International Economic Systems and Global Integration

Posted on Jun 13, 2025 in Economy

International Monetary Systems and Institutions

The Keynes Plan: Proposal for an International Currency Union

The Keynes Plan proposed a new international monetary system with the following key measures:

  • A non-metallic international currency: the “bancor”.
  • A pre-established method for determining exchange rates between national currencies.
  • An International Clearing Union for international payments compensation.
  • An internal mechanism (1% tax) to stabilize the system by applying pressure on both surplus and deficit balance of payments countries.
  • Controls on capital movements.

Benefits of the Keynes Plan:

  • Prevention of the emergence of a “key currency”.
  • Meeting real economy liquidity requirements.
  • Reduction of international imbalances.
  • Sharing the burden of adjustment between debtor and creditor countries.
  • Reduction of financial speculation.

Disadvantages of the Keynes Plan:

  • Likely inflationary pressures.
  • Reduction of national policies’ relevance.

The White Plan

The White Plan proposed a system based on:

  • A fixed exchange rates system.
  • Creation of a stabilization fund:
    • Contribution of members in gold and currencies.
    • Financial assistance for countries suffering a balance of payments crisis.
    • Requirement to adopt adjustment policies in the deficit country.
  • Creation of an international bank for reconstruction and development.

The International Monetary Fund (IMF)

The IMF’s primary functions include:

  • To promote international monetary cooperation.
  • Surveillance of financial and monetary conditions in its member countries and in the world economy (especially on exchange rate policies; recommendations are not binding).
  • Financial assistance to help countries overcome major balance-of-payments problems (temporary financing; loans will be repaid).
  • Technical assistance and advisory services to member countries.

International Trade Agreements and Organizations

Different forms of international economic integration include:

  • Free Trade Area (FTA): Example: USMCA (United States-Mexico-Canada Agreement).
  • Customs Union: Example: Mercosur.
  • Single Market: Example: European Union (EU).

The World Trade Organization (WTO)

The WTO has significantly shaped global trade by:

  • Engineering a shift from trade liberalization based on tariff concessions to discussions of domestic policies, institutional practices, and regulation.
  • Constructing a new agenda expanding the scope and changing the character of negotiations from a focus on bargaining over products to negotiations over policies that shape the conditions of competition.
  • Initiating a movement towards policy harmonization (e.g., in subsidies, services).
  • Setting procedures for settling disputes.

Foreign Direct Investment (FDI) and Transnational Corporations (TNCs)

Foreign Direct Investment (FDI)

FDI is an investment outside the home country of the investing company in which control over the resources transferred remains with the investor.

It consists of a package of assets and intermediate goods such as capital, technology, management skills, access to markets, and entrepreneurship. It entails control of business decisions.

Forms of FDI:

  1. Greenfield Investment:
    • Creation of a new company or establishment of facilities abroad.
    • A form of market entry commonly used when a company wants to achieve the highest degree of control over foreign activities.
  2. Mergers and Acquisitions (M&A):
    • Transferring the ownership of existing assets to an owner abroad.
    • In a merger, two companies are combined to form one.
    • In an acquisition, one company is taken over by another.

Types of Integration in FDI:

  1. Vertical Integration: Different stages of the production process are incorporated into one firm (e.g., Apple).
  2. Horizontal Integration: A company makes the same product in different countries or seeks to expand their presence within the same industry by merging with or acquiring competitors or complementary businesses (e.g., Disney – which has acquired Pixar, Marvel, 21st Century Fox).
  3. Conglomerate Integration: A company produces a number of different product lines in a variety of countries (e.g., Nestlé).

Transnational Corporations (TNCs)

A TNC is a firm that owns and controls production (value-added) facilities in two or more countries. It refers to multinational corporations or enterprises.

European Integration and Monetary Union

Key stages and areas of European integration include:

  • EU Customs Union: Includes the EU member states, small states (like Andorra, San Marino), and Turkey.
  • European Economic Area (EEA): EU member states plus Norway, Iceland, and Liechtenstein.
  • Schengen Area: Includes most EU member states plus Switzerland and other non-EU countries, allowing free movement of people.

Common Currency: The Eurozone

Benefits of a Common Currency:

  1. Elimination of exchange rate risk.
  2. Removal of transaction costs.
  3. More stability and price transparency.
  4. Trade is boosted.
  5. More macroeconomic stability.
  6. A stronger currency against others (e.g., the US Dollar).
  7. No currency speculation.

Risks of a Common Currency:

  1. No more independence for central banks to fix interest rates and to define monetary policy.
  2. Economic adjustments can only be achieved through:
    • Public expenditure (limited in the EU).
    • Labor mobility (difficult) or wage flexibility.
    • Increased competitiveness.
  3. Economic sanctions if convergence criteria are not kept.

Convergence Criteria (Maastricht Criteria) for Euro Adoption:

Countries wishing to adopt the euro must meet specific criteria, including:

  • Inflation Rate: Not more than 1.5 percentage points higher than the average of the three best-performing EU member states.
  • Government Deficit: Must not exceed 3% of GDP.
  • Government Debt: Must not exceed 60% of GDP.
  • Exchange Rate Stability: Participation in the Exchange Rate Mechanism (ERM II) without severe tensions for at least two years.
  • Long-term Interest Rates: Not more than 2 percentage points higher than the average of the three best-performing EU member states.