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International Institutions
Institutions = rules and organizations that govern and constrain behavior
Types of institutions:• Formal institutions:
written set of rules that explicitly state what is allowed or not allowed in an economy
• Informal institutions: Traditions or customs that govern
behavior, but without legal enforcement -- there may be rules, but there is no legal mechanism to make them stick
Some International Institutions
Institutional Type Organizations
Commodity or Industry Specific
OPEC – petroleum suppliersInternational Sugar OrganizationInternational Telecommunications Union
Agencies or Commissions IBWC – international boundary and water commissionMekong River Commission
Banks and Funds ADB - Asian Development BankIDB – Inter-American Development Bank
Regional Trade Agreements Mercado Comun del Sur-Mercosur
NAFTA
Global Trade Organizations IMF, World Bank, WTO
IMF, WORLD BANK, WTO
These banks/funds play an important but to some extent controversial role in the international economy
IMF = International Monetary Fund
World Bank = a collection of banks & funds
WTO = World Trade Organization succeeding GATT (General Agreement
on Trade and Tariffs)
IMF
Founded by 29 nations (1945) at the Bretton Woods meetings between the Allies in July 1944
184 + members -- IMF is the central monetary institution in today’s international economy
Attempts to correct financial crises and upsets in member nation macroeconomies – control of monetary policy, reduce inflation, impose policies on exchange rate policy -- runs into resistance --- some times accused of favoritism - - deals with balance of payments issuesFunding comes from member quotas, or “deposits”, that depend on member size, status, and weight in voting
IMF dealing with Financial Crises
A financial crises occurs when a country runs out of foreign exchange reserves—a major currency or gold that can be used to pay for imports and international borrowings
Members borrow against IMF quotas in the event of financial crisis
IMF places conditions on economic policy such as, for example, requirements for the borrowing member to carry out economic reforms in exchange for a loan, tighter monetary policy, independence of the central bank and the treasury and political influences, imposition of a currency board, etc.
Crises and the problem of inflation --- A RUN ON RESERVES
INITIALLY, EX HANGE RATE (€/£) IS FIXED AT SOME RATE AS SHOWN BELOW IN PANEL A --- INFLATION HITS IN THE € NATION --- THE RESULT IS THAT DEMAND FOR £ INCREASES
BECAUSE £-DENOMINATED GOODS ARE CHEAPER --- AND THE SECOND ROUND OF CHANGE IS THAT
SUPPLY OF £ RETRACTS --- LESS £ COMING IN TO EXCHANGE FOR € --- THE RESULT IS A HIGHER €/£
RATE (PANEL B)
€/£
£
Demand for £
Supply of £
Fixed exchange rate €/ £
€/£
£
THE € NATION HAS TO SUPPLY £ TO THE MARKET FROM RESERVES TO SHIFT SUPPLY OF £ BACK TO KEEP THE €/£ RATE AT THE INITIAL FIXED RATE --- IF NO RESERVES OF £ THEY HAVE TO BORROW FROM OTHER NATIONS OR FROM THE IMF – OR ARRANGE FOR SDR
(A) (B))
Fixed exchange rate €/ £
Supply of £
Demand for £
NEED TO Supply £ TO THE MARKET
RESU
LTIN
G D
EVA
LUATIO
N O
F
€ R
ELATIV
E T
O T
HE £
WORLD BANK
Founded in 1944 as the International Bank for Reconstruction and Development (IBRD)
Today, IBRD is one of the five subgroups making up the World Bank Group
World Bank has 184 + members Money comes from donor nation
contributions and sales of debt securities in private markets
The Main functions of the World BankInvesting in people, particularly through basic health and educationFocusing on social development, inclusion, governance, and institution-building as key elements of poverty reductionStrengthening the ability of the governments to deliver quality services, efficiently and transparently ---- There is some controversy on changing missions and who the bank serves
World Bank is also charged with:
Protecting the environment
Promoting business activity and markets --- markets have been the emphasis as of late --- but this role
has varied over the years
Promoting reforms in macroeconomic policies around the world --- some criticism on which nations are served by this thrust
GATT – General Agreement on Trade & Tariffs
GATT is the precursor of the World Trade Organization
GATT policies focused on the reduction in tariffs, quotas, and non-tariff barriers to international trade
GATT lacked power to set policy regarding the main mission
Began with 23 nations (1947) based on principles established in 1934 Reciprocal Trade Agreement Act• Nondiscrimination: focused in the concept
of most favored nation (MFN); every aligned member must treat every other member as it treats its most favored trading partner
• National treatment: imports must be given similar treatment on the domestic market as domestically produced goods.
GATT operated through trade rounds: inter-state negotiations to reduce tariffs and other barriers to trade
Geneva (‘47)
Annecy, Torquay, Geneva II, Dillon (‘49-’61)
Kennedy (’64-’67)
Tokyo (’73-’79)
Uruguay (’86-’93)
WTO comes from GATT
WTO gets more muscle and teeth in dealing with international disputes
The Uruguay round of GATT established WTO (1986 – 1993)
WTO monitors international trade issues and disputes more consistently and with settlement incentives
WTO monitors national trade practices more consistently
WTO and the Doha Round
The Doha round comes over the 2001 – 2006 period
The focus was on the developed- less developed nation trade -- this debate is still ongoing
Nations such as Brazil and India are working to form developing nation coalitions to discuss the developed-less developed issue and trade
The Doha Round – the stalled discussions
• Talks stalled over unresolved disputes
U.S. farm subsidies --- Target and loan policies for ag products, U.S. subsidies to production in the U.S.
E.U. agricultural tariffs --- the common agricultural policy of the European Community --- variable levy issue --- load a ship with grain in the U.S. or Brazil, then by time the ship reaches Amsterdam, the price that the imported grain has to sell for above the European levy has increased to protect European grain prices
Manufacturing tariffs --- tariffs imposed by small nation manufacturing interests
“Free Trade Agreements”
Do we have “free” trade agreements?
Are we moving to multilateral free international trade?
These are the 2 big questions in today’s international trade arena
Let’s look at the types of trade agreements and see how they come out on “free” trade conditions
“Free Trade Agreements”
1. Partial trade agreement: two or more countries liberalize trade in a selected group of product categories – remove barriers, reduce tariffs, etc.
2. Free trade area (FTA): trade in goods and services fully liberalized between two or more countries – but some pre-existing conditions exist
• NAFTA - North American Free Trade Agreement
“Free Trade Agreements”
1. Partial trade agreement: two or more countries liberalize trade in a selected group of product categories – remove barriers, reduce tariffs, etc.
2. Free trade area (FTA): trade in goods and services fully liberalized between two or more countries – but some pre-existing conditions exist
• NAFTA - North American Free Trade Agreement
“Free Trade Agreements”
3. Customs union (CU): an FTA plus a common external tariff (CET)
Examples:• European Union in the 1970s and 1980s• MERCOSUR in South America (Brazil,
Argentina, Uruguay, Paraguay)
4. Common market: a CU plus free mobility of factors of production
Example:• European Union in the 1990s
“Free Trade Agreements”
5. Monetary Union --- common currency – such as France and Western African nations --- Francophone Africa, the states of the U.S.
6. Economic Union: 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
International vs. nationalInstitutions
International institutions have limited power relative to national law embedded in national institutions
International institutions do, in some instances, reduce uncertainty and provide order in trade negotiations
Order and reduced uncertainty are “public goods” provided by the international institution
International vs. nationalInstitutions
The problem with a public good is that no nation wants to pay for the public good, the benefits from which all share
If Q = the public good, then Qi = Q, for the ith nation relative to the international scene --- so a “free rider” problem is involved with the supply of the public good --- a constant issue in managing international trade with an international institutional authority
International vs. nationalInstitutions
Public goods are:• Nonexcludable: the price mechanism does
not work in its usual allocation role in providing access to public goods
• Nonrival (or nondiminishable): they are not diminished or reduced by consumption
• Order and reduced uncertainty are intangibles
• What are their value?
So providing lender of last resort loans to less developed nations meets up with the public good problem --- who is in favor of such an action? --- even though the loan could work to reduce the threat of financial crises
In our own current case of a deep recession, which nation is going to lead in opening up markets in order to prevent a vast reduction of exports?
How would an international currency get set up in order to efficiently resolve debt payments around the world?
The conflicts
International institutions such as IMF can violate national sovereignty by imposing unwanted domestic economic policies on crises nations.
Can there be transparency in the decisions that are made by Word Bank or IMF on lending, and economic growth to take place and the sectors that will be targeted?
Does the economic advice of IMF or World bank reflect the biases of more developed nations? (The Doha round problem)
Are there asymmetries about who can absorb the costs of development and/or correcting economic policy?