Lecture 2 Institutions of the International Economy

1. Lecture 2Institutions of the International Economy Econ 340

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 Lecture 2: Institutions

5. 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) Lecture 2: Institutions

6. 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 Lecture 2: Institutions

9. 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, Qatar Stumbled in 2003 (Cancún) and 2005 (HK) Suspended July 2006, but restarted 2007 Suspended again in 2008 • Future uncertain: More on this later Lecture 2: Institutions

10. 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 Lecture 2: Institutions

15. 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. What’s Happening Now? – Recovery from The World Financial Crisis • 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 Lecture 2: Institutions

20. What’s 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

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

22. July 2008 Mar 2009 Source: IMF Lecture 2: Institutions

23. July 2008 Feb 2009 Down 43% Source: IMF Lecture 2: Institutions

24. Global Recession StatusJanuary 10, 2010 In Recession Moderating Recovering Expanding 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’s 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

28. What’s 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 Lecture 2: Institutions

29. What’s Happening Now? – Recovery from The World Financial Crisis • 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.) Lecture 2: Institutions

30. What’s 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 • Similar things happened later to Ireland, and markets now fear the same for Portugal and Spain Lecture 2: Institutions

31. 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

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

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 threshold Slide 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 Lecture 2: Institutions

45. 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

46. 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

47. Regional Trade Agreements (RTAs) Notified to GATT/WTO Lecture 2: Institutions

48. 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

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