International policy coordination.

Cooper, Richard N.

The world, by which I mean mainly journalists and academics, is constantly calling for more international economic cooperation and complaining that there is not enough international economic cooperation. The thesis I want to develop today is that, in fact, there is a lot of international economic cooperation. Most of it is so successful that it is invisible to everyone except the people directly involved. We take it for granted. A familiar example is air traffic control. There is a world system of air traffic control and it works. Another is the world system of public health standards, concerning inoculations, pharmaceuticals and so forth. Or international postal service. So the things that really work well are the things that we come to take for granted and do not normally think about. Dr. Bhagwati has just expounded on an extreme example of international economic cooperation, the Uruguay Round, in which 110 countries came together, agreed on a common general objective and translated that common general objective into a large number of specific commitments with implications for their own behavior. While major events have been episodic, we've had extensive cooperation since 1945 in the area of international trade, and that cooperation is responsible in considerable measure for the great growth in world prosperity during the past half century.

When complaints are registered, however, they often concern cooperation in the area of macroeconomic policy, inclusive of exchange-rate policy, which is really a subdivision of macroeconomic policy. We have relatively few clear examples of international coordination of macroeconomic policy: a coordinated reduction of interest rates at Chequers in 1967; the Bonn Economic Summit of 1978, where five countries agreed on concrete actions, different but coordinated; the Plaza Accord of 1985, in which seven nations agreed on the direction in which exchange rates should move, and then six months later followed up with a coordinated reduction in interest rates. Thus we have some examples, but it has been very episodic, and it is entirely true to say that there has not been systematic coordination of macroeconomic policy. Moreover, for the foreseeable future we are not likely to see systematic coordination of macroeconomic policy. But coordination is an especially strong form of cooperation; there are several less demanding forms of international cooperation that now occur routinely.

The first level of international economic cooperation is simply the exchange of information, so that officials in each country know what is going on elsewhere. Information is regularly available these days. It was not always so, partly because the information did not exist in easily digestible form, and partly because some economic information was regarded as state secrets.

A step beyond simple provision of information is standardization of information. Not only do we provide our information, but we put it in a form recognizable to other countries and it is often directly comparable. There has been a vast, and on the whole successful, worldwide effort to standardize the system of national accounts, the balance of payment accounts and so on -- an impressive operation that has taken place in small increments.

A third form of cooperation is trying to agree on general objectives, such as liberalizing the world trade system or, at a minimum, keeping it from becoming more restricted.

A fourth form of cooperation is to convey one's policy plans to other countries, for policy makers to talk with their foreign counterparts about what they are thinking of doing. This does not involve making formal commitments, but rather exchanging information about intentions. Such an exchange may of course, on occasion, result in changes of planned actions.

The fifth stage of cooperation involves translating those intentions into commitments, in light of the intentions we have heard from other countries, and vice versa. That amounts to coordinated action.

The sixth form of cooperation is genuinely joint action in which two or more countries agree to do something together, often, but not necessarily, involving joint financing.

The first three or four stages of cooperation have been routinized, although discussions of intentions sometimes engage a relatively small group of countries. The fifth and sixth, coordinated actions and joint actions, are more difficult and are relatively rare; we are unlikely to see them often in the macroeconomics area. Why is that? I suggest four reasons why such coordination might be difficult, and then I focus on one of those four.

First, countries may not share objectives. Our objectives may be literally incompatible with those of another country. For example, the United States may want an exchange rate of 1.5 marks to the dollar, and Germany may want 1.7 marks to the dollar. Generally, they are not literally incompatible, just different, and thus call for different actions. The standard example in the macroeconomic area is the tradeoff between unemployment and inflation. Preferences may differ from one country to another about where they should be along the short-run Phillips curve. Some academic economists deny the existence of such a tradeoff, but anyone who has looked at real national economies discovers that it generally does exist over periods measured in a few years. And short-run choices about where to be on that curve may differ from country to country.

Second, countries may have different forecasts about the future. The Federal Reserve may believe there is some discernible risk of rising inflation. European policy makers may not share that view, and that will lead them to a different view about the requirements for policy.

Third, different policy makers have different views on how the world actually works. I have just alluded to one such disagreement. More than a few academics believe even the short-run Phillips curve does not exist. There is no tradeoff between unemployment and inflation. Policy makers in one country may believe such a tradeoff does not exist, and those in another country may believe that it does. That leads them to different conclusions about policy.

Fourth, policy makers may all agree on objectives, prognostication and how the world works, but not on how to share the gains from collective action. Typically, at the beginning of any negotiation, the claims on the prospective gains exceed one hundred percent. An important task of negotiators is to get the claimed shares of collective gains down to a hundred percent of those gains without losing the gains themselves; that is often the most demanding part of any negotiation.

Often all four of these sources of disagreement are present when there are disagreements on macroeconomic policy, but in the last two decades the main source of disagreement has been different views about how the world works. We had more of a consensus in the late 1960s among both policy makers and academics on the macroeconomics of modern monetized economies than we have for the last two decades. It was President Richard Nixon who said in the early 1970s that we are all Keynesians now -- he said that just as the consensus was breaking down. Macroeconomists have been figuratively at each other's throats since then, and that gets reflected in the policy debate. It is very difficult to pursue a coordinated expansion in fiscal policy, for example, if some but not all officials believe that a fiscal expansion will not stimulate the economy but rather, through growing debt and loss of confidence, may even weaken it.

Some years ago I was puzzled by why it was so difficult to achieve macroeconomic coordination when it was obvious to me that it was desirable and potentially mutually beneficial. I decided to look at an area where nobody questioned the desirability of international cooperation: public health. There is an extensive cooperative system out there, and its crowning achievement was to eliminate from the face of the earth smallpox, a disease that was the scourge of mankind until the early 19th century. Now it is completely gone as a result of close international cooperation.

I tried to discover the differences between macroeconomics, the hard case, and public health, the easy case. What I found caught me completely off-guard. I was looking at public health, where cooperation worked so smoothly, through time, from the perspective of today. In fact, in this apparently easy case, it took 70 years from the time that a serious problem was first identified as one calling for international cooperation -- the concrete problem was an epidemic of cholera that hit Europe, not cognizant of national boundaries -- until just the rudiments of a cooperative system were put in place. Then it took another 40 years for those rudiments to evolve into the World Health Organization.

Why did it take so long? What was the difficulty? The answer resides in what I mentioned earlier: Officials did not know how the world worked -- in this case, how diseases were transmitted. There were many theories, falling into two big classes: the contagion theory and the miasma theory. Ignorance was vast. The costs and benefits of policy actions associated with each theory, of course, were distributed differently among the players. If you believed the contagion theory, quarantine seemed to be the indicated policy, or so they thought in the 19th century. Quarantine, as the name suggests, meant 40 days in isolation for the possibly infected ship, passengers and goods. That is hard on foreign trade and travel. Britain, the world's greatest trading nation, did not like quarantine and, therefore, did not like the contagion theory on the spread of disease. It had good and careful, but in the end incorrect, reasons for thinking the contagion theory was wrong. And so it went, a fascinating and contentious scientific, practical and policy debate that continued for decades until scientists figured out how cholera is transmitted. At that point a large part of the debate over policy collapsed because positions were no longer tenable. My guess is that we will see an analogous evolution in macroeconomics until we have rebuilt a consensus on how economies actually work.

I do not suggest that we will never see coordinated macroeconomic policy. But it will occur only when at a particular moment there happens to be a convergence of interests among major countries that makes it possible to put together a deal. That is what happened at the Bonn Summit in 1978, and at the Plaza in 1985.

In conclusion, I would like to say a bit about process, since coordination" is an abstract concept. We need a mechanism for doing it. We actually have several mechanisms. In the macroeconomic area, three are especially noteworthy. Each of them has strengths and weaknesses.

We have the Interim Committee of the International Monetary Fund, 22 ministers of finance -- chosen, it is worth noting, on a representative basis. It is the only case in the international system of which I am aware where we have a glimmer of representative government. Of the 22, 15 are chosen by coalitions of countries. All of the ministers come together twice a year to discuss the world economic outlook and make speeches on what should be done about it. Apart from matters of the International Monetary Fund itself, there have not been any solid examples of coordination coming out of that group, but it is at least a forum where the relevant issues are discussed.

Second, there is the Organization for Economic Cooperation and Development (OECD), located in Paris and sometimes called the rich man's club, which Korea and Mexico are about to join. The OECD has an annual ministerial meeting, supported by a large amount of staff work and supplementary meetings. Many issues of economic policy, including but not limited to macroeconomic policy, are discussed at these meetings, and the ministers make a joint declaration on what is desirable in the coming year. It falls short of coordinated action, but the discussion presumably informs and influences national actions.

Finally, we have the G-7 summits, where the heads of government of seven nations plus the president of the European Commission come together once a year to discuss economic and other issues. This is an ad hoc arrangement that started in 1975 and has continued annually since then because, for one reason or another, summiteers have found it useful to continue it, or at least they found it more awkward to kill it than to continue it. Several summits have produced some coordination of policy. I mentioned earlier the 1978 Bonn summit, but one might also mention Toronto in 1988, with its agreement on how to handle debt in developing countries; and Houston in 1990, on how to handle China after the killings in Tiananmen Square. That meeting involved mainly an exchange of information but also some mutual understanding, rather than formal agreement. One could also mention Tokyo in 1993, where -- two years too late -- a coordinated package of assistance to Russia was put together, with a common set of objectives and conditions related to those objectives.

Sometimes the summits provided little more than photo opportunities for summiteers to be shown with other leaders of the world back in their home papers. Ronald Reagan was especially fond of photo opportunities. Sometimes agreements were actually reached. In all cases the summits are large shows, and that leads to a certain amount of dissatisfaction, particularly if "nothing is done." Some have suggested that the summits should cease. I believe that view is in error.

The fact of the summit itself is important, for two reasons. First, before the summit it focuses attention of senior bureaucrats and ministers on the issues on the summit agenda. These issues by construction are common to at least a majority of the seven countries. Most democratic governments are preoccupied with their domestic affairs. To have one occasion a year in which the senior policy makers have to think about their relationship with the rest of the world, or at least with their major trading partners, is a useful way both to focus the attention of the bureaucracy and to give some more clout within bureaucracies to those officials and ministers who have more international interests and responsibilities than do most ministers, whose preoccupations are generally domestic.

Second, it is useful for these leaders just to get together, meet one another, find out their counterparts are real human beings who have views that, when explained, are not completely absurd. Japan has a very special view of Russia. The Europeans are extremely anxious about what is happening in Russia, and they put Russia at the top of the agenda. At the other extreme, Japan finds Russia very remote and indeed uncooperative in a number of areas, particularly with respect to the four northern islands. The United States is someplace in the middle. It is useful for the U.S. president to hear firsthand both the anxieties of the Europeans and the reservations of the Japanese. That kind of exchange of information of course also takes place through diplomatic channels, but that is not the same as face-to-face discussion. So we should not be in a hurry to condemn these summits, even when they do not result in any apparent coordination of policy or other direct and concrete results.