lecture 2 institutions of the international economy
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Lecture 2 Institutions of the International Economy. Econ 340. 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 - PowerPoint PPT PresentationTRANSCRIPT
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 2: Institutions 3
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
Lecture 2: Institutions 4
The Three Main Institutions
• Functions– IMF (International Monetary Fund): Financial
Assistance– World Bank: Development Assistance– WTO (World Trade Organization): Trade
Policy Regulation and Negotiation
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The Three Main Institutions
• History– Before World War II
• Great Depression• High Tariffs on trade• Competitive Devaluations
of currencies
“Beggar Thy Neighbor Policies”
(we’ll see why later)
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The Three Main Institutions
• 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)
Lecture 2: Institutions 7
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.
Lecture 2: Institutions 8
The Three Main Institutions
• 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
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The Three Main Institutions
• 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
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The Three Main Institutions
• Reputation today, among some:
Lecture 2: Institutions 11
The Three 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
– Some in US for undermining US power
Lecture 2: Institutions 12
The Three Main Institutions
• 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
Lecture 2: Institutions 13
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
Lecture 2: Institutions 14
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
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G-20
Lecture 2: Institutions 16
Other Institutions
• UN = United Nations– UNCTAD (United Nations Conference on
Trade and Development)
– ILO (International Labor Organization)– WIPO (World Intellectual Property
Organization)
Lecture 2: Institutions 17
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
Lecture 2: Institutions 18
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
Lecture 2: Institutions 19
• 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
What’s Happening Now? – Recovery from The World Financial Crisis
Lecture 2: Institutions 20
• 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
What’s Happening Now? – Recovery from The World Financial Crisis
Lecture 2: Institutions 21Source: IMF & IndexQ.org
Lecture 2: Institutions 22
July 2008
Mar 2009
Source: IMF
Lecture 2: Institutions 23Source: IMF
July 2008
Feb 2009
Down43%
Global Recession StatusJanuary 10, 2010
Lecture 2: Institutions 24
In RecessionModeratingRecoveringExpanding
Source: Dismal Scientist
Lecture 2: Institutions 25
Global Recession StatusDecember 31, 2010
Source: Dismal Scientist
Lecture 2: Institutions 26
Global Recession StatusJanuary 8, 2012
Source: Dismal Scientist
Lecture 2: Institutions 27
• 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’s Happening Now? – Recovery from The World Financial Crisis
Lecture 2: Institutions 28
• 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’s Happening Now? – Recovery from The World Financial Crisis
Lecture 2: Institutions 29
• 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.)
What’s Happening Now? – Recovery from The World Financial Crisis
• 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
Lecture 2: Institutions 30
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.
Lecture 2: Institutions 31
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
Lecture 2: Institutions 33
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
Lecture 2: Institutions 34
What’s Happening Now? - Doha
• Doha Round starts and stops– Cancún Ministerial, 2003: Failed to agree
Slide Omitted
Lecture 2: Institutions 35
• Cancún:
Slide Omitted
Lecture 2: Institutions 36
What’s Happening Now? - Doha
• Doha Round starts and stops– Cancún Ministerial, 2003: Failed to agree– Hong Kong Ministerial, 2005: Only minimal
agreement
Slide Omitted
Lecture 2: Institutions 37
• Hong Kong:
Slide Omitted
Lecture 2: Institutions 38
What’s Happening Now? - Doha
• 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
Lecture 2: Institutions 39
What’s Happening Now? - Doha
• 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
Lecture 2: Institutions 40
What’s Happening Now? - Doha
• 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
Lecture 2: Institutions 41
What’s 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 thresholdSlide Omitted
Lecture 2: Institutions 42
What’s Happening Now? - Doha
• 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)
Lecture 2: Institutions 43
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
Lecture 2: Institutions 44
What’s Happening Now? - PTAs
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)
What’s 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.Lecture 2: Institutions 45
What’s Happening Now? - PTAs
• 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
Lecture 2: Institutions 46
Lecture 2: Institutions 47
Regional Trade Agreements (RTAs) Notified to GATT/WTO
What’s 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
Lecture 2: Institutions 49
What’s Happening Now? - Disputes
• Trade Disputes– Boeing-Airbus: US vs EU over aircraft
subsidies
Lecture 2: Institutions 50
What’s Happening Now? - Disputes
• Trade Disputes– Byrd Amendment: US redistribution of anti-
dumping duties, ruled illegal by WTO
Lecture 2: Institutions 51
What’s Happening Now? - Disputes
• 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%
Lecture 2: Institutions 52
What’s Happening Now? - Disputes
• 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
Lecture 2: Institutions 53
How China’s Exchange Rate BehavesUS$/yuan Exchange Rate
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Recent Movements of the Yuan
Lecture 2: Institutions 55
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