Looking into the International Monetary System

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This period was a good chance for developing countries to be globalized and attract foreign investment. Combined liberalization and privatization, these countries supported free trade and opened capital market. The currencies of most of these countries were linked to one of the major of world currencies. In order to work well in the international system, the developing countries needed to establish the convertibility of their currencies through reducing budgetary and balance-of-payment deficits. The effort got response from the developed countries, which increased the international capital flow.

On European land, after the SEA (the Single Europe Act) and the Maastricht Treaty on European Unity, Europe took important steps to liberalize monetary. Firstly, the countries opened the capital market. Then, they settled the related fixed exchange rate to complete the currency convertibility. At last, the organization established the central institution and emitted the unified currency.

The newly elected Clinton administration focused on reducing of budget deficit. Due to the deficit legislation and the economy boost because of Infobahn, America got budget surplus in 2000. However, the dollar remained weak while the economy prospected. At the meanwhile, the other currencies such as yen were strong. After 1995, things changed, yen and Euro were weak although they experienced trade deficit. Thus, the countries started to reduce budget deficit to ease inflation. Dollar kept the position of official reverse currency followed by mark and yen. At the late 1990s, Euro became a choice of official reverse currency.

In Japan, yen up valued dramatically after the Plaza Agreement. This country once regulated the capital market strictly and kept the domestic market closed. In 1980s, Japan opened it market gradually and its economy got prospective progress. The bubble economy began to collapse in 1990, the prices of land and stocks fell. The overheated economy made lots of the enterprises to hold capital and estate. Banks could not be paid and exposed bad debt. The banks rejected to provide loans, which contributed to the difficulty of recovery. Furthermore, the overvalued added pressures to Japanese export-relied economy. The government released the monetary policy while in 1991 and Japan remained a low growth rate in 1990s.

Retrospection of crises in 1990s

The free flow of capital also brought the crises across the world. When the economic fluctuation occurs in one country, the influence can expand to the rest of the world through monetary system and world trade.

Between 1994 and 1995, the Mexican Peso crisis threatened financial market worldwide. After 1990s, the economy boosted in at a high speed because of the inflow of foreign capital and the policy of privation and liberalization. However, due to the excessive dependence on short-term capital inflows which came from the rapidly growing securities markets and the overvalued currency which had been remained as a problem for long time, the prospective economy encountered a serious problem. In 1994, the financial minister claimed that peso was devalued by 15.6 percent, which resulted in the panic of citizens to purchase dollars leading to the ungorier devalue of peso. The second day, the government declared the floating exchange rate without intervene of the central bank, which added to the turbulence in financial market. This crisis resulted from a series of reasons including the unpredictable events in political and the inherent problem in the economic structure. The impact soon expanded to the Latin America and the rest of the world.

The crisis broke out in Thailand by mid-1997 owned the similar reason. With the strong economic boost in 1980s, export growth of the tigers and the Southeast Asian countries shrank because the import demands decline in Japan and the competence of China. Besides, dollar became stronger while the currencies of these countries were tied to dollar. Thus, the up value in currency aggravated the trade deficits. The crony capitalism also contributed to the crisis. Banks and other financial institutions lacked risk management and lend fund to their favored institutions without adequate attention to their financial soundness. At last, the crisis erupted in Thailand where the weak government could not remit the problem effectively. Then, Indonesia failed to keep the economy in order with the uncertainty about the stability of political system.

It is worthwhile to mention that IMF played a key part in the two crises. In other word, America devoted itself to help the damaged countries through aid from its budget and WB, IMF and other countries such as Japan. After the crisis in Mexico, G-7 proposed some regulations to manage and supervise the policies in domestic to prevent future crises.

Besides, there are some similarities in the two crises. First, the developing countries and regions witnessed a rapid economic growth and benefit from the world trade and liberalized capital markets. Second, the myopic policies such as the monetary policies in these two crises account a part of the damage. Government and central banks focused on the former monetary policy without considering about other facts which resulted in currencies to be overvalued harmed the international trade. Finally, political elements also should take the responsibility in the two examples. Therefore, effective and accurate economic policy and aid measures are based on the powerful governments and stable political environment.

Valuation of the international monetary system

It is hard to deny that the international monetary system contribute to the world free trade and economic recovery in the worldwide. After the Second World War, the Bretton woods system help to stabilize the exchange rate and reduce the trade protective measures among the destructive states. With the help of America, Europe and Japan recovered gradually. In fact, the exchange rate was kept stable while the world trade developed at a high speed under the system.

With the privation and liberalization in the developing countries in the interdependence and global stages, the less developed economies experienced rapid growth with the capital inflow and export revenues. Capital flows around the world in a larger scale freely, which improve the condition of poverty.

What’s more, the closer relationships among different countries stimulate the solution of international monetary problem. The establishment of the international institutions such as IMF and WB regular and supervise the word financial order as well as provide related loans and aid for the countries in need. The regular meeting of the developed