Chapter 2

International
Economic
Institutions
Since World
War II

Learning Objectives
Classify and give examples of the main types
of international economic organizations.
Compare and give examples of the different
levels of integration found in regional trade
agreements.
Analyze the roles of international economic
organizations.
Discuss common criticisms of international
economic organizations

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Introduction: International Institutions

and Issues since World War II
International 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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TABLE 2.1 A Taxonomy of International

Economic Institutions, with Examples

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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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The IMF and World Bank

International Monetary Fund (IMF)
Founded by 29 countries (1945) at the
Bretton Woods conference in July 1944
The 188 member (2012) IMF is the central
monetary institution in todays international
economy

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The IMF and World Bank

(cont.)
Funding for the IMF comes from its
membership fee, or quota (the price of
membership)
depends on size of the economy
Importance of its currency in world trade

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The IMF and World Bank (cont.)

The most visible role for the IMF is to
intercede, by invitation, whenever a nation
experiences a crisis in its international
payments.
For example, if a country imports more than it
exports, then it may run out of foreign
exchange reserves.

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The IMF and World Bank (cont.)

Foreign exchange reserves are dollars,
yen, pounds, euros, or another currency (or
gold) that is accepted internationally.
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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The IMF and World Bank

(cont.)
IMF has its own currency, called an SDR, or
special drawing right
SDRs are based on a countrys quota and
are a part of its international reserves.

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The IMF and World Bank (cont.)

World Bank
Has same membership and similar
structure to IMF
Members voting rights are proportional to
number of shares owned

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The IMF and World Bank (cont.)

Original purpose
- To provide financing mechanisms to rebuild
Europe after World War II

Main function today

- Assisting development in non-industrial
economies

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The GATT, the Uruguay Round,

and the WTO
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

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The GATT, the Uruguay Round,

and the WTO (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-1960s, and
the Tokyo Round in the 1970s, other issues
included:

- Problems with dumping

- Subsidies to industry
- Nontariff barriers to trade

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The GATT, the Uruguay Round,

and the WTO (cont.)
The Uruguay Round established the WTO
(1995)

The Doha Round/Doha Development

Agenda (2001-2006)

Focused on trade issues of

importance to developing countries

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The GATT, the Uruguay Round,

and the WTO (cont.)
The General Agreement on Trade and
Tariffs (GATT) followed 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); a prohibition
against discrimination

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TABLE 2.2 The GATT Rounds

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Regional Trade Agreements

Regional trade agreements (RTAs) between
two (bilateral) or
Several countries (plurilateral) are another
important institution in the world economy,
Called multilateral agreement because it
includes, potentially, all the countries of the
world.

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TABLE 2.3 Five Types of Regional

Trade Agreements

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TABLE 2.4 Prominent Regional

Trade Blocs

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TABLE 2.4 (continued) Prominent

Regional Trade Blocs

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Five Types of Regional Trade

Agreements
1. Partial trade agreement: Two or more
countries agree to drop trade barriers in a
selected group of product categories such
as steel or autos
2. Free-trade area: Nations trade goods and
services across international boundaries
without paying a tariff and without the
limitations imposed by quotas

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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 an

agreement to allow the free mobility of
inputs, such as labor and capital.
- The European Union in the 1990s

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Five Types of Regional Trade

Agreements (cont.)
5. 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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Regional Trade Agreements and

the WTO
Since 1948, over 500 agreements have been listed
with the WTO; with majority of the notifications since
1990
338 of these agreements are still active (2012)
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:
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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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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For and Against RTAs (cont.)

Opponents question many of these assumptions:
1.Their greatest criticism is that RTAs undermine
progress toward multilateral (worldwide) agreements.
2.Pro-trade opponents of RTAs do not believe that they
encourage agreements through the WTO
3.Opponents point out that RTAs are often
discriminatory against poor and less-developed
countries

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For and Against RTAs (cont.)

Proponents have several arguments on their side.
1.Easier for a few countries to reach agreement than it
is for all the countries in the WTO.
2.The domestic effects of a reduction of trade barriers
are less dramatic.
3.RTA member countries can experiment with new
agreements.
4.RTAs can be used as a political and economic threat
to encourage agreements in the WTO.

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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 goods
intangibles that are different from most goods
and services

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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

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Definition of Public Goods

(cont.)
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 dont pay

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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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TABLE 2.5 Four Examples of

International Public Goods

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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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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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