3.

Classical Gold Standard

4. Gold Exchange Standard
International Finance: Bretton Woods System 5. Bretton Woods System
6. System of Flexible Rates
International Monetary System (IMS)
1. Era of Specie Money - Pre-modern era
What is money? → Specie money - metal money in circulation.
→ Any good that is widely accepted in exchange of → money in the form of coins, precious stones (as
goods and services, as well as payment of debts. opposed to paper money)
→ Example: A roman coin
3 Functions of Money → Governments had no control over monetary
1. Medium of exchange – money used for buying issues (i.e. money flow)
and selling goods and services → Another problem: chronic specie scarcity
2. Unit of account – common standard for
measuring relative worth of goods and services 2. Era of Political Money - 18th and 19th century
3. Store of value – convenient way to store wealth → Financial revolution: introduction of paper money
→ Government started printing money and acquired
Why does it matter? extensive control over money supply.
→ Sound IMS is prerequisite for stable world → Example of a paper money is Chinese paper
economy money during 1200s
→ Requirement for growth of world trade and foreign → Crucial macroeconomic variable:
investment a. Government’s influence over economic activities
→ Government could solve inadequacy of specie
Requirement for Stable IMS money
1. Liquidity a. E.g., Governments could fight against deflationary
2. Adjustment Mechanism pressure
3. Confidence → But this can also create inflationary bias
a. Too much monetary injection could cause inflation
(e.g. hyperinflation during Weimar Republic)
A. Liquidity - Amount of assets (e.g., money) that
b. May diminish value of currencies
can be easily available to finance trade
c. Could cause instability in IMS
Market Liquidity - describes how easily an item can
Dilemma:
be traded for another item, or into the common
→ States wanted both flexibility in domestic
currency within an economy.
economic policies and stability in IMS
→ Money is the most liquid asset because it is
→ BUT, trade-off between autonomous domestic
universally recognized and accepted as the common
economic policies and stable monetary order exists.
currency.
→ The way this dilemma was resolved characterizes
→ IMS should provide adequate liquidity to finance
the subsequent phases in history of IMS.
international transactions.
3. The Classical Gold Standard - 1870-1914
B. Adjustment Mechanism - System must specify
→ Essential Feature:
methods to resolve balance of payment (BOP)
a. Nations fixed the value of their currencies in terms
disequilibria.
of gold
b. Gold is freely transferable between countries
BOP - All payments between a country and its → Essentially a fixed rate system
trading partners. a. Suppose the US announces a willingness to buy
gold for $200/ per oz and the UK announces a
Disequilibria - imbalance willingness to buy gold for £100 per oz.
b. Then £1=$2
C. Confidence - Sound IMS should provide → Embodied classical liberal economic principles
confidence in the system. → Very successful IMS: facilitated growth of world
trade and global prosperity
History of IMS → But at the cost of autonomy in domestic economic
1. Era of Specie money policies
2. Era of political money → Worked well till World War I
 → Creation of the International Monetary Fund (IMF)
Why did the Classical Gold Standard collapse? to supervise the Bretton Woods System
→ Rise of warfare states → The compromise of domestic autonomy and
→ Major consequence of WWI: nationalization of stability of IMS:
IMS a. Embedded liberalism - “Unlike the economic
→ States safeguarded their gold supplies, nationalism of the thirties, it would be liberalistic in
disengaged from fixed exchange rate. character; unlike the liberalism of the gold standard,
its liberalism would be predicated upon domestic
4. Gold Exchange Standard - Interregnum period interventionism.” - John G. Ruggie.
(period between WWI and II) b. Cont. Involving a compromise between two
→ Currency tied to gold, but the return to gold desirable but partially conflicting objectives. The first
standard was ruled out objective was to revive free trade. Before World War
→ Instead of gold, states could use gold-backed I, international trade formed a large portion of global
currencies such as British pound or sterling GDP, but the classical liberal order which supported
→ Gold Exchange only survived a few years. Why? it had been damaged by war and by the Great
a. Rise of welfare state Depression of the 1930s. The second objective was
b. Advent of Keynesianism: governments should to allow national governments the freedom to
fight against frequent recession and unemployment. provide generous welfare programmes and to
→ The central belief of Keynesian economics is that intervene in their economies to maintain full
government intervention can stabilize the economy. employment. This second objective was considered
Keynes’ theory was the first to sharply separate the to be incompatible with a full return to the free market
study of economic behavior and individual incentives system as it had existed in the late 19th century—
from the study of broad aggregate variables and mainly because with a free market in international
constructs. capital, investors could easily withdraw money from
c. Welfare objectives (e.g., continuous economic nations that tried to implement interventionist and
growth and full employment) are more important redistributive policies.
than stable international monetary order ← Rise of → Avoided:
labor unions. a. Subordination of domestic economic activities to
→ Active intervention in monetary issue the stability of the IMS (key feature of the Classical
→ The trade-off: Gold Standard).
a. Autonomy of domestic economic policies over a b. The sacrifice of the IMS to the domestic policy
stable international monetary system. autonomy (key character of the interwar period)
b. “Beggar-thy-neighbor policies”, competitive c. Intended to enable governments to pursue
depreciation → Great Depression → WWII Keynesian growth policies at home, without
→ Beggar-thy-neighbor refers to economic and sacrificing international monetary stability.
trade policies that a country enacts that end up d. Also to achieve a stable international monetary
adversely affecting its neighbors and/or trading system, without subordinating autonomy in domestic
partners. Protectionist barriers such as tariffs, economic activities.
quotas, and sanctions are all examples of policies
that can hurt the economies of other countries. How the dilemma was solved during the BWS
→ Competitive devaluation is a theoretical scenario 1. If a country is suffering temporary BOP
in which one nation matches an abrupt devaluation disequilibria, the IMF would provide a medium-term
in another country's currency, often in a tit-for-tat loan to the country.
manner. In other words, one nation is matched by a 2. If a country is suffering fundamental BOP
currency devaluation of another, which in turn disequilibria, the system would permit a country to
devalues its currency in response. change its exchange rate.

5. Bretton Woods System The key to the system:

Two goals of the Bretton Woods System 1. American economy → dollar
a. A world in which governments would have 2. Other nations pegged their currencies to the dollar
considerable leeway to pursue national (System of fixed XR)
economic objectives, yet
b. The monetary order was based on fixed exchange → The US pledged to keep the dollar convertible
rate to prevent competitive depreciation into gold at $35 per ounce.
→ In other words, both autonomy and stability. → Dollar was the principal medium of exchange,
store of value, and unit of account.
→ It was successful. But why did the system > an increase in living standards, improvement in
collapse? self- esteem needs and freedom from oppression as
Answer: Triffin dilemma well as a greater choice (Todaro)
Triffin Dilemma - The soundness of the Bretton > most accurate method of measuring development
Woods system depended on liquidity and is the human developmen index HDI which takes into
international confidence created by the US economy account the literacy rates & life expectancy which
→ Every state wants dollars to rectify their BOP
affect productivity and could lead to growth.
problem.
→ But the US can’t print dollars indefinitely →
Inflationary pressure → devalue the worth of dollars.
→ People will lose confidence in the dollar and in the
system.
Case Study: Human Development Index
→ To provide liquidity, the US would have to run
BOP deficit. To broaden the development debate beyond
→ US BOP deficit in the long run will undermine income poverty, the Human Development Report
confidence in the dollar and the system. introduced the HDI. This index measures countries’
achievements in terms of:
Two basic asymmetries:
1. Role of dollar as providing liquidity → US BOP >a long and healthy life, measured by life expectancy
deficit → decreased confidence in the system at birth;
2. US, not able to devalue the dollar to improve its
BOP position > knowledge, measured by adult literacy rate and the
combined primary, secondary, and tertiary gross
Collapse of the BWS enrollment ratio; and

August 15, 1971 - Nixon announced that the US will > a decent standard of living, measured by GDP per
suspend the convertibility of the dollar into gold. capita in purchasing power parity (PPP) (in US
dollars)
6. System of Flexible Rates - Kingston Conference
(1976) Economic growth does not take into account the
→ The determination of the par value of a currency size of the informal economy
is the responsibility of the country.
➢ not regulated or protected by the state

Edith Marie C. Ibrahim-Uy ABIS-1st Year Development alleviates people from low standards
of living into proper employment with suitable
Development:Lesson 9 shelter.
Definition of Terms Economic growth does not take into account the
depletion of natural resources which might lead to
What is the difference between growth and pollution, congestion and disease
development?
Development however is concerned with
Economic growth: sustainability which means meeting the needs of the
present without compromising future needs.
➢ Narrower concept than development
➢ Increase in country’s real level of national However, to determine how many people benefit
output caused by an increase in quality and from economic growth, one must look at the
quantity of resources. distribution of income
Economic development ➢ Income inequality is a measure of how the
wealth in the economy is distributed among
the population
Growth, Poverty, and Inequality DAC’s Definition of Aid

Properties of growth, inequality and poverty: DAC’s distinction between two sorts of recipients:

➢ Holding inequality constant, ➢ Part I countries - the poorest developing

growth ↑ poverty ↓ countries as well as those countries termed
➢ Holding growth constant, lower and upper middle-income countries
inequality ↑ poverty ↑ ➢ Part II countries - consist of the more
advanced developing nations and ‘countries
So, if the objective is to reduce poverty, then and territories in transition
growth is a plus for poverty reduction and increased
inequality a minus

“Is growth good for the poor?” Official Development Aid (ODA)

➢ Yes, if growth is viewed in isolation. ➢ the aid comprised of the assistance going to
➢ But if growth is accompanied by increased Part. 1 countries
inequality, then the net effect is no longer
clear... Official Aid (OA)

➢ aid which meets the eligibility criteria and

which goes to Part II countries.
World Bank in comparing levels of development:
ranks countries in terms of per capita income Competing Perspectives on Global Divide

This measure of income is a useful way for 1. Modernization Theory

comparing levels of development
2. Dependency Theory
➢ It provides the widely used measure of how
countries are improving (or deteriorating) 3. Neoliberalism
based on this development aspect

Modernization Theory
Foreign Aid
Proponents of this theory argue that societies
Foreign aid undergo stages of growth and move from being a
traditional society to a modern one
➢ broadly defined, it consists of all resources
transferred by donors to recipients To overcome poverty, societies must advance
➢ e.g. physical goods, skills and technical from traditionalism to modernization
know-how, financial grants, or loans
➢ Poor societies remain poor because they cling
This broad catch-all description is rarely deployed to traditional attitudes, technologies, and
by those who are directly engaged in the business. institutions

Development aid or development assistance

➢ the narrower types of aid

➢ is defined based on the purpose for which the
aid is given (i.e. development)
 ➢ these nations have been dominated by rich
nations
➢ through the neo-colonial practices
➢ dependency on debt with the World Bank and
the IMF,
➢ The conditions on foreign aidt
➢ The influence of multinational corporations
on the policies in the developing countries

Traditional values block a country from Case Study: Endo, Globalization and the South
developing e.g. valuing the extended family, blocks
geographical mobility “End all forms of contractualization”. These posters
express denunciation of contractual labor as a form
Traditional values of employment practice in the Philippines. “Endo”,
or end of contract, exists when employers hire
➢ Ascription (status attributed)
workers and then terminate their contracts after five
➢ Particularism months to avoid regularizing them. According to the
➢ Collectivism law, an employee who has been working for a
company for six months should be regularized unless
Modern values
the individual is not eligible to be a regular employee.
➢ Achievement Endo is a labor flexibilization practice designed to
➢ Universalism attract investors through cheap labor costs.
➢ Individualism
We can’t understand the fate of a single country,
without understanding how it fits into the overall
system
Dependency Theory
Countries aren’t poor because of their own specific
Proponents of this theory argue that the root cause history or internal characteristics
of poverty and underdevelopment is imperialism as
Rather, they are poor because of their position
well as the dependency of poor nations on the rich
relative to others in the global capitalist system
countries

➢ Fernando H. Cardoso, Enzo Falleto,

Theotonio dos Santos, James Caporaso Key concepts:

Core: therich,developedcountries
It is a counterargument to the modernization ➢ Also: the West; metropolitan countries;
theory, which prescribes that developing countries developed world
must follow path of the developed nations
Periphery: poor,dependent nations
According to dependency scholars, industrial
capitalism brings exploitation ➢ Also: underdeveloped countries; satellites;
dependencies
Furthermore, poor societies are not born but made

But why have poor nations been unable to resist

exploitation?
 Dependency: The vulnerable state of being
exploited by core countries

➢ They depend on the core for trade, investment,

loans, technology, etc. (related term:
underdevelopment)

Neoliberal Theory

Just as modernization theory was losing its Pantawid Pamilyang Pilipino Program (4Ps)
prominence in academic circles, many countries
were rediscovering the ideals of free trade and free Is a human development measure of the national
markets government that provides conditional cash grants to
the poorest of the poor, to improve the health,
The intellectual basis for neo-liberal theory comes nutrition, and education of children aged 0-18.
from neo-classical economics, which combines
arguments supportive of free market with is patterned after the conditional cash transfer
scientifically inclined school of economics (CCT) schemes in Latin American and African
countries, which have lifted millions of people
Case Study: Imported Goods in Philippine Market around the world from poverty.

Because of international trade, it is common to find Coverage

imported goods in Philippine stores. Consumers
primarily benefit from trade because they get to As of August 26, 2015, there are 4,353,597 active
enjoy greater variety of goods at a lower price. But household-beneficiaries, of which 570,056 are
imports compete with locally produced goods. indigenous households and 217,359 have at least one
Filipino enterprises are hard-pressed in face of stiff PWD
competition because of globalization.
The program also covers 10,235,658
Policy prescriptions: schoolchildren aged 0 to 18, from the total registered
with an average of two to three children per
➢ Privatization household
➢ Deregulation
➢ Liberalization Cash Grants

The policies prescribed by neoliberalism and The 4Ps has two types of cash grants that are given
advanced by the IMF have been called the out to household-beneficiaries:
Washington Consensus
health grant: P500 per household every month, or
Millennium Development Goals (MDGs) a total of P6,000 every year

8 international development goals through 2015 education grant: P300 per child every month for
ten months, or a total of P3,000 every year (a
Established during the 2000 UN Millennium household may register a maximum of three children
Summit for the program)

All member states as well as other IOs have

committed to the MDGs

Target year: 2015

Conditions and Compliance

1. Pregnant women must avail pre- and post-natal

care, and be attended during childbirth by a trained
professional;

2. Parents or guardians must attend the family

development sessions, which include topics on
responsible parenting, health, and nutrition;

3. Children aged 0-5 must receive regular preventive

health check- ups and vaccines;

4. Children aged 6-14 must receive deworming pills

twice a year; and

5. Children-beneficiaries aged 3-18 must enroll in

school, and maintain an attendance of at least 85% of
class days every month.

Partnerships with Government Agencies

In partnership with the Commission on Higher

Education, the Department of Labor and
Employment, and the Philippine Association of State
Universities and Colleges, 4Ps has enrolled 36,003
beneficiaries in state universities and colleges as of
June 2015.

Additionally, in partnership with PhilHealth, 4Ps

has covered 4.4 million beneficiaries under the
National Health Insurance Program

Assessments

World Bank gives CCT thumbs up

The Conditional Cash Transfer (CCT) is 'on track

to meet the goals of keeping children healthy and in
school,' says the World Bank

The costs and benefits of Pantawid Pamilya

There is growing evidence showing positive

outcomes for the government's conditional cash
transfer