International Economic Organizations, Developing Country Reforms, and Trade

Article excerpt

Anne O. Krueger [*]

International Economic Organizations

The three major international economic organizations are the World Bank, the International Monetary Fund (IMF), and the World Trade Organization (WTO). The WTO emerged out of the General Agreement on Tariffs and Trade (GATT) in 1995; it is an arrangement across countries that serves as a forum for negotiations on trading rules as well as a mechanism for dispute settlements in trade issues. [1] By contrast, the World Bank and IMF deal with their member countries one at a time. They have little influence with industrial countries but can affect developing countries during times of economic crisis and when those countries seek additional foreign exchange resources. The origins and evolution of the three organizations are of considerable interest. [2] Perhaps even more important in light of the recent financial crises in Mexico, East Asia, and a few other countries, are the questions that arise about the current and future roles of the IME and the World Bank. [3]

These questions cover a broad set of issues. A healthy open trading system is crucial for the progress of the international economy. It is particularly important in providing an environment in which developing countries can successfully reform their policies and achieve rapid economic growth and rising living standards for all. I have been particularly interested in the relationship between preferential trading arrangements, such as the North American Free Trade Agreement (NAFTA), and the WTO. [4] The issue is simple: the WTO is based on the principle of open, nondiscriminatory trade among its members, while preferential trading arrangements are, by their nature, discriminatory. Under NAFTA, for example, goods originating in Mexico and Canada are not subject to duties when they enter the United States, yet the same goods from other countries are subject to U.S. duties. Assuring that preferential trading arrangements will not block progress in multilateral liberalization is important, and I am now completing a paper in which I analyze how much discrimination has been a factor under the first three years of NAFTA.

My other major concern regarding international economic organizations is closely related to the subject of developing countries' economic policy reforms. I want to know what the current and future roles of the World Bank and IMF will be in economic policy reform in developing countries. In the case of the World Bank, for example, to what extent will the Bank need to focus its resources on poor countries and the support of economic policy reforms, as opposed to tackling "new issues," such as gender and ethnicity (including treatment of minorities). Both the Bank and the IMF have been criticized by many in light of the Asian financial crises of 1997 and 1998.

Economic Policy Reforms

That takes me immediately to my second set of issues of concern: the choice of exchange rate regime and its relationship to economic growth and the avoidance of crisis. Even before 1994 there was cause for concern about Mexico and other countries that adopted "nominal anchor" exchange rate policies: they deliberately kept their exchange rates from depreciating as rapidly as would have been warranted on the basis of the inflation differential between themselves and the rest of the world. These regimes enabled foreigners to invest very profitably in local markets (because they received the domestic interest rate and could convert it into their own currencies at the appreciated exchange rate) until investors realized that the debt-servicing obligations that were accumulating were too heavy. [5]

Moreover, as long as foreigners were willing to lend and invest, domestic credit could increase in these countries without strong inflationary pressures: the lending financed an excess of imports over exports. Investors appear to have been fooled: they did not observe fiscal deficits, but they also failed to recognize that under these exchange rate regimes, rapid expansion of domestic credit was equivalent to increasing the contingent liabilities of the government, with the same long-run implications for sustainability unless capital inflows financed highly productive investments. …