INTERNATIONAL ECONOMIC

INSTITUTIONS SINCE
WORLD WAR II

2-1
UNIT 6: GLOBAL MACRO
ECONOMIC ENVIRONMENT
GATT
WTO
Economic Integration

Copyright © 2011 Pearson Addison-Wesley. All rights reserved. 2-2

Copyright © 2011 Pearson Addison-Wesley. All rights reserved. 2-3
 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)

2-4
 The International Monetary
Fund (IMF)
• Founded by 29 nations (1945) at the Bretton
Woods meetings between the Allies in July 1944

• The 184 member (2006) IMF is the central

monetary institution in today’s international
economy

• Funding for the IMF comes from its membership

fee, or quota (the price of membership)
– depends on the member’s size and status
– determines the member’s voting weight
2-5
The International Monetary Fund (IMF) is an
organization of 189 countries, working to foster
global monetary cooperation, secure financial
stability, facilitate international trade, promote
high employment and sustainable economic
growth, and reduce poverty around the world

Copyright © 2011 Pearson Addison-Wesley. All rights reserved. 2-6

 The International Monetary
Fund (IMF) (cont.)
• Functions of the IMF:
-Prevents crisis in a financial system by promoting sound
macroeconomic policy, which includes
-Balanced expansion of trade
-Stable exchange rates
-Avoidance of competitive devaluations
-Orderly corrections of Balance of Payments problems
A Financial crisis occurs when a country runs out of foreign
exchange reserves, which are a major currency or gold that can
be used to pay for imports and international borrowings
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 2-7
THE WORLD BANK

Copyright © 2011 Pearson Addison-Wesley. All rights reserved. 2-8

The World Bank is an international financial institution that
provides loans and grants to the governments of poorer
countries for the purpose of pursuing capital projects.
It comprises two institutions: the International Bank for
Reconstruction and Development (IBRD), and the International
Development Association (IDA).
The World Bank is a component of the World Bank Group.
The World Bank's most recent stated goal is the reduction of
poverty. As of November 2018, the largest recipients of World
Bank loans were India ($859 million in 2018) and China ($370
million in 2018), through loans from IBRD. 189 Members. The
International Bank for Reconstruction and Development (IBRD)
has 189 member countries, while the International Development
Association (IDA) has
Copyright © 2011 Pearson Addison-Wesley. 173 members.
All rights reserved. 2-9
 The World Bank
• Founded in 1944 as the International Bank for
Reconstruction and Development (IBRD)
• IBRD and International Development Association (IDA)
comprise World Bank
• Has same membership and similar structure to IMF
• Member’s voting rights are proportional to number of shares
owned
• Original purpose: To provide financing mechanisms to
rebuild Europe after World War II
• Main function today: Assisting development in non-industrial
economies

2-10
 General Agreement on Tariffs
and Trade (GATT)
• 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 based on 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); every WTO member must treat
every other member as it treats its most favored trading
partner

2-11
 GATT (cont.)

• The GATT functioned through trade rounds:

Times when countries periodically negotiate a set
of incremental tariff reductions
• other issues included:
- Problems with dumping
- Subsidies to industry
- Nontariff barriers to trade

2-12
 From GATT to World Trade
Organization (WTO)
• The Uruguay Round established the WTO (1994)
– WTO members meet every two years to set WTO policy
objectives
– Has a more effective dispute settlement mechanism
– Monitors national trade practices more consistently
– Members : 164 members since 29 July 2016 .

2-13
The WTO has 164 members and 23 observer
governments. Liberia became the 163rd member on
14 July 2016, and Afghanistan became the 164th
member on 29 July 2016. In addition to states, the
European Union, and each EU country in its own
right, is a member. India has been a WTO member
since 1 January 1995 and a member of GATT since 8
July 1948.

Copyright © 2011 Pearson Addison-Wesley. All rights reserved. 2-14

 World Trade Organization
(WTO)
• The Doha Round/Doha Development Agenda (2001-2006)
– Focused on trade issues of importance to developing
countries

– Key issues of Doha Development Agenda:

-Farm subsidies in high income countries of Europe, US,
and Japan
-Greater market access by developing countries and
strong farm sector high income countries
-Trade in services
-Problems poor countries face in implementation

2-15
1. Three levels of economic integration
The econ integration has been a predominant feature of the contemporary
global economy. The econ integration brings together countries based on
collaboration, flexibility, risk and cost, shared interest and objectives.
The econ integration has led to a relocation of resources across sectors
and space.
• Global: trade liberalization by GATT or WTO
– The General Agreement on Tariffs and Trade (GATT) was first signed in
1947. This agreement was designed to provide an international forum that
encouraged free trade between member states by regulating and reducing
tariffs on traded goods and by providing a common mechanism for resolving
trade disputes.
– The World Trade Organization (WTO) came into being in 1995. It is the
successor to the GATT. Now it is the only global international organization
dealing with the rules of trade between nations. At its heart are the WTO
agreements, negotiated and signed by the bulk of the world’s trading nations
and ratified in their parliaments. The goal is to help producers of goods and
services, exporters, and importers conduct their business.
– Location-Geneva, Switzerland
– Members—153 countries
• Regional: preferential treatment of member countries in the group
– NAFTA
16
• Bilateral: preferential treatment between two countries
Economic Integration: Forms of economic
integration:
1) Free Trade Area (FTA)
-Free trade between the members
2) Custom Union (CU)
-FTA + common external tariffs (CET) on trade
with non-members
3) Common Market (CM)
- CU + free mobility of factors of production
4) Economic Union (EU)
- CM + common economic policy

17
2. Four types of economic integration
Groups or countries are coming together all over the world with the idea of defending
themselves economically against the incursions of other blocks in the area.
a) FTA (free trade area)—free and open trade among members
• no internal tariffs among members, but each country imposes its own external
tariffs to the third country.
– NAFTA (North America Free Trade Agreement)
• 1994; free trade area among the US, Canada and Mexico.
– AFTA (ASEAN Free Trade Area)
• Signed in 1992 Singapore; originally 6 countries
– EFTA (European Free Trade Area)
• 1960, Austria, Denmark, Norway, Sweden, Portugal, Switzerland and UK
b) Customs union
• no internal tariffs and common external tariffs
– Mercosur (Southern Common Market)
• Formed in 1991 by Brazil, Argentina, Paraguay and Uruguay
– CACM (Central American Common Market)
• 1960, Guatemala, El Salvador, Honduras, Nicaragua
– CARICOM (Caribbean Community and Common Market)
• 1973, 15 members

18
c) Common market:
• free movement of products and factors (resources), which is customs union
plus factor mobility
• EU (European Union – previously Euro Econ Community)
d) Economic union
• common market plus common currency
• coordination of fiscal and monetary policy
– EMU (Economic and Monetary Union)

19
3. Economic effects of economic integration
Econ integration brings significant benefits, more efficient allocation
of resources

• Static effects: Short-term effects

– Better use of existing resources
– Trade creation: production shifts to more efficient member
countries from inefficient domestic or outside countries.
• Specialization, comparative advantage
• Dynamic effects: Long-term effects
– Cost reduction due to economies of scale
– Cost reduction due to increased competition.
– Both producers and consumers benefit from more efficient
allocation of resources as a result of integration

20
“Admire the best, forget the rest, The Economist
• The Scandinavian countries have the world’s highest taxes and the most generous
welfare benefits
• Sweden, Finland and Denmark have a strong growth and low unemployment
• Sweden’s big companies such as Ericsson, Volvo are breaking export records 2005
– Well-managed, export-driven, high-tech companies and its well-educated workforce.
– Female participation is the highest
• Weaknesses:
– High unemployment rate
– No new jobs, especially in the private sector
– Labor market is heavily regulated
– Powerful unions (enforcing min wage)
– Public sector—30% of employment in the public sector

There is never a single economic model for other countries to follow. Neither
membership of the EU nor adoption of the euro seems necessary: Sweden is in
the EU, but not the euro, Finland is in both, Norway is neither. Different
countries have different strengths:
Finland—education; Denmark—labor mkt; Sweden’s management of big companies,
Norway’s oil.
The right conclusion is that it is wisest not to look for a single country model at all, but just
to take best practice wherever you find it

21