interantional economics 5th by gerber ch02
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Chapter 2
International
Economic
Institutions
since World
War II
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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
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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
•
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 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
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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
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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
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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
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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
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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
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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
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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
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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)
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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
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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
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TABLE 2.2 The GATT Rounds
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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
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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)
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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
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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
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Table 2.3 Five Types of Regional Trade
Agreements
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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)
• 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:
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
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For and Against RTAs
•
Opponents
•
Undermine progress toward multilateral (worldwide) agreements
•
Discriminatory against poor & less developed countries
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