International Economic Institutions since World · -Orderly corrections of Balance of Payments...

Chapter 2

International

Economic

Institutions

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

Institutions

since World

War II

Chapter Objectives

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

• Present a taxonomy of international economic institutions

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

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


– 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


• 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


Fund (IMF) (cont.)

• Functions of the IMF:

-Prevents crisis in a financial system by

promoting sound macroeconomic policy, which

includes


includes

-Balanced expansion of trade

-Stable exchange rates

-Avoidance of competitive devaluations

-Orderly corrections of Balance of Payments problems


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,


• 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


(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


- 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


• 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


– 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:


– 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


2. Free trade area (FTA): Trade in goods and

services is fully liberalized between two or more

countries

-North American Free Trade Agreement

(NAFTA)


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


– MERCOSUR in South America

4. Common market: A CU plus free mobility of

factors of production

– European Union in the 1990s


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)• 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),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


• 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


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


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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