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 Monday Jan 20. You should be watching for international economic news. • GSI: Hyejin Rho • Office: M-101 Lorch • Hours: • Tuesdays 3:00-4:00 PM • Thursdays 9:00-10:00 AM 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 Euro-Zone 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 • BrettonWoods 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 financial crisis. • 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 the Doha Round Begun 2001 in Doha, Qatar Negotiations started and stopped several times • Finally reached limited agreement in Bali, Indonesia, December 2013 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 sometimes imposed misguided policies • World Bank: Wastes resources on corrupt elites • WTO: Dominated by rich countries, corporations Lecture 2: Institutions

13. 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 Euro-Zone Crisis • The Doha Round • PTAs • Trade Disputes Lecture 2: Institutions

14. 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

15. 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, the 8th, was September 2013, in St. Petersburg, Russia • Next, Nov 5-6, 2014, will be in Brisbane, Australia • Finance Ministers still meet, as needed • 2013: Feb, Jul Moscow; Apr Oct Washington, DC • 2014: Feb, Sydney Lecture 2: Institutions

16. G-20 Lecture 2: Institutions

17. 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

18. Other Institutions • EU = European Union • NAFTA = North American Free Trade Area (or Agreement) • OECD = Organization for Economic Cooperation and Development • Club of high-income countries • Does research, collects data, drafts policies Lecture 2: Institutions

19. Lecture Outline: Institutions of the International Economy • The Three Main Institutions (IMF, World Bank, WTO) • Other Institutions • What’s Happening Now? • The World Financial Crisis • The Euro-Zone Crisis • The Doha Round • PTAs • Trade Disputes Lecture 2: Institutions

20. What’s Happening Now?– Recovery from The World Financial Crisis • Crisis started in US with burst of housing bubble in 2007-8 • Loans had been made, expecting that house prices would rise • With burst of bubble, 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

21. 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

22. 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

23. Source: IMF Lecture 2: Institutions

24. July 2008 Feb 2009 Down 43% Lecture 2: Institutions

25. Global Recession StatusJanuary 10, 2010 In Recession Moderating Recovering Expanding Source: Dismal Scientist Lecture 2: Institutions

26. Global Recession StatusDecember 31, 2010 Source: Dismal Scientist Lecture 2: Institutions

27. Global Recession StatusJanuary 8, 2012 Source: Dismal Scientist Lecture 2: Institutions

28. Global Recession StatusSeptember 3, 2012 Source: Dismal Scientist Lecture 2: Institutions

29. Global Recession StatusJanuary 13, 2013 Source: Dismal Scientist Lecture 2: Institutions

30. Global Recession StatusJanuary 12, 2014 Source: Dismal Scientist Lecture 2: Institutions

31. 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 in summits, first in London Lecture 2: Institutions

32. What’s Happening Now? – Recovery from The World Financial Crisis • What was done about it? • IMF is 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

33. 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

34. 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, Portugal, and Spain Lecture 2: Institutions

35. 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 should bear some cost • Result has been repeated “fixes” that don’t fix • Some say this all threatens the euro. • In July 2012, European Central Bank (ECB) announced that it will “do whatever it takes” to save the euro. That seems to have worked. Lecture 2: Institutions

36. What’s Happening Now? - Doha Round? • Doha Round: See Donnan • Had ministerial meeting December 2013 in Bali, Indonesia • Doha Round was officially “at an impasse.” Not likely to reach a full agreement on its objectives in the near future (if ever) • In Bali, they did agree on several things, largest being “trade facilitation” – reducing impediments to trade at the border (red tape, delays, etc.) • Likely instead to be increased move toward PTAs/RTAs among pairs and small groups of countries Lecture 2: Institutions

37. 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

38. What’s Happening Now? - PTAs Lecture 2: Institutions

39. 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. • Since then, Mexico, Canada, and in 2013, Japan joined. • The countries are extremely diverse. Lecture 2: Institutions

40. 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 for • Labor, environment, intellectual property Lecture 2: Institutions

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

42. What’s Happening Now? - PTAs • Most recently, in 2012-13: • June 2012: EU signed FTAs with Colombia, Peru • November 2012: Asian nations plan FTA • January 2013: US-EU FTA negotiations began • February 2013: India seeks FTA with EU • March 2013: EU-Japan FTA negotiations began • April 2013: China-Iceland FTA agreed • August 2013: Brazil sought FTA with EU • October 2013: Canada-EU FTA agreed Lecture 2: Institutions

43. What’s Happening Now? - Disputes • Trade Disputes • Boeing-Airbus: US vs EU over aircraft subsidies • This has been going on for many years, as each has filed complaints against the other in the WTO. • Both have won! • Yet nothing has been done Lecture 2: Institutions

44. What’s Happening Now? - Disputes • Trade Disputes • Solar panels • Both US and EU complain that China’s solar panels are both subsidized and dumped • EU negotiated a settlement under which China promises to sell for a minimum price • US imposed tariffs of 24-36% on Chinese-made solar panels • Now Chinese manufacturers have moved production to Taiwan to avoid the duties. Lecture 2: Institutions

45. What’s Happening Now? - Disputes • Trade Disputes • US-EU beer dispute • US taxes beer: • Big brewers: $18 per barrel • Small brewers: $7 per barrel on their first 60,000 barrels • Purpose of the lower tax on small brewers is to encourage small “craft” brewers. • But EU brewers, even if small, are not eligible for the lower rate. EU complains. Lecture 2: Institutions

46. 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

47. 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 until early 2012; then again last year in 2013. Lecture 2: Institutions

48. How China’s Exchange Rate BehavesUS$/yuan Exchange Rate Lecture 2: Institutions Source: IMF

49. Recent Movements of the Yuan 2.5% Lecture 2: Institutions Source: X-Rates.com

50. What’s Happening Now? - Disputes • Other Trade Disputes • EU vs. Brazil over 30% tax on imported vehicles • US catfish farmers unhappy over catfish from Vietnam, want harsher inspections • EU vs. Russia over “recycling fee” on imported cars. • US ban on some Samsung products due to patent infringement • Russia bans imports from some uncooperative former Soviet-bloc countries, claiming health hazards Lecture 2: Institutions