IMFX 2012

INSTITUTIONS OF THE INTERNATIONAL ECONOMY

REFERENCES
1.
2.

3. 4.

Amit Bhaduri, Ch 5 Age of Uncertainty: The Mandarin Revolution Keynes The Ascent of Money: Ch 5 Chimerica Amit Bhaduri & Deepak Nayyar An Intelligent persons guide to liberalisation

INTERNATIONAL INSTITUTIONS

The Three Main Institutions (IMF, World Bank, WTO)

Why They Were Created, and When How They Have Changed Their Reputations Today

Lecture 2: Institutions

Other Institutions

United Nations OECD = Organization for Economic Cooperation and Development Preferential Trading Arrangements
The World Financial Crisis The Doha Round PTAs Trade Disputes

Whats Happening Now?

THE 4 - MAIN INSTITUTIONS

Functions

IMF (International Monetary Fund): Financial Assistance World Bank: Development Assistance WTO (World Trade Organization): Trade Policy Regulation and Negotiation WIPO

Lecture 2: Institutions

THE 4 MAIN INSTITUTIONS

History

Before World War II

Lecture 2: Institutions

Great Depression High Tariffs on trade Competitive Devaluations of currencies

Beggar Thy Neighbor Policies

THE 4 MAIN INSTITUTIONS

History

End of World War II

Lecture 2: Institutions

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

Never ratified Instead: GATT (General Agreement on Tariffs and Trade)

WIPO

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

Lecture 2: Institutions

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.

MAIN INSTITUTIONS

History

Changes since 1940s

Lecture 2: Institutions

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

MAIN INSTITUTIONS

History

Changes since 1940s

Lecture 2: Institutions

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, Qatar Stumbled in 2003 (Cancn) and 2005 (HK) Suspended July 2006, but restarted 2007 Suspended again in 2008

Future uncertain: More on this later

9

MAIN INSTITUTIONS

Reputation today, among some:

Lecture 2: Institutions

10

MAIN INSTITUTIONS

Reputation Today: Criticized by

Opponents of globalization Opponents of corporations Some in Developing Countries for dominance

by US by rich countries by corporations

Lecture 2: Institutions

Some in US for undermining US power

11

MAIN INSTITUTIONS

Reputation Today: Criticized by

Scholars for institutional flaws

Lecture 2: Institutions

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

12

OTHER INSTITUTIONS

G-7, G-8, G-20: These are Groups of countries

G-7 = US, Canada, Japan, Britain, France, Germany, Italy

Lecture 2: Institutions

Finance ministers meet Heads of state met annually, until recently

G-8 = G-7 + Russia (since 1998)

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

= 19 Countries 13 + 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

Lecture 2: Institutions

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

14

G-20

15

Lecture 2: Institutions

OTHER INSTITUTIONS

UN = United Nations

UNCTAD (United Nations Conference on Trade and Development)

Lecture 2: Institutions

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

16

OTHER INSTITUTIONS
EU = European Union NAFTA = North American Free Trade Area ASEAN = Asso of South East Asian Nations SAARC = South Asia MERCOSUR = South America APEC, BIMTECH, Mekong Delta OECD = Organization for Economic Cooperation and Development

Lecture 2: Institutions

Club of high-income countries Does research, collects data, drafts policies

17

WHATS 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

Lecture 2: Institutions

Bad loans Complex financial instruments whose value fell and/or was uncertain

18

Whats Happening Now?

Recovery from The World Financial Crisis

Crisis spread
To most other developed countries through financial institutions To some developing countries too

Lecture 2: Institutions

Income and expenditure fell, causing world-wide recession

Falling house prices alone reduced wealth Failures in financial markets made it worse Banks stopped lending

19

Whats Happening Now?

Recovery from The World Financial Crisis

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

20

World GDP, annual, 2005=100

140.000
120.000 100.000 80.000 60.000 40.000 20.000 0.000 1970 1972 1974 1976 1978 1980 1982 1984 1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 Source: IMF & IndexQ.org
21
Lecture 2: Institutions

1600

World Exports, monthly, $billion July 2008 Mar 2009

Lecture 2: Institutions

1400

1200

1000

800

600

400

200

22

Source: IMF

1000

1200

1400

1600

1800

200

400

600

800

Lecture 2: Institutions

Source: IMF

World Goods Exports, monthly, $billion

Down 43%

July 2008 Feb 2009

2006 Jan 2006 Apr 2006 Jul 2006 Oct 2007 Jan 2007 Apr 2007 Jul 2007 Oct 2008 Jan 2008 Apr 2008 Jul 2008 Oct 2009 Jan 2009 Apr 2009 Jul 2009 Oct 2010 Jan 2010 Apr 2010 Jul 2010 Oct 2011 Jan 2011 Apr 2011 Jul
23

GLOBAL RECESSION STATUS JANUARY 10, 2010

Lecture 2: Institutions

In Recession Moderating Recovering Expanding

Source: Dismal Scientist

24

GLOBAL RECESSION STATUS DECEMBER 31, 2010

Source: Dismal Scientist

25

Lecture 2: Institutions

GLOBAL RECESSION STATUS JANUARY 8, 2012

Source: Dismal Scientist

26

Lecture 2: Institutions

Whats Happening Now?

Recovery from The World Financial Crisis

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

Lecture 2: Institutions

27

Whats Happening Now?

Recovery from The World Financial Crisis

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

28

Lecture 2: Institutions

Whats Happening Now?

Recovery from The World Financial Crisis

What will prevent future problems?

Financial regulation
restraints on bank lending reform of credit rating agencies

Lecture 2: Institutions

Managed currency policies? (US concern with Chinas currency.)

29

Whats Happening Now?

Debt Problems of EU

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

Lecture 2: Institutions

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

30

Whats Happening Now?

Debt Problems of EU

Leaders of the EU have met repeatedly

They disagree over

Lecture 2: Institutions

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 dont solve the problem

Some say this all threatens the euro.

31

WHATS 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

32

WHATS HAPPENING NOW? - DOHA

Doha

Round (of multilateral trade negotiations under the WTO)

Lecture 2: Institutions

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

33

WHATS HAPPENING NOW? - DOHA

Doha

Round starts and stops

Lecture 2: Institutions

Cancn Ministerial, 2003: Failed to agree

34

Cancn:

35

Lecture 2: Institutions

WHATS HAPPENING NOW? - DOHA

Doha

Round starts and stops

Lecture 2: Institutions

Cancn Ministerial, 2003: Failed to agree Hong Kong Ministerial, 2005: Only minimal agreement

36

Hong Kong:

37

Lecture 2: Institutions

WHATS HAPPENING NOW? - DOHA

Doha

Round starts and stops

Lecture 2: Institutions

Cancn 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; dont know when, & whether, talks will resume

38

WHATS HAPPENING NOW? - DOHA

Doha Round

Objective was: Doha Development Agenda

Lecture 2: Institutions

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

39

WHATS HAPPENING NOW? - DOHA

Doha Round

Reasons for failure of Doha Round:

Lecture 2: Institutions

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); thats hard to achieve!

40

WHATS HAPPENING NOW? - DOHA

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 threshold

41

Lecture 2: Institutions

WHATS HAPPENING NOW? - DOHA

Doha

Round: What will happen next?

Lecture 2: Institutions

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)

42

WHATS 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

Lecture 2: Institutions

NAFTA (North American Free Trade Area) They are not necessarily economically beneficial

Well study the effects of these later in the course

43

WHATS HAPPENING NOW? - PTAS

Recent United States Free Trade Agreements

Completed since 2001 Australia, Bahrain, Chile, Costa Rica, Dominican Republic, El Salvador, Guatemala, Honduras, Jordan, Morocco, Nicaragua, Singapore Signed and ratified 2011: S. Korea, Colombia, Panama

Being Negotiated Ecuador, Malaysia, Oman, Peru, Thailand, United Arab Emirates, + SACU (Southern African Customs Union)
Also Trans-Pacific Partnership (TPP)
44

Lecture 2: Institutions

WHATS HAPPENING NOW? - PTAS

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.

45

Lecture 2: Institutions

WHATS HAPPENING NOW? - PTAS

Objective of the TPP

To negotiate a state of the art trade agreement

Lecture 2: Institutions

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

46

Regional Trade Agreements (RTAs) Notified to GATT/WTO

47

Lecture 2: Institutions

WHATS HAPPENING NOW? - PTAS

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

Lecture 2: Institutions

48

WHATS HAPPENING NOW? DISPUTES

Trade Disputes

Boeing-Airbus: US vs EU over aircraft subsidies

Lecture 2: Institutions

49

WHATS HAPPENING NOW? DISPUTES

Trade Disputes

Byrd Amendment: US redistribution of anti-dumping duties, ruled illegal by WTO

50

Lecture 2: Institutions

WHATS HAPPENING NOW? DISPUTES

Trade Disputes

Chinas currency (the yuan)

Lecture 2: Institutions

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%

51

WHATS HAPPENING NOW? DISPUTES

Trade Disputes

Chinas currency (the yuan)

Lecture 2: Institutions

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

52

0.00 2000 Jan 2000 Jul 2001 Jan 2001 Jul 2002 Jan 2002 Jul 2003 Jan 2003 Jul 2004 Jan 2004 Jul 2005 Jan 2005 Jul 2006 Jan 2006 Jul 2007 Jan 2007 Jul 2008 Jan 2008 Jul 2009 Jan 2009 Jul 2010 Jan 2010 Jul 2011 Jan 2011 Jul
Lecture 2: Institutions

0.04

0.06

0.08

0.12

0.14

0.16

0.18

0.02

0.10

HOW CHINAS EXCHANGE RATE BEHAVES US$/YUAN EXCHANGE RATE

53

RECENT MOVEMENTS OF THE YUAN

Lecture 2: Institutions

54