Global Economic Institutions • all economies use economic institutions• US as an example

- independent Federal Reserve - monetary stability- constitution, free trade between states- legal rules for economic activity

• institutions might be beneficial for global economy

• which global institutions exist?• how they do they work?• their achievements, and their futures Readings:Look up GATT, WTO, IMF, and World Bank in the index of Y&Y and skim the relevant entries Outline• Reasons for global institutions• Historical background• IMF• World Bank• GATT/WTO

Economic problems addressed by global institutions• negotiating trade agreements • rules for trading relations, trade dispute resolution • lowering international transactions costs

- legal rules, international courts- attacking economic crime- harmonizing regulations e.g. on telecoms

• lessening macroeconomic instability• economic development• environment• peace-keeping In what ways have these problems been addressed?• dominant nations

- UK in 19th century; US in 20th century• small “clubs”

- e.g. NAFTA, EU, NATO, G7• global institutions

- UN, GATT/WTO, IMF, World Bank, etc

Review overhead sets 2 and 3 for a fuller list of the most important world economic institutions

Historical Background

Before 1945• 19th century

- modern industry spreads- world trade dominated by a few countries

• after WWI (1914-18)- attempts to establish global institutions

▫ US isolationism▫ French and British disagree▫ Germany outsider

- failure• between the world wars

- world depression- cooperation poor, e.g. Smoot Hawley

• after WWII (1939-1945)- US takes the lead- global institutions established

Formation of global institutions (1945-1950)• international economy viewed as one cause of war• Why the US took the lead

- rivalry with USSR- USA dominant (50% of world income)- dollar = “world currency”- changing US views after WWII

▫ experience as international actor▫ rise of outward oriented industries

e.g. shipbuilding, aircraft▫ rise of Pacific coast economy

• post-war institutions- United Nations on political, economic, social- IMF on macroeconomics- World Bank on development- GATT on trade

1950-70: golden era of the “Bretton Woods” system• 1950-70 annual GNP growth

- Europe 4.6% - US 3.7%- Japan 10%

• growth of international trade 9% per year Harder times from 80’s onwards• relative decline of US and UK• other strong economies

- Germany, Japan, France, etc• more countries 1950-1990

- decolonization 1948-1965 - China opens 1978- 1990's Russia, etc

• more issues 1980-2000+- increase in world trade, capital flows- services, agriculture, investment- development, democracy, environment, etc

IMF – International Monetary Fund

• December 1945• part of UN• macroeconomics• objectives

- “promote international monetary cooperation”- “facilitate the expansion and balanced

growth of international trade”- “promote exchange [rate] stability”- “make its general resources temporarily available to its members experiencing balance of payments difficulties”

 Organization• 184 members• each contributes a “quota”

- proportional to size of economy- US quota = 17.5% of total

• voting power roughly equal to quotasG7 (US, UK, France, Germany, Italy, Japan, Canada) 49.5% of votes

• Managing Director traditionally European

IMF Operations

surveillance• official commentary on all members’ policies

technical assistance• examples

- tax administration- design of statistical procedures

financial assistance• crisis management

- lends to member countries with problems- at low interest rates

• conditionality- on macroeconomic policies- on foreign borrowing- trade restrictions

Commentary on IMF

problems identified by critics• narrow view of appropriate economic policies

- "austerity", free markets, globalization• influenced too much by Western financial interests• "moral hazard" problem• conditionality selectively enforced

- political reasons e.g. Russia

proposals• use shorter-term and more costly lending

- to address moral hazard problem• focus more on large short-term crises

- IMF as "bankruptcy administrator"▫ long-standing proposal▫ analogy to company bankruptcies

• many, different competing proposals by economistson appropriate conditionalities for IMF to use

World Bank

• World Bank Group – set of related institutions• sister institutions of IMF• membership, organization, and voting as IMF• usually World Bank President is from US Objectives“to help each developing country onto a path of stable, sustainable, and equitable growth in the fight against poverty” Resources• contributed capital by members• funds borrowed from world capital markets

World Bank operations

technical assistance• examples:

- designing development projects- building capacities of governments

lending • to governments• long-term (30-40 years)• no interest for poorest countries• low interest next poorest• two types of loans

1. developments projects2. countries in crisis

facilitating international investment• insurance against political risk• International Center for the Settlement

of Investment Disputes

World Bank commentarysuccesses2003: $18.5 billion of development loansworking in over 100 countries Examples of projects - loans passed in March 2004Egypt: Airports Development ProjectGuyana: HIV/AIDS Prevention & Control ProjectPoland: Hard Coal Social Mitigation ProjectPoland: Road Maintenance and Rehabilitation ProjectSri Lanka: Community Development and Livelihood Improvement “Gemi Diriya” ProjectVietnam: Water Resources Assistance ProjectAlbania: Integrated Water And Ecosystems Management ProjectBurkina Faso: Multi-Country Statistical Capacity Building ProgramCaricom: Pan Caribbean Partnership Against HIV/AIDSChina: Fourth Inland Waterways ProjectNicaragua: Public Sector Technical Assistance ProjectTurkey: Renewable Energy ProjectUkraine: Development of the State Statistics System for Monitoring the Social and Economic Transformation ProjectBenin: Poverty Reduction Support CreditBurundi: Emergency Demobilization, Reinsertion and Reintegration Program GrantBurundi: Road Sector Development ProjectCameroon: Community Development Program Support ProjectSenegal: Private Sector Adjustment CreditAlbania: Power Sector Generation And Restructuring ProjectKyrgyz Republic: Payments And Banking System Modernization ProjectSerbia And Montenegro: Serbia Energy Efficiency ProjectComoros: Services Support ProjectIndia: Rajasthan Health Systems ProjectMali: Transport Corridors Improvement ProjectChina – Wuhan Urban Transport ProjectGhana: Education Sector ProjectNepal: Financial Sector Restructuring ProjectZambia: Road Rehabilitation and Maintenance ProjectPeru: Justice Services Improvement ProjectRussia: E-Learning Support Project

criticisms

• straying too far into the IMF’s area- crisis loans- conditionality

• from "left"- not sensitive enough to environment, human

rights, democracy, etc• from "right"

- too “socialist”, interventionist• from both

- willing to deal with corrupt, incompetentgovernments

- aid has not produced a large effect on growth

GATT/WTO

GATT 1947-1994• 23 members originally, 110 at end• Uruguay round - GATT becomes WTO

WTO 1995-• now 146 members and 20 applicants• unified GATT agreements

- continuation and strengthening of GATT• permanent organization• extended GATT to other areas e.g. services 

GATT

• Objectives- substantial reduction in trade barriers- elimination of discrimination in trade policy

Tools

code of behavior• MFN - most favored nation

- advantages to one, apply to all• national treatment rule

- treat imports like domestic goods• tariff binding

- once lower, cannot raise again

"rounds" of negotiated world trade deals• eight, including:

- Kennedy round 1964-7, very large tariff cuts- Tokyo round 1973-79,

attacking non-tariff barriers- Uruguay round – 1986-1993 - WTO

GATT becomes the WTO

successes of GATT• huge increases in world trade• new members: 23 to 110• enormous reductions in tariffs

problems• weakness in face of non-tariff barriers• did not cover many areas of activity (e.g. services)• decision-making slow and cumbersome• weak powers

Uruguay Round• ambitious goals• slow negotiations

- US versus EU on agriculture- disagreements on intellectual property

• Clinton pressured for final agreement- threat of end of fast-track- threat of regional FTAs

Results of the Uruguay Round

WTO• follows basic principles of GATT• permanent, but weak, central organization• one-country, one-vote

- with super-majority rules

Dispute settlement • panel of three "judges"• decisions within 20 months• if decisions not implemented, winner can retaliate

Trade rules• WTO uses basic GATT code of behavior, plus

- banning of VERs- stronger justification for escape

clauses (safeguards)

Trade liberalization• agriculture

- banning quotas (convert to tariffs)- reduction in tariffs- reducing subsidies

• textiles- phasing out of quotas- reductions of tariffs

• "tariff-bindings" now apply to 99% of imports GATS General Agreement on Trade in Services • service trade previously not covered by GATT• GATT-type rules now apply to services TRIPS - trade-related aspects of intellectual property• obligations for protection and enforcement of intellectual property rules (patents, copyright, etc)• forces countries to use domestic sanctions• WTO handles violations

Commentary

• GATT/WTO successes- growth of world trade- increasing membership- absence of large trade wars

• proponents of WTO focus on:- need to widen trade agreements- need stronger supra-national organization

• opponents of WTO focus on:- loss of national sovereignty- non-trade issues (e.g. environment)- decisions dominated by "Quad" group

▫ Europe, Japan, Canada, and USA• Contentious issues

- developed countries disagree on agriculture▫ exporters: US, Canada, Australia▫ importers: EU, Japan, S. Korea

- developing countries▫ want previous commitments fulfilled▫ want more open agricultural trade

- developed countries focus on labor and environmental standards

• Caused delay in starting new trade negotiations"Seattle round" 1998

THE FUTURE Agreements made Doha, Qatar, November 2001• Implementation of Uruguay Round

- commitment to abide by past agreements- insisted on by developing countries

• Declaration on Intellectual Property and Public Health- national health emergency gives discretion on

intellectual property issues• Commitment to a new round of negotiations:

- "the development round"- deadline for agenda, March 2003- deadline for agreement: 1/1/2005- further trade liberalization

▫ reduce highest tariffs (= textiles)▫ agriculture

- trade and environment▫ relating trade agreements to

environmental agreements- strengthen WTO rules

▫ anti-dumping▫ subsidies

Issues that need to be addressed• decision-making structure• strengthening dispute adjudication and resolution• further reducing trade barriers• extending the GATT/WTO structure

e.g. investment, electronic commerce, excludedcategories of goods and services, etc

 which issues should WTO deal with?• Intellectual property issues introduced into WTO

developed country proposal• mainstream economists: why combine with trade?• should the WTO also focus on environment?

mainstream economics – why?protesters – trade rules damage environment

Deadlock, September 2003

• Meeting in Cancun abandoned withoutagreement on agenda for negotiations

• Agriculture- developed countries divided

• formation of G21- important developing countries

China, India, Brazil, Mexico,…- want agricultural subsidies eliminated- if not, no negotiation on other issues

• possible scenarios- revived talks, WTO advances- WTO as monitor of existing agreements- WTO loses power