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interantional economics 5th by gerber ch02

Chapter 2
International
Economic
Institutions
since World
War II

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Introduction: International Institutions and
Issues since World War II




International institutions play important role


Increase stability




Reduce uncertainty

Institutions: Rules and organizations that govern and constrain behavior


Formal institutions



Informal institutions

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TABLE 2.1 A Taxonomy of International Economic Institutions,
with Examples

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TABLE 2.1 (continued) A Taxonomy of International Economic
Institutions, with Examples

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The IMF, the World Bank,
and the WTO


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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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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The International Monetary
Fund (IMF)


High income countries’ voting power is disproportionate to population



Functions of the IMF:
- Prevents crisis in a financial system by promoting sound macroeconomic policy

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The International Monetary
Fund (IMF)
• Financial crisis: a country runs out of foreign
exchange reserves, 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


IMF resources are inadequate for financial crisis in large economy

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The World Bank
• Founded in 1944 as the International Bank for
Reconstruction and Development (IBRD) at Bretton
Woods
• 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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The World Bank


Original purpose
- To provide financing mechanisms to rebuild Europe after World War II
- Capital reserves were insufficient
- US found it politically desirable to control rebuilding



Main function today
-Assisting development in non-industrial economies

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General Agreement on Tariffs
and Trade (GATT)
• Began with 23 nations in 1946 with the International Trade
Organization (ITO)
• ITO was not supported by US, so it died in 1950
• Before ITO failed, 23 countries opened negotiations with
45,000 tariff reductions, affecting $10 billion in
goods/services.
• General Agreement on Tariffs and Trade followed in 1950

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General Agreement on Tariffs
and Trade (GATT)
• GATT/WTO principles:
- National treatment: Imports are given similar treatment on the domestic market as domestically produced goods

- Nondiscrimination: Enshrined in the concept of most favored nation (MFN); every member must treat every other
member as it treats its most favored trading partner

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GATT
• Trade rounds: Times when countries periodically
negotiate a set of incremental tariff reductions
• Kennedy Round (mid-1960’s), and the Tokyo Round
(1970’s) addressed trade rules and:
- Problems with dumping
- Subsidies to industry
- Nontariff barriers to trade
• As tariffs fell, nontariff issues grew

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From GATT to World Trade
Organization (WTO)
• GATT ignored contentious sectors like ag, textiles, and
apparel
• The Uruguay Round of GATT established the WTO
(1994)






Signed by 125 countries
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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World Trade Organization
(WTO)
• The Doha Round/Doha Development Agenda
– Focused 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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Case Study - GATT Rounds
• First 5 rounds were based on product by product
negotiations
• Kennedy round: simplified negotiations with
percentage reduction in all tariffs for range of goods
• Tokyo Round was first to establish rules for subsidies


Laborious process



Most important rule: prohibit subsidies for exports of industrial goods

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TABLE 2.2 The GATT Rounds

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Regional Trade Agreements


Key part of the institutional structure of the world economy



Regional trade agreements are bilateral (two countries) or plurilateral (several countries)



WTO is multilateral



Often violate basic principles of GATT and WTO

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Five Types of Regional Trade
Agreements
1. Partial trade agreement:
• Two or more countries
• For specific good/product
2. Free trade area (FTA):


Fully liberalized trade in goods/service



Between countries in certain area
- North American Free Trade Agreement (NAFTA)

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Five Types of Regional Trade
Agreements (cont.)
3. Customs union (CU): An FTA plus a
common external tariff (CET)



European Union in the 1970s and 1980s
MERCOSUR in South America

4. Common market: A CU plus free mobility
of factors of production


European Union in the 1990s

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


A common market



Coordination of macroeconomic policies
(common currency, harmonization of
standards and regulations)
– United States
– Canada
– European Union members participating in the Euro currency zone

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Table 2.3 Five Types of Regional Trade
Agreements

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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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For and Against RTAs


The central economic question:

Is RTA a building block or a stumbling block?
• Proponents


RTAs are building blocks for free, open trade



Easier for a few countries to reach agreement



Only covers a few goods, mitigating negative effects



RTAs let countries experiment with different agreements

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For and Against RTAs


Opponents


Undermine progress toward multilateral (worldwide) agreements



Discriminatory against poor & less developed countries

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