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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
Some International
Institutions
Institutional Type
Organizations
Commodity or Industry
Specific
OPEC – petroleum suppliers
International Sugar
Organization
International
Telecommunications Union
Agencies or Commissions
IBWC – international
boundary and water
commission
Mekong River Commission
Banks and Funds
ADB - Asian Development
Bank
IDB – Inter-American
Development Bank
Regional Trade Agreements
Mercado Comun del Sur-Mercosur
NAFTA
Global Trade Organizations
IMF, World Bank, WTO
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)

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
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.
Crises and the problem of inflation --- A
RUN ON RESERVES




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)
(A)
€/£
Supply of £
€/£
(B)
)
NEED TO Supply £ TO
THE MARKET
Supply of £
Fixed exchange rate €/
Fixed exchange rate €/
£
£
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
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
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
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
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


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.
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)
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

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 developedless developed issue and trade

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
“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

“Free Trade Agreements”
1.
Partial trade agreement: two or more
countries liberalize trade in a selected
group of product categories – remove
barriers, reduce tariffs, etc.
2.
Free trade area (FTA): trade in goods
and services fully liberalized between
two or more countries – but some preexisting conditions exist
•
NAFTA - North American Free Trade
Agreement
“Free Trade Agreements”
1.
Partial trade agreement: two or more
countries liberalize trade in a selected
group of product categories – remove
barriers, reduce tariffs, etc.
2.
Free trade area (FTA): trade in goods
and services fully liberalized between
two or more countries – but some preexisting conditions exist
•
NAFTA - North American Free Trade
Agreement
“Free Trade Agreements”
Customs union (CU): an FTA plus a
common external tariff (CET)
3.
•
•
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
4.
•
Example:
European Union in the 1990s
“Free Trade Agreements”
5.
6.
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
International vs. national
Institutions
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

International vs. national
Institutions


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
International vs. national
Institutions

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?
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?
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?