International Organisations (HSC SSCE Economics): Revision Notes
International Organisations
Overview of international economic institutions
The major institutions of the global economy play a crucial role in maintaining international trade and financial stability. The three most important are the World Trade Organization (WTO), the International Monetary Fund (IMF) and the World Bank. Both the IMF and World Bank were established at the Bretton Woods conference in 1944, which designed the post-war global economic system.
The Bretton Woods conference was a landmark event that shaped the architecture of the post-war international economic system. The agreements made there continue to influence global economic governance today, even as these institutions have evolved significantly from their original mandates.
These institutions have had to adapt significantly to new circumstances as the global economy has become increasingly complex. The flow of capital and goods across borders during the globalisation era has created challenges that these organisations were not originally designed to handle.
Other influential organisations include the Organisation for Economic Cooperation and Development (OECD) and the United Nations (UN), both of which play important roles in coordinating global economic policy and development.
World Trade Organization (WTO)
Formation and purpose
The WTO was formed in 1995 as the first international organisation with powers to enforce trade agreements across the world. Its primary role is to implement and advance global trade agreements and resolve trade disputes between economies.
Before the WTO, the General Agreement on Tariffs and Trade (GATT) process, which began in 1947, handled trade negotiations. However, GATT lacked an enforcement mechanism, meaning many countries only implemented parts of the agreements. In 1993, GATT was replaced with the new WTO structure.
The transition from GATT to the WTO represented a fundamental shift in international trade governance. While GATT operated as a forum for negotiations, the WTO became an organization with legal authority to enforce compliance with trade agreements – a significant enhancement of global trade rules.
Key features and scope
The formation of the WTO was significant for several reasons:
- Enforcement powers: Unlike GATT, the WTO can enforce trade agreements
- Expanded coverage: The WTO's reach extends beyond trade in goods to include trade in services (such as insurance and banking) and intellectual property (such as patents, copyright, electronic circuits and trademarks)
- Dispute resolution: Countries can lodge complaints about trade rule violations
Dispute resolution mechanism
One of the most important features of the WTO is its dispute resolution process:
- A country that believes it is suffering harm from another country's failure to comply with WTO obligations can lodge a complaint
- A process of dispute resolution begins, initially seeking direct agreement
- If no agreement is reached, a WTO panel hears the complaint and issues a decision
- If the offending country does not comply, the complaining country may impose trade sanctions, including high tariffs
Since 1995, 617 disputes have been brought to the WTO and over 350 rulings have been issued.
Effectiveness and limitations
The WTO has proved effective in resolving disputes between smaller countries. However, it has been less effective with disputes between the United States and the European Union. These major powers have delayed compliance and continued to lodge appeals rather than accept WTO decisions.
While the WTO has successfully resolved hundreds of disputes between smaller nations, its effectiveness is significantly limited when dealing with major economic powers like the United States and European Union, which have the resources and influence to delay or avoid compliance with unfavorable rulings.
Membership and achievements
The WTO's membership includes:
- 164 member countries
- 25 further "observer" countries negotiating to join
Key achievements since 1995:
- Oversaw a halving of average tariff rates among member economies
- Negotiated the Trade Facilitation Agreement in 2014, which aimed to reduce trade costs by to per cent by simplifying customs procedures
- Secured voluntary agreements to reduce trade barriers in financial services, information technology, telecommunications and shipping
The Doha Round and challenges
The Doha Round of trade liberalisation talks began in 2001 in Qatar with ambitious goals:
- Reduce agricultural protection
- Lower tariffs on manufactured goods
- Reduce restrictions on trade in services
It was claimed this could create annual welfare gains of US$90 to US$200 billion per year and lift over million people out of poverty in the developing world.
Why the Doha Round failed:
- Disagreements on access to agricultural markets
- Disputes over pharmaceutical medicine production restrictions
- Arguments between developed and developing nations
- Manufacturing protection disputes
- Declining public support for free trade in many countries
The failure of the Doha Round represents one of the most significant setbacks in the WTO's history and highlights the growing challenges of achieving consensus on trade liberalisation in an increasingly divided global economy.
The Round did produce some results, such as the Nairobi Package in 2015, a voluntary agreement to reduce export subsidies for farm exports.
Current challenges facing the WTO
A quarter of a century after its establishment, the WTO's role has been weakened by rising protectionist sentiment globally. The United States, historically the leading advocate for freer trade, has become critical of the WTO.
Critical weakening of the WTO:
- US criticism that the WTO fails to address China's breaches of trade rules
- Since 2019, the US (under both Trump and Biden Administrations) has refused to approve replacement judges on the WTO's appeals body
- The appeals body cannot enforce WTO rules as a result
- Nations can only resolve disputes through informal arbitration
This represents a fundamental threat to the WTO's effectiveness, as the dispute resolution mechanism was one of its key innovations over the previous GATT system.
Despite these challenges, the WTO has made progress on specific issues. At its 2022 ministerial council meeting, agreements were reached to:
- Override patent rights for COVID-19 vaccines
- Reduce fishing subsidies
International Monetary Fund (IMF)
Role and structure
The International Monetary Fund is one of the most important institutions in the global economy. Established in 1944, it now has 190 members, covering almost all nations. Its primary role is to maintain international financial stability, particularly in relation to foreign exchange markets.
Originally, the IMF oversaw a system of fixed exchange rates to stabilise economic relationships between economies. When this system collapsed in the 1970s, the IMF's role widened to ensuring global financial stability. When financial crises occur in an economy, region or globally, the IMF plays a critical role in minimising the crisis.
The evolution of the IMF's role demonstrates the adaptive nature of international institutions. From its original mandate of managing fixed exchange rates, it has transformed into a global financial crisis responder and economic policy advisor – a much broader and more complex role than originally envisioned.
Crisis response and recent interventions
The IMF's role in ensuring stability in global financial markets was demonstrated during the COVID-19 pandemic:
- Established a new Short-term Liquidity Line in 2020 for developing and emerging economies
- Provided one-off payments and interest-free loans to help countries design policy responses
- Received requests from over 100 countries by May 2020
- Approved a US$650 billion emergency aid fund in July 2021 (the largest-ever relief package) to help developing economies buy vaccines and pay down pandemic debt
- After Russia's invasion of Ukraine in February 2022, approved a four-year Extended Fund Facility of US$15.6 billion as part of a US$115 billion total support package
Structural adjustment policies
In the longer term, the IMF aims to support the free trade of goods and services and the free movement of finance and capital throughout world markets. The IMF often requires countries to change their economic policies before receiving financial assistance. These structural adjustment policies include:
- Reducing the size of government
- Privatising government businesses
- Deregulating markets
- Balancing government budgets
The impact of the IMF's policy approach is increased because many international banks and other private lenders require countries to adopt IMF-supported policies before they will lend. Additionally, the IMF increasingly tailors these policies to wider economic priorities, with growing focus on climate risk given the harsher impact of climate change on financially vulnerable countries.
Criticisms and reforms
The IMF has attracted criticism during financial crises where its policies appeared to make conditions worse for affected economies.
Asian financial crisis (late 1990s): After widespread criticism about the negative impact of IMF-demanded reforms, the IMF adopted a different approach during the global financial crisis of the late 2000s:
- Supported expansionary macroeconomic policies
- Gave borrowing countries more freedom to increase spending to avoid recession
- In 2010, altered its governance structure to give developing and emerging economies (many IMF assistance recipients) a greater say over IMF policies
This represented a significant shift in the IMF's approach, acknowledging that its traditional austerity-focused policies could worsen economic downturns.
European sovereign debt crisis (2010s): The IMF faced criticism that its demands harmed the most vulnerable groups while protecting financial institutions. An IMF audit report in 2016 acknowledged that measures demanded from Greece disproportionately affected vulnerable groups and intensified recession.
However, a broader IMF evaluation of its lending programs between 2011 and 2017 concluded that three-quarters were successful or partially successful in achieving their objectives.
Speed of response: The IMF has been criticised for moving too slowly and cautiously, particularly during the COVID-19 pandemic. This has led to proposals for reforms to lending practices so the IMF can move faster to provide low-interest loans to economies in crisis.
World Bank
Primary role and structure
The World Bank's primary role in the global economy is to help poorer countries with their economic development. The official title of its main organisation, the International Bank for Reconstruction and Development, indicates its focus: to fund investment in infrastructure, reduce poverty and help countries adjust their economies to the demands of globalisation.
Subsidiary organisations
The World Bank has several organisations providing specific assistance to lower-income countries:
- International Development Association: Provides "soft loans" (loans at little or no interest to developing countries)
- International Finance Corporation: Attracts private sector investment to the Bank's projects
- Multilateral Insurance Guarantee Agency: Provides risk insurance to private investors
- International Centre for Settlement of Investment Disputes: Provides conciliation and arbitration of investment disputes between states, and between states and corporations
Major goals
The World Bank has two major goals:
- Reduce extreme poverty to less than per cent of the world's population by 2030 (compared to current forecasts of to per cent living on less than $1.90 per day by 2030). At the per cent level, those in poverty will mostly be experiencing "frictional poverty" – poverty related to short-term disasters such as extreme weather events rather than long-term poverty. This goal supports the United Nations Global Goals, although it is more narrowly focused.
- Reduce inequality by fostering income growth for the world's bottom per cent.
Funding and operations
The World Bank is funded by contributions from member countries and from its own borrowings in global financial markets. It makes loans to developing nations at rates below standard commercial rates to fund infrastructure projects such as power plants, roads and dams.
Scale of operations:
- Active portfolio of investments exceeds US$300 billion
- Record lending commitments of US$105 billion in 2022
COVID-19 response
In response to the COVID-19 recession, the World Bank:
- Committed $157 billion for over lower-income countries
- These countries accounted for per cent of the world's population
- Funding helped countries obtain vaccines, strengthen health systems and reduce economic damage from the pandemic
- Partnered with the International Finance Corporation to provide US$47 billion for credit support in 2020 when private credit markets seized up
Important initiatives
Heavily Indebted Poor Countries Initiative: One of the most important actions in the past two decades has been supporting this initiative. The World Bank aims to reduce debt by two-thirds in the world's poorest countries in Africa, South Asia and Latin America, whose debt levels are considered unsustainable. By 2023, 37 countries had received debt relief estimated to have saved them over US$100 billion.
Climate transition: The World Bank plays a role in the global transition away from fossil fuels, with 35 per cent of its investments designed to help reduce carbon emissions.
Declining but important role
In overall terms, the World Bank's global importance as a lender to developing countries has declined as private lending markets have expanded in recent decades. However, it continues to play an important role, particularly when private credit markets seize up during crises.
China's Belt and Road Initiative
Overview and scale
Surprisingly, the world's largest lender of international development finance is not one of the traditional international organisations, but China. Since launching its Belt and Road Initiative (BRI) in 2013, China has provided US$1 trillion in support to countries through construction contracts and non-financial investments.
In an average year, China lends around US$85 billion for overseas development projects – more than double the lending of the US (US$37 billion). BRI support focuses on building infrastructure in the developing world, leveraging China's $3 trillion in foreign exchange reserves.
Benefits for developing countries
Developing countries have reaped significant benefits from China's BRI lending:
- Statistical analysis published in 2022 indicates an average BRI project increases economic growth in a host country by percentage points after two years
- BRI infrastructure projects can reduce economic inequality, with a percentage point reduction in the concentration of economic activity within a district in a low- or middle-income country
Risks and criticisms
Despite these benefits, BRI projects involve risks for developing countries:
- Environmental degradation due to expedited approvals and high-speed construction
- Inflated costs
- Social issues and corruption
- Large-scale debt burden, with China now the world's largest bilateral lender
- Growing number of countries facing debt distress as rising interest rates and slower growth make it difficult to service debts
The World Bank has warned that the debt burden from BRI projects could trigger a series of international debt defaults on a scale not seen since the 1980s. This represents a significant risk to global financial stability, as many developing countries have taken on substantial debts to fund BRI infrastructure projects.
United Nations (UN)
Scope and membership
The United Nations is a global organisation established in 1945 with 193 member states – more than any other political or economic organisation. Its agenda is broader than any other organisation, covering:
- The global economy
- International security
- The environment
- Poverty and development
- International law
- Global health issues
However, its decision-making powers are limited because it relies on the support of member states, and budgets for different UN arms are small compared to national governments in many advanced economies.
Role in promoting globalisation
The UN has historically played an important role in supporting greater linkages between economies and promoting globalisation. Various UN agencies have developed international standards that make trade and investment flows easier between nations, such as:
- Standards for food safety
- Rules on copyright and intellectual property
Key UN agencies
Important UN agencies include:
- World Health Organization
- UN Development Programme
- UN Children's Fund (UNICEF)
- UN Refugee Agency (UNHCR)
- World Food Programme
- UN Conference on Trade and Development (UNCTAD)
- UN Environment Programme (UNEP)
Human rights and development
The UN has overseen the development of numerous international agreements to enforce human rights and political freedoms. Research by the World Bank has consistently shown individual freedoms strengthen a country's prospects for economic growth and development. Several conventions were developed with the intention of addressing underlying causes of poverty in developing nations.
Sustainable Development Goals
One of the most important recent roles is establishing a set of Global Goals (or Sustainable Development Goals), which aim to reduce global poverty and inequality between 2015 and 2030.
Background: These goals build on the Millennium Development Goals, which oversaw a reduction in the proportion of people living on less than $1 a day between 1990 and 2015 – from per cent to per cent of all people in low- and middle-income economies (chiefly as a result of rapid economic growth in China lifting million people out of poverty).
The 17 Sustainable Development Goals cover:
- Global poverty
- Hunger
- Wellbeing
- Education
- Gender equality
- Clean water and sanitation
- Clean energy
- Economic growth
- Sustainable cities
- Climate action
- Sustainable use of land and oceans
They incorporate targets that UN member states have pledged to take action towards during 2015 to 2030.
Progress at the halfway point (2023):
- Only about per cent of measurable targets were on track
- Close to half were moderately to severely off track
- per cent had seen no improvement or regression below the 2015 baseline
This limited progress raises serious concerns about the achievability of the Sustainable Development Goals by 2030 and highlights the need for accelerated action across all member states.
Organisation for Economic Cooperation and Development (OECD)
Structure and goals
The OECD is an international economic organisation of mostly advanced economies committed to democracy and open markets. Its primary goal is to promote policies "to achieve the highest sustainable economic growth and employment and a rising standard of living in member countries while maintaining fiscal stability and thus contribute to the development of the world economy".
Main functions
In practice, the main role played by the OECD is to:
- Conduct and publish research on a wide range of economic policy issues
- Coordinate economic cooperation among member nations
- Develop common policy agendas
For example, the OECD provided a forum for member countries to share research and coordinate policy responses to the COVID-19 pandemic.
Research and data
Alongside research conducted by the IMF and World Bank, OECD economic research is regarded as the most reliable source of comparative economic data. The OECD publishes in-depth research and analysis of a wide range of domestic policy issues relating to advanced economies, including:
- Competition
- Education
- Employment
- Health
- Industry
- Innovation
- Migration
- Regulation
- Tax
Influencing global policy
The OECD has influenced the global economic policy agenda in recent years:
Inclusive growth: Its advocacy for "inclusive growth" strategies in the past decade has challenged traditional assumptions that policymakers must always trade off equity and efficiency (inequality versus economic growth). This reflects concerns that the level of inequality in many economies has become a constraint on economic growth.
Corporate taxation reform: The OECD played a key role in an international agreement in 2021 to reform corporate taxation rules. This agreement involves:
- A global minimum corporate tax rate of per cent
- Measures to ensure companies pay tax in the places where economic activity occurs, rather than using tax havens to avoid paying tax
Key Points to Remember:
- The WTO, IMF and World Bank are the three major institutions of the global economy, with the IMF and World Bank both established at Bretton Woods in 1944
- The WTO has members and enforces trade agreements through its dispute resolution mechanism, though its effectiveness has been weakened by US opposition to its appeals body since 2019
- The IMF maintains international financial stability and provides emergency funding during crises, but faces criticism that its structural adjustment policies can harm vulnerable groups
- The World Bank focuses on economic development in poorer countries, with goals to reduce extreme poverty to less than per cent by 2030 and foster income growth for the world's bottom per cent
- China's Belt and Road Initiative has made China the world's largest overseas development lender, providing US$1 trillion to countries since 2013, though it has created debt sustainability concerns
- The UN's Sustainable Development Goals include goals and targets for 2015–2030, but only per cent of measurable targets were on track at the halfway point in 2023
- The OECD, with mostly advanced economy members, conducts influential economic research and played a key role in establishing a global minimum corporate tax rate of per cent in 2021