International Institutions

1. International Institutions • Institutions = rules and organizations that govern and constrain behavior • Types of institutions: • Formal institutions: • written set of rules that explicitly state what is allowed or not allowed in an economy • Informal institutions: • Traditions or customs that govern behavior, but without legal enforcement -- there may be rules, but there is no legal mechanism to make them stick

2. Some International Institutions

3. IMF, WORLD BANK, WTO These banks/funds play an important but to some extent controversial role in the international economy IMF = International Monetary Fund World Bank = a collection of banks & funds WTO = World Trade Organization succeeding GATT (General Agreement on Trade and Tariffs)

4. IMF Founded by 29 nations (1945) at the Bretton Woods meetings between the Allies in July 1944 184 + members -- IMF is the central monetary institution in today’s international economy Attempts to correct financial crises and upsets in member nation macroeconomies – control of monetary policy, reduce inflation, impose policies on exchange rate policy -- runs into resistance --- some times accused of favoritism - - deals with balance of payments issues Funding comes from member quotas, or “deposits”, that depend on member size, status, and weight in voting

5. IMF dealing with Financial Crises • A financial crises 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 places conditions on economic policy such as, for example, requirements for the borrowing member to carry out economic reforms in exchange for a loan, tighter monetary policy, independence of the central bank and the treasury and political influences, imposition of a currency board, etc.

6. Crises and the problem of inflation --- A RUN ON RESERVES NEED TO Supply £ TO THE MARKET (B)) (A) €/£ Supply of £ Supply of £ €/£ Fixed exchange rate €/£ Fixed exchange rate €/£ RESULTING DEVALUATION OF € RELATIVE TO THE £ Demand for £ Demand for £ £ £ THE € NATION HAS TO SUPPLY £ TO THE MARKET FROM RESERVES TO SHIFT SUPPLY OF £ BACK TO KEEP THE €/£ RATE AT THE INITIAL FIXED RATE --- IF NO RESERVES OF £ THEY HAVE TO BORROW FROM OTHER NATIONS OR FROM THE IMF – OR ARRANGE FOR SDR INITIALLY, EX HANGE RATE (€/£) IS FIXED AT SOME RATE AS SHOWN BELOW IN PANEL A --- INFLATION HITS IN THE € NATION --- THE RESULT IS THAT DEMAND FOR £ INCREASES BECAUSE £-DENOMINATED GOODS ARE CHEAPER --- AND THE SECOND ROUND OF CHANGE IS THAT SUPPLY OF £ RETRACTS --- LESS £ COMING IN TO EXCHANGE FOR € --- THE RESULT IS A HIGHER €/£ RATE (PANEL B)

7. 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 • Money comes from donor nation contributions and sales of debt securities in private markets

8. The Main functions of the World Bank • 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 ---- • There is some controversy on changing missions and who the bank serves

9. World Bank is also charged with: Protecting the environment Promoting business activity and markets --- markets have been the emphasis as of late --- but this role has varied over the years Promoting reforms in macroeconomic policies around the world --- some criticism on which nations are served by this thrust

10. GATT – General Agreement on Trade & Tariffs GATT is the precursor of the World Trade Organization GATT policies focused on the reduction in tariffs, quotas, and non-tariff barriers to international trade GATT lacked power to set policy regarding the main mission

11. Began with 23 nations (1947) based on principles established in 1934 Reciprocal Trade Agreement Act • Nondiscrimination: focused in the concept of most favored nation (MFN); every aligned 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.

12. GATT operated 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)

13. WTO comes from GATT WTO gets more muscle and teeth in dealing with international disputes The Uruguay round of GATT established WTO (1986 – 1993) WTO monitors international trade issues and disputes more consistently and with settlement incentives WTO monitors national trade practices more consistently

14. WTO and the Doha Round The Doha round comes over the 2001 – 2006 period The focus was on the developed- less developed nation trade -- this debate is still ongoing Nations such as Brazil and India are working to form developing nation coalitions to discuss the developed-less developed issue and trade

15. The Doha Round – the stalled discussions • Talks stalled over unresolved disputes • U.S. farm subsidies --- Target and loan policies for ag products, U.S. subsidies to production in the U.S. • E.U. agricultural tariffs --- the common agricultural policy of the European Community --- variable levy issue --- load a ship with grain in the U.S. or Brazil, then by time the ship reaches Amsterdam, the price that the imported grain has to sell for above the European levy has increased to protect European grain prices • Manufacturing tariffs --- tariffs imposed by small nation manufacturing interests

16. “Free Trade Agreements” Do we have “free” trade agreements? Are we moving to multilateral free international trade? These are the 2 big questions in today’s international trade arena Let’s look at the types of trade agreements and see how they come out on “free” trade conditions

17. “Free Trade Agreements” • Partial trade agreement: two or more countries liberalize trade in a selected group of product categories – remove barriers, reduce tariffs, etc. • Free trade area (FTA): trade in goods and services fully liberalized between two or more countries – but some pre-existing conditions exist • NAFTA - North American Free Trade Agreement

18. “Free Trade Agreements” • Partial trade agreement: two or more countries liberalize trade in a selected group of product categories – remove barriers, reduce tariffs, etc. • Free trade area (FTA): trade in goods and services fully liberalized between two or more countries – but some pre-existing conditions exist • NAFTA - North American Free Trade Agreement

19. “Free Trade Agreements” • Customs union (CU): an FTA plus a common external tariff (CET) Examples: • European Union in the 1970s and 1980s • MERCOSUR in South America (Brazil, Argentina, Uruguay, Paraguay) • Common market: a CU plus free mobility of factors of production Example: • European Union in the 1990s

20. “Free Trade Agreements” • Monetary Union --- common currency – such as France and Western African nations --- Francophone Africa, the states of the U.S. • 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. International vs. nationalInstitutions International institutions have limited power relative to national law embedded in national institutions International institutions do, in some instances, reduce uncertainty and provide order in trade negotiations Order and reduced uncertainty are “public goods” provided by the international institution

22. International vs. nationalInstitutions The problem with a public good is that no nation wants to pay for the public good, the benefits from which all share If Q = the public good, then Qi = Q, for the ith nation relative to the international scene --- so a “free rider” problem is involved with the supply of the public good --- a constant issue in managing international trade with an international institutional authority

23. International vs. nationalInstitutions • Public goods are: • Nonexcludable: the price mechanism does not work in its usual allocation role in providing access to public goods • Nonrival (or nondiminishable): they are not diminished or reduced by consumption • Order and reduced uncertainty are intangibles • What are their value?

24. So providing lender of last resort loans to less developed nations meets up with the public good problem --- who is in favor of such an action? --- even though the loan could work to reduce the threat of financial crises In our own current case of a deep recession, which nation is going to lead in opening up markets in order to prevent a vast reduction of exports? How would an international currency get set up in order to efficiently resolve debt payments around the world?

25. The conflicts • International institutions such as IMF can violate national sovereignty by imposing unwanted domestic economic policies on crises nations. • Can there be transparency in the decisions that are made by Word Bank or IMF on lending, and economic growth to take place and the sectors that will be targeted? • Does the economic advice of IMF or World bank reflect the biases of more developed nations? (The Doha round problem) • Are there asymmetries about who can absorb the costs of development and/or correcting economic policy?