Bretton Woods

Bretton Woods is the name of the system of monetary management that set the rules for commercial and financial relations among the world's major industrial states in the mid 20th century.

It is a system of not only rules, but also institutions and procedures to regulate the international monetary system. These include, the International Bank for Reconstruction and Development (IBRD) – now one of five institutions in the World Bank Group, and the International Monetary Fund (IMF).

The Bretton Woods Agreements were signed in July 1944 by delegates from all 44 allied nations. They are named after the location of the hotel in New Hampshire, in the United States where the allies met to negotiate them.

Bretton Woods was the first example of a fully negotiated monetary order intended to govern monetary relations among independent nation-states.
The current world financial crisis has highlighted the need for reform these structures and institutions, including to:

• better equip them to deal with globalise financial markets
• enhance macroeconomic surveillance and strengthen macroeconomic cooperation between major world economies
• increase representation to reflect emerging and developing economies.

Conditionality

Countries facing economic difficulties can borrow from the International Monetary Fund (IMF).

When a country does this, its government makes commitments on economic and financial policies – a requirement known as conditionality.

Conditionality is a way for the IMF to monitor that its loan is being used effectively in resolving the country’s economic difficulties.

This is so that the country will be able to repay promptly, in order to make funds available to other members in need.

Contagion

Contagion is where an economic crisis in one country triggers a crisis in one or more other countries.

It occurs where countries are economically interdependent.

It can also occur if countries are perceived by investors and businesses as being similar and, therefore, subject to the same vulnerabilities.

Credit crisis, ‘credit crunch’

A credit crisis is when borrowing from banks and other financial institutions becomes prohibitively expensive or unavailable.

Borrowing forms a crucial part of the economy. When it is too expensive or unavailable it reduces businesses’ ability to invest, expand and create jobs.

It also reduces the ability of individual to obtain the credit required for major capital expenditure, such as a mortgage.

Domestic goals

When entering into international negotiations on the global economic crisis countries need to consider how the agreements they make at the international level will affect their own citizens, and pre-existing policies which they have committed to pursuing at home.

An ideal international agreement is one that achieves the domestic and international goals of all countries involved.

However, countries will often be required to make concessions to each other during international negotiations in order to reach a successful agreement.
A desirable agreement is one where – despite the concessions they make – all countries leave negotiations better off than they would have been if no agreement had been made.

Economic interdependence

Economic interdependence occurs between countries or regions for a number of reasons. Typical reasons are:

• sharing significant volumes of trade in goods and services
• experiencing large financial flows between one another
• sharing significant amounts of foreign direct investment
• sharing common economic policies – for example, through membership of a common currency area, such as the Eurozone.

Where countries or regions are economically interdependent, economic developments in one – such as a slowdown in growth or a change in national economic policy – can impact the others.

Emerging economies

Emerging economies are countries whose economies are in the process of rapid growth and industrialisation.

They are considered to be making the transition between developing and developed country status.

Financial governance

Financial governance or financial regulation refers to the policies and institutions governments use – such as the Financial Services Authority in the UK – to ensure the effective functioning of the financial sector.

There is no one definition for what makes an effective financial sector. But it might be described as one that:

• provides value for money for savers and borrowers – for businesses and individuals
• avoids excessive risk taking, while at the same time providing opportunities for riskier investments with higher returns
• provides businesses and individuals with opportunities to insure themselves against risk
• minimises the chance of a crisis in the financial system.

With globalisation, financial sectors in different countries have become more closely integrated.

This has made it more difficult for a government in one country to regulate its own financial system without cooperating with governments in other countries.

Financial Stability Forum (FSF)

The Financial Stability Forum (FSF) promotes international financial stability through information exchange and international cooperation in financial supervision and surveillance.

It provides a forum for discussing international financial regulation.

Members include treasuries, central banks, and supervisors in important financial centres, as well some of the international financial institutions.

Financial markets

A financial market is a place, system, procedure or institution where financial assets are bought and sold between individuals and firms.

They can consist of hundreds of thousands of individuals trading contractual claims on financial assets on a daily basis with other individuals who might be thousands of miles away, in different countries, continents and time zones.

Fiscal policy

Fiscal policy refers to attempts by government to influence the direction of the economy through changes in government taxes, or through spending – known as fiscal allowances.

G20

The G20 – the Group of Twenty – consists of the worlds 19 largest economies plus the European Union.

Finance and central bank Governors from the G20 meet once a year to discuss matters relating to international financial stability.

In November 2008 G20 countries heads of state met in Washington to discuss the Global Financial Crisis. They will meet again in London in April 2009.

G20 countries provide 85% of the worlds economic output.

Global financial governance

Global financial governance refers to international policies, agreements and institutions that ensure the effective functioning of financial sectors across the globe.

International financial institutions (IFIs)

International financial institutions are organisations set up and governed by more than one country to provide a range of functions, such as:

• financial support to countries suffering from poverty or short term economic crisis
• fora for the discussion of national and international economic policy
• economic surveillance to anticipate and counteract economic risks that affect more than one country.

The best known international financial institutions are the Bretton Woods institutions – the International Monetary Fund (IMF) and the World Bank.

Regional development banks, also known as multilateral development banks (MDBs) are also international financial institutions.

International Monetary Fund (IMF)

The International Monetary Fund (IMF) monitors the global financial system by following the macroeconomic policies of its 185 member countries.

It also offers technical and financial support – loans – to member countries, acting as a ‘lender of last resort’ during times of economic crisis.

The IMF was founded in 1945 following the ratification of the United Nations Monetary and Financial Conference – the Bretton Woods Agreement.

Liquidity

The liquidity refers to the ease with which a financial asset can be bought and sold in the market.

The current credit crisis – the ‘credit crunch’ – is also sometimes referred to as a ‘liquidity crisis’. This is because companies are unable to borrow funds from financial markets.

When companies borrow, they are effectively selling debt. This debt is a financial asset which is traded in financial markets.

During a liquidity crisis firms are unable to sell debt or face interest rates that are too high to justify the borrowing.

Macroeconomic

Macroeconomic refers to interactions within an economy as a whole that affect:

• economic growth
• overall levels of demand and output
• sustainablility of the country’s financial position with regards to the rest of the world (balance of payments)
• price stability (inflation)
• full employment, and so on

Macroeconomic policy refers to a government’s efforts to direct those interactions in its economy by controlling:

• interest rates
• overall government spending – also called fiscal policy
• other high level policies – such as exchange rates and the money supply.

Microeconomic

Microeconomics refers to interactions within economies between consumers, households and firms, as buyers and sellers.

It focuses on patterns of supply and demand and the determination of price and output in individual markets.

Policy makers and acedemics who study microeconomics attempt to understand the decision-making processes of firms and households.

Microeconomic policy refers to a government’s efforts to influence the behaviour of individuals and firms in order to achieve specific policy objectives.

A range of tools exist for doing this, some typical examples might be:

• taxes
• subsidies
• regulation
• service provision

Monetary policy

Monetary policy is the process by which a government, central bank, or monetary authority attempts to achieve growth and stability of an economy by controlling the:

• supply of money
• availability of money
• cost of money or rate of interest

Multilateral development banks (MDBs)

The multilateral development banks are international institutions owned by more than one country that provide financial and technical assistance to developing countries.

They do not operate like retail – ‘high street’ – banks.

MDBs provide financial assistance for a wide array of purposes, including investment in education, health, public administration, infrastructure, financial and private sector development, agriculture, and environmental and natural resource management.

Examples of MDBs include the World Bank, African Development Bank, Asian Development Bank, European Bank for Reconstruction and Development, Inter-American Development Bank

Washington Summit

The Washington Summit on Financial Markets and the Global Economy was a conference between the leaders of the G20 group of industrial nations.

Its purpose was to agree on ways to:

• tackle the financial crisis beginning in 2008
• support economic growth
• lay the foundations of reform to prevent similar financial crises in the future

It took place in November 2008.

The London Summit in April 2009 will provide a forum for further global discourse to take forward these agreements on coordinated, international actions to:

• restore financial stability
• drive economic recovery
• progress the transition to a high-growth, low carbon global economy

World Bank

The World Bank is an international institution owned by 185 member organisations that provides financial and technical assistance to developing countries.

Like other multilateral development banks (MDBs) it is not a bank in the common sense.

The IMF was founded in 1945 following the ratification of the United Nations Monetary and Financial Conference – the Bretton Woods Agreement.