HSC Economics
The Global Economy
Week 2
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HSC Economics
The Global Economy
1
WEEK 2 – INTERNATIONAL ORGANISATIONS
Trade, financial flows and foreign investment
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the basis of free trade – its advantages and disadvantages
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role of international organisations – WTO, IMF, World Bank, United Nations,
OECD
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influence of government economic forums – G20, G7/8
•
trading blocs, monetary unions and free trade agreements
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advantages and disadvantages of multilateral (EU, APEC, NAFTA, ASEAN)
and bilateral agreements
INTERNATIONAL ORGANIASATIONS
WORLD TRADE ORGANISATION (WTO)
The WTO implements and enforces trade agreements between countries in the global economy.
Initially, this role was held by the General agreement on Tariffs and Trade (GATT) which organized
multiple rounds of trade negotiation. However GATT had no power to enforce trade agreements and
force members to hold to their promises and so countries would only implement parts of the planned
trade agreements. In 1995 the GATT was replaced by the WTO which had the legal power to ensure
that once an agreement was negotiated it was implemented as quickly and fully as possible.
WTO membership continues to grow with 153 countries currently enrolled and 30 outstanding
applications. The WTO has had some success in negotiating further agreements to free up world trade
with some countries making voluntary reductions in areas with trade barriers such as financial
services, telecommunications, and IT. In recent years the WTO has focused on the Doha Rounds of
negotiations which has been dubbed the ‘Development Round’ as it could have added $520bn to
GWP by 2015 and lifted 140 million people out of poverty. However the WTO has been criticised for
the failure of the Doha Round. Negotiations were held up by the refusal of developed nations to
remove agricultural subsidies which are costing developing countries $38bn a year.
The WTO also has a role to resolve any trade disputes that occur amongst member nations. This
system of dispute resolution has been successful amongst smaller nations however the WTO has been
criticised not being able to enforce arbitration amongst larger and more wealthy countries.
Furthermore, this process of dispute resolution is extremely expensive which makes in accessible to
developing countries.
Recently, environmental sustainability has been integrated into the WTO’s activities. In Module 3 we
will learn more about environmental economics and its role in policy. However, this combination of
trade liberalisation and ecologically sustainable economics is extremely interesting and gives students
some good material to incorporate in their extended responses:
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Liberalizing environmental goods
Under the ongoing negotiations on mutual supportiveness of trade opening with the environment,
WTO members are working to eliminate trade barriers in the goods and services that can benefit the
environment. Facilitating access to products and services in this area can help improve energy
efficiency, reduce greenhouse gas emissions and have a positive impact on air quality, water, soil and
natural resources conservation. A successful outcome of the negotiations on environmental goods
and services could deliver a triple-win for WTO members: a win for the environment, a win for trade
and a win for development.
Environmental goods can cover a number of key technologies that may contribute positively to the
fight against climate change. Reducing or eliminating import tariffs and non-tariff barriers in these
types of products will reduce their price and make them more accessible. Increased competition will
foster technological innovation in areas related to protection of the environment and combating
climate change. According to a recent World Bank study on trade and climate change, elimination of
both tariffs and non-tariff barriers to clean technologies could result in a 14 per cent increase in
trade.
To illustrate, the Intergovernmental Panel on Climate Change has identified a range of mitigation and
adaptation technologies that can assist in the challenge of climate change. Many of these
technologies involve products currently being negotiated in the Doha negotiations. These include
wind and hydropower turbines, solar water heaters, tanks for the production of biogas, and landfill
liners for methane collection.
INTERNATIONAL MONETARY FUND (IMF)
The IMF’s role is to maintain international financial stability, particularly in relation to foreign
exchange. In a situation where a financial crisis breaks out, the IMF attempts to minimise the crisis
through the development of a ‘rescue package’. The IMF often requires countries to change their
policies in regards to finance before they are eligible to receive a rescue package, known as ‘structural
adjustment policies’. These structural adjustment policies have played a major part in globalisation as
they ensure that many countries have adopted similar economic strategies such as balancing budgets,
deregulating markets and privatizing businesses. Many large international financial intermediaries will
only lend to countries that have adopted the IMF’s structural adjustment policies.
During the GFC the IMF pumped $520billion into the global economy and provided specific support
for countries hard hit by the crisis, with its lending commitments reaching a record of $157billion by
2009. The IMF also suspended interest payments on some loans during the GFC. When the European
sovereign debt crisis began in 2011 the IMF provided a €300bn bailout package at the condition of
strict austerity measures such as cutting spending, increasing taxes and privatization of PTE’s for
countries such as Greece, Ireland, Portugal and Ireland.
The IMF has been criticised for its rescue packages often doing more harm than good for countries in
financial crisis. For example, during the Asian Financial Crisis in the late 1990’s the Indonesian
government was required to reduce government debt through reduced spending on health and
education. Though the financial package restored financial stability, it resulted in poverty almost
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The Global Economy
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doubling from 11% to 20%. The IMF has also been criticised for serving the interests of rich countries
as they contribute more the IMF’s budget which entitles them more voting power in the decisions of
IMF policy (the US provides 18% of the IMF’s total budget). Furthermore, the IMF’s policies are
accused of only helping developing nations so that they are able to repay their debts to financial
institutions in rich countries.
WORLD BANK
The World Bank mainly focuses on helping developing countries with their economic development. It
funds investment in infrastructure, reduces poverty and helps developing countries adjust to the
demands of globalisation. The World Bank also has specific institutions which aim to financially help
developing countries by providing ‘soft loans’ with little or no interest, attracting private sector
investment and providing risk insurance to private investors (in the case of economies with civil and
political instability that may threated the success of investments).
In recent years the major aim of the World Bank’s Millennium Development Goals has been to reduce
poverty from its 1990 levels to half that by 2015, i.e from 29% to 14.5%. Other objectives highlighted
in the Millennium Development Goals are to ensure global primary education, improve child morality
and reduce epidemics like HIV/AIDS and malaria.
During the GFC the World Bank tripled lending to developing countries to $35billion and a further
$100billion was earmarked for developing nations due to a sudden lack of liquidity on global financial
markets. Currently the World Bank supports the Heavily Indebted Poor Countries Initiative which aims
to reduce the debt in the 46 poorest nations in world. However it has attracted criticism for this as
debt relief is seen as an irresponsible economic policy. This is because debt relief created the
impression that one day all debt will be cleared without any economic innovation and so provides no
incentive for these countries to improve their infrastructure and education.
Furthermore, it is in doubt whether the relief funds actually go to poverty reduction, instead often
going to military budgets. This issue extends deeper as developing countries suffer greatly from
corruption and any finds given to developing countries may be incorrectly used. In 2006 the World
Bank froze all payments to Cambodia and demanded that the Cambodian government repay $7million
to US which were lost to corruption.
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Development in Tanzania
One famous example of the World Bank’s success in aiding economic development was the
transformation of the Tanzanian economy from a centrally-planned economy to a market based
economy. Over the past 15 years Tanzania dramatically improved its economic performance, as a
process of comprehensive economic reforms transformed the country from a controlled economy to
an open, market-based one.
Tanzania’s reform process began gradually in 1986 and intensified beginning in 1996. The first phase
saw a partial liberalization of the economy. The second phase saw far-reaching structural reforms. The
reforms, which were a response to the dismal economic performance of the country in 1970-85,
transformed the country to market economy. The major reforms since 1996 include the
following: sound fiscal and monetary policies to control inflation; fiscal consolidation and stronger
public financial management; privatization and reform of state-owned enterprises; reduction in the
level of state intervention in the economy—trade reform, liberalization of the financial sector, and
creation of market-oriented regulatory framework.
Beginning in the mid-1990s, the macro economy stabilized, inflation declined to single digits, and
economic growth improved. Growth accelerated in recent years, averaging about 7% a year in 200107. Tanzania has been successful in attracting FDI. A large share of FDI is directed to the mining sector,
but manufacturing, tourism, and financial sectors have also attracted FDI. There has been remarkable
progress in enrolment in primary and secondary schools.
OTHER ORGANISATIONS AND FORUMS
UNITED NATIONS (UN)
The UN is the largest global organisation with 193 members. It covers a larger range of issues than any
other organisation such as the global economy, security, environment, law and health.
A range of UN agencies have been developed to make it easier for trade and investment to occur
globally such as the standardisation of food safety and rules on copyright and intellectual property.
The International Labour Organisation has also developed standards to improve working conditions
around the world and prevent child labour and discrimination. The UN has also created many
international agreements that promote human rights and freedoms as these are necessary conditions
for economic growth and development.
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ORGANISATION FOR ECONOMIC COOPERATION AND DEVELOPMENT (OECD)
The OECD is an organisation of 34 countries that are committed to democracy and the market
economy. The OECD conducts research into a wide range of economic outcomes and coordinated
economic cooperation among member nations to tackle economic issues so that overall there is
higher sustainable economic growth, employment and standard of living for members. For example,
the OECD conducted research and proposed the internationally coordinated macroeconomic stimulus
when the GFC stuck the world economy in 2008.
G8 AND G20
These organisations are government economic forums for world leaders that allow economic policies
of major economies to be coordinated in response to economic and social issues. The G8 was formed
in 1976 and has been the most important economic forum in recent decades. It consists of the 8
largest and most industrialised economies in the world and is unofficial for coordinating global
macroeconomic policy as it contains 8 wealthiest economies.
However, the G8 is now in decline as power now shifts to rapidly emerging economies like China
which have a large population. Though the G8 still contains 60% of world GDP it only represents 14%
of the population and as a result its economic importance has now shifted to other issues like global
security.
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In the aftermath of the GFC, the G20 emerged as the major forum for economic cooperation. It
includes the 19 largest economies in the world plus the EU, hence covering 80% of GWP and 2/3 of
the world population. The G20 helped greatly during the GFC when it allowed major economies to for
an agreement for fiscal stimulus as well as a plan for increased supervision of global financial markets.
In 2010 the G20 allowed for the cooperation as economies balanced the need to stimulate the global
economic bounce back from the GFC and the need to reduce large fiscal deficits.
MULTILATERAL AND BILATERAL TRADE AGREEMENTS
BILATERAL TRADE AGREEMENTS
A bilateral trade agreement involved the removal of protection between two countries. They are the
easiest type of trade agreement to negotiate as they only consider the interests of two countries.
Bilateral trade agreements have experienced a rise in popularity in recent times, mainly due to the
faltering of the WTO’s progress and the ability of wealthy nations to negotiate favourable trade
relationships with other countries using their economic power. Bilateral trade agreements are
currently the main focus of trade policy in Australia. Australia has formed many bilateral trade
agreements with other countries such as Thailand, UAE, Chile and most recently China. Some of those
bilateral agreements are summarized below.
The Singapore-Australia Free Trade Agreement (SAFTA) was Australia’s first trade agreement with an
Asian country. It was initiated in 2003. The trade agreement covers the elimination of tariffs and
improves market access for services such as telecommunications, finance and professional services. It
also provides cooperation across other areas of policy affecting business such as professional
standards, education and competition policy.
The Australia-United States Free Trade Agreement (AUSFTA) was implemented in 2005 and focused
on the reduction of tariffs, mainly in agriculture and manufacturing, with all automotive tariffs being
removed immediately and all other tariffs set to be removed by the end of 2015. Since this agreement
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the United States has become Australia’s 3 largest trading partner, participating in 8.5% of
Australia’s total trade flows.
While bilateral trade agreements do go some way towards trade liberalisation they do so on a country
by country basis, and so the benefits are not as widespread as they can be. Furthermore, the benefits
of bilateral trade agreements tend to be overstated due to their tendency to cause ‘trade diversion’,
i.e not increase the overall level of trade in the world, simply shift more into the countries involved in
the agreement. Bilateral trade agreements have some use and should be created however they
shouldn’t take preference over the final goal of multilateral trade liberalisation.
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MULTILATERAL TRADE AGREEMENTS
Multilateral trade agreements are those that provide free or preferential trade between many
nations, usually on a regional basis.
The Association of South East Asian Nations (ASEAN) is one of the main forces of trade liberalisation
in the Asia Pacific region. It excludes all of the larger Asian economies and is used to give voice to the
smaller emerging economies such as Indonesia, Thailand, Singapore, The Philippines, Vietnam, Brunei,
Burma, Cambodia and Laos.
Australia’s main multilateral trade agreement is the ASEAN-Australia-New Zealand Free Trade
Agreement (AANZFTA). It came into effect in 2010. This agreement covers 20% of Australia’s total
trade and creates a free trade area of 600 million people with a combined GDP of US$3.7 trillion. This
agreement is particularly effective as Australia and the ASEAN are complimentary economies, i.e
goods produced by one economy are demanded by the other. AANZFTA is forecasted to boost the
Australian economy by $19bn during the decade after its implementation.
During the 1990’s Australia’s trade efforts were focused on the Asia Pacific Economic Cooperation
(APEC). It was originally targeted at free trade by 2020 but it has made little progress in recent years
because there are no binding laws or agreements between APEC members that force them to keep
their promises. Hence countries have reneged on their promises to reduce protection. The APEC is
now a forum for discussion on global issues such as climate change and terrorism. However, the
forum still encourages trade liberalisation among members and from 1990 to 2010 Asia Pacific tariffs
have fallen from an average of 17% to 6% and proportion of goods without tariff has increased to
40%. 37 regional trade agreements have been formed amongst APEC members.
The main disadvantage with multilateral trade agreements is that sometimes they can be exclusive. A
trading bloc occurs when a number of countries join together to in a formal preferential trading
arrangement to the exclusion of other all countries. To major trading blocs are NAFTA and the EU.
The North American Free Trade Agreement (NAFTA) is between the United States, Canada and
Mexico. It was created in 1994 and aimed to eliminate all agricultural protection in 5 to 15 year
period. It has been particularly successful at increasing trade between members. Mexico has
benefited greatly from being able to export to the United States very large consumer market while
the corporations in USA and Canada have been able to cut costs by moving many of their
manufacturing processes to Mexico where labour wages are lower.
The European Union (EU) is the most major trading bloc in the world with 27 member nations.
European economies historically had imposed a large amount of trade barriers against each other
over time, an effect being worsened by war and other conflicts within area. The EU was formed in the
1950’s to decompose the complex systems of protection that had grown in the area and to give the
member countries preferential trading conditions. As more and more countries joined the EU they
began to put up barriers against countries in the rest of the world and trade more exclusively with
countries in their own region. This was one of the major reasons that Australia’s trade flows, which
had mainly historically been with Europe, shifted to Asia.
To further make trade more preferential and easier between European countries the Euro was
created as a common currency and accepted by 17 of the 27 countries. This meant that it was easier
to facilitate trade between countries as exchange rates no longer needed to be considered. However,
the Euro has had serious disadvantages too, including not being able to run separate monetary policy
in different European countries despite them having different economic conditions. This became
apparent during the Eurodebt crisis.
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HOMEWORK
1) Explain how the WTO has contributed to globalisation
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2) Outline how the IMF has contributed to globalisation
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3) Discuss the effectiveness of the IMF in stabilising financial markets during crisis
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4) Evaluate the impact of international organisations on economic development
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5) Compare and contrast the role of the G20, G8 and OECD.
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6) Discuss the effectiveness of trade agreements in helping reach trade liberalisation
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7) Why has Australia been active in making bilateral trade agreements? Outline the benefits of
ONE of these agreements
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8) Differentiate between the WTO and GATT. Relate this to the role of APEC in the global
economy.
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9) Discuss the effects of international organisations in Australia’s economic performance
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10) Which international organisation would be most likely to play the major role in the following
situations?
 A dispute between the EU and the US with regard to the EU’s policy that all imports of
genetically modified food should be labelled correctly
 Construction of a major dam and irrigation project in Burma
 A crisis in global financial markets that threatens a severe global recession
End of homework
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