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The Limits of International Cooperation

  • Deepak Lal
Chapter
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Abstract

When Milton Friedman delivered the first Wincott Lecture in 1970 on The Counter Revolution in Monetary Theory,1 he could hardly have imagined how quickly the ideas of economic liberalism would be accepted and, however imperfectly, begin to be adopted in the conduct of the internal affairs of most countries. So much so that my former colleague, David Henderson, viewing the world from the vantage point of the OECD, has called the second part of this decade an ‘emergent new Age of Reform’.2

Keywords

Exchange Rate Greenhouse Effect Ozone Layer Macroeconomic Policy Exchange Rate Policy 
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Notes

  1. 2.
    P. D. Henderson, ‘A New Age of Reform’, 1989 Annual Lecture to the Institute of Fiscal Studies, London.Google Scholar
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    For an exposition of this dogma, D. Lal, The Poverty of ‘Development Economics’, Hobart Paperback No. 16, London: Institute of Economic Affairs, 1983.Google Scholar
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    For a discussion and refutation of the most recent attempts to subvert this case — so-called strategic trade theory — see J. Bhagwati, Protectionism, MIT Press, Cambridge, Mass., 1988.Google Scholar
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    Harry Johnson, ‘Optimum Tariffs and Retaliation’, in his International Trade and Economic Growth, Allen & Unwin, London, 1958.Google Scholar
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    Lord Robbins, ‘Liberalism and the Economic Problem’, originally published in his Politics and Economics, London 1961 and reprinted as Ch. XI in his Money, Trade and International Relations, Macmillan, 1971, London, p. 262.Google Scholar
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    This contrast has been noted explicitly by Martin Feldstein (see his Introduction in M. Feldstein (ed.), International Economic Co-operation, University of Chicago Press, Chicago, 1988), a trenchant critic of this new international dirigisme.Google Scholar
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    J. M. Buchanan and C. Stubblebine, ‘Externality’, Economica, Vol. 29, 1962; reprinted in K. J. Arrow and T. Scitovsky (eds), Readings in Welfare Economics, Allen and Unwin, London, 1969.Google Scholar
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    J. Viner, ‘Cost Curves and Supply Curves’, Zeitschrift für Nationalokonomie, Vol. III, 1931, reprinted in G. J. Stigler and K. E. Boulding (eds), Readings in Price Theory, Allen and Unwin, London, 1953.Google Scholar
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    A good modern discussion of the theory of externalities is in W. J. Baumol and W. E. Oates, The Theory of Environmental Policy, Prentice-Hall, New York 1975.Google Scholar
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    The case for such corrective taxes goes back to A. C. Pigou, The Economics of Welfare, Macmillan, London, 1920.Google Scholar
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    N. Ridley, Policies Against Pollution, Policy Study No. 107, CPS, London, June 1989.Google Scholar
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    W. Beckerman, Pricing for Pollution, Hobart Paper No. 66, IEA, 1975.Google Scholar
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    Also see the recent restatement of these principles in D. Pearce et al., Blueprint for a Green Economy, Earthscan, London, 1989.Google Scholar
  14. 15.
    H. Wallich, ‘Institutional Co-operation in the World Economy’, in J. A. Frenkel and M. L. Mussa (eds), The World Economic System: Performance and Prospects, University of Chicago Press, Chicago, 1984.Google Scholar
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    A vast literature has grown up on international macro-economic coordination. A survey is provided in R. N. Cooper, ‘Economic Interdependence and Coordination of Economic Policies’, in R. W. Jones and P. B. Kenen, Handbook of International Economics, Amsterdam, North Holland, 1985.Google Scholar
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    Three collections of essays in addition to Feldstein (ed.), op. cit., may also be noted; W. Buiter and R. C. Marston (eds), International Economic Policy Co-ordination (Cambridge, 1985);Google Scholar
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    Paul Volcker et al., International Monetary Co-operation: Essays in Honour of Henry C. Wallich, Princeton Essays in International Finance No. 169, December 1987,Google Scholar
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    and R. N. Cooper et al., Can Nations Agree?, Washington, DC, Brookings Institutions, 1989.Google Scholar
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    An accessible summary of the arguments is in W. M. Corden, Inflation, Exchange Rates & the World Economy, 3rd edn, University of Chicago Press, Chicago, 1986.Google Scholar
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    A. O. Hirschman, The Strategy of Economic Development, Yale University Press, New Haven, 1958.Google Scholar
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    For a critical discussion of the literature on ‘pecuniary externalities’ and ‘linkages’ to developing countries, see I. M. D. Little, Economic Development, Basic Books, New York, 1982, pp. 38–47. A clear account of the modern theory of externalities which excludes pecuniary externalities as Pareto-irrelevant is in Baumol and Oates, op. cit.Google Scholar
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    W. M. Corden, ‘Fiscal Policies, Current Accounts and Real Exchange Rates: In Search of a Logic of International Policy Co-ordination’, Weltwirtschaftliches Archiv, Vol. 122, No. 3, 1986, p. 7.CrossRefGoogle Scholar
  24. 26.
    W. J. Baumol, J. C. Panzar and R. D. Willig, Contestable Markets and the Theory of Market Structure, Harcourt Brace Jovanovich, New York, 1982. But the seminal article introducing the importance of contestability in establishing competitive conditions even in a natural monopoly is H. Demsetz, ‘Why Regulate Utilities?’, Journal of Law and Economics, April 1968.Google Scholar
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    See E. Helpman and P. Krugman, Market Structure and International Trade, MIT Press, Cambridge, Mass., 1985.Google Scholar
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    Jeffrey Frankel, ‘Obstacles to International Macroeconomic Policy Coordination’, Princeton Studies in International Finance, No. 64, Princeton, December 1988, and J. Frankel and K. E. Rockett, international Macro-economic Policy Co-ordination When Policy Makers Do Not Agree on the True Model’, American Economic Review, Vol. 78, June 1988.CrossRefGoogle Scholar
  27. 31.
    G. Oudiz and J. Sachs, ‘Macroeconomic Policy Co-ordination Among the Industrial Countries’, Brookings Papers on Economic Activity, No. 1, 1984.Google Scholar
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    This point has been made among others by Martin Feldstein, for instance in his introduction to M. Feldstein (ed.), International Economic Cooperation, University of Chicago Press, Chicago, 1988.Google Scholar
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    See R. D. Putnam and C. R. Henning, ‘The Bonn Summit of 1978: How Does International Policy Co-ordination Actually Work?’, Brookings Discussion Papers in International Economics, No. 53, 1986.Google Scholar
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    D. Lal and M. Wolf (eds), Stagflation, Savings and the State, Oxford University Press, Oxford 1986.Google Scholar
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    T. Congdon, Monetarism Lost, CPS, London, 1989, p. 16.Google Scholar
  32. 41.
    I have dealt with various arguments against floating, many of which are still current, in Lal, ‘A Liberal International Economic Order: The International Monetary System and Economic Development’, Princeton Essays in International Finance, No. 139, October 1980. The major alternatives to floating are: McKinnon’s ‘New Gold Standard Proposals’, and John Williamson’s ‘Target Zone Proposal’. For the most recent versions of their schemes, see R. McKinnon, ‘Monetary and Exchange Rate Policies for Financial Stability: A Proposal’, Journal of Economic Perspectives, Vol. 2, No. 1, Winter 1988, and ‘An International Gold Standard Without Gold’, Cato Journal, Vol. 8, No. 2, Fall 1988;Google Scholar
  33. 41a.
    and J. Williamson, The Exchange Rate System, revised edn, Institute for International Economics, 1985. Trenchant critiques of McKinnon are contained in the comments by R. Dornbusch on the above articles. A balanced critique of target zones is in Jacob Frenkel, ‘The International System: Should It Be Reformed?’, American Economic Review, May 1989. The best critique of exchange rate targeting à la EMS remains Alan Walters, Britain’s Economic Renaissance, Oxford, 1986, Ch. 7; also M. Fratianni, ‘The European Monetary System: How Well Has It Worked?’ Cato Journal, Vol. 8, No. 2, Fall 1988.Google Scholar
  34. 42.
    Two collections of essays are particularly useful in providing accessible summaries of the scientific evidence and controversies surrounding various environmental issues: Julian Simon and Herman Kahn (eds), The Resourceful Earth, Blackwell, Oxford, 1984, which presents a counterview to the Global 2000 report sponsored by US President Carter.Google Scholar
  35. 42a.
    The others are The Darwin College Lectures edited by L. Friday and R. Laskey, The Fragile Environment, Cambridge, 1989.Google Scholar
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    G. Hardin, ‘Political Requirements for Preserving our Common Heritage’, in Howard P. Brokaw (ed.), Wildlife and America, Washington, DC, Council on Environmental Equality, 1978, p. 314. The article in which Hardin introduced the Prisoners’ Dilemma game of the Commons was ‘The Tragedy of the Commons’, Science, Vol. 162, December 1968.Google Scholar
  37. 48.
    The first part of S. H. Schneider, Global Warning, Sierra Club, San Francisco, 1989, provides a concise and fair account of the scientific history of the greenhouse effect, and the great scientific uncertainties that surround it. The following discussion is based in large part on this work by a reputable climatologist, who himself is an environmental activist, seeking international action to halt global warming. But, as he states, there is a distinction between the weight of the scientific evidence ‘including all the uncertainties and caveats’ and the scientists’ desire ‘as human beings [to] want to leave the world a better place than they found it’ (p. xi). It is the scientific part of his book I cite and not its ‘human’ policy part!Google Scholar
  38. 51.
    J. D. Hamaker and D. A. Weaver, The Survival of Civilisations, Hamaker-Weaver, Burlingham, California, 1982.Google Scholar
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    S. Twomey, Inadvertent Climate Modification, Report on the Study of Man’s Impact on Climate, MIT Press, Cambridge, Mass., 1971.Google Scholar
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    W. W. Kellogg and R. Schware, Climatic Change and Society: Consequences of Increasing Atmospheric Carbon Dioxide, Westview Press, Boulder, Colorado, 1981.CrossRefGoogle Scholar
  41. 65.
    It is not too surprising that agreement was reached on banning CFCs in aerosols, as Scott Barrett notes that ‘the marginal costs of abatement are fairly flat for some uses of CFCs ... the costs of substituting for CFCs in aerosols is trivially small’. (F. Scott Barrett, ‘Ozone Holes, Greenhouse Gases, and Economic Policy’, London Business School, July 1989, published as an IEA Occasional Paper in 1990.) Also he notes that there are only a few producers of CFC — of which DuPont and ICI are the main producers, who are supporting a ban on production of CFCs by the year 2000. This announcement preceded the decision by the US and the EEC to ban hard CFCs. He suggests that the reason for this altruistic behaviour is strategic interaction between the firms, who are competing to persuade ‘governments to modify the nature of demand by forcing customers to buy a different, perhaps even more expensive, product.... If Du Pont develops cheap and more environmentally friendly substitutes for CFCs and if regulatory policy concomitantly forces users to switch to the alternatives, then Du Pont will have a competitive edge over its rivals. Indeed, if the government forces all users to switch to the substitutes, Du Pont will have the market all to itself.’ Seeing this, its competitors will also have an incentive to join in the CFC ban, and quickly develop the race for substitutes.Google Scholar
  42. 72.
    J. Pezzey, ‘Economic Analysis of Sustainable Growth and Sustainable Development’, Dept of Environment Working Paper No. 15, World Bank, Washington, DC, 1989.Google Scholar
  43. 73.
    H. Binswanger, ‘Brazilian Policies that Encourage Deforestation in the Amazon’, Dept of Environment Working Paper No. 16, World Bank, April 1989;Google Scholar
  44. 73a.
    D. Mahar, Government Policies and Deforestation in Brazil’s Amazon Region, World Bank, 1989.Google Scholar

Copyright information

© The Wincott Foundation 1996

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  • Deepak Lal

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