Institutions and Second World War Period

List of top four institutions that were set up during second world war period. The institutions are: 1. The International Monetary Fund 2. The World Bank 3. Demise of the Bretton Woods System 4. GATT and WTO.

Institution # 1. The International Monetary Fund (IMF):

The Bretton Woods conference also contributed to the establishment of the International Monetary Fund (or IMF), which administers the international monetary system even today and serves as a central bank for central banks. Member countries subscribe by lending their currencies to the Fund; the Fund then relends these funds to help member countries solve their short-run balance-of-payments problems.

How­ever, these problems are often a result of standard difficulties and slow growth of exports. The IMF typically makes conditional loans requiring debtor countries to implement macroeconomic policies or structural reforms that will alleviate balance-of-pay­ments problems (such as control of inflation, or devaluation of currency, with its permission).

In recent years, the Fund has played a strategic role in organizing a cooperative response to the inter­national debt crises and in helping the new born post-socialist countries like Russia make the transition to the market. Moreover, it has been playing an im­portant role in debt rescheduling, wherein banks would lend more funds and stretch out payments on existing loans.

Institution # 2. The World Bank:

The World Bank, created at the Bretton Woods conference in 1944, raises capital for loans by borrow­ing funds in private money markets. It is a profit- making institution that makes ‘hard’ loans to less developed countries for specific development projects.

Such loans are to be repaid within 20 years as scheduled. The funds thus raised are utilized by the Bank to make loans to developing countries like India at concessional rates of interest for projects which cannot get private-sector funding.

Such long term loans enable goods and services to flow from advanced nations to developing countries. In recent years, the Bank has made new loans of $25 billion per year on an average. The World Bank also provides technical assistance on specific projects and consult­ation on general economic policies.

If a borrowing nation can choose projects cor­rectly, then eventually its production will rise by more than enough to pay interest on the loans. This means that foreign capital will raise GDP and will ultimately lead to higher wages and improved living standards. The advanced countries also gain when the loans are repaid by being able to enjoy somewhat higher im­ports of useful goods.

Institution # 3. Demise of the Bretton Woods System:

From 1945 to 1970 the world was on a dollar standard. Under Bretton Woods the US dollar was the key currency: most of world trade and international finance were carried out in dollars and payments were most often made in dollars. Moreover, exchange- rate parities were set in dollar terms, and private and official reserves were held in dollar balances.

However, this trend did not continue for long. There was huge accumulation of dollar in industrial countries, as Germany and Japan developed trade surpluses. At the same time, U.S. trade deficits were fuelled by an overvalued currency, budget deficits, and growing foreign investment by U. S. multination­als.

By 1971, due to huge accumulation of dollar balances, governments had genuine difficulty defend­ing the official parities. So America’s trade partners began to lose confidence in the dollar. Moreover, the lower barriers to capital flows meant that billions of dollars would cross America and threaten to over­whelm existing parities.

In 1971 the dollar was delinked from gold, which brought the Bretton Woods era to an end. And the U.S. Government officially declared that it would no longer automatically con­vert dollars into other currencies or into gold at $35 per ounce.

It was also declared that no longer would the USA set an official parity of the dollar and then defend this exchange rate at all costs. As the USA abandoned the Bretton Woods system, the modern era started the world moved into today’s hybrid system.

Today’s Hybrid System:

Without any central planning authority giving a clear direction, or without any institution having planned it, the world has moved to a hybrid exchange rate system.

The main features of the present system are the following:

i. Clean Floating:

A few countries allow their currency to float freely. This means that a country allows markets to determine its currency’s value and it rarely intervenes. The USA has done this for some periods in the last two decades.

ii. Managed (dirty) Floating:

Some major countries like Canada, Japan and Britain have fol­lowed the system of managed floating. Under this system, “a country will buy or sell its currency to reduce the day-to-day volatility of currency fluctua­tions. In addition, a country will sometimes engage in systematic intervention to move its currency toward what it believes to be a more appropriate level.”

iii. Crawling Peg:

Small developing countries like Korea or Taiwan usually peg (fix) their currencies to a major currency or to a basket of currencies. Some­times they allow the peg to glide smoothly upward or downward in a system known as a gliding or crawling Peg.

iv. Currency Bloc:

Some European countries have joined together (by forming a currency boc, viz., the European Monetary System) in order to stabilize exchange rates among themselves while allowing their currencies to move flexibly relative to those of the rest of the world.

v. General Intervention:

Finally, as a general rule, almost all countries tend to intervene either when markets become ‘disorderly’ or when exchange rates seem far out of line with their fundamental values, i.e. with exchange rates that are appropriate for existing price levels and trade flows.

Institution # 4. GATT and WTO:

The GATT is both an agreement and an institu­tion. Its charter speaks of raising living standards through ‘substantial reduction of tariffs and other barriers to trade and elimination of discriminatory treatment in international commerce.’ The GATT cur­rency has 107 members, accounting for 85% of inter­national trade.

Principles:

The main principles underlying the GATT are the following:

1. Firstly, countries should lower trade bar­riers.

2. Secondly, all trade barriers should be applied on a non discriminatory basis across nations. This means that no nation should enjoy the ‘most favourable nation’ status.

3 Thirdly, when a country increases its tariffs above agreed-upon levels, it must compensate its trading partners for the economic loss suffered.

4. Finally, trade conflicts should not be settled unilaterally but by consultations and arbitration.

No doubt the GATT has achieved some success in promoting international economic cooperation. Representatives of major industrial countries meet at periodic intervals under the auspices of the GATT to identify major trade barriers and negotiate their removal. In 1993 nations completed the ‘Uruguay Round’.

In addition to the traditional goal of remov­ing tariff and non-tariff barriers, the new round sought to achieve the ambitious goal of lowering trade barriers and subsidies in agriculture and removing quotas on textiles and have extended free trade to services (such as tourism, banking, insurance, transport and communication) and intellectual property (such as patents, copyrights and trademarks).

Finally, from 1995, the GATT has been renamed the “World Trade Organisation” (WTO), with enhanced powers to enforce international trade agreements so as to be able to complete the task of pursuing the unfinished business from the Uruguay Round.