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International economic structures, government interests, and international coordination of macroeconomic adjustment policies

Published online by Cambridge University Press:  22 May 2009

Michael C. Webb
Michael C. Webb
Affiliation:
Assistant Professor of Political Science at the University of Victoria, British Columbia, Canada.
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Abstract

Analysts have commonly argued that there has been a decline in international coordination of the kinds of policies that governments can use to manage the international payments imbalances that emerge when different governments pursue different macroeconomic policies. The decline typically has been attributed to a posited decline in American hegemony. In contrast, this article argues that international coordination of macroeconomic adjustment policies (trade and capital controls, exchange rate policies, balance-of-payments financing, and monetary and fiscal policies) was at least as extensive for much of the 1980s as it had been in the 1960s. There was, however, a shift away from coordination of balance-of-payments financing and other policies that have limited direct consequences for domestic economic and political conditions and a concurrent shift toward coordination of monetary and fiscal policies that are critically important for domestic politics and economics. This change is best explained as a consequence of changes in the structure of the international economy. Most important, international capital market integration encouraged governments to coordinate monetary and fiscal policies because balance-of-payments financing and exchange rate coordination alone are insufficient to manage the enormous payments imbalances that emerge when capital is able to flow internationally in search of higher interest rates and appreciating currencies.

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Articles
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International Organization , Volume 45 , Issue 3 , Summer 1991 , pp. 309 - 342
Copyright
Copyright © The IO Foundation 1991

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References

Earlier versions of this article were presented at the 1990 annual meetings of the Canadian Political Science Association in Victoria, B.C., and the American Political Science Association in San Francisco. I am grateful to the Social Sciences and Humanities Research Council of Canada, the Eisenhower World Affairs Institute, and the MacArthur Foundation for funding of the research. I also thank Steve Krasner, Judy Goldstein, Mark Zacher, Jan Thomson, Jeffry Frieden, Geoffrey Garrett, Alexander George, Michael Hawes, Keisuke Iida, and the reviewers of International Organization for their criticisms and suggestions.

1. The subject area on which this article focuses is often labeled international monetary relations; the term “international macroeconomic adjustment policies” is preferable because it captures the wide range of nonmonetary policies that can also be used to reconcile national macroeconomic objectives with international market constraints.

2. For examples of realist analyses, see Gilpin, Robert, U.S. Power and the Multinational Corporation: The Political Economy of Foreign Direct Investment (New York: Basic Books, 1975)CrossRefGoogle Scholar; and Krasner, Stephen D., “State Power and the Structure of International Trade,” World Politics 28 (04 1976), pp. 317–43CrossRefGoogle Scholar. For a critique and prominent examples of liberal institutionalist analyses, see Grieco, Joseph M., “Anarchy and the Limits of Cooperation: A Realist Critique of the Newest Liberal Institutionalism,” International Organization 42 (Summer 1988), pp. 485–507CrossRefGoogle Scholar; Kindleberger, Charles P., “Dominance and Leadership in the International Economy: Exploitation, Public Goods, and Free Rides,” International Studies Quarterly 25 (06 1981), pp. 242–54CrossRefGoogle Scholar; and Keohane, Robert O., After Hegemony: Cooperation and Discord in the World Political Economy (Princeton, N.J.: Princeton University Press, 1984)Google Scholar. Kindleberger argued that American hegemony was a substitute for international coordination. Keohane argued that American hegemony facilitated coordination, although coordination was also possible when the distribution of international power was oligarchic. For examples of neo-Marxist analyses, see Cox, Robert W., Power, Production, and World Order: Social Forces in the Making of History (New York: Columbia University Press, 1987)Google Scholar; and Block, Fred L., The Origins of International Economic Disorder: A Study of United States International Monetary Policy from World War II to the Present (Berkeley: University of California Press, 1977)Google Scholar.

3. Throughout the article, these periods are labeled “the 1980s” and “the 1960s,” respectively.

4. Thus, the shift from fixed to flexible exchange rates can be explained by the argument of this article; it is not an exogenous variable. For a detailed discussion of the issue, see Webb, Michael C., “International Coordination of Macroeconomic Adjustment Policies, 1945–1989,” Ph.D. diss., Stanford University, Stanford, Calif., 1990, chaps. 7 and 8Google Scholar.

5. This definition closely resembles Keohane's definition of cooperation in After Hegemony, pp. 51–52. I have used the term “coordination” because “cooperation” is often used more broadly in the literature on international monetary relations to include information sharing, international consultations, and other processes that do not involve negotiated policy adjustments. The definition presented here differs from Wallich's frequently cited definition of coordination as “a significant modification of national policies in recognition of international economic interdependence.” See Wallich, Henry C., “Institutional Cooperation in the World Economy,” in Frenkel, Jacob A. and Mussa, Michael L., eds., The World Economic System: Performance and Prospects (Doyer, Mass.: Auburn House Publishing, 1984), p. 85Google Scholar. Wallich's definition is inappropriate for the purposes of this article because it does not distinguish independent policymaking that takes international factors into account from internationally negotiated adjustments to national policy. As Wallich's article makes clear, his definition also includes a normative bias, favoring (and labeling as coordination) policies that accept the desirability and legitimacy of making national policy conform to international market pressures. This would exclude, for example, mutual policy adjustments by governments seeking to prevent market forces from undermining their abilities to achieve their objectives.

6. See Waltz, Kenneth N., Theory of International Politics (Reading, Mass.: Addison-Wesley Publishing Company, 1979)Google Scholar.

7. For a more fundamental challenge, see Ruggie, John Gerard, “Continuity and Transformation in the World Polity: Toward a Neorealist Synthesis,” World Politics 35 (01 1983), pp. 261–85CrossRefGoogle Scholar.

8. Waltz, , Theory of International Politics, pp. 69–73Google Scholar.

9. For a theoretical discussion of the meaning of structure and its relationship to the actions of individual units, see Wendt, Alexander E., “The Agent-Structure Problem in International Relations Theory,” International Organization 41 (Summer 1987), pp. 335–70CrossRefGoogle Scholar. In this article, I focus more on the impact of structure on the units or agents (governments, in this case) than on the impact of government actions on the structure.

10. This kind of approach makes certain standard assumptions about the ability of governments to recognize and respond rationally to structural stimuli. As discussed in a subsequent section of this article, these assumptions often are not met in practice. Nevertheless, governments do appear to respond to the incentives identified in this section often enough to make this a good starting point for understanding patterns of international coordination.

11. The schema presented here is based on Cooper's categorization and is commonly employed in the literature. See Cooper, Richard N., The Economics of Interdependence: Economic Policy in the Atlantic Community (New York: McGraw-Hill, 1968), chap. 1Google Scholar.

12. Although surplus countries would generally be opposed to drastic devaluation by deficit countries, they might well favor moderate changes, especially if these were an alternative to trade restrictions. In any case, surplus countries would prefer that decisions about deficit country exchange rate changes be coordinated internationally to give them the opportunity to protect their interests.

13. Deficit countries would typically run out of foreign exchange reserves before surplus countries exhausted their ability to accumulate reserves and “sterilize” their impact on the domestic money supply. Sterilized intervention involves making sales of government securities (or purchases, in the case of deficit countries) in the domestic market to offset the impact that changes in foreign exchange reserves would otherwise have on the total supply of reserves in the banking system.

14. These arguments about international economic asymmetries as sources of bargaining power are inspired by Hirschman and others. See Hirschman, Albert O., National Power and the Structure of Foreign Trade (Berkeley: University of California Press, 1945)Google Scholar.

15. Economies may be linked by long-term investment as well, but this investment is not highly sensitive to short-term macroeconomic policy differentials.

16. In the 1940s and 1950s, the leading surplus country, the United States, financed West European and Japanese payments deficits in the hope that this would encourage trade liberalization in the future and help governments in these countries resist threats from the Soviet Union and domestic communists. At the time, U.S. exports to Western Europe and Japan were not critical for the highly insulated American economy.

17. Some domestic industries in deficit countries would always favor protection, but the argument here is that as the importance of trade increases, there will be more industries which oppose restrictions that would interfere with their international operations. See, for example, Milner, Helen V., Resisting Protectionism: Global Industries and the Politics of International Trade (Princeton, N.J.: Princeton University Press, 1988)Google Scholar; and Krasner, Stephen D., “United States Commercial and Monetary Policy: Unravelling the Paradox of External Strength and Internal Weakness,” in Katzenstein, Peter J., ed., Between Power and Plenty: Foreign Economic Policies of Advanced Industrial States (Madison: University of Wisconsin Press, 1978), pp. 51–87Google Scholar.

18. Surplus countries lent money year after year to Britain and the United States in the mid-1960s. For a detailed discussion of why creditor countries and institutions that lent money to Britain did not insist on fundamental reforms to eliminate Britain's balance-of-payments weakness, see Strange, Susan, Sterling and British Policy: A Political Study of an International Currency in Decline (London: Oxford University Press, 1971), pp. 289–95Google Scholar.

19. The ideal measure would be the sensitivity of imports and exports to macroeconomic policy changes, but reliable data on this are not available for the countries and time periods in question. The volume of imports and exports relative to GDP gives a rough approximation.

20. This section is based on open-economy macroeconomic theory. For a good textbook source, see Rivera-Batiz, Francisco L. and Rivera-Batiz, Luis, International Finance and Open Economy Macroeconomics (New York: Macmillan, 1985)Google Scholar.

21. In the context of flexible exchange rates, domestic interest rates equal the international interest rate plus the expected rate of depreciation of the domestic currency.

22. Trade flows adjust more slowly to exchange rate changes than do capital flows. Thus, there is potential for a temporary fiscal stimulus; its length depends on how long it takes goods and services markets to adjust to the instantaneous currency appreciation.

23. Examples of the effects of expansionary and restrictive monetary policies can be found in the 1980s. France abandoned expansionary monetary policies in 1983 in the face of capital flight (which occurred despite attempts to control capital flows) and severe downward pressure on the franc. The United States relaxed monetary policy in 1985 in part because tight monetary policy, in combination with fiscal expansion, had driven the dollar up to a level that severely eroded the international competitiveness of American industries. After the October 1987 stock market crash, Germany relaxed monetary policy to slow the mark's appreciation against the dollar, which had been weakened by loose monetary policy, and against other European currencies.

24. McKinnon, Ronald I., An International Standard for Monetary Stabilization (Washington, D.C.: Institute for International Economics, 1984), pp. 24–25Google Scholar.

25. Examples are legion. In the autumn of 1989, the G-7 attempted to stop the dollar from rising. Its coordinated intervention during a three-week period totaled about $11 billion, but the dollar continued to rise. See Globe and Mail, 17 October 1989, pp. B1 and B2.

26. The Bank for International Settlements estimated that the average daily volume of foreign exchange trading in London, New York, and Tokyo in April 1989 totaled $431 billion. See Globe and Mail, 14 September 1989, pp. B1 and B4. This estimate includes an unknown amount of purely speculative churning; net flows are undoubtedly less, although certainly substantial, especially when investors believe that a currency is undervalued or overvalued. In contrast, the combined foreign reserve holdings of the central banks of Britain, the United States, and Japan amounted to only $295 billion in the same month, based on data derived from the International Monetary Fund (IMF), International Financial Statistics (Washington, D.C.: IMF, 09 1989), pp. 45, 48, and 50Google Scholar. Similar data are not available for the 1960s, but a comparison of indicators for which data are available reveals that the annual volume of international bank loans and bond issues represented only 13 percent of the annual volume of total national reserves of advanced capitalist countries during the 1964–67 period but represented roughly 103 percent during the 1985–87 period. See Webb, , “International Coordination of Macroeconomic Adjustment Policies,” Table II:3, pp. 64–65Google Scholar.

27. The appeal of this option is also undermined by concerns about indebtedness to foreigners, especially if indebtedness is accompanied by rising inward foreign direct investment, as in the United States in the late 1980s.

28. As discussed below, the United States was uniquely able to force other countries to adjust their policies to compensate for destabilizing American monetary and fiscal policies.

29. Regarding the effects of the lack of consensus among economists, see, for example, Frankel, Jeffrey A., Obstacles to International Macroeconomic Policy Coordination (Princeton, N.J.: International Finance Section, Department of Economics, 12 1988)CrossRefGoogle Scholar. It should be stressed, however, that governments did coordinate macroeconomic policies after 1985, despite substantial disagreement about the appropriateness of specific policies.

30. Britain had also borrowed heavily from the IMF in 1956, 1964, and 1965 but was not required to accept substantive policy conditions.

31. For a detailed discussion of these cases, see Webb, “International Coordination of Macroeconomic Adjustment Policies,” chap. 6. See also de Vries, Margaret Garritsen and Horsefield, J. Keith, The International Monetary Fund, 1945–1965: Twenty Years of International Monetary Cooperation, vol. 2 (Washington, D.C.: IMF, 1969)Google Scholar; de Vries, Margaret Garritsen, The International Monetary Fund, 1966–1971: The System Under Stress (Washington, D.C.: IMF, 1976)Google Scholar; and Strange, Susan, International Monetary Relations, vol. 2 of Shonfield, Andrew, ed., International Economic Relations of the Western World 1959–1971 (London: Oxford University Press, 1976)Google Scholar.

32. See Cox, Robert W., “Social Forces, States and World Orders: Beyond International Relations Theory,” Millenium 10 (Summer 1981), pp. 145–46CrossRefGoogle Scholar; and Keohane, Robert O. and Nye, Joseph S., Power and Interdependence: World Politics in Transition (Boston: Little, Brown, 1977), pp. 117–19Google Scholar.

33. In the case of Britain, however, the policy conditions attached to IMF credits in 1967 and 1969 had been worked out in G-10 meetings.

34. Russell, Robert W., “Transgovernmental Interaction in the International Monetary System, 1960–1972,” International Organization 27 (Autumn 1973), p. 457CrossRefGoogle Scholar.

35. For an excellent discussion of the G-10 meetings, see ibid., pp. 431–64. In International Monetary Relations, p. 163, Susan Strange points out that central banks from creditor countries were reluctant to press Britain too hard for changes in monetary policies for fear of undermining the principle of central bank policymaking autonomy. Regarding the BIS, see Coombs, Charles A., The Arena of International Finance (New York: Wiley, 1976), pp. 28 and 198Google Scholar; and Cooper, , The Economics of Interdependence, pp. 198–99Google Scholar. According to Cooper, central bankers “avoided candid discussions” of pending policy changes.

36. Report of the G-30, cited by Polak, Jacques J. in “Comments,” in Bryant, Ralph C. et al. , eds., Macroeconomic Policies in an Interdependent World (Washington, D.C.: Brookings Institution, IMF, and Center for Economic Policy Research, 1989), p. 373Google Scholar. Note that the G-30 statement defines coordination in the same manner as Wallich does; see footnote 5, above.

37. See Michaely, Michael, The Responsiveness of Demand Policies to Balance of Payments: Postwar Patterns (New York: National Bureau of Economic Research, 1971), pp. 30 and 32–33Google Scholar. This finding excludes Canada, which had a floating exchange rate until 1962 and therefore could not logically have been constrained by IMF exchange rate rules.

38. Ibid., p. 42. There was also limited evidence of such a tendency in the case of Italy.

39. Ibid., pp. 42–43.

40. Ibid., pp. 53–57.

41. Ibid., p. 57. Against Michaely's statement must be set some evidence that on brief occasions in 1960–61, 1963, and 1967, international consultations helped halt interest rate spirals set off by several countries' reciprocal moves to tighten credit and thereby prevent outflows of capital. If this did occur, it is evidence of the incentives to coordinate monetary policy when capital is even slightly mobile internationally. For brief mentions of these episodes, see Roosa, Robert V., The Dollar and World Liquidity (New York: Random House, 1967), p. 55Google Scholar; Aubrey, Henry G., Atlantic Economic Cooperation: The Case of the OECD (New York: Praeger, 1967), pp. 108–9 and 195Google Scholar; Cooper, , The Economics of Interdependence, pp. 145, 161–62, and 199Google Scholar; and Strange, , International Monetary Relations, p. 265Google Scholar.

42. An important example of this type of policy coordination was the March 1967 understanding reached by Germany and the United States. In exchange for Germany's agreement not to present its growing dollar holdings for conversion to gold, the United States agreed to continue stationing hundreds of thousands of American troops in Germany. See Strange, , International Monetary Relations, p. 272Google Scholar; and Block, , The Origins of International Economic Disorder, p. 184Google Scholar.

43. The loan probably did prevent the dollar from falling even further, however. The estimate of the 1987 increase in foreign central bank holdings of U.S. dollars is from Destler, I. M. and Henning's, C. RandallDollar Politics: Exchange Rate Policymaking in the United States (Washington, D.C.: Institute for International Economics, 1989), p. 61Google Scholar. The decline in the dollar is calculated from the IMF's International Financial Statistics Yearbook, 1988 (Washington, D.C.: IMF, 1988), p. 717Google Scholar.

44. For a detailed list of capital controls in effect in the late 1960s, see Cooper, , The Economics of Interdependence, pp. 242–48Google Scholar.

45. See Strange, , International Monetary Relations, p. 190Google Scholar; and McKenzie, George W., The Economics of the Euro-Currency System (London: Macmillan, 1976), pp. 9–10CrossRefGoogle Scholar.

46. Strange, , Sterling and British Policy, p. 209Google Scholar.

47. Regarding Japanese and West European concerns, see, for example, Putnam, Robert D. and Bayne, Nicholas, Hanging Together: Cooperation and Conflict in the Seven-Power Summits, rev. ed. (London: Sage, 1987), pp. 192 and 205Google Scholar; and Funabashi, Yoichi, Managing the Dollar: From the Plaza to the Louvre (Washington, D.C.: Institute for International Economics, 1988), pp. 4 and 106Google Scholar.

48. As Putnam, and Bayne, pointed out in an earlier edition of their book (Hanging Together: The Seven-Power Summits [London: Heinemann Educational Books, 1984], pp. 78–102)Google Scholar, each of the leading governments was internally divided, and domestic advocates of the policy adjustments being demanded by foreign governments were able to use international pressures to strengthen their hand in domestic debates.

49. For a detailed account of international debates during these years, see Putnam and Bayne, Hanging Together, rev. ed.

50. International debates during 1985–87 are chronicled by Funabashi in Managing the Dollar and by Putnam and Bayne in Hanging Together, rev. ed.

51. For a detailed discussion of the Louvre Accord, see Funabashi, Managing the Dollar. My account draws on this source.

52. Interview with a senior official in the foreign ministry of a G-7 country, May 1990. There is some evidence that exchange rate coordination established by the Louvre Accord has had this effect. A recent IMF study argues that the process of economic policy coordination “has enhanced the role of exchange rates as a guide for policy in all of the major industrial countries.” See Batten, Dallas S. et al. , “The Conduct of Monetary Policy in the Major Industrial Countries: Instruments and Operating Procedures,” occasional paper no. 70, IMF, Washington, D.C., 07 1990, p. 1Google Scholar.

53. See The New York Times, 14 January 1988, pp. 1 and 33. See also Economist, 19 November 1988, p. 93; 14 January 1989, p. 71; and 1 April 1989, pp. 65–66.

54. See Economist, 27 February 1988, p. 63; 24 September 1988, pp. 47–48; and 22 July 1989, p. 67. See also The New York Times, 15 January 1988, pp. 25–26.

55. See Economist, 2 July 1988, pp. 56 and 58; and 29 October 1988, p. 35. See also Globe and Mail, 20 June 1990, p. B6.

56. German money supply targets were overshot in 1986, 1987, and 1988. See Economist, 5 August 1989, pp. 15–16.

57. Germany was motivated in large part by the fear that if it kept monetary policy tight at a time when the U.S. Federal Reserve Bank and the Bank of Japan were relaxing monetary policy to prevent the crash from spreading, the mark would soar and the European Monetary System would come under severe pressure. See The New York Times, 6 November 1987, pp. 1 and 33.

58. See Economist, 13 February 1988, p. 79; and 7 May 1988, pp. 71–72. See also Globe and Mail, 3 March 1989, pp. B1 and B8.

59. OECD data were reported in Economist, 11 03 1989, p. 67Google Scholar. Table 3 shows that German fiscal deficits increased in 1987 and 1988.

60. Economist, 24 September 1988, p. 47.

61. Economist, 30 September 1989, p. 12.

62. See The New York Times, 29 June 1990, pp. A1 and D2. See also Economist, 30 June 1990, pp. 34–35.

63. Criticism of American policy was severe at the G-7 finance ministers' meetings in May 1989 and September 1990. See Globe and Mail, 1 June 1989, p. B4; and 24 September 1990, pp. B1 and B4.

64. As Table 3 shows, monetary and fiscal expansion slowed in the United States in 1988–89. Monetary policy was relaxed in Japan and Germany in 1988 and the first half of 1989, and both countries continued to pursue expansionary fiscal policies.

65. This debate has pitted finance ministries, which are generally more concerned about signs of recession, against central banks, which are generally more concerned with inflationary pressures, in many of the OECD countries. See Economist, 12 May 1990, p. 67. For example, in April 1990, the Japanese finance ministry wanted foreign interest rates to fall and thereby reduce pressure on the Japanese central bank to raise its interest rates; however, the Bank of Japan was willing to contemplate raising Japanese interest rates to dampen inflationary pressure at home.

66. See The New York Times, 8 April 1990, p. 10; and Globe and Mail, 9 April 1990, pp. B1 and B4.

67. The response of the United States was especially interesting, since the government had recently given many indications that it would prefer lower interest rates but could not make a unilateral move in that direction because of the need to keep its rates competitive with overseas rates in order to attract foreign investment in American government and corporate debt. Meeting the Japanese request might therefore have served the government's domestic interests as well as the interests of Japan.

68. See Globe and Mail, 8 May 1990, p. B25.

69. See Globe and Mail, 21 January 1991, pp. B1 and B2; 22 January 1991, pp. B1 and B2; and 1 February 1991, p. B7.

70. See Marston, Richard C., “Exchange Rate Policy Reconsidered,” in Feldstein, Martin, ed., International Economic Cooperation (Chicago: University of Chicago Press, 1988), pp. 101–3Google Scholar.

71. See ibid., pp. 103–6; Putnam, and Bayne, , Hanging Together, rev. ed., p. 199Google Scholar; and Funabashi, Managing the Dollar, chap. 1.

72. For a detailed account of exchange rate coordination from summer 1985 to spring 1987, see Funabashi, Managing the Dollar. For a brief account from 1985 through 1989, see Destler and Henning, Dollar Politics, chap. 4.

73. See Globe and Mail, 10 April 1990, pp. B1 and B10; 1 February 1991, p. B7; 9 February 1991, p. B6; and 13 March 1991, p. B8. See also Economist, 10 March 1990, pp. 85–86.

74. Funabashi, , Managing the Dollar, p. 39Google Scholar.

75. For example, extensive negotiations in 1968–69 failed to produce an agreement to raise the value of the German mark and lower the value of the French franc, despite widespread agreement that such a realignment was desirable. In 1969, France and Germany each unilaterally adjusted their exchange rates. See Strange, , International Monetary Relations, pp. 325–28Google Scholar; and Coombs, , The Arena of International Finance, pp. 181–86Google Scholar. IMF par values for leading currencies had initially been chosen unilaterally by each government. The inability to agree to realign currency values against the dollar in 1969–71 caused the United States to adopt the policy of “benign neglect” that eventually brought down the system of fixed exchange rates.

76. The EC was an exception, however, since exchange rate coordination was backed by monetary policy coordination among EC members.

77. Cohen, Benjamin J., “Balance-of-Payments Financing: Evolution of a Regime,” in Krasner, Stephen D., ed., International Regimes (Ithaca, N.Y.: Cornell University Press, 1983), pp. 315–36Google Scholar.

78. Lending by foreign central banks financed the bulk of the U.S. current account deficit of $154 billion in 1987. See Destler, and Henning, , Dollar Politics, p. 61Google Scholar.

79. See Gilpin, Robert, The Political Economy of International Relations (Princeton, N.J.: Princeton University Press, 1987), pp. 328–40CrossRefGoogle Scholar. International policy coordination encouraged private lending to the United States by reducing interest rates in Japan and Germany, thereby making investments in the United States more attractive.

80. In 1973, the Bundesbank, concluded that recent experience had “made it abundantly clear that even stronger administrative action against capital flows from foreign countries … does not suffice when speculative expectations run particularly high.” Cited by Kruse, D. C. in Monetary Integration in Western Europe: EMU, EMS, and Beyond (London: Butterworths, 1980), p. 130Google Scholar.

81. Banks are currently under siege in the United States and Japan because of unwise lending (primarily on real estate) in the boom years of the 1980s. Despite their unpopularity, there has been no serious discussion of preventing them from engaging in international activities that are crucial for their own survival and for the operations of transnational corporations.

82. See Kapstein, Ethan B., “Resolving the Regulator's Dilemma: International Coordination of Banking Regulations,” International Organization 43 (Spring 1989), pp. 323–47CrossRefGoogle Scholar; and Kane, Edward J., “Competitive Financial Reregulation: An International Perspective,” in Portes, Richard and Swoboda, Alexander K., eds., Threats to International Financial Stability (Cambridge: Cambridge University Press, 1987), pp. 111–49Google Scholar.

83. See Bank for International Settlements (BIS), Recent Innovations in International Banking (Basel: BIS, 1986), p. 149Google Scholar; and Frankel, Jeffrey A., The Yen/Dollar Agreement: Liberalizing Japanese Capital Markets (Washington, D.C.: Institute for International Economics, 1984), pp. 19–20Google Scholar.

84. Frankel, The Yen/Dollar Agreement.

85. See Economist, 18 March 1989, p. 85; 4 November 1989, p. 100; and 27 January 1990, p. 7.

86. The U.S. government in 1981–84 was the significant exception to this pattern.

87. Figures for the G-5 countries were calculated from data shown in Table 3. Figures for Italy and Canada were calculated from data in the OECD's Economic Outlook, no. 47, 06 1990, Table 7Google Scholar. As argued above, the fiscal deficits of Japan and Germany in 1987–89 resulted in part from American pressure, not simply from internal problems.

88. This argument is well established in the literature. See Russett, Bruce, “The Mysterious Case of Vanishing Hegemony; Or, Is Mark Twain Really Dead?” International Organization 39 (Spring 1985), pp. 207–32CrossRefGoogle Scholar; Strange, Susan, States and Markets (London: Pinter, 1988)Google Scholar; and Gill, Stephen, “American Hegemony: Its Limits and Prospects in the Reagan Era,” Millenium 15 (Winter 1986), pp. 311–36CrossRefGoogle Scholar.

89. See OECD, National Accounts, 1960–1988, vol. 1 (Paris: OECD, 1990), p. 145Google Scholar. These shares are calculated using purchasing power parities rather than widely fluctuating and misaligned current exchange rates.

90. As an example of this problem, Britain is generally considered to have been “hegemonic” in the late nineteenth century, even though it was not as large relative to other leading countries as the United States is in the 1990s.

91. According to the vast body of literature based on game theory, hegemony is not necessary for cooperation. See especially Keohane, After Hegemony; and Snidal, Duncan, “The Limits of Hegemonic Stability Theory,” International Organization 39 (Autumn 1985), pp. 579–614CrossRefGoogle Scholar. Recent work has also begun to emphasize the importance of bipolarity and the East–West conflict as factors encouraging the allied Western governments and Japan to coordinate policies, regardless of the degree of American hegemony. See, for example, Webb, Michael C. and Krasner, Stephen D., “Hegemonic Stability Theory: An Empirical Assessment,” Review of International Studies 15 (04 1989), pp. 183–98CrossRefGoogle Scholar; and Gowa, Joanne, “Bipolarity, Multipolarity, and Free Trade,” American Political Science Review 83 (12 1989), pp. 1245–56CrossRefGoogle Scholar.

92. American deficits have been especially destabilizing because they are combined with a low domestic savings rate, which means that they are financed by foreign capital to a greater extent than are the deficits of other advanced capitalist states.

93. Similar arguments have been made by Cooper and others. See Cooper, The Economics of Interdependence.