PART 1
Question A
The Bretton Woods system was built to stabilize economic growth and exchange rates, expand trade liberalization, promote cooperation between countries and establish a multilateral system of payments. While the Bretton Woods system was successful at first, it required the willingness of countries like the United States and Germany to make some adjustments, or sacrifices, in its domestic economic policies in order to maintain a balance within the global economy. To do so, it required a large amount of support from the IMF to bail countries out of reserve exhaustion. Such sacrifice for the United States led to inflation, a decline in gold stocks, unemployment and import surcharge. It is highly unlikely that the United States will want to enter into another monetary system like this today given the political climate and the Trump Administration’s objective to put America First especially in economic policies. It is also hard to imagine another country today willing to make such adjustments in their domestic economy needed for Bretton Woods to succeed, considering recent large-scale changes like Brexit.
The Bretton Woods system also asks who is to bear the cost of adjustment to ensure that deficits and surpluses balance out in the global economy. This refusal to bear such cost led to the collapse of the Bretton Woods system. Its initial success could be credited to the homogeneity of the few members it had. With the involvement of more members, it brought competition of ideas in the system, but as well as competition within the markets they shared. With the success these countries gained from Bretton Woods, it lead them to take protectionist policies in an effort to maintain this success and become less cooperative in making compromises with the adjustments necessary to keep the Bretton Woods system alive. If a similar monetary system were to be introduced today, negotiations within the system will continue to see conflict and cause delay in progress in reaching decisions, which can affect the economy considering how time sensitivity is a crucial characteristic of the global economy.
Main economic policy options that could and have been used without the system are tariffs, exchange rates, domestic policies, and sanctions or pressure. Tariffs have been used to open (as well as close) markets. The United States has used tariffs to promote their products over consumption of others. It has also been a tool used in addressing the imbalance problem between deficits and surpluses. Exchange rate has been used to increase the value of the dollar to make US goods cheaper and more attractive, while also addressing the imbalance problem. Domestic policies allow countries to address their current-account deficits. Sanctions or pressure can be used to direct other countries to make changes in their domestic policies to reduce their surpluses and address the global imbalance.
Question C
In the United States-Germany-Japan squabble of the 1980’s involved a large current account deficit within the United States that amounted to hundred of billions of dollars. The deficit was able to be offset by Japan and Germany combined, yet the United States continued to accrue deficits. This was due to the policies each country set out in its economies. The United States, under Reagan, cut taxes and increased military spending allowed for an increase in domestic demand of imports. Germany and Japan on the other hand were focused on honing in their economies. Both wanted to bring back balance into its government budgets by implementing a restrictive monetary policy to address inflation rates. The United States, meanwhile, was focused on keeping its interest rates high to continue attracting Japanese and German investors, as well as other countries with surpluses in order to balance out the growing and huge deficit it had accumulated.
Because the United States dollar appreciated so much, President Reagan was forced to evaluate the United States monetary policy in order to prevent it from appreciating anymore. The imbalance was addressed with the Plaza Accord, an agreement between the United States, Japan, Germany, France and Britain (the G-5) that involved the objective to bring down the value of the dollar against the mark and yen. Because capital had become so mobile, the countries were forced to face a choice between monetary policy and fixed exchange rates, referring to the Mundell-Fleming theory. The agreement also included the concurrence of the parties involved to intervene when the dollar’s value is increasing again. They created a target zone and coordinated their individual macro policies, which involved more expansionary policies on Japan and Germany while the United States practiced more restriction.
When asking could a similar solution be attainable to address current market imbalances, countries could experience similar outcomes. Largely, I believe that the Accord initially succeeded, reducing the value of the dollar by 40% a few years later, because of the smaller number of countries involved that had similar goals. Oatley also in the textbook mentioned that the intervention involved an allocation of $18 billion from the parties involved. It is questionable whether countries now are willing to do the same and make sacrifices for the good of the global economy when countries like the United States are currently taking a protectionist approach. With the emergence of larger and new economies like China, it is possible countries could come together to ensure a balance in the foreign exchange rate, considering the manipulation of exchange rates in China. However, the outcome of the Plaza Accord showed that intervention in the foreign exchange market bid little effect on exchange rates. Countries today may favor using tariffs, non-tariff barriers or other policies that can exert pressure on other countries to act accordingly, especially with the leaning of the current administration towards acting unilaterally.
PART 2
Question E
Globalization has been known of impacting the welfare of the world. As Oatley discussed in the textbook, globalization has been opposed by many due to the increase in inequality it brings to nations abroad. Opponents of globalization point to poverty rates, income inequality, uneven distribution of income and methods of exploitations of people or workers in the developing world through payment of too low wages, abuse in the workplace, and use of sweatshops. While globalization has been credited for the proliferation of jobs and modernization of industries in developing and developed countries alike, opponents of globalization argue that the wealth accrued from modernization has been enjoyed by a fewer number of people than those involved in the process. It is a situation where the rich get richer while the remainder of the population, especially in developing countries, don’t typically see much change in the quality of their lives and remain living in poverty.
On the other hand, supporters of globalization, as Oatley discusses, refer to the contribution of globalization, as the solution, in the lowering of poverty rates, lowering of the global income inequality and rise in income. This success has been visible in the greater rate of growth within poorer countries like China and India compared to the richest countries in the world. Oatley points out that the population living in poverty has decreased significantly in the last 20 years, more than ever in the past, which can be attributed to the widening of free trade and financing to developing countries. The establishment of manufacturing and factories abroad has enabled individuals in such countries to acquire jobs that otherwise would not have been available to them, and consuming goods of much better quality than before. Income has risen over time thanks to globalization.
In asking the question whether the net effect of globalization is good or bad, I would believe that globalization had been good. Due to globalization, progress has been made. The progress may be very slow and gradual, but modernization and globalization of trade and finance can be credited for the increase in jobs available to the international market. Free trade, finance, foreign direct investment and intergovernmental institutions like the World Bank can be thanked for its incorporation and accommodation of developing countries while bringing success to developed countries as well. It is without a doubt that it has led to abuses and exploitation of people in developing countries and degradation of the environment. With that gravity of an impact, international organizations, as well as domestic governments and groups, have taken action to address these issues and ensure that the workers’ rights are exercised and respected in the workplace, like the work of human rights activists and groups like Chie Abad, and that companies and governments are held accountable for their contribution to the deterioration of the environmental quality in international agreements like the Paris Agreement.
In terms of electing President Trump who favors protectionist policies, economic self-interest played a significant role, considering how Trump ran on the platform that sought to put America First. Trump assured his voters that the trade agreements and multilateral agreements the United States took part and will take part in translate to economic welfare for Americans. He promised to bring back jobs to the American people by backing away from globalization that allowed liberalization of trade and multinational corporations to use horizontal FDI and vertical FDI that allowed them to move to other countries, transfer the jobs there and away from the American people, to find legal ways around taxes and minimize their costs while maximizing gain.
Question F
Using central bank independence to describe the politics of finance, the central bank is the extent to which central banks are free from the influence of politics and interference of government to set monetary policies and set out economic goals, to lower inflation rates and stabilize prices, in order to achieve stable and long-term economic growth. Central banks are granted independence to constrain future governments from abusing the economic system, political opportunism and partisan policies that can hinder or stop the country’s economic growth. One feature of central bank independence is that it is able to solve the time-consistency problem that the central bank may otherwise have an issue with because of pressure from politicians to act in such a way that favors their political goals and hinder the central bank’s ability to maintain lower inflation rates. The central bank is crucial in its role and to have such independence due to its ability to speed up economic growth or slow it down. In terms of politics, despite it having independence, the central bank still sees conflict between itself and government officials. Because the executive branch can control exchange rate policies, government officials can pressure the central bank to pursue monetary policies that are in favor of the politician’s objectives, which are essentially designed to satisfy constituent desires.
As for trade, politics is more international. Where central bank independence faces pressures from local politicians, governments can use tariffs to pressure other countries to affect liberalization of trade. As seen in the prisoner’s dilemma or the tit-for-tat method, cooperation between countries in relation to trade can be particularly difficult where they choose protectionist policies to defend against potential losses despite the fact that cooperation can clearly produce gains. The United States in particular has set out an action to work out trade protectionism. It introduced the Reciprocal Trade Agreements Act (RTAA) that essentially regrouped large, very different groups of countries that favor liberalization into smaller groups that will have better successes in coming up common goals and pursuing those. This is crucial because, simply put, groups or countries that are able to organize much easily are advantageous in the politics of trade. Because countries are fearful of taking hits in trade and politics, it pushes them to take protectionist policies like tariffs, which can have a strong influence on the rest of the world’s ability to trade. It can affect prices if the state plays a large enough role in the supply and demand of the good, and minimize other countries’ access to those goods. With the RTAA, it is an agreement that ensures all parties acquire the same treatment as the most favored nation. It is a situation where we lower our tariffs when you lower yours – a reciprocal relationship that enables compromise and gains for all.
Policy reforms in trade and finance generally have a similar effect on interest group influence. With trade policy generally worked out in Congress, interest groups have access to politicians and various legislative members that with enough lobbying and elbow grease can deliver the legislation necessary to accomplish the goals interest groups have on trade. Despite its independence, the Central Bank is still not free from pressure. Interest group preferences on exchange rate policies and monetary policies do not change and remain to have the desire and incentives to accomplish those. They are not easily deterred by the unpoliticization of the central bank. Interest groups still express their wishes to the Central Bank, but typically have to resort to other methods to be more successful, like putting the pressure on various economic actors or politicians to accomplish such goals and actualize the adjustments on monetary and exchange-rate policies.
In terms of IPE’s approach to trade and finance, the two do not differ. Trade politics involves the response of politicians and government officials to the demands of interest groups and the involvement of policy makers in the global and domestic economy to pursue objectives that are intended to address economic issues and encourage stable economic growth. Similarly, politics of finance involves politicians responding to the demands of interest groups on changes in monetary and exchange rate policies, while balancing the goals of the government itself to address economic issues and continue to stimulate stable growth.