#MakingHistory
X ANNIVERSARY EDITION
THE WASHINGTON CONFERENCE ON POLITICAL AND ECONOMICAL STRATEGY
FB.COM/MUNUR.ORG/ WWW.UROSARIO.EDU.CO/MUNUR/ GET READY TO MAKE HISTORY Index:
LETTER OF 4 PRESENTATION
HISTORY 4 OF THE COMMITTEE FUNCTIONS 6 OF THE COMMITTEE
IMPORTANCE 10 OF THE COMMITTEE
12 TOPIC A TOPIC B 17 CHALLENGES AND OBJECTIVES FOR THE IMF
36 REFERENCES
LETTER OF PRESENTATION Understanding the origins of the malfunctioning of the Bretton Woods system is of great American dollars—to twice the amount of its quota. In simpler terms, by putting in a very importance because its collapse led to the end of commodity money, an epoch-making break small quantity in gold, a country can borrow many times that amount in dollars or other in monetary history (Cesarano, p.2, 2006). valuable currencies (Hazlitt, p.54, 1984) e system appeared to work well during a couple of decades, but tensions quickly rose due My name is Eduardo Manuel Martín Ibárcena Callirgos e United Nations Monetary and Financial Conference, better known as the Bretton to an insecurity about the legitimacy of the dollar as a supporting currency. In particular, Woods Conference, was held in July 1944 with the objective of deciding the future of the some heads of state started questioning whether the USA truly had enough gold to back up and I will be your director of the aforesaid committee. I was born in Peru and raised in international monetary order after World War II (WWII). e conference was urgent as the amount of currency that was circulating. e doubts on the legitimacy of the dollar were Switzerland during my early years oh middle School. I nished High School and my many of the most important currencies in the world were not stable and a plan was needed further increased when it became evident that the USA was acquiring an enormous debt and International Baccalaureate in Perú and now currently I'm studying Business Administra- to “ x and stabilize their national currency unit” (Hazlitt, p.47, 1984). ree main goals were it just had to print more money to pay. ese insecurities led some mandataries to return US tion and Marketing at ESAN Business School in Lima. achieved: the establishment of a xed exchange monetary system, the creation of the dollars to the USA in exchange for gold. International Monetary Fund (IMF) and the establishment of the International Bank for Regarding my MUN experience, it all started 3 years ago with Peruvian Universities, I had Reconstruction and Development (IBRD.) Because these doubts were, in fact, true, President Richard Nixon, in an attempt to mitigate the opportunities to participate in international conferences like World Harvard Model the possible damaged caused, signed a document for the “suspension of dollar convertibility United Nations 2017 and 2018 winning Diplomacy award in DISEC, Harvard National With the aim of achieving these goals, three commissions were established. e rst one was on 15 August 1971” (Cesarano, p.1, 2006). is suspension simply meant that there no Model United Nations Latin America with Outstanding Delegate awards and MUNUR in charge of Harry Dexter White, the head delegate of the USA, and its objective was to longer was a xed rate between dollars and gold and thus the end of the Bretton Woods 2017 where we won the Best Small Delegation award. Since then, I have served as director discuss the International Monetary Fund. e second held as a topic the International Bank System had come about. for DISEC and Crisis Committee’s in Peru and last year at MUNUR 18. for Reconstruction and Development and was led by John Maynard Keynes, the English head delegate and one of the most important economists of the twentieth century. And, nally, Economically speaking, according to Paul Krugman the Bretton Woods System had three I like to say I characterize myself as a very strategic person, always with a clear and speci c there was a third commission chaired by Eduardo Suárez in which other economic issues that main goals. It would “foster full employment and price stability while allowing individual goal. For this committee, I intend you to develop structured proposals and strategic ideas, the other two commissions were not concerned with were discussed. countries to attain external balance without imposing restrictions on international creative but most important with a speci c purpose. Needless to say, our committee should trade”(547) at is, it hoped to make all available labor resources be in use (full be guided under the scope of diplomacy and cooperation, emphasizing the need for e conference was of particular importance because it set the working of the international employment), a sustainable and slow change in prices of goods and services(price stability), exchanging ideas for developing strongly supported proposals. monetary system for several decades. Its main conclusion was that the economic objectives and a balance between the exports and imports of each country. that it had established could only be achieved through xing of each currency to the dollar and, in turn, the xing of the dollar to a gold standard. Speci cally, an equivalence of 35 As was explained earlier, it intended to do so by maintaining a xed exchange rate between Eduardo M. Ibárcena Callirgos dollars to an ounce of gold was established. the dollar and gold, and a xed exchange rate between the other currencies and the dollar. e Director latter was achieved by each country’s selling or buying of currencies to maintain a stable price. But of course, because the market is dynamic it was impossible to x such prices if there was e change was important as it avoided several problems that had been experienced in the not a pressure created in the system that followed the laws of supply and demand. erefore, past and could have lead to severe problems in the future. First of all, a stable exchange rate under the Bretton Woods system, it was part of the pact that it was the duty of each meant that countries couldn’t purposely devalue their currency to bene t from trade. individual country to buy and sell currencies in order to maintain the appropriate balance as erefore, under such a system trade wars couldn’t have happened. dictated by the exchange rate. And, if it were the case that these countries couldn’t on their own furnish the capital to maintain the stability, then it was the role of the IMF to aid them Furthermore, it prevented countries from increasing the supply of money for paying debts, in obtaining the necessary resources. Hazlitt describes how this last step worked as follows: which was one of the main causes that had led to the 30. And yet, even though it provided Each country will make a maximum contribution in gold of only 25 percent of its quota, (...) good underlying support for the money, it was more exible than the gold-standard which On the basis of this quota, it can "buy" currencies of real value—meaning in the main various economists theorize aggravated the great depression and led it to have the consequences that it did. In fact, it could be the case (Paul Kruggman) that such a strong 4
dependence on gold might have lead central banks to be overzealous of protecting their own gold reserves which might have in turn prevented such banks from providing the liquidity needed to reduce the impact of the depression.
Nonetheless, as we mentioned before, to make such a system work each country needs to buy and sell its own currency to maintain a stable exchange rate. And there might be situations where the country in question might not be able to do so because of a lack of funds. is is one of the roles the IMF serves. Given a situation where a country is unable to buy or sell what it needs the IMF works a central bank that is able to give loans to keep so that such a country might still hold the exchange rates xed. If such an institution didn’t exist it would simply be naïve to assume that at every point in time the country would have enough resources to behave nancially as it was stipulated in the agreement. LETTER OF PRESENTATION Understanding the origins of the malfunctioning of the Bretton Woods system is of great American dollars—to twice the amount of its quota. In simpler terms, by putting in a very importance because its collapse led to the end of commodity money, an epoch-making break small quantity in gold, a country can borrow many times that amount in dollars or other in monetary history (Cesarano, p.2, 2006). valuable currencies (Hazlitt, p.54, 1984) e system appeared to work well during a couple of decades, but tensions quickly rose due Dear Delegates, e United Nations Monetary and Financial Conference, better known as the Bretton to an insecurity about the legitimacy of the dollar as a supporting currency. In particular, Woods Conference, was held in July 1944 with the objective of deciding the future of the some heads of state started questioning whether the USA truly had enough gold to back up I believe that, if taken seriously, this committee will be a challenge. I hope that you arrive at international monetary order after World War II (WWII). e conference was urgent as the amount of currency that was circulating. e doubts on the legitimacy of the dollar were the sessions having more than a surface knowledge about the IMF, exchange rates or the many of the most important currencies in the world were not stable and a plan was needed further increased when it became evident that the USA was acquiring an enormous debt and World Bank. Although the country is economic in nature it is not designed for economists to “ x and stabilize their national currency unit” (Hazlitt, p.47, 1984). ree main goals were it just had to print more money to pay. ese insecurities led some mandataries to return US but rather for those who will study and thus for those who will have content in their achieved: the establishment of a xed exchange monetary system, the creation of the dollars to the USA in exchange for gold. speeches and lobby. In other words, those that will achieve that which their country needs International Monetary Fund (IMF) and the establishment of the International Bank for and desires. Reconstruction and Development (IBRD.) Because these doubts were, in fact, true, President Richard Nixon, in an attempt to mitigate I am very excited to be part of your Dais with Eduardo because of two reasons. First, I the possible damaged caused, signed a document for the “suspension of dollar convertibility believe that MUNUR is the best Model of United Nations that I have attended in With the aim of achieving these goals, three commissions were established. e rst one was on 15 August 1971” (Cesarano, p.1, 2006). is suspension simply meant that there no Colombia and any involvement in it makes me very happy. Second, I understand that for in charge of Harry Dexter White, the head delegate of the USA, and its objective was to longer was a xed rate between dollars and gold and thus the end of the Bretton Woods many Model UNs are a joke, but for me, they have been one of the greatest tools I have discuss the International Monetary Fund. e second held as a topic the International Bank System had come about. ever had for learning. If you see more in it than a game, you can learn how to play fair and for Reconstruction and Development and was led by John Maynard Keynes, the English head take what you want, how to be kind, but respected. It is not only the verbal skills that you delegate and one of the most important economists of the twentieth century. And, nally, Economically speaking, according to Paul Krugman the Bretton Woods System had three gain or an improvement over your body language, but it is also a great (if not one of the there was a third commission chaired by Eduardo Suárez in which other economic issues that main goals. It would “foster full employment and price stability while allowing individual greatest) aids to better your con dence, which is for me one of the most important things the other two commissions were not concerned with were discussed. countries to attain external balance without imposing restrictions on international in life. trade”(547) at is, it hoped to make all available labor resources be in use (full e conference was of particular importance because it set the working of the international employment), a sustainable and slow change in prices of goods and services(price stability), I studied at Abraham Lincoln School in which it is mandatory to participate each year in monetary system for several decades. Its main conclusion was that the economic objectives and a balance between the exports and imports of each country. the School’s model since fourth grade. During school, I went once to TESMUN and that it had established could only be achieved through xing of each currency to the dollar AISMUN and I was dais my last two years in high school. When I went to AISMUN I and, in turn, the xing of the dollar to a gold standard. Speci cally, an equivalence of 35 As was explained earlier, it intended to do so by maintaining a xed exchange rate between participated as Armando Benedetti in the committee Congreso de Colombia to discuss dollars to an ounce of gold was established. the dollar and gold, and a xed exchange rate between the other currencies and the dollar. e Santo’s tax reform of 2016. After that committee, my desire to of studying journalism and latter was achieved by each country’s selling or buying of currencies to maintain a stable price. literature waned but my desire to study International Relations became stronger. Despite But of course, because the market is dynamic it was impossible to x such prices if there was e change was important as it avoided several problems that had been experienced in the the mayor I intended to do, I knew that I would like to continue learning of MUN, so not a pressure created in the system that followed the laws of supply and demand. erefore, past and could have lead to severe problems in the future. First of all, a stable exchange rate there's where I learned about UR Diplomats. I loved the idea of learning about MUNs so under the Bretton Woods system, it was part of the pact that it was the duty of each meant that countries couldn’t purposely devalue their currency to bene t from trade. much that it even a ected my desire to come to El Rosario. Currently, I am in Diplomats individual country to buy and sell currencies in order to maintain the appropriate balance as erefore, under such a system trade wars couldn’t have happened. and this will be my second year in HNMUN, MUNUR, and PUJMUN. dictated by the exchange rate. And, if it were the case that these countries couldn’t on their I hope you can learn a lot from the 10th edition of MUNUR with us, Luna Bernal. own furnish the capital to maintain the stability, then it was the role of the IMF to aid them Furthermore, it prevented countries from increasing the supply of money for paying debts, in obtaining the necessary resources. Hazlitt describes how this last step worked as follows: which was one of the main causes that had led to the 30. And yet, even though it provided Each country will make a maximum contribution in gold of only 25 percent of its quota, (...) good underlying support for the money, it was more exible than the gold-standard which Luna Bernal On the basis of this quota, it can "buy" currencies of real value—meaning in the main various economists theorize aggravated the great depression and led it to have the Director consequences that it did. In fact, it could be the case (Paul Kruggman) that such a strong 5
dependence on gold might have lead central banks to be overzealous of protecting their own gold reserves which might have in turn prevented such banks from providing the liquidity needed to reduce the impact of the depression.
Nonetheless, as we mentioned before, to make such a system work each country needs to buy and sell its own currency to maintain a stable exchange rate. And there might be situations where the country in question might not be able to do so because of a lack of funds. is is one of the roles the IMF serves. Given a situation where a country is unable to buy or sell what it needs the IMF works a central bank that is able to give loans to keep so that such a country might still hold the exchange rates xed. If such an institution didn’t exist it would simply be naïve to assume that at every point in time the country would have enough resources to behave nancially as it was stipulated in the agreement. HISTORY OF THE COMMITTEE
Understanding the origins of the malfunctioning of the Bretton Woods system is of great American dollars—to twice the amount of its quota. In simpler terms, by putting in a very importance because its collapse led to the end of commodity money, an epoch-making break small quantity in gold, a country can borrow many times that amount in dollars or other in monetary history (Cesarano, p.2, 2006). valuable currencies (Hazlitt, p.54, 1984) e system appeared to work well during a couple of decades, but tensions quickly rose due e United Nations Monetary and Financial Conference, better known as the Bretton to an insecurity about the legitimacy of the dollar as a supporting currency. In particular, Woods Conference, was held in July 1944 with the objective of deciding the future of the some heads of state started questioning whether the USA truly had enough gold to back up international monetary order after World War II (WWII). e conference was urgent as the amount of currency that was circulating. e doubts on the legitimacy of the dollar were many of the most important currencies in the world were not stable and a plan was needed further increased when it became evident that the USA was acquiring an enormous debt and to “ x and stabilize their national currency unit” (Hazlitt, p.47, 1984). ree main goals were it just had to print more money to pay. ese insecurities led some mandataries to return US achieved: the establishment of a xed exchange monetary system, the creation of the dollars to the USA in exchange for gold. International Monetary Fund (IMF) and the establishment of the International Bank for Reconstruction and Development (IBRD.) Because these doubts were, in fact, true, President Richard Nixon, in an attempt to mitigate the possible damaged caused, signed a document for the “suspension of dollar convertibility With the aim of achieving these goals, three commissions were established. e rst one was on 15 August 1971” (Cesarano, p.1, 2006). is suspension simply meant that there no in charge of Harry Dexter White, the head delegate of the USA, and its objective was to longer was a xed rate between dollars and gold and thus the end of the Bretton Woods discuss the International Monetary Fund. e second held as a topic the International Bank System had come about. for Reconstruction and Development and was led by John Maynard Keynes, the English head delegate and one of the most important economists of the twentieth century. And, nally, Economically speaking, according to Paul Krugman the Bretton Woods System had three there was a third commission chaired by Eduardo Suárez in which other economic issues that main goals. It would “foster full employment and price stability while allowing individual the other two commissions were not concerned with were discussed. countries to attain external balance without imposing restrictions on international trade”(547) at is, it hoped to make all available labor resources be in use (full e conference was of particular importance because it set the working of the international employment), a sustainable and slow change in prices of goods and services(price stability), monetary system for several decades. Its main conclusion was that the economic objectives and a balance between the exports and imports of each country. that it had established could only be achieved through xing of each currency to the dollar and, in turn, the xing of the dollar to a gold standard. Speci cally, an equivalence of 35 As was explained earlier, it intended to do so by maintaining a xed exchange rate between dollars to an ounce of gold was established. the dollar and gold, and a xed exchange rate between the other currencies and the dollar. e latter was achieved by each country’s selling or buying of currencies to maintain a stable price. But of course, because the market is dynamic it was impossible to x such prices if there was e change was important as it avoided several problems that had been experienced in the not a pressure created in the system that followed the laws of supply and demand. erefore, past and could have lead to severe problems in the future. First of all, a stable exchange rate under the Bretton Woods system, it was part of the pact that it was the duty of each meant that countries couldn’t purposely devalue their currency to bene t from trade. individual country to buy and sell currencies in order to maintain the appropriate balance as erefore, under such a system trade wars couldn’t have happened. dictated by the exchange rate. And, if it were the case that these countries couldn’t on their own furnish the capital to maintain the stability, then it was the role of the IMF to aid them Furthermore, it prevented countries from increasing the supply of money for paying debts, in obtaining the necessary resources. Hazlitt describes how this last step worked as follows: which was one of the main causes that had led to the 30. And yet, even though it provided Each country will make a maximum contribution in gold of only 25 percent of its quota, (...) good underlying support for the money, it was more exible than the gold-standard which On the basis of this quota, it can "buy" currencies of real value—meaning in the main various economists theorize aggravated the great depression and led it to have the consequences that it did. In fact, it could be the case (Paul Kruggman) that such a strong 6
dependence on gold might have lead central banks to be overzealous of protecting their own gold reserves which might have in turn prevented such banks from providing the liquidity needed to reduce the impact of the depression.
Nonetheless, as we mentioned before, to make such a system work each country needs to buy and sell its own currency to maintain a stable exchange rate. And there might be situations where the country in question might not be able to do so because of a lack of funds. is is one of the roles the IMF serves. Given a situation where a country is unable to buy or sell what it needs the IMF works a central bank that is able to give loans to keep so that such a country might still hold the exchange rates xed. If such an institution didn’t exist it would simply be naïve to assume that at every point in time the country would have enough resources to behave nancially as it was stipulated in the agreement. HISTORY OF THE COMMITTEE
Understanding the origins of the malfunctioning of the Bretton Woods system is of great American dollars—to twice the amount of its quota. In simpler terms, by putting in a very importance because its collapse led to the end of commodity money, an epoch-making break small quantity in gold, a country can borrow many times that amount in dollars or other in monetary history (Cesarano, p.2, 2006). valuable currencies (Hazlitt, p.54, 1984) e system appeared to work well during a couple of decades, but tensions quickly rose due e United Nations Monetary and Financial Conference, better known as the Bretton to an insecurity about the legitimacy of the dollar as a supporting currency. In particular, Woods Conference, was held in July 1944 with the objective of deciding the future of the some heads of state started questioning whether the USA truly had enough gold to back up international monetary order after World War II (WWII). e conference was urgent as the amount of currency that was circulating. e doubts on the legitimacy of the dollar were many of the most important currencies in the world were not stable and a plan was needed further increased when it became evident that the USA was acquiring an enormous debt and to “ x and stabilize their national currency unit” (Hazlitt, p.47, 1984). ree main goals were it just had to print more money to pay. ese insecurities led some mandataries to return US achieved: the establishment of a xed exchange monetary system, the creation of the dollars to the USA in exchange for gold. International Monetary Fund (IMF) and the establishment of the International Bank for Reconstruction and Development (IBRD.) Because these doubts were, in fact, true, President Richard Nixon, in an attempt to mitigate the possible damaged caused, signed a document for the “suspension of dollar convertibility With the aim of achieving these goals, three commissions were established. e rst one was on 15 August 1971” (Cesarano, p.1, 2006). is suspension simply meant that there no in charge of Harry Dexter White, the head delegate of the USA, and its objective was to longer was a xed rate between dollars and gold and thus the end of the Bretton Woods discuss the International Monetary Fund. e second held as a topic the International Bank System had come about. for Reconstruction and Development and was led by John Maynard Keynes, the English head delegate and one of the most important economists of the twentieth century. And, nally, Economically speaking, according to Paul Krugman the Bretton Woods System had three there was a third commission chaired by Eduardo Suárez in which other economic issues that main goals. It would “foster full employment and price stability while allowing individual the other two commissions were not concerned with were discussed. countries to attain external balance without imposing restrictions on international trade”(547) at is, it hoped to make all available labor resources be in use (full e conference was of particular importance because it set the working of the international employment), a sustainable and slow change in prices of goods and services(price stability), monetary system for several decades. Its main conclusion was that the economic objectives and a balance between the exports and imports of each country. that it had established could only be achieved through xing of each currency to the dollar and, in turn, the xing of the dollar to a gold standard. Speci cally, an equivalence of 35 As was explained earlier, it intended to do so by maintaining a xed exchange rate between dollars to an ounce of gold was established. the dollar and gold, and a xed exchange rate between the other currencies and the dollar. e latter was achieved by each country’s selling or buying of currencies to maintain a stable price. But of course, because the market is dynamic it was impossible to x such prices if there was e change was important as it avoided several problems that had been experienced in the not a pressure created in the system that followed the laws of supply and demand. erefore, past and could have lead to severe problems in the future. First of all, a stable exchange rate under the Bretton Woods system, it was part of the pact that it was the duty of each meant that countries couldn’t purposely devalue their currency to bene t from trade. individual country to buy and sell currencies in order to maintain the appropriate balance as erefore, under such a system trade wars couldn’t have happened. dictated by the exchange rate. And, if it were the case that these countries couldn’t on their own furnish the capital to maintain the stability, then it was the role of the IMF to aid them Furthermore, it prevented countries from increasing the supply of money for paying debts, in obtaining the necessary resources. Hazlitt describes how this last step worked as follows: which was one of the main causes that had led to the 30. And yet, even though it provided Each country will make a maximum contribution in gold of only 25 percent of its quota, (...) good underlying support for the money, it was more exible than the gold-standard which On the basis of this quota, it can "buy" currencies of real value—meaning in the main various economists theorize aggravated the great depression and led it to have the consequences that it did. In fact, it could be the case (Paul Kruggman) that such a strong 7
dependence on gold might have lead central banks to be overzealous of protecting their own gold reserves which might have in turn prevented such banks from providing the liquidity needed to reduce the impact of the depression.
Nonetheless, as we mentioned before, to make such a system work each country needs to buy and sell its own currency to maintain a stable exchange rate. And there might be situations where the country in question might not be able to do so because of a lack of funds. is is one of the roles the IMF serves. Given a situation where a country is unable to buy or sell what it needs the IMF works a central bank that is able to give loans to keep so that such a country might still hold the exchange rates xed. If such an institution didn’t exist it would simply be naïve to assume that at every point in time the country would have enough resources to behave nancially as it was stipulated in the agreement. Understanding the origins of the malfunctioning of the Bretton Woods system is of great American dollars—to twice the amount of its quota. In simpler terms, by putting in a very importance because its collapse led to the end of commodity money, an epoch-making break small quantity in gold, a country can borrow many times that amount in dollars or other in monetary history (Cesarano, p.2, 2006). valuable currencies (Hazlitt, p.54, 1984) e system appeared to work well during a couple of decades, but tensions quickly rose due e United Nations Monetary and Financial Conference, better known as the Bretton to an insecurity about the legitimacy of the dollar as a supporting currency. In particular, Woods Conference, was held in July 1944 with the objective of deciding the future of the some heads of state started questioning whether the USA truly had enough gold to back up international monetary order after World War II (WWII). e conference was urgent as the amount of currency that was circulating. e doubts on the legitimacy of the dollar were many of the most important currencies in the world were not stable and a plan was needed further increased when it became evident that the USA was acquiring an enormous debt and to “ x and stabilize their national currency unit” (Hazlitt, p.47, 1984). ree main goals were it just had to print more money to pay. ese insecurities led some mandataries to return US achieved: the establishment of a xed exchange monetary system, the creation of the dollars to the USA in exchange for gold. International Monetary Fund (IMF) and the establishment of the International Bank for Reconstruction and Development (IBRD.) Because these doubts were, in fact, true, President Richard Nixon, in an attempt to mitigate the possible damaged caused, signed a document for the “suspension of dollar convertibility With the aim of achieving these goals, three commissions were established. e rst one was on 15 August 1971” (Cesarano, p.1, 2006). is suspension simply meant that there no in charge of Harry Dexter White, the head delegate of the USA, and its objective was to longer was a xed rate between dollars and gold and thus the end of the Bretton Woods discuss the International Monetary Fund. e second held as a topic the International Bank System had come about. for Reconstruction and Development and was led by John Maynard Keynes, the English head delegate and one of the most important economists of the twentieth century. And, nally, Economically speaking, according to Paul Krugman the Bretton Woods System had three there was a third commission chaired by Eduardo Suárez in which other economic issues that main goals. It would “foster full employment and price stability while allowing individual the other two commissions were not concerned with were discussed. countries to attain external balance without imposing restrictions on international trade”(547) at is, it hoped to make all available labor resources be in use (full e conference was of particular importance because it set the working of the international employment), a sustainable and slow change in prices of goods and services(price stability), monetary system for several decades. Its main conclusion was that the economic objectives and a balance between the exports and imports of each country. that it had established could only be achieved through xing of each currency to the dollar and, in turn, the xing of the dollar to a gold standard. Speci cally, an equivalence of 35 As was explained earlier, it intended to do so by maintaining a xed exchange rate between dollars to an ounce of gold was established. the dollar and gold, and a xed exchange rate between the other currencies and the dollar. e latter was achieved by each country’s selling or buying of currencies to maintain a stable price. But of course, because the market is dynamic it was impossible to x such prices if there was e change was important as it avoided several problems that had been experienced in the not a pressure created in the system that followed the laws of supply and demand. erefore, past and could have lead to severe problems in the future. First of all, a stable exchange rate under the Bretton Woods system, it was part of the pact that it was the duty of each meant that countries couldn’t purposely devalue their currency to bene t from trade. individual country to buy and sell currencies in order to maintain the appropriate balance as erefore, under such a system trade wars couldn’t have happened. dictated by the exchange rate. And, if it were the case that these countries couldn’t on their own furnish the capital to maintain the stability, then it was the role of the IMF to aid them Furthermore, it prevented countries from increasing the supply of money for paying debts, in obtaining the necessary resources. Hazlitt describes how this last step worked as follows: which was one of the main causes that had led to the 30. And yet, even though it provided Each country will make a maximum contribution in gold of only 25 percent of its quota, (...) good underlying support for the money, it was more exible than the gold-standard which On the basis of this quota, it can "buy" currencies of real value—meaning in the main various economists theorize aggravated the great depression and led it to have the consequences that it did. In fact, it could be the case (Paul Kruggman) that such a strong
HISTORY OF THE COMMITTEE
dependence on gold might have lead central banks to be overzealous of protecting their own gold reserves which might have in turn prevented such banks from providing the liquidity needed to reduce the impact of the depression.
Nonetheless, as we mentioned before, to make such a system work each country needs to buy and sell its own currency to maintain a stable exchange rate. And there might be situations where the country in question might not be able to do so because of a lack of funds. is is one of the roles the IMF serves. Given a situation where a country is unable to buy or sell what it needs the IMF works a central bank that is able to give loans to keep so that such a country might still hold the exchange rates xed. If such an institution didn’t exist it would simply be naïve to assume that at every point in time the country would have enough resources to behave nancially as it was stipulated in the agreement.
88 Understanding the origins of the malfunctioning of the Bretton Woods system is of great American dollars—to twice the amount of its quota. In simpler terms, by putting in a very importance because its collapse led to the end of commodity money, an epoch-making break small quantity in gold, a country can borrow many times that amount in dollars or other in monetary history (Cesarano, p.2, 2006). valuable currencies (Hazlitt, p.54, 1984) e system appeared to work well during a couple of decades, but tensions quickly rose due e United Nations Monetary and Financial Conference, better known as the Bretton to an insecurity about the legitimacy of the dollar as a supporting currency. In particular, Woods Conference, was held in July 1944 with the objective of deciding the future of the some heads of state started questioning whether the USA truly had enough gold to back up international monetary order after World War II (WWII). e conference was urgent as the amount of currency that was circulating. e doubts on the legitimacy of the dollar were many of the most important currencies in the world were not stable and a plan was needed further increased when it became evident that the USA was acquiring an enormous debt and to “ x and stabilize their national currency unit” (Hazlitt, p.47, 1984). ree main goals were it just had to print more money to pay. ese insecurities led some mandataries to return US achieved: the establishment of a xed exchange monetary system, the creation of the dollars to the USA in exchange for gold. International Monetary Fund (IMF) and the establishment of the International Bank for Reconstruction and Development (IBRD.) Because these doubts were, in fact, true, President Richard Nixon, in an attempt to mitigate the possible damaged caused, signed a document for the “suspension of dollar convertibility With the aim of achieving these goals, three commissions were established. e rst one was on 15 August 1971” (Cesarano, p.1, 2006). is suspension simply meant that there no in charge of Harry Dexter White, the head delegate of the USA, and its objective was to longer was a xed rate between dollars and gold and thus the end of the Bretton Woods discuss the International Monetary Fund. e second held as a topic the International Bank System had come about. for Reconstruction and Development and was led by John Maynard Keynes, the English head delegate and one of the most important economists of the twentieth century. And, nally, Economically speaking, according to Paul Krugman the Bretton Woods System had three there was a third commission chaired by Eduardo Suárez in which other economic issues that main goals. It would “foster full employment and price stability while allowing individual the other two commissions were not concerned with were discussed. countries to attain external balance without imposing restrictions on international trade”(547) at is, it hoped to make all available labor resources be in use (full e conference was of particular importance because it set the working of the international employment), a sustainable and slow change in prices of goods and services(price stability), monetary system for several decades. Its main conclusion was that the economic objectives and a balance between the exports and imports of each country. that it had established could only be achieved through xing of each currency to the dollar and, in turn, the xing of the dollar to a gold standard. Speci cally, an equivalence of 35 As was explained earlier, it intended to do so by maintaining a xed exchange rate between dollars to an ounce of gold was established. the dollar and gold, and a xed exchange rate between the other currencies and the dollar. e latter was achieved by each country’s selling or buying of currencies to maintain a stable price. But of course, because the market is dynamic it was impossible to x such prices if there was e change was important as it avoided several problems that had been experienced in the not a pressure created in the system that followed the laws of supply and demand. erefore, past and could have lead to severe problems in the future. First of all, a stable exchange rate under the Bretton Woods system, it was part of the pact that it was the duty of each meant that countries couldn’t purposely devalue their currency to bene t from trade. individual country to buy and sell currencies in order to maintain the appropriate balance as erefore, under such a system trade wars couldn’t have happened. dictated by the exchange rate. And, if it were the case that these countries couldn’t on their own furnish the capital to maintain the stability, then it was the role of the IMF to aid them Furthermore, it prevented countries from increasing the supply of money for paying debts, in obtaining the necessary resources. Hazlitt describes how this last step worked as follows: which was one of the main causes that had led to the 30. And yet, even though it provided Each country will make a maximum contribution in gold of only 25 percent of its quota, (...) good underlying support for the money, it was more exible than the gold-standard which On the basis of this quota, it can "buy" currencies of real value—meaning in the main various economists theorize aggravated the great depression and led it to have the consequences that it did. In fact, it could be the case (Paul Kruggman) that such a strong
FUNCTIONS OF THE COMMITTEE
dependence on gold might have lead central banks to be overzealous of protecting their own It rests on the assumption that nothing will be done right unless a grandiose formal gold reserves which might have in turn prevented such banks from providing the liquidity intergovernmental institution is set up to do it. It assumes that nothing will be run well unless needed to reduce the impact of the depression. Governments run it. One institution is to be piled upon another, even though their functions duplicate each other (Hazlitt, p.57, 1984) Nonetheless, as we mentioned before, to make such a system work each country needs to buy and sell its own currency to maintain a stable exchange rate. And there might be situations Bretton Woods was created with the initial functionality of providing to the world equal where the country in question might not be able to do so because of a lack of funds. is is opportunities to trade with a currency backed up with Gold, the commodity all countries one of the roles the IMF serves. Given a situation where a country is unable to buy or sell would use to give value to this common currency. what it needs the IMF works a central bank that is able to give loans to keep so that such a country might still hold the exchange rates xed. If such an institution didn’t exist it would After the suspension of the Conference in 1971 by president Nixon, the US Dollar never simply be naïve to assume that at every point in time the country would have enough went back to be backed up by Gold again. For this, the Bretton Woods Conference has resources to behave nancially as it was stipulated in the agreement. decided to recall the nations and settle a common solution facing the future of the economic system. is committee should decide the creation of a new Conference like the previous Bretton Woods in 1944 and if under what circumstances this new economic system will work.
9 Understanding the origins of the malfunctioning of the Bretton Woods system is of great American dollars—to twice the amount of its quota. In simpler terms, by putting in a very importance because its collapse led to the end of commodity money, an epoch-making break small quantity in gold, a country can borrow many times that amount in dollars or other in monetary history (Cesarano, p.2, 2006). valuable currencies (Hazlitt, p.54, 1984) e system appeared to work well during a couple of decades, but tensions quickly rose due e United Nations Monetary and Financial Conference, better known as the Bretton to an insecurity about the legitimacy of the dollar as a supporting currency. In particular, Woods Conference, was held in July 1944 with the objective of deciding the future of the some heads of state started questioning whether the USA truly had enough gold to back up international monetary order after World War II (WWII). e conference was urgent as the amount of currency that was circulating. e doubts on the legitimacy of the dollar were many of the most important currencies in the world were not stable and a plan was needed further increased when it became evident that the USA was acquiring an enormous debt and to “ x and stabilize their national currency unit” (Hazlitt, p.47, 1984). ree main goals were it just had to print more money to pay. ese insecurities led some mandataries to return US achieved: the establishment of a xed exchange monetary system, the creation of the dollars to the USA in exchange for gold. International Monetary Fund (IMF) and the establishment of the International Bank for Reconstruction and Development (IBRD.) Because these doubts were, in fact, true, President Richard Nixon, in an attempt to mitigate the possible damaged caused, signed a document for the “suspension of dollar convertibility With the aim of achieving these goals, three commissions were established. e rst one was on 15 August 1971” (Cesarano, p.1, 2006). is suspension simply meant that there no in charge of Harry Dexter White, the head delegate of the USA, and its objective was to longer was a xed rate between dollars and gold and thus the end of the Bretton Woods discuss the International Monetary Fund. e second held as a topic the International Bank System had come about. for Reconstruction and Development and was led by John Maynard Keynes, the English head delegate and one of the most important economists of the twentieth century. And, nally, Economically speaking, according to Paul Krugman the Bretton Woods System had three there was a third commission chaired by Eduardo Suárez in which other economic issues that main goals. It would “foster full employment and price stability while allowing individual the other two commissions were not concerned with were discussed. countries to attain external balance without imposing restrictions on international trade”(547) at is, it hoped to make all available labor resources be in use (full e conference was of particular importance because it set the working of the international employment), a sustainable and slow change in prices of goods and services(price stability), monetary system for several decades. Its main conclusion was that the economic objectives and a balance between the exports and imports of each country. that it had established could only be achieved through xing of each currency to the dollar and, in turn, the xing of the dollar to a gold standard. Speci cally, an equivalence of 35 As was explained earlier, it intended to do so by maintaining a xed exchange rate between dollars to an ounce of gold was established. the dollar and gold, and a xed exchange rate between the other currencies and the dollar. e latter was achieved by each country’s selling or buying of currencies to maintain a stable price. But of course, because the market is dynamic it was impossible to x such prices if there was e change was important as it avoided several problems that had been experienced in the not a pressure created in the system that followed the laws of supply and demand. erefore, past and could have lead to severe problems in the future. First of all, a stable exchange rate under the Bretton Woods system, it was part of the pact that it was the duty of each meant that countries couldn’t purposely devalue their currency to bene t from trade. individual country to buy and sell currencies in order to maintain the appropriate balance as erefore, under such a system trade wars couldn’t have happened. dictated by the exchange rate. And, if it were the case that these countries couldn’t on their own furnish the capital to maintain the stability, then it was the role of the IMF to aid them Furthermore, it prevented countries from increasing the supply of money for paying debts, in obtaining the necessary resources. Hazlitt describes how this last step worked as follows: which was one of the main causes that had led to the 30. And yet, even though it provided Each country will make a maximum contribution in gold of only 25 percent of its quota, (...) good underlying support for the money, it was more exible than the gold-standard which On the basis of this quota, it can "buy" currencies of real value—meaning in the main various economists theorize aggravated the great depression and led it to have the consequences that it did. In fact, it could be the case (Paul Kruggman) that such a strong
IMPORTANCE OF THE COMMITTEE
dependence on gold might have lead central banks to be overzealous of protecting their own e importance of a second United Nations Monetary and Financial Conference relies on the Another example of the instability and power shift that is occurring in the recent visit of gold reserves which might have in turn prevented such banks from providing the liquidity need to avoid an economic crisis and reorganize the economy, which favors the west, into the Colombia’s president, Iván Duque, to China. Historically, the US has been the great ally of needed to reduce the impact of the depression. new geopolitical reality. ere has been a political shift in the 21st century, where power is Colombia and although in the past half-century the Latin American nation has tried to getting di used. e United States is no longer the hegemon, as major developing countries expand its foreign relations with other regions, the visit to China is a response to the recent Nonetheless, as we mentioned before, to make such a system work each country needs to buy are rising and establishing their own rules of behavior while making their own an option to challenges that Trump has produced to the Colombia-US relations. Trump has questioned and sell its own currency to maintain a stable exchange rate. And there might be situations those countries that ask help to the US. Countries that didn’t represent a threat like the the willingness of the Colombian government to eradicate coca plantations. e US where the country in question might not be able to do so because of a lack of funds. is is BRICS are now directly or indirectly questioning the position of the USA. e political administration promotes the use of glyphosate, although the WHO and the EPA declared one of the roles the IMF serves. Given a situation where a country is unable to buy or sell context of the international system a ects the economic ‘rules’ of the game. As Patrick (2014) that it may cause health issues such as cancer, and has threatened to quit the USA's economic what it needs the IMF works a central bank that is able to give loans to keep so that such a states: help. Furthermore, the Trump administration walked away from the Paris Agreement , left country might still hold the exchange rates xed. If such an institution didn’t exist it would the free trade pact with Paci c nations and initiated a global trade war. simply be naïve to assume that at every point in time the country would have enough Shifts in global power have always ultimately produced shifts in the institutional resources to behave nancially as it was stipulated in the agreement. superstructure, but what is distinctive today is the simultaneous emergence of multiple power China might not be the great ally of Colombia; in fact, this country has been one of the centers with regional and potentially global aspirations. As the United States courts relative closest to the US. However, many Latin American countries such as Brazil and Argentina decline and Europe and Japan stagnate, China, India, Brazil, Russia, Turkey, Indonesia, and have been receiving the help of China for a while and have been yielding political space. For others are exing their muscles, expanding their regional in uence and insisting on greater example, Argentina allowed China to have a space station on its national territory in exchange voice within multilateral institutions (p.3) for investment according to Londoño (2018). “Trade between China and countries in Latin America and the Caribbean reached $244 billion last year, more than twice what it was a It is not only the rivalry of the US with other countries but the own political instability of the decade earlier(…). Since 2015, China has been South America’s top trading partner, eclipsing national context that “emboldens revisionist regional powers” (Patrick, 2014, p.7). e the United States” (Londoño, 2018). Nonetheless, China has a discourse of peaceful rise political change that has su ered the United States with Donald Trump has not been enough which doesn’t intend to question or replace today's US power. China could retreat from this to produce an international or a national US crisis. In fact, the country’s economy is doing position if the political arena changes in its favor. well, but it is due to the political resources that it has accumulated. However, as there are now alternatives to the US, those countries who have been sanctioned or who had accomplished All these suppositions are to say that the economic and political power that the US manages the conditionalities imposed by the US in exchange for support, can turn their backs to this is changing, as well as its capacity to produce general unrest without any consequence. country or at least it seems that they could do it in the near future. erefore, a discussion about the validity of the current international economic system is important. “[BRICS] summit communiqués condemn the dollar’s privileges as the world’s e power accumulated in the last centuries by the US allows for the whims of unstable main reserve currency and insist on accelerated governance reforms within the international governments. Only the US could retract from the nuclear deal from Iran without any nancial institutions” (Patrick, p.3, 2014). Not only the fact that the USD is the main reserve consequences. e European Union has been very careful not to oppose its position despite currency produces discontent, but it could produce a great crisis in case that its political not having empirical proof to sustain the agreement withdrawal. As well, Donald Trump has power is nally questioned. e value of the USD relies on the con dence about the US altered its position towards North Korea to the point that it puts at risk countries like South economy, it is duciary money, so in case the value of the USD falls because of political Korea and Japan. “North Korea red two short-range ballistic missiles o its east coast on instability, the international economy is at risk. Wednesday, (…) the North’s second weapons test in less than a week” (Sang-Hun, 2019) demonstrating Kim Jong-Un’s discontent. is action shows his willingness to respond militarily if a deal with the USA is not negotiated. Maybe the DPRK doesn’t have the military capabilities, but it's despair to change its economic and political situation turns its scarce resources in great danger for international security.
10 Understanding the origins of the malfunctioning of the Bretton Woods system is of great American dollars—to twice the amount of its quota. In simpler terms, by putting in a very importance because its collapse led to the end of commodity money, an epoch-making break small quantity in gold, a country can borrow many times that amount in dollars or other in monetary history (Cesarano, p.2, 2006). valuable currencies (Hazlitt, p.54, 1984) e system appeared to work well during a couple of decades, but tensions quickly rose due e United Nations Monetary and Financial Conference, better known as the Bretton to an insecurity about the legitimacy of the dollar as a supporting currency. In particular, Woods Conference, was held in July 1944 with the objective of deciding the future of the some heads of state started questioning whether the USA truly had enough gold to back up international monetary order after World War II (WWII). e conference was urgent as the amount of currency that was circulating. e doubts on the legitimacy of the dollar were many of the most important currencies in the world were not stable and a plan was needed further increased when it became evident that the USA was acquiring an enormous debt and to “ x and stabilize their national currency unit” (Hazlitt, p.47, 1984). ree main goals were it just had to print more money to pay. ese insecurities led some mandataries to return US achieved: the establishment of a xed exchange monetary system, the creation of the dollars to the USA in exchange for gold. International Monetary Fund (IMF) and the establishment of the International Bank for Reconstruction and Development (IBRD.) Because these doubts were, in fact, true, President Richard Nixon, in an attempt to mitigate the possible damaged caused, signed a document for the “suspension of dollar convertibility With the aim of achieving these goals, three commissions were established. e rst one was on 15 August 1971” (Cesarano, p.1, 2006). is suspension simply meant that there no in charge of Harry Dexter White, the head delegate of the USA, and its objective was to longer was a xed rate between dollars and gold and thus the end of the Bretton Woods discuss the International Monetary Fund. e second held as a topic the International Bank System had come about. for Reconstruction and Development and was led by John Maynard Keynes, the English head delegate and one of the most important economists of the twentieth century. And, nally, Economically speaking, according to Paul Krugman the Bretton Woods System had three there was a third commission chaired by Eduardo Suárez in which other economic issues that main goals. It would “foster full employment and price stability while allowing individual the other two commissions were not concerned with were discussed. countries to attain external balance without imposing restrictions on international trade”(547) at is, it hoped to make all available labor resources be in use (full e conference was of particular importance because it set the working of the international employment), a sustainable and slow change in prices of goods and services(price stability), monetary system for several decades. Its main conclusion was that the economic objectives and a balance between the exports and imports of each country. that it had established could only be achieved through xing of each currency to the dollar and, in turn, the xing of the dollar to a gold standard. Speci cally, an equivalence of 35 As was explained earlier, it intended to do so by maintaining a xed exchange rate between dollars to an ounce of gold was established. the dollar and gold, and a xed exchange rate between the other currencies and the dollar. e latter was achieved by each country’s selling or buying of currencies to maintain a stable price. But of course, because the market is dynamic it was impossible to x such prices if there was e change was important as it avoided several problems that had been experienced in the not a pressure created in the system that followed the laws of supply and demand. erefore, past and could have lead to severe problems in the future. First of all, a stable exchange rate under the Bretton Woods system, it was part of the pact that it was the duty of each meant that countries couldn’t purposely devalue their currency to bene t from trade. individual country to buy and sell currencies in order to maintain the appropriate balance as erefore, under such a system trade wars couldn’t have happened. dictated by the exchange rate. And, if it were the case that these countries couldn’t on their own furnish the capital to maintain the stability, then it was the role of the IMF to aid them Furthermore, it prevented countries from increasing the supply of money for paying debts, in obtaining the necessary resources. Hazlitt describes how this last step worked as follows: which was one of the main causes that had led to the 30. And yet, even though it provided Each country will make a maximum contribution in gold of only 25 percent of its quota, (...) good underlying support for the money, it was more exible than the gold-standard which On the basis of this quota, it can "buy" currencies of real value—meaning in the main various economists theorize aggravated the great depression and led it to have the consequences that it did. In fact, it could be the case (Paul Kruggman) that such a strong
IMPORTANCE OF THE COMMITTEE
dependence on gold might have lead central banks to be overzealous of protecting their own e importance of a second United Nations Monetary and Financial Conference relies on the Another example of the instability and power shift that is occurring in the recent visit of gold reserves which might have in turn prevented such banks from providing the liquidity need to avoid an economic crisis and reorganize the economy, which favors the west, into the Colombia’s president, Iván Duque, to China. Historically, the US has been the great ally of needed to reduce the impact of the depression. new geopolitical reality. ere has been a political shift in the 21st century, where power is Colombia and although in the past half-century the Latin American nation has tried to getting di used. e United States is no longer the hegemon, as major developing countries expand its foreign relations with other regions, the visit to China is a response to the recent Nonetheless, as we mentioned before, to make such a system work each country needs to buy are rising and establishing their own rules of behavior while making their own an option to challenges that Trump has produced to the Colombia-US relations. Trump has questioned and sell its own currency to maintain a stable exchange rate. And there might be situations those countries that ask help to the US. Countries that didn’t represent a threat like the the willingness of the Colombian government to eradicate coca plantations. e US where the country in question might not be able to do so because of a lack of funds. is is BRICS are now directly or indirectly questioning the position of the USA. e political administration promotes the use of glyphosate, although the WHO and the EPA declared one of the roles the IMF serves. Given a situation where a country is unable to buy or sell context of the international system a ects the economic ‘rules’ of the game. As Patrick (2014) that it may cause health issues such as cancer, and has threatened to quit the USA's economic what it needs the IMF works a central bank that is able to give loans to keep so that such a states: help. Furthermore, the Trump administration walked away from the Paris Agreement , left country might still hold the exchange rates xed. If such an institution didn’t exist it would the free trade pact with Paci c nations and initiated a global trade war. simply be naïve to assume that at every point in time the country would have enough Shifts in global power have always ultimately produced shifts in the institutional resources to behave nancially as it was stipulated in the agreement. superstructure, but what is distinctive today is the simultaneous emergence of multiple power China might not be the great ally of Colombia; in fact, this country has been one of the centers with regional and potentially global aspirations. As the United States courts relative closest to the US. However, many Latin American countries such as Brazil and Argentina decline and Europe and Japan stagnate, China, India, Brazil, Russia, Turkey, Indonesia, and have been receiving the help of China for a while and have been yielding political space. For others are exing their muscles, expanding their regional in uence and insisting on greater example, Argentina allowed China to have a space station on its national territory in exchange voice within multilateral institutions (p.3) for investment according to Londoño (2018). “Trade between China and countries in Latin America and the Caribbean reached $244 billion last year, more than twice what it was a It is not only the rivalry of the US with other countries but the own political instability of the decade earlier(…). Since 2015, China has been South America’s top trading partner, eclipsing national context that “emboldens revisionist regional powers” (Patrick, 2014, p.7). e the United States” (Londoño, 2018). Nonetheless, China has a discourse of peaceful rise political change that has su ered the United States with Donald Trump has not been enough which doesn’t intend to question or replace today's US power. China could retreat from this to produce an international or a national US crisis. In fact, the country’s economy is doing position if the political arena changes in its favor. well, but it is due to the political resources that it has accumulated. However, as there are now alternatives to the US, those countries who have been sanctioned or who had accomplished All these suppositions are to say that the economic and political power that the US manages the conditionalities imposed by the US in exchange for support, can turn their backs to this is changing, as well as its capacity to produce general unrest without any consequence. country or at least it seems that they could do it in the near future. erefore, a discussion about the validity of the current international economic system is important. “[BRICS] summit communiqués condemn the dollar’s privileges as the world’s e power accumulated in the last centuries by the US allows for the whims of unstable main reserve currency and insist on accelerated governance reforms within the international governments. Only the US could retract from the nuclear deal from Iran without any nancial institutions” (Patrick, p.3, 2014). Not only the fact that the USD is the main reserve consequences. e European Union has been very careful not to oppose its position despite currency produces discontent, but it could produce a great crisis in case that its political not having empirical proof to sustain the agreement withdrawal. As well, Donald Trump has power is nally questioned. e value of the USD relies on the con dence about the US altered its position towards North Korea to the point that it puts at risk countries like South economy, it is duciary money, so in case the value of the USD falls because of political Korea and Japan. “North Korea red two short-range ballistic missiles o its east coast on instability, the international economy is at risk. Wednesday, (…) the North’s second weapons test in less than a week” (Sang-Hun, 2019) demonstrating Kim Jong-Un’s discontent. is action shows his willingness to respond militarily if a deal with the USA is not negotiated. Maybe the DPRK doesn’t have the military capabilities, but it's despair to change its economic and political situation turns its scarce resources in great danger for international security.
11 TOPIC:A
124 INTRODUCTION TO TOPIC A
e new Economic System in 2020, is oil the new Gold?
Since 1971, after the previous deal on xed exchange rates was suspended by President Nixon, the US Dollar found a way to maintain its power in the world as the leading currency by being the unique currency used for trading commodities like oil.
e United States of America used its economic power to keep the US Dollar (USD) on top of the world. One of the key factors has been the political strategy of the USA to keep oil under their currency power for trade. Nevertheless, in the last forty years, the USD has battled to maintain its position as the strongest currency in the world. In fact, the economic growth of China and the European Union has weakened the USD. In 2020 we are facing a need for a new economic system that adjusts to the current reality, where a nal solution must be brought to the table.
134 HISTORY OF THE ISSUE
In the 1970s when in ation raised due to Vietnam's War debt, de cit on the balance of payments increased and the extravagant domestic spending habits, the Nixon administration decided to terminate the convertibility of US Dollars into Gold turning it into a at currency. e collapse of the Bretton Woods System impulsed the United States of America to close a bilateral agreement with Saudi Arabia on the standardization of oil prices in Dollar terms, where the petrodollar system was born1.
e creation of the Petrodollar along with the framework of economic cooperation for Saudi Arabia served to persuade the members of OPEC to standardize all sales of oil into US Dollars in return for US military assistance for the Arab States members during the invasion of Afghanistan, the fall of the Iranian Shah and of course the Iran - Iraq War.
is agreement on the petrodollar helped the greenback to elevate as the world dominant currency. As result, the Dollar became the reserve currency of the world allowing for example oil producing countries to spend their surplus dollars on domestic consumption and investments in US Dollar-denominated assets2. In this manner, the currency would be recycled performing a bene t for the US by using those petrodollars or recycled dollars on creating liquidity in the nancial markets, keeping interest low and promoting non-in ationary growth. OPEC states bene t of avoiding any currency risk conversion and investing in secure US investments.
1 How Petrodollars a ect the US Dollar (2019) Retrieved 21 August from https://www.investo- pedia.com/articles/forex/072915/how-petrodollars-a ect-us-dollar.asp 2 Surplus de nition (2019) Retrieved 21 August from https://www.investope- 144 dia.com/terms/s/surplus.asp CURRENT SITUATION OF THE TOPIC
Petro Currency War
With the continuing growth of di erent economies like China, Russia and the European Union the methods of trading commodities changed, especially between countries with high economic power which battle for leading the world economy, in the end it only leads to currency wars.
e US economy based hegemony is being challenged by China and therefore it is naturally given that the US will try to maintain its global geopolitical and nancial position3. is power struggle between economic powers have taken place in the Middle East since the intervention of the USA in Iraq in 2003 when Saddam Hussein refused to sell oil only in US Dollar, but also the same outcome took place in Libya with Gadda . Finally, Iran joined the con ict when it started to sell oil to China and Russia accepting other currencies than dollars.
Petroyuan Case
If China or like any other economy, allows the trading of oil futures in Yuan, the contract merely promises dated delivery of oil in exchange for Yuan. e contract does not supply the oil, it does not forward the yuan to an oil producer, it is merely a transaction that allows a buyer guaranteed delivery of oil by paying for it in yuan. e counterparty has to supply the oil in exchange for the yuan4.
Nevertheless, in the past years there have been multiple strategies implemented by China to impulse their currency, the Yuan. For example the initiative of launching the oil futures contract on the Shanghai International Energy Exchange (INE), which took place in 2018 with solid acceptance. Even ough the chinese futures still lag in trading volume as like their rivals Brent Crude Oil Futures (London Market) and the West Texas Intermediate (WTI) traded in New York.
3 e Petrocurrency War (2015) Retrieved from https://orientalreview.org/2015/03/22/the-pet- rocurrency-war/ on August 21 2019 4 Yuan-Denominated Oil Futures? (2018) Retrieved from https://www.forbes.com/sites/doug- lasbulloch/2018/04/26/the-petro-dollar-is-a-myth-the-petro-yuan-mere-fantasy/#5b5d04846a14 154 on 21 August 2019 QUESTIONS A RESOLUTION MUST ANSWER
Is a new nancial system necessary like Bretton Woods in 1944? If so, under what 1. structure should it work?
2. Should the war on currencies between the US and China threat be addressed by the IMF?
3. What challenges does the rising Chinese economy put on the IMF and WB?
4. Should countries use Oil as a strategy to strengthen their own economy, why?
164 TOPIC B CHALLENGES AND OBJECTIVES FOR THE IMF “Unfortunately we have no world government, accountable to the people of every country (…) Instead, we have a system that might be called global governance without global government, one in which a few institutions— the World Bank, the IMF, the WTO— and a few players— the nance, commerce, and trade ministries—(…) dominate the scene, but in which many of those a ected by their decisions are left almost voiceless. It’s time to change some of the rules governing the international economic order.” (Stiglitz, 2002, p.22)
174 CHALLENGES AND OBJECTIVES FOR THE IMF
e IMF has been called by some “the [world’s] controversial re ghter.” (Masters and Chatzky, 2018) It serves as the de facto assuager of economic crises and – since recently –promoter of economic development. us, it does not come as a surprise that it holds a pre-eminent role in determining the functioning of the international economic system. And yet, its actions and its functioning have been very controversial. is is not a surprise either. In dealing with “development” and economic crises it is but obvious that any action taken, or any strategy adopted will not be universally accepted. is is not to say that the criticisms posed against the institution are not valid. On the contrary, as we will see, a signi cant amount of them of them are very legitimate observations of the problems that have plagued the institution since it’s conception. is is just a remark to say that it will be impossible to achieve universal accord.
Although some measures have been taken to address the criticisms posed, they have been largely ine ective and have not dealt truly with the problems However, now the IMF stands amidst a great opportunity to a much-demanded restructuring. e recent resignation of Christine Lagarde as Director of the IMF presents an occasion to address the matters that have made IMF’s operation so controversial. It is thus, one of the objectives of this committee to discuss such questions and establish suggestions on the path that the IMF should follow take for the future and the manner in which it’s future director should reorient it’s functioning. To do so, it is rst important to understand what exactly the IMF does and how it functions.
184 BRIEF HISTORY OF THE IMF AND EXPLANATION OF ITS STRUCTURE
e IMF was one of the key institutions that emerged as a result of the Bretton Woods conference— a post-WWII meeting that gathered some of the brightest economic minds at the time to redesign the international economic system. e conference led to an eponymous system whose objective was to prevent further economic crises and to “foster full employment 5and price stability 6 while allowing individual countries to attain external balance 7without imposing restrictions on trade.” (Krugman, R. and Obtsfeld, M., 2003, p.546). e main way in which It attempted to do so was by establishing a system in which each participating currency would have a stable exchange rate with respect to the dollar. e hope was that by pegging the currencies in this manner trade among nations would ourish but there would be a degree of control imposed over the economic system that would prevent the great uctuations and currency devaluations that gave way to global economic crises such as the Great Depression. e IMF thus had the role of overseeing up to an extent the proper functioning of the Bretton Woods System. Its articles worked as attempt to bring a proper mixture of monetary exibility and discipline8 to all countries so that a balance could be achieved between internal and external economic policies. It did so mainly through two mechanisms: Lending Facilities and adjustable parities.
Lending facilities: e IMF lent foreign currencies to its members when it was impossible for them to tighten scal policies further. 1. is money, however, was lent conditionally. us, if a member wanted to borrow money it had to accept suggestions by the IMF that determined the macroeconomic functioning of the country in question. e funds that permitted such lending were obtained through a system of quotas and further borrowing by the institution. is quota was a quantity assigned to each member “which determined both its contribution to the reserve pool and its right to draw on IMF resources.” (Krugman, R. and Obtsfeld, M., 2003, p.548) e quota was periodically re-evaluated so as to to re ect the real economic situation of each member country.
Adjustable Parities: In the Bretton Woods system each exchange rate was xed. However, because the situation of a country might 2. change and thus the real value of its currency, the IMF allowed for
5 A situation where the labor market has reached a state of equilibrium, so that those in the active labor force who are willing and able to work at going wage rates are able to nd work, and the only remaining unemploy- 19 ment is frictional unemployment”(John Black, Nigar -A Dictionary of Economics Oxford third edition 4 (OEDE)) 6 An objective of economic policy aimed at avoidance of both prolonged in ation and de ation.”(OEDE) BRIEF HISTORY OF THE IMF AND EXPLANATION OF ITS STRUCTURE
change and thus the real value of its currency, the IMF allowed for the xed exchange rate to be altered if there existed a fundamental disequilibrium.9 erefore, although the policies focused on monetary discipline, there was a degree of exibility allowed to maintain the proper functioning of the system. (Krugman, R. and Obtsfeld, M., 2003, p.548)
Despite the best e orts, the Bretton Woods system collapsed early in 1973 as a result of U.S macroeconomic policies in the late 1960’s. that led to in ation. After the fall of the Bretton Woods system the Lending facilities of the IMF were kept in place. However, the adjustable parities no longer made sense as the xed exchange rate was no longer in place. us, a series of changes were needed to redirect the IMF and its purpose.
is rede nition of the IMF was achieved through the second amendment, rst put into place in 1979. In it oating currencies were allowed and the role of IMF was rede ned to focus on policy coordination. is was an important move that redirected the IMF to what it is today. As Barry Eichengreen (2008), Economics Professor at Berkeley, explains: the second amendment to the Articles of Agreement, in suggesting that the IMF’s role was to encourage policy coordination among its members, removed the Fund’s responsibility for overseeing a system of par values but spoke of a need for a ‘ rm surveillance’ of national policies (p.148) It is important to note that although the parity criteria wast modi ed, the IMF still held and still holds to this day as one of its most important responsibilities that of lending money when a country was in need of liquidity.10 e description provided above is in fact identical to how it’s lending facilities work in the present.
Now, having understood the basic structure of the IMF and how it came to be, it is important to understand the way in which it works in practice and how it has dealt with di erent crises.
7 “A sustainable pattern of transactions with the ret of the world. With no capital movements, in a static economy external balance requires a zero balance of payments on current account, since otherwise foreign exchange reserves would become exhausted if there was a current account de cit, and would expand without limit if there was a current account surplus.”(OEDE) 8 When the word “discipline” or “strict” are using in monetary terms it refers to limiting the money supply of an economy so as to limit in ation or other negative e ects to the economy in question. 9 e term fundamental disequilibrium is not commonplace in the economic literature nor was it de ned in the Agreements. It was meant as way to leave up to interpretation when a readjustment of parity needed to occur. 20 10 Liquid assets are those that “have the property of being easily turned into money rapidly and at a fairly predictable price” (OEDE) us, liquidity as used above means to have liquid assets A CASESTUDY
After the Bretton Woods era the IMF has been a key player in the subsequent responses to di erent crises that both the world as a whole and that individual nations have faced. ere have been notable examples of interventions by the IMF. Before 2010 these tended to focus on developing nations in Asia, Africa and Latin America. However, after the European nancial crisis during the beginning of the decade, the IMF started aiding di erent countries in Europe to stabilize their economies.
Among the nations aided the most notable case was that of Greece, where a strong disagreement with the European Troika’s11 impositions for borrowing money culminated in a plebiscite were the Greek people rejected the suggested policies. We suggest that as delegates you become deeply acquainted with several of these interventions as they provide useful examples to identify what has and hasn’t worked previously for the IMF. To provide an illustrative example we will look at the way in which the IMF dealt with the East Asian crisis of 1997 and the criticisms it received.
is is an especially important case because it represents what is considered by some to be one of the greatest successes of the institution and yet it is not without several shortcomings. Most of all, it is important to keep in mind while analyzing the East Asian crisis that the policy of austerity has become a staple of the institution.
11 European Commision(EC), the European Central Bank (ECB) and the International 214 Monetary Fund. THE EAST ASIAN CRISIS
Interest rate hikes were not e ective in slowing down the currency e East Asian crisis was a nancial and economic crisis during 1997-1998 depreciation13 , but rather worsened to the extent of the crisis by leading that strongly a ected the region in question and caused fright in the to widespread banking as corporate bankruptcies (p.56) international community due to a possible world nancial contagion. It originated in ailand with the fall of the Baht ( ailand’s currency) which Additionally, it could also be the case that the “ e scal policy led to subsequent capital ight that deepened the problem in ailand and requirements included in the IMF plans were unnecessarily – and adjacent economies. Although the case is not settled on what led to the harmful—strict.“ (p.56). crisis reaching the extent it did, the two most common hypothesis are that it was caused by a “sudden shifts in market expectations and con dence” or e most important takeaway from this discussion is that even in those by “structural and policy distortions in the countries of the region” cases were the IMF has considered it’s interventions a success there are (Corsetti, Pesenti, & Roubini, 1999, p.56.). strong debates to the e ectiveness of its policies and the merits of it’s interventions. Although the conditions that it posed on the countries in What is clear however, is that in 1997 the IMF stepped in to attempt to crisis have led to important debates on their e ectiveness, it is undeniable prevent a deepening of the problem. It did so by providing aid to Indonesia, that the nancial support the IMF led aided greatly in the recovering of the Korea and ailand— the countries most seriously a ected by the crisis— di erent nations. in the form of nancing, macroeconomic policies and structural reforms according to the IMF (2000).
Financially, the IMF directly provided 35 billion dollars to support the countries in the crisis. In terms of macroeconomic policies, it advocated for a tightening of the monetary policy in place “to halt the collapse of the countries exchange rates (…) and to prevent currency depreciation from leading into a spiral of in ation and continuing depreciation” (IMF, 2000). It did so by several methods including raising the interest rates12 . Finally, In terms of structural reforms, the IMF focused on, rst, a nancial sector reform by a closure of all insolvent nancial institutions, recapitalization of potentially viable nancial institutions, close central bank supervisions, and a strengthening of nancial supervision and regulation, and second, a championing for corporate debt restructuring.
Unfortunately, the policies of austerity did not provide as strong results as the IMF had hoped for and the countries experienced deeper recessions that projected. at the IMF was unable to predict the impact of the crisis has been properly recognized by both the institution and outside economists. However, there are several economists that believed that the IMF actively contributed to a worsening of the crisis, like Corsetti, Pesenti, & Roubini. In fact as a paper by Yale Professor Giancarlo Corsetti and colleagues suggests, it might have been that.
12 “ e charge made for the loan of nancial capital expressed as a proportion of the loan. A 224 borrower usually has to repay the lender more than the value of the loan originally granted. e excess of repayment over the loan is the interest rate.”(oxford) THE EAST ASIAN CRISIS
Interest rate hikes were not e ective in slowing down the currency e East Asian crisis was a nancial and economic crisis during 1997-1998 depreciation13 , but rather worsened to the extent of the crisis by leading that strongly a ected the region in question and caused fright in the to widespread banking as corporate bankruptcies (p.56) international community due to a possible world nancial contagion. It originated in ailand with the fall of the Baht ( ailand’s currency) which Additionally, it could also be the case that the “ e scal policy led to subsequent capital ight that deepened the problem in ailand and requirements included in the IMF plans were unnecessarily – and adjacent economies. Although the case is not settled on what led to the harmful—strict.“ (p.56). crisis reaching the extent it did, the two most common hypothesis are that it was caused by a “sudden shifts in market expectations and con dence” or e most important takeaway from this discussion is that even in those by “structural and policy distortions in the countries of the region” cases were the IMF has considered it’s interventions a success there are (Corsetti, Pesenti, & Roubini, 1999, p.56.). strong debates to the e ectiveness of its policies and the merits of it’s interventions. Although the conditions that it posed on the countries in What is clear however, is that in 1997 the IMF stepped in to attempt to crisis have led to important debates on their e ectiveness, it is undeniable prevent a deepening of the problem. It did so by providing aid to Indonesia, that the nancial support the IMF led aided greatly in the recovering of the Korea and ailand— the countries most seriously a ected by the crisis— di erent nations. in the form of nancing, macroeconomic policies and structural reforms according to the IMF (2000).
Financially, the IMF directly provided 35 billion dollars to support the countries in the crisis. In terms of macroeconomic policies, it advocated for a tightening of the monetary policy in place “to halt the collapse of the countries exchange rates (…) and to prevent currency depreciation from leading into a spiral of in ation and continuing depreciation” (IMF, 2000). It did so by several methods including raising the interest rates12 . Finally, In terms of structural reforms, the IMF focused on, rst, a nancial sector reform by a closure of all insolvent nancial institutions, recapitalization of potentially viable nancial institutions, close central bank supervisions, and a strengthening of nancial supervision and regulation, and second, a championing for corporate debt restructuring.
Unfortunately, the policies of austerity did not provide as strong results as the IMF had hoped for and the countries experienced deeper recessions that projected. at the IMF was unable to predict the impact of the crisis has been properly recognized by both the institution and outside economists. However, there are several economists that believed that the IMF actively contributed to a worsening of the crisis, like Corsetti, Pesenti, & Roubini. In fact as a paper by Yale Professor Giancarlo Corsetti and colleagues suggests, it might have been that.
13 “A decrease in the value of one currency in terms of other currencies” 234 CRITICISMS TOWARDS THE IMF
e dangers of Austerity Having understood the structure and the manner in which the IMF Nonetheless contrary to the wishes of its intellectual author, the Besides the monetary problems that austerity could bring there are conducts itself it is now important to consider the main criticisms the IMF has acted in an opposite manner. On the one hand, it’s belief additional problems that nations might face due to contractionary organization faces. One of it’s main critics, Nobel Laureate Joseph Stiglitz in the proper functioning of the free-market has led it to fail to policies. A 2008 study by Stuckler, Kind and Basu (2008) indicated stated in his book Globalization and its discontents that articulate proper explanations for market failures and and the ways that IMF reform programs might have had a negative e ect on the A half Century after its founding, it is that the IMF has failed its mission. to correct it. On the other hand, Keynesian policies required an “incidence, prevalence, and mortality rates in post-communist It has not done what it was supposed to do—provide funds for countries increase in expenditure whenever market failure occurred and yet Eastern European and former Soviet countries, independent of facing an economic downturn, to enable the country to restore itself to the IMF has often done the opposite, requiring more austere and other political, socioeconomic demographic, and health changes in close to full employment (Stiglitz, 2002, p.15) strict nancial policies that the countries had in the past. However, these countries” (2008). Although the study does not establish a the manner in which it has done this has not been fully justi ed nor causal link it does nd a correlation between the enforcement of the And yet, the institution is so important for the formation of the interna- does it have a strong theoretical background to support it. policies and the disease. is example, helps to highlight that even tional economic system and has so much power to do good that it is if strict monetary policies led to an overall economic improvement impossible to give up on it. us, if one has any hopes to understand Lack of Representation they might inadvertently lead to a decrease in true welfare of a exactly how restructure the organization on e must rst understand some By common tacit agreement it is the case that the director of the population. the main criticisms that are thrown at the IMF. IMF is European and the director of the World Bank is Ameri- can. is has brought on many criticisms because, as explained In addition to the aforementioned criticisms it is important to note the Lost Objectives and a Free market Approach: As explained before, the fund till only recently dealt primarily with countries in 1. following which were not included for the sake of economy but that multiple times before, the IMF was conceived in the Bretton Asia, Africa or Latin America and yet the directors, who have an nonetheless should be addressed in the committee. ese additional Woods agreement. One of its main supporters, champions, and active and crucial role in shaping the direction of these countries, criticisms are: Lack of a proper theoretical framework and empirical intellectual author was John Maynard Keynes, one of the most have no real connection with them. In the words of of Stephen evidence, weak communication with the countries it is meant to aid, lack import economists of the 20th century. Under his view, there were Stiglitz “the institutions are not representative of the nations they of environmental concerns, improper measures to secure a smooth liberal- market failures that impeded that markets could be fully left to serve” (2002, p.19). Additionally, in the case of the IMF those who ization of the nations it aids, narrow conception of development, among themselves. Furthermore, because actions of one country a ected directly represent the nation are the nance ministers and the others. another (for example if country A reduces imports this a ects the central bank governors, people who might have special interests quantity of exports by country B) any solution to an international within their countries that might lead them to take decisions that economic problem required global coordination and not an individ- bene t them but not the nations they represent. ual approach to the problem. us, if a market failure occurred where a country was in severe downturn but it didn’t have the Uniform Solutions ability to borrow money to stimulate its economy the IMF could be It is undeniable that each country has di erent needs and each crisis the globally coordinated e ort to solve the problem. As Stiglitz puts requires a di erent approach. Nonetheless, the IMF has consistently it: given uniform solutions to the di erent crisis that each country has e IMF could improve matters [because,] (…) by putting faced. Oxford Professor Ngaire Woods summarizes this approach pressure on countries to maintain their economy at full with the following motto: “Stabilize, liberalize, privatize and dereg- employment and by providing liquidity for those countries ulate.” (Woods, 2006, p.181) As she explains: facing downturns that could not a ord an expansionary e advice and policy prescriptions of the IMF and World Bank increase in government expenditures, global aggregate have not emerged as a result of pure economic research and debate. demand15 could be sustained. (2002, p.196) Rather, the institutions have adapted economic ideas to t their available resources and instruments. Facing new challenges, each 14 “ e concept of a market failure is dicult to de ne but it is crucial for the understanding of the IMF. institution has dashed in using tools already at hand. Necessarily, e dictionary of economics de nes it as: “When an economy has an equilibrium that is not pareto ecient.” In turn the de nition for equilibrium and Pareto Eciency are the following: each has left behind economic theories or policy prescriptions Equilibrium: “A position of balance in the economy or, equivalently, a situation in which no agent in the economy has any incentive to to modify their chosen strategy.” which would require di erent resources or a di erent expertise Pareto Eciency: “A form of eciency for an economic allocation. Allocation is Pareto ecient if there is (p.181). no feasible reallocation that can raise the welfare of one economic agent without lowering the welfare of some other economic agent.” 248 us, one could informally de ne a market failure as a situation where no economic agent has any incentive to modify their strategy and yet it is possible to nd an allocation of resources where the overall welfare of the economic agents. 11 European Commision(EC), the European Central Bank (ECB) and the International Monetary Fund.
CRITICISMS TOWARDS THE IMF
e dangers of Austerity Having understood the structure and the manner in which the IMF Nonetheless contrary to the wishes of its intellectual author, the Besides the monetary problems that austerity could bring there are conducts itself it is now important to consider the main criticisms the IMF has acted in an opposite manner. On the one hand, it’s belief additional problems that nations might face due to contractionary organization faces. One of it’s main critics, Nobel Laureate Joseph Stiglitz in the proper functioning of the free-market has led it to fail to policies. A 2008 study by Stuckler, Kind and Basu (2008) indicated stated in his book Globalization and its discontents that articulate proper explanations for market failures and and the ways that IMF reform programs might have had a negative e ect on the A half Century after its founding, it is that the IMF has failed its mission. to correct it. On the other hand, Keynesian policies required an “incidence, prevalence, and mortality rates in post-communist It has not done what it was supposed to do—provide funds for countries increase in expenditure whenever market failure occurred and yet Eastern European and former Soviet countries, independent of facing an economic downturn, to enable the country to restore itself to the IMF has often done the opposite, requiring more austere and other political, socioeconomic demographic, and health changes in close to full employment (Stiglitz, 2002, p.15) strict nancial policies that the countries had in the past. However, these countries” (2008). Although the study does not establish a the manner in which it has done this has not been fully justi ed nor causal link it does nd a correlation between the enforcement of the And yet, the institution is so important for the formation of the interna- does it have a strong theoretical background to support it. policies and the disease. is example, helps to highlight that even tional economic system and has so much power to do good that it is if strict monetary policies led to an overall economic improvement impossible to give up on it. us, if one has any hopes to understand Lack of Representation 2. they might inadvertently lead to a decrease in true welfare of a exactly how restructure the organization on e must rst understand some By common tacit agreement it is the case that the director of the population. the main criticisms that are thrown at the IMF. IMF is European and the director of the World Bank is Ameri- can. is has brought on many criticisms because, as explained In addition to the aforementioned criticisms it is important to note the Lost Objectives and a Free market Approach: As explained before, the fund till only recently dealt primarily with countries in following which were not included for the sake of economy but that multiple times before, the IMF was conceived in the Bretton Asia, Africa or Latin America and yet the directors, who have an nonetheless should be addressed in the committee. ese additional Woods agreement. One of its main supporters, champions, and active and crucial role in shaping the direction of these countries, criticisms are: Lack of a proper theoretical framework and empirical intellectual author was John Maynard Keynes, one of the most have no real connection with them. In the words of of Stephen evidence, weak communication with the countries it is meant to aid, lack import economists of the 20th century. Under his view, there were Stiglitz “the institutions are not representative of the nations they of environmental concerns, improper measures to secure a smooth liberal- market failures that impeded that markets could be fully left to serve” (2002, p.19). Additionally, in the case of the IMF those who ization of the nations it aids, narrow conception of development, among themselves. Furthermore, because actions of one country a ected directly represent the nation are the nance ministers and the others. another (for example if country A reduces imports this a ects the central bank governors, people who might have special interests quantity of exports by country B) any solution to an international within their countries that might lead them to take decisions that economic problem required global coordination and not an individ- bene t them but not the nations they represent. ual approach to the problem. us, if a market failure occurred where a country was in severe downturn but it didn’t have the Uniform Solutions ability to borrow money to stimulate its economy the IMF could be 3. It is undeniable that each country has di erent needs and each crisis the globally coordinated e ort to solve the problem. As Stiglitz puts requires a di erent approach. Nonetheless, the IMF has consistently it: given uniform solutions to the di erent crisis that each country has e IMF could improve matters [because,] (…) by putting faced. Oxford Professor Ngaire Woods summarizes this approach pressure on countries to maintain their economy at full with the following motto: “Stabilize, liberalize, privatize and dereg- employment and by providing liquidity for those countries ulate.” (Woods, 2006, p.181) As she explains: facing downturns that could not a ord an expansionary e advice and policy prescriptions of the IMF and World Bank increase in government expenditures, global aggregate have not emerged as a result of pure economic research and debate. demand15 could be sustained. (2002, p.196) Rather, the institutions have adapted economic ideas to t their available resources and instruments. Facing new challenges, each institution has dashed in using tools already at hand. Necessarily, each has left behind economic theories or policy prescriptions which would require di erent resources or a di erent expertise (p.181). 258 15“ e total demand for nal goods and services in the global economy at any given time. 12 “ e charge made for the loan of nancial capital expressed as a proportion of the loan. A borrower usually has to repay the lender more than the value of the loan originally granted. e excess of repayment over the loan is the interest rate.”(oxford)
CRITICISMS TOWARDS THE IMF
4. e dangers of Austerity Having understood the structure and the manner in which the IMF Nonetheless contrary to the wishes of its intellectual author, the Besides the monetary problems that austerity could bring there are conducts itself it is now important to consider the main criticisms the IMF has acted in an opposite manner. On the one hand, it’s belief additional problems that nations might face due to contractionary organization faces. One of it’s main critics, Nobel Laureate Joseph Stiglitz in the proper functioning of the free-market has led it to fail to policies. A 2008 study by Stuckler, Kind and Basu (2008) indicated stated in his book Globalization and its discontents that articulate proper explanations for market failures and and the ways that IMF reform programs might have had a negative e ect on the A half Century after its founding, it is that the IMF has failed its mission. to correct it. On the other hand, Keynesian policies required an “incidence, prevalence, and mortality rates in post-communist It has not done what it was supposed to do—provide funds for countries increase in expenditure whenever market failure occurred and yet Eastern European and former Soviet countries, independent of facing an economic downturn, to enable the country to restore itself to the IMF has often done the opposite, requiring more austere and other political, socioeconomic demographic, and health changes in close to full employment (Stiglitz, 2002, p.15) strict nancial policies that the countries had in the past. However, these countries” (2008). Although the study does not establish a the manner in which it has done this has not been fully justi ed nor causal link it does nd a correlation between the enforcement of the And yet, the institution is so important for the formation of the interna- does it have a strong theoretical background to support it. policies and the disease. is example, helps to highlight that even tional economic system and has so much power to do good that it is if strict monetary policies led to an overall economic improvement impossible to give up on it. us, if one has any hopes to understand Lack of Representation they might inadvertently lead to a decrease in true welfare of a exactly how restructure the organization on e must rst understand some By common tacit agreement it is the case that the director of the population. the main criticisms that are thrown at the IMF. IMF is European and the director of the World Bank is Ameri- can. is has brought on many criticisms because, as explained In addition to the aforementioned criticisms it is important to note the Lost Objectives and a Free market Approach: As explained before, the fund till only recently dealt primarily with countries in following which were not included for the sake of economy but that multiple times before, the IMF was conceived in the Bretton Asia, Africa or Latin America and yet the directors, who have an nonetheless should be addressed in the committee. ese additional Woods agreement. One of its main supporters, champions, and active and crucial role in shaping the direction of these countries, criticisms are: Lack of a proper theoretical framework and empirical intellectual author was John Maynard Keynes, one of the most have no real connection with them. In the words of of Stephen evidence, weak communication with the countries it is meant to aid, lack import economists of the 20th century. Under his view, there were Stiglitz “the institutions are not representative of the nations they of environmental concerns, improper measures to secure a smooth liberal- market failures that impeded that markets could be fully left to serve” (2002, p.19). Additionally, in the case of the IMF those who ization of the nations it aids, narrow conception of development, among themselves. Furthermore, because actions of one country a ected directly represent the nation are the nance ministers and the others. another (for example if country A reduces imports this a ects the central bank governors, people who might have special interests quantity of exports by country B) any solution to an international within their countries that might lead them to take decisions that economic problem required global coordination and not an individ- bene t them but not the nations they represent. ual approach to the problem. us, if a market failure occurred where a country was in severe downturn but it didn’t have the Uniform Solutions ability to borrow money to stimulate its economy the IMF could be It is undeniable that each country has di erent needs and each crisis the globally coordinated e ort to solve the problem. As Stiglitz puts requires a di erent approach. Nonetheless, the IMF has consistently it: given uniform solutions to the di erent crisis that each country has e IMF could improve matters [because,] (…) by putting faced. Oxford Professor Ngaire Woods summarizes this approach pressure on countries to maintain their economy at full with the following motto: “Stabilize, liberalize, privatize and dereg- employment and by providing liquidity for those countries ulate.” (Woods, 2006, p.181) As she explains: facing downturns that could not a ord an expansionary e advice and policy prescriptions of the IMF and World Bank increase in government expenditures, global aggregate have not emerged as a result of pure economic research and debate. demand15 could be sustained. (2002, p.196) Rather, the institutions have adapted economic ideas to t their available resources and instruments. Facing new challenges, each institution has dashed in using tools already at hand. Necessarily, each has left behind economic theories or policy prescriptions which would require di erent resources or a di erent expertise (p.181). 268 13 “A decrease in the value of one currency in terms of other currencies”
CHALLENGES AND OBJECTIVES FOR THE WORLD BANK
ere's always a price tag for development. But the question is: Who should pay the price? Should poor people be the ones who sacri ce when the government tries to do a big project? Even the World Bank says the budget for a project should include money to cover people's losses, that you can't just show up at someone's house and tell them to leave — that there has to be a process and that people have to be made whole (Michael Hudson, cited by NPR, 2015).
278 BRIEF HISTORY OF THE WORLD BANK AND EXPLANATION OF ITS STRUCTURE
One of the products and most lasting projects of the Bretton Woods Conference is the International Bank for Reconstruction and Development (IBRD) created in 1944. e IBRD is one of the ve institutions that conforms the World Bank, one of the most powerful nancial institutions worldwide. World War II produced the collapse of the nancial system of Europe and Japan and with it their economies stagnated. e situation led John Maynard Keynes to propose a conference in which experts gave solutions, therefore, the IBRD served to the purpose of reconstructing Europe while preventing with the IMF the occurrence of a similar situation. However, its purpose changed after Europe, Japan and other economies where recovered.
Nowadays, the World Bank Group is said to improve the vulnerability of countries during a crisis, reduce extreme poverty and in general promote high living standards. Some of the ways to achieve its purpose might be by developing infrastructure (damns, roads, electrical infrastructure), improving the education and health system, developing agriculture (irrigation systems), between others. e way governments and the private sector of low and middle-income countries can fund this projects is by loans of the World Bank Group.
288 WORLD BANK GROUP
World Bank Group has 189 member countries, its made up of ve institutions and has over 10,000 employees. Its two main goals are to “End extreme poverty by decreasing the percentage of people living on less than $1.90 a day to no more than 3% [and to] Promote shared prosperity by fostering the income growth of the bottom 40% for every country” (World Bank, 2019). Although there are criticisms to the World Bank as a whole, in this committee the topic will turn around the two main and most popular institutions which are the IBRD and the IDA. Since 1947 there have been “13,753 projects in 174 countries” (World Bank, 2019).
Member countries manage the World Bank Group through four board of directors. To give an example of the composition of these boards, here is how the IBRD board is conformed. It has the Boards of Governors and the Executive Directors; with this last body the President is chosen. According to a 2012 article of Forbes Magazine: “the World Bank has always operated under a gentleman’s agreement that allows the U.S.--its largest shareholder with 16% of the vote--to pick its president, while the other 187 member-governments ow into a 25-member board” (Behar, 2012). In article V, section 4(b) of the IBRD Articles of Agreement it is stated that there must be 12 executive directors of which 5 will be those countries who have the largest shares, which means those who give the biggest amount of money to this institution. Nonetheless, the board has gradually growth up to 25 members, as it was stated before, due to the enlargement of the members of the Bank. e fees paid to the World Bank represent the willingness of the country to participate in the projects as well as the size of its economy. Moreover, “the voting power of each Member country is based on the number of shares it holds. Shares are allocated di erently in each organization, resulting in di erent voting powers” (World Bank, 2019).
298 IBRD
Today this global development cooperative o ers nancial products such as loans and nancial services like advice to governments of middle-income countries who possess low nancial credibility. e 189 member-states have shares in the IBRD and at the same time some of them are clients. e IBRD works in hand with the other four institutions of the World Bank Group to help countries reduce extreme poverty and raise living standards.
Additionally, it partners with private institutions to develop projects or support them. e “IBRD raises most of its funds in the world's nancial markets. is has allowed it to provide more than $500 billion in loans to alleviate poverty around the world since 1946” (World Bank, 2019). Also, it earns money from the low interest rates of the lending. e money it earns is spent in operating expenses, reserves and in the IDA because it transfers money to this institution.
308 IDA
e International Development Association (IDA) is an international nancial institution involved in the goal of helping the ‘poorest’ countries to improve living conditions, to boost their economies and to reduce inequalities and poverty. Nowadays, 76 States are held in the category of the “world’s poorest countries” according to an annually updated GNI per capita threshold and thus these are bene ciaries of concessional loans and debts reliefs while it has 173 shareholder countries. In other words, they are provided with loans that have zero or low interest rates with a long repayment period that can go, for example, until 38 years. e IDA is mostly nanced by shareholders and the 50 donor countries are named IDA deputies. ese countries hold four meetings a year to discuss funding and borrowing countries can assist to those meetings in order to express their needs.
“In the scal year ending June 30, 2018, IDA commitments totaled $24 billion, of which 21 percent was provided on grant terms. New commitments in FY18 comprised 206 new operations. Since 1960, IDA has provided $369 billion for investments in 113 countries” (World Bank, 2019). e IDA spent those $24 billion in multiple issues that include education, health, agriculture and business.
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Criticisms towards the World Bank
In the years after WWII the IBRD accomplished its mission of reconstructing Europe. Although it helped economies who stagnated due to the war like Japan it worked as an instrument for USA’s foreign policy. e institution lend money to governments who needed it and in returned it ask for the approval in internal policies related to the liberal doctrine. Many of these policies where to privatize and to allow the market to determine the prices of products without the intervention of the government. ese in-return-policies might seem as an innocent repayment for the helped that has been given or as a guarantee that the economy of the country would improve in order to repay loans. However, it is not a coincidence that the United States was and still is the biggest contributor to the IBRD and to the World Bank in general. As well, these policies situated countries in one side of the political spectrum that was polarized due to the cold war. Although criticisms to the World Bank has led to a broader approach in which the conditionality is ‘ exible’, other problems have arisen:
I. Inability to track the institution’s budget: in December of 2011 the World Bank’s online budget accounts started to uctuate rapidly without any ocial movement. 2 billion dollars where committed. According the Forbes Magazine there are problems to track “all the cash” (Behar, 2012) as this 2-billion-case shows. Also, the incapacity to oversee the whole budget leaves space to corruption, as the same article states: “others used revolving doors to game the system to make fortunes for themselves or enhance their positions within the bank” (Behar, 2012). e article questions the ability of any institution to audit the enormous amount of money that the World Bank Manages which is why it is worth asking if there should be an institution so large that it manages that amount of resources or it should be divided into more institutions that handle less resources and can do the correct audit. As Paul Volcker, paraphrased by Behar, said: there’s a necessity of “restructuring the bank’s corruption- ghting unit, including moving the leadership into a more powerful notch in the bureaucracy” (Behar, 2012).
Furthermore, the Bank lends money to low and middle-income countries without doing the follow up of the money. Behar arms that the money lend might be used for other purposes that were not approved by the World Bank and that by any means they don’t
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accomplish the goals of the institution. Chavkin and Hudson (2015) investigated for the ICIJ and found that “Ethiopian authorities diverted millions of dollars from a World Bank-supported project to fund a violent campaign of mass evictions, according to former ocials who carried out the forced resettlement program”.
II. Incompatibilities with goals: some consider that the goal of reducing extreme poverty is not being tackled by lending money to major developing countries like BRICS. O course those countries have people living under high living standards, but a great fraction of the budget is spent in improving, for example, infrastructure which will not have a direct impact on poor people in most cases. Also, these kind of projects like building roads might produce wealth but in countries like BRICS wealth is not the issue, but inequalities. Although it may have a positive impact, there are countries who possess a larger amount of fragile population and these same countries don’t have a real access to private-sector capital. e bank has argued that by lending to countries like China it earns more money in order to help those who are clearly in need. Still, as Behar explains, mentioning what the economist Adam Lerrick found in the bank’s books, there are “real annual losses of $100 million to $500 million per year on its loans” (Behar, 2012) and in the past decades China has borrowed over 30 billion dollars.
III. Compromised Principles: in 2007, China warned the World Bank that it would stop borrowing from it due to a corruption- ghting-plan it had. After this happened the Bank decided to stop using a global standard and to measure corruption according to the situation, allowing with this exibility and subjectivity towards corruption. is is just an example of how the World Bank has acted in high stakes situations where it has been put under pressure.
IV. More harm than good: When e World Bank Does More Harm an Good is an article of NPR which highlights some parts of the Report made by e International Consortium of Investigative Journalists. In the investigation that led to this report it was found that many of the projects of the World Bank produces more poverty or at least a ects those in the most vulnerable conditions. According to NPR (2015):
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People are often displaced, or their livelihoods are ruined. Over the past decade an estimated 3.4 million people have been displaced by bank-funded projects, says Michael Hudson, a senior editor at ICIJ, who worked on the report. In one instance, hundreds of families had their homes burned down.
is case of the people’s homes burned occured in Kenya when a land conservation initiative for a forest led to a World Bank’s loan for the Kenyan forest Service. As stated by Michael Hudson, cited by NPR (2015):
e problem is with the thousands of indigenous people — the Sengwer — living in the forest. Our reporting on the ground shows that hundreds, and perhaps as many as a thousand, homes have been burned by the Kenyan forest service as they try to evict people from the forest.
When big projects are done people lose their homes or/and their sacred lands. When a road or a damp is constructed, many people is physically or economically displaced. e lack of a proper resettlement program plus the inhumane treatment given by some governments and the people in charge of the projects has led to tragedies that worsens the quality of life of those who the project was supposed to help.
As well, this institution has been accused of producing a terrible environmental damage with its projects.
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