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Transcript of 2e031IEP~Session 5
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Amity Business School
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Amity Business School
MBA 2013, 3rd Semester
INTERNATIONAL ECONOMICS AND POLICY
Amanpreet Kang
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International Organizations
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IMF, World Bank and the WTO
IMF - ?
www.imf.org
WB Group
www.worldbank.org
GATT
WTOwww.wto.org
http://www.imf.org/http://www.worldbank.org/http://www.wto.org/http://www.wto.org/http://www.worldbank.org/http://www.imf.org/ -
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IMF and Development Organisations
IMF
Economic policies and programmes of countries
are influenced by policies and conditions of
assistance of these organisations
IMF schemes for countries with BOP crisis,
technical assistance, source of public
investment in developing countries
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IMF and Development Organisations
International Monetary Fund (IMF)
IMF established in 1945, was result of Bretton
Woods Conference held in 1944
Central institution of international monetary
system (international payments and exchangerates)
Helps nations to adopt good economic policies
Members can get fund at the time of crisis i.e.
BOP problems
Membership of IMF prerequisite to become
member of WB.
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IMF and Development Organisations
International Monetary Fund (IMF)
Closely related WB, WTO and Bank for
International Settlements
Objectives of IMF
Expansion and balanced growth of
international trade
International monetary co-operation by
providing institution for consultation andcollaboration
Correction of BOP
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IMF and Development Organisations
Objectives of IMF
Stability of exchange rates (avoiding
competitive currency devaluations)
Establishment of multilateral system of
payments Temporary funds to members to correct
maladjustments
To shorten period and decrease the degree of
diequilibrium in international BOP
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IMF and Development Organisations
International Monetary Fund (IMF)
Monitors economic and financial
development and policies
Lends to members with BOP issues, reform
policies Provides governments & central banks
technical assistance & training
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IMF and Development Organisations
Functions:
Forum for discussion of economic policy and
issues important for stability of international
monetary and financial system
Countries choice of exchange ratearrangements, avoiding destabilizing
international capital flows, designing
internationally recognized standards and
codes for policies and institutions Checks macroeconomic performance
spending, output, employment, inflation and
countrys BOP
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IMF and Development Organisations
Functions:
Macroeconomic policies govt. budget,
management of money and credit and
exchange rate
Financial sector- regulation and supervision ofbanks
Structural policies
Policies to allow effective pursuit of goals such
as employment, low inflation, sustainable
economic growth, etc.
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IMF and Development Organisations
Vision:
Non-inflationary economic growth
Centre of competence for stability of
international financial system
Focus on core macroeconomic and financialareas to safeguard public interest
Learning from experience and adaptation
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IMF and Development Organisations
Organisation and Management:
Board of governors all member countries are
represented
Decides on major policy issues
Executive board manages day to daydecision making 24 Executive Directors and
MD (3 times a week)
Headquarters Washington DC
Largest shareholders: US, Japan, Germany,
France and UK
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IMF and Development Organisations
Organisation and Management:
International Monetary and Finance
Committee (IFMC) meets 2 times a year to
discuss international monetary system
Development Committee formed by BOG ofIMF and WB to discuss development policy
and other matters related to developing
countries
Has weighted voting system larger acountrys quota in IMF (depending on its
economic size), more the votes
Decisions primarily by consensus than voting
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IMF and Development Organisations
Resources:
Quotas and Subscriptions member to
subscribe to IMF, amount equivalent to quota,
quota expressed in SDRs (Statutory Drawing
Rights), reflects economic size of the memberin relation to the total membership of IMF,
quotas reviewed in 5 years
Borrowings - financial resource is through
quotas and subscriptions, GeneralArrangements to Borrow and New
Arrangements to Borrow
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IMF and Development Organisations
Financing facilities and policies:
Provides loans to countries experiencing BOP
crisis, does not lend for specific projects
Process of lending provides loan under anarrangement which spells the conditions the
country must meet to get the loan,
arrangement approved by EB, loans released
in phased installments
Volume of loans fluctuates
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IMF and Development Organisations
Concessional and Non-concessional Lending:
number of loan instruments (facilities) to
address specific circumstances of the
members
Poverty Reduction and Growth Facility (PRGF)
concessional
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IMF and Development Organisations
Non-concessional (rate of charge, market related
interest rate)
Stand-By Arrangements (SBA)
Extended Fund Facility (EFF)
Supplemental Reserve Facility (SRF)
Contingent Credit Lines (CCL)
Compensatory Financing Facility (CFF)
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IMF and Development Organisations
Members: 187
Upon joining, each member is assigned a
quota - based on its relative size in the world
economy.
The IMF's membership agreed in May 2008 on
a rebalancing of its quota system to reflect the
changing global economic realities, especially
the increased weight of major emerging
markets in the global economy.
IMF d D l O i i
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IMF and Development Organisations
The quota suggests basic aspects of members
financial and organizational relationship withthe IMF
IMF d D l t O i ti
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IMF and Development Organisations
Quota also determines the following:
1) Subscriptions Amount of financial
commitment of the member to IMF. A member
must pay its subscription in full upon joining
the IMF: up to 25 percent must be paid in the
IMF's own currency, called Special Drawing
Rights (SDRs) or widely accepted currencies
(such as the dollar, the euro, the yen, or poundsterling), while the rest is paid in the member's
own currency.
IMF d D l t O i ti
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IMF and Development Organisations
Quota also determines the following:
2) SDR allocations. Allocations of SDRs, the IMF's
unit of account, is used as an international
reserve asset. A member's share of general
SDR allocations is established in proportion to
its quota.
3) Voting power - The quota also determines amember's voting power in IMF decisions. Each
IMF member has 250 basic votes plus one
additional vote for each SDR 100,000 of quota.
IMF d D l t O i ti
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IMF and Development Organisations
Quota also determines the following:
4) Access to financing - The amount of financing
a member can obtain from the IMF (its access
limit) is based on its quota. Eg. - Under Stand-By and Extended Arrangements, which are
types of loans, a member can borrow up to
200 percent of its quota annually and 600
percent cumulatively. However, access may behigher in exceptional circumstances.
IMF d D l t O i ti
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IMF and Development Organisations
IMF lending serves three main purposes.
1) First, it can smooth adjustment to various shocks,
helping a member country avoid disruptive
economic adjustment or sovereign default,
something that would be extremely costly, both
for the country itself and possibly for other
countries through economic and financial ripple
effects (known as contagion).
IMF d D l t O i ti
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IMF and Development Organisations
IMF lending serves three main purposes.
2) Second, IMF programs can help unlock other
financing, acting as a catalyst for other lenders. This
is because the program can serve as a signal that
the country has adopted sound policies, reinforcing
policy credibility and increasing investors'
confidence.
3) Third, IMF lending can help prevent crisis on
countries themselves and on other countries through
contagion.
IMF d D l t O i ti
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IMF and Development Organisations
The IMF aims to ensure that conditions linked to
IMF loan disbursements are focused and adequatelytailored to the varying strengths of members' policies
and fundamentals.
The IMF and the government agree on a program
of policies aimed at achieving specific, quantified
goals in support of the overall objectives of the
authorities' economic program. For example, thecountry may commit to fiscal or foreign exchange
reserve targets.
IMF d D l t O i ti
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IMF and Development Organisations
The IMF discusses with the country the economic
policies that may be expected to address theproblems most effectively. The IMF and the
government agree on a program of policies aimed at
achieving specific, quantified goals in support of the
overall objectives of the authorities' economic
program.
IMF and Development Organisations
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IMF and Development Organisations
Loans are typically disbursed in a number of
installments over the life of the program, with eachinstallment conditional on targets being met.
Programs typically last up to 3 years, depending on
the nature of the country's problems, but can be
followed by another program if needed. The
government outlines the details of its economic
program in a "letter of intent" to the Managing
Director of the IMF.
For countries in crisis, IMF loans usually provides
only a small portion of the resources needed to
finance their balance of payments.
IMF and Development Organisations
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IMF and Development Organisations
The IMF has developed various loan instruments, or
facilities, that are tailored to address the specificcircumstances of its diverse membership.
(a) Low-income countries may borrow on
concessional terms through the
Extended Credit Facility (ECF),
Stand by Credit Facility (SCF) and
Rapid Credit Facility (RCF)
IMF and Development Organisations
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IMF and Development Organisations
(b) Non-concessional loans the non-concessional
facilities are subject to the IMFs market-relatedinterest rate, known as the rate of charge, and
large loans carry a surcharge.
Stand-By Arrangements (SBA),
Flexible Credit Line (FCL), and
Extended Fund Facility (for longer-term needs)
(c) Emergency Assistance - to support recovery fromnatural disasters and conflicts.
IMF and Development Organisations
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IMF and Development Organisations
The amount that a country can borrow from the
Fund, known as its access limit, varies depending onthe type of loan, but is typically a multiple of the
countrys IMF quota. This limit may be exceeded in
exceptional circumstances.
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IMF and Development Organisations
For Low Income Countries: under Poverty Reduction and Growth Trust
(PRGT) access limits and norms have been approximately doubled
compared to pre-crisis levels. Financing terms have been made more
concessional, and the interest rate is reviewed every two years.
The Extended Credit Facility (ECF) succeeds the Poverty Reduction andGrowth Facility (PRGF) as the Funds main tool for providing medium-term
support to LICs with extended balance of payments problems. Financing
under the ECF currently carries a zero interest rate, with a grace period of
5 years, and a final maturity of 10 years.
The Standby Credit Facility (SCF) provides financial assistance to LICs
with short-term balance of payments needs and can be used in a wide
range of circumstances, including on a precautionary basis. Financing
under the SCF currently carries a zero interest rate, with a grace period of
4 years, and a final maturity of 8 years.
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IMF and Development Organisations
The Rapid Credit Facility (RCF) provides rapid financial assistance with
limited conditionality to LICs facing an urgent balance of payments need.
The RCF streamlines the Funds emergency assistance for LICs, and can
be used flexibly in a wide range of circumstances. Financing under the
RCF currently carries a zero interest rate, has a grace period of 5 years,
and a final maturity of 10 years.
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IMF and Development Organisations
Middle Income Countries:
Stand-By Arrangements (SBA). The bulk of Fund assistance to middle-
income countries is provided through SBAs. The SBA is designed to help
countries address short-term balance of payments problems. Program
targets are designed to address these problems and Fund disbursements
are made conditional on achieving these targets (conditionality). The
length of a SBA is typically 1224 months, and repayment is due within
3-5 years of disbursement. SBAs may be provided on a precautionary
basiswhere countries choose not to draw upon approved amounts but
retain the option to do so if conditions deteriorateboth within the normalaccess limits and in cases of exceptional access. The SBA provides for
flexibility with respect to phasing, with front-loaded access where
appropriate.
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IMF and Development Organisations
Middle Income Countries:
Flexible Credit Line (FCL). The FCL is for countries with very strong
fundamentals, policies, and track records of policy implementation and is
particularly useful for crisis prevention purposes. FCL arrangements are
approved for countries meeting pre-set qualification criteria. The length of
the FCL is one or two year (with an interim review of continued
qualification after one year) and the repayment period the same as for the
SBA. Access is determined on a case-by-case basis, is not subject to the
normal access limits, and is available in a single up-front disbursement
rather than phased. Disbursements under the FCL are not conditioned onimplementation of specific policy understandings as is the case under the
SBA. There is flexibility to either draw on the credit line at the time it is
approved or treat it as precautionary.
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IMF and Development Organisations
Middle Income Countries:
Precautionary Credit Line (PCL). The PCL is for countries with sound
fundamentals and policies, and a track record of implementing such
policies. While they may face moderate vulnerabilities that may not meet
the FCL qualification standards, they do not require the same large-scale
policy adjustments normally associated with traditional SBAs. The PCL
combines qualification (similar to the FCL) with focused ex-post conditions
that aim at addressing the identified vulnerabilities in the context of semi-
annual monitoring. It can have the length of between one and two years.
Access can be front-loaded, with up to 500 percent of quota madeavailable on approval and up to a total of 1000 percent of quota after 12
months subject to satisfactory progress in reducing vulnerabilities. While
there may be no actual balance of payments need should at the time of
approval, the PCL can be drawn upon should such a need arise
unexpectedly.
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IMF and Development Organisations
Middle Income Countries:
Extended Fund Facility (EFF). This facility was established in 1974 to help
countries address longer-term balance of payments problems requiring
fundamental economic reforms. Arrangements under the EFF are thus
longer than SBAsusually 3 years. Repayment is due within 410
years from the date of disbursement.
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IMF and Development Organisations
Emergency assistance.
The IMF provides emergency assistance to countries that have
experienced a natural disaster or are emerging from conflict. Emergency
loans are subject to the basic rate of charge, although interest subsidiesare available for some countries, subject to availability. Loans must be
repaid within 35 years
IMF and Development Organisations
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IMF and Development Organisations
Conditionality explicit commitment. To ensure:
Members achieve viable BoP over time
Members repay the loan
General commitments, quantified plans for financialpolicies
Economic variables that should be effected include
domestic credit, public sector deficit, internationalreserves, external debt
Exchange rate, interest rate, wage rate,
commodity prices
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IMF and Development Organisations
Criticisms:
Conditionalities endanger sovereignty Organs of capitalist imperialism
Dominated by developed countries and do not
pay adequate attention to the demands of thedeveloping
At the time these institutions were formed, most
of the countries were colonies. Hence their
interests not represented at Bretton Woods
Concern was problems of main participants i.e.
the developed countries
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IMF and Development Organisations
Criticisms:
Dominance of the developed countries becauseof the voting system, which gives clear control to
developed countries.
During the post war period focus on financing
reconstruction of war-devastated Europe and
Japan
BoP crisis not just deficit, but surplus also
should be corrected. US is reluctant to increase its contribution and
also let others increase their share as it would
lead to reduced voting power of US
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IMF and Development Organisations
BoP deficit of the developing countries, limited
access to credit due to poor creditworthiness,because of poor credit ratings they had to pay
high rate of interest (i.e. about 4 times)
Unconditional borrowing rights based on quota
discriminate against the developing countries
SDR allocation is also on the basis of economic
size and quota
Debt and debt servicing by developing countries IMF failed in its mission to provide funds to
countries facing economic downturn.
IMF and Development Organisations
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IMF and Development Organisations
Premature capital market liberalization, leading
to instability No control over rich countries
WB has not been able to boost investment in
developing countries
Credit by WB is commercial, leading to debt
servicing issues
Size of funds of the bank depend on contribution
by the rich nations
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IMF and Development Organisations
Suggestions:
Decreasing the dominance of developed
countries
Reviewing SDR policy and allocation of SDRs Development is about inclusive growth,
improving the lives of the poor and enabling
everyone.
Few countries should not dictate their terms
World Bank
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World Bank
The World Bank is a vital source of:
financial and technical assistance to developingcountries around the world.
WB is made up of two unique developmentinstitutions owned by 187 member countries:
the International Bank for Reconstruction and
Development (IBRD) - aims to reduce poverty in
middle-income and creditworthy poorercountries
the International Development Association (IDA)
- focuses on the world's poorest countries.
World Bank
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World Bank
Established in 1944, Headquarters in
Washington, D.C.
WB provides
low-interest loans, interest-free credits
grants to developing countries
World Bank
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World Bank
For a wide array of purposes including
investments in education, health, public
administration, infrastructure, financial and
private sector development, agriculture andenvironmental and natural resource
management.
Do not operate for profit
World Bank
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World Bank
Fund Generation
IBRD sells AAA-rated bonds in the world's
financial markets. Earns a small margin on this
lending. The greater proportion of its income
comes from lending out its own capital. This
capital consists of reserves built up over the
years and money from member country
shareholders. IBRDs income also pays forWorld Bank operating expenses and has
contributed to IDA and debt relief.
World Bank
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World Bank
Fund Generation
IDA - world's largest source of interest-free loans
and grant assistance to the poorest countries.
Funds replenished every three years by 40
donor countries. Additional funds are
regenerated through repayments of loan
principal. IDA accounts for more than 40% World
Bank lending.
World Bank
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New focus apart from reconstruction:
Poverty reduction and the sustainable growth in poor
countries, especially in Africa;
Development and reconstruction challenges in post-
conflict countries and fragile states; development as well as finance for middle-income
countries;
regional and global issues that cross national borders--
climate change, infectious diseases, and trade; development in the Arab world;
pulling together the best global knowledge to support
development.
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GATT
GATT
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International Trade Organisation (ITO)
Formed in 1948 8 rounds
Last one referred to as Uruguay Round
No conclusion, Arthur Dunkel, Dunkel draft
1995 Formation of the WTO
Negotiations on tariff reduction
Represents trade in goods
Tariffs reduced in successive rounds from 40%to 3 to 4% in certain cases
GATT
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Does not mention about trade in services,
intellectual property and internationalsettlements
Dispute Settlement was also a concern
Plurilateral Agreements
Multilateral Agreements
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WTO
World Trade Organisation
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The World Trade Organization (WTO) is:
international organization dealing with the global rules of trade
between nations.
Its main function is to ensure that trade flowsas smoothly, predictably and freely aspossible.
Decisions in the WTO are usually taken byconsensus among all member countries andthey are implemented by membersparliaments.
g
World Trade Organisation
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Trade friction/ disputes are channeled into the
WTOs dispute settlement process where thefocus is on interpreting agreements andcommitments, and to ensure that countriestrade policies conform with them.
The multilateral trading system refers toWTOs agreements, negotiated and signed bya large majority of the worlds trading nations,and implemented by their parliaments.
These agreements are the legal ground-rulesfor international commerce.
g
World Trade Organisation
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The agreements essentially are contracts,
guaranteeing member countries importanttrade rights.
They also bind governments to keep theirtrade policies within agreed limits toeverybodys benefit.
The agreements were negotiated and signedby governments. But their purpose is to help
producers of goods and services, exporters,and importers conduct their business.
The goal is to improve the welfare of the
people of the member countries
g
World Trade Organisation
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WTO is the successor to GATT, which was
established after the Second World War.
The World Trade Organization came into beingin 1995.
MTS was set up under GATT around1947/1948
g
World Trade Organisation
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The system was developed through a series of
trade negotiations, or rounds, held underGATT. The first rounds dealt mainly with tariffreductions but later negotiations included otherareas such as anti-dumping and non-tariffmeasures. The last round the 1986-94
Uruguay Roundled to the WTOs creation.The latest issue after the Doha round involvesimplementation of WTO rules by thedeveloping countries.
WTO Agreements
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Objective To make trade as fair and as freeas possible.
How By negotiating rules and abiding bythem.
The WTOs rules the agreements are theresult of negotiations between the members.The current set were the outcome of the 1986-94 Uruguay Round negotiations which
included a major revision of the originalGeneral Agreement on Tariffs and Trade(GATT).
WTO Agreements
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Through these agreements:
WTO members operate a non-discriminatorytrading system that spells out their rightsand their obligations.
Each country receives guarantees that itsexports will be treated fairly and consistently
in other countries markets. Each promises to do the same for imports
into its own market.
The system also gives developing countries
some flexibility in implementing theircommitments.
WTO Agreements
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Goods:
From 1947 to 1994, GATT was the forum fornegotiating lower customs duty rates and othertrade barriers; the text of the General
Agreement spelt out important rules,particularly non-discrimination.
It deals with specific sectors and with specificissues such as state trading, productstandards, subsidies and actions taken against
dumping.
WTO Agreements
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Services:
The principles appear in the new GeneralAgreement on Trade in Services (GATS).WTO members have also made individualcommitments under GATS stating which oftheir services sectors they are willing to opento foreign competition, and how open thosemarkets are.
WTO Agreements
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Intellectual Property:
The rules state how copyrights, patents,trademarks, geographical names used toidentify products, industrial designs, integratedcircuit layout-designs and undisclosedinformation such as trade secretsintellectual property should be protectedwhen trade is involved.
WTO Agreements
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Dispute Settlement:
Countries bring disputes to the WTO if theythink their rights under the agreements arebeing infringed.
Judgements by specially-appointedindependent experts are based oninterpretations of the agreements andindividual countries commitments.
WTO Agreements
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Trade Policy Review:
The Trade Policy Review Mechanismspurpose is to improve transparency, to createa greater understanding of the policies thatcountries are adopting, and to assess theirimpact.
WTO - Organisation
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Functions:
Administering trade agreements
Acting as a forum for trade negotiations
Settling trade disputes
Reviewing national trade policies Assisting developing countries in trade policy
issues, through technical assistance andtraining programmes
Cooperating with other internationalorganizations
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Structure:
Number of members Number of Agreements
Covers 97% of world trade
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Structure:
Ministerial Council
General Council
Trade Policy Review Body
Dispute Settlement Body Goods Council
Services Council
IP Council
Specialized committees, working groups,working parties
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Secretariat:
Geneva Director General
The Secretariats main duties are:
to supply technical support for the variouscouncils and committees and the ministerial
conferences, to provide technical assistance for developing
countries,
to analyze world trade, and
to explain WTO affairs to the public and media. The Secretariat also provides some forms of
legal assistance in the dispute settlementprocess and advises governments wishing tobecome members of the WTO.
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Write notes on:
GATT
Discussion Rounds prior to WTO
Principles of trading system of WTO Trade without discrimination
Freer trade
Predictable trade
Fair competition
WTO Questions???
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1. Discuss the role of international institutions likeIMF, World Bank and WTO in promoting globaleconomic integration.
2. IMF and World Bank serve the interests ofindustrialized nations rather than those ofdeveloping countries. Comment in the light ofviews presented in the case above.
3. Comment on unequal participation of countriesin the world economic order. Have theseinternational institutions promoted unequaldevelopment of economies?
Case Questions
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Thanks