International Economic Organisations: One Mark Questions, Book Back Answers and Notes

About International Economic Organisations

Medium ~120 min study

After the Great Depression of the 1930s, many countries tried to protect themselves by raising tariffs and devaluing their currencies to undercut each other. World trade shrank, and the Second World War made things worse. In July 1944, representatives of 44 nations met at Bretton Woods in the USA to build a system that would prevent a repeat.

Two institutions came out of that conference, often called the Bretton Woods twins: the International Monetary Fund and the International Bank for Reconstruction and Development, better known as the World Bank. Trade was handled from 1947 by the General Agreement on Tariffs and Trade, a temporary arrangement that was replaced by the permanent World Trade Organisation in 1995. Put simply, the IMF looks after exchange rates and short-term payment problems, the World Bank gives long-term loans for development, and the WTO sets and enforces the rules of world trade.

Questions from this unit usually ask for years, headquarters, objectives and functions, so keep a small table of these for each body. You should also be able to explain SDRs, the difference between TRIPS, TRIMs and GATS, and the steps from a free trade area to an economic union.

What you'll learn

• Explain the conditions after the Depression and the Second World War that led to the Bretton Woods Conference.
• State the objectives and functions of the IMF and explain what SDRs are.
• Describe the functions of the World Bank and its affiliates IDA and IFC.
• Explain the functions of the WTO and distinguish between TRIPS, TRIMs and GATS.
• Describe the stages of regional economic integration from free trade area to economic union.
• State the objectives and limitations of SAARC, ASEAN and BRICS.

Before you start

• International trade, exports, imports and exchange rates from Unit 7.
• The balance of payments, trade deficits and foreign exchange reserves.
• A broad idea of world history around the Second World War.

International Economic Organisations explained

Global and Regional Economic Institutions

International Monetary Fund (IMF)

The IMF came into being in 1945 and has its headquarters in Washington, D.C. Its objectives are to promote international monetary cooperation, keep exchange rates stable, help the balanced growth of world trade and help members correct short-term balance of payments deficits. It lends through facilities such as the Basic Credit Facility and the Extended Fund Facility, and it also gives technical and advisory help. To add to world liquidity it created Special Drawing Rights in 1969. SDRs, called paper gold, are a reserve asset whose value is based on a basket of major currencies. India is a founder member and has drawn on IMF support during foreign exchange crises, most notably in 1991.

International Bank for Reconstruction and Development (IBRD)

The World Bank was set up alongside the IMF to provide long-term capital, first for rebuilding war-damaged Europe and then for developing countries. Today its lending goes mainly to poverty reduction, agriculture and rural development, power, education, health and infrastructure. The World Bank Group includes affiliates such as the International Development Association (IDA), which gives soft loans on very easy terms to the poorest countries, and the International Finance Corporation (IFC), which supports private sector investment.

World Trade Organisation (WTO)

The WTO replaced GATT on 1 January 1995 and is based in Geneva. It administers the multilateral trade agreements, provides a forum for trade negotiations and settles disputes between members. Its main agreements include the Agreement on Agriculture, TRIPS (Trade-Related Aspects of Intellectual Property Rights), TRIMs (Trade-Related Investment Measures) and GATS (General Agreement on Trade in Services). Their broad aim is to lower tariffs and remove discrimination in trade. India, a founder member, has had disagreements over farm subsidies and patent rules, but uses the dispute settlement system to defend its export interests.

Regional Economic Integration and Trade Blocs

Countries in the same region often group together to remove trade barriers among themselves. Integration moves through stages: a free trade area (no tariffs among members), a customs union (plus a common external tariff), a common market (plus free movement of labour and capital) and an economic union (plus common economic policies). The chapter discusses SAARC (1985), which brings together eight South Asian countries; ASEAN (1967), a group of South-East Asian nations; and BRICS, which links Brazil, Russia, India, China and South Africa. BRICS set up the New Development Bank to fund infrastructure and sustainable development. How far these blocs succeed depends on members settling political differences and aligning their policies.

Common mistakes to avoid

• Mixing up the roles of the IMF and the World Bank. The IMF deals with short-term balance of payments problems and exchange rate stability; the World Bank gives long-term loans for development projects.
• Describing SDRs as coins or notes. They are a book-keeping reserve asset, a potential claim on the currencies of IMF members, and the IMF's unit of account.
• Treating GATT and the WTO as the same body. GATT was a provisional agreement without a permanent organisation; the WTO is a permanent institution with a dispute settlement system.
• Confusing a free trade area with a customs union. Both remove tariffs among members, but only a customs union has a common external tariff on outsiders.
• Writing that TRIMs bans all restrictions on foreign investment. It only prohibits investment measures that distort trade, such as local content requirements.

Test yourself on these with the practice test, then check the worked reasoning in the solved MCQs.

Frequently asked questions

What is the main difference between the IMF and the World Bank?

Both came out of the Bretton Woods Conference, but their jobs differ. The IMF helps member countries with short-term balance of payments difficulties and works for exchange rate stability. The World Bank provides long-term loans for development, such as roads, power, irrigation and education, and for poverty reduction.

What are Special Drawing Rights?

SDRs are an international reserve asset created by the IMF in 1969 to increase world liquidity. They are often called paper gold. SDRs are not a currency in circulation; they are a potential claim on the freely usable currencies of IMF members, and their value is based on a basket of major currencies. The IMF also uses the SDR as its unit of account.

Why was GATT replaced by the WTO?

GATT, which began in 1947, was a provisional agreement that dealt mostly with trade in goods and had no permanent organisation. The Uruguay Round of negotiations led to the WTO, set up in 1995 as a permanent body. Its rules also cover services, intellectual property and investment measures, and it has a formal system for settling trade disputes.

How do TRIPS and TRIMs differ?

TRIPS sets minimum standards for protecting intellectual property such as patents, copyrights and trademarks. TRIMs deals with investment measures that distort trade in goods. It stops members from imposing conditions such as local content requirements (forcing a foreign firm to buy a set share of inputs locally) or trade-balancing requirements that tie imports to exports.

What are the stages of regional economic integration?

In a free trade area, members remove tariffs on trade among themselves. A customs union adds a common external tariff against non-members. A common market also allows labour and capital to move freely among members. An economic union goes further and harmonises monetary and fiscal policies.

How has India benefited from WTO membership?

As a founder member, India gets Most Favoured Nation treatment in the markets of other members without negotiating separate bilateral agreements. Membership has helped lower the cost of imported inputs, given access to information on world markets and provided a legal system for settling trade disputes.