An international monetary regime is structured to achieve international liquidity and is necessarily founded on the principle of collective action and, as such, a stable monetary regime is a collective or public good driven by collective interests-a result (fruit) to be enjoyed by a large group (of countries or economies).
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The efficacy of the monetary policy is conditioned by the very characteristics of group action and of a public good viz., factors like non-excludability, jointness of supply, non-rivals for consumption, varying externalities, and heterogeneous preferences of individuals in a group. This paper reiterates that the outcome of an international monetary system based on such collective action necessarily relies to a large extent on cooperation between group members, certainly more so, than it does in the case of international trade or security alliances among member states.
Collective Good: A Basis for International Monetary Regimes
An economic regime is a set of rules designed to resolve economic problems. An international monetary regime aims at preserving and stabilizing the global economy through measures aimed at producing collective gains in the form of exchange rate stability, optimum liquidity, capital account convertibility, and stable individual economies coupled with increasing international cooperations amongst group participants. Thus a stable monetary policy is a public good aimed to be provided for collective gain through collective action and the efforts of the individual member participants are aggregated towards a common goal through international cooperation.
Olson in 1971 outlined a “logic of collective action” and evolved a “theory of groups” wherein he argued that the larger groups tend to provide themselves an increasingly lesser collective gain while smaller groups tend towards providing themselves with sub-optimal collective gain (28). The theory rests on certain premises like:
- Organizations aim to achieve common interests.
- Common good, a public good, is non-excludable in large groups and free-riding is easy.
- Coercion is needed more, the larger the group, to resolve collective action issues and is based on the need to improve collective gains of the group as a whole as against the very individual interests which drive group organization.
Cooperation: Contributory Factor for International Monetary Stability
In light of the foregoing, it may be concluded that cooperation is a natural implication of the very formation of the organization of groups to achieve common interests. Unlike trade or security-driven international policies, which manifest as a set of rules seemingly conflicting and counter facing individual member states amongst one another being driven by individual interests, an international monetary regime necessarily implies resolving a larger collective action problem of achieving global liquidity, stable exchange and interest rates, capital account convertibility and spirit of interdependence and cooperation amongst member states or countries.
Cooperation may be driven and fostered by ideological considerations, demand for the increasingly open economy in the present globalized, convergent, international environment, and consensus among member participants as to commonality of regime objectives. Keohane in his “After Hegemony” has stated that cooperation occurs when actors adjust their behavior to the actual or anticipated preferences of others, through a process of policy coordination (51-52).
A global monetary regime is structured to attain the stated common and collective gains, and necessarily impel member states and/or countries of an organized group towards increasing cooperation. An example is the European Monetary Union which has been primarily set up to provide and sustain a class of collective goods through voluntary cooperation amongst member nations as well as led a concerted effort at solving mutual problem issues and ensuring monetary stability of the European member states.
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Leadership and cooperation is the need of the hour. While international coordination has to be emphasized, it must support a healthy internal governance structure in the individual nations and economic stability needs to be maintained by both leaders and other member states. This implies the promotion of an open and global economy, capital lending structures, foreign exchange stability, and convertibility, as also macroeconomic coordination amongst the member states.
Political autonomy must necessarily subjugate to the concept of economic interdependence and should be geared to provide larger collective gains of open markets, free capital movements, a stable monetary system, and freedom from the market and economic failures. This also means that an appropriate set of measures be built into the monetary system to withstand economic and political externalities, positive or negative.
Oates (1999) has shown in his theory of fiscal federalism that macroeconomic stabilization policy is an important subset of exclusive collective goods (1120-1149). Stability of monetary regimes whether national or international hinges on the collected action of an organization of nation-states bound together by common interests and fostered through cooperation among member states. The social theory of collective action is highlighted as never before and even more so as the threat of impending global economic meltdown looms nearer.
Even the United States cannot take its hegemony for granted; rather it needs to adapt to changing conditions both politically and economically and help foster a spirit of cooperation, leadership, and spirit of interdependence supported by strong and democratic national institutions. While global capital convertibility and openness of the economy may be positive trends, yet, there seems to be a lull before a storm and a new global economic order is the need of the times.
Keohane, Robert O. After Hegemony, N.J.: Princeton University Press, 1984, pp. 51-52, 120-140, p.244.
Oates, W.An Essay on Fiscal Federalism. Journal of Economic Literature, 1999. vol. 37, p. 1120-1149.
Olson, M. The Logic of Collective Action: Public Goods and the Theory of Groups. Cambridge, Mass: Harvard University Press, 1971. p.28.