MARKET INTEGRATION

ECONOMIC DEVELOPMENT DURING AND AFTER WORLD WAR II

• Major events during and after World War II had negative effects on almost all major
economies (except US economy).
• Movement of many countries, notably fascist Italy & Germany, in the direction of
autarky or the turn inward of a nation in order to create as much economic self-
sufficiency as possible.
• US had a strong tendency toward isolationism
• Western world, especially the US and Great Britain began planning for a more open
international economy.
• The focus:
• reduce trade barriers
• Create conditions necessary for the free flow of money and investment
• Create conditions needed for financial stability around the globe

Bretton Woods and the Bretton Woods System

Backdrop for the creation of the Bretton Wood system and its five key elements:
1. Lack of cooperation which is thought to be a key factor in the Depression.
2. High tariffs
3. Other import restrictions and protectionist practices
4. Propensities of governments to devalue their currencies to gain an edge in global trade
over other countries and later exchange rate wars

5 key elements to the creation of the Bretton Woods:

1. Each participating state would establish a “par value” for its currency expressed in gold
or of the gold value of the US dollar as of July 1944 (Boughton 2007:106)
2. The official monetary authority in each country (a central bank or its equivalent) would
agree to exchange its own currency for those of other currencies at the established
exchange rates, plus or minus a one-percent margin (Boughton 2007:106-7)
3. The International Monetary Fund (IMF) was created (Babb, 2007:128-64) to establish,
stabilize, and oversee exchange rates.
4. The member states agreed to eliminate, at least eventually, “all restrictions on the use
of its currency for international trade” (Boughton, 2007:107)
5. The entire system was based on the US dollar.

EFFECTS OF THE BRETTON WOODS SYSTEM

In terms of Global trade:
• “unconditional most-favored nation”- required governments to offer the same trade
concessions i.e. reductions in trade barriers, non-discrimination against a nation’s
products
 • Restrictions on international trade were reduced over the years through various
meetings under the auspices of General Agreement on Tariffs and Trade (GATT) and
later the WTO

In terms of monetary order (where IMF took center stage):

• Exchange rates became stable enough to encourage international trade and
investment.
note: The goal was to provide security, as well as flexibility, to the monetary order.

In terms of global investment:

• A key development in terms of investment involved MNCs, especially American-based
firms in fields like automobiles and computers, constructing their own plants and or
investing in indigenous companies in the countries.
• The global openness also contributed to the emergence/expansion of social welfare
programs in many countries.
• Welfare states sought to deal with various problem like recessions, layoffs,
reduction in wages, and bankruptcies of uncompetitive firms.
• Creation of a social safety net within a given country served to protect it and its citizens
from these problems
• Gave a nation and its entrepreneurs the cover they needed to be actively involved in
the global marketplace.

General Agreement on Tariffs and Trade (GATT)

• A system for the liberalization of trade that grew out of Bretton Woods and came into
existence in 1947.
• Operated until 1995 when it was superseded by the World Trade Organization (WTO) .
General Agreement on Tariffs and World Trade Organization
Trade (GATT)
Focused on trade in goods Focused on trade in services
Forum for the meeting of Independent organization
representatives of countries
More acceptable by the US and Not as acceptable by the US and
other countries other countries

• In 1947, a number of initial trade agreements were negotiated by 23 nations

• Over the years, a number of “rounds” of negotiation were completed; It was out of the
Uruguay Round (1986-1993) that an agreement was reached to create the WTO.
• While GATT has been superseded by the WTO many of its elements were incorporated
into the WTO, although they continue to change and evolve as a result of changing
global economic realities.
 • More recently, attention has shifted to issues such as international trade in services,
trade-related international property rights (TRIPS) and trade-related investment
measures (TRIMS)
• TRIPS was negotiated through the WTO, as a result of the Uruguay round of negotiations.
This involved intangible ideas, knowledge and expressions that required their use to be
approved by their owner. Ex. Movies, books, music recordings, and computer software,
which exists, or whose value lies largely in the realm of ideas.
• TRIMS are a range of operating or performance measures that host-country
governments impose on foreign firms to keep them from distorting effect on trade in
goods and services. There are a number of specific restrictions and constraints on
foreign firms that can be included here like including requirements for minimum amounts
of local content, how much of a foreign producer’s output must be exported, and limits
on the value of goods imported.

World Trade Organization (WTO)

• A multilateral organization headquartered in Geneva, Switzerland with 152 member
nations as of 2008 (Krueger 2000; Trachtman 2007: 1308-15)
• Places focus on trade at the heart of economic globalization and has made it a magnet
for those opposed either to the broader process of trade liberalization and promotion
and to some specific aspect of WTO operations.
• Encompasses much of what was GATT’s mandate, but has moved onto other issues and
areas such as:
• services (General Agreement on Trade in Services (GATS) (Koivusalo 2007: 479-81)
• Intellectual property
• Each member has an equal vote.
• Organization of member states not a supranational organization.

STRESSES & STRAINS in WTO (developed vs developing)

• Exclusion of smaller powers from the meeting of larger trading powers in the so-called
“Green Room”
• No Mechanism for involvement of international nongovernmental organizations (INGO)
in WTO’s decision-making.
• While GATT focused on tariff reduction WTO focused more with non-tariff barriers
(quotas, national subsidies to industry and agriculture)
• Has been criticized for not going far enough in countering the trade barriers retained by
developed countries in such domains as agricultural products and some services.

International Monetary Fund (IMF)

• Goal is macroeconomic stability for both member nations and the global economy
(Cardim de Carvalho 2007:658-63
• Deals with exchange rates, balances of payments, international capital flows, and the
monitoring of member states and their macroeconomic policies.
Nature and Functions:
• In the beginning, it managed the exchange rate system created at Bretton Woods.
• Watches a nation’s balance of payments in order to be sure it could sustain the agreed-
upon exchange rate for its currency
• If problems in balance of payments occur IMF is concerned with two matters:
– Policy errors by a nation which can be corrected
– More fundamental economic problems
• Ensures that a nation did not use such problems as an excuse to lower its exchange rate
and therefore improve its competitive position vis-à-vis other nations
• If fundamental disequilibrium occurred, the IMF had the power to authorize a change
in the exchange rate of a nation’s currency
• Gives adjustment loans to nations in disequilibrium so that they are able to meet their
international financial obligations
• Was created on the basis of quotas for member nations
• Each nation’s quota was related to the limits on its borrowing, as well as its voting
power in the IMF
• Adopted general models of the requirements for the operation of a market economy
and these tended to be imposed on developing economies without regard for the
differences among and between their economies

• Changes in the IMF because of global economic crises in the late 20th century:
• Shifted from an interest in balance-of-payments issues that were related to current
accounts to capital account movements of financial assets
• Result: creation of a capital markets department to monitor financial markets and
to suggest ways of stabilizing them.
• Because of shortage in reserves and credit lines they began to focus on other issues
such as wording to “prevent crises, monitoring the global economy and providing
technical assistance” (Weisman 2007:C1)

• Problems encountered:
• Protests from the rest of the world over the continuing dominance of the IMF by the
Western powers
• The countries bailed out in the 1990s become powerful economically and
increasingly resented being dictated to by the Fund
• Lingering resentments over IMF interventions that demanded austere budgets and
other fiscal tightening in exchange was over the traditional approach of the IMF

World Bank
• The International Bank for Reconstruction and Development (IBRD) –
– is the most important element of the
– Established in 1944 at Bretton Woods and began operations in 1946
• Membership is open to all member states of IMF
• Provides funds to government-sponsored or guaranteed programs in so-called Part II
countries (member states that are middle-income or creditworthy poorer nations).
• Provides advice and analytical services to such states

• Missions:
– Encourages development of productive facilities and resources in less developed
countries
– Funds productive purposes when private capital cannot be obtained on reasonable
terms;
– Encourages international investment in order to promote international trade and
development and equilibrium in balance of payments; and
– Helps member countries improve their productivity, standard of living, and labor
conditions

• Deals with a broad range of issues related to economic development including:

– Population
– Education
– health
– Social security
– Environment
– Culture
– Aspects of macroeconomic policy and structural
– Poverty alleviation

• Makes loans to deal with a variety of governance matters such as:

– Public sector management
– Corruption
– Legal and judicial form
– And some aspects of human right and broader policy reforms

• Support is also given to help women deal with gender inequality and discrimination
• All member states have a say in he World Bank Group
• State’s number of votes varies depending on its size and its importance in the world
economy
• Each member state appoints a governor to the Board of Governors
• The 24-member Board of Executive Directors are empowered handle the most important
functions of the larger and more unwieldy Board of Governors
• The president of the Bank is chief of the Bank’s operating staff
• The Board officially appoints the president to a five-year renewable term
• But by tradition, the president is appointed by the President of the United States
• The resources of the bank include both a relatively small sum paid in by member countries
and a much larger amount that can be called in by the Bank for the members.
 • Controversial Issues:
– The Bank is seen as dominated by rich developed nations, and less developed countries
and non-states have little say in it.
– There are concerns that the Bank serves certain interests (e.g. the nation-state,
international capital, and wealthy nations) and thereby adversely affects those of
others especially the poor and less developed nations
– The Bank is seen as having lost focus and encroaching on the activities of other
agencies

• Reasons for remaining an important force globally:

– It is a forum for a vast number of nations to discuss development and development
financing.
– It remains a significant source of funds for developing countries.
– It is an important source of information on development and provides valuable advice
and support to the nations that are its members.

Changes in Bretton Woods Era Organizations

• Recent changes in the organizations are traceable to several major forces including:
– Globalization
– Major trade disputes
– Increasing power and ambition of growing economic powers

Issues on the following organizations:

• World Bank
– Loaning large sums of money to countries whose economies did not need such
loans
• IMF
– Relentless criticism of past austerity programs imposed on poor countries in
exchange for bailouts
• WTO
– The possibility that the failure of the Doha Round could lead to a reversal of the
long trend toward more open trading systems
• Issue of the leadership of the organizations especially the preeminent position occupied
by the US.
– Became increasingly controversial because the US is not contributing as much
money as it used to, in comparison to other nations

A critique of the Bretton Woods System

• Most effective critics: JOSEPH E. STIGLITZ
– Has great practical experience as a member of President Bill Clinton’s Council of
Economic Advisors and as Chief Economist of World Bank
 – Defines globalization as “the removal of barriers to free trade and the closer integration
of national economies,” which makes it synonymous to economic globalization
* economic globalization is neoliberal economic globalization

 Arguments of Stiglitz:
– Economic globalization can be a positive force and can enrich everyone in the world,
including the poor
– He agrees with the West that it has been hypocritical in seeking the elimination of trade
barriers in other parts of the world, maintaining its own barriers to trade .
– The IMF was created on the basis of the belief that markets often worked badly, but
now it has become a strong champion of market supremacy
– The IMF and the World Bank became missionary institutions pushing neoliberal,
“Washington Consensus” ideas such as market liberalization (the removal of barriers),
fiscal austerity, and privatization on developing countries
– The IMF grew increasingly imperialistic, seeing almost all structural issues as having
macroeconomic implications

• IMF fails in terms of its ission of providing funds, to countries to weather economic downturns,
and more generally to create greater global economic stability
• Who is in charge of the IMF and the World Bank
• Lack of transparency in its decision-making and in its operations

 Specific IMF errors and blunders

– The privatization of state-run system was often done too quickly and the new privatized
businesses were often ineffective
• Result: consumers and workers suffered
• Privatization also went hand-in-hand with corruption
– The push to liberalize financial and capital markets, and to reduce barriers to trade,
often hurt small emerging countries (e.g., through higher unemployment) and
contributed to the financial crises of 1990s.
• Resentment was generated in those countries because the pressure to liberalize
them came with restrictions on finance, capital, trade.
– The emphasis on foreign investment often adversely affected indigenous businesses in
less developed countries
– The IMF failed in the sequencing and pacing of the changes:
• forcing liberalization before safety nets were put in place, before there was
adequate regulatory framework
• Before the countries could withstand the adverse consequences of the sudden
changes in market sentiment that are part and parcel of modern capitalism
• Forcing policies that led to job destruction before the essentials of job creation
were in place
 • Forcing privatization before there were adequate competition and regulatory
frameworks
– The IMF failed to deal with a variety of issues:
• Job creation, land reform, improved education and health services, and helping
workers adversely affected by its policies

Other Important Economic Organizations

• Organization for Economic Cooperation and Development (OECD) 8
– A broad group of 30 developed nations
– The most encompassing ‘club’ of the world’s rich countries (Ougaard 20007:914-17)
– Has little formal power but highly influential
• European Union (EU)
– Product of WWII and Bretton Woods era, has 27 member states
– Largest domestic market in the developed world with over 500 million citizens
– Encompasses those nations in Europe that have adopted the euro as their basic
currency
– Most but not all members (Great Britain, Sweden, and Denmark) are using euro
• Euros have become controversial over time
• Mercosur
– Sometimes called as Southern Common Market
– Created by a treaty of Asuncion in 1991
– Its goal is a common market in South America by 1995 (Roett 1999)
• The Multinational Corporation
– A major player in economic globalization
– Encompasses transnational corporations (TNCs)
– Operates in more than two countries
– Leads to the development of complex networks
• Transnational Capitalism
– Territorial boundaries are of declining importance in capitalist globalization
– Prctices:
• Economic transnational practices are able to transcend geographical
boundaries.
• Political transnational practices predominates, but it does not necessarily own
the means of production
• Transnational capitalists are:
• “Members” tend to share global and local interests
• They seek to exert various types of control across nations
• They tend to share a global rather a local perspective on a wide range of issues
• They come from many different countries but they see themselves as citizens
of the world and not just their birth place
• They share similar lifestyles, especially in terms of the goods and services they
consume