international institutions institutions = rules and organizations that govern and constrain...

International Institutions

Institutions = rules and organizations that govern and constrain behavior

Types of institutions:• Formal institutions:

written set of rules that explicitly state what is allowed or not allowed in an economy

• Informal institutions: Traditions or customs that govern

behavior, but without legal enforcement -- there may be rules, but there is no legal mechanism to make them stick

Some International Institutions

Institutional Type Organizations

Commodity or Industry Specific

OPEC – petroleum suppliersInternational Sugar OrganizationInternational Telecommunications Union

Agencies or Commissions IBWC – international boundary and water commissionMekong River Commission

Banks and Funds ADB - Asian Development BankIDB – Inter-American Development Bank

Regional Trade Agreements Mercado Comun del Sur-Mercosur

NAFTA

Global Trade Organizations IMF, World Bank, WTO

IMF, WORLD BANK, WTO

These banks/funds play an important but to some extent controversial role in the international economy

IMF = International Monetary Fund

World Bank = a collection of banks & funds

WTO = World Trade Organization succeeding GATT (General Agreement

on Trade and Tariffs)

IMF

Founded by 29 nations (1945) at the Bretton Woods meetings between the Allies in July 1944

184 + members -- IMF is the central monetary institution in today’s international economy

Attempts to correct financial crises and upsets in member nation macroeconomies – control of monetary policy, reduce inflation, impose policies on exchange rate policy -- runs into resistance --- some times accused of favoritism - - deals with balance of payments issuesFunding comes from member quotas, or “deposits”, that depend on member size, status, and weight in voting

IMF dealing with Financial Crises

A financial crises occurs when a country runs out of foreign exchange reserves—a major currency or gold that can be used to pay for imports and international borrowings

Members borrow against IMF quotas in the event of financial crisis

IMF places conditions on economic policy such as, for example, requirements for the borrowing member to carry out economic reforms in exchange for a loan, tighter monetary policy, independence of the central bank and the treasury and political influences, imposition of a currency board, etc.

Crises and the problem of inflation --- A RUN ON RESERVES

INITIALLY, EX HANGE RATE (€/£) IS FIXED AT SOME RATE AS SHOWN BELOW IN PANEL A --- INFLATION HITS IN THE € NATION --- THE RESULT IS THAT DEMAND FOR £ INCREASES

BECAUSE £-DENOMINATED GOODS ARE CHEAPER --- AND THE SECOND ROUND OF CHANGE IS THAT

SUPPLY OF £ RETRACTS --- LESS £ COMING IN TO EXCHANGE FOR € --- THE RESULT IS A HIGHER €/£

RATE (PANEL B)

€/£

£

Demand for £

Supply of £

Fixed exchange rate €/ £

€/£

£

THE € NATION HAS TO SUPPLY £ TO THE MARKET FROM RESERVES TO SHIFT SUPPLY OF £ BACK TO KEEP THE €/£ RATE AT THE INITIAL FIXED RATE --- IF NO RESERVES OF £ THEY HAVE TO BORROW FROM OTHER NATIONS OR FROM THE IMF – OR ARRANGE FOR SDR

(A) (B))

Fixed exchange rate €/ £

Supply of £

Demand for £

NEED TO Supply £ TO THE MARKET

RESU

LTIN

G D

EVA

LUATIO

N O

F

€ R

ELATIV

E T

O T

HE £

WORLD BANK

Founded in 1944 as the International Bank for Reconstruction and Development (IBRD)

Today, IBRD is one of the five subgroups making up the World Bank Group

World Bank has 184 + members Money comes from donor nation

contributions and sales of debt securities in private markets

The Main functions of the World BankInvesting in people, particularly through basic health and educationFocusing on social development, inclusion, governance, and institution-building as key elements of poverty reductionStrengthening the ability of the governments to deliver quality services, efficiently and transparently ---- There is some controversy on changing missions and who the bank serves

World Bank is also charged with:

Protecting the environment

Promoting business activity and markets --- markets have been the emphasis as of late --- but this role

has varied over the years

Promoting reforms in macroeconomic policies around the world --- some criticism on which nations are served by this thrust

GATT – General Agreement on Trade & Tariffs

GATT is the precursor of the World Trade Organization

GATT policies focused on the reduction in tariffs, quotas, and non-tariff barriers to international trade

GATT lacked power to set policy regarding the main mission

Began with 23 nations (1947) based on principles established in 1934 Reciprocal Trade Agreement Act• Nondiscrimination: focused in the concept

of most favored nation (MFN); every aligned member must treat every other member as it treats its most favored trading partner

• National treatment: imports must be given similar treatment on the domestic market as domestically produced goods.

GATT operated through trade rounds: inter-state negotiations to reduce tariffs and other barriers to trade

Geneva (‘47)

Annecy, Torquay, Geneva II, Dillon (‘49-’61)

Kennedy (’64-’67)

Tokyo (’73-’79)

Uruguay (’86-’93)

WTO comes from GATT

WTO gets more muscle and teeth in dealing with international disputes

The Uruguay round of GATT established WTO (1986 – 1993)

WTO monitors international trade issues and disputes more consistently and with settlement incentives

WTO monitors national trade practices more consistently

WTO and the Doha Round

The Doha round comes over the 2001 – 2006 period

The focus was on the developed- less developed nation trade -- this debate is still ongoing

Nations such as Brazil and India are working to form developing nation coalitions to discuss the developed-less developed issue and trade

The Doha Round – the stalled discussions

• Talks stalled over unresolved disputes

U.S. farm subsidies --- Target and loan policies for ag products, U.S. subsidies to production in the U.S.

E.U. agricultural tariffs --- the common agricultural policy of the European Community --- variable levy issue --- load a ship with grain in the U.S. or Brazil, then by time the ship reaches Amsterdam, the price that the imported grain has to sell for above the European levy has increased to protect European grain prices

Manufacturing tariffs --- tariffs imposed by small nation manufacturing interests

“Free Trade Agreements”

Do we have “free” trade agreements?

Are we moving to multilateral free international trade?

These are the 2 big questions in today’s international trade arena

Let’s look at the types of trade agreements and see how they come out on “free” trade conditions


1. Partial trade agreement: two or more countries liberalize trade in a selected group of product categories – remove barriers, reduce tariffs, etc.

2. Free trade area (FTA): trade in goods and services fully liberalized between two or more countries – but some pre-existing conditions exist

• NAFTA - North American Free Trade Agreement


3. Customs union (CU): an FTA plus a common external tariff (CET)

Examples:• European Union in the 1970s and 1980s• MERCOSUR in South America (Brazil,

Argentina, Uruguay, Paraguay)

4. Common market: a CU plus free mobility of factors of production

Example:• European Union in the 1990s


5. Monetary Union --- common currency – such as France and Western African nations --- Francophone Africa, the states of the U.S.

6. Economic Union: common market with coordination of macroeconomic policies (including common currency, harmonization of standards and regulations)

• United States• Canada• European Union members

participating in the Euro currency zone

International vs. nationalInstitutions

International institutions have limited power relative to national law embedded in national institutions

International institutions do, in some instances, reduce uncertainty and provide order in trade negotiations

Order and reduced uncertainty are “public goods” provided by the international institution


The problem with a public good is that no nation wants to pay for the public good, the benefits from which all share

If Q = the public good, then Qi = Q, for the ith nation relative to the international scene --- so a “free rider” problem is involved with the supply of the public good --- a constant issue in managing international trade with an international institutional authority


Public goods are:• Nonexcludable: the price mechanism does

not work in its usual allocation role in providing access to public goods

• Nonrival (or nondiminishable): they are not diminished or reduced by consumption

• Order and reduced uncertainty are intangibles

• What are their value?

So providing lender of last resort loans to less developed nations meets up with the public good problem --- who is in favor of such an action? --- even though the loan could work to reduce the threat of financial crises

In our own current case of a deep recession, which nation is going to lead in opening up markets in order to prevent a vast reduction of exports?

How would an international currency get set up in order to efficiently resolve debt payments around the world?

The conflicts

International institutions such as IMF can violate national sovereignty by imposing unwanted domestic economic policies on crises nations.

Can there be transparency in the decisions that are made by Word Bank or IMF on lending, and economic growth to take place and the sectors that will be targeted?

Does the economic advice of IMF or World bank reflect the biases of more developed nations? (The Doha round problem)

Are there asymmetries about who can absorb the costs of development and/or correcting economic policy?

international institutions institutions = rules and organizations that govern and constrain...

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