International Financial Integration: Competing Ideas and Policies in the Post-Bretton Woods Era

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Its challenges will also be examined. Lastly, the trajectory of reforming the international monetary architecture will be evaluated. The dollar-centred international monetary landscape Over the course of monetary history, the international monetary system IMS has evolved into various forms, starting with the Silver Standard, the Gold Standard, the Bretton Woods system BW and more recently the Dollar Standard. As the global monetary architecture undergoes profound changes, it has demonstrated at least two facts. First, almost every IMS has its own defects. Indeed, the way in which the dollar was enthroned was pure serendipity in that America as the military exporter at that time grew into the world creditor with enormous gold transferred from the war-ravaged Europe, positioning it to support the BW system Vasudevan At the turn of this historic event, the era of the gold standard was over.

A lack of agreements on what the new IMS should be and the increasingly popular sentiment towards free market favoured the advent of floating currencies in a fiat money system Steil The dollar hegemony, however, remains unchallenged for a multitude of reasons. Once the dollar was detached from gold, rapid trade growth is made feasible by a credit-based trade system. This is because awarding a fiat money the reserve status allows that country to finance its balance-of-payments deficits in the global capital market by extending mounting credit to its trading partners instead of paying finite gold Duncan To summarise, in a world led by a single national reserve currency and governments that can increase paper money supply with no obligations to redeem it lead to an exploding proliferation of global liquidity at an unprecedented pace during peacetime.

Vulnerabilities of the dollar standard: unsustainable US current account deficit In order to maintain competitive advantages, surplus countries usually are reluctant to convert their dollar receipts into their own currencies that would otherwise give rise to an appreciation against dollars.

How the Bretton Woods System Changed the World

Rather, they would invest these receipts in the interest-bearing US assets, primarily sovereign debt Krugman Therefore, some of the excess credit remains in the system of surplus countries. Ultimately, the principal flaw stemming from the dollar standard is the absence of a built-in stabiliser that governs the correction of trade imbalances on the part of deficit countries Steil While it might precisely capture the global thrift phenomenon, it somehow departs from the idea that trade imbalances are largely determined by domestic factors and cannot be forced upon a country Duncan This is indeed what was mentioned earlier that the US overleveraging is largely a result of its choice to exploit the soft borrowing constraint.

The dollar standard has, therefore, attracted sharp criticism among academics, sardonically coined as the dollar crisis. Its potential extent of damage provides strong ground for reforming the existing IMS. A banker should not lend unless he is highly confident that the loan will be repaid. The factors that affect the probability of default will differ across countries.

Ousmene Mandeng Economics Advisory

But regardless of the country in which the bank operates, lending based on relationships or names without proper due diligence is simply unsound banking. There are two elements of improvement. The first is a clearer distribution of responsibilities among regulators for prudential oversight of international financial institutions. The Basle Concordat lays out the allocation of responsibilities between parent and host supervisory authorities for banking institutions. But with the advent of the internet, and more generally globalised banking, it has become harder to pinpoint exactly where financial transactions are being carried out, and which supervisor has responsibility over them.

In this environment, supervisors need to cooperate more closely with each other to ensure effective consolidated supervision of the institutions under their charge. This will lower compliance costs for financial institutions, arising from having to satisfy different regulatory and legal regimes in different countries. Unfortunately such harmonisation is extremely difficult, even if we confine ourselves to a small subset of countries. The issues are far too intricate and complex to be resolved in a multilateral setting.

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Institutional structures, market practices and philosophical approaches differ from country to country. And each country guards its regulatory powers jealously, and wants the freedom to set and enforce its own rules. The multiple national regulators that exist in the European Union are a good example. Mutual recognition need not be all or nothing. It can be applied to specific areas, starting from cross-border offerings of financial products such as collective investment schemes and suitable initial public offerings. Institutions can save half or more of their compliance costs, if they only have to comply with one set of regulations recognised by both regulators.

This benefits both markets by deepening liquidity and broadening product offerings. As a small country, our ability to push the envelope on regulatory practices is limited. But we have conscientiously kept abreast of global regulatory initiatives, and adopted the best international standards and practices for regulating and supervising our financial institutions and capital markets, taking into account the specific circumstances of our financial industry.

For instance, the Committee on Disclosure and Accounting Standards, a private sector led body formed to review disclosure and accounting standards in Singapore, has recommended that Singapore should adopt International Accounting Standards IAS as the accounting standards for Singapore.

We are ready to conclude similar arrangements with other like-minded regulators. Before the collapse of the Bretton Woods system, financial institutions had predominantly domestic clienteles and tended to locate in their respective financial capitals, for easy access to clients. So the largest centres tended to be financial capitals of countries with the largest economic bases.

But as the structure of the financial industry evolved post-Bretton Woods, there has been a decoupling between the size of a financial centre and the size of its economic base. Institutions now need to service customers from many countries.

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It is not feasible for international players to maintain a major presence in every jurisdiction where they operate. So the financial centres that are able to enhance the competitiveness of their constituent firms are the ones that thrive. Proximity to clients has become less critical. What counts now are intangibles such as market information networks, quality of regulation and supervision, credibility, as well as a critical mass of skilled and innovative professionals. Despite not being part of the Eurozone, and having a smaller economic base than financial centres on the continent like Frankfurt and Paris, London has thrived, and by all indications will continue to grow as a financial centre.

In Asia too, the trend is towards consolidation of activities in fewer centres, resulting in keener competition between financial centres. This overall consolidation reflects the economics of the industry.

The Future of Bretton Woods

But which particular cities emerge as major centres depends also on the competitive advantage which they create for themselves, i. Our vision is for Singapore to provide a full-range of financial services for East Asia. Obviously, we cannot match London, New York or Tokyo in terms of size or depth of domestic markets.

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But that should not stop us from becoming a key global node in certain areas. Our approach has been twofold: first, to set fair and transparent rules for the industry, and provide a conducive, open and competitive operating environment. And second, to catalyse the growth of promising sectors of the industry, with incentives and promotional support.

We have sought to push in the direction of market forces, rather than against them. We assessed very early on was that there was good potential for growing the asset management industry in Singapore. A rising affluent class across Asia would have assets needing to be managed. Most of the savings in Asian countries are still in the form of bank deposits. There is considerable scope for diverting some of these funds for professional management.

A Qualitative Framework Abstract.

Bibliographic Information

The ideas of economists proposing either to construct, or change or reform international financial arrangements are by their very nature informed by underlying doctrines. Those doctrines make assertions about how the international economy functions, and incorporate methodological preconceptions on how to collect, interpret and evaluate evidence on the international economy. As well, economic doctrines usually embody specific policies and practical suggestions for change and reform. The international financial system as it is presently configured, including the international use of currencies, has evolved in a manner that no prominent economist predicted during or at the end of the Bretton Woods era Solomon ; Endres Following the collapse of the Bretton Woods system some economists viewed the ensuing international financial arrangements either as fragile or precarious because they did not constitute a genuine, planned IFO.

Williamson By the end of the period under review Robert Mundell , p. Much earlier Max Corden and , p. By contrast, another distinguished commentator, James Tobin , pp. The trend toward growing international financial integration using market-based processes in the last quarter of the twentieth century was accompanied by a distinctive parallel trend in thinking among economists about exchange rate regimes.

Our focus in this chapter will be on the policy choice of exchange rate regimes; it will not be exhaustively surveying the more technical and theoretical concerns of economists with exchange rate determination in the short run or long run. The purpose of the following discussion is to explain the main features and dimensions of the exchange regime choice — a choice informed by events, long-run historical research, more technical econometric research, and by more subterranean philosophical and doctrinal factors.

At the end of the BW era there was much scepticism among economists about free market-determined international capital movements which paralleled their scepticism over the efficacy of market-determined exchange rates.