globalization and free trade (global issues) - summary

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GLOBALIZATION AND FREE TRADE

(GLOBAL ISSUES)By: Natalie Goldstein

COMPLETE BOOK SUMMARY

Semester Project

MBA-4A

Prepared by: Course: International Business Analysis

Yusra Jamil SIddiqui Teacher: Mansoor Zakir

Umair Aftab

Malik Mughera Awan

Submission Date: 12th January, 2012


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Table of ContentsACKNOWLEDGEMENT .............................................................................................................................................. 3

GLOBALIZATION AND FREE TRADE ............................................................................................................................ 4

SUMMARY ................................................................................................................................................................ 4

PART 1 (AT ISSUE) ................................................................................................................................................. 4

INTRODUCTION ................................................................................................... Error! Bookmark not defined.

HISTORICAL BACKGROUND .................................................................................. Error! Bookmark not defined.

BOOM, BUST, AND BELLIGERENCE (1890s to 1918) .............................................. Error! Bookmark not defined.

PROTECTIONISM (1918 to 1945) ......................................................................... . Error! Bookmark not defined.

THE BRETTON WOODS INSTITUTIONS IN 1950s & 1960s ...................................... Error! Bookmark not defined.

THE INTERNATIONAL TRADE ORGANIZATION AND GENERAL AGREEMENT ON TARIFFS AND TRADE ...........Error!

Bookmark not defined.

FOREIGN DIRECT INVESTMENTS AND MULTINATIONAL CORPORATIONS .............. Error! Bookmark not defined.

GLOBALIZATION AT A CROSSROADS ..................................................................... Error! Bookmark not defined.

PART 3 (RESEARCH TOOLS) ................................................................................................................................. 49

ONLINE SOURCES ............................................................................................................................................ 50

FACTS AND FIGURES ....................................................................................................................................... 51

US ECONOMY ................................................................................................................................................. 59

KEY PLAYERS ................................................................................................................................................... 61

ORGANIZATION AND AGENCIES ...................................................................................................................... 64

List of Acronyms ..................................................................................................................................................... 67

References ............................................................................................................................................................. 70


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ACKNOWLEDGEMENT

We would like to thank our teacher for this course Mr. MANSOOR ZAKIR for giving us an amazing opportunity to

study the international business course. We were assigned with a task to select a book related to the internationalbusiness and then summarize it according to our understanding. It enhanced our theoretical knowledge and gives

us real experience to apply the knowledge we have studied in the class.

We especially like to give our gratitude to you for this opportunity. It was an interesting assignment. We have

studied many theories and how globalization evolved. We also gained knowledge about the current issues and

persistent issues in free trade. This book is divided into three parts and each part has been summarized separately.

All of us put our efforts in this assignment. All members summarized their parts and in the end we discussed all the

parts before compiling the final report. We have tried to put our best in this report. We hope that you will like our

efforts.

Thank you.

Regards

Yusra Jamil Siddiqui

Umair Aftab

Malik Mughera Awan

MBA-4A


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GLOBALIZATION AND FREE TRADEBY NATALIE GOLDSTEIN (Foreword by Frank W. Musgrave)

SUMMARYEconomic globalization is frequently discussed in todays world, among all the stories and reports on its success and

failures, its good and bad effects, one thing stands out globalization is inevitable. No single person or group of

people, and apparently not even mankind as a whole, will be able to stop globalizations edgy march.

In this book the author in part I (issue), globalization is defined as the worldwide spread of industrial production

and new technologies that is promoted by unrestricted mobility of capital and the unfettered freedom of trade.

This definition not only describes globalization but also the role of resources moving through trade to the best

advantage of the trading nations. The author introduces basic economic concepts in their historical context .In part

II (primary sources), globalization is set in the rich context of American history. This is a period of rapid industrial

growth, financial crises, political upheavals, and a test of the role of government in what had become a laissez-faire

economy. The author capably uses this time period to give the readers a sense of the very significant issues raised

by globalization. In Part III (research tools) reports on examples of globalization in other parts of the world. The

author analyzes the situation in East Asia. In this part of the book the author also explores the effects of

globalization on China, and Cochabamba, a city in Bolivia.

PART 1 (AT ISSUE) CHAPTER 1In this part author is giving the introduction about the institution and the theories which are related or involved in

the international trade and globalization. Then the author discusses about the issues which are persistent with the

globalization.

Starting with the part 1 (At issue) Natalie starts with the example of Rome and China trade (at that time which was

not a free trade) in the first century. Back at that time trade was very difficult due to less transportation facilities

and the demerits are doubled by difference in cultures acceptance as well as human exploitation as slaves and

workmen but that was back in first century looking in todays world Globalization is a whole new picture a person

can see.

Defining the word Globalization Natalie defines it as a buzzword meaning that which is a popular, talk on topic

nowadays, means the word itself is described by people differently in different meanings according to their

knowledge and understanding. Giving the reference of an economist John Gray, Natalie described Globalization as

di-localization. Delocalization means that local activities and networks of local relationships are broken because

globalization scatters many of their functions across the globe. Explaining this term further I would like to give anexample as our lecturer Mansoor Zakir gave in one of its Lectures, asking us to write down the names of things we

carry daily and using them daily and to write their country where they were made in. By doing so we realized that

the watch I was wearing was made in Switzerland, shoes in Italy, clothes fabric exported from china, locket made in

China, cellphone made in japan etc. it shows how diverse is a product is or the extend of Globalization in our lives

today that different accessories we carry daily are made from different countries where we havent ever visited.

Natalie then for the purpose of book gave a definition of Globalization as:


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Coming to the explaining of Mercantilism NATALIE explained Mercantilism as economic doctrine in which

government control of foreign trade is of paramount importance for ensuring the prosperity and security of the

state. In particular, it demands a positive balance of trade. Mercantilism dominated Western European economic

policy and discourse from the 16th to late-18th centuries. Mercantilism was a cause of frequent European wars in

that time and motivated colonial expansion. Mercantilist theory varied in sophistication from one writer to another

and evolved over time. Favors for powerful interests were often defended with mercantilist reasoning.

Mercantilist policies which are discussed by the author in this book are summarizes as below:

y High tariffs, especially on manufactured goodsy Monopolizing markets with staple portsy Exclusive trade with coloniesy Forbidding trade to be carried in foreign shipsy Export subsidiesy Banning all export of gold and silvery Promoting manufacturing with research or direct subsidiesy Limiting wagesy Maximizing the use of domestic resourcesy Restricting domestic consumption with non-tariff barriers to trade.

Defining some early critics by NATALIE said that the famous Adam Smith and David Hume were the founding

fathers of anti-mercantilist thought. A number of scholars found important flaws with mercantilism long before

Adam Smith developed an ideology that could fully replace it. Hume famously noted the impossibility of the

mercantilists' goal of a constant positive balance of trade. As gold flowed into one country, the supply would

increase and the value of gold in that state would steadily decline relative to other goods. Conversely, in the state

exporting gold, its value would slowly rise. Eventually it would no longer be cost-effective to export goods from the

high-price country to the low-price country, and the balance of trade would reverse itself. Mercantilists

fundamentally misunderstood this, long arguing that an increase in the money supply simply meant that everyone

gets richer.Another Scottish philosopher, James Mill (17731836), criticized mercantilism. Mill argued that the mercantilist

notion that only exports are good for a nation is absurd because a nation exports its goods in order to obtain

money to buy imports. He wrote: The benefit which is derived from exchanging one commodity for another arises

in all cases from the commodity received, not the commodity given.

It was after the criticism the word Laissez faire was given meaning leaving alone means free trade no

interventions by governments in the trade policies of the country.

NATALIE discussed the Adam Smiths theory of free market. A new economic order is taking shape before our eyes,

and it is one that includes accelerated convergence between the old western powers and the emerging world's

major new players. But the forces driving this convergence have little to do with what generations of economistsimagine when they pointed out the insufficiency of the old order; and these forces' implications may be equally

unsettling. In economics, invisible hand or invisible hand of the market is the term economists use to describe the

self-regulating nature of the marketplace. This is a metaphor first coined by the economist Adam Smith. The exact

phrase is used just three times in his writings, but has come to capture his important claim that by trying to

maximize their own gains in a free market, individual ambition benefits society, even if the ambitious have no

benevolent intentions. Adam smith first introduced the concept in The Theory of Moral Sentiments, written in 1759.


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In this work, however, the idea of the market is not discussed, and the word "capitalism" is never used. New York:

Penguin, 2009.

By the time he wrote The Wealth of Nations in 1776, Smith had studied the economic models, and in this work the

invisible hand is more directly linked to the concept of the market: specifically that it is competition between

buyers and sellers that channels the profit motive of individuals on both sides of the transaction such thatimproved products are produced and at lower costs.

ACCORDING TO US: The idea of markets automatically channeling self-interest toward socially desirable ends is a

central justification for the laissez-faire economic philosophy, which lies behind neoclassical economics. In this

sense, the central disagreement between economic ideologies can be viewed as a disagreement about how

powerful the "invisible hand" is.

NATALIE then defined the Modern statement of Ricardos law of comparative advantage to fully appreciate

Ricardos own statement and, perhaps, to also understand why some confusion has existed over the nature of his

proof. David Ricardo (17721823) published Principles of Political Economy and Taxation in 1817. In this work,

Ricardo set forth his labor theory of value, which stated that the value of a product that is made and sold in a

competitive environment is related to the cost of labor involved in its production. Ricardo formulated his iron law

of wages, which states that because of population growth and competition for jobs (and for greater profits among

businesses) Ricardos main contribution to the economics of globalization, however, was not his pessimistic view of

labors future. The NATALIE applying Malthuss principles, showed Ricardos theory that the shortage of usable land

available to support a growing population will force nations to prioritize its use in order to maximize its yield per

unit (in other words, to get the most production out of a given unit, such as an acre of land)

ACCORDING TO US: In simplified terms, comparative advantage is the notion that even if a nation could efficiently

produce by itself everything it needs and uses the country would benefit still more if it specialized in producing

what it was best at making and then trading with other nations for the rest. To give a simplified example, althoughit is possible that parts of the United States might efficiently produce bananas, this would not be an optimum use of

its land. The United States would be better off using its land to grow wheat or citrus fruit because its soil, climate,

labor force, and technology give it a comparative advantage over other nations in producing these commodities. It

should therefore export these foodstuff s and import bananas from a country that has a comparative advantage in

banana growing. In short, a nation has a comparative advantage in producing a product.

Then coming to LAISSEZ FAIRE, NATALIE explained it as in economics, laissez-faire is an environment in which

transactions between private parties are free from state intervention, including restrictive regulations, taxes, tariffs

and enforced monopolies. The phrase laissez-faire is French and literally means "let do", but it broadly implies "let

it be", or "leave it alone." In England, a number of "free trade" and "non-interference" slogans had been coinedalready during the 17th century. But the French phrase laissez faire gained currency in English-speaking countries

with the spread of Physiocratic literature in the late 18th century. Notably, classical economists, such as Thomas

Malthus, Adam Smith and David Ricardo, did not use the phrase.

ACCORDING TO US: Adam Smith first used the metaphor of an "invisible hand" in his book The Theory of Moral

Sentiments to describe the unintentional effects of economic self-organization from economic self-interest. Some

have characterized this metaphor as one for laissez-faire, but Smith never actually used the term himself.


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Then NATALIE discussed different era when capitalism emerges as new economic system.

She explained as 1873 and 1893 were years remembered primarily as the beginnings of two disastrous economic

depressions, or "panics." Americans witnessed nationwide labor strikes and sustained price deflation. However the

two decades also marked the most dramatic economic transformations in the history of the world. The U.S. was on

its way to becoming the leading capitalist nation on earth. The manufacturing and banking industries of the latenineteenth century produced businesses that were unprecedented in the U.S. "Big Business" generated wealth in

staggering concentrations and made a few men richer than anyone could have imagined. Social class became a

reality in the United States during this period. The gap between the owners and the workers became obvious. The

Homestead Act, passed during the Civil War was designed to ensure that the Trans-Mississippi West was settled by

small, hard-working, independent framers. They arrived taking advantage of the opportunity to start a new but so,

too, did railroad businesspersons and commercial farmers, immigrant workers and miners. They all participated in

one way or another displacing the Indians who had lived in the west for centuries. As the west was settled and

developed it was soon a vital part of the nations political economy of global capitalism. Beef, timber, gold, and

silver were sent back east and the epic independent, self-sufficient, and self-reliant westerner was just another part

in the industrialization of America.

NATALIE then focused on China and explained as China, with its vast natural wealth and large population, was the

supreme prize in the Western powers plans to force open trade with Asia. China was the perfect outside state, and

it was no stranger to Western interruption. In the first half of the 19th century, British and French traders were

taking silk, tea, porcelain, and jade out of China and offering Western imports or currency in exchange. China

refused to accept either, wisely (or so it seemed) demanding payment in gold or silver. For a while, the Europeans

accepted this arrangement, but they soon found their reserves of precious metal dwindling. To reverse this

troublesome trend, the British insisted that China accept opium as payment instead. (The British could easily and

cheaply get opium from their colony in India.) China adamantly refused, and tensions mounted. The First Opium

War (183842) greatly weakened China and limited its capacity to resist Western intrusion. The treaty signed at theend of this conflict opened even more of China to Western exploitation. China attempted to resist the harsh treaty

conditions, and between 1856 and 1858, France and Britain again fought China in the Second Opium War. China

was routed and forced to accept the legal importation of opium as payment for trade. (For the first time, opium

addiction became a serious and widespread problem in China.

NATALIE discussed the protected economy which was emerged after the First World War. She also discussed some

economic theories and models which were practiced during that era.

NATALIE explained The Great Depression was a breeding ground for protectionism. Output fell, prices declined, and

unemployment rose, pressuring governments to do something to recover their economies, even if that meant

limiting imports. But contrary to popular perception, some countries went much further down this protectionistroad than others; I conclude that a key factor behind this variation in trade policies was nations' adherence to the

gold standard. Those countries that adhered to the gold standard were more likely to restrict trade than those that

abandoned it. Previous the countries that remained on the gold standard tended to endure sharper and longer

downturns than those that allowed their currencies to depreciate, without the flexibility to depreciate their

currencies, many gold-standard nations turned to trade restrictions in hopes that these would boost their domestic

industries and control unemployment. Thus, the 1930s' rush to protectionism was not so much a triumph of


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special-interest politics as it was a result of second-best macroeconomic policies, the authors write. Their study

"suggests that had more countries been willing to abandon the gold standard and use monetary policy to counter

the slump, fewer would have been driven to impose trade restrictions."

ACCORDING TO US: The Great Depression was a worldwide economic decline in 1930's. It was the most difficult

and longest period of unemployment and low business activity in modern times. The Depression began in October1929, when the stock values dropped very quickly. Many stockholders lost large amounts of money. Banks,

factories, and stores closed and left millions of Americans jobless and penniless. The Depression caused a very

sharp decrease in world trade because each country raised taxes on imported goods trying to help their own

industries. The depression caused some countries to change their type of government and their leader. The stock

market crash occurred from 1925 to 1929. During this period the price of common stocks on the New York Stock

Exchange more than doubled. When stock values rose it encouraged many people to buy stocks hoping to make

large profits following the future price increases.

As with other major world events, it is not possible to explain the causes and conduct of World War II (193945)

here but NATALIE explained in her book about world war, and begins as in September 1939, the German army

invaded Poland, Britain declared war on Germany, and World War II began. Japan was allied with Germany(the Axis

powers), and in 1941, Japan bombed Pearl Harbor in Hawaii, bringing the United States out of its isolationist mode

and into the worldwide conflict. World War II cost the lives of more than 55 million people and wounded35 million

more. As happened in World War I, deficit spending to pay for the conflict forced most nations to abandon the gold

standard. Bombing destroyed large parts of Europe. By the time the war ended with the defeat of the Axis in1945,

most of the European economies were in ruins, and many of their cities and industrial centers were destroyed. In

1945, the United States adopted the Marshall Plan to help rebuild the economies of Europe. The generous U.S.

expenditures were intended to achieve specific goals. The United States understood that if it were going to

prosper, it needed to support the economies of its strongest trading partners in Europe. Another key goal of the

Marshall Plan was to create strong capitalist economies in Western Europe to counteract the growing power of thecommunist government in the Soviet Union, established after the Bolshevik revolution of 1917.

Stabilization of the Postwar Economy (1940s) NATALIE explained that many Americans feared that the end of

World War II and the subsequent drop in military spending might bring back the hard times of the Great

Depression. But instead, repressed consumerdemandfueled exceptionally strongeconomic growthin the

postwar period. A housing boom, stimulated in part by easily affordable mortgages for returning members of the

military, added to the expansion. The nation's gross national product rose from about $200,000 million in 1940 to

$300,000 million in 1950 and to more than $500,000 million in 1960. At the same time, the jump in postwar births,

known as the "baby boom," increased the number of consumers. More and more Americans joined the middle

class.

NATALIE then explained the Keynesian economics is an economic theory named after John Maynard Keynes (1883 -

1946), a British economist. It was his simple explanation for the cause of the Great Depression for which he is most

well-known. Keynes' economic theory was based on a circular flow of money. His ideas spawned a slew

of interventionist economic policies during the Great Depression. In Keynes' theory, one person's spendings goes

towards anothers earnings, and when that person spends her earnings she is, in effect, supporting anothers

earnings. This circle continues on and helps support a normal functioning economy. When the Great Depression hit,


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people's natural reaction was to store their money. Under Keynes' theory this stopped the circular flow of money,

keeping the economy at a standstill. Keynes' solution to this poor economic state was to prime the pump. By prime

the pump, Keynes argued that the government should step in to increase spending, either by increasing the money

supply or by actually buying things on the market itself. During the Great Depression, however, this was not a

popular solution. It is said, however, that the massive defense spending that United States President Franklin

Delano Roosevelt initiated helped revive the US economy.

The essence of Keyness ideas was to create an international economic system in which there is free trade in goods

and commodities but restrictions on the flow of speculative capital. The whole system would be managed by what

Keynes called an international clearing union, which resembled a global central bank. This union would control a

stabilization fund, capitalized with billions of dollars from member nations, which would lend money mainly to

underdeveloped nations struggling with financial crises. Since the Second World War, the economies of the

capitalist world have conducted experiments with the different types of exchange rate systems. For almost a

quarter of a century after the war (1947-1971), nations operated under the 1944 international Bretton Woods

Agreement that provided for a fixed, but adjustable, exchange rate system where, when necessary, nations could

invoke widespread limitations on international financial movements (i.e., capital controls). Since the 1970s, manyeconomists abandoned any support for Keynes policies and instead accepted the classical theory of efficient

markets as correct doctrine. As the Second World War was winding down, the victorious Allied nations called a

conference at Bretton Woods in New Hampshire. The purpose of this Bretton Woods conference was to design a

post war international payment system that avoided creating conditions for another Great Depression. Keynes was

the chief representative of the United Kingdom delegation at this Bretton Woods conference. In contrast to the

classical view of the desirability of free exchange rate markets, Keynes position at Bretton Woods was that there is

an incompatibility thesis in the classical approach to international trade and finance. Keynes argued that permitting

free trade, flexible exchange rates and free capital mobility across international borders can be incompatible with

the economic goal of global full employment and rapid economic growth. Keynes offered an alternative to the

classical approach to the problem. This alternative was the A Keynes Plan solution that would make internationaltrade and financial flow arrangements to assure global full employment and vigorous economic growth.

ACCORDING TO US: Even though the Keynes Plan was rejected at Bretton Woods, between 1947 and 1971

whenever imbalances in trade or international payments occurred, policy makers often under took actions that

would have been normal under the Keynes Plan. Whenever serious international payment problems arose, many

developed nations, including the United States, instituted capital control policies. Capital control policies are

designed to constrain the international flow of capital funds across national boundaries B a policy that is directly

contrary to the idea that frees markets means free movement of capital funds across national borders. Despite

such anti-free market government policies, this post war period until 1971 was an era of sustained economic

growth in both developed and developing countries. It was truly a golden age of economic development forcapitalist nations throughout the world.

Cumming to the topic of WORLD BANK NATALIE discussed about the institutions that were formed by the global

powers to make interest groups and to implement the new economic world order.


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In 1944 an international conference took place in Bretton Woods, New Hampshire (USA). 44 countries attended

this conference in order to restructure international finance and currency relationships. The participants of this

conference created the International Monetary Fund (IMF) and the International Bank for Reconstruction and

Development (IBRD/World Bank). Additionally, they agreed on implementing a system of fixed exchange rates with

the U.S. dollar as the key currency.

NATALIE explaining The World Bank differs from the World Bank Group, in that the World Bank comprises only two

institutions: the International Bank for Reconstruction and Development (IBRD) and the International Development

Association (IDA), whereas the latter incorporates these two in addition to three more International Finance

Corporation (IFC), Multilateral Investment Guarantee Agency (MIGA), and International Centre for Settlement of

Investment Disputes (ICSID).The World Bank is the worlds most important source of financial aid for developing

nations. It provides nearly $16 billion in loans annually to its client countries. It uses its financial resources, highly

trained staff, and extensive knowledge base to help each developing country onto a path of stable, sustainable, and

equitable growth in the fight against poverty. Its goals are to improve living standards and to eliminate the worst

forms of poverty. It supports the restructuring process of economies and provides capital for productive

investments. Furthermore, it encourages foreign direct investment by making guarantees or accepting partnershipswith investors. The World Bank aims to keep payments in developing countries balanced and fosters international

trade. It is active in more than 100 developing economies. It forms assistance strategies by cooperating with

government agencies, nongovernmental institutions and private enterprises. It offers financial services, analytical,

advisory, and capacity building. Development economics is concerned with finding the best ways to enhance

economic development in poor nations. It is based on the idea that developing nations are fundamentally different

from developed nations and therefore need different prescriptions for economic growth. For example, the laissez-

faire free trade principles that might work for an advanced economy would be ruinous for a poor one.

Development economics recognizes that most poor nations rely on the relatively low income they derive from

commodity exports and so have unfavorable trade balances. For this reason, LDCs may not see the potential

benefits of international trade as a means of economic improvement. LDCs also suffer from what developmenteconomists call the late-late syndrome, which means that they are so late in entering the global marketplace that

they may never be able to catch up to or reasonably compete with economically developed nations. The Banks

development economists prescribed a Big Push for such nations, encouraging their governments to take an active

role in creating a positive economic climate. Foreign development aid was also deemed essential to help these

faltering economies, and this is where the WB was most helpful. The Bank assisted LDC governments in creating an

economic climate conducive to growth. For the most part, this new direction for the Bank was welcomed by

developing nations.

Then NATALIE explaining The IMF was officially established on December 27, 1945, when the 29 participating

countries at the conference of Bretton Woods signed its Articles of Agreement. It commenced its financialoperations on March 1, 1947. The IMF is an international organization, which today consists of 183 member

countries. The purposes of the IMF are to promote international monetary cooperation by establishing a global

monitoring agency that supervises, consults, and collaborates on monetary problems. It facilitates world trade

expansion and thereby contributes to the promotion and maintenance of high levels of employment and real

income. Furthermore, the IMF ensures exchange rate stability to avoid competitive exchange depreciation. It

eliminates foreign exchange restrictions and assists in creating systems of payment for multilateral trade.


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Moreover, member countries with imbalances in their balance of payments are provided with the opportunity to

correct their problems by making the financial resources of the IMF available for them. The IMF has no control over

national economic policies of its members. On the contrary, the chain of command runs from the governments of

the member countries to the IMF. The highest authority is the Board of Governors, which consists of one Governor

(usually the minister of finance or the head of the central bank) of each member country. Additionally, there is an

equal number of Alternates (representative Governors). The Board of Governors gathers only on the occasion of

annual meetings. This point illustrates the dominance of the USA in the System of Bretton Woods as the United

States, with the worlds largest economy, contributes most to the IMF, providing about 18 percent of total quotas

(about $35 billion).

ACCORDING TO US: We will now explained the criticisms explained by the NATALIE in the book we came to the

conclusion that economists have been that financial aid is always bound to so-called Conditionalitys. It is claimed

that conditionalitys (economic performance targets established as a precondition for IMF loans) retard social

stability and hence inhibit the stated goals of the IMF, while Structural Adjustment Programs lead to an increase in

poverty in recipient countries. The IMF sometimes advocates austerity programs, cutting public spending and

increasing taxes even when the economy is weak, in order to bring budgets closer to a balance, thus reducingbudget deficits. Countries are often advised to lower their corporate tax rate

Secondly, the Fund worked on the incorrect assumption that all payments disequilibria were caused domestically.

The Group of 24 (G-24), on behalf of LDC members, and the United Nations Conference on Trade and

Development (UNCTAD) complained that the Fund did not distinguish sufficiently between disequilibria with

predominantly external as opposed to internal causes. This criticism was voiced in the aftermath of the 1973 oil

crisis. Then LDCs found themselves with payments deficits due to adverse changes in their terms of trade, with the

Fund prescribing stabilization programs similar to those suggested for deficits caused by government over-

spending. Faced with long-term, externally-generated disequilibria, the Group of 24 argued that LDCs should be

allowed more time to adjust their economies and that the policies needed to achieve such adjustment are different

from demand-management programs devised primarily with internally generated disequilibria in mind.The third criticism was that the effects of Fund policies were anti-developmental. The deflationary effects of IMF

programs quickly led to losses of output and employment in economies where incomes were low and

unemployment was high. Moreover, it was sometimes claimed that the burden of the deflationary effects was

borne disproportionately by the poor.

Fourthly is the accusation that harsh policy conditions were self-defeating where a vicious circle developed when

members refused loans due to harsh conditionality, making their economy worse and eventually taking loans as a

drastic medicine.

Lastly is the point that the Fund's policies lack a clear economic rationale. Its policy foundations were theoretical

and unclear due to differing opinions and departmental rivalries whilst dealing with countries with widely varying

economic circumstances.


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Now NATALIE discussed how International trade organization starts and how GATT developed. The Bretton Woods

Conference of 1944 recognized the need for a comparable international institution for trade (the later

proposed International Trade Organization, ITO) to complement the International Monetary Fund and the World

Bank. Probably because Bretton Woods was attended only by representatives of finance ministries and not by

representatives of trade ministries, an agreement covering trade was not negotiated there. In early December

1945, the United States invited its war-time allies to enter into negotiations to conclude a multilateral agreement

for the reciprocal reduction of tariffs on trade in goods. In February 1946, calling for a conference to draft a charter

for an International Trade Organization (ITO). A Preliminary Committee was established in February 1946, and met

for the first time in London in October 1946 to work on the charter of an international organization for trade; the

work was continued from April to November 1947. At the same time, the negotiations on the General Agreement

on Tariffs and Trade (GATT) in Geneva advanced well and by October 1947 an agreement was reached: on October

30, 1947 eight of the twenty-three countries that had negotiated the GATT signed the "Protocol of Provisional

Application of the General Agreement on Tariffs and Trade "General Agreement on Tariffs and Trade (GATT),

former specialized agency of the United Nations. It was established in 1948 as an interim measure pending the

creation of the International Trade Organization. However, plans for the latter were abandoned and GATT

continued to exist until the end of 1995. Members of GATT were pledged to work together to reduce tariffs and

other barriers to international trade and to eliminate discriminatory treatment in international commerce. The

most important service of GATT was to negotiate multilateral extensions of tariff reductions through the

application of the most-favored-nation clause. GATT also provided for regular meetings to consider other problems

of international trade. An important GATT principle was that protection of domestic industries was to be done

strictly through tariffs and not measures such as import quotas. The only exceptions permitted to GATT rules were

those dealing with balance of payments difficulties, and these exceptions are carefully supervised. GATT provided

the framework for most important international tariff negotiations from 1947 until 1994. The eighth, or Uruguay

round, of GATT negotiations, which began in 1986 with 15 negotiating groups, was long stalemated by the issue of

agricultural subsidies maintained by the European Community. The agreement that resulted (1994) from the

Uruguay round led to the creation (1995) of the more powerful World Trade Organization (WTO) as a replacement

for GATT. However, the GATT framework remained in place for a 12-month transition period.

NATALIE then explains The Vietnam War was a Cold War-era military conflict that occurred in Vietnam, Laos, and

Cambodia from 1 November 1955 to the fall of Saigon on 30 April 1975. This war followed the First Indochina War

and was fought between North Vietnam, supported by its communist allies, and the government of South Vietnam,

supported by the United States and other anti-communist nations. The Viet Cong (also known as the National

Liberation Front, or NLF), a lightly armed South Vietnamese communist-controlled common front, largely fought a

guerrilla war against anti-communist forces in the region. The Vietnam People's Army (North Vietnamese Army)

engaged in a more conventional war, at times committing large units into battle. U.S. and South Vietnamese forces

relied on air superiority and overwhelming firepower to conduct search and destroy operations, involving ground

forces, artillery, and airstrikes. The U.S. government viewed involvement in the war as a way to prevent a

communist takeover of South Vietnam as part of their wider strategy of containment. The North Vietnamese

government and Viet Cong viewed the conflict as a colonial war, fought initially against France, backed by the U.S.,

and later against South Vietnam, which it regarded as a U.S. puppet state. American military advisors arrived in

what then French Indochina was beginning in 1950. U.S. involvement escalated in the early 1960s, with troop levels

tripling in 1961 and tripling again in 1962. U.S. combat units were deployed beginning in 1965. Operations spanned


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international borders, with Laos and Cambodia heavily bombed. American involvement in the war peaked in 1968,

at the time of the Tat Offensive. After this, U.S. ground forces were gradually withdrawn as part of a policy known

as Vietnamization. Despite the Paris Peace Accords, signed by all parties in January 1973, fighting continued.

NATALIE discusses the OPEC history have impacted the history of free trade. NATALIE explained that by the early

1970s, American oil consumptionin the form of gasoline and other productswas rising even as domestic oilproduction was declining, leading to an increasing dependence on oil imported from abroad. Despite this,

Americans worried little about a dwindling supply or a spike in prices, and were encouraged in this attitude by

policymakers in Washington, who believed that Arab oil exporters couldn't afford to lose the revenue from the U.S.

market. These assumptions were demolished in 1973, when an oil embargo imposed by members of the

Organization of Arab Petroleum Exporting Countries (OAPEC) led to fuel shortages and sky-high prices throughout

much of the decade. As mentioned previously, in 1961, the Middle Eastern Countries of Saudi Arabia, Venezuela,

Iran, Iraq, and Kuwait formed OPEC, the Organization of Petroleum Exporting Countries. By the end of the 1960s,

Algeria, Indonesia, Libya, Nigeria, Qatar and The United Arab Emirates had joined this collective as well. OPEC now

controlled 53 percent of the worlds oil, with the remaining 47 percent having much higher costs of recovery. In

1971, Venezuela flexed its muscles even more, raising the royalties charged to the oil companies to 70 percent ofthe current price on a per barrel basis, and announced plans that they were going to nationalize, or take over from

the oil companies, its oil industry. One OPEC nation after another followed suit, and in short order, the oil

companies were left with only controlling the oil outside of OPEC. In 1973, OPEC pulled the gloves off. First, OPEC

raised prices by another 70 percent, raising prices to $5.11 a barrel. Then, in response to the Arab-Israeli war, OPEC

imposed an embargo on the nations that supported Israel, cutting shipments to The Netherlands and the United

States. This exacerbated the already tight oil market in the U.S. as the government has instituted a cap on the price

of domestic oil in a bid to fight inflation. This discouraged oil companies from expanding U.S. oil production, and

exerted serious pressure on the markets. The raised prices in 1971 further exacerbated the problem, and by the

time the embargo hit, the U.S. had two options as prices spiraled upwards. The military option, going in and taking

control of the oil fields by force, was stymied by threats from the Soviet Union, leaving only to sit and watchhelplessly as prices spiraled upwards to beyond $20 a barrel. The United States reached its personal Peak Oil

point right when King Hubbert, a geologist with the U.S. Geological survey predicted it would. Hubbert had been

derided as a quack by the oil companies due to his postulations that, owing to the nature of the oil business, peak

production would follow along roughly 40 years after the peak of oil discoveries. Since the peak of the oil

discoveries in the US occurred in approximately 1930, the peak of oil production was predicted to occur in 1970. He

was right. The high prices made exploration and discovery of new fields outside of OPEC worthwhile, and the

investments paid off. The North Sea oil fields were developed, Russia found new fields, and the United States

became the most surveyed country in the world, being probed in every nook and cranny, with new major fields

found in the Gulf of Mexico and in Prudhoe Bay, Alaska. These sources were more expensive to find, to develop,

and to transport the crude to refineries, but the high prices made them cost competitive. By 1986 non-OPEC

production had increased by 14 million barrels a day, and OPEC lost market share in a smaller market. Their cut of

the global supply pie had fallen from just over 50% to just fewer than 30%.


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NATALIE now explaining the Neoliberalism is a contemporary form of economic liberalism that emphasizes the

efficiency of private enterprise, liberalized trade and relatively open markets to promote globalization. Neoliberals

therefore seek to maximize the role of the private sector in determining the political and economic priorities of the

world. Changes occurred from the 1970s to the 1980s. Started off with most of the democratic world governments

focused primarily on the primacy of economic individual rights, rules of law and roles of the governments in

moderating relative unregulated trade. It was almost considered national self-determination at the time.

IMF policies are based on neoliberal economics, or, as Nobel Prizewinning economist Joseph calls it, market

fundamentalism. The IMFs philosophy rests on the following concepts: (1) inflation is the most serious of

economic ills; it is always and in every case bad, and must be corrected first, no matter what other conditions

prevail or what the consequences; (2) the short-term effects of fighting inflation are immaterial, as what counts is

the long-term result; and (3) all countries are alike and therefore will benefit from the application of the same

economic prescription. The universal application of neoliberal economic policies will, the IMF believes, always be

just what an ailing economy needs to get back on its feet. In some cases, the IMFs neoliberal prescriptions have

effectively cured sick economies. In other cases, its one-size-fits-all approach has had less salutary effects.

NATALIE explained the Conditionality as a concept in international development, political economy and

international relations which describes the use of conditions attached to a loan, debt relief, bilateral aid or

membership of international organizations, typically by the international financial institutions, regional

organizations or donor countries. Conditionality is typically employed by the International Monetary Fund, the

World Bank or a donor country with respect to loans, debt relief and financial aid. Conditionalitys may involve

relatively uncontroversial requirements to enhance aid effectiveness, such as anti-corruption measures, but they

may involve highly controversial ones, such as austerity or the privatization of key public services, which may

provoke strong political opposition in the recipient country. This conditionalitys are often grouped under the label

structural adjustment as they were prominent in the structural adjustment programs following the debt crisis of

the 1980s.

The term Washington Consensus was coined in 1989 by the economist John Williamson to describe a set of ten

relatively specific economic policy prescriptions that he considered constituted the "standard" reform package

promoted for crisis-wracked developing countries by Washington, D.C.-based institutions such as the International

Monetary Fund (IMF), World Bank, and the US Treasury Department. The prescriptions encompassed policies in

such areas as macroeconomic stabilization, economic opening with respect to both trade and investment, and the

expansion of market forces within the domestic economy.

Subsequently to Williamson's work, the term Washington Consensus has commonly come to be used in a second,

broader sense, to refer to a more general orientation towards a strongly market-based approach (sometimes

described, typically pejoratively, as market fundamentalism or neoliberalism). The term Washington Consensus isalso sometimes used in a historical sense to refer to the era when, as some authors suggest, the policy

prescriptions involved (whether interpreted in the broad or narrow sense of the term) were especially influential.

Williamson himself has argued (below) that his ten original, narrowly-defined prescriptions have largely acquired

the status of "motherhood and apple pie" (i.e., are broadly taken for granted), but that the broader neoliberal

manifesto "never enjoyed a consensus [in Washington] or anywhere much else" and can by now reasonably be said

to be dead. Discussion of the Washington Consensus has long been contentious. Partly this reflects a lack of


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agreement over what is meant by the term, in face of the contrast between the broader and narrower definitions

outlined above. But there are also substantive differences involved over the merits of the various policy

prescriptions involved (there has been much debate, but less consensus, over the success or failure of countries

that are variously claimed to have embraced (or rejected) the key recommendations of the consensus, however

defined). Some of the critics discussed in this article take issue, for example, with the Consensus's emphasis on the

opening of developing countries to global markets, and/or with what they see as an excessive focus on

strengthening the influence of domestic market forces, arguably at the expense of key functions of the state. For

other commentators reviewed below, the point at issue is less what is included in the Consensus than what is

missing, including such areas as institution-building and targeted efforts to improve opportunities for the weakest

in society. Despite these areas of controversy, a great many writers and development institutions would by now

accept the more general proposition that, rather than any single "one size fits all" formula, strategies need to be

tailored to the specific circumstances of individual countries

NATALIE coming to the topic of privatization explains as a large state-owned enterprise is one of the most radical

policy developments of the last quarter century. Right-wing governments have privatized in an effort to decrease

the size of government, while left-wing governments have privatized either to compensate for the failures of state-owned firms or to generate revenues. In this way, privatization has spread from Europe to Latin America, from Asia

to Africa, reaching its zenith with Central and Eastern Europe's transition from socialism to capitalism.

Partial privatization, for example, tends to be more widespread than one might think, and the effects of

privatization on efficiency are generally mixed but rarely negative. Also, while privatization appears uncontroversial

in competitive sectors, it becomes increasingly complex in more monopolistic sectors where good regulation is

crucial. Privatization concludes with alternative frameworks for countries in Africa and other regions that seek to

develop privatization policy and programs. Privatization also entails selling off key state-run industries, and this can

have real economic benefits. Quite often, state-run industries are wildly inefficient and for-profit control increases

efficiency enormously. Selling off a state-run industry also raises ready cash that a debtor nation can use to serviceits debt. Yet, as with the privatization of services, the privatization of industry often results in higher

unemployment as workers are laid off. And privatized industries are at least, if not more, corrupt than privatized

services. Again, as with privatization of services, the IMF too often shuts down a government-run enterprise before

a for-profit company is available to undertake the business. Then the industry simply disappears, and the people

who rely on it are out of luck. When the IMF ordered the government to cease selling the fowl, even though no

private poultry concern was ready or able to step in and take over the enterprise. According to, the IMF simply

assumed that once a government enterprise was shut down, private enterprise would immediately fill the gap.44

in some cases, multinational corporations (MNCs) will invest in a developing country by taking over a state-run

industry closed down by the IMF. Though MNC investment can be, and sometimes is, a boon to a growing

economy, too often the benefits that accrue from the industrial operation go largely to the corporation, itsshareholders, and its home country. The LDC may realize little benefit from the MNC investment.

NATALIE discusses the interest dilemma and says that though privatization has had beneficial effects in some cases,

it should not be pursued without government oversight and input. Each nation is different, and government should

steer privatization toward the most needed sectors, ensure that it is non-monopolistic and affordable to all, make

sure that it is regulated properly, and ease the pain of job losses. Experience shows that it is possible for regulation


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to focus less on control than on ensuring access to bottleneck facilities and encouraging competition and entry, in

turn encouraging innovation.

Cumming to the topic of liberalizations NATALIE discusses what happened during the period. Some of these

liberalizations are caused by the conditions imposed by the IMF and others are the part of the agreements that

countries signed.

Summarizing Market Liberalization There is two types of liberalization that are part of the IMFs conditionalitys.

One is the liberalization of trade, in which a nation opens its market to imports, increases its exports, and generally

reduces or eliminates tariff s. The second type of liberalization refers to capital, or financial, markets. In an open

capital market, a debtor nation is required to rescind regulations that control the flow of currency into and out of

the country.

ACCORDING TO US: In general, liberalization (or liberalization) refers to a relaxation of previous government

restrictions, usually in areas of social or economic policy. In some contexts this process or concept is often, but not

always, referred to as deregulation. Liberalization of autocratic regimes may precede democratization (or not, as in

the case of the Prague Spring. Most often, the term is used to refer to economic liberalization, especially trade

liberalization or capital market liberalization.

Although economic liberalization is often associated with privatization, the two can be quite separate processes.

Liberalized and privatized public services may be dominated by just a few big companies particularly in sectors with

high capital costs, or high such as water, gas and electricity. In some cases they may remain legal monopoly at least

for some part of the market (e.g. small consumers).Liberalization is one of three focal points (the others being

privatization and stabilization) of the Washington Consensus's trinity strategy for economies in transition. An

example of Liberalization is the "Washington Consensus" which was a set of policies created and used by Argentina

There is also a concept of hybrid liberalization as, for instance, in Ghana where cocoa crop can be sold to a variety

of competing private companies, but there is a minimum price for which it can be sold and all exports arecontrolled by the state. The history of trade between nations has been a long and colorful one, punctuated by wars

and dramatic changes in beliefs about trade. Because of the economic impact that trade has always had on

civilizations, governments often become involved in trade with the goal of producing a particular economic

outcome for their countries. Trade liberalization refers to the removal of government incentives and restrictions

from trade between nations. It is a subject of much scholarly and political debate, given the impact that trade has

on the livelihood of so many people, especially in developed countries.

Economists in particular have debated the advantages and disadvantages of trade liberalization for centuries.

Classical economists such as David Ricardo and Adam Smith were strongly in favor of free trade, believing that it led

to the economic prosperity of civilizations. They pointed to examples of civilizations that had flourished as a resultof increased trade liberalization, such as Egypt, Greece, and the Roman Empire, as well as the more modern

example of the Netherlands.

The Netherlands had been under the imperial rule of Spain, but after they rejected the rule of the Spanish Empire

and declared complete freedom of trade, they experienced unprecedented prosperity. This made the debate over

trade liberalization into the most important question in economics for many years to come. Modern economists

who favor trade liberalization cite evidence that it creates jobs, fosters economic growth, and improves the


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standard of living because of increased consumer choice in the marketplace. Those who argue against rapid trade

liberalization also cite statistical evidence that free trade can harm the ecology of the marketplace and have

negative effects on poor countries. For example, the World Bank estimates that the number of people in the world

living on less than $2 U.S. Dollars (USD) per day has risen by almost 50% since 1980. This correlates precisely with

the period of the most worldwide trade liberalization in recent history. The implication of many of the arguments

against trade liberalization is that trade negotiations should focus first on fairness to developing countries, rather

than further opening up the markets of the poorest countries to competition.

All developed countries have had to deal with the question of free trade versus its opposite, protectionism. In most

of the worlds developed nations, tariffs are in place on agricultural products, and in the developing world, there

are high tariffs on many goods, especially manufactured goods. Trade barriers such as these are the subject of

debates that will undoubtedly continue as long as economic disparities exist between nations.

NATALIE then explains the capital, or financial, market is the global trade in currencies. Seeking profit from the

buying and selling of currencies took off in 1971 after President Richard Nixon abandoned the gold standard,

initiating the era of flexible exchange rates. One of the most controversial aspects of globalization is capital-market

liberalizationnot so much the liberalization of rules governing foreign direct investment, but those affecting

short-term capital flows, speculative hot capital that can come into and out of a country. In the 1980s and 1990s,

the IMF and the US Treasury tried to push capital-market liberalization around the world, encountering enormous

opposition, not only from developing countries, but from economists who were less enamored of the doctrines of

free and unfettered markets, of market fundamentalism, that were at that time being preached by the

international economic institutions. The economic crises of the late 1990s and early years of the new millennium,

which were partly, or even largely, attributable to capital-market liberalization, reinforced those reservations. This

paper takes as its point of departure a recent IMF paper, to provide insights both into how the IMF could have gone

so wrong in its advocacy of capital-market liberalization and into why capital-market liberalization has so often led

to increased economic instability, not to economic growth.

ACCORDING TO US: One of the main criticisms of the IMFs approach addresses the timing and the sequence in

which its policies are enacted in debtor nations. IMF policies would likely be far more beneficial to a struggling

economy if they were implemented more carefully. In cases in which inflation must be controlled or comparative

advantage exploited via private enterprise, appropriate corrective measures should be applied at the correct time

and in the correct order. Critics of the IMF approach say that before a country is forced to face high unemployment

from privatization and trade liberalization, it should first put in place a well-functioning mechanism for creating

jobs, as well as some type of social safety net to help the jobless. Similarly, a nation that is undergoing privatization

should first get help with establishing the legal framework that will regulate the privatized industry to make sure it

fulfills its function and to ensure competition. Too often, the IMF demands that its policies be instituted all at once

and before any supportive or mitigating institutions or frameworks are established.

NATALIE now defining the transitional economy is one that is undergoing a change from a communist command

economy to a capitalist market economy. Russia typifies a transitional economy. When Russia and other former

communist nations abandoned communism, the IMF and other international financial institutions, particularly the

U.S. Treasury, imposed a dose of shock therapy to hasten the economic transition. Little attention was paid to

sequence and timing or to establishing the economic infrastructure required to support the new economic system.


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The free for all that resulted led to widespread criminality and corruption. It brought immense wealth to a few and

intense misery to most Russians. Even the conservative Strobe Talbot quipped on a trip to Russia in 1993 that

What Russia needs is less shock and more therapy. Though his remark was greatly appreciated by his hosts, it

aroused the ire of the neoliberal architects of Russias reforms in Washington.

ACCORDING TO US: IMF today has the current crisis is the worst to hit mature financial markets in decades, and it isnot yet over. In the run-up to the crisis, low nominal interest rates, ample liquidity, low financial market volatility,

and a general feeling of complacency had encouraged many types of investors to take on more risk. The lengthy

period of benign financial market conditions was expected to continue, global growth had been robust, and the

previous excesses of the dot-com bubble seemed in the distant past. In short, many believed in a new paradigm for

financial markets. Hence, investment in riskier assets and strategies became the norm, often with little

understanding of the underlying risks and insufficient capital to support them.

Despite repeated warnings from the official sector that financial stability could be compromised by the intense

"search for yield," private sector incentives continued to encourage further risk taking. By the spring of 2007, even

top managers in some of the largest financial institutions began to express public concern, particularly about

structured credit securities backed by subprime mortgages and the leniency of the loan covenants and conditions

backing leveraged buyout activity. But, with still-low interest rates and ample liquidity, demand for structured

credit products carrying the AAA rating and earning higher-than-normal yields continued unimpeded until mid-

2007. Supervisors had insufficient information and clout to halt the proliferation of overpriced securities. Thus,

competitive pressures to issue and sell these types of products were so intense thatas Charles Prince, Chairman

and Chief Executive Officer of Citigroup, told a reporter in early July that yeartop management felt that "as long

as the music is playing, you've got to get up and dance." As in many previous credit crises, it was the loosening of

credit standards during the lending frenzy that caused the initial set of losses. Although the event was triggered by

rising U.S. mortgage loan delinquenciesparticularly in the subprime marketthe knock-on effects have been

particularly severe. The opacity and complexity of the burgeoning array of structured credit products hid thelocation, size, and leverage of the positions held sometimes even from the financial institutions themselves. The

broadening effects of the crisis have also surprised and unnerved many investors. Solving the problems will not be

easy because the incentives that underpinned the crisis are deeply ingrained in private sector behavior and, in

some cases, are even encouraged by regulation. But the problems deserve serious attention because the effects of

the crisis are set to reach a broad swathe of average citizens in many countries.

NATALIE explains that neoclassical trade theory failed to explain the existence of MNCs, Multi-National

Corporations. Explanations solely in terms of differences in rates of return between countries could explain

portfolio investments, but not the movement of capital across borders along with ownership control, i.e. foreign

direct investments (FDI). It was not until Hymer presented his work, in 1960, of foreign direct investments and

multinational enterprises that a satisfying explanation was at hand. Markets were no longer assumed to be perfect

and information was no longer assumed to flow freely and at no cost. Hymer stated that local companies had

better information about the economic environment in their country than the foreign competitors did. Kindle

Berger suggested that four different types of imperfections could explain the existence of FDI: imperfections in

goods markets, imperfections in factor markets, scale economies and government-imposed disruptions.


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However, the possession of ownership-specific advantages or firm-specific advantages could not alone explain why

firms engage in foreign production. They could exploit such advantages by, for example, licensing to a foreign

producer or through exports. Why did companies locate sales or manufacturing subsidiaries abroad? Firm-specific

advantages are a necessary but not sufficient condition for FDI. Several theories has emerged, approached this

problem from different angels. One of these was the theory of internalization, with roots as far back as in the 1937,

as in the work of Coase. The basis of this theory was imperfect markets, which made it costly to undertake certain

types of transactions. This leads to companies rejecting the market and organizes and control transactions within

the company itself, the line of thought which Buckley and Casson developed. They claimed that imperfections in

markets related to knowledge, such as technology, patents and human capital force the profit-maximizing firm to

internalize certain activities.

Government regulations like tariff barriers and taxation are often reasons for internalizations. For example through

transfer pricing, which is organized and controlled in-house, the company may minimize tax payments. Several

theorists, Dunning, 1979, Rugman, 1980 &Teece, 1981 cited in Nordstrom, 1991, have expanded on those theories.

The appropriability theory has many similarities to the internalization theory, and the essence of the theory is that

the advantages of MNCs derive from their ability to appropriate investments in know-how. The theory of

internalizations may therefore explain why companies prefer FDI to licensing. But the theory of internalization does

not explain why companies not exploit their advantages through export to foreign countries rather than FDI. Why

do companies take the risk and trouble of organizing operations abroad? The diversification theory (Lessard, 1979

cited in Nordstrom, 1991) explains this problem through imperfections in financial markets that creates incentive

for MNCs to internationalize. The essence of this theory is that MNCs may gain advantages through risk reduction

through international diversification. This has been difficult to underpin empirically, i.e. to demonstrate that MNCs

shares are good substitutes for international portfolio investments. It has never been shown why this advantage of

equity-market arbitrage is unique to MNCs. FDI is the result of several factors and no single theory is able to hold all

the explanations proposed. Several authors, e.g. Baumann, 1975 & Dunning, 1977 cited in Nordstrom 1991

recognized the need for an eclectic approach, which will be explained later on, holding a number of theories, all of

which have something to contribute.

Now NATALIE is discussing some principles and guidelines of international agreements and organization, that the

member countries are bound to obey.

In 1981, Robert McNamara was replaced as head of the WB by Alden Winship Clausen, a man more amenable to

the neoliberal theories dominant at that time. The Bank continued to fund some infrastructural projects, but for

the next two decades, it embarked on a program of providing mainly structural adjustment loans, with IMF

approval. These loans came with their own WB conditionalitys. Yet, as Columbia University professor of economics

Jagdish Bhagwati (1934 ) points out, The World Bank (not the IMF) is judged mainly by how much it spends. If the

World Bank ends the year without lending for development, it is a failure. That creates a dilemma: if the Bank holds

up spending because conditionality is not accepted or complied with, then it fails to spend; if it spends without

adequate compliance, then it fails to enforce conditionality. For this reason, the WB often compromises or cuts

deal with its debtor nations to ease the pain of conditionalitys. Overall, the WB has a slightly better reputation

than the IMF, although some of its projects (for example, the funding of high dams) are very controversial. Yet,

even during the heyday of neoliberalism, the Bank emphasized and encouraged debtor-nation participation in

decision making far more than did the IMF. The Bank also maintained a resident staff in the host country and so

had a better handle on its social, political, and economic history and conditions, as well as the aspirations of the


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people it was trying to help. In contrast, the IMF had no resident staff, few local contacts, and little or no

experience or knowledge of the loan-seeking nation. In 1986, a WB report revealed that Despite the difficult

economic environment, 85 percent of all projects reviewed . . . were characterized as having achieved satisfactory

results. Only three years later, and after it had assumed its IMF-like role of providing mainly SAP loans, the WB

acknowledged that, of SAPs granted in Africa, only two (Ghana and Tanzania) were considered successful. The WB

has tried to maintain more open lines of communication with host nations than has the IMF. Where the IMF

banned debtor-nation officials from policy meetings that would determine their nations future, the WB

encouraged such participation. In general, the WB has shown greater respect for democratic institutions than the

IMF and its externally imposed conditionalitys.

Explaining further NATALIE says the GATT was the only multilateral instrument governing international trade from

1945 until the WTO was established in 1995. Despite attempts in the mid-1950s and 1960s to create some form of

institutional mechanism for international trade, the GATT continued to operate for almost half a century as a semi-

institutionalized multilateral treaty regime on a provisional basis .Among the various functions of the WTO, these

are regarded by analysts as the most important:

y It oversees the implementation, administration and operation of the covered agreements.y It provides a forum for negotiations and for settling disputes.

Additionally, it is the WTO's duty to review and propagate the national trade policies, and to ensure the coherence

and transparency of trade policies through surveillance in global economic policy-making. Another priority of the

WTO is the assistance of developing, least-developed and low-income countries in transition to adjust to WTO rules

and disciplines through technical cooperation and training.

The WTO is also a center of economic research and analysis: regular assessments of the global trade picture in its

annual publications and research reports on specific topics are produced by the organization. Finally, the WTO

cooperates closely with the two other components of the Bretton Woods system, the IMF and the World Bank.

Principles of the trading system

The WTO establishes a framework for trade policies; it does not define or specify outcomes. That is, it is concerned

with setting the rules of the trade policy games. Five principles are of particular importance in understanding both

the pre-1994 GATT and the WTO:

Non-Discrimination

It has two major components: the most favored nation (MFN) rule, and the national treatment policy. Both are

embedded in the main WTO rules on goods, services, and intellectual property, but their precise scope and nature

differ across these areas. The MFN rule requires that a WTO member must apply the same conditions on all trade

with other WTO members.

Reciprocity

It reflects both a desire to limit the scope of free-riding that may arise because of the MFN rule, and a desire to

obtain better access to foreign markets. A related point is that for a nation to negotiate, it is necessary that the gain

from doing so be greater than the gain available from unilateral liberalization; reciprocal concessions intend to

ensure that such gains will materialize.


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Binding and enforceable commitments

The tariff commitments made by WTO members in a multilateral trade negotiation and on accession are

enumerated in a schedule (list) of concessions. These schedules establish "ceiling bindings": a country can change

its bindings, but only after negotiating with its trading partners, which could mean compensating them for loss of

trade. If satisfaction is not obtained, the complaining country may invoke the WTO dispute settlement procedures.

Transparency

The WTO members are required to publish their trade regulations, to maintain institutions allowing for the review

of administrative decisions affecting trade, to respond to requests for information by other members, and to notify

changes in trade policies to the WTO. These internal transparency requirements are supplemented and facilitated

by periodic country-specific reports (trade policy reviews) through the Trade Policy Review Mechanism (TPRM).The

WTO system tries also to improve predictability and stability, discouraging the use of quotas and other measures

used to set limits on quantities of imports.

Safety valves

In specific circumstances, governments are able to restrict trade. There are three types of provisions in this

direction: articles allowing for the use of trade measures to attain noneconomic objectives; articles aimed at

ensuring "fair competition"; and provisions permitting intervention in trade for economic reasons. Exceptions to

the MFN principle also allow for preferential treatment of developed countries, regional free trade areas and

customs unions.

Explaining the AGREEMENT ON AGRICULTURE NATALIE explains the WTO is Agriculture Agreement was negotiated

in the 1986 Uruguay Round and was a significant first step toward fairer competition and a less distorted sector. It

includes specific commitments by WTO member governments to improve market access and reduce trade-

distorting subsidies in agriculture. These commitments were to be implemented over a six-year period (10 years for

developing countries) that began in 1995. The idea of replacing agricultural price support with direct payments to

farmers decoupled from production dates back to the late 1950s, when a Panel of Experts, chaired by Professor

Gottfried Haberler, was established at the twelfth session of the GATT Contracting Parties to examine the effect of

agricultural protectionism, fluctuating commodity prices and the failure of export earnings to keep pace with

import demand in developing countries.

The AoA has three central concepts, or "pillars": domestic support, market access and export subsidies

Domestic support:

The first pillar of the AoA is "domestic support". The WTO Agreement on Agriculture negotiated in the Uruguay

Round (1986-1994) includes the classification of subsidies into boxes depending on their effects on production

and trade: amber (most directly linked to production levels), blue (production-limiting programs that still distorttrade), and green (causing not more than minimal distortion of trade or production). While payments in the amber

box had to be reduced, those in the green box were exempt from reduction commitments. Detailed rules for green

box payments are set out in Annex 2 of the Agreement on Agriculture. However, all must comply with the

fundamental requirement in paragraph 1, to cause not more than minimal distortion of trade or production, and

must be provided through a government-funded program that does not involve transfers from consumers or price

support to producers.


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Market Access

"Market access" is the second pillar of the AoA, and refers to the reduction of tariff (or non-tariff) barriers to trade

by WTO member-states. The 1995 AoA required tariff reductions of 36% average reduction by developed countries,

with a minimum per tariff line reduction of 15% over six years.24% average reduction by developing countries with

a minimum per tariff line reduction of 10% over ten years. Least Developed Countries (LDCs) were exempted from

tariff reductions, but either had to convert nontariff barriers to tariffsa process called ratificationor "bind"

their tariffs, creating a "ceiling" which could not be increased in future.

Export subsidies

"Export subsidies" is the third pillar of the AoA. The 1995 AoA required developed countries to reduce export

subsidies by at least 36% (by value) or by at least 21% (by volume) over the six years. In the case of developing

country Members, the required cuts are 14% (by volume) and 24 % (by value) over 10 years.

At one time, trade involved only tangible stuff, things you could touch or weigh. With the incorporation of the

General Agreement on Trade in Services (GATS) into the WTO, the concept of trade was expanded to include

service provision. A GAT was reportedly finalized at secret meetings during the Uruguay Round. The concept of

trade in services was truly radical, and it is believed that it was pushed by the largest service MNCs in the

developed world. The rationale for GATS was that it would benefit poor nations unable to provide their citizens

with needed services. In essence and in practice, GATS is a WTO agreement that promotes privatization. There are

120 services listed under GATS, among them, health and hospital care, child care, education (primary through

postsecondary), libraries, museums, trash collection, transport, banking, social assistance, energy, real estate,

insurance, postal services, publishing, broadcasting, telecommunications, construction, sewage treatment, and

water supply. Essentially, any service you can think of that you use or that your community provides is part of

GATS. Liberalization of trade in services attempts to provide greater market access to MNCs by requiring

developing or LDC nations to eliminate laws that control the service sector and or prevent or deter foreign

companies from taking over these services. A GAT applies horizontally, granting most favored nation status to allcountries. This means that once a nation has allowed a corporation from one country to provide a service, it is

required to open its service sector to corporations from all member countries. For some very poor countries,

allowing a foreign corporation to step in and provide a service that the domestic government cannot afford to

provide itself, that it provides poorly or inefficiently, or that is not provided by a domestic company makes a lot of

sense and helps citizens. However, critics of GATS assert that it is undemocratic because it undermines the

authority of popularly elected governments and prevents a nation from shaping a service sector that is attuned to

its needs and culture. GATS also specifically prohibit government oversight and regulation of the Foreign Service

provider. Lack of oversight is particularly important in such vital service sectors as education and health care. No

nation wants a foreign corporation dictating how its schools should be run and its children educated. In other

sectors, government is forbidden to enact regulations to prevent MNCs from breaking environmental or labor laws.

The WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS), negotiated during the

Uruguay Round, introduced intellectual property rules for the first time into the multilateral trading system. The

Agreement, while recognizing that intellectual property rights (IPRs) are private rights, establishes minimum

standards of protection that each government has to give to the intellectual property right in each of the WTO

Member countries. The Member countries are; however, free to provide higher standards of intellectual property

rights protection. The Agreement is based on and supplements, with additional obligations, the Paris, Berne, Rome


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and Washington conventions in their respective fields. Thus, the Agreement does not constitute a fully

independent convention, but rather an integrative instrument which provides Conventionplus protection for

IPRs. The TRIPS Agreement is, by its coverage, the most comprehensive international instrument on IPRs, dealing

with all types of IPRs, with the sole exception of breeders rights. IPRs covered under the TRIPS agreement are:

y Copyrights and related rights;y Trademarks;y Geographical Indications;y Industrial Designs;y Patents;y Layout designs of integrated circuits; andy Protection of undisclosed information (trade secrets).

The TRIPS agreement is based on the basic principles of the other WTO Agreements, like non-discrimination

clauses - National Treatment and Most Favored Nation Treatment, and is intended to promote technological

innovation and transfer and dissemination of technology. It also recognizes the special needs of the leastdeveloped country Members in respect of providing maximum flexibility in the domestic implementation of laws

and regulations.

The power to settle international disputes with binding authority distinguishes the World Trade Organization from

most other intergovernmental institutions. The Understanding on Rules and Procedures Governing the Settlement

of Disputes gives the WTO unprecedented power to resolve trade-related conflicts between nations and assign

penalties and compensation to the parties involved.

Dispute settlement is administered by a Dispute Settlement Body (DSB) that consists of the WTO's General Council.

The DSB has the authority to "establish panels, adopt panel and Appellate Body reports, maintain surveillance of

implementation of rulings and recommendations, and authorize suspension of concessions and other obligations."

The Dispute Settlement system aims to resolve disputes by clarifying the rules of the multilateral trading system; it

cannot legislate or promulgate new rules.

When a Member believes that another party has taken an action that impairs benefits accruing to it directly or

indirectly under the Uruguay Round Agreements, it may request consultations to resolve the conflict through

informal negotiations. If consultations fail to yield mutually acceptable outcomes after 60 days, Members may

request the establishment of a panel to resolve the dispute. Panels typically consist of three individuals with

expertise in international trade law and policy; these panelists hear the evidence and present a report to the DSB

recommending a course of action within six months. The panel can solicit information and techni

globalization and free trade (global issues) - summary

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