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World: Analysis From Washington -- Market Discipline And International Affairs

  • Paul Goble

Washington, 17 April 1998 (RFE/RL) -- A proposal to enlist the discipline of the marketplace to prevent future economic turmoil like that affecting the Asian markets unintentionally highlights the role of governments in making markets work.

But in addition, this latest example of efforts to substitute economics for politics may not work in just the ways its authors intend. And it could even generate a kind of backlash that would undermine the very international marketplace that this plan hopes to protect.

On Tuesday, U.S. Treasury Secretary Robert Rubin suggested establishing new rules that would require national governments to provide international financial institutions with significantly more information about key economic and financial variables in their countries.

Such information, Rubin continued, could serve as an early warning to the International Monetary Fund and the World Bank about impending problems and thus allow these institutions to take action before events spiral out of control.

In this way, Rubin argued, the IMF and the World Bank would be able to enlist the imperatives of the marketplace, something he described as "the most powerful source of discipline we have around the world."

There is no question that greater transparency of the economic and financial houses of countries everywhere could encourage better and more timely policies in just the way Secretary Rubin describes. But there are three reasons to think that the proposal itself may generate a backlash that will reduce the possibility that such reporting will serve in that way.

First, many national governments around the world are certain to resist such calls for greater openness. On the one hand, many of them are already uncomfortable with what looks to them to be an example of a U.S. insistence that other countries copy the American system of economic accounting and reporting.

And on the other, even more of these governments are likely to view this appeal as a threat to their prerogatives as sovereign states. To make such a reporting system work, these states would have to accept international intervention on issues that the governments involved have typically seen as their own.

Second, many countries are likely to suspect that the new system will not work in anything like a universal fashion or perhaps not even work at all. They are likely to assume that others are cheating and hence be under some pressure from their own bureaucracies and businesses to do the same.

Moreover, they will assume that the international financial institutions are unlikely to be able to impose such reporting requirements on a relatively large number of countries around the world. At present, some governments lack the institutions necessary to provide such information. And others are sufficiently powerful to be able to reject demands by the IMF or the World Bank.

And many governments have already indicated that they do not believe that better information will necessarily produce better policy. Policy by definition is a political choice, rather than something dictated by information, however copious.

Consequently, few countries are likely to be willing to move in this direction in the absence of a concerted political push by the leaders of the largest and most important economies around the world.

And third, such a new set of reporting requirements could lead some countries approaching the brink either to choose non-economic means to respond to economic problems or to fail to provide information in a timely fashion precisely in order to get more help from these international bodies.

Unless the international financial institutions are prepared to make any future assistance contingent on the past supply of information by the countries involved, many governments would be likely to conclude that they would benefit by playing a high stakes game of chicken.

They are even more likely to do so precisely because they believe the international financial community would not be willing to allow them to fail completely, fearing the impact such a failure would have on the broader world marketplace.

And so a suggestion that the power of the marketplace could help discipline national decision-making demonstrates yet again that governments play a key role in making the marketplace work. And that whatever their power, market forces are not a perfect substitute for political choices at either the national or international level.