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Lecture 1: Emergence of International Economic Institutions

1.1 Introduction to International Economic Institutions

1.1.1 Definition of International organizations*

(*note: institution(s) and organization(s) are used interchangeably) definition

 “International organization” can be defined as a continuous structure established by

agreement between members (governmental and / or non-governmental) from two

or more sovereign 君主 states with aim of pursuing the common interest of the

membership.

 The definition places emphasis on:

 Membership (i.e. which does not necessary has to be of governments).

 Structure (i.e. it should be more permanent than a conference 会议).

 Pursuit 追求 of members’ interests (i.e. the membership should not just exist

for the convenience of one member).

 Classification of international organization:

 Membership:

1) Intergovernmental organizations 政府间组织 (IGOs) (i.e. created by

intergovernmental agreement and their members are governments or their

agents; e.g. United Nation, European Union, World Bank etc.)

2) International non-governmental organizations (INGOs) (i.e. private

organizations performing on international stage that pursue specific issues

such as humanitarian, social, environmental etc.; e.g. Association for Regional

Economic Development, BRAC etc.)

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3) Transnational organizations (TNOs) (i.e. establishments that are not agents of

governments or international organizations that become institutionalized

based on common interest; e.g. International Economic Development Council,

International Union of Economist etc.).

 Structure (e.g. if the membership of an organization is strictly for a few

countries within a region, then it could most probably being set up to protect

the regional interest; if an organization has consultative assembly 协商会议,

then the policy making of the organization is collective 集体).

 Aim and activities (based on the pursuit of members’ interests) (e.g. addressing

international trade issues for World Trade Organization and international

monetary issues for Internatial Monetary Fund).

 Roles of international organizations:

 Instrument 仪器 of the membership (i.e. used by the membership for their

own interest in the global system and bring responsibilities and restrain 抑制

by limiting the power of independent action).

 Forum for activity (i.e. an arena for members to meet, debate and execute

action).

 International actor (i.e. institution framework allows members to achieve more

than if their members acted separately).

 Functions of international organizations:

 Recruitment (i.e. recruit of participants in the international political system to

allow them to gain access to organizations and promote their state interests).

 Aggregation of views (i.e. aggregate opinions and articulate them more

effectively).

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 Norms and socialization (i.e. spreading norms and values throughout the world,

e.g. the importance of free market etc.).

 Rules (i.e. devising rules to govern country members in the pursuit of an

organization’s objectives, e.g. WTO enforces rules on countries that signed the

free trade agreement to achieve the objective of liberalization of trade).

 Operational (i.e. organizations depending on the objective of its establishment

undertake functional activities such as banking (e.g. Bank of International

Settlement), research (e.g. various ECOSOC bodies) etc.).

1.1.2 Definition of international economic institutions

 No precise definition for international economic institutions / organizations but the

term is understood to refer to “international organization” that engage in

international economic matters.

 The analytical of international organization in academic has shifted from “formal

institutions” to “institutional processes to “organizational roles” to “international

regimes 制度” in recent history.

 “International economics” in general concerns of the economic relationship

between countries and the countries’ policies on:

 Trade in goods and services

 Factor movements (i.e. migration, capital movements, technology transfer etc.)

 International monetary arrangements (i.e. exchange rates, exchange reserves

etc.)

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 International economics organization integrates the economy at international level

and facilitates economics activities among players / agents / country members in

the organization that have various conflicting interests and potentials.

 The main objective is to maximize the utility 效用 and increase the welfare 福利

among the organization members subjected to the limitations presented by the

environment and the members’ capabilities.

 Among some of the functions that an international economics organization can

perform in general are:

 Monitoring functions to ensure all country members adhere to the terms of

their commitment.

 Provide forums to mitigate “collective-action problem” that could threaten the

cooperation among members.

 Provide forums for negotiation to resolve coordination problem.

 Provide forums to learn about economic or policy constraint facing by country

members.

 Create structures for enforcement and dispute 争议 resolution (although

actual enforcement powers typically remain in the hands of member

states).

 International economics organization is a very important foundation for cooperation

and global economy because cooperation among countries can be more resilient 弹

性 in the face of underlying shifts in economic power and interest.

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1.2 Foundation of International Institutions: Organizational Politics

1.2.1 Introduction

 Organizational politics refers to the interactive process of influence between states /

countries and international organizations.

 It is the central concept in examining how interests are created and how decisions

are made in international economics organizations.

 Two most important aspects of organizational politics are:

 Institutional venue 制度,机构场地

 Negotiation

 These two aspects constitute the foundation of practices and determine the norms

and behavior of country members of an organization when engaging in cooperation.

1.2.2 Institutional venue

 Institutional venue refers to the organizational structure and political process of an

international organization.

 The institutional venue will affect the manner in which negotiations are conducted.

It consists of two components:

 Organizational structure

 Political process

 The organizational structure refers primarily to the formal, institutional framework

manifested in an organization’s constitution.

 Organizational structure which outlines an organization’s the main functions and

organs commonly features:

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 Explicit function of an organization (i.e. whether it is a forum or a service

organization, and the extent to which it combines both roles).

 Conduct of proceedings 进行诉讼 (i.e. the agenda of the organization

and its rules of procedure).

 Formal decision-making apparatus (e.g. voting provisions, the type of decisions

permitted, the time available to take decisions etc.).

 Membership (i.e. the criteria for membership and the number and type of

actors / states / countries permitted membership).

 Budgetary provisions (i.e. the source of finance and the size of financial

requirements).

 Structure of authority (i.e. the source of finance and the size of financial

requirements).

 Role of the secretariat (i.e. the formal role of the secretariat and the

responsibilities assigned to the executive head).

 The organizational structure accounts for the static and unchanging aspects but

cannot explain the process of change in international organizations.

 The political process on the other hand is a set of variables that enable the analysis

of changes in the scope and level of organizational behavior, conflictual behavior or

the changing impact of the environment.

 The political process comprises of some key characteristics as follow:

 Standard operating procedures (i.e. rules of thumbs and sets of practices which

cannot be inferred from the formal, constitutional provisions).

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 Development of groups and institutionalization of group behavior (e.g. the

formation of G77 and OECD in North-South diplomacy, all countries are also

members of the U.N.).

 Decision making procedures (i.e. decision reached by consensus, simple /

complex majority vote, or the existence of veto provision).

 Nature and source of conflict (i.e. major sources of conflict can be endogenous

or exogenous to an organization).

 Conflict resolution (i.e. how conflicts are resolved):

1)Behavioral conflict such as violation of rules by a country.

2)Structural conflict such as the North-South conflict where the Third World

attempted a structural transformation of the international economic order.

 Stratification of power (i.e. internal distribution of post and bargaining power

and power possessed by an organization to affect outcomes outside of the

organization).

 Organizational ideology (i.e. values, goals and aspirations of an organization’s

members which enable the leadership of the organization to embark in task

expansion and systematic transformation).

 Organizational leadership (i.e. the role played by the secretariat and the

executive head:

1) In keeping members informed issues raised.

2) Performing its research function to educate members about issues discussed.

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1.2.3 Negotiation

 Negotiation is a bargaining process between two or more parties in quest of

reaching a mutual agreement or reconciling differences in resolving a conflict.

 The process includes a range of behaviors and goals, leading to a variety of

outcomes.

 Negotiations outcomes are affected by two factors:

 Duration of time

 Social context

 Duration of negotiations is critical because international negotiation takes place

over a considerable period of time and both the environment and actors / countries

are liable to change, thus the situation of a conflict or disagreement rarely remain

the same over time.

 Social context of negotiations is critical because negotiations are located in time,

place and space and cannot be separated from historical context.

 The elements of social context in negotiations are:

 Actors involved

 Type and range of issue

 Time element involved

 Institutional venue involved

 In the game theory (under closed systems), there are three analytical modes of

bargaining:

 Distributive 分配的 (i.e. all parties cannot gain because the ‘pool’ is fixed and

therefore they attempt to increase their individual shares by decreasing

others’).

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 Integrative 综合 (i.e. all parties attempt to increase the joint gain in a situation

where all can gain).

 Mixed (i.e. all parties attempt to increase joint gain and also decide how to

distribute the shares from the ‘pool’).

 In the organizational politics model international organizations are not viewed as

closed system but external environment is also taken into consideration.

 There are two external environment discussed under the organizational politics

model:

 General environment (i.e. the key systematic features such as economic,

political and military power, patterns of conflict and alignment in the world

system and the economic and political characteristics of states / countries.

 Task environment (i.e. specific issues and areas of concern for specific

organization, for example the IMF is concerned with international monetary

relations.

1.3 General Types of International Economic Organization Setup

1.3.1 Multilateralism 多边主义

 Multilateralism is defined as recurring efforts to coordinate relations between three

or more states / countries on the basis of certain generalized principles of conduct,

indivisibility and expectations of diffuse reciprocity.

 Multilateralism is in contrast with unilateralism (the action of one stat taken without

the consultation or coordination with others) and bilateralism (the coordination of

action by two states).

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 In the context of economics, multilateralism is the believe that international

economic relation should be conducted on the basis of equal treatment for all non-

nationals / members (i.e. multilateral trade and international capital movements

rather than preferential arrangements within blocs).

 Multilateralism is often associated with globalism and universalism and contrasted

with regionalism.

 The total sum of multilateralism of individual economies adds up to global

multilateralism.

 The opposing directions of economic integration however have proven to be

compatible and can coexist.

 It is unclear whether regionalization is a step towards more general world free trade,

or an obstacle 障碍 to achieving it.

1.3.2 Regionalism 地域

 Regionalism definition is still inconclusive. The most common definition is the

disproportionate 不成比例 concentration of economic flows or the

coordination of foreign economic policies among a group of countries in a

geographically specified area.

 Other defines regionalism in non-geographical terms i.e. economic integration due

to similarity in countries demographic (i.e. culture, language, religion, ethnic

background etc.) and by product of government policies (i.e. preferential trading

agreements and the formation of single currency with country members not located

in close proximity).

 Paradox to globalization and liberalization of economies is the rise of regional

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trading block.

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 It is thought that regional arrangements are preferred to full multilateral

liberalization because of the extreme difficulty in reaching worldwide agreement

 7 theoretical types / stages of regionalization (member countries must be at least 2):

 Preferential tariff agreement: Tariffs on trade among the country members are

lower in relation to tariffs charged on trade with third countries (e.g. member

countries of X and Y mutual tariff is 5%; X tariff for non-member Z is 7% and Y

tariff with non-member Z is 8%)

 Partial customs union: Member countries retain their initial tariffs on their

mutual trade and introduce common external tariff on trade with third

countries ((e.g. member countries of X and Y mutual tariff is 5%; X and Y tariff

for non-member Z is same at 7%)

 Free trade area: Member countries eliminate all tariff and quantitative

restrictions on mutual trade. Every country in this area retains its own tariff and

other regulation of trade with third countries but adhere to the agreement of

the rules of origin. (These rules prevent trade deflection, e.g. goods from non

member Z is traded via X to Y because X has lower tariff compared to Y and

trade between X and Y is non tariff. However, production deflection is possible,

e.g. parts the production of a good is imported by X from non member Z and the

finished good is exported from X to Y if the difference in tariff offsets the

difference in production and trade cost).

 Customs union: Member countries remove tariff and quantitative restrictions on

their intra-group trade and introduce a common external tariff on trade with

third countries. Member countries take part in international negotiations about

trade and tariffs as a single entity.

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 Common market: Apart from a customs union, there is free mobility of factors

of production (i.e. natural resources, labor, capital stock etc.). Common

regulations (restrictions) on the movement of factor of production with third

countries are introduced.

 Economic union: Apart from common market, the integration includes

harmonization of fiscal, monetary, industrial, regional, transport and other

economic policies.

 Total economic union: Union of a single economic policy and a supranational

government with great economic authority. There are no administrative barriers

to the movements of goods, services and factors, hence prices are equalized net

of transport cost.

Table 1.1: Theoretical types of international economic integration

Policy action Type

Preferential

Free trade

Economic

economic
Common
Customs
customs

market
Partial

union

union

Total
tariff

area

Removal of tariffs No No Yes Yes Yes Yes Yes

and quota
Common external No Yes No Yes Yes Yes Yes
tariff
Factor mobility No No No No Yes Yes Yes
Harmonization of No No No No No Yes Yes
economic policies
Total unification of No No No No No No Yes
economic policies
*Table modified from Javanovic (2006) (The Economics of International Integration)

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1.3.3 Rationalizations supporting regionalism

 Homogeneity 同质性 facilitates cooperation – There is a natural tendency

toward regionalism based on homogeneity of interests, traditions, and values

within small groups of neighboring states / countries.

 Small group and close proximity 接近 reduces complexity – Political, economic, and

social integration is more easily attained among lesser number of states / countries

within a limited geographic area than on a global basis.

 Efficient economic unit to compete – Regional economic cooperation provides more

efficient economic units than the smaller states, and these larger units can compete

in world market.

 Better conflict control – Local threats and issues disruptive to economic are more

willingly and promptly dealt with by governments of that area than by disinterested

states at greater distances from the scene of conflict.

 Global balance of power – By combining states / countries into regional groupings, a

global balance of power in terms of economic and security will be maintained.

 Catalyst to eventual global multilateralism / universalism – The world is not ready to

establish global authority sufficient to manage all international issues. Regionalism

is the first step in gaining experience and building areas of consensus towards

eventual intergovernmental coordination or integration.

 No problem of heterogeneity conflict – Global multilateralism / universalism fails to

take into account the heterogeneity of economic, political, social, and geographical

factors throughout the world that militate against global unity. These differences

can be more easily accommodated within a regional framework.

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1.3.4 Rationalizations supporting multilateralism / universalism

 Interdependence requires global solutions – World interdependence has created an

increasing number of problems that require global solutions. Economic, political and

social problems reach across regional boundaries.

 Scarcity of resources – Regional resources are often inadequate to resolve the

problems of states / countries within a region.

 Global crisis control – Since economic crisis is indivisible, only a world organization

can deal effectively in attempt to avert it from spreading beyond local and regional

limits.

 Check and balance – Only a universal organization can provide an adequate check of

a large state / country that can often dominate the other members of a regional

arrangement.

 Effective economic sanctions – Sanctions against a state / country that violates the

international norms are usually ineffective if applied on a regional basis because of

sources of aid from to the state / country outside the region.

 Regions are imprecise and impermanence – No agreement can be reached on a

system of regions into which the globe can be conveniently divided.

 Regionalism leads to conflicts – Regional alliances provide the basis of rivalries and

competition for economic supremacy among regions leading to potential conflicts.

 Proven success – The existence of numerous, moderately successful international

organizations demonstrates the desire of the world community to cooperate on

global basis without the necessity of first going through regional integration to

enlarge areas of consensus.

*Adapted from Bennett (1995) (International Organizations: Principles and Issues)

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