The development of the international trading and monetary systems since World War II began with the inception of the Bretton Woods Monetary System known as the Liberal International Economic Order (LIEO). This liberal system of reciprocity that transformed the global economic ideal was conceived by the capitalist powers of the West after World War II in order to “create a reliable mechanism for determining the value of countries currencies in relation to one another” (Kegley Jr., World Politics 2006). The Bretton Woods fixed interest rate system, which delegated governments responsibility for imposing its rules, was formed in order to conduct international trade and finance under a set of shared concepts and vocabulary that would allow all countries to benefit in trade as well as recover from the devastations of WWII. The LIEO is based on three assumptions: concentration of economic power in a small number of advanced industrial states, existence of a common interest shared by these states, and the presence of a dominant power willing and able to assume leadership (class notes, 11-16-06).
The political leaders felt that a set of organizations were a necessary part of the new economic system, partly to prevent a repetition of the 1930s’ economic catastrophe, and partly because of the United States belief in a system of commercial liberalism. One of the organizations in the LIEO was the General Agreement on Tariffs and Trade (GATT), which was introduced in order to protect and promote free trade through a set of principles and rules. Those principles are non-discrimination, expansion of trade through the reduction of barriers, and unconditional reciprocity (Class notes, 11-16-06). Bretton Woods also introduced the International Monetary Fund as its main instrument in the management of the world economic system, which was designed to advance credits to countries with payment deficits. Today the IMF helps in providing states with equilibrium and stability within the economic system and promotes democratic rule and cooperation among states. Bretton Woods also created the International Bank for Reconstruction and Development (World Bank), another IGO established to aid countries in recovery from the war, and today helps to finance economic growth in developing countries as a technical part of the U.N.
However, in the time period immediately after World War II, the devastation was so great and the Breton Woods System so new that the IMF and the World Bank did not have the resources or the experienced manpower to rebuild the world alone. America took the reins here and established its hegemonic power as manager of the international monetary system. The U.S. fixed a relationship between gold and the dollar and committed to exchanging at any time these two entities, and in so doing made the dollar a universally accepted “parallel currency.” With America’s initiation of the Marshall Plan this fixed exchange rate system began to rebuild Europe with dollars, and at the same time, strengthen the U.S. economy and its hegemonic position in the world.
This system became increasingly unstable however as a result of the massive amount of dollars outside American borders, and America’s ability to stabilize the currency of the dollar began to decline. The deterioration of the monetary system led to an enactment of the commercial domino theory, which essentially destroyed the Bretton Woods monetary system.
In 1971 the U.S. unexpectedly announced that it would stop exchanging dollars for gold and by 1972 the Bretton Woods System ceased to exist. The new system that America adopted, although still characterized as a Liberal International Economic Order, was based on floating exchange rates. Rather than making the global economy more stable, however, this new system left it even more vulnerable to crisis, and sudden and extreme currency exchange rate whirlings. That along with the fact that many states (mostly Global South countries) are now unable to manage inflation, interest, and income and make their interest payments on debts has stressed the system to near collapse.
The G-5 Great Powers responded in 1985 to the growing number of states that relied on the healthy stability of the dollar and a strong U.S. economy by “pledging to collectively coordinate their economic policies through management of exchange rates internationally and interest rates domestically” (Kegley Jr., World Politics, 2006). The G-7 and G-8 made similar pledges but with little result to show for their management of a global monetary system, primarily for lack of a shared ideology on how best to manage the world economy in order to sustain global trade and economic growth.
A major turning point in the world economic trading system of today came in 1995 with the creation of the WTO, a new free-trade IGO that broadened GATT’s scope. The WTO included previously inadequately addressed issues of products, sectors, and conditions of trade, imposed rules bound by WTO arbitration panels to settle disputes, and fixed the problem of free riding by imposing membership requirements that demand all member states to adhere to the Uruguay Round agreements and submit to certain market access accords. Since the inception of the WTO global prosperity and the value of international trade have both increased, leading many to believe that the WTO is responsible.
But for all the benefits of the WTO there are also externalities. Despite statistical evidence that points to advantages of freer trade and the implementation of “comparative advantage” principals, there is a large disparity of power and wealth between the Global North and South with many Global South countries stuck in poverty traps, unable to reap the benefits of liberal trade policies. Global North countries point to a lack of democratic rule and corrupt governments as a reason for economic failure in this area of the world, but Global South countries say that the reason for their economic failure is because “the WTO institutionalizes an inequality between the small core or rich advanced industrialized countries and the rest of the world” (Class notes, 11-16-01).
Many feel that the rules and policies of the WTO were created by and for the prosperity, and to the advantage of, already advanced industrial Global North countries like the U.S. and Japan, with little regard for the less developed third world countries. These less developed countries often fall victim to the externalities of an open global economy and the imposing rules of the WTO, which have lead many Global South countries to feel as if they are being exploited by the rich developed countries and Multi-National Corporations. Any comparative advantage these countries may have through lower wage scales are often minimized or taken away completely by imposed high WTO standards that make it hard for less developed countries today to make progress and compete with the technologically advanced countries of the Global North. Many under developed countries feel that the WTO makes economic decisions over their lives with little accountability to their populations, which can lead to an unfair advantage for the Global North countries. This lead to developing countries 1970s’ proposal of the New International Economic Order, which failed implementation because of the Great Powers resistance of it, even though it was backed by the U.N. This is mainly because political economy is “not only the pursuit of wealth, but the pursuit of power” (Galpin, Nature of Political Economy, 1975).
Common trade trends today in the ever-competitive global economy are regional free trade regimes like NAFTA and ASEAN, which have often met with great success in creating wealth within their regional scope, but have the potential to do harm in the long run to the global economy by creating rivalries between trade-blocs and exclusions to certain markets outside a trade-bloc’s region of influence.
. Globalization has made clear to the world the externalities of a single, integrated economic system, which can be sudden and devastating to all countries, like the global consequences from the 1998 collapse of the Hong Kong stock market. Because states are becoming more and more interdependent, we all suffer the consequences of a collapsed economy and the side effects of an economic crisis in one country. The United States failure to adjust its economic policies to stymie this effect has led many to believe that reform must come in the cast of a non-hegemonic based international monetary system in order to maintain world economic stability.
Despite the vulnerability of a shaky floating exchange rate system, however, the likelihood of increased currency dilemmas in the future, and the recognition by many IGO’s and economists that reforms are needed, this world economic system isn’t likely to change any time soon. A major reason being that the great powers have too much at stake in the system as it is today, and another reason being that the world has yet to determine and agree upon a more advantageous, more viable system for an ever increasing globalized world. Rectification, however, of demands on the current international economic system may be essential for the future sustainability of an interdependent world.