Chapter 2: International Institutions
Class Notes: these count for 1% of your total grade
1. List the primary international institutions and their main goals
- International Monetary Fund (IMF): IMF provides loans to its members for the short,
medium, and long term. It was created to help stabilize exchange rates and assist nations
that are unable to pay their international debts
- World bank: It provides relief to war-damaged nations and assists with reconstruction. It
now focuses on offering development support
- World Trade Organization (WTO): Created to oversee and administer the General
Agreement on Tariffs and Trade (GATT). It serves as a forum for establishing rules, a
mediator of disputes, and an organizer of actions to resolve problems. It holds the greatest
responsibility for resolving trade disagreements.
- General Agreement on Tariffs and Trade (GATT): Successfully brought down trade
barriers gradually through a series of trade rounds. It served as the basis for the
subsequent WTO
2. List the different rounds of GATT/WTO and identify one major goal of each round
Round Year Major goal
Geneva I 1947 To implement agreements on tariffs and trade rules (led to
45,000 tariff reductions)
Annecy 1949 Involved mutual cuts in tariffs on specific products
Torquay 1951 Involved mutual cuts in tariffs on specific products
Geneva II 1956 Involved mutual cuts in tariffs on specific products
Dillion 1960 – 1961 Involved mutual cuts in tariffs on specific products
Kennedy 1964 – 1967 Began negotiating an across-the-board percentage reduction in
all tariffs for industrial products
Tokyo 1073 – 1979 Was the first round to begin establishing rules regarding
subsidies
Uruguay 1086 – 1993 Created the World Trade Organization (WTO) as a formal
organization to oversee and administer the GATT
Doha (WTO) 2001 - Launched to launch a new round of trade negotiations
emphasizing issues of developing countries (known as the
Doha Development Agenda), focusing on farm subsidies,
agricultural protection, and trade in services
3. What does it mean to confer most favored nation status?
Conferring most-favored nation (MFN) status is a fundamental principle of the WTO and GATT
agreements.
- MFN status is embodied in the concept of nondiscrimination.
- It requires all WTO members to treat each other as they treat their most-favored trading
partner.
- In effect, MFN status functions as a prohibition against discrimination among members.
- However, MFN allows trade agreements, such as the North American Free Trade
Agreement (NAFTA) and the European Union (EU), even though these agreements
inherently discriminate in favor of their members and against non-members
4. Why are international capital flows greater today than a century ago?
International capital flows today are much larger in absolute terms compared to the previous era
of globalization, primarily because economies themselves are larger. Three major differences
distinguish contemporary capital flows from those a century ago:
1. Increased complexity of financial instruments: Today, there is a far greater variety of
financial instruments available, ranging from mundane stocks and bonds to relatively
exotic instruments such as derivatives and currency swaps. A century ago, most
international financial transactions involved the buying and selling of bonds.
2. Increased role of foreign exchange transactions: Today, buying and selling assets
denominated in foreign currencies (foreign exchange transactions) is the largest
component of international capital movements. This high volume is partly driven by the
fact that the fixed exchange rates common in 1900 have been replaced by flexible rates,
meaning firms involved in international trade or finance now face greater day-to-day risk
from sudden changes in foreign currency values. Consequently, firms spend significant
resources protecting themselves from these shifts, resulting in huge daily volumes.
3. Significantly lower transaction costs: The costs associated with foreign financial
transactions, including costs for obtaining market information, negotiating, and enforcing
agreements, have fallen significantly. Modern communications technologies, like the
telecommunications revolution, have made it less expensive to move capital across
international boundaries
5. Definitions
IMF conditionality: The changes in economic policy that borrowing nations are required to make
in order to receive International Monetary Fund loans. These changes usually require policies
that reduce or eliminate a severe trade deficit and/or a central government budget deficit, often
involving reduced expenditures by the government and by the private sector, and increased taxes
National treatment: The principle that national laws should not treat foreign firms differently
from domestic firms. It is a requirement that foreign goods must be treated similarly to the same
domestic goods once they enter a nation’s markets
Nondiscrimination: The notion that national laws should not treat foreign firms differently from
domestic firms.
Nonexcludable: A characteristic of a good or service in which people who do not pay for it
cannot be excluded from its consumption. This is one of the characteristics of public goods
Nonrival: A characteristic of a good or service meaning that its consumption is not reduced (or
"nondiminishable") by others consuming it.
6. What are the five types of regional trade agreements?
Regional trade agreements (RTAs) can be classified into five categories, each level incorporates
the features of the previous level:
1. Partial trade agreement: Free trade in the outputs of one or a few industries.
2. Free-trade area: Free trade in outputs (goods and services).
3. Customs union: A free-trade area plus a common external tariff toward nonmembers.
4. Common market: A customs union plus the free movement of inputs (such as capital
and labor).
5. Economic union: A common market plus substantial harmonization of economic
policies, including the potential use of a common currency
7. List the criticisms of international institutions
Criticisms of international institutions such as the World Bank, IMF, and WTO cover a wide
spectrum. These criticisms fall into four main categories:
1. Sovereignty and Transparency:
- Sovereignty: The primary complaint is that international institutions violate national
sovereignty by imposing unwanted economic policies, especially when the IMF mandates
policy changes (conditionality) in exchange for crisis loans.
- Transparency: Concerns exist regarding the decision-making structure, particularly in the
IMF and World Bank, where voting power is proportional to quotas, giving high-income
countries (like the United States) a disproportionate control. Critics argue that these
policies are designed to benefit special interests in developed countries.
2. Ideology:
Some critics argue that the advice and technical assistance provided often reflect the
ideological biases and wishes of developed countries, such as demanding that developing nations
open their financial markets or privatize government-owned firms.
3. Implementation and Adjustment Costs:
Trade agreements are criticized because implementing their provisions (such as strict
enforcement of intellectual property rights under the TRIPS agreement) imposes substantial
opportunity costs on developing countries with limited resources.