The World Economic Governance on trial since 1944

1. The World EconomicGovernance on trial since 1944

2. Key Questions • Who/What are the actors in global economic governance, and what are their goals? • How has the West built the foundation for world economicgovernance? • How has the idea of global economic governance evolved since 1945? • How efficient are the different systems in place?

3. Preview Introduction • The Need for a World EconomicGovernance • Governancedictated by a bipolar world III. EconomicGovernance: a southern perspective

4. Introduction The acceleration of globalization in the 20th century has caused economies to become more interdependent. Organizing globalization by a world governance assumes that economic actors agree.

7. The Actors of World Governance

8. World Economic Governance since 1944

9. The 1st five shareholder powers elect 5 members to the Board of Directors China, Saudi Arabia and Russia elect 1 member to the Board of Directors Source: IMF

10. How do these countries compare with those that control the IMF?

11. Main IMF Borrowers

12. Timeline

13. I. The Need for a World EconomicGovernance • World monetarycrisis of 1930’s currencywars(competitivedevaluation) protectionism • pave the way for FDR to fostereconomiccooperationbetween allies • International ConferenceatBrettonWoods 1944

14. Video:BrettonWoods International MonetaryConference

15. A. 2 opposing visions of world economicorder: Keynes (UK) vs. White (US) a. Keynes = genuine world economicgovernance, responsible for international monetarypolicy b. White = return to Gold Exchange standard with dollar replacing the pound sterling

17. John Maynard Keynes was a British economist whose ideas have fundamentally affected the theory and practice of modern macroeconomics, and informed the economic policies of governments. He built on and greatly refined earlier work on the causes of business cycles, and is widely considered to be one of the founders of modern macroeconomics and the most influential economist of the 20th century. His ideas are the basis for the school of thought known as Keynesian economics, and its various offshoots. In the 1930s, Keynes spearheaded a revolution in economic thinking, overturning the older ideas of neoclassical economics that held that free markets would, in the short to medium term, automatically provide full employment, as long as workers were flexible in their wage demands. Keynes instead argued that aggregate demand determined the overall level of economic activity, and that inadequate aggregate demand could lead to prolonged periods of high unemployment. According to Keynesian economics, state intervention was necessary to moderate "boom and bust" cycles of economic activity. He advocated the use of fiscal and monetary measures to mitigate the adverse effects of economic recessions and depressions. Following the outbreak of the Second World War , Keynes's ideas concerning economic policy were adopted by leading Western economies. During the 1950s and 1960s the success of Keynesian economics resulted in almost all capitalist governments adopting its policy recommendations.

18. Keynes's influence waned in the 1970s, partly as a result of problems that began to afflict the Anglo-American economies from the start of the decade, and partly because of critiques from Milton Friedman and other economists who were pessimistic about the ability of governments to regulate the business cycle with fiscal policy. However, the advent of the global financial crisis in 2007 caused a resurgence in Keynesian thought.. Keynesian economics provided the theoretical underpinning for economic policies undertaken in response to the crisis by President George W. Bush of the United States, Prime Minister Gordon Brown of the United Kingdom, and other heads of governments. In 1999, Time magazine included Keynes in their list of the 100 most important and influential people of the 20th century, commenting that: "His radical idea that governments should spend money they don't have may have saved capitalism." He has been described by The Economist as "Britain’s most famous 20th-century economist.“

19. B. New Institutions Created: • IMF (International MonetaryFund) • World Bank Both bodies are multilateral, financed by all member countries but dominated by the U.S. (veto power on all decisions)

21. The IMF • to foster global monetary cooperation, • secure financial stability, • facilitate international trade, • promote high employment and sustainable economic growth, • reduce poverty around the world. • Itsheadquarters are in Washington, D.C.

22. II. Governancedictated by a bipolar world Universalgovernancequestioned by the Cold War • USSR rejects IMF & World Bank • USA rejectsidea of a world tradeorganization • Marshall Plan replaces other bodies to rebuild Western Europe • Soviet satellites leaveBrettonWoods institutions to join the Comecon (Council for Mutual Economic Assistance)

23. Limits of the System • International Monetary System leads to permanent deficit in US balance of payments, unsustainable over long term • In 1960, de Gaulle requests the conversion of France’s dollars into gold • Nixon suspends convertibility of dollar into gold – Bretton Woods system collapses in 1971

24. US President Nixon Video: Nixon ends International Monetary sytemBretton Woods

25. C. The World EconomicGovernance Body faces the crisis of the 1970’s • Since March 1973, the floating exchange rate has been followed and formally recognized. • Nations still need international reserves in order to intervene in foreign exchange markets to balance short-run fluctuations in exchange rates. • The prevailing exchange rate regime is in fact often considered as a revival of the Bretton Woods policies, namely Bretton Woods II

26. The U.S. and Bretton Woods II • US Department of Treasury releases Treasury Bonds • The Federal Reserve increases money in circulation • Allows the U.S. to play with the dollar exchange rates which remains the main international currency • This economic policy enables the U.S. to finance their ever growing public debt and trade deficit Video: Crash Course Chapter 9 A Brief History of US Money

27. Consequences of Monetary policy

28. Foreign Holders of US Treasury Bonds(US Foreign debt) in billions of dollars Source: U.S. Department of the Treasury/Federal Reserve Board February 18, 2014

29. US Foreign Debt

30. Faced with the difficulties to raise the debt ceiling without the agreement of Republican Congress members, Barack Obama creates the ”Debt Reduction Supercommittee” in August 2011 which is composed of elected Republicans and Democrats. This committee is in charge of finding a political consensus around the necessary measures to take in order to bring the U.S. out of the economic slump.

31. Who Shrank The Superpower? The Next President will inherit an America with a great deal less economic and strategic influence than it had eight years ago. And China isn’t the half of it. By ParagKhanna Audio: Radio Open Source: Who Shrank the Superpower? ParagKhanna

32. New Face of the IMF • To compensate for the weakened IMF, a new Governance Body instigated by the mostpowerful countries – G6 and laterG7 in 1975-1976 • IMF finds new mission: financingthird world debt. • Mexicandebtcrisis • Latin American intervention in 1982-1983

33. From the G6 to the G20 (1975-2012) • Created in 1975 on French initiative to cope with the petroleum crisis • Slowly enlarged to 7, 8 then 20 members • Annual summit of heads of state of most powerful economies of the planet • Defends interests of countries representing 90% of the economy and 2/3 of the world population

34. Successive Enlargements