Multilateral Institutions Fewest Degrees of Freedom
The discussion in Chapter 2 highlighted a key multilateral predicament occasioned by the ongoing structural transformations: On the one hand, there is need for better coordination at the multilateral level to facilitate the realignment of national economies and the smooth functioning of the international financial system, including the orderly correction of the payments imbalances. On the other hand, there is a distinct lack of effective multilateral mechanisms that command the necessary expertise and legitimacy to inform the much-needed coordination activities.
Interestingly the issue is not one of identifying what different countries in the world need to do to facilitate a smooth adjustment that is in the interest of all. Indeed, a strong consensus exists as to what constitutes the correct policy response at the level of countries and regions. This consensus has been reinforced by the analysis of the IMF in the context of its "multilateral surveillance," the six-monthly communiqués of the G-7 and the International Monetary and Finance Committee, and the work of numerous researchers and think tanks. Rather, the problem is one of implementation, and specifically that of dealing with the same theoretical considerations that are associated with any other typical coordination problem.
The global solution calls essentially for countries to implement specific measures in a coordinated and simultaneous fashion in the context of a "shared responsibilityThe specific steps are as follows: The United States is to reduce consumption to allow for a halt and reversal in the mounting external and internal imbalances; Europe and Japan are to implement structural reforms that will allow their economies to increase growth capacity and productivity; and Asia and the oil exporters are to stimulate domestic components of aggregate demand. The result of this policy cocktail is to be the maintenance of a high global growth rate concurrent with the reduction in global imbalances and a lowered risk of financial system instability.
Sounds easy, right? Well, here is the rub: In the absence of strong coordination mechanisms that ensure simultaneous policy implementation, no rational, free-choosing country would necessarily proceed on its national policy agenda. This is called a "prisoner's dilemma." In order to act, each individual country needs strong assurances that others will also implement their policy agendas. Why? Because any country that goes it alone ends up in a worse state. In other words, a national policy action may not be actionable unless it is implemented simultaneously with the other national policy measures set out for other countries.
Given these considerations, it is not surprising that we have seen very few effective policy actions on the global trade payments imbalances notwithstanding agreement on the required policy actions and broad recognition that (1) the imbalances are unsustainable and (2) the longer the delay in addressing them, the greater the risk of a disorderly and costly unwinding.
This situation is like the predicament of an orchestra that has been given a new score to perform but lacks a conductor. There is no good alternative: The attempt of individual musicians to proceed and start playing on their own will most likely end up in a rather raucous and ineffective composition that will have the audience asking for their money back; and the alternative of not playing and waiting for a conductor who is slow to appear also results in audience impatience and dissatisfaction.
So why have multilateral institutions that are desperately in search of a new role in the global economy been unable to respond to a widely recognized multilateral policy coordination problem? The answer to this question also speaks to the broader issue of their failure to perform other functions that could help the world accommodate more smoothly the ongoing secular transformations. In the meantime, they are compounding the risk that we will end up with a "policy mistake," one that has the potential to complicate, rather than facilitate, the journey to the new secular destination.
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