CHAPTER 2 LECTURE INTERNATIONAL ECONOMIC
INSTITUTIONS SINCE WORLD WAR II
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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
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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
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A TAXONOMY OF INTERNATIONAL ECONOMIC
INSTITUTIONS, WITH EXAMPLES
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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)
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THE 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
• 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
http://www.imf.org/external/index.htm
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THE IMF
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.
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THE IMF
• 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.
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THE 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
http://www.worldbank.org/
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KEY DIFFERENCE BETWEEN THE IMF
AND THE WORLD BANK
• IMF:
–
–
–
–
Exchange rate stability
Monetary policy
Mission creep development
Loans are large for macro-targets ($100s millions-billions)
• World Bank
–
–
–
–
Development
Smaller loans ($10s millions-$100 millions)
Specific projects (dam, schools, oil pipeline)
Multiple projects in one country (big countries may have
several project loans, e.g., India >10)
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THE WORLD BANK
• Critics (e.g. Easterly 2005) allege that the World Bank has
fallen far short of its goals of improving living standards and
reducing poverty.
• Many argue that failure is due to the imposition of misguided
policy conditions through the development projects.
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SOME REASONS THE TWO INSTITUTIONS
OFTEN GET CONFUSED
• Like the IMF, World Bank uses conditionality with
many (but not all) loans
• Often, the World Bank requires an IMF program be
in good standing!
– So the conditionality may run through the IMF
• Both institutions founded in 1944 @ BW, NH
• Both have a similar governance structure
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THE GATT, THE URUGUAY ROUND,
AND THE WTO
• 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 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
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THE GATT, THE URUGUAY ROUND,
AND THE WTO
• The Uruguay Round established the WTO (1995)
• The Doha Round/Doha Development Agenda (20012006)
– 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
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THE GATT ROUNDS
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THE THREE MAIN INSTITUTIONS
• Reputation Today: Criticized by
– Opponents of globalization
– Opponents of corporations
– Some in Developing Countries for dominance
• by US
• by rich countries
• by corporations
– Some in US for undermining US power
– Scholars for institutional flaws
• IMF: Has sometimes imposed misguided policies
• World Bank: Wastes resources on corrupt elites
• WTO: Dominated by rich countries, corporations
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THE THREE MAIN INSTITUTIONS
Reputation today, among some:
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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.
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FIVE TYPES OF REGIONAL TRADE AGREEMENTS
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PROMINENT REGIONAL TRADE BLOCS
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PROMINENT REGIONAL TRADE BLOCS
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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
3. Customs union (CU): An FTA plus a common
external tariff (CET)
–
–
European Union in the 1970s and 1980s
MERCOSUR in South America
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FIVE TYPES OF REGIONAL TRADE AGREEMENTS
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
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
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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
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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)?
• Proponents of RTAs view them as building
blocks toward freer, more open, world trade
• Opponents view RTAs as undermining progress
toward multilateral (worldwide) agreements
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FOR AND AGAINST RTAS
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 WTO
3. Opponents point out that RTAs are often
discriminatory against poor and less-developed
countries
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FOR AND AGAINST RTAS
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.
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OTHER INSTITUTIONS
• G-7, G-8, G-20: These are Groups of countries
– G-7 = US, Canada, Japan, Britain, France,
Germany, Italy
• Finance ministers meet regularly
• Heads of state meet annually
– G-8 = G-7 + Russia (1998-2014)
• Heads of state met annually, for a few years
– G-20 = G-8 + Australia & EU, + 10 major EMEs
(Emerging Market Economies)
= 19 Countries
+ EU
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OTHER INSTITUTIONS
• UN = United Nations
– UNCTAD (United Nations Conference on Trade
and Development)
– ILO (International Labor Organization)
– WIPO (World Intellectual Property Organization)
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OTHER INSTITUTIONS
• EU = European Union
• NAFTA = North American Free Trade Area (or
Agreement)
• OECD = Organization for Economic
Cooperation and Development
– Club of mostly high-income countries
– Does research, collects data, drafts policies
– Does not have any direct power
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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
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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
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FOUR EXAMPLES OF INTERNATIONAL PUBLIC GOODS
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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
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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
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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CURRENT TRADE DISPUTES
https://www.wto.org/english/tratop_e/dispu_e/dispu_status_e.htm
https://www.iisd.org/business/issues/trade.aspx
http://topics.nytimes.com/top/reference/timestopics/subjects/i/international_trade_a
nd_world_market/index.html
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