Copyright © 2011 Pearson Addison-Wesley. All rights reserved. Chapter 2 International Economic...

Copyright © 2011 Pearson Addison-Wesley. All rights reserved.

Chapter 2

International Economic Institutions since World War II

Copyright © 2011 Pearson Addison-Wesley. All rights reserved. 2-2

Chapter Objectives

• Discuss the history and functions of international institutions in world economy

• Present a taxonomy of international economic institutions

• Introduce the role of regional trade agreements in the global economy

• Analyze the arguments opposing international economic institutions


Introduction: International Institutions and Issues since World War II

• Institutions: Rules and organizations that govern and constrain behavior

– Formal institutions: Written sets of rules that explicitly state what is and is not allowed

– Informal institutions: Customs or traditions that define appropriate behavior, but without legal enforcement


TABLE 2.1 A Taxonomy of International Economic Institutions, with Examples


TABLE 2.1 (continued) A Taxonomy of International Economic Institutions, with Examples


The IMF, the World Bank, and the WTO

• The three global organizations that play a major role in international economic relations are:

– The International Monetary Fund (IMF)– The World Bank– The World Trade Organization (WTO)


The International Monetary Fund (IMF)

• Founded by 29 nations (1945) at the Bretton Woods meetings between the Allies in July 1944

• The 184 member (2006) IMF is the central monetary institution in today’s international economy

• Funding for the IMF comes from its membership fee, or quota (the price of membership)– depends on the member’s size and status– determines the member’s voting weight


The International Monetary Fund (IMF) (cont.)

• Functions of the IMF:-Prevents crisis in a financial system by promoting sound macroeconomic policy, which includes

-Balanced expansion of trade

-Stable exchange rates

-Avoidance of competitive devaluations

-Orderly corrections of Balance of Payments problems


The International Monetary Fund (IMF) (cont.)

• A Financial crisis occurs when a country runs out of foreign exchange reserves, which are a major currency or gold that can be used to pay for imports and international borrowings

• In the event of a financial crisis,

– Members borrow against IMF quotas

– IMF conditionality: Requirement for the borrowing member to carry out economic reforms in exchange for a loan


The World Bank

• Founded in 1944 as the International Bank for Reconstruction and Development (IBRD)

• IBRD and International Development Association (IDA) comprise World Bank

• Has same membership and similar structure to IMF

• Member’s voting rights are proportional to number of shares owned


The World Bank (cont.)

• Original purpose-To provide financing mechanisms to rebuild Europe after World War II

• Main function today

-Assisting development in non-industrial economies


General Agreement on Tariffs and Trade (GATT)

• Began with 23 nations in 1946 when the International Trade Organization (ITO) was established

• The General Agreement on Trade and Tariffs (GATT) followed in 1950 based on the following principles:

- National treatment: Imports must be given similar treatment on the domestic market as domestically produced goods

- Nondiscrimination: Enshrined in the concept of most favored nation (MFN); every WTO member must treat every other member as it treats its most favored trading partner


GATT (cont.)

• The GATT functioned through trade rounds: Times when countries periodically negotiate a set of incremental tariff reductions

• During the Kennedy Round in the mid-1960’s, and the Tokyo Round in the 1970’s, other issues included:

- Problems with dumping

- Subsidies to industry

- Nontariff barriers to trade


From GATT to World Trade Organization (WTO)

• The Uruguay Round established the WTO (1994)

– WTO members meet every two years to set WTO policy objectives

– Has a more effective dispute settlement mechanism– Monitors national trade practices more consistently– Membership now totals 153 (2008)


World Trade Organization (WTO)

• The Doha Round/Doha Development Agenda (2001-2006)

– Focused on trade issues of importance to developing countries

– Key issues of Doha Development Agenda:

-Farm subsidies in high income countries of Europe, US, and Japan

-Greater market access by developing countries and strong farm sector high income countries

-Trade in services

-Problems poor countries face in implementation


TABLE 2.2 The GATT Rounds


Regional Trade Agreements

• Besides economic organizations, regional trade agreements form a key part of the institutional structure of the world economy

• Regional trade agreements are bilateral (two countries) or plurilateral (several countries)


Five Types of Regional Trade Agreements

1. Partial trade agreement: Two or more countries liberalize trade in a selected group of product categories such as steel or autos

2. Free trade area (FTA): Trade in goods and services is fully liberalized between two or more countries

-North American Free Trade Agreement (NAFTA)


Five Types of Regional Trade Agreements (cont.)

3. Customs union (CU): An FTA plus a common external tariff (CET)

– European Union in the 1970s and 1980s– MERCOSUR in South America

4. Common market: A CU plus free mobility of factors of production

– European Union in the 1990s


Five Types of Regional Trade Agreements (cont.)

5. Economic Union: A common market with coordination of macroeconomic policies (including common currency, harmonization of standards and regulations)

– United States

– Canada

– European Union members participating in the Euro currency zone

Table 2.3 Five Types of Regional Trade Agreements



TABLE 2.4 Prominent Regional Trade Blocs


TABLE 2.4 (continued) Prominent Regional Trade Blocs

Regional Trade Agreements and the WTO

• Since 1948, over 400 agreements have been listed with the WTO; 75% of those since 1995

• 225 of these agreements are still active (2008)

• The WTO and GATT allow RTAs, assuming they create more new trade than they destroy

- trade creation > trade diversion


For and Against RTAs

• The central economic question:

-Are RTAs supportive of gradual, long run increases in world trade (building blocks),

or

-Do they tend to become obstacles to further relaxation of trade barriers (stumbling blocks)?


For and Against RTAs (cont.)

• Proponents of RTAs view them as building blocks toward freer, more open, world trade

• Opponents view RTAs as undermining progress toward multilateral (worldwide) agreements



The Role of International Economic Institutions

• The primary difference between international institutions and national governments is that the former have limited enforcement power

• However, international institutions help provide order and reduce uncertainty

-Order and certainty are public—intangibles that are different from most goods and services


Definition of Public Goods

• Public goods are:– Nonexcludable: The normal price mechanism does not

work as a way of regulating access to them– Nonrival (or nondiminishable): They are not

diminished or reduced by consumption

• Private markets fail to supply public goods because of free riding: People have no incentive to pay for a public good because they cannot be excluded from its consumption even if they don’t pay

Maintaining Order and Reducing Uncertainty

• Two important functions of international economic institutions to reduce free riding are:

- Maintaining order in international economic relations

- Reducing uncertainty



TABLE 2.5 Four Examples of International Public Goods


Criticism of International Institutions

• International institutions receive three types of criticism

1. Sovereignty and Transparency-International institutions can violate national

sovereignty by imposing unwanted domestic economic policies

-Transparency concerns are based on questions about the mechanism with which decisions are made within an international institution


Criticism of International Institutions (cont.)

2. Ideology-Critics argue that the advise and technical assistance provided to developing countries are often a reflection of the biases and wishes of developed country wishes.

3. Implementation and adjustment costs-When agreements are reached that combine developed and developing countries, there are often asymmetries in the ability to absorb the costs associated with them that favor developed nations.

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