Efficacy of Institutions in the Global System - Research Paper Example

and Number Paper Efficacy of s in the Global System Government s play a crucial role in promoting the smooth flow of economic activities. Through the enforcement of various laws, the government regulates the activities of different players in the business sector. The emergence of globalization, where products are manufactured and sold in different countries, provides the government with increased challenges in creating effective laws. Globalization requires the need to legislate and enforce trading laws that are beneficial to transnational companies, the locals, and the state. This denotes the significance of international institutions, such as International Monetary Fund (IMF), World Trade Organization (WTO), and World Bank in helping countries respond more to the challenges of globalization (Milner 836). This paper attempts to demonstrate the significance of international institutions to enhance the economy of various countries. It also provides evidence that these multilateral institutions have a valuable impact on the economy of developing nations. Role of International Institutions The primary goal of International Monetary Fund (IMF) is to help improve the economy of less developed countries by providing them with short and long term loans at low interest rates. The institution has been active in delivering this role which is evident in the various programs that it has successfully implemented in over sixty developing countries in 2000 alone. Moreover, the mission of World Bank was also to support the growth of less developed nations and to help them overcome the financial crisis. This goal was efficiently carried out through the provision of grants and loans at zero interest to poor nations especially in Africa. In fact, over 50% of the fund of World Bank for 2003 went to projects in the nearby countries of Sahara. On the other hand, the mission of World Trade Organization (WTO) was to enhance bilateral partnerships among countries and to encourage them to adopt trade liberalization as an effective strategy for enhancing their economy (Milner 836). The WTO has successfully performed this mission which is evident in the emergence of various multinational companies in developing countries. These giant companies significantly contribute to the economy of emerging countries through the creation of jobs. This was revealed in the study of Greenaway and Wright on the effects of trade liberalization in the economy of developing countries. The findings showed that liberalization of trade policies and entry barriers has a significant positive impact to the economic growth of less developed countries (229). Impact of International Institutions on Economic Growth The WTO plays a significant role in enhancing the value international trade of its member countries. For instance, Rose conducted a study on whether or not WTO together with its previous counterpart (Generalised Agreement on Tariffs and Trade (GATT) has been effective in promoting the value of international trade among its 175 member countries for 50 years. Through the analysis of the gravity model, the study revealed that WTO has a direct contribution for doubling the value of trade among member nations (98). In addition, Subramanian and Wei also conducted a study on whether or not WTO has a significant impact on the trading condition of its member countries. Their findings revealed that WTO provides a significant positive impact on trade which translates to 120% marginal increase for 2000. However, the study revealed that the positive impact of WTO is not evenly achieved by its member countries. In addition, increase in bilateral trade is high when each partner nation adopt liberalization while countries without trade liberalizations did not acquire trade increase. The World Trade Organisation (WTO) plays a significant role in creating and enforcing relevant trading rules across different countries. This has been supported by various research showing the relevance of WTO in enhancing assets (151). Furthermore, the International Monetary Fund (IMF) also had a significant positive impact on the growth of the economy of participating countries. This was supported by the study of Przeworski and Vreeland on the effects of IMF programs on the economy of various countries. The findings showed that participant countries experienced a significant increase in their growth rate when they leave the program after availing the loan. This is in contrast to the slower growth rate that countries experience if they do not participate in the IMF programs (385). Moreover, the projects of the World Bank have also a significant impact on the growth of the economy of participant countries. This is supported by the study of Boockmann and Dreher (633) which aimed to identify whether or not participating in IMF and World Bank projects can contribute to the economic freedom of various countries. The study involved economic data from 1970 to 1997 on 85 countries. The findings showed that the quantity of projects undertaken by World Bank has a significant impact on the economic freedom of participating countries. In addition, the World Bank also had a significant contribution in poverty reduction among less developed countries. It has provided loans, not just for transportation and power but also to support agriculture and to develop the small and medium size credit industry among participant countries (Birdsall & Londono 32). Significance of International Institutions in Globalization The height of globalization provides challenges to governments of different countries on how to strike a balance between opening the country from foreign investments while still protecting the interest of local businesses from global capitalists. The WTO, IMF, and World Bank aim to protect the welfare of the developing nations from the possible threat of being taken advantage of by wealthy countries, which are the home of multinational corporations. According to Milner, the particular goals of these international institutions in the face of globalization are a) to limit the political influence of wealthy countries over less developed nations; b) to give better information and set the transaction cost of international trading at the minimum; c) to promote effective trading partnership of countries, and finally d) to encourage political and legislative reforms within countries (838). Through the international rules of trading set by WTO, powerful nation states will have to make business decisions that adhere to the laws approved by other member countries belonging to emerging and developing economies. Through these rules, the global capitalist perspective of powerful nations for amassing large profits is constrained; thus protecting the interest of less developed countries (Milner 838). Moreover, WTO encourages developed and emerging countries to share information on trade policies and forms of market entry. This trading strategy is based on the precept that international trading is enhanced when there is high certainty on relevant information between countries. If there is knowledge of accurate trading policy between countries, it is more likely that size of the country and extent of market power will not influence the trading decisions and negotiations between them. These provide an opportunity for emerging countries to have a leveling field for international trade (Milner 838). Furthermore, IMF and WTO also encouraged the bilateral trading between developed and undeveloped countries through the aid of trade liberalization. This involves the reduction of tariffs for foreign companies and loosening stringent trade policy to facilitate easy market entry for both countries in negotiation. This is beneficial to both economies since the under developed countries can gain income from the investments poured by developed countries. In addition, the emerging economy can also provide employment opportunities to its citizens, which are significant in propelling the economy of the developing country. Some research shows that trade liberalizations, which was promoted by IMF and WTO, has a significant positive impact on the growth of emerging economies. From the survey of Winters on the effects of liberalization in economic growth, the result showed that trade liberalization can significantly increase productivity of the people which leads to significant increase in the growth rate of the economy of developing nations (4). There are many critics of the functions of multilateral institutions such as WTO, IMF, and World Bank. However, based on the evidence presented, it is argued that these international institutions have a big contribution in ensuring that the wealth of the word is not just concentrated among the powerful nations. The international rule that WTO promote and enforce to member countries gives emerging nations the chance to benefit from the profits of globalization without being subjected to much political influence of powerful nations. Moreover, the grants and loans of IMF and World Bank also helps ensure that less developed countries are given enough capital to propel their economy at very low interest rate. This provides opportunities for less developed countries to improve their economic performance significantly. There is a popular belief that these institutions are merely used by powerful nations to control the politics and economy of the developing nations at their advantage. However, it is argued that since their inception, WTO, IMF, and World Bank has made an important contribution in improving the economy of emerging nations. In this globalised business environment, these institutions also help governments of different countries adopt international trading rules that will protect the interest of the state and its people but also provide good revenue opportunities for foreign investors. This leads to growth which are both beneficial for emerging and developing countries. Conclusion International Institutions play a crucial role in helping countries achieve economic prosperity most especially the poor and less developed countries. This has been supported by the results of various studies which highlight the positive impact of WTO, IMF, and World Bank for the development of emerging economies. With the emergence of globalization, this institution has played a significant role in protecting the interest of developing countries while still giving them opportunities for economic growth. Thus, international institutions should be given enough recognition and credit for promoting a stable world economy. Works Cited Birdsall, Nancy, and Juan Luis Londono. "Asset Inequality Matters: An Assessment of the World Bank's Approach to Poverty Reduction." The American Economic Review 87.2 (1997): 32-37. Print. Boockmann, Bernhard, and Axel Dreher. "The Contribution of the IMF and the World Bank to Economic Freedom." European Journal of Political Economy 19.3 (2003): 633-649. Greenaway, David, Wyn Morgan, and Peter Wright. "Trade Liberalisation and Growth in Developing Countries." Journal of Development economics 67.1 (2002): 229-244. Print. Milner, Helen V. “Globalization, Development, and International Institutions: Normative and Positive Perspectives.” Review Essay Web 1 Dec. 2013. Przeworski, Adam, and James Raymond Vreeland. "The effect of IMF programs on economic growth." Journal of development Economics 62.2 (2000): 385-421. Rose, Andrew K. “Do We Really Know that the WTO Increases Trade?” American Economic Review 94,1(2002): 98-114. Print. Subramanian, Arvind, and Shang-Jin Wei. "The WTO Promotes Trade, Strongly but Unevenly." Journal of International Economics 72.1 (2007): 151-175. Print. Winters, LAlan.. "Trade Liberalisation and Economic Performance: An Overview*." The Economic Journal 114.493 (2004): F4-F21. Read More