Transcript The Revived Bretton Woods hypothesis (BW II)‏

The Revived Bretton Woods
hypothesis (BW II)
First Presentation
by Michael Bürscher
Supervisor: a.Univ.Prof. Dr. Martin Riese
WS 2008/09
The Revived Bretton Woods
hypothesis (BW II)
by Dooley, Folkerts-Landau and Garber
„today's international financial system is similar to
the Bretton Woods system„
Structure

Bretton Woods I

The Revived Bretton Woods hypothesis (BW II)

Export Led Growth

Criticism of the BW II hypothesis

Outlook
Bretton Woods I

International monetary regime (WW II – early 1970s)

“pegged rate” or “adjustable peg” currency regime

hegemonic monetary regime centred on the Dollar

center-periphery system
Bretton Woods I

Periphery Countries (Europe - Japan)

Undervalued exchange rates

(Dollar-) Reserve accumulation

Use centre region (US) as financial intermediary

US-FDI in Europe/Japan
The Revived Bretton Woods
hypothesis

Main points (1):

still US as centre of the system, but East Asia as the
developing periphery now

EA economies are pursuing export-led growth strategies

some EA currencies fixed against US-Dollar

other EA economies limit appreciations against the Dollar
East Asian Exchange Rate Pegs (against US-$)
Source: McKinnon (2004)
The Revived Bretton Woods
hypothesis

Main points (2):

EA economies run huge trade surpluses with the US

huge (and rising) US current account deficit

current account surpluses in East Asia

accumulation of dollar-denominated official reserves throughout
EA
US – Chinese Trade Balance
Current Account
Current Account (in billion US-Dollars)
600.00
400.00
200.00
billion $
0.00
China
United States
EA (NIE 4 + ASEAN 4)
-200.00
-400.00
-600.00
-800.00
-1000.00
2000
2001
2002
2003
2004
2005
2006
2007
US Current Account: 1960-2007
Official Foreign Exchange Reserves
(in million of Dollars; 1980-2004)
Source: McKinnon (2004)
The Global Framework



Trade Account Region (~Asia)
export-led development strategy
Capital Account Region (~Europe)
private investors drive capital flows and
exchange rates
Centre (United States)
issues the reserve currency
financial intermediary of the system
Export Led Growth

Central role in the BW-II framework

Fuel economic growth by promoting exports
“Exports mean Growth”
Justifications for Export-led
Growth

Lack of robust domestic demand

Innovation and technological diffusion

Attract Foreign Direct Investment (FDI)

Get foreign exchange via exports

Trade surpluses are more desired

Underemployed populations
Critique on Export-Led Growth

Reinforces dependency on industrial countries

Prevents development of domestic markets

“race to the bottom”

Relationship of ELG and financial instability
--> alternative: domestic demand-led growth
Mutual Benefits of the Current
System

East Asia




growth and development
creation of a competitive capital stock
foreign reserves as collateral / “insurance”
United States




Stable and low-cost funding for current account deficit
Accumulation of Dollars in EA helps to hold interest
rates down
Cheap imported consumption goods --> lower inflation
Benefits also for US-firms producing in EA
Criticism of the BW II - hypothesis


Highly disputed hypothesis
e.g.:
Eichengreen: “world has changed dramatically”
Palley: “fundamentally different microeconomic
regimes”
Goldstein, Lardy: BW II framework is focused on
China and other EA economies are hard to fit
into the BW 2 idea
Outlook

Bretton Woods I vs. Bretton Woods II
Facts on World Trade – In Line with the BW II?

Export-Led Growth “Now and Then”

Criticism of the BW II hypothesis

The Special Role of China

Euroland's Role in All This (?)

The End of BW 2 – Even Now?

Thanks for your Attention