Summary
Comparative advantage is an economic concept that some countries, states or regions are better set off in producing specific goods than others. Comparative advantage is important in world politics because it determines the countries or regions that will benefit from specializing in he production of certain goods or products and selling to other countries. Comparative advantage is based on various factors such as capability, climatic conditions, and natural resources. Therefore, countries with a comparative advantage must have the necessary resources to produce the goods compared to other countries.
Gold Standard
The gold standard is a monetary system which dictates that a country’s currency must be equal to the gold the country owns. It is important in the political world because it ensures that governments do not produce excessive money, leading to inflation in a country. Additionally, the gold standards ensure that there are fixed pattern exchange rates, which helps create certainty in the money systems. Besides, the gold standard helps to facilitate international trade by tracking the international expansion of countries. However, one of the main drawbacks is that it leads to insufficient supply because the gold mined may not be equivalent to the global economic growth.
Economies of Scale
Economies of scale is the cost-benefit formed when a company, country or region increases the production capacity of the products. This benefit is realized due to the efficiencies as a result of increased production and the inverse relationship between the per-unit fixed cost and produced quantity. Globalization has led to the division of labour where countries can now export less profitable labour and, on the other hand, import beneficial labour. This has led to the shift of many manufacturing and production processes from western countries, where labour is more expensive, to the eastern countries, where labour is cheap.
Commodity Cartels
Commodity cartels are a group of good producers who agree to work together and limit the supply of goods to manipulate the prices. Commodity cartels have affected the prices of certain goods, especially those with a monopoly in producing the stated goods. They merge and cut down the supply of important products in the supply chain, creating an artificial shortage and sometimes they may use it for political gains or influence various policies. For example, the Organization of the Petroleum Exporting Countries, which controls 44% of the global petroleum products, can hold their oil to influence changes in prices.
The IMF
The International Monetary Fund (IMF) is a global organization that promotes global cooperation by supporting various economic policies, promoting financial stability, job creation and increased productivity in countries. The organization affects the political world by using the funds it has to influence policies in different countries. The IMF gives its member states various regulations and demands that they have to meet to receive financial and economic benefits. These demands may be directly linked to political factors, which shows that the organization is used to further the political interests of some countries.
The Architecture of the Bretton Woods System
Its Main Institutions
The Bretton Woods System is a monetary money system created in 1944 by forty-four countries to establish common monetary systems that would tackle the challenge of competitive devaluations, enhance exchange rate stability across the forty-four states and promote their economic growth. It comprises of five institutions, including; the International Monetary Fund (IMF), International Finance Corporation (IFC), Multilateral Investment Guarantee Agency (MIGA), The World Bank, and The World Trade Organization (WTO).
Roles of the Institutions
The IMF has the role of providing financial assistance to member countries. Additionally, the institution is also involved in other duties such as tackling the issue of hunger, leveraging the highly indebted countries, and providing economic growth assistance to countries based on their resources and comparative advantage. Besides, the IMF encourages trade by discouraging policies that restrict trade between member countries. They act as negotiators in times of economic and trade wars.
IFC helps businesses in developing countries to grow by providing advisory and investment help. They have flexible and specific business solutions that they can offer organizations in developing countries on how to expand. They also finance businesses through private equity funds, leading companies, facilitating bank loans, and using housing finance institutions. They mainly focus on climate investment, infrastructure, environmental and social sustainability, corporate advice, and financing.
MIGA is an institution that improves people’s lives, supports economic growth, and reduces poverty through direct foreign investment. The institution provides political risk insurance for investors who want to invest in foreign countries against risks such as civil disturbance, terrorism, expropriation, and breach of contract. It helps to restore investor confidence, allowing investors to venture into third-world countries. The institution also intervenes whenever there is a conflict between foreign investors and governments of specific countries.
The World Bank is an institution that offers financial and technical assistance to developing countries. It helps in promoting economic growth with its main goal of eradicating poverty. The World Bank helps war-infested countries rebuild their country by providing them with loans. They also give loans to developing countries to increase their economic growth. The World Bank provides financial, technical and economic advice to countries that are in need of such services to help them raise the living standards of their citizens. Finally, it has revolutionized economic reforms in developing countries, encouraging industries to come to under-developed countries.
WTO is an organization that helps African countries to achieve their economic growth by enlarging the capacity of their multi-treading systems. The organization facilitates trade to trade by lowering trade barriers among member states and assuring them of stability. Therefore, producers of raw materials are certain that they can receive finished products, while the manufacturers are certain that they will get raw materials from member states. This leads to more peaceful, prosperous, and accountable trade relations between member states. WTO provides dispute and settlement services when there are trade quarrels between member countries. Sometimes disputes may arise when a country thinks its rights are being infringed. Besides, WTO has helped build trade capacity for developing countries. It has ensured that these countries have special provisions, such as longer periods to enforce commitments, helping them build their trading capacity and having specific measures to increase their trading opportunities.
How the Bretton Woods System Institutions Have Changed Over Time
The role of the IMF has changed over the past few years, and now the institution is called upon to provide assistance to diversity problems, private capital inflows and help struggling countries establish institutions. However, IMF has still focused on its initial goal of an open market and prudent fiscal policies to ensure economic growth and stability. However, the changes have been aimed at broadening the organization’s scope but contributing to evolving factors that lead to economic growth and stability. It aims at helping countries achieve good public expenditure on essential elements such as healthcare and the military.
The IFC evolved by adjusting its models to meet the current changing needs. The institution was started to provide loans to countries; however, it has evolved into advising, investing, and mobilizing capital to help develop the private sector. By 2007, the institution’s aim had evolved to creating opportunities that help people to escape poverty, and it has continually evolved. In 2011 it redefined its goals to Influence, Innovation, Demonstration, and Impact. IFC seems to have moved away from its primary goal of providing loans and further opted to use other modern solutions such as innovation, influence, and demonstration to pull people out of poverty.
MIGA is one institution that has not deviated away from the initial goals. It is still focused on its goals of providing political risk insurance and credit services to its consumers. However, MIGA is currently providing technical advice to the businesses it is interacting with. MIGA still protects against breach of contract, currency inconvertibility, exploration, war, and civil disturbance and does non-honoring of financial obligations.
The role of the World Bank has changed from providing loans to countries that were affected by World War II to reconstruction and development, mainly of irrigation systems, electrical grids, and roads. It has increased its scope to touch on economic growth, fighting poverty, and ensuring sustainable lives. This shows that the World Bank has deviated away from its original goals of providing loans to war-infested countries because of changes in politics and reduction and focus on modern-day problems, making it more relevant.
Finally, the WTO has also evolved but not significantly like the other institutions. It seems to have stuck to its initial goal of facilitating trade within the member states. The institution has ensured economic growth by reducing trade tariffs and has successfully quadrupled the number of goods traded across the world. This can be attributed to its field, whereby there are not many global trading systems changes.