🏙️Public Economics Unit 11 – International Public Economics

Key Concepts in International Public Economics

• International public economics studies the economic interactions and policies among nations
• Focuses on the effects of international trade, capital flows, and migration on economic welfare and public policies
• Analyzes the role of international organizations (World Trade Organization, International Monetary Fund) in shaping global economic governance
• Examines the provision of global public goods (climate change mitigation, international financial stability) and the management of global externalities
• Investigates the impact of fiscal and monetary policies in an open economy setting
  • Open economy refers to an economy that engages in international trade and financial transactions
  • Policies in one country can have spillover effects on other countries
• Explores the implications of international tax competition and the potential for international tax coordination
• Considers the distributional consequences of globalization and the role of public policies in addressing them

Global Economic Interdependence

• Global economic interdependence refers to the interconnectedness of economies through trade, investment, and financial flows
• Trade in goods and services allows countries to specialize based on their comparative advantages, leading to increased efficiency and welfare gains
  • Comparative advantage means a country can produce a good or service at a lower opportunity cost than another country
• International investment and capital flows enable countries to access foreign savings, technology, and expertise
  • Foreign direct investment (FDI) involves a company investing in production facilities or acquiring ownership in a foreign country
  • Portfolio investment refers to the purchase of foreign financial assets (stocks, bonds)
• Migration of labor across borders affects the supply of skills and the distribution of income in both source and destination countries
• Global value chains have become prevalent, with different stages of production located in multiple countries
  • This leads to increased specialization and efficiency but also greater vulnerability to supply chain disruptions
• Economic shocks and policies in one country can be transmitted to other countries through these channels of interdependence
  • The global financial crisis of 2008-2009 highlighted the extent of financial interconnectedness and the potential for contagion

International Trade Policies and Their Effects

• International trade policies are measures taken by governments to regulate the flow of goods and services across borders
• Tariffs are taxes imposed on imported goods, raising their prices and protecting domestic industries
  • Tariffs can also be used as a source of government revenue
  • However, tariffs reduce overall economic efficiency by distorting prices and resource allocation
• Non-tariff barriers include quotas, regulations, and standards that restrict or discourage imports
  • These measures can be less transparent and more difficult to quantify than tariffs
• Export subsidies are payments or tax breaks given to domestic producers to encourage exports
  • They can distort international trade and lead to retaliation from other countries
• Preferential trade agreements (free trade agreements, customs unions) lower trade barriers between participating countries
  • They can create trade diversion, where trade shifts from more efficient non-member countries to less efficient member countries
• The World Trade Organization (WTO) provides a framework for negotiating and enforcing trade rules among its member countries
  • The WTO aims to promote free trade and resolve trade disputes through its dispute settlement mechanism
• Trade liberalization, or the reduction of trade barriers, can increase overall economic efficiency and welfare
  • However, it can also lead to distributional effects, with some industries and workers facing increased competition and potential job losses

Fiscal Policy in an Open Economy

• Fiscal policy refers to the use of government spending and taxation to influence economic activity
• In an open economy, fiscal policy can affect the trade balance and the exchange rate
  • An expansionary fiscal policy (increased spending or reduced taxes) can stimulate domestic demand, leading to higher imports and a deterioration of the trade balance
  • This may put downward pressure on the country's currency, making its exports more competitive but its imports more expensive
• The effectiveness of fiscal policy in an open economy depends on the degree of capital mobility and the exchange rate regime
  • With high capital mobility, fiscal expansion may lead to capital inflows, appreciating the currency and offsetting some of the stimulative effects
  • Under a fixed exchange rate regime, the central bank must intervene to maintain the exchange rate peg, limiting the scope for independent fiscal policy
• Fiscal policy coordination among countries can help internalize cross-border spillovers and improve global economic stability
  • However, coordination is challenging due to differences in economic conditions, political priorities, and institutional frameworks across countries
• Fiscal rules, such as limits on government budget deficits or debt levels, can help ensure fiscal sustainability and credibility
  • However, overly rigid rules may constrain the ability of governments to respond to economic shocks or pursue necessary public investments

International Tax Competition and Coordination

• International tax competition refers to the lowering of tax rates or offering of tax incentives by countries to attract foreign investment and mobile tax bases
  • This can lead to a "race to the bottom," where countries undercut each other's tax rates, eroding tax revenues and the ability to fund public goods and services
• Tax havens are jurisdictions with very low or zero tax rates and high levels of financial secrecy
  • They facilitate tax avoidance and evasion by multinational corporations and wealthy individuals
  • Tax havens can distort investment decisions and lead to an inefficient allocation of capital globally
• Base erosion and profit shifting (BEPS) refers to strategies used by multinational corporations to exploit gaps and mismatches in tax rules to artificially shift profits to low-tax jurisdictions
  • The OECD has led efforts to combat BEPS through the development of international guidelines and standards for tax transparency and information exchange
• International tax coordination aims to reduce harmful tax competition and ensure a fair distribution of tax revenues among countries
  • Coordination can take the form of bilateral tax treaties, multilateral agreements, or supranational tax rules (e.g., within the European Union)
• Challenges to international tax coordination include the sovereignty of nations over their tax policies, the complexity of international tax systems, and the political influence of powerful interest groups
• Proposals for reforming the international tax system include the introduction of a global minimum corporate tax rate and the allocation of taxing rights based on the location of consumers or users rather than the location of production

Global Public Goods and Externalities

• Global public goods are goods or services that provide benefits to people across multiple countries and whose consumption is non-rival and non-excludable
  • Examples include climate change mitigation, international financial stability, and the eradication of infectious diseases
• The provision of global public goods is subject to the free-rider problem, where countries have an incentive to underinvest and rely on the contributions of others
  • This leads to an undersupply of global public goods relative to the socially optimal level
• Global externalities are the unintended cross-border consequences of economic activities, such as pollution, financial contagion, or the spread of antibiotic resistance
  • Negative externalities impose costs on other countries that are not fully reflected in market prices, leading to overproduction and inefficiency
• Addressing global public goods and externalities requires international cooperation and coordination
  • International agreements (Paris Agreement on climate change, Basel Accords on banking regulation) can help establish common goals, standards, and mechanisms for collective action
• Financing the provision of global public goods is a major challenge, as the benefits are diffuse and long-term, while the costs are often concentrated and immediate
  • Innovative financing mechanisms, such as global taxes (carbon tax, financial transaction tax) or public-private partnerships, have been proposed to mobilize resources
• The governance of global public goods and externalities involves a complex web of international organizations, national governments, civil society, and the private sector
  • Ensuring the legitimacy, accountability, and effectiveness of these governance arrangements is an ongoing challenge

International Organizations and Economic Governance

• International organizations play a key role in shaping the rules, norms, and institutions that govern the global economy
• The International Monetary Fund (IMF) promotes international monetary cooperation, exchange rate stability, and the provision of financial assistance to countries facing balance of payments difficulties
  • The IMF conducts surveillance of member countries' economic policies, provides technical assistance, and serves as a lender of last resort during crises
• The World Bank Group provides financing, technical assistance, and policy advice to promote economic development and poverty reduction in low- and middle-income countries
  • It includes the International Bank for Reconstruction and Development (IBRD), which lends to governments, and the International Development Association (IDA), which provides grants and concessional loans to the poorest countries
• The World Trade Organization (WTO) oversees the global trading system, providing a forum for negotiating trade agreements and resolving trade disputes among its member countries
  • The WTO aims to promote free trade and ensure a level playing field for international commerce
• Regional development banks (African Development Bank, Asian Development Bank, Inter-American Development Bank) provide financing and technical assistance to support economic and social development in their respective regions
• The Organisation for Economic Co-operation and Development (OECD) is a forum for policy dialogue and coordination among developed countries
  • The OECD conducts research, sets standards, and provides policy recommendations on a wide range of economic and social issues
• The effectiveness and legitimacy of international economic governance have been challenged by the rise of emerging economies, the backlash against globalization, and the need to address new global challenges (climate change, digital transformation)
  • Reforming and strengthening the multilateral system to ensure its relevance and responsiveness to these challenges is a major task for the international community

Current Challenges in International Public Economics

• Rising income and wealth inequality, both within and between countries, has led to concerns about the distributional impact of globalization and the need for more inclusive growth
  • This has fueled populist and protectionist sentiments in many countries, challenging the international economic order
• The COVID-19 pandemic has exposed the vulnerabilities of global supply chains and the uneven distribution of the costs and benefits of economic integration
  • It has also highlighted the importance of international cooperation in addressing global health challenges and ensuring equitable access to vaccines and treatments
• Climate change poses a major threat to global economic stability and the well-being of future generations
  • Transitioning to a low-carbon economy requires significant investments and policy reforms, as well as international coordination to address the global nature of the problem
• The digitalization of the economy, including the rise of e-commerce, digital platforms, and cryptocurrencies, presents new challenges for international taxation, regulation, and monetary policy
  • Ensuring fair competition, protecting consumer rights, and preserving financial stability in the digital age require adapted policy frameworks and international cooperation
• The rise of China and other emerging economies is shifting the balance of economic power and challenging the dominance of the US-led international economic order
  • Managing the economic and geopolitical implications of this shift, while preserving the benefits of economic integration, is a major challenge for the international community
• The backlash against globalization and the rise of economic nationalism have led to increased trade tensions and the fragmentation of the global trading system
  • Preserving the rules-based multilateral trading system, while addressing its shortcomings and ensuring its fairness and inclusiveness, is crucial for global economic stability and prosperity
• The need to finance global public goods, such as climate change mitigation and adaptation, global health security, and the conservation of biodiversity, requires innovative financing mechanisms and a greater mobilization of public and private resources
  • Ensuring an equitable sharing of the costs and benefits of these investments is a major challenge for international cooperation