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: International Institutions and Issues since World War II
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
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4. TABLE 2.1 A Taxonomy of International Economic Institutions, with Examples
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5. TABLE 2.1 (continued) A Taxonomy of International Economic Institutions, with Examples
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6. 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)
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7. The International Monetary Fund (IMF)
Founded by 29 nations (1945) at the Bretton Woods meetings between the Allies in July 1944
The 184 member (2006) IMF is the central monetary institution in today’s international economy
Funding for the IMF comes from its membership fee, or quota (the price of membership)
depends on the member’s size and status
determines the member’s voting weight
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8. The International Monetary Fund (IMF) (cont.)
Functions of the IMF:
-Prevents crisis in a financial system by promoting sound macroeconomic policy, which includes
-Balanced expansion of trade
-Stable exchange rates
-Avoidance of competitive devaluations
-Orderly corrections of Balance of Payments problems
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9. The International Monetary Fund (IMF) (cont.)
A Financial crisis occurs when a country runs out of foreign exchange reserves, which are a major currency or gold that can be used to pay for imports and international borrowings
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
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10. The World Bank
Founded in 1944 as the International Bank for Reconstruction and Development (IBRD)
IBRD and International Development Association (IDA) comprise World Bank
Has same membership and similar structure to IMF
Member’s voting rights are proportional to number of shares owned
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11. The World Bank (cont.) Original purpose Main function today
-To provide financing mechanisms to rebuild Europe after World War II
Main function today
-Assisting development in non-industrial economies
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12. General Agreement on Tariffs and Trade (GATT)
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 based on 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); every WTO member must treat every other member as it treats its most favored trading partner
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13. GATT (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
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14. From GATT to World Trade Organization (WTO)
The Uruguay Round established the WTO (1994)
WTO members meet every two years to set WTO policy objectives
Has a more effective dispute settlement mechanism
Monitors national trade practices more consistently
Membership now totals 153 (2008)
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15. World Trade Organization (WTO)
The Doha Round/Doha Development Agenda ( )
Focused on trade issues of importance to developing countries
Key issues of Doha Development Agenda:
-Farm subsidies in high income countries of Europe, US, and Japan
-Greater market access by developing countries and strong farm sector high income countries
-Trade in services
-Problems poor countries face in implementation
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16. TABLE 2.2 The GATT Rounds
NEEDS TO BE UPDATED WITH DOHA (WTO) MEMBERSHIP = 153
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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 are bilateral (two countries) or plurilateral (several countries)
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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 such as steel or autos
Free trade area (FTA): Trade in goods and services is 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: 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
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21. Table 2.3 Five Types of Regional Trade Agreements
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22. TABLE 2.4 Prominent Regional Trade Blocs
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23. TABLE 2.4 (continued) Prominent Regional Trade Blocs
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24. TABLE 2.4 (continued) Prominent Regional Trade Blocs
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25. Regional Trade Agreements and the WTO
Since 1948, over 400 agreements have been listed with the WTO; 75% of those since 1995
225 of these agreements are still active (2008)
The WTO and GATT allow RTAs, assuming they create more new trade than they destroy
- trade creation > trade diversion
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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)?
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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
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28. 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—intangibles that are different from most goods and services
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29. 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
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
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30. 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
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31. TABLE 2.5 Four Examples of International Public Goods
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32. 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
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33. 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.
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