international economics and international economic organizations
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Internationale Betrekkingen En Diplomatie
International Economics
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SAMENVATTING: INTERNATIONAL ECONOMICS AND INTERNATIONAL ECONOMIC ORGANIZATIONS
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 = Originates from the concept of public goods in an international concept.
What are public goods?
Definition saying a public good has 2 characteristics
- Non-exclusion. Once this good/service is produced, you cannot exclude people from using it,
consuming, enjoying the good. Once it is there you cannot exclude people from the benefits.
- Non-rivalry in consumption. It is not because I use the good, someone else can’t enjoy it. It does not
reduce your ability to have access to the good.
Private goods, private market produced goods – produced by the market mechanism. Provides a pricing
mechanism for these goods. If you want to enjoy it, you have to pay for it. If you pay for it and own it, it is no
longer available for others to enjoy.
In practice: a lot of quasi-public goods, or ‘joint products’
Basic problem: underprovision due to free riding
Under provision due to free riding. Everyone wants them, but no one is prepared to pay for them.
The government can step in. The finance is from taxes. There is a mechanism where the public sector
intervenes. To guarantee this supply. You cannot rely on the market mechanism for those things to
automatically happen.
To overcome underprovision by ‘rules’, ‘institutions’
You can try to overcome this under provision due to rules, institutions… to produce this public good.
Joint products = goods or services that can be or are produced by the market mechanism but they have some
public characteristics. Public transport for example. It is not 100% one of these two. Use this concept from a
more general perspective – goods and services that cannot be liable produced by the market mechanism.
Link to global public goods
Application to global context: global public goods (GPGs)
Public goods are more a national concept, for their citizens.
Applying this concept to a global, international level. There are certain desirable goods and services that we
should try to provide in sufficient quantities. Leave it to the individual countries to produce those.
Why will there be under provision?
- Because there is free-riding on the level of states, countries. Certain desirable things or problems –
global public bads as the mirror image but from the problematic side.
- Global public bad is pollution – Global public good is clear air.
- Kind of international agreement, rules, institutions to be dealt with. In order to be sure that this
desirable thing is there in sufficient quantities.
You have a number of problems or goods that are transnational because they don’t stop at the border. With
globalisation, more of these public goods that may be first only be national are now international, global. Some
have always been global, like pollution, but some are new because of the globalization.
National organisations as providers of global public goods.
Different technologies of provision exist (e.g. summation, weakest link, best shot)
Technologies of provision = deals with the way or relationship between individual efforts. In terms of adding to
the supply of global goods. Relationship between the individual contribution and the total supply of these
public goods. Relation between individual and aggregate.
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,3 important things:
1. Summation
The total is just a simple sum of the individual. Example: pollution. What is the effect of the individual
contribution to the total? What you do matters. The sum of the aggregate, is the sum of what we all
together do collectively, everyone matters, everyone counts. The more you do, the better the results.
2. Weakest link
You are just as strong as your weakest link. Only the sum of that person who does the least, smallest
contribution. Suppose we are all on an island, own part of the island + coast. In globalization that
means, no fences between the plots of land, no borders. Want to protect ourselves against the water.
We all build walls, dikes, dams… and some may build high ones, other low ones. And maybe some of
you are free-riding. The water will come in and will flood the whole island, not only that piece.
The level of the weakest, the lowest level. It has no effect, what so ever if one person is not doing it or
doing a little bit. Only protected collectively if everybody does. Policy consequence, you should target
the weakest link. Matters the most, because an intervention is only effective when targeted the
weakest link. No sense at all to target an intervention at a different person.
3. Best shot
The aggregate effect is determined by the effort of the one with the highest contribution.
When we try to find a new vaccine or a drug. How are we going to direct our resources? With a best
shot is most effective to target our contributions to the best shot, one that has proven to have the
biggest capacity, resources… We don’t have time to spread our resources, not efficient to do this.
Must look at the best shot, focus on the one with the highest chance, contribution.
Application to International economics
- Rules on trade
- International financial stability, optimal capital provision
Applications on institutions:
- International trade issues: the WTO
- International Finance: IMF/World Bank
International finance stability
- Global public bad we try to prevent = a global economic crisis.
- Watch out for the weakest links, there will be the highest probability that a financial crisis will start
here. The IMF should target the weakest link.
- Global financial crisis started in the US, so the US was the weakest link.
Optimal capital provision
- We cannot rely on the market mechanism to make sure that poor countries the money they need for
their development. Cannot rely on private capital markets. Need an intervention that cures, solves this
problem of exclusion.
- You can frame the idea of development, aid… that provide financing from this global public good. A
cure for exclusion.
- WTO and IMF as global institutions where the mandate, objective can be clearly translated in a public
good.
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 domestic households, businesses and government of a given country and
residents of the rest of the world during a specific period (usually 1 year).
2
,BoP ‘identity’:
Current account + capital (and financial) account =0
The annual balance of payments is reflecting all the cross-border transactions between residents of the country
particular and the rest of the world. The balance of payment only deals with cross border transactions.
Everything that stays in the country, is not for them.
The balance of payment is the key format, identity where you can see the amount, the magnitude of
finance.
We have always these 2 basic payments
1. Current account
Transactions. Current account openness, the country is open to the rest of the world.
2. Capital account
Capital account openness, the country is open for transnational transactions. Referring to the idea of a
country allowing this kind of transaction. Allow, engage with the rest of the world for cross border
transactions. Strictly speaking this is found on the financial account of the Balance of Payment.
What used to be the capital account is now split up in the capital account and the financial account.
What used to be 2 parts are now 3.
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: one entry indicating the ‘nature’ of the transaction, other one
indicating the foreign exchange consequence (forex inflow or outflow)
General rule:
- Everything leading to forex inflows is +, so forex inflow itself is –
- Everything leading to forex outflows is -, so forex outflow itself is +
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, of course, errors are made: balancing item ‘errors and omissions’ added to BOP
Accounting rules – important to realise that a balance of payment is always balanced, always sums to zero.
Conceptually because you use double entry booking. The essential thing is that for each cross-border
transaction, you have two entries to separate bookings in the balance of payment. A credit and a debit one
with the same amount but an opposite sign. If you sum them it becomes zero by concept.
What are these two entries?
- One entry indicates the nature of the transaction, what is it about? What is the nature of the
transaction.
- The other one is the financial payment that bows with the transaction. That payment is typically in
foreign exchange, meaning typically not in the currency of that country. All cross-border transactions
are in dollars. Limited set of currencies that are used in international transactions. For a developing
country their currency is worth nothing on the international market.
One leg dealing with the transaction, one with the payment.
Is this an incoming or outgoing payment?
Very simple example; transport transaction.
Tanzania is exporting coffee. What are the two changes that happens? What are the two bookings?
1. Nature of the transaction. Goods and services Goods, Coffee is leaving the country.
2. Dollars coming in. Incoming payment of dollars.
3
, Where do we book that and how do we book that?
Export transaction
Everything leading to foreign exchange inflows is a + and so the foreign exchange inflow itself is a minus -. The
export transaction is put in the balance of payment with a +.
Import transaction
Everything leading to foreign exchange outflows is a - and so the foreign exchange outflow itself is a +. Imports
are goods coming in. The nature of the transaction is goods coming in and you pay for an exchange. Import is
leading to foreign exchange outflows. Dollars leaving the country is a minus.
There can be errors or non-official transactions. The bigger these errors are in the total, it says something on
the quality of the system, but maybe also something about the degree of informal transactions taking place.
Example, hypothetical case.
Balance of payments – deals with cross border, state borders flows of money, capital, labour, migration…
Goods and services, finance, flows that are linked to labour, cross border wages payments…
The balance of payments is always balanced, summon to zero.
Current account
- International trade transactions – exports and imports.
- Exports with a plus sign, imports with a minus.
- Foreign exchange coming into the country – will be registered with a minus.
Which income is interesting here?
Number 11. A minus sign.
You will always have a transaction reflecting the nature of the transaction from 1-12 and you will always have
an inflow or outflow be booked under number 11.
Example Tanzania coffee – import of goods. How do we book that?
Under 1 with a minus. This was -800.
Dollars go out, where do we book that?
Under number 11. So here it is +800.
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