Summary International Economic & International Economic Organizations
2024/2025
Lecture 1
The global financial system
= the network of financial institutions, markets rules, practices and technologies that facilitate the flow of capital
and financial transactions across national borders. It encompasses banks, investment firms, central banks,
regulatory authorities, and international financial organizations working together to support economic
activities such as trade, investment and the allocation of resources.
The effect of the emergence of a global financial system:
Advanced states have become increasingly financialized = the short-term focus of financial
markets impacts economic policies, welfare systems and other sectors.
- Developed states have been affected by the inflows and outflows of foreign capital.
- Evidenced by series of financial crises and COVID-19 → exposed vulnerabilities in the
international financial system leading to economic instability and highlighting the need for better
coordination and regulation to mitigate future risks.
Key challenge in international finance: ensure that financial globalization and the international
monetary system become stabilizing forces that foster growth and development
Standard economic theory: Two main categories of goods depending on two characteristics.
Rivalry = does one person’s consumption of the good reduces another person’s ability to consume it?
Excludability = can the owner prevent others from using the good?
1. A private good = rival + excludable.
2. A public good = non-rival + non-excludable
a. Basic problem: under-provision due to freeriding = individuals/countries benefit
without contributing to the cost of providing the good.
Public-private continuum:
At the one end purely private goods and at the other end purely public goods.
Many goods fall somewhere in between influenced by sociocultural, moral, ethical,
environmental or economic factors = quasi-public goods or joint products: share
characteristics of both private and public goods.
GPG (global public goods) = goods whose benefits/costs extend nearly universally, potentially affecting
anyone, anywhere regardless of national borders.
Global impact: influencing people and places far beyond where they are produced/consumed and often
impacting future generations as well.
3 main types of assembly processes for providing public goods:
1. Summation = the total provision of the good is the sum of individual contributions; each person’s
contribution adds to the overall provision.
2. Summation with a weak link = the goods provision depends on the weakest contributor; if one
person fails to contribute adequately, the overall provision is significantly affected.
3. Best shot = the good is provided at the level of the best individual contribution meaning the highest
contribution determines the outcomes.
GPG’s are delivered in a fractured global order: countries have conflicting interests and varying levels
of commitment wherefor delivering GPG’s becomes difficult. This leads to challenges like under provision,
freeriding and coordination failures making it harder to achieve the collective benefits of GPGs across all
nations.
1
,Key question: Is the current system of multilateral cooperation well-equipped to effectively address
the challenges posed by GPGs?
Complexities of global coordination and differing national interests: States and nonstate actors are
active contributors to GPG provision but the sum of these contributions fall in many cases short of
requirements leaving GPG-related problems often unsolved.
Considering the provision of GPGs must involve:
1. Balance between horizontal and vertical decentralization = ensuring that decision-making is
appropriate distributes at local/national/global level while maintaining effective coordination.
2. Willingness to cooperate = ensuring motivation to work together.
3. Stakeholder views and expectations = considering the concerns and needs of all affected parties.
4. Financing = identifying and mobilizing the necessary funds.
5. Cost-benefit sharing = determining how the cost and benefits will be shared among stakeholders.
GPGs present a new policy challenge due to their unique characteristics:
→ The need for a new approach is illustrated by COVID-19: essential inputs like funding for vaccines and
support for developing countries was crucial. However the response to combating the pandemic was
fragmented and many necessary resources were underfunded which lead to gaps in addressing the global
crisis effectively.
GPGs don’t fit neatly into traditional policy categories like domestic/foreign policy and cannot be solved through
military force/economic coercion → Requires innovation in provision
1. GPGs challenges the 19th century concept of sovereignty while emphasizing non-interference and
national borders → Requires policy interdependence = effective global governance with respect
for national policymaking.
2. GPGs require more than just human interest and short-term aid/donations → Requires investment
thinking = prioritizing long-term sustainability and financing.
→ GPGs should be recognized as a distinct type of public policy issue requiring a platform or
mission-oriented approach to address under provision effectively.
Resolving existing problems through coordinated action.
Entrepreneurial state: driving innovation to solve complex global challenges.
The discussion of GPGs and global governance emphasizes the need for a fit-for-purpose
multilateralism with the following key characteristics:
1. Compatibility of cooperation and sovereignty = respecting both international collaboration and
the autonomy of states.
2. Recognition of GPGs as a unique challenge = GPGs should be treated as distinct from
development assistance.
3. Mission-oriented approach = a focused goal driven strategy to ensure that resources and efforts are
directed toward concrete solutions.
4. Role of regional organizations as intermediaries = addressing the specific interests of individual
states within the framework of global governance.
Financial stability as GPG in the context of increasing financial globalization:
1. Weakest link = the stability of the global financial system depends on the weakest/most vulnerable
parts of it.
2. Intervention portfolio → managing uncertainty and information asymmetry.
a. Aim to correct private market failures by designing optimal public interventions:
i. Crowd in desired behaviour = e.g. promoting financial inclusion.
ii. Crowd out undesired behaviour = e.g. preventing illicit finance.
2
,Financial stability as GPG (global public good) is crucial to achieving these objectives:
1. Optimal allocation of capital = distribution with attention to development needs.
2. Financial inclusion = access to financial services both at the macro- and microlevel.
a. Macrolevel = countries.
b. Microlevel = households.
3. Harmonious global trade and production = promoting fair and stable exchange rates.
4. Financial risk management = preventing and minimizing global financial crises.
5. Good governance = implementing global governance principes for effective management.
Balance of Payments (BoP) = an account record that tracks all monetary transactions between a
country’s domestic entities and the rest of the world over a specific period (usually one year).
Monetary transactions = goods, services, income and financial assets.
BoP = current account + capital (and financial) account = 0
The Balance of Payments must always balance conceptually meaning its total must sum to
zero. This is due to the double-entry bookkeeping system: one entry records the nature of a
transaction and the other reflects its foreign exchange (forex) consequence (inflow/outflow).
o Forex inflows = credits: (=exports/income received/current transfers received/decrease in foreign
assets/increase in foreign liabilities) are recorded as positive (+) → but the forex inflow itself is
recorded as negative (-) in terms of BoP accounting
o Forex outflows = debit: (=imports/income paid/current transfers paid/increase in foreign
assets/decrease in foreign liabilities) are recorded as negative (-) → but the forex outflow itself is
recorded as positive (+) in terms of BoP accounting.
! Despite the BoP needing to balance overall individual components can show surpluses/deficits. In
practice errors and omissions are included to account for small discrepancies in data recording.
→ Financing: when the reserve assets/foreign exchange reserves are – this means that the surplus of
the accounts is used to increase reserves or finance of other needs.
BoP-problem = When there is a structural overall/global deficit which indicates a loss of foreign
exchange reserves over time → Concerns arise in certain situations:
1. Capital flight = a deficit financed by foreign financial flows can be vulnerable to capital flight leading
to a loss of foreign exchange.
2. Falling exchange rate = a persistent deficit may lead to a decline in the exchange rate causing
inflation.
3. Eurozone example = Spain, Greece and Portugal had large current account deficits which signalled
economic non competitiveness. They weren’t able to devalue their currency wherefor they faced slow
economic growth and reduced exports.
Not necessarily when there is a trade-/current account deficit → They are not inherently problematic if
they are manageable and financed by sustainable capital flows.
E.g. UK and US.
A current account deficit financed by FDI (foreign direct investment) can be positive: indicating that the
country is attracting investment which can enhance its productive capacity.
Trade liberalization has impacted the current account gap which reflects imbalances in trade
between countries:
1. Openness to trade = trade liberalization boosts economic growth and living standards by enabling
countries to access a larger market for goods and services.
2. But asymmetric trade liberalization = mainly benefiting trade in goods rather than in services.
Leading to different outcomes for various countries.
a. Goods-specializing countries: benefited from declining trade barriers in goods; allowed them
to increase exports relative to imports; contributing to their current account’s surpluses – e.g.
China, Germany and Japan.
b. Service-specializing countries: faced more restricted trade in services; led them to run
persistent current account deficits – e.g. UK and USA.
3
, Several policy measures can be implemented to address a current account deficit:
1. Supply-side policies = improving the competitiveness of exports through productivity improvements
→ can help increase export volume and reduce the deficit.
2. Tight fiscal/monetary policies = reducing consumer spending (domestic demand) → lowering
imports and improving the current account; also helps to reduce inflation by making exports more
competitive. But these measures might negatively affect economic growth in the short term.
3. Exchange rate devaluation = making exports cheaper (=boosting exports) and imports more
expansive (=reducing import levels) → can improve the current account.
Lecture 2
Global capital flows
= the movement of financial assets and investments across international borders → Significantly
impacting economic growth, exchange rates and financial stability.
1. FDI (foreign direct investment) = long-term investments where a foreign entity takes control/establishes
lasting interest in a business in another country.
2. Portfolio Investment = investments in financial assets like stocks, bonds and mutual funds without
seeking control over the business.
3. Bank and other financial flows = cross-border loans, deposits and other forms of financial transactions
conducted by banks and financial institutions.
4. Official flows = movements of capital between governments or through international organizations.
The evolution of global capital flows:
Pre-WOI = robust global capital flows driven by colonial ties and gold standard stability.
Post-WOII= declined global capital flows due to political instability and capital controls.
From 1970’s onwards = reviving global capital flows due to financial liberalization supported by
technological advancements, deregulation and globalization.
Today: global capital flows are diverse and vulnerabilities such as crises triggered by sudden stops or
excessive debt remain.
Capital openness
= the extent to which a country allows capital flows → The distinction between de jure and de facto
openness is significant for understanding how policies and actual market conditions influence capital
movement.
1. De jure capital openness = the extent to which a country’s laws and formal regulations
permit the free flow of capital across its borders.
a. E.g. restrictions; taxes and quota.
b. Provides insight into the policy environment and government intent regarding capital flow;
useful for understanding formal barriers to capital movement.
c. Does not capture how effectively these policies are implemented; legal openness does not
always translate to market openness due to enforcement or other informal barriers.
d. Typically assed using indices such as the Chinn-Ito Index and the IMF’s Annual Report on Exchange
Arrangements and Exchange restrictions.
2. De facto capital openness = the extent to which a capital actually moves into and out of a
country regardless of legal restrictions.
a. E.g. foreign portfolio investment; cross-border lending and borrowing; actual FDI.
b. Reflects real-world conditions and financial integration; provides a more accurate picture of
market dynamics.
c. Does not reveal the role of policy in facilitating or restricting capital flows; external factors
(e.g. global market trends) can influence flows regardless of domestic policies.
d. Typically measured by observing the size of foreign assets and liabilities as a percentage of GDP; actual
capital inflows and outflows over time.
4
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