Transcript Chapter 11: The Global Trade and Investment Environment EM S SDR Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a International Trade and Investment by John Gionea Slides.

Chapter 11: The Global Trade and
Investment Environment
EM
S
SDR
Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a
International Trade and Investment by John Gionea
Slides prepared by John Gionea
Lecture Plan:
• Brief history of the international monetary
system
– Gold Standard; the Bretton Woods System; the
Floating Exchange rate system
Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a
International Trade and Investment by John Gionea
Slides prepared by John Gionea
The International Monetary
System
• The Gold Standard
• The Bretton Woods system (1944); fixed
exchange rate system
• The floating exchange rate system
Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a
International Trade and Investment by John Gionea
Slides prepared by John Gionea
The Gold Standard system
• Under the gold standard, countries pegged their
currency to gold . At one time, for example, the US
government would agree to exchange one dollar for
23.22 grains of gold (1 ounce=480 grains)
• The exchange rate between currencies was determined
based on how much gold a unit of each currency
would buy.
– The gold standard worked fairly well until the inter-war
years and the Great Depression. Following competitive
devaluations (eg for export support), people lost confidence
in the system and started to demand gold for their currency.
Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a
International Trade and Investment by John Gionea
Slides prepared by John Gionea
The Bretton Woods system(1944)
– Provided for two multinational institutions :
• the IMF and the World Bank.
– The US dollar was to be pegged and convertible to
gold, and other currencies would set their exchange
rates relative to the dollar.
• A country could not devalue the currency by more than
10% without IMF approval.
– fixed exchange rates were to force countries to have
greater monetary discipline.
– Some flexibility through the use of short term funds
from the IMF to help support currencies during
temporary pressures for revaluation.
Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a
International Trade and Investment by John Gionea
Slides prepared by John Gionea
The Bretton Woods system
(1944)
• A key problem with the gold standard was that
there was no multinational institution that could
stop countries from engaging in competitive
devaluations.
• The Bretton Woods system provided for two
multinational institutions - the IMF and the World
Bank.
• The US dollar was to be pegged and convertible to
gold, and other currencies would set their
exchange rates relative to the dollar. Devaluations
were not to be used for competitive purposes.
–
Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a
International Trade and Investment by John Gionea
Slides prepared by John Gionea
The Bretton Woods system
(1944)
• The system also provided some flexibility,
and could use short term funds from the
IMF to help support currencies during
temporary pressures for revaluation.
• The World Bank's (IBRD) major purpose
was to provide funds to help in the
reconstruction of Europe and the
development of third world economies.
Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a
International Trade and Investment by John Gionea
Slides prepared by John Gionea
The collapse of the fixed
exchange rate system
• The fixed exchange rate system established in Bretton
Woods collapsed mainly due to the economic
management of the USA (Vietnam war fiscal crisis)
• Speculation that the dollar would have to be devalued
relative to most other currencies forced other countries
to increase the value of their currency relative to the
dollar.
• The Bretton Woods system relied on an economically
well managed US. When the US began to print
money, run high trade deficits, the system was strained
to the breaking point.
Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a
International Trade and Investment by John Gionea
Slides prepared by John Gionea
Fixed versus Floating exchange
rates
• Floating rates are claimed to
– give countries autonomy regarding their monetary
policy
– facilitate smooth adjustment of trade imbalances
• Fixed exchange rates are claimed to:
– impose monetary discipline on a country
– avoid speculative pressures
– provide more stability to international trade and
investment
– promote more stable prices
Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a
International Trade and Investment by John Gionea
Slides prepared by John Gionea
Distribution of IMF Members’ Foreign
Exchange Arrangements (182) by type as a
% of total,1998
Other
9%
Independently
floating
25%
Pegged
currencies
35%
Managed
Floating
31%
Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a
International Trade and Investment by John Gionea
Slides prepared by John Gionea
CASE:The Australian exchange
rate system
• Fixed exchange rates
– Pegged to the Pound sterling (prior to Dec. 1971)
– Pegged to the US Dollar (Dec. 1971-Sept.1974)
– Pegged to a TWI* (Sept. 1974-Nov. 1976)
• Managed float (TWI + Government):
– Nov.1976-Dec.1983
• Independently Floating Exchange Rates:
– Since Dec. 1983, with some RBA intervention (“the
dirty float”)
* TWI =Trade Weighted Index
Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a
International Trade and Investment by John Gionea
Slides prepared by John Gionea
Exchange Rates in practice
-Pegged exchange rates• Pegged exchange rates are popular among the
world’s smaller nations, as they peg their
exchange rate to that of other major
currencies.
– There is some evidence that a pegged exchange
rate regime does moderate inflationary pressures
in a country.
Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a
International Trade and Investment by John Gionea
Slides prepared by John Gionea
Exchange Rates in practice
- Currency boards• A Currency board commits itself to
converting its domestic currency on demand
into another currency at a fixed exchange
rate. To make this commitment credible,
the currency board holds reserves of foreign
currency equal, at the fixed exchange rate,
to at least 100% of the domestic currency
issued.
Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a
International Trade and Investment by John Gionea
Slides prepared by John Gionea
“Dollarisation”
• Involves completely replacing the local
currency with a foreign currency(e.g. the
US dollar).
• Disadvantage:Monetary conditions are
almost completely controlled by the foreign
central bank(for instance, the U.S. Federal
Reserve)
Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a
International Trade and Investment by John Gionea
Slides prepared by John Gionea
The European Monetary System
• Objectives :
– 1) create a zone of monetary stability in Europe,
– 2) control inflation, and
– 3) to coordinate exchange rate policies with third
currencies.
• The ECU: a basket of currencies that served as the
unit of account for the EMS. Each national currency
was given a central rate vis-à-vis the ECU. From this
central rate flow a series of bilateral rates.
• Currencies were not allowed to depart by more than
2.25% from their bilateral rate with another EMS
Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a
International Trade and Investment by John Gionea
Slides prepared by John Gionea
The EURO
• Benefits:
– significant savings for businesses and individuals
– easier comparability of prices; more competition
– boost to the development of a highly liquid panEuropean capital market
– more investment options
• Drawbacks:
– national authorities lose control over monetary
policy
– EU is not an “optimal currency area”
Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a
International Trade and Investment by John Gionea
Slides prepared by John Gionea
The European Central Bank(ECB)
• Implements the monetary policy in the Euro-zone
• In January 1999, the ECB assumed responsibility
for union-wide monetary policy in the 11 countries
of the euro-zone forming the European Monetary
Union(Greece joined later).
• Conflicts between member-countries with low
inflation and members with high inflation.
• A second major concern is whether each member
country will be able to use its national fiscal
policy effectively to improve its performance..
Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a
International Trade and Investment by John Gionea
Slides prepared by John Gionea
Changes in the role of the
International Monetary Fund(IMF)
• With the introduction of the floating rate system
and the emergence of global capital markets,
much of the original reason for the IMF's
existence have disappeared.
• New role: helping third world countries out of
their debt crisis's.
– 1995:Mexico
– 1997: Thailand,Indonesia,South Korea
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International Trade and Investment by John Gionea
Slides prepared by John Gionea
Criticism of the IMF
• A “one size fits all” policy
– But E.Asia is not the same with Mexico.Debt in E.Asia was
mainly private, while in Mexico was mainly government .
• The IMF creates a moral hazard
– since people and governments believe that the IMF will
bail them out, they undertake overly risky investments.
• the IMF has become too big and does not have
enough accountability for its actions.
– Overall, still extremely helpful to many countries.
Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a
International Trade and Investment by John Gionea
Slides prepared by John Gionea
Australia’s Position in International Trade
1980, 2000
Rank 1980
Rank 2000
% of World
2000
Merchandise
exports
18
25
1.0
Merchandise
Imports
Services
exports
19
20
1.1
23
21
1.2
Services
Imports
14
22
1.2
Indicators
Copyright ©2003 McGraw-Hill Australia Pty Ltd PPTs t/a
International Trade and Investment by John Gionea
Slides prepared by John Gionea