial part of the world economy if they are kept in the periphery. There should also be a greater voice by the global south in the World Bank due to structural and cultural issues (Steil 30). The governance continues to deny the global south a voice in the institution’s boardroom and the architecture reflects the outdated donor-recipient order rather than the new economic world system. The cultural aspect is as a matter of fair representation for all races since it’s the World Bank after all. The changing global dynamics presents a chance to include new voices into global governance which the global south and in specific Africa, should capitalize on so as to safeguard the recent gains in development. Works cited Steil, Benn. The Battle of Bretton Woods: John Maynard Keynes, Harry Dexter White, and the Making of a New World Order. Princeton: Princeton University Press, 2013. Print McArthur, John. Own goals.What the Millennium Development Goals Have Accomplished. March/April 2013 issue. Print. Zoellick, Robert. "The currency of power: want to understand Americas place in the world? Write economics back into the plan." Foreign Policy 196 (2012): 67+. Global Issues In Context. Web. 22 Jan. 2015. Lamy text, international political economy. Print JOHN W. MCARTHUR is a Senior Fellow at the Fung Global Institute and the UN Foundation and a Nonresident Senior Fellow at the Brookings Institution. From 2002 to 2006, he was Manager and Deputy Director of the UN Millennium Project. Follow him on Twitter @mcarthur. See more by this authorclose Read More