International Institutions The IMF, GATT and WTO

1. International Institutions The IMF, GATT and WTO Mikkeli 2005 Compiled by Rulzion Rattray

2. International Monetary Fund (IMF) • IMF - key role in providing foreign currencies and other sources of world liquidity to support growth of international trade. Also stabilisation programmes provide support for economies in ‘crisis’. • Countries with balance of trade deficits: • Low foreign exchange reserves to meet the deficit and likely to have low GDP per capita, meaning that borrowing is difficult. Likely to have a poor credit rating. It is for this type of liquidity problem that the IMF was set up. • IMF has a pool of foreign currencies that can be used to ‘finance’ temporary balance of payments deficits. This is more advantageous than deflation, protectionist… policy alternatives.

3. (IMF) Varying conditions on borrowing • At the ‘hard end’ of the spectrum are IMF Stabilisation Programmes. The main elements to these are some (or all) of the following: • Fiscal contraction - reduction in budget deficit via reduced public spending or increased tax. • Monetary contraction - restrictions on credit to public sector and increases in interest rates. • Devaluation of the exchange rate (often a pre-condition of a stabilisation programme) • Liberalisation of the economy - supply side policies, privatisation… • Incomes policies - restrictions on wages, transfer payments and reduction of subsidies.

4. The WTO and GATT • GATT objectives were to reduce barriers to trade in belief that freer trade would raise living standards in all participating countries. • Since 1947 (when GATT signed) there have been seven rounds of trade negotiations with the average tariff in industrialised nations falling from 40% in 1947 to below 5% in 1995 when GATT was replaced by the WTO. • WTO has 135 member countries with China’s membership bringing it to 136. Another 30 are waiting to join. It continues to seek a reduction in trade barriers and also seeks to resolve (rule on) trade disputes.

5. WTO and Trade Disputes • Crucially, trade disputes come under the remit of the WTO. • Unlike GATT, WTO the findings of dispute panels cannot be vetoed. Countries in violation must remove the cause of the violation or pay compensation. If offending party fails to comply,WTO ruling can sanction specified retaliation. • More than half of the disputes brought to the WTO involve the USA and Europe!

6. GATT / WTO Principles:- • Non Discrimination - the benefits of any bilateral agreements must extend to all members (I.e. become multilateral). • Progressive Reduction in Tariff and Non-tariff Barriers.

7. Trade & the World Economy Growth in World GDP & Merchandise Trade average annual % change Source WTO Statistics, cited in Grifiths, A., & Wall, S., 1999 pp 631 Share of Inter Regional Trade in total trade between nations located in region Source WTO Statistics, cited in Grifiths, A., & Wall, S., 1999 pp 632

8. GDP Gross Domestic Product • Gross domestic product is the sum of gross value added by all resident producers in the economy plus any product taxes and minus any subsidies not included in the value of the products. It is calculated without making deductions for depreciation of fabricated assets or for depletion and degradation of natural resources.

9. Some World Economies 1998 1999 2000 2001 2002 2002 2003 Above figure are based on (Euro Year on year Exchange Rate). Source of information: World Trade Organisation

10. Finland & Ireland Source of All figures: WTO.

11. References • Griffiths, A., and Wall, S., (Eds), (1999), “Applied Economics”, Prentice Hall. • Tayeb, M., (2000), “International Management; Theories and Practice”, Prentice Hall. • Shenkar, O. and Luo, Y.(2004), “International Business”, John Wiley and Sons, Inc.