interantional economics 5th by gerber ch02

Chapter International Economic Institutions since World War II Copyright © 2011 Pearson Addison-Wesley All rights reserved 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 Copyright © 2011 Pearson Addison-Wesley All rights reserved 2-2 TABLE 2.1 A Taxonomy of International Economic Institutions, with Examples Copyright © 2011 Pearson Addison-Wesley All rights reserved 2-3 TABLE 2.1 (continued) A Taxonomy of International Economic Institutions, with Examples Copyright © 2011 Pearson Addison-Wesley All rights reserved 2-4 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) Copyright © 2011 Pearson Addison-Wesley All rights reserved 2-5 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 Copyright © 2011 Pearson Addison-Wesley All rights reserved 2-6 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 Copyright © 2011 Pearson Addison-Wesley All rights reserved 2-7 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 Copyright © 2011 Pearson Addison-Wesley All rights reserved 2-8 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 Copyright © 2011 Pearson Addison-Wesley All rights reserved 2-9 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 Copyright © 2011 Pearson Addison-Wesley All rights reserved 2-10 Five Types of Regional Trade Agreements Partial trade agreement: • Two or more countries • For specific good/product Free trade area (FTA): • Fully liberalized trade in goods/service • Between countries in certain area - North American Free Trade Agreement (NAFTA) Copyright © 2011 Pearson Addison-Wesley All rights reserved 2-19 Five Types of Regional Trade Agreements (cont.) Customs union (CU): An FTA plus a common external tariff (CET) – – European Union in the 1970s and 1980s MERCOSUR in South America Common market: A CU plus free mobility of factors of production – European Union in the 1990s Copyright © 2011 Pearson Addison-Wesley All rights reserved 2-20 Five Types of Regional Trade Agreements (cont.) 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 Copyright © 2011 Pearson Addison-Wesley All rights reserved 2-21 Table 2.3 Five Types of Regional Trade Agreements Copyright © 2011 Pearson Addison-Wesley All rights reserved 2-22 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 Copyright © 2011 Pearson Addison-Wesley All rights reserved 2-23 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 Copyright © 2011 Pearson Addison-Wesley All rights reserved 2-24 For and Against RTAs • Opponents • Undermine progress toward multilateral (worldwide) agreements • Discriminatory against poor & less developed countries Copyright © 2011 Pearson Addison-Wesley All rights reserved 2-25 The Role of International Economic Institutions • International institutions have limited enforcement power – subtle powers to encourage cooperation • International institutions help provide order and reduce uncertainty - Order and certainty are public goods Copyright © 2011 Pearson Addison-Wesley All rights reserved 2-26 Definition of Public Goods • Nonexcludable: 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 – No incentive to pay for a public good – Can’t be excluded from consumption Copyright © 2011 Pearson Addison-Wesley All rights reserved 2-27 Maintaining Order and Reducing Uncertainty • Maintaining order and reducing uncertainty help prevent free-riding – Prevent free-riding during recession • Acting as lender of last resort also important for international institutions Copyright © 2011 Pearson Addison-Wesley All rights reserved 2-28 TABLE 2.5 Four Examples of International Public Goods Copyright © 2011 Pearson Addison-Wesley All rights reserved 2-29 Case Study – Bretton Woods • Four problems to guard against: – Worldwide Depression – Collapse of international trade – Collapse of international monetary system – Collapse of international lending • Institutions central to achieving goals • Stabilize exchange rates • Assist nations in paying international debts • Agreements to reduce trade barriers • Provide relief & assistance for war damaged countries Copyright © 2011 Pearson Addison-Wesley All rights reserved 2-30 Case Study – Bretton Woods • Founding principles of Bretton Woods – Trade is open in all countries – No discrimination against other countries – Do not limit buying and selling of currency when it is meant to pay for imports – Fixed exchange rates with occasional adjustments Copyright © 2011 Pearson Addison-Wesley All rights reserved 2-31 Criticism of International Institutions Sovereignty and Transparency - National sovereignty violated by imposing unwanted domestic economic policies -Transparency concerns about the mechanism with which decisions are made within an international institution Copyright © 2011 Pearson Addison-Wesley All rights reserved 2-32 Criticism of International Institutions (cont.) Ideology - Advice and technical assistance provided to developing countries is reflection of the biases and wishes of developed countries Implementation and adjustment costs - Costs of agreements more easily absorbed by large, developed countries - Costs are difficult for developing countries Copyright © 2011 Pearson Addison-Wesley All rights reserved 2-33 ... Pearson Addison-Wesley All rights reserved 2-5 The International Monetary Fund (IMF) • Founded by 29 nations (1945) at the Bretton Woods meetings between the Allies in July 1944 • The 184 member... disproportionate to population • Functions of the IMF: - Prevents crisis in a financial system by promoting sound macroeconomic policy Copyright © 2011 Pearson Addison-Wesley All rights reserved... 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