SAMENVATTING: INTERNATIONAL ECONOMICS AND
INTERNATIONAL ECONOMIC ORGANISATIONS
INTRODUCTION: GPG AND THE BOP
1. INTERNATIONAL ECONOMICS: A GLOBAL PUBLIC GOODS APPROACH
Basic characteristics of a (pure) public good:
- Non-exclusion
- Non-rivalry in consumption
Global public goods = typically starts from the concept of public goods in a national setting
Public good has 2 characteristics
- Non-exclusion: Once this good/service is produced, you cannot exclude people from using/
consuming/ enjoying the good → accessible to everyone
- Non-rivalry in consumption: Not because one person uses it that another cannot/ is
excluded from using it (we can all enjoy the good)
→ Private goods/ private market produced goods: market mechanism provides a pricing mechanism
→ you have to pay to enjoy the good ➔ no longer available for others to enjoy
= produced by market mechanism, for which there is a supply/ demand/ price that regulates the
production/ consumption of these goods
In practice: a lot of quasi-public goods, or ‘joint products’
Basic problem: under provision due to free riding
Everyone wants access to these goods, but no one wants to pay for them → under provision by the
market (get no compensation for it) (e.g. Clean air, public lighting) → cannot rely on market mechanism
to provide these goods
To overcome under provision by ‘rules’, ‘institutions’
Rely on public sector to regulate this by (1) producing it themselves or (2) by intervening in the market
in order to change the market behaviour to ensure that this desirable thing is produced in sufficient
quantities → government steps in with money from taxes CUZ cannot rely on the market mechanism
for these things to automatically happen ➔ under provision can be prevented by rules/agreements or
institutions (set up especially to provide public goods + use taxes to pay for goods)
Very few pure public goods (that fully comply with 2 characteristics)
- quasi-public goods: comply with one of the 2 characteristics
- Joint products: are produced by the market mechanism but have some public characteristics (ex.
Public transport)
Generic: cannot rely on the market mechanism for these public goods → intervention needed to provide
these goods (more known from a national perspective: gov provides it for its citizens)
Application to global context: global public goods (GPGs) same principles as national public good
apply to GPG)
GPG: On international level desirable goods/ services that should be provided in sufficient quantities
(e.g. clean air → Global Public Bad: Pollution) → typically have cross-border/ transnational nature
- will not be produced enough if we leave it to the (1) market and (2) individual countries → due
to free riding (every state wants them, but they do not want to pay for them) → need for
international agreement/ rules/ institution to make sure there are sufficient quantities
- With globalisation there are more of these goods that were 1st national and now becoming
international → need for international intervention/ public institutions as providers of these
GPG’s (some always been global, like pollution, but some are new cuz of the globalization)
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,Different technologies of provision exist (e.g. summation, weakest link, best shot)
Technologies of provision/production: the relationship between individual efforts in terms of adding to
the supply of GPG’s and the total aggregate supply of the GPG → 3 main technologies:
1. Summation:
Total is sum of the individuals (everyone matters, what we all do collectively) (e.g. Pollution)
→ Policy: to increase aggregate, say: Everyone matters (the more you do, the better the results/ effect)
2. Weakest link:
You are as strong as the weakest link (the effect of everyone's contributions is not the sum of what we
all do together, but depends on the one who has the least)
(e.g. on island with different plots of land without borders (globalisation), protect against water rising
→ all built dams → if someone did not build a dam, the water is going in at that level, but also floods
the other pieces of land ➔ does not matter if others build the highest dams, only protected collectively)
→ Policy: target intervention at the weakest link, because he/she matters most
(e.g. the creation of international financial stability → GP Bad: global financial crisis: financial crisis
in one country could spill over to other countries through trade, hence the IMF exists to target weakest
link, because of globalisation: cross-border financial transactions)
3. Best shot:
The aggregate is determined by the effort of the strongest
(e.g. when we try to find new vaccines, the one who does the most effort in the least time matters)
→Policy: target interventions to the one/ two that has highest probability of providing the good (not
spread resources)
Application to International economics
- Rules on trade
- International financial stability, optimal capital provision (see IMF at weakest link)
Applications on institutions:
- International trade issues: the WTO
- International Finance: IMF/World Bank (objective defined in GPG-context)
Optimal capital provision: making sure that countries have enough resources to finance their
development (not excluded from that finance) → cannot rely on private capital markets to supply this
finance for development (GPG), need a public intervention to solve problem of exclusion of poor
countries in global private financial markets ➔ World Bank intervenes to save from market failure
2. THE CONCEPT OF THE BALANCE OF PAYMENTS
Balance of Payments (BoP): an accounting record (in monetary terms) of all transactions of goods,
services, income and financial assets between (1) domestic households, businesses and government of
a given country and (2) residents of the rest of the world during a specific period (usually 1 year)
→ reflects all the cross-border transactions between residents of the country and the rest of the world
(as long as relation between gov/ household/ business stays domestic → not in the BoP)
➔ BoP shows the amount/ magnitude and types of cross-border transactions
BoP ‘identity’: Current account + capital (and financial) account = 0
- Current account openness: a country is open to the rest of the world to do these kind of
transactions in terms of current transactions (= transactions)
- Capital account openness: the country engages themselves to be open for cross-border financial
transactions (e.g. allowing foreign loans, foreign direct investments, foreigners to guide a
business) → country allows these kinds of investments
- NOW: 3 parts of BoP: current account + capital account + financial account (capital is split up)
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,3. IMBALANCES
Conceptually, a BoP must always balance (sum to zero); a total BoP surplus or deficit cannot exist
→ because of system of double entry-booking (= debit/credit accounting method): one entry indicating
the ‘nature’ of the transaction, other one indicating the foreign exchange consequence (forex inflow or
outflow)
- For each cross-border transaction you have 2 entries (credit/ debit) in the BoP with the same
amount but with an opposite sign (+/-), if you sum them it becomes 0 (otherwise an error by the
accountant)
- 2 entries:
(1) Nature of transaction (what is it)
(2) Financial payment that goes with the transaction typically in foreign exchange (not in the
currency of that country but $$$) → other smaller currencies are not worth anything on the
international market/ is confined to the national market
→ Payment in foreign exchange and whether it is an incoming or outgoing payment for the
country (ex. Export transaction: coffee is leaving the county (nature), dollars coming in
(payment))
General rule: (- is good)
- Everything leading to foreign exchange inflow is a + (e.g. export 500 units → +)
Foreign exchange inflow itself is a – (e.g. the foreign money you get for the export → -)
- Everything leading to a foreign exchange outflow is a – (e.g. import 500 units)
Foreign exchange outflow itself is a + (e.g. payment for import)
Credit (+): exports, income and current transfers received, decrease of foreign assets, increase of foreign
liabilities.
Debit (-): imports, income and current transfers paid, increase of foreign assets, decrease of foreign
liabilities.
- BUT each of the different BoP components individually can be unbalanced (surpluses/deficits)
- In reality, errors are made: balancing item ‘errors and omissions’ added to BOP (4th element)
(e.g. registration of import/export transactions at customs → payments at banks)
(e.g. Take dollars in Tanzania, don’t report it and pay with it → only partly registered)
➔ (conceptually it should always balance → reality)
!!! The bigger the 4th part is → says sth about the quality of the system of registration and about the
degree of informal transactions that take place!!!
Example of BoP
If 11. Is negative = good (inflow > outflow)
If 1.- 10. Is negative = bad
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, Current account:
1. Trade balance: difference between export and import (export + cuz leading to forex inflow /
import – cuz leading to forex outflow)
→ Export (500) is linked to foreign exchange inflow (= -) → - 500 in financial account number 11.
Change in reserve assets (forex)
→ Nature of the transaction = 1-10, foreign exchange consequence = 11. = balance)
→ Import: - 800 (nature) , foreign exchange consequence (11) = +800 → balance
= here it shows a trade balance deficit in 1 ➔ import > export = bad/ more money going out than coming
in → Losing more reserves in number 11. (Central bank builds foreign exchange reserves in the past)
2. Net income received from abroad
- Compensation of employees: people that work in other country (salary = cross-border)
- Investment income: interest/ dividend payments (foreign loan → interests have to be paid/
foreign shares → foreign dividends are received)
→ Negative = pay more to foreign countries than they receive (dividend leaving/ interest paid)
→ Is linked to 11. with a + because foreign exchange is leaving the country
3. Net current transfers (workers remittances: send money from abroad to their country + aids)
→ Positive cuz for ex. Tanzania received aid and money from families abroad
→ Linked to 11. with a – because foreign exchange is coming in
4. CURRENT ACCOUNT BALANCE = 1 + 2 + 3 (can be a deficit/ surplus)
Here deficit (bad) → losing foreign exchange → can be a problem depends on 2 things
(1) Do I have a lot of reserves from the past + (2) Rest of BoP
Capital account: → very specific
5. Net capital transfers
- A transfer that the creditor gives to you: a loan which is a capital instrument, long term, multi-annual
thing = specific type of loan (capital forgiveness = creditors forgive the loan)
6. Refers to non-financial assets like leases/ patents
→ Here it is compensating for the current account balance deficit (see 7. = positive)
Financial account → cross-border financial transactions
8. Foreign Direct investment: foreign individual/ company acquires shares of a company in Tanzania
→ partly owner of that company/ get equity by buying existing shares OR by creating new company (all
shares) → gets dividends OR Tanzanian buying shares in another country → wants to get involved in
daily management/ have a say
➔ It can be inward and outward (+ = investments coming in, typical for development country)
→ Criterion for difference 8-9: own more than 10% of total equity of a firm = DIRECT
INVESTMENT (in the market for the long term)
9. Portfolio investment: foreign individual/ company acquires shares of company in Tanzania → not
to be involved in daily management BUT cuz thinks the share price will go up (= good investment)
ALSO buying bonds/bills of a country (loans/ debt issued by the gov)
→ = You pay interest rates on both loans and bonds
→ ≠ bonds have a secondary market (= trading market where every day you can buy/ sell bonds)
→ difference from loans (original lender is forced to keep loan during whole period of loan)
- bill = short term / bond = long term
2 OPTIONS: you can buy them today and sell them tomorrow = both volatile/ short-term
➔ if +, foreigners bought many shares and bonds in Tanzania
10. Net other investment: 2 types (+ is good)
Loans + foreigners depositing money on a bank account (cuz good interest rates)
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