international economic institutions since world · -orderly corrections of balance of payments...
TRANSCRIPT
Chapter 2
International
Economic
Institutions
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Institutions
since World
War II
Chapter Objectives
• Discuss the history and functions of international institutions in world economy
• Present a taxonomy of international economic institutions
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institutions
• Introduce the role of regional trade agreements in the global economy
• Analyze the arguments opposing international economic institutions
Introduction: International Institutions and
Issues since World War II
• Institutions: Rules and organizations that
govern and constrain behavior
– Formal institutions: Written sets of rules that
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– 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
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TABLE 2.1 (continued) 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:
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– 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
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• 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
The International Monetary
Fund (IMF) (cont.)
• Functions of the IMF:
-Prevents crisis in a financial system by
promoting sound macroeconomic policy, which
includes
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includes
-Balanced expansion of trade
-Stable exchange rates
-Avoidance of competitive devaluations
-Orderly corrections of Balance of Payments problems
The International Monetary
Fund (IMF) (cont.)
• A Financial crisis occurs when a country runs out of foreign
exchange reserves, which are a major currency or gold that
can be used to pay for imports and international borrowings
• In the event of a financial crisis,
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• 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
The World Bank
• Founded in 1944 as the International Bank for Reconstruction and Development (IBRD)
• IBRD and International Development Association (IDA) comprise World Bank
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(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 (cont.)
• Original purpose
-To provide financing mechanisms to rebuild
Europe after World War II
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• Main function today
-Assisting development in non-industrial
economies
General Agreement on Tariffs
and Trade (GATT)
• 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 based on the following principles:
- National treatment: Imports must be given similar
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- 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); every WTO member must treat every other member as it treats its most favored trading partner
GATT (cont.)
• 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
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• 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
From GATT to World Trade
Organization (WTO)
• The Uruguay Round established the WTO (1994)
– WTO members meet every two years to set WTO policy
objectives
– Has a more effective dispute settlement mechanism
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– 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 (2001-2006)
– Focused on trade issues of importance to developing
countries
– Key issues of Doha Development Agenda:
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– 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
TABLE 2.2 The GATT Rounds
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Regional Trade Agreements
• Besides economic organizations, regional
trade agreements form a key part of the
institutional structure of the world economy
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• Regional trade agreements are bilateral
(two countries) or plurilateral (several
countries)
Five Types of Regional Trade
Agreements
1. Partial trade agreement: Two or more countries
liberalize trade in a selected group of product
categories such as steel or autos
2. Free trade area (FTA): Trade in goods and
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2. Free trade area (FTA): Trade in goods and
services is fully liberalized between two or more
countries
-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
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– 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 with coordination of macroeconomic policies (including common currency, harmonization of standards and regulations)
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– United States
– Canada
– European Union members participating in the Euro currency zone
Table 2.3 Five Types of Regional Trade
Agreements
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TABLE 2.4 Prominent Regional Trade Blocs
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TABLE 2.4 (continued) Prominent Regional Trade
Blocs
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TABLE 2.4 (continued) Prominent Regional Trade
Blocs
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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)• 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
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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),increases in world trade (building blocks),
or
-Do they tend to become obstacles to further
relaxation of trade barriers (stumbling blocks)?
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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
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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
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• However, international institutions help provide
order and reduce uncertainty
-Order and certainty are public—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
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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
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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TABLE 2.5 Four Examples of International Public
Goods
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Criticism of
International Institutions
• International institutions receive three types of criticism
1. Sovereignty and Transparency
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-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
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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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