Daniel W. Drezner
I’ll believe in macroeconomic policy coordination at the G-20 when I see it
To put it gently, international macroeconomic policy coordination has not had a glorious history over the past century. Usually, the domestic political and economic costs were large enough to impede most efforts to coordinate. Sham coordination was far more common than genuine coordination. Most successes in global policy coordination occurred when two of the following ...
To put it gently, international macroeconomic policy coordination has not had a glorious history over the past century. Usually, the domestic political and economic costs were large enough to impede most efforts to coordinate. Sham coordination was far more common than genuine coordination.
Most successes in global policy coordination occurred when two of the following three conditions held. First, when there was a state powerful enough to go it alone, coordination was usually a matter of the hegemon unilaterally providing the necessary public goods to facilitate coordination (see: Marshall Plan, Dodge Line). Second, when countries were being asked to take actions that boosted their domestic economies, they were willing to coordinate policy. Contractionary fiscal or monetary policies have proven to be far more difficult to coordinate than expansionary actions. Third, policymakers needed to be right on the economics. Agreements to coordinate on an unsustainable set of policy prescriptions – such as the interwar gold exchange standard, Bretton Woods, or the Growth and Stability Pact – had a short half-life.
Now, to give the G-20 some credit, this current crisis has led to greater levels of coordination than in the past — and more than I expected. This might be a function of policy learning from the debacles of the interwar period. But it could also the fact that, to date, governments have been asked to pursue expansionary policies. Each country was going to do something like what they are doing anyway — the G-20 just acted as a useful focal point to cajole some of the more reluctant countries.
What happens when it’s time to clamp down? Australian PM Kevin Rudd and South Korean President Lee Myung-bak proffer some recommendations in the Financial Times for the hard part of macroeconomic policy coordination:
At Pittsburgh, G20 leaders should agree to a three-stage process. First, national governments should develop their own national strategies for recovery. Second, they should agree to deliver these strategies to the International Monetary Fund before the end of the year and ask the IMF to report back on their consistency with balanced and sustained global growth. Third, G20 leaders should meet again in 2010 (when South Korea is the chair of the G20) to agree their responsibilities and actions to achieve this goal within the framework of post-crisis global economic management.
Steps one and two make a great deal of sense, and even have a good chance of being implemented. The wording of step three is a bit vague, for it to mean anything it boils down to, "make everyone scales back on priming the pump in a coordinated manner."
If that actually happens, well, tip your cap to the G-20, because the G-7 — a much more homogenous group of countries — never succeeded at that task.
Question to readers: does the G-20 have a chance in hell of succeeding in their next task?