INTERNATIONAL POLITICAL ECONOMY

The International Monetary

and Finance Structure
Chapter 7

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6 interconnected arguments in
this chapter
• This chapter describes a number of fundamental • First, after World War II the United States and its allies
elements of the international monetary and constructed a fairly tightly controlled international
finance structure, including its institutions and monetary and finance system that complemented their
mutual goals of containing communism and gradually
who manages them, who determines its rules, deregulating currency and finance markets. These
how and why these rules change, and who measures manifested a situation where the United States
benefits from its operation could pursue “hegemony on the cheap,” work toward the
stabilization of Western capitalist economies, and contain
communism.

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6 interconnected arguments 6 interconnected arguments

in this chapter in this chapter
• Second, as some of the security and economic interests of the • Third, since the end of the Cold War and pursuant to its
Western alliance changed and diverged, exchange rates and continued hegemonic role in the international political
capital controls were gradually allowed to reflect market economy, the United States has continued to run huge
conditions. The 1970s and 1980s, however, were marked by deficits in the current account of its balance of payments.
OPEC oil price hikes, increasing interdependence among states, Recently emerging economies such as China and Saudi
and later globalization, along with many efforts to open up Arabia have been investing their surplus capital into the
international currency and finance markets. At the same time, United States and other current account deficit nations,
many states made efforts to control direct economic growth in which has enabled the United States to cover its balance‐
ways that gradually weakened the international monetary and of‐payments deficits.
finance structure.

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 6 interconnected arguments 6 interconnected arguments
in this chapter in this chapter
• Fourth, the recent financial crisis jeopardize this • Fifth, the financial crisis has also severely
U.S. strategy and continues to weaken the U.S. weakened efforts by IOs, others states, and many
dollar and U.S. leadership of the current monetary nongovernmental organizations (NGOs) to resolve
and finance structure. problems in debtor countries as well as help the
developing nations overcome poverty.

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6 interconnected arguments
in this chapter
• We begin the chapter by explaining the role of
• Sixth and finally, the global monetary and finance exchange rates in the international political economy
structure remains vulnerable to fluctuating market and then move on to discuss three distinct
conditions, which should lead to increased state international monetary and finance systems that
cooperation to deal with a number of problems have existed since the XIX century.
that, if not resolved, could result in a global
financial meltdown. • The chapter moves to a discussion of the role of the
U.S. dollar in the inter‐national political economy
today.
• The chapter concludes with the introduction to the
financial crisis.

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Hard currency
• Hard currency is money issued by large countries with
reliable and predictably stable political economies. This
legal tender is traded widely and has recognized value
associated with the wealth and power of many
industrialized developed nations, including the United
States, Canada, Japan, Great Britain, Switzerland, and the
Euro zone. A hard‐currency country can generally exchange
A PRIMER ON FOREIGN EXCHANGE its own currency directly for other hard currencies, and
therefore for foreign goods and services—giving it a
distinct advantage. Therefore, a hard currency like the U.S.
dollar (USD), the euro, or the yen is easily accepted for
international payments.

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 Soft currency
• Soft currency is not as widely accepted, and is usually • A soft‐currency country must usually acquire hard currency
limited to its home country or region. Its value may be too (through exports or by borrowing) in order to purchase
uncertain or the volume of possible transactions goods or services from other nations.
insufficient based on an absence of trade with other • Another problem with a soft currency is that international
countries or conditions that raise suspicions about the lenders are generally unwilling to accept payment in soft
stability of its political economy. Many less developed currencies. These countries need to earn hard currency to
countries (LDCs) have soft currencies, as their economies pay their debts, which tend to be denominated in hard
are relatively small and less stable than those of other currency. Because only hard currencies get much inter‐
countries. national use, we focus on hard currencies in this chapter.

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• An important point to remember is that the exchange rate • Many political and economic forces affect
is just a way of converting the value of one country’s unit of exchange rates. These include the following:
measurement into another’s. It does not really matter what
■ currency appreciation and depreciation
units are used. What does matter is the acceptability of the
measurement to the actors (banks, tourists, investors, and ■ currency‐rate manipulation
state officials in different countries) involved in a ■ whether one’s currency is fixed to the value of
transaction at any given time, and how much values another currency
change over time. Shifts in exchange rates can vary over ■ interest rates and inflation
different periods of time, depending on a variety of ■ speculation
circumstances that impact the demand for one currency or
another.

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currency appreciation and currency‐rate

depreciation manipulation
• When a currency’s exchange price rises—that is, when it becomes
more valuable relative to other currencies‐ we say that it • Often exchange rates are set by the market forces of supply
appreciates. When its exchange price falls and it becomes less and demand. There is also considerable temptation for
valuable relative to other currencies, we say it depreciates. For nations to purposefully manipulate currency values so as to
example, the USD depreciated relative to the Japanese yen achieve a desirable outcome for that state. At times, states
between 2009 and 2012. A USD cost ¥ 90 in November 2009, but (secretly) intervene in currency markets, buying up their
only ¥ 80.02 in November 2012. The fact that the USD depreciated own currency or selling it in an attempt to alter its
relative to the yen also means that the yen appreciated against the exchange value. A central bank will buy (demand) and sell
USD. Or simply put, in terms of the USD, the yen increased in price (supply) enough of its own currency to alter the exchange
from about 1.11 cents to 1.24 cents during this period. In the case rate. At other times when the demand for the country’s
of trade, changes in the exchange rates tend to alter the currency declines, a central bank will use its foreign
competitive balance between nations, making one country’s goods reserves to buy (demand) its own currency, pushing up the
a better value than another. value of its currency again.

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 currency‐rate currency‐rate
manipulation manipulation
• Regardless of market conditions, for many states an • Sometimes LDCs overvalue their currency to gain access to
undervalued currency that discourages imports and cheaper imported goods such as technology, arms,
increases exports can be politically and economically good manufactured goods, food, and oil. This may benefit the
for some domestic industries. This shifts production and wealthy and shift the terms of trade in their favor. Although
international trade in that state’s favor. The dark side of their own exported goods would become less competitive
currency depreciation is that when goods such as food or abroad, these LDCs could at least enjoy some imported
oil must be imported, they will cost more if the currency is items at lower cost.
under‐valued. Undervaluation can also reduce living
standards and retard economic growth, as well as cause
inflation.

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currency‐rate whether one’s currency is fixed to

manipulation the value of another currency
• In practice, it is hard for LDCs to reap the benefits of • In the 1990s, until the end of the decade, the value of the
overvaluation in any meaningful way because their currencies USD steadily climbed relative to the value of the currencies
are usually soft and not used much in international business of many developing nations. While this helped the exports
and finance. This does not stop them from trying, depend‐ing of the emerging nations, their consumers paid higher
on political circumstances. In many cases, this invariably prices for many technological imports and value‐added
winds up choking domestic production and leaving the LDCs products. To stabilize the relationship between the USD
dependent on foreign sellers and lenders for help. Agriculture and other currencies, many countries decided to peg (fix)
seems to be especially sensitive to this problem. In some their currency to the dollar. China pegged the yuan at 8.28
cases, developing countries with overvalued currencies have per USD. Because the United States and the EU are major
unintentionally destroyed their agricultural sectors and importers of Chinese goods, if the USD depreciated relative
become dependent on artificially cheap foodstuffs. to the euro and most other world currencies, so did the
yuan.

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inflation and interest rates inflation and interest rates

• Two other important issues are inflation and interest rates. • Likewise, interest rates and investment returns in general
All else being equal, a nation’s currency tends to depreciate influence the value and desirability of the investments that
when that nation experiences a higher inflation rate than a particular currency can purchase. If interest rates decline
other countries. Inflation—a rise in overall prices—means in the United States, for example, as they did in the 1990s
that currency has less real purchasing power within its and throughout the 2000s, then the demand for dollars to
home country. This makes the currency less attractive to purchase U.S. government bonds and other interest‐
foreign buyers, and it tends to depreciate on foreign earning investments decreases, pushing the dollar’s
exchange markets to reflect its reduced real value at home. exchange rate to a lower value. In the same way, higher
interest rates lead to an increased demand for the dollar, as
dollar‐denominated investments become more attractive
to foreigners.

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 speculation
• Speculation is betting that the value of a currency or market
price for a certain item or service will go up and earn the
owner a profit when it is sold. A currency generally rises and
falls in value according to the value of goods, services, and
investments that it can buy in its home market. If those who
invest in currencies (speculators) believe (based on their
understanding of the foreign exchange market model and
anticipated changes in the various determinants of demand THREE FOREIGN EXCHANGE RATE SYSTEMS
and supply) that a currency like the peso will appreciate in
the future, they will want to buy pesos now to capitalize on
the exchange rate fluctuations.

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• The gold standard is a monetary system backed by the value

of physical gold.
• Gold coins, as well as paper notes backed by or which can
be redeemed for gold, are used as currency under this
system.
• The gold standard was popular throughout human
THE CLASSIC GOLD STANDARD: PHASE I civilization, often part of a bi‐metallic system that also
utilized silver.
• Most of the world's economies have abandoned the gold
standard since the 1930s and now have free‐floating fiat
currency regimes.

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• Under the prevailing liberal economic theory of the time, the • A country’s gold would be sold to earn money to pay for its
system was a self‐regulating international monetary order. deficit. This resulted in tighter monetary conditions that
Different currency values were pegged to the price of gold. If curtailed the printing of money, raised interest rates, and
a country experienced a balance‐of‐payments deficit—that is, cut government spending in response to a deficit. In turn,
it spent more money for trade, investments, and other items higher interest rates were supposed to attract short‐term
than it earned—corrections occurred almost automatically capital that would help finance the deficit. Domestic
via wage and price adjustments. monetary and fiscal policy was “geared to the external goal
of maintaining the convertibility of the national currency
into gold.”

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 • The gold standard had a stabilizing, equilibrating, and
confidence‐building effect on the system. But by the end
of the war the gold standard had died, though it was The Bretton Woods System: The
temporarily resurrected again in the early 1930s during the Qualified Gold Standard and Fixed
Great Depression. After World War I, Britain became a
debtor nation and the U.S. dollar took the place of the Exchange Rates: Phase II
pound sterling as the world’s strongest and most trusted
currency. According to many hegemonic stability theorists,
the gold standard folded because the United States acted
more in its own interest and failed to meet the
international responsibility commensurate with its
economic and military power.

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• During the Great Depression, the international monetary • In July 1944, the United States and its allies met in Bretton
and finance structure was in a shambles. “Beggar thy Woods, New Hampshire, to devise a plan for European
neighbor” trade policies that put national interests ahead recovery and create a new post‐war international
of international interests resulted in some of the highest monetary and trade system that would encourage growth
trade tariffs in history. The nonconvertibility of currency and development. In an atmosphere of cooperation, most
was also blamed for increasing hostility among the of the fifty‐five participating countries wanted to overcome
European powers that ultimately resulted in World War II. the high unemployment conditions of the Great Depression
and the malevolent competitive currency devaluations of
the 1930s. Keynes, Great Britain’s representative, believed
that unless states took coordinated action to benefit each
other, their individual efforts to gain at the expense of their
competitors would eventually hurt them all.

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• At Bretton Woods the Great Powers created the • The World Bank was to be concerned with economic
International Monetary Fund (IMF), the World Bank, and recovery immediately after the war and then development
what would later become the General Agreement on Tariffs issues.
and Trade (GATT). Many argue that these institutions were • The IMF’s primary role was to facilitate a stable and orderly
empty shells that represented only the values and policy international monetary system and investment policies. It
preferences of the major powers, especially the United is still the IMF’s role to facilitate international trade,
States. stabilize exchange rates, and help members with balance‐
of‐payments difficulties on a short‐term basis. However,
today the IMF also attempts to prevent and resolve
currency and financial crises that have recently occurred in
developing countries.

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• Two distinct IPE perspectives give primary responsibility for the • Meanwhile, U.S. Treasury official Harry Dexter White’s plan
institutional design and mission of the IMF to different players. for the bank was to put nearly all of the adjustment
From the economic liberal perspective, John Maynard Keynes pressure on debtor countries, without any symmetric
convinced the Allied powers to construct a new international obligation for creditors to make sacrifices. The U.S.
economic order based on liberal ideas proposed at the time. Congress would not have approved a treaty that forced the
Keynes himself worked on setting up the World Bank. He was United States to sacrifice just because Britain or another
committed to creating an institution that could provide generous debtor country could not pay its bills
aid to both the victors and the vanquished nations after World • The burden of adjustment ultimately fell on the debtors,
War II. He especially wanted to prevent a repeat of the brutal not on both debtors and creditors, as Keynes had intended.
and ultimately destructive terms the winners imposed on the
losers at the end of World War I. He was adamant that creditors
should help debtors make adjustments in their economies.

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• For both mercantilists and realists, the IMF’s institutional structure • If the value of any currency increased above or fell below
and monetary rules also reflected the interests of the Great the band limits, central banks behind those currencies
Powers. Under pressure from the United States, the IMF adopted a were required to step in and buy up excess dollars or sell
modified version of the former gold standard’s fixed‐exchange‐rate their own currency until the currency value moved back
system that was more open to market forces, but not divorced into the trading bands limits, reestablishing a supply–
from politics. At the center of this modified gold standard was a demand equilibrium (par value)
fixed‐exchange‐rate mechanism that fixed the rate of an ounce of
gold at $35. The values of other national currencies would fluctuate
against the dollar as supply and demand for those currencies
changed. Additionally, governments agreed to intervene in foreign
exchange markets to keep the value of currencies within 1 percent
above or below par value (the fixed exchange rate).

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• Confidence in the system relied on the fact that dollars • This arrangement boosted Western European and Japanese
could be converted into gold at a set price. At the end of recovery from the war and preserved an environment for
World War II, the United States started with the largest trade and foreign investment in Western Europe. These
amount of gold backing its currency. This arrangement policies also helped tie together the allies into a liberal‐
politically and economically stabilized the monetary capitalist, U.S.‐dominated monetary and finance system
system, which desperately needed the members’ that complemented U.S. efforts to divide the West from
confidence and a source of liquidity if recovery in Europe the Soviet‐dominated Eastern Bloc. Capital movements into
was to be realized. Once the Cold War began in 1947, the and out of the com‐munist nations were severely limited.
United States consciously accepted its hegemonic role of
providing the collective good of security for its allies.

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 • In this monetary arrangement, the U.S. dollar became the • The US benefited both economically and politically from
hegemonic currency, or top currency, one in great demand this arrangement because, as part of the postwar recovery
often used in international trade and financial transactions. process, dollars were in great demand in most of Western
This position afforded the United States many privileges Europe and in other parts of the world. When it came to
when it came to using the dollar as a tool of foreign policy, trade and investments, other states often had to convert
but also imposed on it many management responsibilities. their currencies into U.S. dollars, which saved the United
States a good deal of money on foreign exchange
transactions and helped maintain the strength of the U.S.
dollar against other currencies. The dollar was also the
reserve currency that, because its international market
value was fixed to gold, was held in central banks as a store
of value.

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The Bargain Comes Unstuck

• On the whole, hegemony and the provision of collective goods to • As part of the arrangement, Western European banks were
U.S. allies after World War II came cheaply to the United States. committed to buying up surplus dollars to bring the value
During these heyday years of the Bretton Woods system from 1956 of their currencies back inside the trading bands (relative
to 1964, the rules of the monetary and finance structure gave the to par value). However, the more the United States
US many benefits and advantages when it came to monetary and invested in Europe and spent for the Vietnam War, the
security relations between the US and Western Europe. The US more others complained of the U.S. privilege, undermining
could spend freely for a variety of domestic programs such as the political relations between the allies.
Great Society and, at the same time, fund the Vietnam War, by
merely printing more money. The costs of those programs could
not weaken the dollar against the value of gold, because under the
rules at that time, the value of the dollar was fixed ‐ or could not
depreciate in value against gold.

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• Furthermore, the Western European economies had • To prevent a recession at home, in August 1971, President
recovered sufficiently that they no longer needed or Richard Nixon unilaterally decided to make dollars
wanted as many U.S. dollars. In effect, the fixed‐exchange‐ nonconvertible to gold. The US devalued the dollar, and, to
rate system was restricting the economic growth of U.S. help correct its deficit in the balance of payments, it
allies and limiting the choices of state officials in politically imposed a 10 percent surcharge on all Japanese imports
unacceptable ways. The success of the fixed‐exchange‐rate coming into the US.
system was also undermining the value of the U.S. dollar,
weakening many of the monetary structure’s institutions
and rules, and weakening U.S. leadership of the structure
as well. The structure had become too rigid, making it
difficult for states to grow at their own pace and to
promote their own interests and values.

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 • Both the US and Western Europe accused one another of
not sacrificing enough to preserve the fixed‐exchange‐rate
system. From the U.S. perspective, Western Europe should
The Float‐ or Flexible‐Exchange‐
have purchased more goods from the United States to help Rate System: Phase III and the
correct the balance‐of‐trade and balance‐of‐payments
problems. On the other hand, the Europeans argued that Changing Economic Structure
trade was not the primary problem; instead, the United
States needed to reform its own economy by cutting
spending, which meant getting out of Vietnam and/or
reducing domestic spending—two things that were
politically unacceptable to the U.S. administration at the
time.

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• In 1973 a new system emerged that is commonly referred • Several other developments contributed to the end of the
to as the float‐ or flexible‐exchange‐rate system, or fixed‐exchange‐rate monetary system
managed float system. The major powers authorized the • Capital controls (restrictions on money moving in and out of a
IMF to further widen the trading bands so that changes in nation) and fixed exchange rates were manipulated to allow states
currency values could more easily be determined by to respond to domestic political forces without causing exchange‐
rate instability
market forces. Some states independently floated their
• Policy makers intentionally limited the movement of finance and
currencies, while many of the countries that joined the capital between countries for fear that financial crises like those in
European Economic Community (EEC) promoted regional the 1920s and 1930s could easily spread from one country to
coordination of their policies. Many states still had to deal many others
with balance‐of‐payments issues, but the framework of • Flexible‐exchange rates complemented the relaxation of capital
collective management was meant to be less constraining controls, which added yet another source of global liquidity to
on their economies and societies. complement lending by states and loans by the IMF, the World
Bank, and regional banks

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• The flexible‐exchange‐rate system helped entrench a multi‐ • The rise of OPEC and tremendous shifts in the pattern of
polar international security structure that would be international financial flows after oil price increases in
cooperatively managed by the United States, the EU, Japan, 1973–1974 and 1978–1979 transformed the system into a
and (later) China. global financial network. Almost overnight, billions of
dollars moved through previously nonexistent financial
channels as OPEC states demanded dollars as payment for
oil. This increased the demand for U.S. dollars in the
international economy, which helped maintain the dollar’s
status as the top currency. Many of the OPEC
“petrodollars” deposited in Western banks were recycled in
the form of loans to developing countries

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 • In the early 1980s, trade imbalances in the developed • Rapid capital flows were now contributing to volatile
countries contributed to stagflation, or slow economic exchange rates, which interfered with FDI and international
growth accompanied by rising prices—two phenomena trade. The United States resisted making hard choices
that do not usually occur together. At this time a change in about currency adjustments that could threaten its
political‐ economic philosophy occurred in Great Britain economic recovery or lead to cutbacks in defense
and the United States. The pre‐vailing Keynesian orthodoxy spending. Instead, in 1985, the United States pressed the
was swept aside in favor of a return to the classical liberal other G5 states (Great Britain, West Germany, France, and
ideas of Adam Smith and Milton Friedman. Japan) to meet in New York, where they agreed to
intervene in currency markets to collectively manage
exchange rates. The Plaza Accord committed the G5 to
work together to “realign” the dollar so that it would
depreciate in value against other currencies, thereby
raising interest rates in the other economies.

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The debt crisis of the

1980s
• In 1982 Mexico announces that it would default on its
The IPE of International bank debt. This generated fear that other countries
that have accumulated substantial debt such as Brazil
would follow Mexico.
Debt and Financial Crisis • LDCs were encouraged to borrow because inflation
rates were running ahead of interest rates on loans‐
creating negative real rates, which traditionally favors
borrowers.

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The Baker Plan

• IMF debt management policies included austerity • The Baker Plan‐ was initiated by US Treasury
measures (cutbacks in state spending), debt Secretary James Baker. This was made in order to
rescheduling with commercial banks, and new implement market‐oriented structural changes to
public and private lending. Only Turkey and Korea debtor economies combined with efforts to coax
recovered; others went deeper into the red. commercial banks into providing $20 billion in new
loans over three years. This plan did not work
because while all the countries tried to export all
at once, commodity and oil prices collapsed,
leaving many nations (especially African ones)
worse off than before loans.

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 Donor fatigue The prisoner’s dilemma
• Donor fatigue ‐ is the period in the late 1980s • The prisoner’s dilemma ‐ is the phenomenon
when social and political tensions related to when each bank or state wanted others to forgive
policies adopted to relieve the debt grew and the debt but were unwilling to do so themselves,
dissatisfaction with international debt for fear (rationally speaking) that those who
management worsened. cooperated to grant the relief would bear a cost
that would not be shared by those who paid
nothing to solve the problem.

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Debt Crises and a new role

for the IMF
• The Brady plan – the plan introduced in 1989 by • Lender of last resort ‐ an institution that could help debtor
George W.H.Bush whereby old debt was nations overcome their debt (this is how IMF was seen in
exchanged for new bonds that could be exchanged 1980s by some experts).
for new bank loans • Structural adjustment policies (SAPs)‐a series of conditions
or actions to which the borrowing government must agree
before receiving a loan.
• IMF Conditionality ‐ is seen as controversial to the extent
that IMF terms reflect the economic liberal ideas behind
the Washington consensus policies and interests of the
United States and not the individual needs of the
borrowing nations.

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A balance‐of‐payments The seven stages of

financial crisis financial crisis
• Balance‐of‐payments crisis – are the cases when • Displacement – refers to an external shock or some “news”
states have borrowed too much money to use for that fundamentally alters the economic outlook in a
development projects, or they cannot export market, shifting concerning future profits in some
significant way. When investors and speculators are
enough to pay for imports. They may lack foreign focused in a specific country.
investment.
• Expansion – the stage when the boom is fed by an increase
• Capital flight – when investors transfer their bank in liquidity (investment money), which provides the means
accounts out of country to “safe harbour” nations. for the boom to grow, perhaps becoming a bubble. This is
when there is a pool of potential investors or speculators,
when even the grandmothers start to invest. This is also
called “over‐trading” and “pure speculation”.

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 The seven stages of The seven stages of
financial crisis financial crisis
• Euphoria – is when the purpose of buying becomes to sell • Torschluspanik – gate shut panic‐ describes how
and take capital gain as the price rises higher and higher. falling prices feed on themselves, creating self‐
• Distress – is the stage when between euphoria and fulfilling prophecies. The result is a crisis which
revulsion when there is concern that the strength of the might be a crash (collapse in price) or panic
market may be fragile or that the limits of liquidity may be (sudden needless flight).
near.
• Revulsion – is a sharp shift in actions and expectations • Contagion crisis – is the financial crisis that
caused by new information or significant event. “Insiders” spreads internationally to the extent that it causes
realize the importance of the news and sell first, at the top a worldwide depression.
of market, while “outsiders” are still buyig. Liquidity dries
up and causes discredit.

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The peso crisis and the

tequila hangover
According to Kindle Berger there are 3 options to • This is about financial crisis in Mexico in 1990s. In those
bring financial crisis to an end: years everyone was thinking of investing in Mexico because
of development of financial markets. As the number of
1.crisis might turn into a “fire sale” with prices investor increased the prices were increasing too. When
falling until buyers are eventually brought back into the presidential candidate was killed in 1994, people were
the market, starting to doubt about the stability of their investments.
Mexico now was in the middle of a political and financial
2. Trading may be halted by some authority, limiting crisis, so the clever investors were running for the closing
losses, gates. The crisis occurred and with it the unemployment
3. a lender of last resort (IMF) may step to provide rose sharply, inflation rose, interbank interest rates soared
(86, 03%?!?!?!?!:P). Not only Mexico but also other
the liquidity necessary to bring the crisis to a “soft countries suffered from this crisis which was also called
landing”. “tequila hangover”.

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The Asian financial crisis

• Asian financial crisis started when in Thailand there was a • For Thai citizens foreign products were more
currency crisis. Thai government guaranteed an exchange rate of expensive, and for US citizens Thai products were
25 baht per dollar. cheaper. Many citizens that were hoping to profit
• Everyone started to go to Thailand because of higher interest now found themselves bankrupt.
rates. But there were a lot of bad loans in Thai banks, so foreign
investors started to get worried about their money. They started • This crisis was not only the case in Asia but also all
to pull their funds out of there. over the world, ex. US was affected by Thai
• The reserves of dollars of Thai government were going down and companies not ordering Boeing airplanes because
the government now had to abandon the pledge, so the baht fell of economic problems.
from 25 baht per dollar to 30 baht per dollar. Later this changed
to a rate of 50 baht for a dollar.

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 The IMF and the Asian The Argentine Financial
crisis Crisis
• In general there were 2 crises at once in Asia: an internal • In 1991, Argentina fixed its exchange rate at one peso per
crisis of lower incomes, higher unemployment, and rising US dollar. But in the coming years US dollar appreciated
social tensions; and an external crisis in the form of a dramatically against most other currencies pulling peso
current account deficit and rising foreign debt. with it. Argentina’s currency was overvalued compared to
• Bail‐in ‐ lenders trying to protect their investments by economic competitors such as Brazil. A lot imported goods
extending additional credit rather than pulling funds out of were coming to Argentina and this led to debt. At the
the country. beginning Argentina did not break the link from a
depreciation of the peso because: 1. the fear that the old
• Moral suasion – when IMF tried to persuade the banks to corrupt political economy would return and 2.the debt
bail‐in, using variety of tools including veiled threats, burden was affected by the exchange rate. But finally in
implicit promises, and moral suasion. January 2002 Argentina abandoned its fixed exchange rate
with disastrous economic and political consequences.

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Lessons from these

Long term debt and the HIPCs
crises
• HIPC initiative – the man idea here was to push all players
• There are 3 important lessons from the Asian financial
in finance and debt structure to accept debt cancellation.
crisis: This effort failed.
1. The economic crisis can happen anywhere.
• Odious debt‐is the obligation incurred by a former corrupt
2. Little was learned from the Mexico peso crisis.
regime that left a new government owing billions to
3. Global finance creates the possibility of a global financial outside agencies. Ex. Iraq‐Saddam Hussein.
crisis
• Moral hazard – is the problem that people will take one • Poverty reduction strategy paper (PRSP) ‐ an economic
measure that required consultation with civil society before
more and more risk if they believe that someone will bail
action could be taken on the debt.
them out if any loss they incur.
• Transparency – is the public’s ability to see how the • UN Millennium Development Goals ‐ measures taken by
UN, IMF, and the World Bank as an effort to target poverty.
decisions are made within the IMF, which provides more
information to investors to make better decisions.

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Liberals’ point of view Liberals’ point of view

• Liberals in general favour increased international trade and
investment opportunities which are available by flexible
• Casino capitalism –speculators may do no harm as
exchange rates and capital mobility. Neoliberals say that IMF bubbles in the stream of enterprise. But the
and World Bank have played a positive rile on promoting position is serious when enterprise becomes the
economic liberal goals and policies. They are worried about bubble on whirlpool of speculation. When the
the weakness of US dollar and also the growing problem of capital development of a country becomes the by‐
speculation. Globalization has an undermining effect to the product of the activities of a casino, the job is likely
extent that it threatens to destabilize the entire international
economy. Although criticizers of globalization, in the financial
to be ill‐done.
structure, liberals say that developing countries must protect
themselves to some extent, at least until they can compete
with the industrialized states on a more equal basis. IMF is not
and cannot be the global lender of last resort.

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 Mercantilists’ point of view Structuralists’ point of view
• There is a temptation of a mercantilist nation to either • Structuralists say that the finance and monetary system is
devalue or overvalue its currencies to satisfy some not as stable as neoliberals think it is .They say that the
combination of domestic and international objectives. market’s invisible hand has failed in many of the poor
Some developing countries with overvalued currencies countries. According to structuralists finance structure
unintentionally destroyed their agricultural sectors and courages exploitation and imperialism. Globalization only
became dependent on artificially cheap foodstuff. Many gives more power to US and other developed nations to
states have supported the globalization campaign as a part dominate developing nations. The structures of IPE do not
of strategy to compete with other states for foreign operate effectively and there are many unresolved and
investment, enhancing their wealth and power. Although it unsolved issues in the world. IMF and World Bank should
is not easy, there should be some global efforts to reform necessarily change but structuralists don’t have any specific
the IMF and The World Bank. plan for that.

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• End of chapter 7

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