Global Financial Systems and Trade Institutions Explained

Modern Currency Trading

Currency trading began in 1980, with transactions now averaging over $3 trillion a day. New financial instruments have emerged, including:

• Derivatives: Options against the future
• Sovereign wealth funds
• Offshore financial centers

The 1990s Asian Financial Crisis

In 1997, speculation drove up the Thai baht. Attempts to protect its value caused investors to flee, leading to a 20% drop in value. The crisis spread to Malaysia, the Philippines, Indonesia, Singapore, and South Korea.

As countries were unable to quickly adjust to rapid capital withdrawal:

• Exchange rates plummeted 50%
• Stocks fell 80%
• Real GDP dropped 4–8%

The International Monetary Fund (IMF) responded with large, controversial bailout packages featuring lengthy conditions and monitoring devices. Resulting budget cuts eliminated some social services and increased poverty, creating moral hazard problems, though all states eventually resumed economic growth.

International Monetary Fund (IMF)

• Designed to stabilize exchange rates.
• 1944–1972: The US guaranteed stability by fixing the value of the dollar against gold at $35 per ounce.
• 1976: The IMF formalized the system of floating exchange rates.
• The IMF provides short-term loans to member states.

World Bank

Initially designed to facilitate reconstruction after World War II, the focus shifted in the 1950s toward development. It loans money to states for projects in energy, transportation, and agribusiness through:

1. International Finance Corporation (IFC)
2. International Development Association (IDA)
3. Multilateral Investment Guarantee Agency (MIGA)

General Agreement on Tariffs and Trade (GATT)

• Supports trade liberalization.
• Promotes nondiscrimination in trade (Most-favored-nation principle).
• Encourages developed countries to provide preferential access to products from the South to stimulate economic development.
• Supports “national treatment” of foreign firms.

World Trade Organization (WTO)

• 1995: GATT becomes the WTO.
• Expands to cover intellectual property and services.
• Represents states that conduct over 90% of the world’s trade.
• Utilizes the Trade Policy Review Mechanism (TPRM) and a Dispute Settlement Body.
• Doha Round: General unwillingness to reduce farm subsidies, such as the $20 billion in direct US farm subsidies.
• USA v Brazil: Cotton subsidies dispute