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Copyright © 2008 Pearson Addison-Wesley. All rights reserved. Chapter 2 International Economic Institutions since World War II.

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Presentation on theme: "Copyright © 2008 Pearson Addison-Wesley. All rights reserved. Chapter 2 International Economic Institutions since World War II."— Presentation transcript:

1 Copyright © 2008 Pearson Addison-Wesley. All rights reserved. Chapter 2 International Economic Institutions since World War II

2 Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 2-2 Chapter Objectives Discuss the history and functions of international institutions in world economy Present a taxonomy of international economic institutions Introduce the role of regional trade agreements in the global economy Analyze the arguments opposing international economic institutions

3 Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 2-3 Introduction Institutions: rules and organizations that govern and constrain behavior –Formal institutions: written set of rules that explicitly state what is and is not allowed –Informal institutions: custom or tradition that define appropriate behavior, but without legal enforcement

4 Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 2-4 TABLE 2.1 Taxonomy of International Economic Institutions, with Examples

5 Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 2-5 International Institutions The three global organizations playing a major role in international economic relations are –The International Monetary Fund (IMF) –The World Bank –The World Trade Organization (WTO)

6 Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 2-6 The IMF Founded by 29 nations (1945) at the Bretton Woods meetings between the Allies in July member (2006) IMF is the central monetary institution in todays international economy Funding comes from member quotas, or deposits –depend on members size and status –determine members voting weight

7 Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 2-7 The IMF Functions –Prevent crisis in the system by promoting sound macroeconomic policy, which includes Balanced expansion of trade Stable exchange rates Avoidance of competitive devaluations Orderly corrections of BoP problems

8 Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 2-8 The IMF Financial crisis –Occurs when a country runs out of foreign exchange reservesa 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 conditionality: requirement for the borrowing member to carry out economic reforms in exchange for a loan

9 Copyright © 2008 Pearson Addison-Wesley. All rights reserved. 2-9 The 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 (2006) Money comes from donor nation contributions and sales of debt securities in private markets

10 Copyright © 2008 Pearson Addison-Wesley. All rights reserved The World Bank Main functions –Investing in people, particularly through basic health and education –Focusing on social development, inclusion, governance, and institution-building as key elements of poverty reduction –Strengthening the ability of the governments to deliver quality services, efficiently and transparently

11 Copyright © 2008 Pearson Addison-Wesley. All rights reserved The World Bank (cont.) Main functions (cont.) –Protecting the environment –Supporting and encouraging private business development –Promoting reforms to create a stable macroeconomic environment, conducive to investment and long-term planning

12 Copyright © 2008 Pearson Addison-Wesley. All rights reserved GATT Began with 23 nations (1947) based on principles established in 1934 Reciprocal Trade Agreement Act –Nondiscrimination: enshrined in the concept of most favored nation (MFN); every WTO 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.

13 Copyright © 2008 Pearson Addison-Wesley. All rights reserved GATT (cont.) Functioned 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)

14 Copyright © 2008 Pearson Addison-Wesley. All rights reserved From GATT to WTO Uruguay Round established the WTO –reaches beyond GATT to new trade issues GATS, TRIPS, TRIMS –has a more effective dispute settlement mechanism –monitors national trade practices more consistently –Membership now totals 149 (2006)

15 Copyright © 2008 Pearson Addison-Wesley. All rights reserved WTO Doha Round ( ) –Focused on trade between developed and developing nations (Commonly referred to as the Doha Development Agenda) –Talks stalled over unresolved disputes U.S. farm subsidies E.U. agricultural tariffs Manufacturing tariffs

16 Copyright © 2008 Pearson Addison-Wesley. All rights reserved TABLE 2.2 The GATT Rounds

17 Copyright © 2008 Pearson Addison-Wesley. All rights reserved Regional Trade Agreements Besides economic organizations, regional trade agreements form a key part of the institutional structure of the world economy Regional trade agreements have proliferated around the world since the beginning of the 1990s

18 Copyright © 2008 Pearson Addison-Wesley. All rights reserved Five Types of Regional Trade Agreements 1.Partial trade agreement: two or more countries liberalize trade in a selected group of product categories 2.Free trade area (FTA): trade in goods and services fully liberalized between two or more countries –North American Free Trade Agreement (NAFTA)

19 Copyright © 2008 Pearson Addison-Wesley. All rights reserved Five Types of Regional Trade Agreements (cont.) 3.Customs union (CU): an FTA plus a common external tariff (CET) –European Union in the 1970s and 1980s –MERCOSUR in South America 4.Common market: a CU plus free mobility of factors of production –European Union in the 1990s

20 Copyright © 2008 Pearson Addison-Wesley. All rights reserved Five Types of Regional Trade Agreements (cont.) 5.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

21 Copyright © 2008 Pearson Addison-Wesley. All rights reserved TABLE 2.3 Prominent Regional Trade Blocs

22 Copyright © 2008 Pearson Addison-Wesley. All rights reserved The Role of International Economic Institutions Primary difference between international institutions and national governments: the former have limited enforcement power However, international institutions help provide order and reduce uncertainty –Order and certainty are publicintangibles that are different from most goods and services

23 Copyright © 2008 Pearson Addison-Wesley. All rights reserved Public Goods Public goods are –Nonexcludable: the normal price mechanism does not work as a way of regulating access to them –Nonrival (or nondiminishable): they are not diminished or reduced by consumption Private markets fail to supply public goods because of free riding; people have no incentive to pay for a public good because they cannot be excluded from its consumption even if they did not pay

24 Copyright © 2008 Pearson Addison-Wesley. All rights reserved TABLE 2.4 Four Examples of International Public Goods

25 Copyright © 2008 Pearson Addison-Wesley. All rights reserved Opposition to International Institutions International institutions receive three types of criticism –1. Sovereignty and Transparency International institutions can violate national sovereignty by imposing unwanted domestic economic policies. Transparency concerns are based on questions about the mechanism with which decisions are made within an international institution.

26 Copyright © 2008 Pearson Addison-Wesley. All rights reserved Opposition to International Institutions (cont.) –2. Ideology Critics argue that the advise and technical assistance provided to developing countries are often a reflection of the biases and wishes of developed country wishes. –3. Implementation and adjustment costs When agreements are reached that combine developed and developing countries, there are often asymmetries in the ability to absorb the costs associated with them that favor developed nations.


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