L1.2 International Economic Institutions

Chapter 2

International Economic

Institutions Since World

War II

Copyright ©2014 Pearson Education, Inc. All rights reserved. 2-2

Learning Objectives

• Classify and give examples of the main types of international economic organizations.

• Compare and give examples of the different levels of integration found in regional trade agreements.

• Analyze the roles of international economic organizations.

• Discuss common criticisms of international economic organizations


Introduction: International Institutions and Issues since World War II

• International 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


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 IMF and World Bank

International Monetary Fund (IMF)•Founded by 29 countries (1945) at the Bretton Woods conference in July 1944

•The 188 member (2012) IMF is the central monetary institution in today’s international economy


The IMF and World Bank (cont.)

• Funding for the IMF comes from its membership fee, or quota (the price of membership)

• depends on size of the economy• Importance of its currency in world trade



The most visible role for the IMF is to intercede, by invitation, whenever a nation experiences a crisis in its international payments.

For example, if a country imports more than it exports, then it may run out of foreign exchange reserves.



• Foreign exchange reserves are dollars, yen, pounds, euros, or another currency (or gold) that is accepted internationally.

• 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



• IMF has its own currency, called an SDR, or special drawing right

• SDRs are based on a country’s quota and are a part of its international reserves.



World Bank

•Has same membership and similar structure to IMF

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



• Original purpose- To provide financing mechanisms to rebuild

Europe after World War II

• Main function today- Assisting development in non-industrial

economies


• 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

The GATT, the Uruguay Round, and the WTO


• 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

The GATT, the Uruguay Round, and the WTO (cont.)


• The Uruguay Round established the WTO (1995)

• The Doha Round/Doha Development Agenda (2001-2006)– Focused on trade issues of

importance to developing countries



The General Agreement on Trade and Tariffs (GATT) followed 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); a prohibition against discrimination



TABLE 2.2 The GATT Rounds


Regional Trade Agreements

• Regional trade agreements (RTAs) between two (bilateral) or

• Several countries (plurilateral) are another important institution in the world economy,

• Called multilateral agreement because it includes, potentially, all the countries of the world.


TABLE 2.3 Five Types of Regional Trade Agreements


TABLE 2.4 Prominent Regional Trade Blocs


TABLE 2.4 (continued) Prominent Regional Trade Blocs


Five Types of Regional Trade Agreements

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

2. Free-trade area: Nations trade goods and services across international boundaries without paying a tariff and without the limitations imposed by quotas


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 an agreement to allow the free mobility of inputs, such as labor and capital. - The 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


Regional Trade Agreements and the WTO

• Since 1948, over 500 agreements have been listed with the WTO; with majority of the notifications since 1990

• 338 of these agreements are still active (2012)

• 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



Opponents question many of these assumptions:1.Their greatest criticism is that RTAs undermine progress toward multilateral (worldwide) agreements.2.Pro-trade opponents of RTAs do not believe that they encourage agreements through the WTO3.Opponents point out that RTAs are often discriminatory against poor and less-developed countries



Proponents have several arguments on their side. 1.Easier for a few countries to reach agreement than it is for all the countries in the WTO.2.The domestic effects of a reduction of trade barriers are less dramatic. 3.RTA member countries can experiment with new agreements.4.RTAs can be used as a political and economic threat to encourage agreements in the WTO.


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 goods—

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


Definition of Public Goods (cont.)

• 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.

L1.2 International Economic Institutions

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