IPE-Reviewer-and-Module.docx

**INTERNATIONAL POLITICAL ECONOMY** (IPE) is the **study of how economic interests** and **political processes *interact* to shape government policies**. The decision by the **Bush Administration** to [raise tariffs on imported steel] in the [spring of 2002]. The decision to raise the steel tariff...

**INTERNATIONAL POLITICAL ECONOMY** (IPE) is the **study of how economic interests** and **political processes *interact* to shape government policies**. The decision by the **Bush Administration** to [raise tariffs on imported steel] in the [spring of 2002]. The decision to raise the steel tariff was prompted by lobbying by the owners of American steel firms & the United Steel Workers of America. The steel industry lobbied for the higher tariff because [*imported steel was capturing a large share of the American market*,] resulting in a large number of plant closings and layoffs. - **34 American steel mills** filed for bankruptcy between 1997 & 2002, causing about **18,000 workers** to lose their jobs. - The tariff hurts American industries that-use steel to produce goods, i.e. auto manufacturers, because these firms must now pay a higher price for the steel they use. These costs have motivated the **Consuming Industries Trade Action Coalition** (CITAC), a business association that represents firms that use steel & other imported inputs to produce other goods, to pressure the Bush Administration and Congress to lower the steel tariff. - The tariff also harms foreign steel producers, who now sell less steel in the American market than before the tariff was raised. These foreign firms have pressured their governments to take measures to force the US to reverse the decision. In response, governments in the EU and Japan have threatened to retaliate by raising tariffs on goods that the US exports to their markets and have initiated an investigation within the **WTO** (the international organization that has responsibility for such disputes). The ultimate fate of the American steel tariff depends on the result of these ongoing political processes. The case of the steel tariff also highlights the many distinct elements that IPE incorporate when attempting to make sense of developments in the global economy. To fully understand the steel tariff, we need to know something about: - the **economic** **interests** of the businesses and workers that produce and consume steel. To understand these interests requires knowledge of economic theory. - how political processes in the US transform these **economic interests into trade policy.** This requires knowledge of the American political system and the American trade policy process. - how a policy decision made by the US affects businesses and workers based in other countries (more economic theory for this), and - how governments in these countries are likely to respond to these consequences (requiring knowledge about the political systems in these countries). - the role that international economic organizations like the **World Trade Organization** play in regulating the foreign economic policies that governments adopt. **One-way scholars** **GLOBAL ECONOMY is broken into four issue areas:** - **THE** **INTERNATIONAL TRADE SYSTEM**, - **THE INTERNATIONAL MONETARY SYSTEM**, - **MULTINATIONAL** **CORPORATIONS (MNCS),** - **ECONOMIC DEVELOPMENT**. Rather than studying the global economy as a whole, scholars will focus on one of these four issue areas in relative isolation from the others. Of course, it is somewhat misleading to separate these four issue areas and study each independently. Example, **MNCs** are important actors in the international trade system. The **international monetary system** *exists solely to enable people living in different countries to engage in economic transactions with each other*. It has no purpose, therefore, outside consideration of international trade and investment. Moreover, problems arising in the international monetary system are intrinsically connected to **developments** in **international trade and investment**. *Trade, MNCs, and the international monetary system in turn all play an* *important role in economic development*. Each of these 4 issue areas is deeply connected to the others. Despite these deep connections, the central characteristics of each area are sufficiently distinctive that one can pull them apart to study each in relative isolation from the others, as long as one remains sensitive to the connections among them when necessary. 1. **INTERNATIONAL TRADE SYSTEM** involves the *formation* of **GATT** and the **WTO** in showing how international trading is done and observed and how these institutions rule over issues that are detrimental to the involved countries. These international institutions have created *[nondiscriminatory international trade system]* which enable countries to access to all WTO members' market on equal terms. In addition, the WTO and the GATT, have [enabled governments to progressively eliminate tariffs] and [other barriers to the cross-border flow of goods and services]. As these barriers have been dismantled, world trade has grown steadily. 2. **INTERNATIONAL MONETARY SYSTEM** *enables people living in different countries* to **conduct trade** and **financial transactions** with *each other*. *[Ex]*: Americans who may want to buy goods produced in Japan must be able to determine what a good produced in Japan & priced in yen will cost in dollars. Additionally, American workers earn & spend dollars, but Japanese producers want yen for the goods they sell to Americans. **The international monetary system has changed during the last 50 years in two important ways.** - **First**, in the first 20 years **following WWII**, gov. ***attempted to maintain*** relatively **stable or fixed exchange rates.** Then in the **early 1970s**, gov. *abandoned this system* & have since allowed the *value of their currencies to be determined largely* by **financial markets** with *only **occasional government intervention***. - **Second,** during the **early postwar period** gov's. **restricted** the *flow of financial capital into & out of their national economies*. Many gov's have dismantled these restrictions since the **late-1970s** & now **allow** *financial capital to flow freely across national borders*. As a result, international capital flows have increased sharply. Scholars who study the IMS focus on the creation, operation, & consequences of this system. 3. **MULTINATIONAL CORPORATIONS** occupy a prominent & often controversial role in the global economy. It is **a firm** that ***controls production facilities in at least two countries*.** The largest of these firms are Ford Motor Company, General Electric, and General Motors. 4. **ECONOMIC DEVELOPMENT**. Throughout the postwar period, developing country governments have **adopted** ***explicit development strategies*** that they *believed would raise incomes* by **promoting industrialization**. The success of these strategies has varied. Some countries, like the **Newly Industrialized Countries** (NICs) **of East Asia** (*Taiwan, South Korea, Singapore,* and *Hong Kong*) have been so successful in promoting industrialization & raising per capita incomes that they can no longer be considered developing countries. *Other countries*, particularly in sub-Saharan Africa & in parts of Latin America, have been much less successful. Governments in these countries adopted different development strategies than the NICs throughout much of the postwar period & realized much smaller increases in per capita incomes. Students of the politics of economic development focus on the specific strategies that developing countries governments adopt and attempt to explain why different governments adopt different strategies. In addition, these students are concerned about which development strategies have been relatively more successful than others (and why), and about whether participation in the international economy facilitates or frustrates developing countries\' efforts to industrialize. **LESSON 2. MULTILATERAL TRADE SYSTEM: THE CREATION OF GATT AND THE WTO AS AN INSTITUTION** The international trade offers significant contributions in making the global economy stable and successful through the **Multilateral Trade System**. This unfolds the emerging importance of the various rules governing international trade and its impact to the government members of the World Trade Organization (WTO). - **Multilateral Trade System** is an *international political system.* International trade institutions stand in the centre of this system. This highlights the creation of the ***General Agreement on Tariffs and Trades (GATT)*** on **** which succeeded by the ***WTO*** in **[1994.]** **[GATT difference from the WTO]** **GATT** is a **[treaty]**, while **WTO** is an **[international organization]**. It has [same legal status] with that of UN, IMF and World Bank. But it is **[relatively small]** compared to other International Organizations. And it comprises **[165 countries]** (as of August, 2024) **Functions of WTO:** 1. Providing a **[forum for trade negotiations]** among its member governments 2. **[Administering the trade agreements]** that governments conclude 3. **[Providing a mechanism]** through which governments can **[resolve trade disputes]** Although WTO is the institutional center of the world trade system, **GATT has not disappeared**. It **still provides** **many of the rules** governing international trade relations. The **creation of the WTO**, therefore, **represented an organizational change** & it **did not produce** a *[**wholly new set of international trade rules**.]* The rules that provide the foundation of the multilateral trade system are those that were initially est.in **1947** and that have been **gradually revised** & **amended** ever since. **THE MULTILATERAL TRADE SYSTEM THREE (3) INDIVIDUAL COMPONENTS:** 1. **Intergovernmental bargaining process** 2. A **set of rules** and **principles governing international trade relations** 3. A **dispute settlement machine** **WTO** focuses on **TRADE LIBERALIZATION** -***[elimination of government policies]*** that make it difficult for the goods and services produced in one country to be sold in another. **It highlighted the:** - **Tariffs**- taxes that governments impose on foreign goods coming into the country - **Nontariff Barriers**- health and safety regulations, and government purchasing practices. **TRADE LIBERALIZATION** was achieved after series of rounds (**9 rounds**), one of which is **the Uruguay Round**. Each round brought WTO countries to negotiate an agreement covering a specific set of trade-related issues. **URUGUAY ROUND** Negotiations under this round included - tariff reduction, - create brand new rules to govern international trade in services, - protect intellectual property. It was on the **8th round** (the Uruguay) when GATT was succeeded by the WTO. The first six rounds of GATT focused on tariff.  **URUGUAY ROUND** was the most exceptional because for the first time, the negotiations **focused most heavily on problems** other than tariff. *During Uruguay round, they created international rules in three (3) new areas:* 1. **Rules to Protect Intellectual Property** Acc. to the **World Intellectual Property Organization** (one of the UN's specialized agencies), **INTELLECTUAL PROPERTY** \"is the **creations of the mind**: *inventions, literary, & artistic works, symbols, names, images, & designs used in commerce*.\" Like the Nike \"swoosh,\" a Hollywood movie, & computer software. **IP** *is **protected through*** **[patents]** *and* **[copyrights]** *that give the **creator** the* ***exclusive right to profit from his or her invention** or **artistic work*****.** It became **apparent during the 1980s** that many gov's, particularly in developing countries, were making *little effort to protect intellectual property created by foreign firms*. As a result, firms & individuals were making *counterfeit versions* of Microsoft software, American movies, Nike & Adidas sneakers, Calvin Klein & Guess jeans, pharmaceutical products, etc. *The ease with which anyone could purchase counterfeit or pirated products at much reduced prices throughout the developing world indicated that largely Western creators were losing billions of dollars.* Moreover, such **piracy**, [***reduced the incentive to invent new products***.] In negotiating **Trade-Related Intellectual Property Rights (TRIPs**), **governments created multilateral rules that [now require all governments] to [protect intellectual property] to prevent piracy.** 2. **Create Brand New Rules to Govern International Trade in Services** A **service** is an **economic activity** that **doesn't involve *manufacturing****, **farming,*** or ***resource extraction*** (financial services like banking, insurance, shipping & tourism, accounting, consulting, & telecommunications). **Service sector accounts** for **60%** of the *economic activity* in the [advanced industrialized countries]. While **22%** of **world trade**. Through the **General Agreement on Trade and Services (GATS)**, it removed small number of barriers which aimed for further **liberalization.** ***Trivia**:* The GATT text alone which spells out basic rules governing international trade in goods, is more than 50 pages long. **FOUR PRINCIPLES EMBODIED IN THE FOUNDATION FOR THE MULTILATERAL TRADE** **SYSTEM:** 1. **MARKET-BASED LIBERALISM**- Broadest principle which provides rationale to the system. It emphasizes that **trade liberalization** is a **desirable objective** because ***[trade raises the standard of living for all countries]***. (Once trading is flowing freely, it can greatly benefit all countries) This idea is based on economic theories of international trade. ***Thought to ponder:** "if a good costs less to buy in a foreign market than it does to produce at home, a country is better off if it imports the good than if it produces the good itself"* **Absolute Advantage (Adam Smith's theory) -** A country has an absolute advantage when it can **produce a good** or **service more efficiently** (using fewer resources) than another country. - ***Oatley\'s Discussion**:* He emphasizes that absolute advantage is relatively straightforward, countries that are more productive in producing certain goods will focus on those goods. This concept *highlights the benefits of trade based on **superior efficiency*****.** - ***Ex**:* If Country A can produce 10 cars/hr. & Country B can produce only 5 cars/hr. with the same resources, Country A has an absolute advantage in producing cars. **Comparative Advantage (David Ricardo's theory)-** A country has a comparative advantage when it can **produce a good at a lower opportunity cost** than another country, even if it does not have an absolute advantage in producing that good. - ***Oatley\'s Discussion***: Comparative advantage is more foundational to trade theory, as it explains why countries benefit from trade even if one country is more efficient in producing everything. Oatley expands on how this theory promotes specialization and mutual gains from trade. - ***Ex***: Suppose Country A can produce either 10 cars or 5 computers in an hour, while Country B can produce either 5 cars or 2 computers at the same time. Even though Country A is better at producing both cars & computers, it has a comparative advantage in producing cars (because it sacrifices fewer computers to make a car). Country B has a comparative advantage in producing computers, so they should specialize & trade. 2. **PRINCIPLE OF NONDISCRIMINATION**. This **prohibits governments** from using **trade policies** to *provide* **special advantages** to **some countries** at the **expense of others.** This principle takes a specific form called **Most Favored Nation (MFN).** This simply requires each ***WTO member to treat all other members as well as it treats its most-favored trading partner.*** **[Ex:]** If US lowered the tariff to the imported goods of Brazil, then it must also give the same way to other WTO members. - This assures that **all countries have access** to **foreign markets** on **equal terms.** No country shall suffer discrimination, and *no other countries benefit from special advantages*. - Governments are also allowed to discriminate if they join **a free trade area** or **customs union**. In the **North American Free Trade Agreement (NAFTA),** goods produced in Mexico enter the US duty-free, while the US imposes tariffs on the same goods imported from other countries. These exceptions aside, nondiscrimination is a fundamental principle of the multilateral trade system. 3. **PRINCIPLE OF RECIPROCITY.** Reciprocity was incorporated into the GATT to ensure that the **concessions** that **each government makes in multilateral trade negotiations are roughly the same size as the concessions it gains from its trading partners**. **[Ex:]** if the US offers to reduce its tariffs on steel imported from Brazil, Brazil must offer to reduce tariffs on goods it imports from the US, such as computers, rather than offer a reduction on something that the US does not produce. Moreover, these reciprocal tariff reductions should result in an approximately equal number of exports for the two countries. If the American tariff reduction is expected to raise Brazilian steel exports to the US by \$10M, then the reciprocal Brazilian tariff reductions should result in about a \$10M expansion of American exports to Brazil. 4. **PRINCIPLE OF DOMESTIC SAFEGUARD-** Domestic safeguards are **escape clauses** that **permit governments to temporarily suspend tariff reductions** they have made within the WTO when **continued compliance would result in serious damages to a domestic industry.** **[EX:]** The world price of steel fell sharply during the late 1990s & early 2000s, resulting in a surge of steel imports into the US. This import surge hurt American steel producers who began to lose domestic market share to foreign producers. The safeguards incorporated in the WTO allowed the US to raise tariffs on imported steel temporarily to protect American steel producers from these imports. - Governments cannot resort to such safeguards, however, without **first investigating carefully** to determine whether the problems that a domestic industry faces are in fact temporary and the consequence of a sudden import surge. Even though the multilateral trade system allows governments to opt out of their commitments for short periods, it also limits their ability to do so. 3. **Dispute Settlement Mechanism** It is a **quasi-judicial tribunal** that is **used to resolve trade disputes between WTO member governments**. Dispute *arises when one government believes that another is failing to live up the obligations it has accepted as member of the WTO* (*such disputes can involve the violation of the rules like nondiscrimination or the use of domestic safeguards*). **[EX:]** In February 2000, Japan turned to the dispute settlement mechanism to challenge a U.S. decision to invoke the domestic safeguards rule to raise tariffs on Japanese steel imports. In such cases, the injured party can initiate a WTO process that evaluates the legal merits of the complaint. If the panel of trade experts concludes that the country is violating one of its WTO obligations, that government must alter its policy to conform to WTO rules or compensate the government that is harmed by the policies. **The dispute settlement mechanism thus provides a kind of court that helps WTO members resolve trade disputes.** The **MULTILATERAL TRADE SYSTEM** is a political system. The **WTO** provides a set of international rules that govern countries\' trade policies. These rules establish what governments can and cannot do to influence the flow of goods into and out of their countries. Within this multilateral framework, *governments amend existing rules and create new rules* through a **process of intergovernmental bargaining**. Throughout the postwar period, this bargaining process has progressively reduced tariffs on manufactured goods and created new multilateral rules to govern other aspects of international trade. The system also contains a dispute settlement mechanism that helps governments resolve trade disputes and make sure that all members comply with the international rules they have created. **LESSON 3: INTERNATIONAL MONETARY FUND AND THE WORLD BANK** The **INTERNATIONAL MONETARY FUND** was conceived in **July 1944**, at a UN conference **in Bretton Woods**, **[New Hampshire,] [United States]**. The **44 participating governments** sought to build a framework for economic cooperation that would *forestall any repetition of the disastrous policies*, including **competitive devaluations**, that contributed to the **Great Depression** of the **1930s** & to **WWII**. The world has changed dramatically since **1945**, bringing extensive prosperity to many countries & lifting millions out of poverty. The organization has played a central role within the international financial architecture. With its near-global membership of **189 countries**, the **IMF** is uniquely positioned to **help its member governments to take advantage of the opportunities and manage the challenges posed by globalization and economic development.** - **IMF** was set to *formulate* & *implement* **monetary arrangements**, pertaining to **exchange rates** and **international payment mechanisms**, for the post-war period. The **International Bank for Reconstruction and Development** was established in **1944** and *renamed* as **WORLD BANK** and there headquarter was located at *[Washington, D.C., United States]*. This international financial institution has **183 countries** as members together with **five development institutions:** - **International Bank for Reconstruction and Development** (IBRD) - International Development Association (IDA) - **International Finance Corporation** (IFC) - Multilateral Investment Guarantee Agency (MIGA) - **International Centre for Settlement of Investment Disputes** (ICSID). **The Difference of IMF and World Bank** These two international financial institutions have a distinct difference to each other. **The World Bank** - helps and assists the governmental finances & giving technical & policy advice at the same time helping private sectors from developing countries to achieve progress. - Its main focus is *to aide developing countries in order to lessen the poverty and expand economic stability*, **The International Monetary Fund** - oversees the international economy & the budgets of its members as they provide lending and assistance to their members. - Its main focus is to sustain international monetary system and observe global currencies (*World Bank Organization*). **Purpose and Function of International Monetary Fund** The **IMF** is a **cooperative international monetary organization** whose nearly universal membership comprises **189 countries**. It was established in **1945**, together with the **International Bank for Reconstruction and Development** (**World Bank**), under agreements reached by delegates from ***45 countries** who convened during **July 1944** at the **Bretton Woods Conference***. The responsibilities of the **IMF** derive from the **basic purposes** for which the institution was established, as set out in **Article I of the IMF Articles of Agreement---**the charter that governs all policies and activities of the IMF: - To **promote international monetary cooperation** through a [permanent institution] this *provides the machinery for consultation* and *collaboration* on **international monetary problems**. - To **facilitate the expansion and balanced growth of international trade**, and to *contribute* thereby to the [promotion] and [maintenance] of [high levels of employment] and [real income] and to the *development of the productive resources* of *all members* as **primary objectives of economic policy.** - To **promote exchange stability**, to [maintain orderly exchange arrangements among members], and [to avoid competitive exchange depreciation. ] - To **assist in the establishment of a multilateral system of payments** in [respect of current transactions between members] and in the [elimination of foreign exchange restrictions] which hamper the growth of world trade. - To **give confidence to members** by [making the general resources of the Fund] *temporarily available to them under adequate safeguards*, thus [providing them with opportunity to correct maladjustments in their balance of payments] *without* **resorting to measures destructive of national or international prosperity.** - In accordance with the above, to **shorten the duration** and **lessen the degree of disequilibrium** in the *international balances of payments of members*. **Purpose and Function of World Bank** The **World Bank** **aids military conflict countries** by providing them with ***reconstruction loans*** as they help **poor countries** to ***increasing their economic growth***, ***lessen poverty***, and ***improve their living standards***. It also **lends money to governments** for irrigation, agriculture, water supply, health, and education, among other things. In addition, the World Bank **gives member countries** with [economic], [monetary], and [technical guidance] on any of their initiatives, and ***it promotes the growth of industries in developing countries***. The **purpose of World Bank**: - It aspires to foster an **investment-friendly environment**. - to **improve economic stability** *through lowering poverty.* As a result, it is **aiming to achieve long-term growth**. - **Increasing** the *number of job* and *commercial possibilities* in [poor member countries]. - to **improve the society\'s socioeconomic standing through investment**. - It strives to make sure that **judicial** and **legal institutions are developed** and that *individual rights are safeguarded*. - By encouraging education, it **aims to strengthen the governments** of its member countries. *Combating corruption* *and ensuring that proper training* and *research facilities are available*. - It aspires to **offer low-interest loans**. **Key activities of the IMF that is classified under three areas** 1. **LENDING FUNCTIONS** of the IMF are tailored to *address the specific circumstances* of its diverse membership. The IMF is probably best known as **a financial institution that provides resources to member countries experiencing temporary balance of payments problems** (actual or potential). This financial assistance enables countries to *rebuild their international reserves*, *stabilize their currencies, continue paying for imports,* and *restore conditions for strong economic growth*, while implementing policies to correct underlying problems. The IMF is also **actively engaged in promoting economic growth** and **poverty reduction** for *its poorer members facing a protracted or short-term balance of payments* need by providing financing on concessional terms. 2. **SURVEILLANCE FUNCTIONS** stem primarily from the IMF's responsibility for **overseeing the international monetary system** and **the policies of its members**, a *task entrusted to the IMF following the collapse of the Bretton Woods fixed exchange rate system in the early 1970s*. These activities include **bilateral surveillance**, which is the regular monitoring and peer review by other members of economic and financial developments and policies in each member country. **Regional and multilateral surveillance** is conducted through ongoing reviews of world economic conditions, financial markets, fiscal developments and outlooks, and through oversight of the international monetary system. 3. **CAPACITY BUILDING** and other services to members of the IMF include **provision of technical assistance & external training**; **creation** & **distribution of international statistical information** & **methodologies;** and **establishment and monitoring of standards and codes for international best practice in several areas**, including *timely country economic and financial statistics*, *monetary and fiscal transparency*, *assessment of financial sector soundness*, and *promotion of good governance*. **Five (5) Institution that contained in the World Bank** - **International Bank for Reconstruction and Development (IBRD)** This institution provides **investments and policy guidance** to different nations to achieve poverty reduction and to sustain development (Kenton, 2021). It is also a global development cooperative with all the 189 member countries as owners. - **International Development Association (IDA)** This institution assists countries that are under severe poverty by **giving lending with zero to low interest** for them to create programs that can lessen poverty, improve the economy, and enhance the living condition of the people (*International Development Association*) - **International Finance Corporation (IFC)** An institution under World Bank that focuses on **encouraging private sectors** wherein the main aim of this institution is to improve economic growth and enhance people lives by making new markets, encourage investors to invest, and give guidance (*International Finance Corporation*). - **Multilateral Investment Guarantee Agency (MIGA)** This institution focuses on **promoting direct investment** in both political and economic risk insurance to all developing countries as this agency support to achieve the development of economy, lessen the poverty, and give people a positive living (*Kenton, 2020*). - **International Centre for Settlement of Investment Disputes (ICSID)** An institution that focuses on the **settlement of International Investment Dispute** as this institution will take care all the international investment cases. Member's states assent International Centre for Settlement of Investment Disputes as a forum for investor-State dispute settlement in international investment treaties, laws and contracts (*International Centre for Settlement of Investment Disputes*). **Nature of both organizations as lending institution and its policies** **International Monetary Fund --** provides financing to its members through three channels, all of which serve the common purpose of transferring reserve currencies to member countries: - regular (nonconcessional) lending from the **General Resources Account** (GRA), - concessional lending from the **Poverty Reduction and Growth Trust** (PRGT), - the **SDR Department**. **Regular** and **concessional lending operations** involve the *provision of financing to member countries under* "**arrangements**" with the IMF that are like **lines of credit**. A large majority of IMF lending arrangements condition *use of these lines of credit (facilities)* on **[achievement of economic stabilization objectives]** *agreed between the borrowing member and the IMF*. The IMF may also create **international reserve assets** by **allocating SDRs to members**, which can use them to *obtain foreign exchange from other members*. *[Use of SDRs is unconditional], although a market-based interest rate is charged*. **World Bank --** its *loans have been adjusted in terms of its interest rates* (now at **7-5 %**) and a **grace period up to 5 years** and *implied that they are on longer and softer terms* (with a higher grant element) than **commercial credits**, which are usually limited up to **3-5 years.** This organization **lends monetary to middle - income countries** with ***lower interest rates on loans*** than ***business banks***, while, when **poorest developing countries** borrows money there is ***no interest rate***. [All the borrowers of World Bank have a longer period to pay their loans and debts] (World Bank Organization). **INTERNATIONAL MONETARY FUND** and **WORLD BANK** is a *financial institution* that *allows its members* to **borrow money** to **[fight poverty]** and **[develop economic growth]**. Both was established during **1994 at Bretton Wood Conference** where in **World Bank** is considered as **development institution with main goal of lessening the poverty** while the **International Monetary Fund** is **monetary institution with a main goal of overseeing the whole economy and sustaining financial stability.** **SUMMARY** The International Monetary Fund (IMF) and the World Bank are two of the most important international institutions formed during the Bretton Woods Conference in 1944. Despite their common origin and similar overarching goals of promoting global economic stability, they serve distinct purposes and operate in different ways. **Key Differences** 1. **Purpose** - **IMF -** its primary role is to **ensure the stability of the international monetary system,** including **exchange rates** & **balance of payments**. It provides [temporary financial support] to countries [facing balance of payments problems] & [advises on economic policies] *that affect the global economy*. - **WORLD BANK -** is a **development institution** that **provides financial** and **technical assistance** to [developing countries]. Its focus is on **long-term economic development**, **poverty reduction**, and **infrastructure projects** *to promote social and economic progress*. 2. **Mandates** - **IMF** - Maintains an orderly system of payments and receipts between nations. - Provides short- to medium-term financial support to countries to stabilize their economies - Promotes global monetary cooperation, exchange rate stability, and facilitates international trade. - **WORLD BANK** - Focuses on funding long-term development projects that improve infrastructure, education, health, and other critical sectors in developing countries. - Supports projects that promote economic development and alleviate poverty. 3. **Structure and Size** - **IMF** - **Staff:** Around 2,300 professionals, mainly economists and financial experts. - **Structure:** The IMF is smaller and operates more like a credit union, providing short-term financial assistance. - **Headquarters:** Washington, D.C., with small offices in Paris, Geneva, and New York. - **WORLD BANK** - **Staff:** Around 7,000 professionals with a wide range of expertise, including engineers, urban planners, economists, and health specialists**.** - **Structure:** *The World Bank comprises two main institutions:* - **International Bank for Reconstruction and Development (IBRD) --** Provides **loans to middle-income** and **creditworthy [low-income countries]**. - **International Development Association (IDA) --** Offers **interest-free loans** and **grants** to the **[poorest nations.]** - **Affiliates:** The Bank also has other affiliates like the **International Finance Corporation (IFC)** and the **Multilateral Investment Guarantee Agency (MIGA).** - **Headquarters:** Washington, D.C., with offices in over 40 countries. 4. **Funding Sources** - **IMF** - Funded by quota subscriptions (membership fees) from 180 member countries. - The size of each member\'s quota is based on its economic size. - Total quotas amount to approximately \$215 billion. - **WORLD BANK** - The World Bank raises funds primarily by borrowing from international capital markets through the issuance of bonds, which are highly rated due to government backing. - IBRD provides loans at market rates, while IDA offers concessional loans and grants to the poorest countries. - Member countries hold equity shares in the Bank, which were valued at \$176 billion in 1995. 5. **Recipients of Assistance** - **IMF** - Both developed and developing countries can seek financial assistance from the IMF. - Funds are typically lent to resolve balance of payments issues and must be repaid within 3-5 years, or up to 10 years under special conditions. - **WORLD BANK** - The World Bank provides funding exclusively to developing countries. - IBRD loans go to countries with a higher per capita income, while IDA provides interest-free loans to the poorest nations. - Loans are primarily used for long-term infrastructure and development projects. 6. **Operations and Focus Areas** - **IMF** - Oversees and advises on members\' monetary and exchange rate policies. - Provides technical assistance to strengthen economic institutions such as central banks and tax authorities. - Offers financial aid in exchange for economic reforms aimed at addressing the root causes of financial instability. - **WORLD BANK** - Focuses on development projects that target poverty reduction and social development. - Funds infrastructure projects like roads, dams, schools, and hospitals. - Supports efforts in agriculture, health, education, energy, and rural development. - Provides technical assistance to help countries design and implement sustainable development policies. **Cooperation Between IMF and World Bank** While the IMF and World Bank have distinct mandates, they often work together, especially in countries facing severe financial and developmental challenges. Their collaboration ensures a holistic approach to stabilizing economies and promoting long-term development. For example, IMF stabilization efforts may be complemented by World Bank-funded infrastructure projects that foster sustainable economic growth. Although the IMF and World Bank share some similarities in their origins and goals they have clearly defined and distinct roles in the global economic system. The IMF focuses on short-term financial stability and monetary policy, while the World Bank is dedicated to long-term development projects aimed at reducing poverty and improving living standards in developing countries. Their cooperation ensures that countries benefit from both financial stability and sustainable development. **Quick Comparison Chart:** +-----------------------+-----------------------+-----------------------+ | Criteria | IMF | World Bank | +=======================+=======================+=======================+ | **Primary Goal** | International | Long-term economic | | | monetary stability | development | +-----------------------+-----------------------+-----------------------+ | **Recipients** | Both developed & | Developing countries | | | developing countries | only | +-----------------------+-----------------------+-----------------------+ | **Funding** | Quota subscriptions | Borrowing from | | | from member countries | international capital | | | | | | | | markets | +-----------------------+-----------------------+-----------------------+ | **Loan Terms** | Short- to medium-term | Long-term loans, | | | loans | concessional for | | | | poorest | +-----------------------+-----------------------+-----------------------+ | **Staff** | \~2,300 (mainly | \~7,000 (varied | | | economists) | expertise | | | | | | | | across development) | +-----------------------+-----------------------+-----------------------+ **LESSON 4: THE DEVELOPMENT OF EAST ASIA AND LATIN AMERICA: A COMPARATIVE PERSPECTIVE OF LITERATURE REVIEW** Since the end of the 2^nd^ World War, the international spotlight has shined on *developments and reforms* among "**Third World**" nations. As Third World nations that were not aligned with either NATO or the Communist Bloc, the regions of **East Asia** and **Latin America** drew scholarly interest due to their [comparative successes] with **[rapid industrialization]**. According to *Duke University Professor* **Gary Gereffi**, **Latin America** as a region "***found it difficult to maintain their previous levels of growth***". On the other hand, **East Asia** exceled in "***almost all indicators of economic and social development***". Although **Latin America** began industrializing many decades before the newly industrializing countries (NICs) in East Asia, the economic growth rate of Latin American nations was quickly overtaken by their Asian counterparts. Significant academic discussion has been devoted to understanding how East Asia was able to sustain its economic growth throughout the 20^th^ century while Latin America showed clear signs of mitigated progress and stagnation. In attempts to explain this discrepancy, scholars have pointed to different theoretical perspectives & varying socioeconomic factors. **TWO MAIN THEORIES** Two main economic theories seek to explain the varying paths of development in East Asia and Latin America: These perspectives reflect the ideas of "**the new comparative political economy**," which *examines the relationship between government policies, international relations, and the economy*. 1. **NEOCLASSICAL ECONOMIC THEORY** This theory claims that **economic openness was the key**. Its framework supports "**laissez-faire trade policies**, a **free labor market**... and **a limited**, **non-interventionist role for the government in the economy**". Theory states that **EAST ASIAN** nations maintained an "environment conducive to high rate of savings and investment" and kept their economies open to foreign technology and capital. 2. **WORLD-SYSTEMS/DEPENDENCY THEORY**. This theory postulates "**a hierarchy of core, semi peripheral, and peripheral nations**" in which ***development of peripheral** and **less powerful nations** is* [restricted by its relative resources and obstacles]. According to this model, **LATIN AMERICA** had trouble sustaining growth because it could not become "**fully modernized as long as they remain(ed) in the capitalist world system**" dominated by the core nations" such as the United States. **Factor of Development** 1. **"STATECRAFT"** Although these two major perspectives provide general insights and an introduction to the available literature, they fail to explain specific factors that account for the divergent paths of growth between East Asia and Latin America. In addition to these grand theories, scholars such as **José Luis León** have emphasized the concept of **"statecraft"**, or ***the role of the state in national development***. In his article, he conducts a [comparative case study] to comment on the relative growth between *Mexico* and *South Korea* ***from* 1950 to 1999**. During that time frame, the percent growth of GDP in **Korea** *[rose] from 4.33% to 7.00%* while that of **Mexico** *[fell] from 6.31% to 4.80%.* León ***concludes*** that the ***different level of* "state autonomy" in Mexico and Korea was the decisive variable.** Here, the **CONCEPT OF STATE AUTONOMY** is loosely defined as the **degree of state involvement and influence in shaping national economic policies.** **[EX:]** Korean state had a *high level of autonomy* since the rule of *President Park Chung Hee* in **1961**, who [nationalized banks] & [worked together] with "**chaebols**" (Korean economic conglomerates). As a result, the Korean government *maintained close ties* to the *business sector* and *directed economic policies* "**committed to export-led industrialization**" that led to the "**Miracle of the Han River**". However, this was not the case for Mexico. The authority of the state was called into question after the **Mexican Revolution** where *the conflict between the Mexican state & the private sector further heightened during the administration* of **Luis Echeverría** in the **1970's.** [Rather than the Mexican state leading the economic reforms], "**state actors relied on new conglomerates \[who\] took advantage of privatization, financial liberalization, deregulation... in efforts to dwarf their competition**". As these **private business** **groups pursued** their **own interests**, a **national scale reform** became **difficult** to **institutionalize**. Simply put, "**the high degree of relative autonomy of the state**" in South Korea played a major role in directing investments & efforts into national long-term development goals. 2. **SHORT/LONG TERM DEVELOPMENT** A second key difference between East Asia & Latin America arises from their varying emphasis on the **short/long term economic plans**. Analyzing the previous development strategies of East Asia & Brazil, **Gilmar Masiero** finds that the ***economic success** of East Asian state*s **"has derived primarily from their long-term strategies"**. Many **Latin American** countries adhered to the Washington Consensus- a *neo-liberal economic policy that encompasses macroeconomic stabilization, expansion of the domestic market and openness in trade relations.* Although **Latin America** "**made major progress in establishing conditions of macroeconomic stability**" through *various applications* of the **Consensus**, it *suffered* from the "**stabilization fatigue**". **EX:** there was initially a substantial GDP surge in Brazil through the Metas & PND II Plans in the early 70s. However, Brazil's external debt was around \$50 billion, and inflation soared to 77% in 1979. This suggests that the real economic growth did not materialize even though Brazil had followed the necessary policies recommended by the Consensus. Since the **Consensus** [emphasizes short-term development through market reforms alone], **Masiero argues** that other important factors necessary for long-term reforms such as **institutional building** and **education** *were largely ignored in Latin America.* Japan & Korea illustrate that ***non-market variables** are also crucial in [promoting economic development] and [maintaining long-term growth]*. Their [economic policies] are labeled as "**strategic pragmatism**" since they are **rational** and **market oriented**. In ideology, this policy does not appear noticeably different from the **Washington Consensus** which also advocates for ***market transformations***. However, East Asia also focused on [human resources] to ensure that development would be sustained even after the initial macroeconomic reforms within the market. **EX:** Korea followed "*[a policy-focused human capital approach to development, incorporating industrial policy but stressing land reform, education, and labor-intensive production]*". Similarly, **Joseph Stiglitz** argues that "**East Asia's success was based on a combination of factors, particularly the high savings rates interacting with high levels of human capital accumulation**". Hence, it appears the **lack of adequate emphasis** on **human resources** *limited the long-term applications of initial economic successes* in Latin American states like Brazil. **Cooperation between Latin America and East** **ASIA** Although many scholars agree that comparative analyses of "East Asian & Latin America provide a sharp contrast in economic development", **Shoji Nishijima** & **Akio Hosono** argue *there is room for cooperation between these two regions*. The authors denote that [pattern of trade and investment changed drastically in the **1990s**]. The countries of "**Latin America and East Asia greatly increased their shares of trade within their own regions as a percentage of their total foreign trade**". **EX: Latin American** countries (excluding Mexico) **increased trade** with their regional partners from **13.7% - 31.4%** from **1990 - 1998**. Similarly, **East Asian** **intraregional trade** increased from **35.7% - 43.4%** during the same period. Such increases in regional trade were due to **multilateral agreements and free trade agreements (FTAs)** which *led to strong intraregional integrations.* Upon examining Japan, Mexico, and Chile, the authors claim there are new initiatives for **"BI-REGIONALISM"** bet. East Asia & Latin America. **EX:** The **Japan-Mexico Economic Committee of Keidanren** had advocated for an FTA between the two nations, which led to the recent **Japan-Mexico Economic Partnership Agreement in 2012**. Prospects for interregional integration appear mutually beneficial since **Latin America** is "**an important source of commodities**" for *East Asia*, and **East Asia** is Latin America's "**newest, and most promising**" *trade partner*. In addition to the **Asia-Pacific Economic Cooperation (APEC)** forum est. **1989,** the **Forum for East Asia-Latin America Cooperation** **(FEALAC)** conceived in **1999** to *encourage further dialogue and harmony among the 36 member countries*. Such **forums** & **organizations** have *developed* a **common goal** to **mutually build** & **reinforce "the contributions of Pacific networks, interregional initiatives, & bilateral links".** **CRITIQUE** There are two main problems with the available literature on the economic progresses of East Asia & Latin America from the mid to late 20^th^ century. 1. First, the **regional generalizations** from the comparative case studies of merely a few countries are problematic. **Laurence Whitehead** rightly notes that *cross-regional comparisons* have "**their limitations** & are **subject to misuse** \[since\] *particular care* is needed to define the boundaries of the regions in questions & the issues to be addressed". This suggests that researchers can choose the countries that best fit their arguments & conduct a study to highlight certain points through either the critical or the least critical case designs. Thus, it becomes quite easy to present a misleading picture that may not accurately reflect the region of interest. **EX:** **Rhys Jenkins** *generalizes* that Latin America *struggled with economic advancement due to its lack of strong state autonomy*. Nonetheless, this generalization didn't apply to all Latin American nations. Although the Mexican state had trouble controlling its divided political groups & businesses, the Chilean gov't enforced its proposed reforms thru "**free-market technocrats** -- the '**Chicago Boys'**" under the dictatorship of **Augusto Pinochet.** 2. Second, **researchers overplay** the **contrast** between **Latin America** & **East Asia**. Since East Asia had a relatively successful economic development, the comparisons have been "**always exaggerated & one-sided**". Consequently, it became customary for scholars like **Masiero** to argue that **East Asian** nations were **capable of designing** & **enforcing effective long run strategies**. By contrast, **Latin America** was portrayed as "**rickety & as being further weakened by anti-statist reforms**". **Whitehead** remarks that the developmental strategies taken by Argentina in the 1990's were "*as long run and transformative as those undertaken in East Asi*a". Nevertheless, such cases are often ignored because they don't fit into the typical literature of East Asian economic dominance over Latin America. For individual countries, a reasonable link can be drawn between the factors of growth and national economic success. There is a strong internal validity which explains the casual relationship between variables & the economic achievement. However, it is rather dangerous to assume that such findings can be **Externally** applied to the region. **\***Different contextual circumstances exist in the individual states of East Asia & Latin America and generalizing them into two contrasting models of development ignores other relevant variables such as regional political structures, cultural developments, and regime types. **Key points:** - **Import Substituting Industrialization (ISI)** -- To nurture infant industries that lack international competitiveness, the government protects the market and helps develop a domestic industry. - **Export Oriented Industrialization (EOI)** --- Once a domestic industry acquires enough skills to produce goods, the government encourages export for larger markets. - Mainstream economists & international financial institutions (e.g. the World Bank & IMF) claimed that East Asian economic success was attributable to the development of free market economies while the Latin American failure was the result of excessive government interventions in the economy. (*Developmental state argument*)