NIRVANA IAS ACADEMY

ECONOMY ORDEX
Vas hai.
CORE ISSUES OFINTERNATIONAL
International Economic order are:
The basic problems/issues related to the
human Resource.
(1) Resource Imbalance including
(2) Sustainability of the developmental process.
followinga closed economic policy resulting into a lack of cushioning effect.
(3) The failures of
expansion so
the formation of the UN and the end of the colonial era, the scope of territorial
(4) After
as to take economic advantages has gone down.
eveloped nations
The differences in economic necessities of different groups of coúntries. The
(5
surplus production and they can take, independent
are concerned with finding a market for there bedisassociated with the social sector on
can
economic decisions because their economic policy they can't
other hand for a developing nation since the. level of social dev. is still low
the a
social sector Any Economic decision by
disassociate their economic policies from the there
socialtenets like employment, poverty etc. and
developing nation has to take care of certain of other
complete openness of trade allowed by the developing nations, the chances
fore if a production are not the same in the
sidelined is high because the conditions of
social sectors being
a chance of uneven trade competition.
developing and developed nations and there, there is
doing
current International Economic order arosé after the IndWorld War with the
Thè basic issue of the
three interests involved:
away of the colonial regimes there were
an open consumer market in the
(i) The interest of the US andRthe allied countries in getting.
developing rations.
Western
colonialcountries in getting an open market in the other
(iü) England and the other erstwhile
Countries
decisions could be taken only in the backdrop of the
(i:) The defeloping nations for whom economic
impact upon the social sectQrs.
closed economy and at the same time get an open
For these countries it was important to retain their open market for
these countries to get an
Market in the deyeloped countries. It was also important for
[Textiles and Agriculture].
those commodities for which they were having surplus production.
that a closed economy will not result into
After the economic crisis of the I[nd World War, it was realised
the balancing or cushioning effect in the case
asustained economic development and will be lacking in
development but a sustained economic
of a economiccrisis and , now the slogan was not just economic
development with mutual cooperation.
the nations.
Atthe same time the UNCalso had emphasized upon economic cooperation between
of force i.e.
For example - In A-55 to 60 and 62. On the other hand the UNC had also prohibited the use
territorial expansion. A-2(4) & 2(7).

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 NIRVANA IAS ACADEMY

The net result of the above situation was the quest for having an International Trade organization which
will take care of open global trade. The most important bottleneck was that there was a direct conflict
between the demands of the developed and developing nations. Nevertheless the developed nations
accepted the demands of the developing nations for a Preferential tariff concessions.
By PTC it meant that when a same commodity is exported from a developed country to a developing
country the latter can impose a greater tariff on that commodity as compared.to that tariff which is
imposed.by.the deweloped natjon when the same happens_viceversa.
After the negotiations what came up was the formation of the IBRD and he IME-as the financial
institutions and also the GATT instead of the ITO the GATT was a mere.agreement.on Trade in goods
[and not services] between 23 countries initially. The Agreement was reached on the 30" Oct 1947 and
came into force on the 1 of January. 1948. The GATT was aset of Agreements between the developing
and the developed nations containing th¹ various tariff concessions given to th developing nations.and
also was subject to the most Favoured Nation Clause. Initially under GATT there was a prohibition
against the grant of MFN status to any country.
DEFECTS OF GATT

(1) The failure of the formation of the ITO was the biggest defect because in the absence of the ITO
setup. The
(2) The GATT was just a document of Agreements and didn't have an organizational of
protocol
GATT infact initially was only an provi_jonal instrùment applied on the basis of
provisional Application.
faith and permanency in GATT,
(3) Due to the provisional Application GATT there was a lack of parties to takc decisions.
there was also an ambiguity about the powers ofthe contracting
GATT.
(4) There was also a doubtregarding the legal status of
Settlement Mechanism, there was no dispute
(5) Main defect.f GATT was the lack of any Dispute
settlement organ as such. A XXII merely provided for a corsultation process between the
the Agreement. Unde this Article the
contracting parties with respct to any matter related to
reyuest of any of the parties to the GATT.
Contracting parties were reqüired to act jointly at the any of its benefits under the GATT have
UJA-XXIILi) if any of thecontracting parties finds that
it has to make a written representation to
been nullified, and impaired by other contracting party party then the efected state can refer the
that other party.and if still no steps are taken by that
matter to. he other contracting-parties.
take either of the following steps:
Under A-XXIII (2) the contracting parties collectively can
(i) Makingrecommendation of the erring parties.
(ii) Making some rulings in that regard. concessiors to the erring state.
(iii) Taking action by authorization to suspend the
consensus
controversy regardirg A-XXII & XIlI was that neither the consultation, nor the
The basic
nullification or impairment were defined, moreover the extent & nature of the binding effect of
nor the Mechanism.
resolution of GATT was also not specified. The drawbacks of the dispute settlement
the
Can be broadly categorized as follows: 2
 NIRVANA IAS ACADEMY
(1) It didn't had a legal basis.
(2) After the Tokyo round
(1973-79) of Negotiations there was a provision for
settlement panels, but the delay in formation of such panels was
formation of dispute
another bottleneck.
(3) There was a lack of
responsiveness on the part of the developed nations w.r.t. the problems of the
developing nations.
(4) Another major problem as that under the pressure of
developed nations the developing nations had
accepted some of their demands without using foresight which created
and Agriculture products] controversies. [Like Textile
(5) The final decision of the GATT Nations was to be given with
unanimity andthis is where the
nations could exercise a kind of veto power making the entire resolution ineffective.
Dispute Settlement Mechanism u/GATT
A-XXV of GATT says that all the states will jointly aci as the trbunal of Dispute Settlement.
A-X imposes a duty upon the states to publish all the important decisions regarding their main
obligations, regulations, periodical decisions, administration rülings,etc. so, that the other states are
kept aware of any changes in the policiesof that state.
Since, 1979 after the Tokyo round under the understanding regarding notification, consultation,
dispute settlement and surveillance,there has beena further duty and commitment by the
Contiacting parties to notify any such changes to the maximum possible extent even if the change is
GATT inconsistent. The above duty takes care of the effective exercise of the rights given uA-XXII
and XXIII

A-XXIl and XXIlPcan be bricflý summarized as follows:

Step |- ihegffectcd state has to get into a consultation process with the erring state.

Step Ile 1t the consiltation fails the affected state is entitled to file a complaint all the GATT
members. In this complaintif has to specify the right which has been nullified and impaired. Before
1979:the GATT nations oñ receipt of such complaint could consider the complaint themselves. But
the 1979 TokyÑ round, of negotiations had introduced the system of formations of panels for dispute
settlement, after 1979 the GATT nations at the request of the effected state will setup apanel.
Step-III -The panel enquires into the matter and submits its report to the GATT nations.
Step-IV - Upon receipt of such report the GATT nations discuss and decide upon the report and
thereafter make recommendations to the erring state. Here the decision of the GATT nations should be
passed by a consensus. It is here that a indirect right to veto is possessed by the member by the
member states. If a single state refuses to give approval to the resolution the resolution will fail due to
lack of consensus.

In the resolution the GATT nations can also suspend the concessions of the erring state.
 NIRVANA IAS ACADEMY

WTO

WTO was fomed aller the Uruguay round (1986-94) of Negotiations in l995. The causes for the
fomation of WTO:
() Defeets of the GATT
(2) The demand for a parity of status through the graduation clause. Gradually do away with the
preferential Treatment given to the developing nations.

(3) The entire composition of International Trade had changed. Services also had become important,
at in the GATT itself
then patents had become important, etc. some changes were attempted
through the various rounds of negotiations.

() Dillon Round (1960-62).

(ii) Kennedy Round (1963-69)

(iii) Tokyo Round (1973-79)

WTO, but to have some changes in
1986-94 In Uruguay Round the agenda was not the fomation ot
GATT s0 as to take care of' tlhe changing trade environment.
Uruguay Round
WTO
Final Act of Negotiations
Minister General Council Other
ial Counc
conferen ils
ce

IA DINpute TrHde Optional Highest 1. Dispute Settlement

Policy Agreeme Decision 2. Body which will take
GAT GAT RIPSettlemg review nts Making care of Trade Policy
T S -ent Mechanis Body review
m
3. Supervision of the
functioning of WTO

aircrap
 NIRVANA IAS ACADEMY
VARIOUS ORGANS OF WTO

MinisterialConference
Meets every two years
any other multilateral
It has a right to adopt a particular interpretation of the WTO agreement as well as
agreement.
It also has the right to amend the WTO agreement or other multilateral agreements.
It also has the power to implement WTO and other multilateral agreements.
consensus can't be reached
The voting in the Ministerial Council is to bè done by a consensus. But if a
then the voting will be done by simple majority.
General Council/Dsß
Meets every month..
Acts as:
Adispute settlement body.
> Body which take care of Trade Policy review,
> Supervision of the functioning of WTO.
Other councils
Councilon Trade in Goods.
Councilon Trade\in Services.
Council on Intellectual Property Rights.
Dispute Setlement Mechanismunder WTO
Step-I: Effective consultations between the parties concerned. dispute through its good
Step-II: Consultation fails and a,cequest is made to the General Councilto resolve the
officer mediation or conciliatioh.
Council.
Step-III: If that also fails,then the concerned state makes a complaint to the General
5 judges.
Step-IV: The General Gouncil as thechoice of theparties concerned will form a panel of either 3 or
Step-V: The panel, lllinvestigate àndgive an oral hearing to the concerned parties and then submit its expert
opinion in the form of areport to the General Council.
an interim
Step-VI: Theapanel report which is submitted to the DSB will first be taken up by the DSB for
back
review. The particçoncerned have aright to intervene during such review. Thereafter, the DSB will send
the report tothe panla
Step Tthe panelnow after conducting further investigations will submit its final report to the DSB. Within
20 days the, DSB will adopt the panel report. The concerned states have a right to raise their objections to the
final report within 10 days of the submission of final report to the DSB.
Step-VIIl: in c§se, anfobjection is raised by the party within 10 days then the DSB will appoint an appellate
panelof 7members froma standing appellate panel. The questions of fact can't be opened in the appellate panel
and only the question of law can be discu_sed.
Step-IX: The appellate panel will submit its report to the DSB which will be adopted by the DSB.
Step-X: Implementation - the DSB has got the power of surveillance of the implementation and u/A-XXI if a
concerned state is found to be violating the recommendations, then the DSB can suspend the concessions of that
State.
 P cvikes NIRVANA IAS ACADEM
IMF
for global open trade couBd not have
The importance of IMF lies in the fact that the mere political agreement
required such conditions couBd be obtained
been sufficient, because the conditions for such openness were also
purpose the IMF for (short term loans) and the
only if appropriate financial support was provided. For this
seen that the ukimate goal of the new
1BRD for (long term loans) was created. In this light it aBso has to be
deveBoped countries and this could
economic order is the complete parity of terms between the developing and
provided with the internal strength.and
have been possible only if the economies of the developing nations were
provide the ong-term Boans for the
for this purpose the financial support was required. The IBRD would
proyideshort and medium
infrastructural development'and other development projects whereas the IMF would
programineslowever,
term loans for BOP crises like situations and also for funding the structural adjustmentpowerwA-V to impose
provided with
since the ultimate goal was a completely free world trade the ÍMF was
the loan.
conditionalities of structural ådjustment and shift of economicpolicies upon a nation which tàkes
witiithesovereigntyof the:conoerned states.
It has been argued that such conditionalities are an interference
conernedstate so as to see that
Moreover, A-IV also allows the IMF to maintain a strict surveillance upon the
the conditionalites of the IMF are not being violated.
Purpose of IMF
(1)To help the removal'of restrictions upon trade.
stábility in theexchange rate among the
(2) To ensure a full convertibility of the currenciesand maintain
curreneies.
Objectives of IMF
(1)To promote and establish a stable intërnatjonal monelary system.
arrangements between nations.
(2) To promote exchange stability and maintain an orderly exchange
(3) To provide competitive exch¡nge deyaluation. eliminate Forex restrictions.
to
(4)To help establishing mulilateral systems of payments and
maladjustments in their BOP.
(5) To help the members in correcting thie.
Functions of IMF
Finance.
()To lay down thetùles of conductofnternational structural adjustments.
(2)To provide short and medium termloans for BOP crises and
drawing rights (SDRS).
(3) Creation,and distribution of finance feserves in the form of special
monetary system rather it also acts as a source of
The IMF does nofonly monitorthe. cônduct ofintermational
liquidity, in the international mogetary system.
Structureof IMF
It consists of
body of the IMF and meets every year.. it
(1) The Board of Governors- It is the highest decision-making country. The governor is
member
consists of one governor and one alternate governor .for each
finance or the head of the central bank.
appointed by the member country and is usually the minister of
committees, the International Monetary
The IMF Board of Governors is advised by two ministerial
and Financial Committee (IMFC) and theDevelopment Committee.
Board takes care of the daily business of the
(2) The Executive Board- The IMF's 24-member Executive
countries. The 8 largest quota holders of IMP
IMF. Together, these 24 board members represent all 188
executive directors are elected by other
appoint,one executive director each. Apart from that, 16 other
members of IME. 2
 NIRVANA IAS ACADEMY

.ources of IMF
nere are 2 sources financial
Subseriptions - A member's quota subscription /etermines the maximum amount of
() IMF. A member must pay its subscription in full
upon
resources the member isobliged to provide to the widely accepted currencies (such as the U.S.,
25 percent must. be paid in SDRS or
joining the Fund: up to rest is paid in the member's own currency.
while the
dollar, the euro, the yen, or the pound sterling), of their
member country is assigned a quota. Quotas are fixed for the members of IMF in light
Each IMF things:
quota allotted to a country will decide two
National Income, Exchange Ratio, BOP etc. The
Sabth Custat
()The voting capacity of that country. international reserve asset, created by the IMFNn
N969 to
country- The SDR is an
(ii) The SDRs of that based on a basket of four major
supplement its member countries' official reserves. Its value is currently include
euro, Japanese yen, and pound sterling), and the basket will be expanded to
currencies(U.S. dollar, October 1, 2016. SDRs canbexchanged for
currency, effective
the Chinese Renminbi (RMB) as the fifth
freely usable currencies.
a general agreement on Borrowings signed in 1962. Ten countries had signed
(2) Borrowing - There was these ten
was Switzerland). Earlier the provision was that the monëy can be borrowed by
then (tenth
drawn by any membercountry.
countries only, but nowthe provision is that it can be
Monetary Fund has made country quota reforms
agreed by the G20 in
IMF Quota reform: The International
2010 a reality.Reforms have resulted in :
than 6 percentage points of the quota, including both the Fund's capital and its
Transfer of more
economies.
proportionate voting rights, from developed toemerging
(about $659 billion).,thus increasing financial
Doubling of permanent.capitalesources to SDR 477 billion
strength of IME.
and Russia) among the 10 largest
Inclusion of the four emerging! market countries (Brazil, China, India,
largest European countries
members of the IME, Other top il0 members include the US, Japan, and four
(France, Germany, Italy, and the ÜK).
Assistance bysIMF
the Reserve Trench or
(1) The IMF provides SDRs to thosestates which have a quota in the IMF. This is called
also the Gold TrenchaN00% of quota can be withdrawn by the State.

(2) Thereare other credit TYenches from which those nations which don't have a quota can also withdraw. It is
upon those trenches that the IMF imposes the conditionality and surveillance clause. Apart from these Trenches
for the developingnations
g the IMF hàs certain other loan programmes:
()CompensatoryFinance Facility
(ü) Buffer Stock Financing
(ii) Extended facility
(iv) Enlarged Access Policy
(v) Structural Adjustment Facility (SAF)
(vi) Enhanced Structural Adjustment (ESAF)

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 NIRVANA IAS ACADEMY

deoNDITHoNALITY AND SURVEILLANCE CLAUSE

One of the purposes of IMF is to provide short-term loans as the support given by the MF is not just a
portfolio support. But, a support with an aim to bring about such changes in the economy as
willcreate the
circumstances for open global trade and also tö see that a similar situation does not arise in future.
Every State
However on the other hand sovereignty being one of the basic principBes of International Relations.
is an equaly important
is free to take its own Economic decisions. Nevertheless, at the same time consent also
principle in international law, It can therefore be argued when a countryconsents to taking of loan from the
IMF with conditionalties it has given up its sovereignty with respect to economic decisionsto that extent.
compettive
Section-1 of A-IV says - "Thé members undertake not to manipulate Exchange Rate or take untair
advantage over the other menber states and also they undertake to endavour for an orderly èconomic gowth
with reasonable price stability.
in order to regulate
Section-3 of A-IV empowers the IMF to have surveillance over the econömy.of membèrs
the international monetary system.
system in order to ensure
Section 3A of A-IV - suggests that the IMF shall oversee the international monetary
with:the obligations mentioned
its effective operation and also shall oversee the compliance.oficach member
u/S-1.
u/S-3A he IME Should exercise firm surveillance
As per Section 3B of A-IV in order to fulfill itsfuniçtions
for the guidance of members. It is
over the exchange rate: policy of members and shall adopt specifiprigciples
the IMF so as to enable it to maintain the
also a duty of the members to give adequáte informatiðn to
surveillance.
Criticism ofthe Surveillance and Conditionality Clause
(1))It is interference in the Economic Pôlicy of the concerned State.
(2) It is against the principle ötself-reltanee
(3) lt excludes BORpolicy
the altenative becomesa)tool Bdeiy c f4 UT toP
(4) The conditiona<ityclayse for rationing of Yesources.
national resources for the restructuring
(5) The mandateof the IME is normally directed towards, directing the
situation the social dimension (developmental
of economyato forther the agenda of globalization. In such a
aspect) of economiopolicy is sidèlined (Growth v/s development). the IMF.
(6) Sometimes the following of the foreign interests is also done by
Positive Criticism
(1) Conseñtof the State.
(2) It is only atemporary measure.
nations.
(3) It is wrong to say that it is ameasure only against the developing

Suggestions to improve the functioning of IMF

(1) Increase in the number of quotas.
(2) Increase the time-limit for structural adjustment programmes.
(3) Use of SDRs should be promoted instead of borrowings.
(4) Liberalization of conditionality.
should fie more upon the developed
(5)The responsibility of developing favorable economic environment
the developing nations as well.
nations andtherefore they should followsuch policies which are beneficial to
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