Global Economic Institutions all economies use economic institutions US as an example -independent Federal Reserve - monetary stability -constitution, free trade between states -legal rules for economic activity institutions might be beneficial for global economy which global institutions exist? how they do they work? their achievements, and their futures Readings: Look up GATT, WTO, IMF, and World Bank in the index of Y&Y and skim the relevant entries Outline Reasons for global institutions Historical background IMF World Bank GATT/WTO

Economic problems addressed by global institutions negotiating trade agreements rules for trading relations, trade dispute resolution lowering international transactions costs -legal rules, international courts -attacking economic crime -harmonizing regulations e.g. on telecoms lessening macroeconomic instability economic development environment peace-keeping In what ways have these problems been addressed? dominant nations -UK in 19 th century; US in 20 th century small “clubs” -e.g. NAFTA, EU, NATO, G7 global institutions -UN, GATT/WTO, IMF, World Bank, etc Review overhead sets 2 and 3 for a fuller list of the most important world economic institutions

Historical Background Before th century - modern industry spreads -world trade dominated by a few countries after WWI ( ) -attempts to establish global institutions ▫US isolationism ▫French and British disagree ▫Germany outsider -failure between the world wars -world depression -cooperation poor, e.g. Smoot Hawley after WWII ( ) -US takes the lead -global institutions established

Formation of global institutions ( ) international economy viewed as one cause of war Why the US took the lead -rivalry with USSR -USA dominant (50% of world income) -dollar = “world currency” -changing US views after WWII ▫experience as international actor ▫rise of outward oriented industries e.g. shipbuilding, aircraft ▫rise of Pacific coast economy post-war institutions -United Nations on political, economic, social -IMF on macroeconomics -World Bank on development -GATT on trade

: golden era of the “Bretton Woods” system annual GNP growth -Europe 4.6% -US 3.7% -Japan 10% growth of international trade 9% per year Harder times from 80’s onwards relative decline of US and UK other strong economies -Germany, Japan, France, etc more countries decolonization China opens 's Russia, etc more issues increase in world trade, capital flows -services, agriculture, investment -development, democracy, environment, etc

IMF – International Monetary Fund December 1945 part of UN macroeconomics objectives -“promote international monetary cooperation” -“facilitate the expansion and balanced growth of international trade” -“promote exchange [rate] stability” -“make its general resources temporarily available to its members experiencing balance of payments difficulties” Organization 184 members each contributes a “quota” -proportional to size of economy -US quota = 17.5% of total voting power roughly equal to quotas G7 (US, UK, France, Germany, Italy, Japan, Canada) 49.5% of votes Managing Director traditionally European

IMF Operations surveillance official commentary on all members’ policies technical assistance examples -tax administration -design of statistical procedures financial assistance crisis management -lends to member countries with problems -at low interest rates conditionality -on macroeconomic policies -on foreign borrowing -trade restrictions

Commentary on IMF problems identified by critics narrow view of appropriate economic policies -"austerity", free markets, globalization influenced too much by Western financial interests "moral hazard" problem conditionality selectively enforced -political reasons e.g. Russia proposals use shorter-term and more costly lending -to address moral hazard problem focus more on large short-term crises -IMF as "bankruptcy administrator" ▫long-standing proposal ▫analogy to company bankruptcies many, different competing proposals by economists on appropriate conditionalities for IMF to use

World Bank World Bank Group – set of related institutions sister institutions of IMF membership, organization, and voting as IMF usually World Bank President is from US Objectives “to help each developing country onto a path of stable, sustainable, and equitable growth in the fight against poverty” Resources contributed capital by members funds borrowed from world capital markets

World Bank operations technical assistance examples: -designing development projects -building capacities of governments lending to governments long-term (30-40 years) no interest for poorest countries low interest next poorest two types of loans 1.developments projects 2. countries in crisis facilitating international investment insurance against political risk International Center for the Settlement of Investment Disputes

World Bank commentary successes 2003: $18.5 billion of development loans working in over 100 countries Examples of projects - loans passed in March 2004 Egypt: Airports Development Project Guyana: HIV/AIDS Prevention & Control Project Poland: Hard Coal Social Mitigation Project Poland: Road Maintenance and Rehabilitation Project Sri Lanka: Community Development and Livelihood Improvement “Gemi Diriya” Project Vietnam: Water Resources Assistance Project Albania: Integrated Water And Ecosystems Management Project Burkina Faso: Multi-Country Statistical Capacity Building Program Caricom: Pan Caribbean Partnership Against HIV/AIDS China: Fourth Inland Waterways Project Nicaragua: Public Sector Technical Assistance Project Turkey: Renewable Energy Project Ukraine: Development of the State Statistics System for Monitoring the Social and Economic Transformation Project Benin: Poverty Reduction Support Credit Burundi: Emergency Demobilization, Reinsertion and Reintegration Program Grant Burundi: Road Sector Development Project Cameroon: Community Development Program Support Project Senegal: Private Sector Adjustment Credit Albania: Power Sector Generation And Restructuring Project Kyrgyz Republic: Payments And Banking System Modernization Project Serbia And Montenegro: Serbia Energy Efficiency Project Comoros: Services Support Project India: Rajasthan Health Systems Project Mali: Transport Corridors Improvement Project China – Wuhan Urban Transport Project Ghana: Education Sector Project Nepal: Financial Sector Restructuring Project Zambia: Road Rehabilitation and Maintenance Project Peru: Justice Services Improvement Project Russia: E-Learning Support Project

criticisms straying too far into the IMF’s area -crisis loans -conditionality from "left" -not sensitive enough to environment, human rights, democracy, etc from "right" -too “socialist”, interventionist from both -willing to deal with corrupt, incompetent governments -aid has not produced a large effect on growth

GATT/WTO GATT members originally, 110 at end Uruguay round - GATT becomes WTO WTO now 146 members and 20 applicants unified GATT agreements -continuation and strengthening of GATT permanent organization extended GATT to other areas e.g. services

GATT Objectives -substantial reduction in trade barriers -elimination of discrimination in trade policy Tools code of behavior MFN - most favored nation -advantages to one, apply to all national treatment rule -treat imports like domestic goods tariff binding -once lower, cannot raise again "rounds" of negotiated world trade deals eight, including: -Kennedy round , very large tariff cuts -Tokyo round , attacking non-tariff barriers -Uruguay round – WTO

GATT becomes the WTO successes of GATT huge increases in world trade new members: 23 to 110 enormous reductions in tariffs problems weakness in face of non-tariff barriers did not cover many areas of activity (e.g. services) decision-making slow and cumbersome weak powers Uruguay Round ambitious goals slow negotiations -US versus EU on agriculture -disagreements on intellectual property Clinton pressured for final agreement -threat of end of fast-track -threat of regional FTAs

Results of the Uruguay Round WTO follows basic principles of GATT permanent, but weak, central organization one-country, one-vote -with super-majority rules Dispute settlement panel of three "judges" decisions within 20 months if decisions not implemented, winner can retaliate Trade rules WTO uses basic GATT code of behavior, plus -banning of VERs -stronger justification for escape clauses (safeguards)

Trade liberalization agriculture -banning quotas (convert to tariffs) -reduction in tariffs -reducing subsidies textiles -phasing out of quotas -reductions of tariffs "tariff-bindings" now apply to 99% of imports GATS General Agreement on Trade in Services service trade previously not covered by GATT GATT-type rules now apply to services TRIPS - trade-related aspects of intellectual property obligations for protection and enforcement of intellectual property rules (patents, copyright, etc) forces countries to use domestic sanctions WTO handles violations

Commentary GATT/WTO successes -growth of world trade -increasing membership -absence of large trade wars proponents of WTO focus on: -need to widen trade agreements -need stronger supra-national organization opponents of WTO focus on: -loss of national sovereignty -non-trade issues (e.g. environment) -decisions dominated by "Quad" group ▫Europe, Japan, Canada, and USA Contentious issues -developed countries disagree on agriculture ▫exporters: US, Canada, Australia ▫importers:EU, Japan, S. Korea -developing countries ▫want previous commitments fulfilled ▫want more open agricultural trade -developed countries focus on labor and environmental standards Caused delay in starting new trade negotiations "Seattle round" 1998

THE FUTURE Agreements made Doha, Qatar, November 2001 Implementation of Uruguay Round -commitment to abide by past agreements -insisted on by developing countries Declaration on Intellectual Property and Public Health -national health emergency gives discretion on intellectual property issues Commitment to a new round of negotiations: -"the development round" -deadline for agenda, March deadline for agreement: 1/1/2005 -further trade liberalization ▫reduce highest tariffs (= textiles) ▫agriculture -trade and environment ▫relating trade agreements to environmental agreements -strengthen WTO rules ▫anti-dumping ▫subsidies Issues that need to be addressed decision-making structure strengthening dispute adjudication and resolution further reducing trade barriers extending the GATT/WTO structure e.g. investment, electronic commerce, excluded categories of goods and services, etc which issues should WTO deal with? Intellectual property issues introduced into WTO developed country proposal mainstream economists: why combine with trade? should the WTO also focus on environment? mainstream economics – why? protesters – trade rules damage environment

Deadlock, September 2003 Meeting in Cancun abandoned without agreement on agenda for negotiations Agriculture -developed countries divided formation of G21 -important developing countries China, India, Brazil, Mexico,… -want agricultural subsidies eliminated -if not, no negotiation on other issues possible scenarios -revived talks, WTO advances -WTO as monitor of existing agreements -WTO loses power