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Unit
4: The WTO
Part 1: The Theory of International Organizations as Public
Goods
International institutions come in many sizes, shapes and
functions. They can:
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promote
the interests of countries that produce a particular commodity
(OPEC, International Sugar Organization)
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provide
regional development finance (Asian Development Bank,
North American Development Bank)
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oversee
regional trade agreements (Asia-Pacific Economic Cooperation,
NAFTA)
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promote
international health (World Health Organization, International
Red Cross)
-
promote
global markets and macro-economic stability (IMF, World
Trade Organization)
The economic theory that underlies the need for all of
these organizations is based on the “public goods”
nature of most international agreements. Technically, a
public good is defined as any good—or outcome of an
international agreement—which is non-excludable, and
non-rival. Non-excludability refers to the fact that a market’s
allocation mechanism, price, cannot regulate access; i.e.,
is access to the roads in your neighborhood relegated only
to those who paid for them? Non-rivalry implies that consumption
of a public good by one person does not diminish its availability
for another; for example, does your neighbor’s use
of the roads in your neighborhood diminish your ability
to use them? Obviously, the answer in both cases is “no.”
In theory, however, there are few truly public goods: even
roads could be excludable (i.e. toll roads), and, at some
point, roads do become rival (i.e. traffic jams). A cleaner
example of a public good is a public fireworks show on the
4th of July. Price cannot regulate access, since it can
presumably be seen by anyone in a certain geographical radius
of the show. And one person’s consumption of the show
doesn’t limit another’s.
With traditional market forces (e.g., prices) an inadequate
supply of public goods is produced. Imagine, for example,
the outcome of a private market 4th of July fireworks show—it
would probably be less than what everyone was hoping to
see. Why? Because even though everyone might want to see
a great fireworks show, not everyone will purchase tickets;
some will try to free ride. In other words, when other people
pay, free riders can get some of it without paying—because
access can’t be regulated. This leads to inefficient
underproduction, since the usual signal of demand—price—only
captures part of the actual demand: the other part of the
demand is hidden by those who are “free riders.”
And if there are too many free riders, the entire market
will ultimately collapse.
In a democracy the decisions of public institutions, which
supply the public goods, are a reflection of the majority
vote of its private citizens. Public institutions solve
the “free riding” problem by using taxes or
other fees to produce goods that private citizens on their
own might not produce. For example, the NC Department of
Transportation, a public institution, receives state income
tax revenues to maintain and expand the roads and highways
of North Carolina. And the department of parks and recreation
in your town might use local taxes to put on a great fireworks
show because the majority of the town “votes”
that some of their tax dollars be spent in this way.
The WTO, an international public institution, has responsibility
for keeping trade free and fair (and we use the terms somewhat
loosely—more about that in a bit) because, as you
will see in the exercise in the next section, while individual
actors might not always opt for free trade (as you might
not opt to pay for roads in another neighborhood, or have
a 4th of July fireworks show in your town), it is in the
general welfare to keep international markets open, which
we’ve explored in previous units. When a nation restricts
imports, it is “free riding” on the international
trade system; it expects the “costs” of free
trade (loss of jobs in some sectors, lower prices on exports)
to be paid by others, while it enjoys its benefits: open
markets and a stable international payments system.
The WTO is there to prevent this, or an escalation into
a full-blown tariff war, from happening.
The WTO is one of many international institutions that serve
to regulate the global economy and ensure that international
public goods, such as free trade, are provided in adequate
supply. The table below summarizes four important public
goods provided by international institutions. The WTO is
responsible for the first good. The others we cover in later
units.
Four
Examples of International Public Goods
|
Public Good |
Purpose |
________________________________________ |
___________________________________________ |
1.Open markets in recession |
To prevent a fall inn exports from magnifying the
effects of a recession |
2.Capital flows to less-developed countries (LDCs)
|
To assist economic development in poor countries. |
3. International money-for settlement of international
debts. |
To maintain a globally accepted system for paying depts. |
4.Last resort lending |
To prevent the spread of some types of financial crises. |
________________________________________ |
___________________________________________ |
VIDEO: Public Goods
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