GLOBAL MONEY, THE GOOD LIFE AND YOU
Understanding The Local Impact of International Financial Institutions
Welcome to the web-based handbook on international finance. This electronic handbook, or "e-book," will help you understand how major flows of money throughout the world (frequently called "international capital") affect your daily life and the lives of people and communities throughout the world. The price you pay for your food or clothes, the costs of a bus or train ride, the amount of money you need to fill the fuel tank of your truck or your automobile, the construction of homes, offices, and other buildings in your town or city, the security of your job or business, the ownership and operation of the banks or finance companies in your locality, the activity of your country's stock markets and the nature of your legal system--all of these vital aspects of your life are tied to, and influenced by, flows of capital originating in other parts of the world.
Put another way, the world of international finance affects your standard of living and influences your views about your future and the future of your family, your community, and your nation. When government officials and experts discuss how law and government policy affect your life, they are typically addressing "development," a very broad term that defies a single definition.
One way of understanding the essence of development is to think about "the good life." Philosophers from India to Africa have for centuries attempted to explain the meaning of that term. But you don’t have to resort to philosophy to understand the term’s meaning. The good life is a framework of living that you and your community would like to achieve or sustain because it fulfills you as a human being. The framework may emphasize the ability to form associations freely, it may stress community solidarity, or it may focus on individualism--or a combination of these qualities.
Another way of understanding development is to think of all of the activities your government pursues to enable you and your community to perform your daily tasks. The activities range from the construction of roads, buildings, dams and other physical structures to providing you with the currency you use to make your purchases. Without these government services, many of your plans might be very difficult to carry out.
By combining ideas of the good life with government activity, we come close to capturing what officials typically think of when they address development. Part One will introduce you to basic concepts regarding development and development policy. You will learn how the concept of development started hundreds of years ago and how the definition of development has evolved into its current use.
The materials in Part One of the e-book will also introduce you to the activities of two important international financial institutions created in the 1940s, the International Monetary Fund (IMF) and the World Bank, collectively called the Bretton Woods Institutions (BWIs). Generally, the IMF has been responsible for fashioning the rules and expectations governing the behavior of member countries in their financial and economic relations with the rest of the world, especially with respect to exchange rates (the value of your country's currency), monetary policy (i.e., policies regarding the supply of your country's currency), and fiscal policy (i.e., policies regarding government taxes and spending). The World Bank's primary role has been to make loans to countries pursuing development projects or undertaking major structural changes in their economies. In the 1980s, the BWIs played highly visible roles in the efforts to cope with an international debt crisis.
The BWI’s activities, especially during the 1970s and 1980s, had a major impact on development policy and, as you will learn in Part Two of the e-book, both have been subject to considerable criticism. They have consequently changed some of their operations in order to maintain their legitimacy in the global community. Part Two will also cover two major topics of development vis a vis the BWIs: (i) the rise of non-governmental organizations (NGOs), which coincided with growing importance of "participatory" or grassroots development and (ii) the latest "movement" to eradicate government corruption and promote regulatory transparency.
"Change" is the major theme in Part Three of the e-book. There you will learn more about the phenomenon called "globalization" and its impact on the operations of the IMF and the World Bank. Globalization generally means that advances in technology and changes in laws and regulations have drawn you and your community into a much smaller world (in many cases a computer-driven "virtual world") that does not face many of the obstacles that used to separate people a decade ago. Change in this type of world will come quickly and relentlessly. With respect to international finance, globalization means that large and powerful flows of international capital can move very quickly in and out of your country. Today, these flows, sometimes called "hot money," are created in large part by "institutional investors," entities that pool the money of many individuals seeking to buy the securities of foreign companies and governments.
As illustrated by the Mexican financial crisis of 1994-1995 and the Asian financial crisis, both explained in Part Three, the rise of the institutional investor and the current dominance of the private capital markets have created many problems and challenges for the IMF and the World Bank. For example, the IMF currently does not directly regulate the flows of hot money. Nor does it control the amount of lending by foreign commercial banks to companies in your country or to your government. When hot money and foreign loans contribute to a financial/economic crisis in one or more countries, such as in Mexico or the Asian countries, the IMF and the World Bank help coordinate "rescue packages" to prevent the crisis from worsening and threatening other countries, if not the entire international financial system.
Many have criticized the rescue-package approach. Some say the World Bank and especially the IMF are engaging in a new type of colonialism under the guise of globalization. Others believe these institutions have not gone far enough to encourage market-based reforms in member countries. Still others would like to abolish the IMF and the World Bank. Part Three will explain these criticisms and many of the proposed solutions, ranging from regulation of speculators in the financial markets to amendment of the IMF Articles of Agreement (i.e., the rules governing what the IMF can do).
Whatever happens, one thing is certain: Globalization will bring rapid, fundamental, and unpredictable change to the meaning of development. To remain viable and legitimate, the IMF and the World Bank will have to make corresponding changes and otherwise be responsive to globalization's demands. Debates regarding globalization and the other topics of this e-book are likely only to intensify in the years ahead. By reading this e-book, you will be better prepared to participate in discussions about international financial issues that will directly affect your future.