GEI Newsletter Issue No. 1

Report on ‘The Future of Global Economic Institutions’ A Workshop of the Global Economic Institutions Research Programme of the Economic and Social Research Council, London, 22/23 March 1995 - by Ray Barrell

Also in this issue:

Editorial
by David Vines
Reforming the International Monetary System: Lessons from the Mexican Experience
by David Vines

Report on 'The Future of Global Economic Institutions' A Workshop of the Global Economic Institutions Research Programme of the Economic and Social Research Council, London, 22/23 March 1995
by Ray Barrell

Back to - 1. The IMF and World Bank

5. Regionalism

The second day of the conference included papers given by members of the GEI Programme. Jill Hills (City University) was chair. David Vines presented a paper on Asia-Pacific regionalism. Regional trading groups have been expanding in number and coverage and up to 70% of world trade is now within regional groups. Asia-Pacific regionalism is particularly interesting – it is the largest potential block and it could present a model for Europe.

The world trade regime is based on reciprocity, with liberalization taking place mutually, usually at a global level through GATT. The process is limited by two GATT articles: No. 1 , which restricts bilateral liberalization, and No.24 , which limits regional blocs. The first article can be a major factor slowing liberalization, especially if the major player (the US) becomes less forceful. The second attempts to prevent trade diversion in closed blocks, with the only regional exception allowed being common markets. Open regionalism involves members of a group liberalizing against all partners, and the bigger the group, the greater the benefits. APEC is in the process of becoming an open region, although the Bogar summit declaration is ambiguous.

There are difficulties in forming closed regions, with complex treaty negotiations required and for APEC there would be difficulties in deciding the scope of the region. An ‘open’ region in Asia Pacific is much easier to build, and it would stop us moving to a three-block world, and Europe would benefit from trade creation. Europe is a closed region, and hence is much more complex to construct and change. The move to open regionalism would also put pressure on the rest of the world to liberalize.

Trade and investment have been central to development in Asia Pacific, with the periphery benefiting from trade with the centre, facilitated by the openness of the trade regime.

Sheila Page opened the discussion by pointing out that however ‘free’ trade is, there will be rules on principles of behaviour that might well form barriers to membership of any region. The case for open regionalism did not make it necessary, because unilateral liberalization would provide many of the same gains.

Jim Rollo argued that case-by-case ‘most favoured nation’ liberalization can be used for discrimination. David Evans thought GATT reciprocity was often mercantilist. Stephen Woodcock asked how open regionalism would deal with environmental issues and standards regulation. David Vines said that sustaining open regionalism when going beyond tariff reductions poses significant problems: even open regions use ‘standard setting’ in ways which can be very like tariffs because they impose a cost on other producers.

Paul David gave a paper on ‘Institutional Rules and Delays in Agreement on Technical Standards’. He defined a standard as a set of generic information on a product, a technical specification that was either documented or specified. There are, of course, many types of standard. There can be simple reference indicators, or they can be minimum quality or safety standards, or they can ensure that there is sufficient compatability or interoperability . The second group of standards are more relevant for trade and internal consumer market regulation, while the last group is more cooperative in its function. The importance of standards has meant we have moved on from the simple matter of engineers agreeing about the grading of screw threads.

There are a number of ways of classifying standardization processes, and they have differing degrees of relevance to the analysis of GEIs.



defacto. These result from market competition and are industry standards. They do not always have a proprietor, but can be the result of severe competition (as with videotape). They are in essence a public good.

consensual. These are negotiated by a committee and are essentially voluntary.

de Jure. There are likely to be regulatory standards, and they are Government (or EU mandated).



The most complex to analyse is the second, and Paul David focused on these. Consensual standards are produced by essentially voluntary bodies. Bargaining is over the selection of a coordination point, and it produces cooperative research and development for production of a public good. There are a number of standards development organizations (SDOs) and they can be international (ITU – telecoms, CCITT – telegraph, telephone), regional (CENELECT European electronics) or national (ANSI, BSI, DIN, AFN). They can publish different types of standards, either for existing products or in anticipation of new products. The structures vary, depending on history, and the process of operation is not always clear.

The outcome of the process will depend upon who participates, and why. Motives vary from altruism to promoting a technical solution or an employer’s interest, with a strong role for multinationals. There is much criticism of the slow speed of resolutions, partly explained because tasks have changed to deal with more anticipatory standards. Reforms could speed up processes, but this is not necessarily beneficial. The process is complex, and formal modelling would have to take account of the public good nature of the outcomes, and their role in oligopolistic market sharing agreements.

Sheila Page asked how many products the discussion applied to, as many standards evolved or are informal, as with software languages. Technical negotiations were not always necessary. David Vines asked if rules and advice would emerge from the research. Paul David replied that there was need for a model of standards committees, and that we needed to understand the whole complex process to give policy advice.

6. Competition Policy and the WTO

The next paper on competition policy and the WTO was given by Peter Holmes . He argued that we need to define competition policy as a combination of (i ) control of monopolies and cartels and (ii ) state aid to industry. EU policy concepts had been important in changing competition policy into the new commercial policy. There were three types of actors to consider:

• framework institutions (WTO, UNCTAD)
• groups of states (EU, OECD)
• secretariats within groups

In order to understand competition policy we need to be clear on the meaning of efficiency, and also to look at aspects of trade and competition. Globalization of production has changed the scope of these questions, with a need to investigate the role of freer trade and capital mobility. The history of recent organizations in this area starts with the Havana Charter chapter on international restrictive business practices. The US Congress opposed a supra-national organization, however, and hence the putative WTO was killed in 1947, with GATT only covering trade.

The agenda changed, in part because of globalisation, but mainly because of the development of the EU. In the 1990s a new agenda emerged, covering efficiency, competition and a fair and equal framework for all producers. This in part resulted because it was clear that competition was good for welfare, but also because it was increasingly clear that a lack of competition could give large gains to some players. There were a number of different sets of objectives, with distribution (LDCs), competition (Chicago), producers (EU) and mercantilists all vying for position. The large players – the US, EU and Japan – all have different mixes of these objectives. It is not clear which institution (WTO, OECD, UNCTAD) can reconcile these objectives.

Mike Nielsen opened the discussion by addressing relations between the EU and the former CPEs. Policies were not mercantilist, but he claimed aimed to deal with state aid, and as it reduced, trade instruments would become less necessary. Jim Rollo welcomed the change of trade policy emphasis to competition, as it gives more transparency, and raises the possibility of reciprocal action and harmonization. Sheila Page asked when such a shift would be in the national interest, and Martin Wolf noted that the potential for a mess was limitless. David Vines suggested the shift raised the possibility of regulatory capture, and Stephen Woolcock stressed the role of state monopolies as barriers to trade. He also thought that there were important links between the research and policy agendas on international competition and international investment.

7. Research on the IMF

The last two papers presented at the conference were on the IMF. Marcus Miller addressed questions of seigniorage and inflation with special reference to the former Soviet Union. In ‘The IMF as a Discipline Device’ he argued a transitional government would have an incentive to print money and cause hyperinflation. There are patronage and political losses to reducing spending to stop inflation, and when inflation depends on expected future deficits there is little incentive for the authorities to reduce it, even if they could, because it depends on the actions of others in the future. There will be an optimal regulation of the deficit, with trigger points depending on the cost of stabilization, the benefits of spending and the relative importance of deficits now and in the future. An outside agency such as the IMF can reduce inflation, but it is difficult to do this without violating sovereignty. There are three ways to do this:

• the IMF can ‘take the blame’ for spending cuts
• the IMF can provide evidence that the governments had credible commitments
• the IMF can take sides in the internal debate

The paper gave an analysis of optimal intervention to stabilize inflation. The IMF must act with caution, as it does make mistakes. The setting up of the rouble zone with 15 central banks is a prime example. Each could issue currency, and hence competition over issue took place. It is clearly much better to persuade each country to have its own currency and then support their central banks through one of the three methods above.

Philip Davis (European Monetary Institute) opened the discussion and pointed to the similarities between the problems of the rouble zone and those that could be faced within the European Union if there was no fiscal discipline. Max Corden reminded the conference of lessons from Latin America, where it was clear that the abilities of the authorities were limited. Martin Wolf questioned the expectations assumptions of the study, but Marcus Miller responded by referring to Cagan’s study of hyperinflations where it was clear that expectations did respond with a lag. The Ukraine had played the fiscal game a lot, and then attempted to tie down its options. As events in the Ukraine show, the IMF can have a big effect as sanctions can stop programme assistance.

The final paper of the conference was presented by William Perraudin on the impact of IMF programmes. (A paper by P Bagczi and W Perraudin was circulated.) The effectiveness of programmes has frequently been questioned and it has been suggested that they can worsen outcomes. There have been several studies to evaluate programme effectiveness, and they have been inconclusive, in part because of selection and measurement problems. Countries adopt programmes because their performance has been poor and hence a comparison of changes in outcome over time, in countries with and without programmes will suffer from selection bias. The decision to undertake a programme is not exogenous, and therefore entry into programmes must be assigned a probability. It is commonly assumed that the selectivity bias makes programmes look more successful, because they will only be adopted when they are expected to work. This is not necessarily the case. The reported results, taking account of selectivity bias, suggest that they have a favourable impact on growth and the balance of payments, but much less impact on inflation. It is suggested that adopting a programme can raise growth by 2% whilst export cover from the improvement in the balance of payments improves by 6½% (current account, 2%).

Philip Davis asked if there was a positive relationship between programmes and the willingness of the private sector to lend to a country. This should be seen as central as capital flows are important. Renato Filosa asked about selectivity bias and its sign. It was also important to consider what instruments were used in a programme, as these in turn had to be exogenous. Martin Wolf asked about the group under study, and if it included only those with programmes. Several people asked for clarification on selectivity biases.

8. Conclusion

David Vines ended the conference with a number of remarks. He suggested that GEIs had to be evaluated in the light of a changing environment, and the problems of 1995 were not the same as those of 1944. Institutions had to be set up in 1944 to cope with potential protectionism; volatile exchange rates and international payments crises; and the possibility of extended and deep recessions. These pre-war problems had largely disappeared (except the second). We now have to deal with globalization in an environment that no longer has a hegemonic power (as the US was in 1944). We now have to provide insurance for countries as well as balance of payments support (a lesson from the ‘Mexico crisis’). And trade issues have become much more complex, with standards and rules replacing tariffs as issues of contention.

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