ABSTRACT
After having discussed several areas where national interests and world interests can clash, like trade policy, locational competition, and environmental allocation, we now look at the institutional design for the world economy. The issue is how strategic and non-cooperative behavior of nation states can be channeled into a system of rules defining a global frame of reference. Countries can behave strategically in their national policies, in order to derive the greatest national benefit out of the international division of labor. In their trade policy, they can levy an optimal tariff or they can attempt to implement strategic trade policy in favor of certain sectors. Countries can also behave as free-riders towards global public goods. All these cases imply non-cooperative behavior of countries, which eventually leads to a welfare loss for the world as a whole and possibly even for the individual country. Consequently, an institutional order has to be created which prevents countries from falling into the trap of non-cooperative behavior. Furthermore, mechanisms should be established that enable countries to get out of a situation of non-cooperative behavior. Strategic behavior in trade policy is explained in section 17.1; other areas of non-cooperative behavior or of externalities are discussed in section 17.2. The world economy needs a system of rules (section 17.3). We then look at the history of the WTO and how it works (section 17.4). A number of new problems have to be addressed, e.g. free market access versus national regulation, competition policy and aggressive trade policy (section 17.5). Moreover, as an implication of the paradigm of, locational competition, rules for the mobility of production factors are receiving increasing attention in the discussion of economic policy (section 17.6). Social norms are a major matter of debate (section 17.7). The integration of the environment in the world trade order represents a specific problem (section 17.8). The mechanisms to stabilize and strengthen the world order are analyzed (section 17.9). The role of the IMF is briefly assessed (section 17.10). Finally, the main elements of the global economic order are summarized (section 17.11).
