Page 232 - DECO503_INTERNATIONAL_TRADE_AND_FINANCE_ENGLISH

International Trade and Finance

Notes own well-being only and without trying to take into account the effect of its policies on the other
countries of the world. A government may understand that its economy is affected by the policies
adopted elsewhere and that its own policies affect other countries but still choose to make its policy
decisions unilaterally. At the other extreme is the view that each (industrial) country should formulate
its economic policies in explicit coordination with every other (industrial) country so that the policies
are chosen to maximize world economic welfare as a whole, or at least to achieve a configuration of
policies from which no country can be made better off without making some other country worse off.
Although this statement of the alternatives might suggest that international coordination is
unambiguously better than the uncoordinated pursuit of national self-interest, it is important to
distinguish between the theoretical possibilities of idealized coordination and the realistic potential
gains of practical coordination. In practice, despite its aspirations, international coordination may
produce results that are not as satisfactory as those that result from each country’s uncoordinated
pursuit of national self-interest.
One reason why coordination may fail to achieve an improvement in world economic performance is
that, as Stanley Fischer notes in his background paper, extensive statistical studies indicate that the
monetary and fiscal policies of each country have only a relatively small effect on the level of economic
activity and inflation in other countries. The potential gain from even perfect coordination is therefore
likely to be small and easily overwhelmed in practice when the policies are less than ideal.
International policy coordination may fail to improve overall economic performance simply because
the political officials who participate in these international negotiations choose policies that are
politically convenient rather than economically sound. We know that this happens all too frequently
at the domestic level.

Why should we expect the same officials to follow a higher standard just because they are
engaged in an international negotiation ?

The process of international negotiation may also be counterproductive because it diverts attention
and action from needed domestic policy changes. Governments may explicitly delay painful domestic
policy changes as part of an international negotiating strategy designed to induce policy changes
abroad that would make the domestic changes unnecessary. The emphasis on international
negotiations may also rechannel domestic political pressures away from needed reforms. Recent
experience provides ample examples of both dangers. Germany and Japan have failed to stimulate
domestic demand enough because of their reliance on expectations of continued exchange rate stability.
The U.S. Administration has diverted attention from the need for budget deficit reduction by
emphasizing the favorable effects on U.S. exports of greater fiscal expansion abroad.
The ability of international macroeconomic coordination to permit countries to pursue more
expansionary policies than would otherwise be possible is both a potential benefit and a potential
danger. When a single country tries to expand by itself, it may soon find that rising imports create a
balance of payments problem. A coordinated expansion by a group of trading partners can eliminate
this balance of payments constraint and permit all of the countries to expand more than any of them
could have done alone. When all economies are operating well below capacity, such coordinated
expansion can provide gains for all. But the ability of coordination to circumvent the balance of
payments constraint on expansionary policies also creates the temptation to overexpand. Without
the automatic market check of a deteriorating balance of payments, governments may pursue
inflationary policies that would otherwise be avoided. On balance, whether one regards the ability to
achieve an expansion that would not be possible without coordinated action as a reason to favor
coordination or to oppose it depends on the likelihood that governments will use that ability to
pursue inflationary policies.
There is a further problem that arises because it is generally far more difficult to alter budget and tax
policies than to change monetary policy. Macroeconomic coordination may in practice be limited to

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