Lecture 2 Institutions of the International Economy

Lecture 2Institutions of the

International Economy

Econ 340

Lecture 2: Institutions 2

Announcements

• We will start discussing news next week, on Wednesday Jan 18 (since there is no class on Monday, MLK Day). You should be watching for international economic news.

• Powerpoint slides: I will post them– Before lectures

• 6 per page• 3 per page with lines

– After lectures: as presented

• Lecture itself will be posted as podcast– See BlueReview in CTools


Lecture Outline: Institutions of the International Economy

• The Three Main Institutions (IMF, World Bank, WTO)– Why They Were Created, and When– How They Have Changed– Their Reputations Today

• Other Institutions– United Nations– OECD = Organization for Economic Cooperation and Development– Preferential Trading Arrangements

• What’s Happening Now?– The World Financial Crisis– The Doha Round– PTAs– Trade Disputes


The Three Main Institutions

• Functions– IMF (International Monetary Fund): Financial

Assistance– World Bank: Development Assistance– WTO (World Trade Organization): Trade

Policy Regulation and Negotiation



• History– Before World War II

• Great Depression• High Tariffs on trade• Competitive Devaluations

of currencies

“Beggar Thy Neighbor Policies”

(we’ll see why later)



• History– End of World War II

• Bretton Woods Meeting (Bretton Woods, NH)– IMF– World Bank– ITO (International Trade Organization)

» Never ratified » Instead: GATT (General Agreement on Tariffs and

Trade)


The Three Main Institutions• History

– Changes since 1940s• IMF

– Originally enforced pegged exchange rates– Purpose: To prevent “beggar-thy-neighbor” exchange-

rate policies– Major currencies switched to floating in 1970s– IMF still provides financial assistance

» Until recently, mostly to developing countries» Subject to “conditionality” = required policy changes» In 21st century, many countries were paying off their

loans, until recently– IMF was wondering about its income, but now is lending

to countries in crisis, such as Greece and Ireland.



• History– Changes since 1940s

• World Bank– =IBRD (International Bank for Reconstruction and

Development)– Originally intended for reconstruction from war– Now mainly assists development– Much of it by funding and assisting with projects



• History– Changes since 1940s

• GATT– Rules of international trade policy– “Rounds” of negotiation

» Uruguay Round» Created WTO in 1995» Currently is/was doing Doha Round

Begun 2001 in Doha, QatarStumbled in 2003 (Cancún) and

2005 (HK)Suspended July 2006, but

restarted 2007Suspended again in 2008

– Future uncertain: More on this later



• Reputation today, among some:



• Reputation Today: Criticized by– Opponents of globalization– Opponents of corporations– Some in Developing Countries for dominance

• by US• by rich countries• by corporations

– Some in US for undermining US power



• Reputation Today: Criticized by– Scholars for institutional flaws

• IMF: Has imposed misguided policies• World Bank: Wastes resources on corrupt elites• WTO: Dominated by rich countries, corporations


Other Institutions

• G-7, G-8, G-20: These are Groups of countries– G-7 = US, Canada, Japan, Britain, France,

Germany, Italy• Finance ministers meet

– G-8 = G-7 + Russia (since 1998)• Heads of state met annually, until recently

– G-20 = G-8 + Australia & EU, + 10 major EMEs (Emerging Market Economies) = 19

Countries + EU


Other Institutions• G-20

– Used to meet regularly, but only the finance ministers– First G-20 summit (i.e., heads of state) met November

2008, London– Met again September 2009, Pittsburgh– Now looks like G-20 summits will be the main regular

meeting, probably once a year• Last was in Cannes, France, November 2011• Next, in June 2012, will be in Los Cabos, Mexico

– Finance Ministers still meet, as needed• 5 times in 2011!• Next in Mexico City, February 2012


G-20


Other Institutions

• UN = United Nations– UNCTAD (United Nations Conference on

Trade and Development)

– ILO (International Labor Organization)– WIPO (World Intellectual Property

Organization)


Other Institutions

• EU = European Union

• NAFTA = North American Free Trade Area

• OECD = Organization for Economic Cooperation and Development– Club of high-income countries– Does research, collects data, drafts policies


What’s Happening Now? – Recovery from The World Financial Crisis

• Crisis started in US with burst of housing bubble– Loans had been made, counting on rising

house prices– With burst, loans went bad– Banks and other institutions were interlinked

via• Bad loans• Complex financial instruments whose value fell

and/or was uncertain


• Crisis spread– To most other developed countries through

financial institutions– To some developing countries too

• Income and expenditure fell, causing world-wide recession– Falling house prices alone reduced wealth– Failures in financial markets made it worse– Banks stopped lending



• Recession caused immediate drop in international trade– This made matters worse– It spread the recession to countries that had

not been exposed to financial markets


Lecture 2: Institutions 21Source: IMF & IndexQ.org


July 2008

Mar 2009

Source: IMF

Lecture 2: Institutions 23Source: IMF

July 2008

Feb 2009

Down43%

Global Recession StatusJanuary 10, 2010


In RecessionModeratingRecoveringExpanding

Source: Dismal Scientist


Global Recession StatusDecember 31, 2010



Global Recession StatusJanuary 8, 2012



• What was done about it?– Central banks, cut interest rates and extended

credit.– Banks were rescued.– Countries used “Stimulus Packages” (tax cuts

and spending increases) to stimulate economies.

– G-20 began meeting, first in London



• What was done about it?– IMF back in business making loans.

• Packages already in hand for – Iceland – Hungary – Ukraine. – Many more

• G-20 promised more funds to IMF



• What will prevent future problems?– Financial regulation

• restraints on bank lending• reform of credit rating agencies

– Managed currency policies? (US concern with China’s currency.)


• In 2010, starting with Greece, countries in the Eurozone found themselves with unmanageable debts– Markets feared default; interest rates rose– EU and IMF stepped in with loans

• Similar things happened later to Ireland, and markets now fear the same for Portugal and Spain


What’s Happening Now? – Debt Problems of EU

• Leaders of the EU have met repeatedly– They disagree over

• Who will pay for any bailout of Greece and others• Whether the bond holders (those who own

sovereign debt of Greece ad others) should bear some cost

– Result has been repeated “fixes” that don’t solve the problem

• Some say this all threatens the euro.


What’s Happening Now? – Debt Problems of EU

32

What’s Happening Now? - IFIs

• IFIs = International Financial Institutions– IMF and World Bank– See Lachman article:

• Reputations suffered– IMF from financial crises and mis-management

» But recent actions have looked better– WB from leadership of Paul Wolfowitz

• Roles have been reduced by private lending, but their staffs have grown, by 50% over last 10 years

• What should they be doing?– IMF: surveillance over exchange systems and imbalances– WB: alleviate poverty, especially in Africa

Slide Omitted


What’s Happening Now? - Doha

• Doha Round (of multilateral trade negotiations under the WTO)– Began at Doha, Qatar, 2001– Negotiations

• Take place at WTO Headquarters in Geneva, Switzerland• But periodically occur at “Ministerial Meetings” (meetings of

trade ministers) in other cities

Slide Omitted



• Doha Round starts and stops– Cancún Ministerial, 2003: Failed to agree

Slide Omitted


• Cancún:

Slide Omitted



• Doha Round starts and stops– Cancún Ministerial, 2003: Failed to agree– Hong Kong Ministerial, 2005: Only minimal

agreement

Slide Omitted


• Hong Kong:

Slide Omitted



• Doha Round starts and stops– Cancún Ministerial, 2003: Failed to agree– Hong Kong Ministerial, 2005: Only minimal

agreement– Negotiations suspended July 2006, restarted 2007– US, EU, Brazil and India met in Potsdam, Germany,

but ended in deadlock June 21, 2007– June 30, 2007: US negotiating authority expired– July 29, 2008: Negotiations broke down over

agriculture– Future uncertain; don’t know when, & whether, talks

will resume

Slide Omitted



• Doha Round – Objective was: Doha Development Agenda

• To achieve substantial further reduction in trade barriers,

• In both developed and developing countries,• While for the first time providing meaningful

benefits to developing countries

– Conflicts:• US and EU agricultural subsidies and tariffs• Developing-country import barriers in

manufactures and services

Slide Omitted



• Doha Round – Reasons for failure of Doha Round:

• All countries wanted – other countries to reduce trade-distorting policies, – but not to change their own policies

• WTO requires agreement by all of its member countries (now 156); that’s hard to achieve!Slide Omitted



• Doha Round – Reason for collapse in 2008 : Disagreement

in agriculture• US trade distorting subsidies: US would “cap”

these, but not at a low enough level to satisfy India and China

• “Special safeguards” for India: Permission to raise tariffs if imports rise above some thresholdSlide Omitted



• Doha Round: What will happen next?– The Round may be able to restart. This will require

leadership, probably from U.S.– Likely to be increased move toward PTAs/RTAs

among pairs and small groups of countries– Who loses? Developing countries (see Blustein

article)


What’s Happening Now? - PTAs

• PTAs (Preferential Trade Agreements) – Most countries are in some of these and are

negotiating to form more– Typical PTA is “Free Trade Area” (FTA) such

as• NAFTA (North American Free Trade Area)

– We’ll study the effects of these later in the course

• They are not necessarily economically beneficial



Recent United States Free Trade Agreements

Completed since 2001 Being Negotiated

Australia, Bahrain, Chile, Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, Jordan, Morocco, Nicaragua, Singapore

Signed and ratified 2011:

S. Korea, Colombia, Panama

Ecuador, Malaysia, Oman, Peru, Thailand, United Arab Emirates, + SACU (Southern African Customs Union)

Also Trans-Pacific Partnership (TPP)


• Trans-Pacific Partnership (TPP)– Started in 2006 as Trans-Pacific Strategic

Economic Partnership: Singapore, Brunei, Chile and New Zealand

– In 2008, US said it would negotiate to join, and this brought in 4 more countries: Australia, Peru, Malaysia, and Vietnam.

– In 2001, Japan and Canada indicated an interest in joining.

– The countries are extremely diverse.Lecture 2: Institutions 45


• Objective of the TPP– To negotiate a “state of the art” trade

agreement• It would go beyond existing agreements• It would permit additional countries to join

– US claims it will• Enhance competitiveness• Promote US employment• Demand high standards



Regional Trade Agreements (RTAs) Notified to GATT/WTO


• Most recently, in 2011:– February 2011: India and Japan sign FTA– June 2011: 26 African nations launch talks for

FTA– October 2011: US Congress approves FTAs

with Korea, Colombia, Panama– October 2011: 8 former Soviet states sign FTA– November 2011: US-Korea FTA approved by

Korea



What’s Happening Now? - Disputes

• Trade Disputes– Boeing-Airbus: US vs EU over aircraft

subsidies



• Trade Disputes– Byrd Amendment: US redistribution of anti-

dumping duties, ruled illegal by WTO



• Trade Disputes– China’s currency (the yuan)

• Was pegged to US $ at 8.2765 ¥/$ and considered undervalued

• Allowed to rise as of July 21, 2005. It rose 2.1%• Rose steadily until July 2008, to 6.8363 ¥/$ about

20%



• Trade Disputes– China’s currency (the yuan)

• In July 2008, dollar itself started to rise, and yuan went back to being fixed to dollar

• Many, in US and especially in EU, think yuan should rise much more. China says no!

• Yuan did start to rise, a little in summer 2010


How China’s Exchange Rate BehavesUS$/yuan Exchange Rate


Recent Movements of the Yuan


Next Time

• Comparative Advantage and the Gains from Trade– What causes countries to export and import?– Why do they gain from trading?– The “Ricardian Model” of International Trade

Documents

Lecture 2 Institutions of the International Economy