Chapter 2
International Economic Institutions
Since World War II
◼ Outline
Introduction: International Institutions and Issues since World War II
International Institutions
A Taxonomy of International Economic Institutions
The IMF, the World Bank, and the WTO
The IMF and World Bank
The GATT, the Uruguay Round, and the WTO
Case Study: The GATT Rounds
Regional Trade Agreements
Five Types of Regional Trade Agreements
Case Study: Prominent Regional Agreements
Regional Trade Agreements and the WTO
For and Against RTAs
The Role of International Economic Institutions
The Definition of Public Goods
Maintaining Order and Reducing Uncertainty
Case Study: Bretton Woods
Criticism of International Institutions
Sovereignty and Transparency
Ideology
Implementation and Adjustment Costs
Case Study: China’s Alternative to the IMF and World Bank: The AIIB
10 Gerber • International Economics, Seventh Edition
◼ Learning Objectives
After studying this chapter, students will be able to:
2.1 Classify with examples the main types of international economic organizations.
2.2 Identify economic circumstances in which the IMF, the World Bank, and the
WTO are active.
2.3 Compare the different levels of integration found in regional trade agreements
with examples.
2.4 Analyze the roles of international economic organizations.
2.5 Debate the pros and cons of international economic organizations.
◼ What Students Should Know after Reading Chapter 2
Chapter 2 introduces the major international governmental organizations of the global economy. This
background material is designed to remove some of the mystery about the IMF, World Bank, WTO, and
GATT early in the course. Chapter 2 also addresses both the need for these organizations and the
criticisms against them. Institutions are supposed to reduce uncertainty and increase stability. Drawing on
material from the new institutionalists, such as Doug North, the chapter introduces international institutions
as organizations that set the rules that govern behavior and potentially constrain or limit a nation’s actions.
Chapter 2 makes the case for international institutions and addresses some of the criticism they have
received. It defines international public goods and addresses the free-rider problem. It gives some examples
of international economic crises that may have been related to market failures. The main benefits of
◼ Supplemental Lecture Possibilities
1. The Global Players: Given some of the sub-themes of this chapter, it usually takes a day
to lecture on what I call the global players: national governments, international multilateral and
regional organizations, multinational or transnational corporations, and nongovernmental
organizations. Understanding issues related to global economic development, the politics of trade
policies and agreements, the responsibilities and criticisms of international economic institutions,
and other current developments requires a clear sense of who the players are and what they bring
Chapter 2 International Economic Institutions Since World War II 11
2. In presenting the major international organizations that deal with the global economy, it is useful to
do a historical overview. What happened in terms of trade, foreign investment, and exchange rates
from World War I through the Bretton Woods conference that made the United States and the United
Kingdom think the IMF, World Bank, and something resembling GATT were necessary institutions?
3. Prior to starting Chapter 3, some instructors prefer to go directly from Chapter 2 to a case study on a
specific regional trade agreement. Chapter 14 on the European Union is one such case study. One
purpose moving to a specific case study is to familiarize students with the various levels of economic
◼ Assignment Ideas
Most important international organizations have Web sites where they provide a large variety of
information as well as detailed descriptions about themselves. Students could be assigned to choose an
organization, go to its Web site, and use the information there to write a short paper (two to three pages)
detailing both the organization’s purpose and structure and the institutional environment it creates. In
addition, they should be asked to think about which countries have the greatest control over their
organization’s policies.
The table below contains the URLs for a number of important international organizations. These
organizations are particularly relevant throughout the book. Addresses for a large number of additional
sites can be found on the United Nations Web server: http://www.unsystem.org.
Name
URL
Asia-Pacific Economic Cooperation (APEC)
www.apecsec.org
European Union (EU)
europa.eu
International Labor Office (ILO)
www.ilo.org
International Monetary Fund (IMF)
www.imf.org
Organization for Economic Cooperation and Development (OECD)
www.oecd.org
Organization of American States (OAS)
www.oas.org
United Nations Conference on Trade and Development (UNCTAD)
www.unctad.org
World Bank Group
World Bank and links to its subgroups
www.worldbank.org
International Finance Corporation (IFC)
www.ifc.org
Multilateral Investment Guarantee Agency (MIGA)
www.miga.org
World Trade Organization (WTO)
www.wto.org
Note that the World Bank is divided into five subgroups, two of which have their own Web sites. These
five subgroups are: the International Development Association (IDA), the International Finance
Corporation (IFC), the Multilateral Investment Guarantee Agency (MIGA), the International Bank for
12 Gerber • International Economics, Seventh Edition
Reconstruction and Development (IBRD), and the International Center for Settlement of Investment
Disputes (ICSID).
The following questions can be worked into the assignment:
• What is the role of the organization you chose to write about?
• What kind of public good does it try to provide?
◼ Answers to End-of–Chapter Questions
1. What is an institution? Give examples of both formal and informal institutions. Explain how they
differ from organizations.
Answer: An institution is a set of rules of behavior. It sets limits or constraints on social, political,
and economic interaction. The rules can be formally recognized in a code of laws, club
2. What are the arguments in favor of international organizations? What are the arguments against
them? Which do you think are stronger?
Answer: Arguments in favor: International organizations are essential for the containment of
national or regional crises and the avoidance of their propagation internationally. By
providing a set of rules (institutions) which are certain and known (transparent), they
Chapter 2 International Economic Institutions Since World War II 13
3. Give the arguments for and against free trade agreements. How might the signing of a free trade
agreement between the United States, Central America, and the Dominican Republic have harmed
Bangladesh?
Answer: Proponents of RTAs view them as building blocks for freer, more open, world trade. They
are able to perform this function because it is easier for a few countries to reach agreement
on difficult trade matters than it is for a large number of countries to reach the same
4. What are public goods and how do they differ from private ones? Give examples of each.
5. Describe the main functions of each of the following:
• The IMF
• The World Bank
• The GATT
• The WTO
Answers: (1) The IMF’s role is to act as a lender of last resort in the case of a debt crisis or foreign
exchange crisis. It provides technical expertise and advice and assists national
14 Gerber • International Economics, Seventh Edition
Copyright © 2018 Pearson Education, Inc.
(4) The WTO is an umbrella organization created by the Uruguay round of GATT. Its
role is similar to GATT’s, but it has expanded its function to include agreements on
services, agriculture, and textiles and apparel, all of which were omitted from the
previous rounds of GATT. In addition, it provides rules for the resolution of trade
disputes between nations and acts as a forum for the discussion and implementation
of further reductions in trade barriers.
6. When nations sign the GATT agreement, they bind their tariffs at their current level, or lower. Tariff
binding means that they agree not to raise them except under unusual circumstances. Explain how
tariff binding in the GATT prevents free riding during a global slowdown.
Answer: During a global slowdown, nations may be tempted to raise barriers to imports. The hope
is that reduced imports will provide greater incentive for domestic production and add
jobs in import-competing industries. This part of the strategy usually works but at the cost
7. Kindleberger’s study of the Great Depression of the 1930s led him to believe that market economies
are sometimes unstable and that nations can get locked into prolonged downturns. Other economists
are not convinced. Suppose that you disagree with Kindleberger and that you believe that market
based economies are inherently stable. How would you view the need for international institutions to
address the provision of each of the public goods in Table 2.5?
Answer: If the international economy is inherently stable, then the need for international
institutions decreases. Most of the cases where there is a failure to provide the public
Chapter 2 International Economic Institutions Since World War II 15
8. What are the five main types of regional trade agreements and what are their primary characteristics?
Answer: The five main types of regional trade agreements are: (1) a partial trade agreement;
(2) a free trade area; (3) a customs union; (4) a common market; and (5) an economic
union.
(1) A partial trade agreement frees up trade between two or more countries in a few
goods. An example is the U.S.-Canada Auto Pact which created free trade in cars and
9. Critics of the global institutions have a variety of complaints about the WTO, the IMF, and the World
Bank. Explain the main categories of complaints.
Answer: The text describes the problems with institutions in terms of issues of sovereignty (may
force adoption of domestic policies against nation’s will or interests), transparency