International Economic Order and Monetary Systems

Item 3: The International Economic Order (IEO)

3.1 The IEO and the Competitive Paradigm

The International Economic Order (IEO) consists of a set of rules governing international economic relations. Its goals are to prevent international crises, encourage and facilitate free trade, and promote economic growth. After World War II, the IEO was established to facilitate economic development in devastated countries. The Bretton Woods conference of allied countries agreed to create a series of institutions (IMF, World Bank) and established the gold standard. This system was a great success for 25 years but started to falter due to the inability to maintain the gold standard and the international oil crisis. The IEO has evolved, transitioning from one international order to another with a liberal administration.

3.2 The International Monetary System Today

The International Monetary System (IMS) arises from the need to establish rules for setting the price of one currency against another. There are two main types of systems:

• Flexible: The exchange rate is determined by the free exchange of supply and demand.
• Fixed: Monetary authorities establish a fixed rate through different instruments.

In reality, there are often intermediate systems, such as:

• Dirty Float: The exchange rate is allowed to fluctuate freely within a certain limit, beyond which monetary authorities intervene.
• Adjustable: A fixed rate is set but with a small margin for adjustment.

The post-war IEO monetary system initially established an adjustable rate of $35/ounce. This system did not work, leading to a financial crisis and a shift to a dirty float system, which is currently in place. While generally effective, it has some flaws, such as the risk of monetary storms. With the evolution of the IEO, economic control institutions have become less important, and decisions are now influenced by private organizations such as the Organization for Economic Cooperation and Development (OECD) and the G8.

3.3 The International Monetary Fund (IMF) and the World Bank (WB)

IMF

Functions:

• Ensure the convertibility of currencies without restriction.
• Monitor economic policies, analyzing the balance of payments.

With these functions, the IMF monitors the economies of countries to avoid sharp swings in exchange rates. Less developed countries are more influenced by the IMF due to aid loans and the significant budgetary rigor that is imposed. The IMF is financed by quotas paid by member countries, depending on the GDP of each country.

World Bank

Its current role is to promote the economic and social progress of less developed countries. It has two main agencies:

• IBRD (International Bank for Reconstruction and Development): Lends funds to finance poorer countries.
• IFC (International Finance Corporation): Focuses its funds on private companies investing in poorer countries.

The IDA (International Development Association) also supports them, financing projects with high investment risk. The World Bank is funded by member countries, bonds, and other financial assets. Both the World Bank and the IMF have relatively low weight internationally.