1. Chapter 2
International Economic Institutions since World War II

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
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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
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4. TABLE 2.1 Taxonomy of International Economic Institutions, with Examples
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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)
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6. The IMF
Founded by 29 nations (1945) at the Bretton Woods meetings between the Allies in July 1944
184 member (2006) IMF is the central monetary institution in today’s international economy
Funding comes from member quotas, or “deposits”
depend on member’s size and status
determine member’s voting weight
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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
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8. The IMF Financial crisis
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 conditionality: requirement for the borrowing member to carry out economic reforms in exchange for a loan
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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
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10. 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
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11. 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
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12. 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.
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13. 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)
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14. 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)
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15. 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
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16. TABLE 2.2 The GATT Rounds
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17. 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
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18. Five Types of Regional Trade Agreements
Partial trade agreement: two or more countries liberalize trade in a selected group of product categories
Free trade area (FTA): trade in goods and services fully liberalized between two or more countries
North American Free Trade Agreement (NAFTA)
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19. Five Types of Regional Trade Agreements (cont.)
Customs union (CU): an FTA plus a common external tariff (CET)
European Union in the 1970s and 1980s
MERCOSUR in South America
Common market: a CU plus free mobility of factors of production
European Union in the 1990s
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20. Five Types of Regional Trade Agreements (cont.)
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
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21. TABLE 2.3 Prominent Regional Trade Blocs
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22. 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 public—intangibles that are different from most goods and services
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23. 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
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24. TABLE 2.4 Four Examples of International Public Goods
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25. 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.
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26. 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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