1. International Economic Institutions Since World War II
Chapter 2
International Economic Institutions Since World War II

2. Learning Objectives
Classify and give examples of the main types of international economic organizations.
Compare and give examples of the different levels of integration found in regional trade agreements.
Analyze the roles of international economic organizations.
Discuss common criticisms of international economic organizations

3. Introduction: International Institutions and Issues since World War II
International institutions: Rules and organizations that govern and constrain behavior
Formal institutions: Written sets of rules that explicitly state what is and is not allowed
Informal institutions: Customs or traditions that define appropriate behavior, but without legal enforcement

4. TABLE 2.1 A Taxonomy of International Economic Institutions, with Examples

5. The IMF, the World Bank, and the WTO
The three global organizations that play a major role in international economic relations are:
The International Monetary Fund (IMF)
The World Bank
The World Trade Organization (WTO)

6. The IMF and World Bank International Monetary Fund (IMF)
Founded by 29 countries (1945) at the Bretton Woods conference in July 1944
The 188 member (2012) IMF is the central monetary institution in today’s international economy

7. The IMF and World Bank (cont.)
Funding for the IMF comes from its membership fee, or quota (the price of membership)
depends on size of the economy
Importance of its currency in world trade

8. The IMF and World Bank (cont.)
The most visible role for the IMF is to intercede, by invitation, whenever a nation experiences a crisis in its international payments. For example, if a country imports more than it exports, then it may run out of foreign exchange reserves.

9. The IMF and World Bank (cont.)
Foreign exchange reserves are dollars, yen, pounds, euros, or another currency (or gold) that is accepted internationally.
In the event of a financial crisis,
Members borrow against IMF quotas
IMF conditionality: Requirement for the borrowing member to carry out economic reforms in exchange for a loan

10. The IMF and World Bank (cont.)
IMF has its own currency, called an SDR, or special drawing right
SDRs are based on a country’s quota and are a part of its international reserves.

11. The IMF and World Bank (cont.)
Has same membership and similar structure to IMF
Member’s voting rights are proportional to number of shares owned

12. The IMF and World Bank (cont.)
Original purpose
- To provide financing mechanisms to rebuild Europe after World War II
Main function today
- Assisting development in non-industrial economies

13. The GATT, the Uruguay Round, and the WTO
Began with 23 nations in 1946 when the International Trade Organization (ITO) was established
The General Agreement on Trade and Tariffs (GATT) followed in 1950

14. The GATT, the Uruguay Round, and the WTO (cont.)
The GATT functioned through trade rounds: Times when countries periodically negotiate a set of incremental tariff reductions
During the Kennedy Round in the mid-1960’s, and the Tokyo Round in the 1970’s, other issues included:
- Problems with dumping
- Subsidies to industry
- Nontariff barriers to trade

15. The GATT, the Uruguay Round, and the WTO (cont.)
The Uruguay Round established the WTO (1995)
The Doha Round/Doha Development Agenda ( )
Focused on trade issues of importance to developing countries

16. The GATT, the Uruguay Round, and the WTO (cont.)
The General Agreement on Trade and Tariffs (GATT) followed the following principles:
National treatment: Imports must be given similar treatment on the domestic market as domestically produced goods
Nondiscrimination: Enshrined in the concept of most favored nation (MFN); a prohibition against discrimination

17. TABLE 2.2 The GATT Rounds
NEEDS TO BE UPDATED WITH DOHA (WTO) MEMBERSHIP = 153

18. Regional Trade Agreements
Regional trade agreements (RTAs) between two (bilateral) or
Several countries (plurilateral) are another important institution in the world economy,
Called multilateral agreement because it includes, potentially, all the countries of the world.

19. TABLE 2.3 Five Types of Regional Trade Agreements

20. TABLE 2.4 Prominent Regional Trade Blocs

21. TABLE 2.4 (continued) Prominent Regional Trade Blocs

22. Five Types of Regional Trade Agreements
Partial trade agreement: Two or more countries agree to drop trade barriers in a selected group of product categories such as steel or autos
Free-trade area: Nations trade goods and services across international boundaries without paying a tariff and without the limitations imposed by quotas

23. 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 an agreement to allow the free mobility of inputs, such as labor and capital.
- The European Union in the 1990s

24. Five Types of Regional Trade Agreements (cont.)
Economic Union: A 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

25. Regional Trade Agreements and the WTO
Since 1948, over 500 agreements have been listed with the WTO; with majority of the notifications since 1990
338 of these agreements are still active (2012)
The WTO and GATT allow RTAs, assuming they create more new trade than they destroy
- trade creation > trade diversion

26. For and Against RTAs The central economic question:
Are RTAs supportive of gradual, long run increases in world trade (building blocks), or
Do they tend to become obstacles to further relaxation of trade barriers (stumbling blocks)?

27. For and Against RTAs (cont.)
Proponents of RTAs view them as building blocks toward freer, more open, world trade
Opponents view RTAs as undermining progress toward multilateral (worldwide) agreements

28. For and Against RTAs (cont.)
Opponents question many of these assumptions:
Their greatest criticism is that RTAs undermine progress toward multilateral (worldwide) agreements.
Pro-trade opponents of RTAs do not believe that they encourage agreements through the WTO
Opponents point out that RTAs are often discriminatory against poor and less-developed countries

29. For and Against RTAs (cont.)
Proponents have several arguments on their side.
Easier for a few countries to reach agreement than it is for all the countries in the WTO.
The domestic effects of a reduction of trade barriers are less dramatic.
RTA member countries can experiment with new agreements.
RTAs can be used as a political and economic threat to encourage agreements in the WTO.

30. The Role of International Economic Institutions
The primary difference between international institutions and national governments is that the former have limited enforcement power
However, international institutions help provide order and reduce uncertainty
Order and certainty are public goods—intangibles that are different from most goods and services

31. Definition of 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

32. Definition of Public Goods (cont.)
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 don’t pay

33. Maintaining Order and Reducing Uncertainty
Two important functions of international economic institutions to reduce free riding are:
Maintaining order in international economic relations
Reducing uncertainty

34. TABLE 2.5 Four Examples of International Public Goods

35. Criticism of 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

36. Criticism of 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.