Global economy: A brief introduction to the institutional framework of the modern global economy
The Global economy refers to the economic exchanges among the different national economies which are encapsulated in a global framework. In this sense, the global economy denotes the existence of a global society that engages in daily economic activities. The origin of the global economy can be located in the advent of the sixteenth century European empires which launch economic activities that eventually became global in nature. The modern era of the global economy arguably began after World War II out of the necessity for a stable international system that would discourage national protectionist policies such as those—for example the US Smoot-Hawley Tariff Act and the subsequently retaliatory policies enacted by other countries—that led to the Great Depression of the 1930s.
The global economy thus necessitated a set of institutions that would ensure a stable exchange rate system, a loan system that would assist countries facing balance of payments issues and that would establish and ensure compliance with a set of rules designed for open trade. In short, the institutional framework of the global economy was to give the international system the necessary stability through institutions that encourage international cooperation and mitigated the possible effects of a breakdown of international commerce.
The Bretton Wood system is often cited as the basis of the modern global economy. The Bretton Woods system was to manage exchange rates and capital flows. At the core of the Bretton Wood system was the IMF and the World Bank. These institutions created a global economy within a context that fostered international monetary cooperation and promoted economic growth and development. The Bretton Wood system collapsed by the 1970s after the US could no longer sustain the dollar's convertibility to gold but its institutions were able to evolve and ultimately outlived the system.
The General Agreement on Tariff and Trade (GATT), a multilateral trade agreement, was complementary to the Bretton Wood system. The GATT contributed to the stability of the global economy by providing a set of rules to conduct international trade and a context for trade negotiations and the settlement of trade disputes. GATT's objective was to gradually eliminate barriers to international trade. Although the GATT was based on the reciprocity principle, it proved to be prone to abuses by its more powerful members. In 1995, the GATT was replaced by the World Trade Organization (WTO). The WTO, in addition to facilitate trade negotiations and disputes, it monitors national trade policies and offers technical assistance and training to developing countries thus enhancing the stability of the global economy.
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