Rationales for International Economic Co-operation

There is a long standing, wide ranging disagreement about the rationale for and value of international economic co-operation on the part of governments, as opposed to the capacity of particular governments to effectively deliver this co- operation or their recent performance in doing so.(3) At one end of the spectrum stand those who argue that the mere attempt at and achievement of intergovernmental co-ordination, on an ad hoc basis by the G7, or through more formal and multilateral institutions, is undesirable, in that is sends inaccurate and confusing signals that deflect market forces from desirable trajectories, delay the needed adjustments which unencumbered markets best produce, and co-ordinates policies on the wrong policy targets. (Feldstein 1988). From this vantage point the alleged retreat of the G7 in the task of macroeconomic policy co-ordination in the 1990's, as in the early 1980's, is a positive move, now allowing the forces of globalization, backed by the spread of market economies and democratic polities, to operate with maximum unencumbered effect.(4) More generally, such opposition to any government intervention in markets, on a collective as well as national basis, is consistent with the logic of “negative” or “shallow” integration, in which unilateral or collective government action to remove or prevent the increase or imposition of barriers to the free movement of goods, services and factors is desirable, in that it allows markets to generate specialization and the economies of scale and scope (Lawrence et al. 1996: 44, Feldstein 1988).

Despite the case for freely functioning international markets devoid of government intervention or regulation, it has long been recognized that there are several rationales for collective government intervention. The first and most basic is the advantages in scale and perhaps speed which accrue when trade liberalization and the removal of border barriers to the international exchange of investment and technology is accomplished not on a unilateral, but bilateral, regional, plurilateral and, optimally, global basis. Institutions such as the G7, which can produce such global liberalization and further induce the outward-looking systemic perspective among members required for such action, thus have considerable value (Bergsten and Henning 1996). Secondly, there is an additional need for markets or mechanisms which ensure against risk and operate with complete and symmetric information. More recently, with the expanding recognition that costs and comparative advantage are determined not only by relative factor endowments, technology and tastes, but also importantly by government regulations, policies and institutions, there has arisen a rationale for international co-operation to ensure that national government actions do not produce major market distortions, and that they more broadly reflect the legitimate political process of social preference aggregation within each country.

From this flows the case for “deeper” or “positive” integration, and the collective international co-ordination and even harmonization of policies, to address both market and political failures. (Lawrence et al. 1996). Such collective international action is thus required for a broad range of purposes: to provide global public goods, to cope with macroeconomic spillovers among the world's increasingly open and market-sensitive economies, to manage the global commons (the deep seabed, radio spectrum, atmosphere, global species diversity), to deal with physical externalities (transborder pollution), to prevent monopoly power, to maintain inalienable or basic individual rights, and to prevent gross violations by governments of the preferences and interests of their citizens.

Most of these rationales are contained within the major theories of international political economy and the rationales they offer for governments to co-operate to manage the international economy. The most basic is regime theory in its rational egoist variant. Robert Keohane points to a persistent demand for international regimes, defined, in Stephen Krasner's classic formulation, as “sets of implicit or explicit principles, norms, rules, and decision making procedures around which actor expectations converge.” (Keohane 1984, Keohane 1994, Krasner 1982). The demand for regimes that incubate and sustain co-operation arises because the competitiveness, uncertainty and conflicting interests that pervades world politics leads rational egoist states to demand regimes as “nests” through which specific agreements can be efficiently arrived at in ways that compensate for market failures, establish an informal substitute for formal frameworks of liability, reduce transactions and information costs, and diminish the fear of being taken advantage of in the future. More specifically, regimes arise in situations of interdependence, where there are many important issues in a single policy area, and where complex linkages and side-payments, and a low cost vehicle for organizing agreements are needed. They also arise where states forgo maximizing short-term interests in the expectation of long run gains, and to reduce uncertainty by providing the high-quality information that provides equal information to all, reduces moral hazard and minimizes deception and irresponsibility. Such information flows most freely in an ongoing relationship in which open governments, with intense transnational relations among subunits of governments, provide knowledge of otherwise internal evaluations, intentions, the intensity of preferences, and willingness to keep commitments in difficult circumstances.

Although this rational egoist variant of regime theory can provide a foundation for far-reaching forms of co-operation, it points at its conceptual core to the value of international regimes and institutions in general, and the G7 in particular, as a deliberative forum. The G7 allows leaders, ministers and others to provide frank, face-to-face, high quality information about national priorities and the rationales for present and prospective national policy action, that allow each autonomously to adjust at the national level to the most beneficial degree. It may also create the personal relationships that to lead to more open and intense communication during the intervals between the Summits. As an international institution which uniquely gathers the leaders of the world's major powers together at fixed annual intervals, and one reinforced by an intense preparatory and follow up process on a functional basis among the officials of the open democracies that compose it, the G7 is institutionally well adapted to perform these deliberative functions. Such deliberation is of particular value at times of far-reaching, short-term change, such as financial crises or panics, or major transformation, such as the transition to a post cold war world. As there is a lack of historical referents to rely on, confidence in the actions of others can be eroded by a lack of communication in the face of such radically novel circumstances.

A second and more robust conception of the rationale for international economic co-operation comes from that variant of regime theory emphasizing the value laden, shared social purpose lying at the core of such regimes. John Ruggie points to the embedded liberalism that lies at the heart of many of the post-1945 regimes and multilateral institutions, while others note how the 1945 generation of multilateral institutions responded to a common aversion to the collectively understood failures of the 1930s, as reinforced by the onset of the cold war (Ruggie 1975, Eichengreen and Kenen 1994, Ikenberry 1996, Keohane 1994). These core commitments to liberalized trade, and controls on competitive exchange rate devaluations provide a common ideological floor below the competing perspectives bred by distinctive national experiences (such as the inflation suffered by Germany, and the depression experienced disproportionately by the United States and Canada). They were reinforced by the consensus bred by World War II, as the major western victors also rapidly embraced (in the case of Italy) or imposed on the vanquished (Japan and Germany) a domestic commitment to a democratic polity with a welfare as well as warfare state, and a social market economy with full employment as the core objective. (5)

The presence of common values points to the primacy of the directional role of the G7. Its dialogue among leaders can lead to a collective process of adaptation or formation of a new consensus, particularly in the face of more recent policy failures experienced by all. Indeed, the G7 leaders have a good record in successfully responding to the second or successor shock they faced, such as the second oil shock of 1979, or initiating and concluding the second round of multilateral trade liberalization from 1986 to 1994, following the failure of the GATT system at the ministerial level in 1982 and 1988 (Kirton 1989). Intense dialogue and the creation of a new policy consensus can extend to a genuine process of learning, with leaders collectively setting new policy directions on the basis of a forward-looking epistemic consensus rather than a direct reaction to a widely shared recent policy failure.

The ease with which the G7 can reach and re-define consensus is enhanced by its small membership, and by its unique character among global institutions as a club that contains only major market democracies.(6)) Because its members are all major powers, they are better able to maintain an outward-looking systemic perspective, and a shared sense of responsibility to maintain a minimum order among the society of states. Because they are all market democracies, headed by democratically and popularly elected leaders they are well structured to engage in both adaptive and dynamic learning. Direction-setting can emerge from the G7's deliberative function, as sharing domestic experiences with various microeconomic policies and best practices can lead to a process of policy benchmarking, or creation of a new consensus about the desired global norm. It further embraces the reduction of systems friction flowing from greater transparency and incremental unilateral policy convergence (Ostry 1990). The directional role of the G7 is of particular value in the face of transformative processes and events (such as the Chernobyl explosion or financial market globalization) for which there are few well understood historical precedents. Included in this directional function is the task of socializing outsiders (beginning with Russia) into the new policy consensus.

The strongest conception of the rationale for international economic co-operation, and the role of the G7, comes from the classic formulation of Charles Kindleberger, who argues that the successful functioning of the global economy requires the provision of core public goods by government. The core functions include creating a numeraire or common unit of value for international transactions, serving as a lender of last resort, and providing liquidity to ensure the clearing of markets at times of panic (Kindleberger 1973). Such functions are traditionally performed by a single globally dominant power such as Britain in the nineteenth century or the United States in the post-1945 period, but can be equally performed in a world of less concentrated power by a small set of powerful countries acting as a K-group (Snidal 1985).

These functions constitute the core of the G7 as a decisional institution, taking often far reaching collective action to address major challenges in the world economy. Here the first function of the G7, a highly conservative one, is to serve as an effective crisis response mechanism, to contain financial and economic panic and do so, by providing the real resources (as a lender of last resort) and psychological reassurance to contain panic and deadly spirals. As in the October 1987 stock market crash, the G7's role is to show the world and its firms and markets that there is a group with the financial capability, willingness and concerted organization ability to mobilize the required funds in a timely and well tailored fashion. In an era where the US lacks the capability and credibility to perform this function unilaterally, the G7 has assumed this basic task.

The political equivalent of this economically conservative function is the maintenance of the major powers that compose the G7 as major powers, market economies, and democratic polities. Indeed, the G7 was born amidst a “crisis of governability” caused by “stagflation, in which a beleaguered core of liberal democracies was newly threatened by the collapse of the monetary and potentially trade systems, the 1973 oil shock and 1994 Indian nuclear explosion, the 1975 defeat of the US in Vietnam, and the spread of Eurocommunism across southern Europe. Its central function has long been to provide the financial resources to protect and where possible extend the market democratic order within its members and beyond. In both realms its role is to defend the existing order, provide leadership to reinforce or replace regimes proven ineffective by systemic shocks or transformative change, and to produce new regimes in emerging areas of international relations where governance is absent. At times of relative peace, prosperity and stability, it is likely to play a less dramatic role. Under such circumstances, it is free to address the expanded tasks of international economic co-operation, moving beyond the provision of public goods to manage the new spillovers of a more tightly connected world, to curb monopoly power, manage the global commons, and ensure basic rights and minimally democratic practices.