International Finance

International Finance

Introduction

International finance and trade institutions play a fundamental role in the global economy. They must become more responsive to environmental and social concerns if society is to achieve the goal of sustainable development. The public expects openness and accountability from members of institutions such as the World Bank Group, the International Monetary Fund (IMF), the World Trade Organization (WTO), and regional development banks and trade organizations.

Economic expansion in the second half of the 20th century was unprecedented. With it came the recognition that nations must accept the concept of environmental sustainability. Achieving sustainability, however, requires changes in both individual and institutional behavior.

The United States has a powerful, diverse and technologically advanced economy that is by far the world's largest. U.S. firms are at the forefront in technological advances, especially in computers and medical, aerospace and military equipment and its financial services and media and entertainment sectors have true global presence. More significantly for the global economy, over the past five years, the United States has been serving as the source of demand of last resort, running huge current account deficits as the world's export-oriented economies sold record amounts in the U.S, sustaining aggregate demand in many countries where it would otherwise have been weak. But, the country's longest economic expansion, which extended from 1991 to 2001, ended in the second quarter of 2001. The economy began decelerating beginning in the third quarter of 2000, actually began contracting in the second quarter of 2001 and declined at a 1.3 percent annual rate in the third quarter. At the same time, and perhaps led by the deceleration in the U.S., the world economy also began to slow dramatically, making 2001 the first year of global synchronization of recession since the middle 1970s(Pura, 1997, 1).

The Sept. 11, 2001, terrorist attacks on the U.S. appeared at first to dramatically slow the U.S. economy. The immediate impacts were in the stock market and in the airline, travel and tourism industries as consumers and businesses paused to assess how safe travel and overseas visits are in a time of war with international terror. But, for reasons not fully understood, American consumers spent very heavily on durable goods in the aftermath of the attacks, even as the unemployment rate rose and the daily news reported falling corporate profits, write-offs and layoffs. Ironically, the economic environment following the attacks seemed so bad that many firms decided to take the opportunity provided by reduced investor expectations to clean up the mistakes accumulated during the long economic expansion of the 1990s. This cleanup of balance sheets appears to be quite intense in America now, and represents exactly the kind of cleanup analysts have been recommending for Japan since bursting of its investment bubble a decade ago. If this is so, then perhaps the terror attacks may have created an environment that will make the U.S. economy ready for recovery sooner than would otherwise have been the case.

The global economy faces a number of major risks that, especially ...