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

Introduction: International Institutions and Issues since World War II

• International institutions play important role– Increase stability– Reduce uncertainty

• Institutions: Rules and organizations that govern and constrain behavior– Formal institutions– Informal institutions


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

• 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



• High income countries’ voting power is disproportionate to population

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



• Financial crisis: a country runs out of foreign exchange reserves, 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

• IMF resources are inadequate for financial crisis in large economy


The World Bank

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

• 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

• Original purpose- To provide financing mechanisms to rebuild Europe

after World War II

- Capital reserves were insufficient

- US found it politically desirable to control rebuilding

• Main function today

-Assisting development in non-industrial economies


General Agreement on Tariffs and Trade (GATT)

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

• ITO was not supported by US, so it died in 1950

• Before ITO failed, 23 countries opened negotiations with 45,000 tariff reductions, affecting $10 billion in goods/services.

• General Agreement on Tariffs and Trade followed in 1950


General Agreement on Tariffs and Trade (GATT)

• GATT/WTO principles:

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

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


GATT

• Trade rounds: Times when countries periodically negotiate a set of incremental tariff reductions

• Kennedy Round (mid-1960’s), and the Tokyo Round (1970’s) addressed trade rules and:

- Problems with dumping

- Subsidies to industry

- Nontariff barriers to trade

• As tariffs fell, nontariff issues grew


From GATT to World Trade Organization (WTO)

• GATT ignored contentious sectors like ag, textiles, and apparel

• The Uruguay Round of GATT established the WTO (1994)

– Signed by 125 countries– 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

– Focused 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


Case Study - GATT Rounds

• First 5 rounds were based on product by product negotiations

• Kennedy round: simplified negotiations with percentage reduction in all tariffs for range of goods

• Tokyo Round was first to establish rules for subsidies– Laborious process– Most important rule: prohibit subsidies for exports of

industrial goods


TABLE 2.2 The GATT Rounds


Regional Trade Agreements

• Key part of the institutional structure of the world economy

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

• WTO is multilateral

• Often violate basic principles of GATT and WTO


Five Types of Regional Trade Agreements

1. Partial trade agreement:• Two or more countries• For specific good/product

2. Free trade area (FTA):

• Fully liberalized trade in goods/service

• Between countries in certain area

- 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

• Coordination of macroeconomic policies (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


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: Is RTA a building block or a stumbling block?• Proponents

• RTAs are building blocks for free, open trade• Easier for a few countries to reach agreement• Only covers a few goods, mitigating negative effects• RTAs let countries experiment with different

agreements


For and Against RTAs

• Opponents• Undermine progress toward multilateral

(worldwide) agreements• Discriminatory against poor & less developed

countries



The Role of International Economic Institutions

• International institutions have limited enforcement power – subtle powers to encourage cooperation

• International institutions help provide order and reduce uncertainty

- Order and certainty are public goods


Definition of Public Goods

• Nonexcludable: 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

– No incentive to pay for a public good – Can’t be excluded from consumption

Maintaining Order and Reducing Uncertainty

• Maintaining order and reducing uncertainty help prevent free-riding– Prevent free-riding during recession

• Acting as lender of last resort also important for international institutions



TABLE 2.5 Four Examples of International Public Goods

Case Study – Bretton Woods

• Four problems to guard against:– Worldwide Depression– Collapse of international trade– Collapse of international monetary system– Collapse of international lending• Institutions central to achieving goals• Stabilize exchange rates• Assist nations in paying international debts• Agreements to reduce trade barriers• Provide relief & assistance for war damaged countries


Case Study – Bretton Woods

• Founding principles of Bretton Woods– Trade is open in all countries– No discrimination against other countries– Do not limit buying and selling of currency

when it is meant to pay for imports– Fixed exchange rates with occasional

adjustments



Criticism of International Institutions

1. Sovereignty and Transparency- National sovereignty violated by imposing

unwanted domestic economic policies-Transparency concerns about the mechanism

with which decisions are made within an international institution


Criticism of International Institutions (cont.)

2. Ideology- Advice and technical assistance provided to developing

countries is reflection of the biases and wishes of developed countries.

3. Implementation and adjustment costs- Costs of agreements more easily absorbed by large,

developed countries

- Costs are difficult for developing countries.

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