MARKET ‘-

INTEGRATION
CHAPTER III

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Introduction
The social institution that has one of the biggest impacts on society is the
economy. You might think of economy in terms of number – number of
unemployed, gross domestic product, or whatever stock market is doing today.
While we often talk about its numerical terms, the‘- economy is composed of
people. It is the social institution that organizes all production,
consumption, and trade of goods in the society. There are many ways in
which products can be made, exchanged and used. Think about capitalism or
socialism. These economic systems – an the economic revolutions that created
them – shape the way people live their lives.
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 Economic systems vary from one society to another. But in any
given economy, production typically splits into three sectors.

• Primary Sector – extracts raw materials natural environments.

• Secondary sector – gains the raw materials
‘- and transforms them into
manufactured goods.
• Tertiary sector – It offers services by doing things rather than making things.

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INTERNATIONAL FINANCIAL INSTITUTION

World economies have been brought closer together by globalization. It is

reflected in the phrase “When the American economy sneezes, the rest of the
world catches a cold.” But it is important to remember that this is not only the
economy of the United States but also other economies of the world that have a
significant impact on the global market and finance. ‘-
The strength of a more powerful economy brings greater effect on other
countries. In the same manner, crises from weaker economies has less effect on
other countries.

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THE BRETTON WOODS SYSTEM/AGREEMENT
How it started?

The major economies in the world had suffered because of World War 1,
The Great Depression in the 1930’s and World War II. Because of the fear of
recurrence of lack of cooperation among nation-states,
‘- political instability, and
economic turmoil, reduction of barriers to trade (free trade) and free flow of
money among nations became the focus to restructure the world
economy and ensure global financial stability.
In anticipation of the inevitable end of the Second World War, 44
countries headed by the USA and Great Britain gathered in Bretton Woods, New
Hamisphire to frame new international economic policies that will regulate
trade and financial agreement. Hence, the establishment of the Bretton Woods
Agreement in July 1, 1944. 6
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 In general, the Bretton Woods system has five key elements.
• First, the expression of currency in terms of gold or gold value to establish a par value.
e.g. a 35 U.S. dollar pegged by the United States per ounce of gold is the same as 175 Nicaraguan
cordobas per ounce of gold. The exchange rate therefore would be 5 cordobas for 1 dollar.

All other currencies is linked to the US dollar and the dollar is linked to gold.

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After wars, US become the superpower since

having the 2/3 of the gold reserves after the war. 8
• Another element is that, “the official monetary authority in each
country (a central bank or its equivalent) would agree to exchange
its own currency for those of other countries at the established
exchange rates, plus or minus a one-percent margin.”

Prior to the Brettton Woods, Gold standard was the system. Most
currencies are pegged to gold, hence “Gold Standard” since it is
redeemable in gold
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But when it comes to the Bretton Woods,

individuals are no longer allowed to
exchanged paper money to gold but central
banks only. 9
• The third element, is the establishment of an overseer for these exchange rates; thus, the International Monetary
Fund (IMF) was founded.

Economic setbacks in the inter-war years from 1929 and 1930s motivated political and financial leaders to set the
institutional foundations for the establishment of three international economic organizations.

1. IMF – International Monetary Fund

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This was established to administer responsibility to coordinate and regulate international monetary transaction as
well as to promote economic prosperity and political stability. The IMF was expected to maintain an equilibrium
functioning of the gold standard that if certain country get short of its balance of payments , financial assistance is
provided. (Short term effects)

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2. World Bank (before was “IBRD” or the International bank for Reconstruction and Development)

This was primarily designed for the Marshall Plan to extend financial loans
to reconstruct the devastated economies in Europe. By 1950s loans were expanded
to the developing countries in the world to provide funds to finance various industrial
projects. (Long term effects)
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• Fourth, eliminating restrictions on the currencies of member states in the
international trade
The General Agreement on Tariffs and Trade (GATT) was established in
1947 charged in crafting and policing multilateral trade agreements. Today, it is
known as World Trade Organization (WTO).
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• The final element, is that the U.S. dollar became the global currency.

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 WHAT HAPPENED TO THE BRETTON WOODS SYSTEM?
By the 1950s and 1960s, European countries and Japan
regained their economies and that undermined the economic
competitiveness of the United States. The monopolization of US dollars led
to the over valuation relative to other currencies to the extent that some
countries doubted the supply of gold in the United States treasury.

As a response,
‘- foreign countries converted their US
dollars into gold thereby depleting US gold
reserves.

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 With the pressure mounting President Nixon of United
States announced on August 15, 1971 to abandon the gold-
exchange standard. Therefore making the dollar and any other
currencies no longer backed up to gold.

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