PS420/520: International Organization

I. Hypotheses linking Problem Structure to Institutional Design

A. This is a chart that captures the discussion that we had on Thursday's class

II. International Trade

A. Nature of problem

1. General description of problem: All countries' economies can grow faster if each has access to a world rather than merely a local market. Both export sector and consumers will benefit from free trade (the former in larger markets, and the latter in lower prices). BUT, there are two costs of engaging in free trade.

a) First, there are transition costs and ongoing political costs of having free trade. Your import competing sector does worse and will eventually die off and they will resist that.

b) Second, engaging in free trade makes one dependent on other countries to some extent.

2. Note: Different types of trade problem: focus here is on

3. Interdependence:

a) Large interdependence if consider different products as different issues. If see all trade as the same, then interdependence with NON-trade issues is low, because trade trumps most other issues (note, however, that interdependence can go the other way, as when trade is used to influence human rights or environmental policies).

4. Capacities: Capacity is not at issue in either sense. All states have ability to engage in both bad and in good behaviors, without being dependent on other states to do so. All states can raise tariffs, quotas, subsidies.

5. Consequences and Incentives

a) Incentives to cheat: strong pressures to respond because it appeals to import competing sector, as visible in US protection of steel industry

b) Incentives and capacity to respond: Like arms control have incentives to respond, but unlike arms control can target responses to violators in ways you can't in weaponry. Tariffs can be imposed only on imports from the violating country.

6. Information and Knowledge

a) Differences between tariffs and quotas on the one hand and subsidies and Non-tariff barriers (NTBs) on the other. Tariffs and quotas CANNOT be undertaken without other side knowing about it. Subsidies and NTBs CAN be undertaken without other side knowing.

b) Knowledge about consequences of different types of trade barriers is quite high.

7. Norms: no strong norms about free trade. Equally appropriate -- in a moral sense -- to have high tariffs or low tariffs. There is a norm of reciprocity, however -- if other state has low tariffs toward your goods, you should have low tariffs toward theirs.

B. Types of solutions

1. Discussion of various rounds of GATT show progress

a) 1947: 23 countries, 45000 concessions, $10B

b) 1949: 33 countries, +5,000 concessions

c) 1951: 37 countries, 25% tariff reductions

d) 1956: further tariff reductions, $2.5B

e) 1961: further reductions and consolidation,

f) 1967: 62 total countries, 75% of world trade, 50% tariff reductions on some goods

g) 1979: 99 countries, $300B worth

h) 1993: WTO replaces GATT, including Trade Policy Review Mechanism for transparency and Dispute Settlement Mechanism

C. Institutional design

1. Incentive compatibility is crucial: need to ensure that rules about responses fit with what states want to do, but this is relatively easy here.

2. GATT/WTO reduce transaction costs - multilateral agreement at common levels rather than multitude of bilateral agreements at all sorts of levels.

3. Membership issues: notice difference between global free trade under WTO and regional trade agreements with limited membership. Easier to control enforcement problems in the latter. EU is prime example.

4. Incentives 4: If CONSEQUENCES for perpetrators are WORSE if other countries engage in good behavior (Collaboration):

a) Response system will rely on retaliation and COMMON (but contingent) obligations, instead of a response system

b) In trade case, retaliatory noncompliance is so likely that specifics of response system are NOT to ensure retaliation but to keep it from escalating and leading to reversion to status quo ante

5. Incentives 1/Capacity 3: If INCENTIVES and/or CAPACITY to cheat on institutional rules are STRONG for some states but not for others

a) Has BROADER scope that creates linkage between one issue area and another and that links current behavior to future behavior, as a means to reward or sanction those with incentives and capacity to cheat

6. Incentives 2 trumped by Information 1: INCENTIVES for states to cheat but EASY for others to get INFORMATION about other actors behavior. So, inspection procedures are not needed in tariff agreements, but may need information procedures for NTBs and subsidies.

7. Incentives 2: If the INCENTIVES that states have to cheat on institutional rules are STRONG

a) Has clearly specified RESPONSE procedures. Collaboration: inspection and response likely.

b) Very clearly specified mechanisms for response, through dispute panels.

c) Important elements of response system are two-fold:

(1) Create linkages over time, among countries, and across products - make it so that violations on bananas are seen as violations of a norm that, if tolerated, would involve downward spiral of violations on all sorts of products. Consider difference in WTO case (where all products are addressed together) to solution to environmental problems that are, at least arguably, equally interlinked in some empirical sense but are treated by separate regimes for each pollutant, species loss, etc.

8. Capacity not at issue, so no capacity enhancement provisions

9. Norms are weak so no normative hypotheses are operative.

10. Progress on tariffs much easier than on NTBs and subsidies

a) Character of problem matters

b) Consider transparency of different types of protection

III. Development Assistance

A. Nature of problem (see Gwin in MGI).

1. General description of problem: For a variety of good and bad reasons, many countries lack the capacity to develop (and also have incentives to invest in ways that promote things other than development) and the failure to develop a stable economy has impacts on other countries.

2. Interdependence

a) Unethical to leave people in poverty, in its own right

b) Negative externalities of underdevelopment: disease, refugees, population flows, environmental degradation, economic production and consumption opportunities. If we don't step in to aid other countries, can cause global economic decline (see Great Depression and "Asian economic flu" of late 1990s).

c) Positive externalities of development: economic growth; political stability; other countries contributing to global problem solving.

3. Capacities:

a) Most countries want to develop but lack the capital to do so.

b) Capital flight and other factors are driven by markets which are often not rational -- once capital flight starts, its hard to stop. Snowball effects once capital flight starts -- shareholders sell which lowers price which causes others to sell, which leads to devaluation of currency as people try to get dollars out, which causes further crash, and this has domino effects in other countries, etc.

c) Capacities are asymmetric -- Positive Externality Plagued by Incapacity

4. Consequences and Incentives

a) Incentive problems on donor side: non-developmental objectives for developmental assistance. Want to provide aid to countries for economic/political/strategic reasons rather than because they need to develop

b) Incentive problems on recipient side: may want to spend aid in ways that address short-term political pressures rather than long-term economic ones.

5. Information and Knowledge: Some knowledge issues in that countries may not recognize benefits and costs of different macro-economic policies. Macro-economics involves complex and dynamic processes.

6. Norms: Some degree of concern about underdevelopment but seems like it doesn't play a big role in the problem. States pay lipservice to this but with little follow-through.

B. Types of solutions

1. History of aid in practice

a) 50s-60s: Nonconsessional aid – loans at market rates to fund large scale infrastructure

b) 70s: Project-based aid since nonconcessional aid didn’t seem to work

c) 80s: Conditional aid requiring structural adjustments in governmental policies

(1) Structural adjustment of:

(a) Fiscal discipline – government shouldn’t spend more in outlays than brings in from taxes and other sources of revenue

(b) Free markets domestically – let markets set prices for goods, capital (interest rates), and exchange rates

(c) Free trade – force domestic producers to compete internationally (thereby removing need for government to intervene to help them out)

(2) Move toward SAPs moves away from alleviating poverty to providing economic stability (which has only indirect and attenuated effects in alleviating poverty)

d) General budget and balance of payments support, tech assistance, and policy advice

e) Dissemination of information on development

f) UN provided grants, Multilateral Development Banks (MDBs) provided loans although on concessional terms (i.e., below market rates)

(1) WB designed for long-term development through lending for specific projects

(2) IMF for short-term macroeconomic adjustment

g) IMF has become organizational focus for lending money to countries suffering from balance of payment problems or rapid capital flight. Money from IMF reserves; regional development banks, World Bank, and national governments.

(1) IMF packages offered to developing countries suffering from routine balance of payment problems are typically on the order of $50-150 million, often over three years.

(2) Bailout packages for countries suffering from sudden capital flight are much, much larger. Mexico, 1995: $40 billion; Thailand, August 1997: $17 billion over three years; Indonesia, November 1997: $43 billion over three years; another $5 billion earlier this month (February 2000); South Korea, December 1997: $57 billion over three years, about half spent almost immediately; Russia, July 1998: $22 billion, another $4.5 billion in July 1999; Brazil, December 1998: $41 billion.

h) Where does the money go?

(1) Governments use most of it to replenish foreign currency reserves, which in turn they use to strengthen local currency by purchasing it in dollars.

(2) Where does this money then go? Most of it into pockets of people selling local currency: that is, investors and currency speculators trying to unload local currency.

(3) In other words, they get to recoup more of their investments when they pull them out than otherwise

(4) And where do these speculators and investors live? In states providing bailout money.

(5) In other words, most of this money winds up back in the North anyway.

(6) AND the borrowers have to pay us interest for the privilege of bailing out our own investors! What a deal.

2. Types of international solutions

a) Bilateral, uncoordinated aid: Problems = Inefficient – could get more bang for the buck by coordinating aid. Some duplication; Ineffective – some problems get missed if don’t adopt comprehensive view; Money is always fungible and can be used for other things.

b) Multilateral provision of aid has advantages:

(1) More resources through pooling – so that can accomplish things couldn’t accomplish otherwise

(2) Changes type of aid given: more development oriented. On donor side, aid is an instrument of foreign policy and foreign policies may be different when they are channeled through International Financial Institutions (IFIs)

(3) Changes who receives aid: goes to poorer countries. Less focused on strategic considerations. Single state can’t decide to have money that goes through IFI only put toward what it wants. Donors want to use aid to get other political/economic benefits. Multilateralism improves this by requiring justifications. Donors direct aid toward countries based on political and commercial interests – i.e., they help countries develop not based on need for development but on benefits if they do develop. Increasingly environment is prioritized over poverty alleviation

(4) Improves credibility of claims of donors: more ability to credibly claim aid is not simply self-interested but in interests of recipients.

(5) Increases legitimacy about how aid should be used: creates norms of procurement which become normatively appropriate

(6) Different resources through institution – financial, administrative and technical advice can be provided

C. Institutional design

1. Incentive compatibility is crucial: need to ensure that recipient, developing countries have incentives to spend money in the way that will promote development but also in ways that donor, developed countries have incentives to provide money

2. Interdependence 1: If INTERDEPENDENCE in other arenas or issues allows linkage that provides leverage

a) Has BROADER scope to include the arenas of linkage

b) Has DIFFERENTIATED obligations, with some actors having to engage in certain types of actions in exchange for others engaging in other types of actions. In development assistance, there are donors and recipients but also there is lots of linkage from donor's point of view of getting recipient to take actions that provide benefit to donor.

3. Interdependence 2: If INTERDEPENDENCE is such that if Country A engages in bad behavior, Country B has incentives and capacity to retaliate by engaging in bad behavior and retaliation will influence Country A. Not the case in Development Aid case.

4. Capacity 2: If some actors lack the CAPACITY to engage in GOOD behavior, leads to institutions that

a) EXPAND membership consisting of donors and recipients

b) Have DIFFERENTIATED obligations, with donors and recipients being required to do different things. In development assistance, there are donors and recipients.

c) RESPONSE will involve capacity enhancements: Positive externalities plagued by incapacity: capacity enhancements, not rewards or sanctions. In development assistance, its all about enhancing capacity to engage in good behavior, not only through providing funds but also training in how to spend them effectively and how to change economy through SAPs.

5. Incentives 2: If the INCENTIVES that states have to cheat on institutional rules are STRONG

a) Has clearly specified INSPECTION procedures. In development assistance,

b) Has clearly specified RESPONSE procedures. In development assistance, it is based on "tranches" of money -- don't get next glob of money if misbehave with first glob

6. Information 2: If actors do not have good INFORMATION about the problems caused by engaging in good or bad behavior (i.e., if transparency about consequences of behavior is low)

a) Has some organization to improve knowledge about the problem. In development assistance, training in economic issues and technical assistance is often important