WIXLIB

List of Conference Participants xiPascal BorisHead of Territory SwitzerlandBNP Paribas (Suisse) SAGenevaLuigi ButtiglioneHead of Global StrategyBrevan Howard Investment ProductsGenevaVincent ChetailAssociate ProfessorThe Graduate Institute of International andDevelopment StudiesGenevaAndrew ClaphamProfessor of International LawThe Graduate Institute of International andDevelopment StudiesGenevaBenoît CoeuréMember of the Executive BoardEuropean Central BankFrankfurt am MainJean-Pierre DanthineVice-chairman of the Governing BoardSwiss National BankZurichPierre DarierPartnerLombard OdierGenevaAlain de CrombruggheVisiting FellowThe Graduate Institute of International andDevelopment StudiesGenevaJacques DelplaConseil d’Analyse EconomiqueParisPaul DembinskiDirectorObservatoire de la FinanceGenevaAndreas DombretMember of the Executive BoardDeutsche BundesbankFrankfurt am Main

xii After the Fall: The Future of Global CooperationCédric DupontProfessor of Political ScienceDirector, International programmes and ExecutiveEducationThe Graduate Institute of International andDevelopment StudiesGenevaJeffry FriedenProfessor of GovernmentHarvard UniversityCambridgeHans GenbergAssistant DirectorIndependent Evaluation Office of the IMFWashington D.CStefan GerlachDeputy GovernorCentral Bank of IrelandDublinMichel GirardinMember of Senior ManagementUnion Bancaire PrivéeChristos GortsosProfessor of International Economic LawPanteion University of AthensAthensTakatoshi ItoProfessorGraduate School of EconomicsUniversity of TokyoThomas JordanChairman of the Governing BoardSwiss National BankZürichChristian KastropDeputy Director GeneralBundesministerium der FinanzenBerlinPierre KellerFormer Senior PartnerLombard OdierGenevaUlrich KohliProfessorof EconomicsUniversity of GenevaDino KosManaging DirectorHamiltonian Associates, LTDNew York

List of Conference Participants xiiiSigne KrogstrupDeputy Head of Monetary AnalysisSwiss National BankZürichRajiv KumarDirector and Chief ExecutiveIndian Council for Research on InternationalEconomic Relations (ICRIER)Anne Le LorierDeputy GovernorBanque de FranceParisEmmanuelle MerleAssistant Vice-presidentBanque Cantonale de GenèveGenevaMaurice MonbaronMember of the BoardCrédit Agricole (Suisse) SAGenevaJohn MurrayDeputy GovernorBank of CanadaOttawaJosé OcampoProfessorSchool of International and Public AffairsColumbia UniversityNew YorkKatrin OchsenbeinEconomistMacroeconomic Support DivisionSwiss State Secretariat of Economic Affairs (SECO)BernUgo PanizzaChiefDebt and Finance Analysis UnitUNCTADGenevaYung Chul ParkProfessorDivision of International StudiesKorea UniversitySeoulJoost PauwelynProfessor of International LawThe Graduate Institute of International andDevelopment StudiesGeneva

xiv After the Fall: The Future of Global CooperationMichael PettisSenior AssociateCarnegie EndowmentBeijingIvan PictetFormer Senior Managing PartnerPictet & CieGenevaFriederike PohlenzDeputy Head SectionMultilateral AffairsSwiss Federal Department of FinanceBernJonas PontussonProfessor of Political ScienceUniversity of GenevaRichard PortesProfessor of EconomicsLondon Business School and CEPRDavide RodognoProfessor of International HistoryThe Graduate Institute of International andDevelopment StudiesGenevaDani RodrikRafiq Hariri Professor of International PoliticalEconomyHarvard UniversityCambridgeBarbara RoosMember of Senior ManagementNotenstein Private Bank LtdGenevaSalvatore RossiMember of the Governing BoardBank of ItalyRomeJean-Pierre RothChairmanBanque Cantonale de GenèveGenevaAmlan RoyManaging Director, Head of Global Demographic andPensionsFixed Income Research DepartmentCrédit SuisseLondonHans-Joerg RudloffChairmanBarclays CapitalLondon

List of Conference Participants xvNeal SossChief EconomistCrédit SuisseNew-YorkClaudia StirboeckHead of Office of Board MemberDeutsch BundesbankFrankfurt am MainAlexander SwobodaProfessor of Economics EmeritusThe Graduate Institute of International andDevelopment StudiesGenevaCédric TilleProfessor of International EconomicsThe Graduate Institute of International andDevelopment StudiesGenevaMarc UzanExecutive DirectorReinventing Bretton Woods CommitteeParisXin WangChief RepresentativePeople’s Bank of ChinaFrankfurt OfficePawel WyczanskiAdvisorFinancial SystemNational Bank of PolandWarsawCharles WyploszProfessor of International EconomicsThe Graduate Institute of International andDevelopment Studies, GenevaDirector ICMB, GenevaCEPR, LondonJean ZwahlenSenior Adviser for AsiaUnion Bancaire PrivéeGeneva

AcknowledgementsThe authors are grateful to the discussants and to the participants at the GenevaConference of May 2012, where a preliminary version of the present report waspresented and carefully discussed. Particular thanks go to Menzie Chinn, BarryEichengreen, Marina Ivanova and Haynie Wheeler. The discussion section hasbeen prepared by Salvatore Dell’Erba and Katja Mann. Many thanks as well toLaurence Procter who singlehandedly organised the conference and performedall of the background work behind this report.xvi

ForewordInternational cooperation has been a recurrent theme in each of the thirteenGeneva Reports on the World Economy published by CEPR and ICMB since1999. The 2004 report, International Economic and Financial Cooperation: NewIssues, New Actors, New Responses, analysed this issue in some depth. This report,the fourteenth in the series, picks up this issue once again, but this time theapproach is different, the recommendations more cautious and incremental, andthe prognosis bleaker. This is not surprising: the authors demonstrate very clearlywhy international cooperation is difficult at the best of times, and very difficultindeed in the midst of a severe financial crisis.A comparison of the 2012 and the 2004 reports shows clearly what has and hasnot changed as a result of the crisis. The 2004 report was very much concernedwith the machinery of international cooperation, and it argued, very persuasively,for a new set of institutions, including a G4, comprising the US, the Eurozone,Japan and China; and a larger Council for International Financial and EconomicCooperation, comprising no more than 15 members. A G4 has not emerged,although the coordinated crisis management by the Fed, the ECB, the Bank ofJapan and the Bank of England resembled a central bankers’ G4. The G20 whichemerged from the burst of cooperation at the beginning of the crisis is in manyways a somewhat larger version of the Council proposed in the 2004 report.Whether the G20 can sustain its early momentum is less clear, however. Chapter4 of this report, which analyses the experiences of cooperation in recent years,offers a number of reasons to be pessimistic.The latest report looks at international cooperation from a differentperspective; it devotes less attention to the question of institutional machinery,focusing instead on identifying the issues that are most likely to benefit fromcooperation, and on which the international community should focus its efforts.The authors’ argument is very clear: international cooperation is difficult at thebest of times, and these are not the best of times. Governments in the developedcountries, beset by all manner of economic and financial difficulties, lack thepolitical capital to spend on international cooperation; the demands of theirdomestic constituencies are too pressing. Governments in the large emergingeconomies may be under less domestic political pressure and so more inclined tocooperate, but they have very different incentives from their developed countrycounterparts. Cooperative agreements may therefore be difficult in general, andimpossible in some areas. Given this analysis, the authors’ recommendation isxvii

xviii After the Fall: The Future of Global Cooperationlogical and compelling. Since improving international cooperation will be verydifficult for the foreseeable future, governments should concentrate their effortson that issues where the gains are likely to be larger and the difficulties smaller.More precisely, progress is likely to be more difficult in trade policy and financialregulation, and the gains are likely to be smaller; governments should spendtheir political capital on other issues instead. They should focus on improvingmacroeconomic policy coordination as a means of preventing a resurgence ofthe global imbalances that helped trigger the crisis. The only way progress can beachieved is by focusing on a one key issue.Not every reader will agree, but that is not the point. The aim of the GenevaReports is to stimulate informed discussion and debate on issues that matter. Thisthe authors have achieved, and we are grateful to them for their diligence anddedication. We are also grateful to the CEPR Publications team – Anil Shamdasaniand Charlie Anderson – for the smooth and professional way in which they haveprepared the report for publication.Charles WyploszDirector, ICMB18 July 2012Stephen YeoChief Executive Officer, CEPR

1 Introduction: Past Imperfect,Present Tense, FutureConditionalThe world economy faces its most serious test since the 1930s. The financialcrisis that began in 2007 has yet to run its course: in most of the OECD, therecovery is at best halting, while much of the European Union has collapsedinto a second recession and faces a daunting sovereign debt burden, the threatof severe banking crises and the possibility of a break-up of the monetary union.Emerging markets have done better, but their fortunes remain closely connectedto trends in the developed world. The immediate future of global economicactivity is not promising.The longer-term future of the international economic order is also in doubt.Even if the principal economies were to resolve their current financial problemswithout another major disaster, the world economy confronts substantialchallenges. The lack of policy coordination that facilitated the macroeconomicimbalances that led to the crisis still prevails, raising the possibility of a newround of debt accumulation and debt crises. The international financial systemhas demonstrated a fragility that threatens the global economy more generally.Even as more and more developing countries turn to exports to drive theireconomic growth, the appetite of the developed world for these imports seems tobe waning. International financial flows remain at an extraordinarily high level,but there are enduring questions both about whether they contribute as hoped toa more efficient allocation of resources, and about whether they can be sustainedwithout creating another round of bubbles and crashes.Many of these problems require concerted international efforts to addressthem. Calls for better ‘global governance’ reflect the accurate perception thatglobal markets seem to have exceeded the ability of national governments, or adhoc international cooperation, to address the problems to which they may giverise.And yet the structure of international cooperation on economic issues seemsseriously deficient. On some dimensions, such as central bank cooperation, itappears to have worked reasonably well in difficult times.1 But this relative successis almost entirely limited to monetary policy, including specific interventions of1Although some emerging-market governments, such as those of Brazil and China, have complainedthat excessively loose monetary policy in the OECD was ‘exporting inflation’ to the rest of the world.1

2 After the Fall: The Future of Global Cooperationlending of last resort. On virtually every other important global economic issue,international cooperation is stalled, flawed or non-existent.We do not think the very limited successes of attempts at greater globaleconomic governance, although regrettable, are surprising. There are majorbarriers to expanding the realm of international cooperation. This is especiallytrue in the very difficult circumstances of the aftermath of the greatest economiccrisis in several generations.Four interrelated factors make international economic cooperation difficult.First, normative theory is only favourable to global governance in a qualified way,depending upon whether or not international collective action is truly essentialto provide the desired public good. Second, even where the case for collectiveaction is strong, governments face substantial domestic political obstacles toparticipation in global cooperative enterprises. Third, there are substantialdivergences among the goals and attitudes of the major international economicplayers. And, finally, the recent history of cooperative efforts is not particularlyencouraging.The immediate future path of international economic affairs will indeed becomplicated by the fact that the major centres of economic activity are likely tospend much of the coming decade absorbed in difficult attempts to clean up therefuse of the financial crisis, and to find new patterns of economic growth. AsNorth America, Europe and Japan struggle with their own domestic economicand political problems, they are unlikely to be willing or able to expend mucheffort to deal with matters outside their borders even if, for the medium and longterm, it is in their own national interest to do so. Past experience and commonsense show that domestic political support is a prerequisite of meaningfulinternational engagement. A government that cannot count on its constituentsto support its foreign policies will soon either change its policies, or cease to bein government. Partly as a consequence of politicians’ failure to communicate totheir constituencies the benefits of international cooperation, there appears to belimited public support for the measures necessary to expand it.At the same time, the number and character of the relevant internationaleconomic actors is changing. It is hard to imagine serious discussions about trade,finance or exchange rates without including China, Brazil and other emergingeconomies. However, the major emerging economies are at very different placeson the path to global economic and political engagement. Generally, it is notclear that such countries as China, India and Brazil will be willing, able or allowedanytime soon to take a leading role in the management of international economicproblems – for one thing, their interests and perspectives are likely to be verydifferent from those of the incumbents. Even among the emerging economiesthemselves, there are important differences in interests and perspectives thatreflect divergent economic and political structures, conflicting positions in theglobal economy and even, in some cases, a history of mutual suspicion. Theexpanding number of systemically important nations increases both the need forsubstantive cooperation to include those nations, and the difficulty of achievingconsensus among ever more disparate international actors.

Introduction: Past Imperfect, Present Tense, Future Conditional 3As the world struggles to emerge from the most serious crisis since the GreatDepression of the 1930s, then, we must also think about the more distant future.What are likely to be the principal issues facing the international economy overthe next decade? What could a realistic analysis hope for in the way of progressin confronting the problems of the future? What are the constraints imposedby the realities of international and domestic politics? And, most directly forour purposes, what forms of international economic cooperation are the mostimportant to pursue, and most likely to be achieved?2In what follows, we speculate on these matters. We start, in Chapter 2, with aquick summary of some of the lessons of previous experiences with an integratedinternational economy. In Chapter 3, we move to an overview of the currentsituation. We outline the major dangers facing the world economy in the nearterm, and the political and economic stumbling blocks to their resolution.Chapter 4 summarises the recent experience of cooperative ventures in a worldmade more complicated by the entry of new major players, and the persistenceof conflicts of interest and perspectives among the principal powers. Despitecontinued rhetorical commitments to economic cooperation – many falling farshort of any meaningful global governance – the recent history of actual attemptsto implement such cooperation is very chequered, and largely disappointing.Chapter 5 analyses some of the domestic economic and political obstaclesthat explain the limited scope of cooperative ventures. It also argues that themajor players are likely to face continuing domestic political constraints overthe coming decade. All governments require support from their constituents toundertake potentially costly international initiatives; without this support, suchinternational initiatives will face grave difficulties. In Chapter 6, we discuss whatnormative theory would suggest might be desirable in the way of governancestructures to address the global problems outlined in the previous chapters.We ask what sorts of international cooperative measures, institutionalisedor otherwise, might be advantageous, assuming they are attainable. We arguethat the great efforts required to achieve forward movement warrant that theinternational community concentrate on limited but very important issues,topics in which the normative case for global governance is particularly strong.Chapter 7 assumes that the worst-case scenarios are avoided and attempts tosketch the general state of international economic affairs five to seven years fromnow. We attempt to identify the issues that we think will be central to this newphase in the international economic order. Chapter 8 summarises and concludes.We emphasise that cooperation among national governments over globaleconomic problems is more important in certain areas than in others.3 But23Two previous Geneva Reports have focused closely on related issues in international cooperation: DeGregorio et al (1999) and

Frieden is also the author of Global Capitalism: Its Fall and Rise in the Twentieth Century (2006), of Banking on the World: The Politics of American International Finance (1987), of Debt, Development, and Democracy: Modern Political Economy and Latin America, 1