Academic journal article Political Research Quarterly

Commitment Compliance in G-7 Summit Macroeconomic Policy Coordination

Academic journal article Political Research Quarterly

Commitment Compliance in G-7 Summit Macroeconomic Policy Coordination

Article excerpt

Conventional wisdom suggests that the G-7 summit makes few substantive decisions and lacks effective monitoring and sanctioning mechanisms to enforce individual countries' commitments. However, evidence exists that G-7 countries do honor their commitments announced in summit declarations. In this article, I offer and test for the period from 1975 to 1989 several causal explanations for compliance with non-binding commitments dealing with inflation control: institutional constraints on monetary and fiscal policymaking, electoral politics, uncertainty, and reciprocity Reciprocating behaviors, independent central banks, and high current inflation rates correlate positively with compliance over inflation-control commitments. In addition, there is some evidence that divided/coalition governments and uncertainty reduce compliance. Theoretical and policy implications of the findings are discussed.

Starting in 1975, the G-7 Countries' have engaged each other in macroeconomic policy coordination at an annual summit. According to conventional wisdom, the G-7 summit serves merely as a photo opportunity for politicians. The institution is considered unimportant and ineffective in setting and achieving targets because country commitments, embodied in joint declarations, are not binding and more important, no mechanism exists to monitor and sanction defection and noncompliance. This stands in contrast to the view of Richard Cooper (1994) that the summit is as important a mechanism for policy coordination as the IMF and the OECD. More perplexing is the finding by Von Furstenberg and Daniels (1992) in their quantitative analyses that the G-7 countries sometimes actually comply with their non-binding, non-enforceable commitments (Von Furstenberg and Daniels 1992). The puzzling question is, "Why?" What explains such "self-perpetuated" international cooperation?

Few studies have sought to examine different explanations to this question in a single analysis. In this paper, I examine and test several causal explanations of commitment-keeping by the G-7 countries over the issue of inflation control. In particular, I ask how factors associated with strategic interactions, such as reciprocity and uncertainty, and domestic politics affect international cooperation on the issue. Although by focusing on inflation control, I have to ignore linkages across various issues discussed at the summits. The benefit is a pooled time-series cross-sectional analysis of the G-7 countries' compliance behaviors over a salient and contentious issue.

Inflation has three major negative consequences (Mishkin and Posen 1997). It heightens market uncertainty about the outcomes of business decisions, affecting investment and economic growth. It increases allocation of resources to unproductive activities such as tax code dodges, reducing the resources available to the economy. And it leads to over-investment in financial activities because under high inflation, the demand for financial services increases. Hence, international collaboration to control inflation appears to be desirable. Moreover, international linkages in trade, capital, and exchange rate render national economic policies interdependent in their effects, producing positive or negative externalities for foreign economies; independent policy-making leads to suboptimal outcomes and cooperation appears necessary for enhancing global welfare (Hamada 1976; Cooper 1985; Canzoneri and Henderson 1991; Turnovsky 1988). Currency substitution, expanding international financial markets and easier capital flows have worsened the consequences of non-cooperative behaviors. The optimal control of inflation cannot be achieved through unilateral actions and macroeconomic policy coordination is necessary in order to reduce negative policy spillovers (Cooper 1985).

However, policy coordination is difficult in a nation-state system of no central authority In addition, policymakers face competing domestic goals between inflation and unemployment and between internal and external balance. …

Search by... Author
Show... All Results Primary Sources Peer-reviewed

Oops!

An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.