The Trouble with International Policy Coordination

BOLOGNA – After a 30-year hiatus, international coordination of macroeconomic policy seems to be back on policymakers’ agendas. The reason is understandable: growth remains anemic in most countries, and many fear the US Federal Reserve’s impending interest-rate hike. Unfortunately, the reasons why coordination fell into abeyance are still with us.

The heyday of international policy coordination, from 1978 to 1987, began with a G-7 summit in Bonn in 1978 and included the 1985 Plaza Accord. But doubts about the benefits of such cooperation persisted. The Germans, for example, regretted having agreed to joint fiscal expansion at the Bonn summit, because reflation turned out to be the wrong objective in the inflation-plagued late 1970s. Similarly, the Japanese came to regret the appreciated yen after the Plaza Accord succeeded in bringing down an overvalued dollar.

Moreover, emerging-market countries’ representation in global governance did not keep pace with the increasingly significant role of their economies and currencies. These countries’ very success thus became an obstacle to policy coordination.

The effort to revive international coordination began in response to the 2008 global financial crisis. The larger emerging-market countries acquired more representation when the G-20 succeeded the G-7 as the preeminent global economic grouping. G-20 leaders agreed on coordinated expansionary policies at their London summit in April 2009. Then they agreed in Seoul in 2010 to give emerging-market countries quota shares in the International Monetary Fund that would be more commensurate with their economic weight. (The US Congress, to its shame, has yet to pass the necessary legislation.)