MISSION REPORT

Person(s) travelling Helmut ReisenPlace(s) of mission LondonDate(s) of mission 23.9.2010External contribution to cost of mission

Accommodation Travel Other x or Total

Purpose of mission Attend a workshop jointly organized by Chatham House and CIGI (Center for International Governance Innovation) Search for Post-Crisis Growth Models and Policy Tools for

Macro-Coordination2-3 December 2010, London

Contacts made (selection) Selective list:Tom Bernes CIGI

Ralph C. Bryant The Brookings Institution

Michael B. Devereux The University of British Columbia (UBC)

Peter Draper South African Institute of International Affairs

Harold Freeman Cabinet Office, UK

Charlotte Garay Canadian High Commission

Paul Jenkins CIGI

Domenico LombardiThe Oxford Institute for Economic Policy; The Brookings Institution

Stephen Pickford Former G20 Finance Deputy

Pierre Siklos WLU and CIGI

Paola Subacchi International Economics, Chatham House

Yoshiki Takeuchi International Economics, Chatham House

Paul Van Den Noord OECD

Andrew Walter LSE

Results of mission 1. Contacts intensified with British cabinet and Treasury officials (Harold Freeman, Stephen Pickford), with CIGI and Chatham House staff, and with Paul van den Noord, Counsellor to Dep SG Padoan.

2. Introduced, in a spontaneous 20 minute presentation (speaking notes available only), development aspects into the issue of macroeconomic coordination.

Implications for ongoing DEVwork

Better informal links to thought leaders in G20 affairs. Better entry contact to ECO. Better identification of DEV role in analytical underpinnings of G20.Chatham House, International Economics Programme, has started a process to invite me as an Associate Fellow, which should be of mutual benefit for both DEV and Chatham.

Tom Bernes (former IMF Evaluation Director) stressed at the start of the workshop that while the G20 Framework for Sustainable Growth was essential, the analytical framework was found lacking. The workshop aimed at one step twd a better underpinning of the benefits and limits of

macroeconomic coordination in the current post-crisis setting. (Throughout the workshop, the concept of cooperation vs coordination remained somewhat blurred.)Dr Andrew Warner (Reader, LSE), looking back at the Bretton-Woods period, produced some noteworthy insights: the US has been running CA deficits since the breakdown of BW; but savings have come down since the Reagan years; IMF surveillance has been weakened – on purpose (the US never accepted to be surveilled by the IMF) – by outsourcing to the OECD/WP3 and BIS/G10.Domenico Lombardi (Oxford U, Brookings) distinguished three phases of macroeconomic cooperation : 1944-72, the ‘ gold standard’ of cooperation; 1972-2008, the low point of cooperation; since 2008: G20, best hope for cooperation. The G20 gave surveillance into the hands of heads of states, an important prerequisite for more legitimacy. (HR adds: and of policy ownership, whence the IOs must remain a side cast to the G20 and a permanent G20 secretary should be rejected on these grounds).Dr Pierre Siklos (WLU, Ontario ; CIGI) pointed to the similarity and popularity of BW1 and BW2 : low inflation, good growth , low FX volatility. But he pointed to the obstacles of reinstalling BW today: CB independence, role of Ems in a multipolar world, and a failure to commit to coordination (“cooperation if necessary, coordination never!”). The location of accountability, the necessary degree of transparency, and the degree of flexibility (vs sovereignty) remained unsettled governance issues.Dr Michael Devereux (UBC) After summarizing the evolution of macroeconomic interdependence (from trade linkages to international business cycles to new crisis contagion channels (CA deficits; financial openness; balance-sheets asymmetries), he drew lessons from monetary policy: the need to merge central banking with macroprudential regulation, the need to focus on the details of national balance sheets (Iceland; Ireland), while fiscal policy coordination had lost importance as fiscal business-cycle channels have, and exchange rates had lost importance as there was no serious evidence that they impact the current accounts of countries.Paola Subacchi (Chatham) discussed incentives for cooperative behavior vs unilateral intervention, as well as tensions between global goals (rebalancing) vs domestic goals (sustaining growth). She also pointed to the divergence of EM goals – sustaining growth – vs OECD goals – jobs, fiscal, exports. She presented a prisoner’s dilemma in which both deficit and surplus countries choose to defect in a Nash equilibrium. The conclusion: global cooperation only works as long as incentives remain aligned with domestic interests (i.e. not much space). Stephen Pickford argued that this analysis implied a case for peer pressure and sanctions. He saw an arms race between IOs in that respect, in order to remain G20 relevant.Ralph Bryant (Brookings) discussed the requirements for a successful promotion of cross-border cooperation. He reckoned that the G20 had made a good start with the Framework and Mutual Assessment, and emphasized that the authority here should not be with the IOs, but with the Framework Working Group. He echoed remarks earlier that the analytical foundations for macro cooperation were not strong enough to overcome domestic interests (historic examples: smallpox contagion). It was hence a priority to move to shared diagnosis to build incentives for cooperation. Currently, even the best multi-country models (including the OECD’s) were not sufficiently disaggregated to have each G20 country specified.Paul van den Noord (OECD) presented analysis to show that fiscal consolidation did not suffice to rebalance the world economy; and that structural reform and FX adjustment were necessary to achieve balanced medium-term growth. I wonder, however, to what extent the interaction of public debt levels/GDP and GDP growth has been calibrated in the underlying ECO (OECD Global) model as, for example, to ignore threshold effects of high debt (as in Reinhart-Rogoff|) would lower the impact of fiscal consolidation on macro outcomes. The model has also heroic assumptions on potential output (which for the US it will be particularly difficult to assess).Stephen Pickford (UK Treasury Dep Sherpa, just retired) argued that the IMF surveillance process had limited traction as it was criticized for lack of ‘ evenhandedness’, as it was seen as the IMF banging China for the US, and too weak to overcome the essential intra-G20 disagreements on FX, unwinding of macro stimulus, and protectionist risks. The Multilateral Consultation Process

was conceived as a case of peer protection rather than peer review and too over-engineered by putting in country plans. He also emphasized the need for policy ownership as a prerequisite for effective surveillance.Peter Draper (South African Institute for International Affairs) looked at the G20 Seoul Action Plan from an African perspective. He distinguished between a mercantilist post-Seoul world with US dollar depreciation, Chinese RMB undervaluation, and Eurozone breakup. The positive alternative would be macro coordination, combined with a successful Doha round, and extension of WTO purview to agricultural products important to Africa, such as cotton.Helmut Reisen (OECD-DEV) discussed the need for global development cooperation in the presence of new actors, above all China, and its implications for African policy choices and global soft law redefinition and compliance. He argued that G20 Seoul had accelerated the deemphasizing of the aid process in favour of a broad economic process to achieve the MDGs. He identified areas for win-win cooperation between new and old and local actors, such as trilateral infrastructure investment and South-South trade liberalization, while the global commons and exhaustible resources remain challenging areas and backgrounds for multilateral cooperation.