Economic Growth and Development:

A 20th Century Perspective

Lecture 2
The international framework

Dr Matthias Morys
 WW2 compared with WW1
• European recovery after WW II cannot be understood
without changes in US foreign policy
• US did not want to repeat the mistakes it had made after
WW I by withdrawing from European politics (isolationism)
• Cold War greatly helped in keeping US interest alive
• In particular: co-operation with losers of WW II (Germany,
Italy): Marshall plan, London debt agreement 1953
• a good understanding of interwar economic history is vital
for appreciating the fundamental changes in post-WW II
economic policies
Support for (Western) Europe was:
• Military: foundation of NATO in 1949

• Political & economic

By common membership: Bretton Woods System
By aiding European integration efforts (lecture 3)

Bretton Woods System was nominally global (or Western)

but effectively focused on North Atlantic economy
What is the exact relationship between the two?
 How best to fit “international framework”
into economic growth perspective?
• Abramovitz (1986) on European catch-up growth
• Catch-growth requires
(a) catch-up potential
(b) social capabilities
(c) supportive international framework
 Bretton Woods System: 1944–1973
• In July 1944, 44 countries met in Bretton Woods, NH, to
design the Bretton Woods system:
– a fixed exchange rates against the U.S. dollar and a fixed dollar price
of gold ($35 per ounce).
• They also established other institutions:
1. The International Monetary Fund
2. The World Bank
3. General Agreement on Trade and Tariffs (GATT), the predecessor to
the World Trade Organization (WTO).
 International Monetary Fund

• The IMF was constructed to lend to countries with

persistent balance of payments deficits (or current account
deficits), and to approve of devaluations.
– Loans were made from a fund paid for by members in gold and
currencies.
– Each country had a quota, which determined its contribution to
the fund and the maximum amount it could borrow.
– Large loans were made conditional on the supervision of domestic
policies by the IMF: IMF conditionality.
– Devaluations could occur if the IMF determined that the economy
was experiencing a “fundamental disequilibrium”.
International Monetary Fund (cont.)

• Due to borrowing and occasional devaluations, the

IMF was believed to give countries enough
flexibility to attain an external balance, yet allow
them to maintain an internal balance and stable
exchange rates.
– The volatility of exchange rates during 1918–1939,
caused by devaluations and the vagaries of the gold
standard, was viewed as a source of economic
instability.
Bretton Woods System: 1944–1973
• In order to avoid sudden changes in the financial account
(possibly causing a balance of payments crisis), countries in
the Bretton Woods system often prevented flows of financial
assets across countries.
• Yet, they encouraged flows of goods and services because of
the view that trade benefits all economies.
– Currencies were gradually made convertible (exchangeable) between
member countries to encourage trade in goods and services valued in
different currencies.
Bretton Woods System: 1944–1973 (cont.)

• Under a system of fixed exchange rates, all

countries but the U.S. had ineffective monetary
policies for internal balance.
• The principal tool for internal balance was fiscal
policy (government purchases or taxes).
• The principal tools for external balance were
borrowing from the IMF, restrictions on financial
asset flows and infrequent changes in exchange
rates.
Recovery of global trade as the second pillar
of US strategy
 International Negotiations of Trade
Policy
• Average tariff rates on dutiable imports have
decreased substantially since 1944.
• Since 1944, much of the reduction in tariffs and other
trade restrictions came about through international
negotiations.
– The General Agreement of Tariffs and Trade was begun in
1947 as a provisional international agreement and was
replaced by a more formal international institution called
the World Trade Organization in 1995.
 International Negotiations
of Trade Policy
• Multilateral negotiations help avoid a trade
war between countries.
• If each country has a political interest to protect
domestic producers, regardless of what other
countries do,
– then all countries could enact trade restrictions, even if it is
in the interest of all countries to have free trade.
International Negotiations
of Trade Policy (cont.)
 International Negotiations
of Trade Policy (cont.)
• Importance of most-favoured nation clause

• Exception to most-favoured national clause

• Relationship of GATT/WTO trade liberalisation

and EC/EU trade liberalisation (common market)
 Concluding remarks
• New international framework shaped by failures of
interwar period & cold war needs
• Western European economic growth depended on it

• Institutions designed to help Western Europe have

undergone fundamental change since then
BW fixed xr system gave way to floating IMS
IMF has turned towards the emerging economies (?)
Problem: decision-making structures often reflect
1950s and not 2010s