Chapter 2 International Economic Institutions since World War

Chapter 2 International Economic Institutions since World War II Copyright © 2011 Pearson Addison-Wesley. All rights reserved.

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

TABLE 2. 1 A Taxonomy of International Economic Institutions, with Examples Copyright © 2011 Pearson Addison-Wesley. All rights reserved. 2 -3

TABLE 2. 1 (continued) A Taxonomy of International Economic Institutions, with Examples Copyright © 2011 Pearson Addison-Wesley. All rights reserved. 2 -4

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) Copyright © 2011 Pearson Addison-Wesley. All rights reserved. 2 -5

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 Copyright © 2011 Pearson Addison-Wesley. All rights reserved. 2 -6

The International Monetary Fund (IMF) • High income countries’ voting power is disproportionate to population • Functions of the IMF: - Prevents crisis in a financial system by promoting sound macroeconomic policy Copyright © 2011 Pearson Addison-Wesley. All rights reserved. 2 -7

The International Monetary Fund (IMF) • 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 Copyright © 2011 Pearson Addison-Wesley. All rights reserved. 2 -8

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 Copyright © 2011 Pearson Addison-Wesley. All rights reserved. 2 -9

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 Copyright © 2011 Pearson Addison-Wesley. All rights reserved. 2 -10

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 Copyright © 2011 Pearson Addison-Wesley. All rights reserved. 2 -11

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 Copyright © 2011 Pearson Addison-Wesley. All rights reserved. 2 -12

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 Copyright © 2011 Pearson Addison-Wesley. All rights reserved. 2 -13

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) Copyright © 2011 Pearson Addison-Wesley. All rights reserved. 2 -14

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 Copyright © 2011 Pearson Addison-Wesley. All rights reserved. 2 -15

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 Copyright © 2011 Pearson Addison-Wesley. All rights reserved. 2 -16

TABLE 2. 2 The GATT Rounds Copyright © 2011 Pearson Addison-Wesley. All rights reserved. 2 -17

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 Copyright © 2011 Pearson Addison-Wesley. All rights reserved. 2 -18

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) Copyright © 2011 Pearson Addison-Wesley. All rights reserved. 2 -19

Five Types of Regional Trade Agreements (cont. ) 3. Customs union (CU): An FTA plus a common external tariff (CET) – – European Union in the 1970 s and 1980 s MERCOSUR in South America 4. Common market: A CU plus free mobility of factors of production – European Union in the 1990 s Copyright © 2011 Pearson Addison-Wesley. All rights reserved. 2 -20

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 Copyright © 2011 Pearson Addison-Wesley. All rights reserved. 2 -21

Table 2. 3 Five Types of Regional Trade Agreements Copyright © 2011 Pearson Addison-Wesley. All rights reserved. 2 -22

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 Copyright © 2011 Pearson Addison-Wesley. All rights reserved. 2 -23

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 Copyright © 2011 Pearson Addison-Wesley. All rights reserved. 2 -24

For and Against RTAs • Opponents • Undermine progress toward multilateral (worldwide) agreements • Discriminatory against poor & less developed countries Copyright © 2011 Pearson Addison-Wesley. All rights reserved. 2 -25

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 Copyright © 2011 Pearson Addison-Wesley. All rights reserved. 2 -26

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 Copyright © 2011 Pearson Addison-Wesley. All rights reserved. 2 -27

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 Copyright © 2011 Pearson Addison-Wesley. All rights reserved. 2 -28

TABLE 2. 5 Four Examples of International Public Goods Copyright © 2011 Pearson Addison-Wesley. All rights reserved. 2 -29

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 Copyright © 2011 Pearson Addison-Wesley. All rights reserved. 2 -30

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 Copyright © 2011 Pearson Addison-Wesley. All rights reserved. 2 -31

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 Copyright © 2011 Pearson Addison-Wesley. All rights reserved. 2 -32

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. Copyright © 2011 Pearson Addison-Wesley. All rights reserved. 2 -33