International Economics –An introduction

•Since the early 1970s and more so after the early 1990s the world has witnessed a
steady sequence of events that has partially changed the global economic scenario.
•Starting from the early 1970s the fixed exchange rate system has given way to he
managed floating exchange rate system.
•The oil shocks of the 70s gave birth to the debt crisis of the developing countries in
the early 80s.
•Starting from early 80s the world economy is going through a process of
liberalisation, privatisation and globalisation which became more pronounced in the
1990s.
•In the wake of globalisation the economics became more open allowing huge
amount of capital inflows but at the same time the regulatory and supervisory
mechanism of these countries could not keep pace with the changing financial and
economic environment thus giving rise to series of financial crises from mid90s to
late 90s.
•These financial crises have forced the nations to adopt to a new and evolving
financial architecture.
•Newly industrialised countries have emerged as an important economic force
capturing a significant share of world export market from advanced nations.
• The booming capital markets around the world have
given rise to new financial instruments and practices,
that have deteriorated government’s supervision of
internal monetary affairs.
• The world political and economic climate has
significantly changed with the breakup of former
USSR, unification of Germany, formation of European
union and eastern European countries switching to
market-oriented economic systems.
• On the trade front the successful completion of
Uruguay round of negotiation and formation of World
Trade Organisation has renewed the prospects of free
international trade.
 International Financial Architecture
• IFA is a system which aims at promoting economic growth while
ensuring economic stability. The main focus of international financial
architecture is to ensure global monetary and financial stability.
• Genesis of the IFA can be traced back to gold standard days which
prevailed from 1875 to 1914.
• After first world war the war ravaged countries engaged in competitive
devaluation as a result the gold standard was finally abandoned in
1931.
• After the second world war a series of efforts were made to restore
order to the international monetary system which resulted into Bretton
woods agreement, the main featurers of which were :
– All national currencies were to be tied to the US dollar which in turn was pegged
to gold ( $35 an ounce)
– Capital controls introduced during war time to remain
– International institutions like world bank and IMF were to be founded.
Origin of developing countries debt crisis