5
1
9780472112111
By Saori N. Katada
All right reserved.
ISBN: 0472112112
Chapter 1 - The Motivation to Cooperate, Lead, and Follow
Financial crisis management comes in various forms, including emergency financial resources (rescue packages) and intervention of public institutions (the IMF or creditor governments) to influence the behavior of the market one way or another and restore international financial stability. Globally, such crisis management is important to avoid further repercussions and international financial disasters. It may thus be considered an international public good. In the last two decades, the IMF has usually been in the forefront of international financial crisis management, but the IMF lacks coercive power, particularly against private creditors, and it fails to maintain sufficient funds to deal with crises on its own. Thus, the active involvement of various financial actors, especially major creditor governments, becomes imperative. Several factors, however, make state actors reluctant to take up this role.
The first disincentive discouraging collective action in crisis management comes from the very nature of a public good and the problem of funding supply, considering that some entity or entities have to shoulder the costs of public goods. A public good is a good that cannot exclude noncontributors from enjoying the benefit of added funds. In these circumstances, the incentives to free ride are high; so are the disincentives to contribute. Although crisis containment aims to provide international financial stability at critical moments, the fungibility of added liquidity through bailout operations makes creditors reluctant to commit their funds. In addition, uncertainty regarding the payoff from crisis management leads to noncontribution. Major creditor governments that want to stabilize debtor economies and improve their external balance might emphasize the global repercussions and systemic risks arising from a crisis. However, there is always the suspicion that a creditor government may be promoting the "public good" of international financial stability while actually trying to secure its own "private goods" in the forms of direct economic payoffs and political gains. This suspicion is even stronger when creditor governments are concerned about their relative gains vis-à-vis other governments, which discourages active involvement.
The second factor that discourages state actors from becoming involved in active cooperative management are the uncertainties and criticisms associated with the impact of financial crisis management involving rescue packages. Some conservative critics of financial rescues argue that rescue operations by public institutions (creditor governments and the IFIs) create a typical moral hazard problem. Bailouts invite moral hazard problems for debtors as well as for lenders and investors. Uneasiness and uncertainty also arise because of multiple perspectives on the desired modality of financial crisis management and crisis solutions.
The third and quite obvious factor discouraging involvement is that government actions might invite taxpayer resistance. Financial rescue packages or extensions of loan repayments provided by governments require additional financial commitments to countries with financial problems. Rescue packages are provided either in the form of direct participation using the country's official funds (bilateral) or in the form of increased capital contributions to IFIs, such as the IMF and the World Bank (multilateral). In many countries, taxpayers in general object to financial bailout packages designed to help debtors, especially when taxpayers have no strong affinity or commitments to the debtors. They also object to assisting investors from their home country who, in the taxpayers' view, misjudged their investments. In turn, when asked to increase their financial commitment to problem debtors, private financial institutions wanting to exit promptly and with as little loss as possible from bad loans and risky investments also resist cooperating with creditor governments.
Finally, because of the tendency toward regional concentration of various economic activities, such as trade and foreign direct investment (FDI), the major regional power usually becomes the first candidate to take the lead in a rescue plan and to commit the largest amount of its own funds. But regional economic crises are usually closely connected to the economic conditions of the regional power, and those regional powers that are most motivated to take initiative might be in an economically weak position to proceed in this manner. This has commonly occurred when financial crises have originated in emerging market countries like Latin America and Asia. For example, the United States was constrained by its budget and trade deficits in the 1980s, when Latin America was in a desperate need for financial assistance. Japan, meanwhile, was criticized for not doing enough for Asia due to Japan's own economic problems at the time of the 1997-98 Asian crisis. As a regional crisis begins to affect global financial activities, the critical question becomes, who else-if anyone-will participate in the collective management of the crisis? Under these circumstances, tensions can occur between the regional power, which is more interested in its private returns, and other participants of the collective action, hindering successful crisis management.
Besides the production of international financial stability through the containment of panic and the provision of financial support to countries in crisis, collective action among creditors can be effective in urging "discipline" on debtors. Creditors, both public and private, have an ultimate interest in making debtors pay back what they owe. Creditors are at a disadvantage if they negotiate separately with various debtors, because that allows debtors to play one creditor against the other. This can create a typical case of a prisoner's dilemma among creditors. In a prisoner's dilemma situation, the creditors' best solution is to cooperate among themselves to impose stricter adjustment and payment conditions on a debtor, but creditors wanting to extract better repayment from the debtor might allow more lenient conditions without knowing what others are doing simultaneously. A simple bidding war might take place, thus enabling the debtor to extract favorable deals. Because they are concerned about international financial stability and with making the debtors follow the established rules of the game, creditor governments have every interest in preventing such a scenario.
One way of getting around the difficulties of establishing a unified front for collective action in financial crisis is through institutionalization. In the 1940s, having regretted that World War II resulted from a failure to adequately respond to the financial and economic crises after the Great Depression, the major economic powers, led by the United States, installed a new design of international cooperation for trade liberalization and balance-of-payments support under a fixed exchange rate regime. The latter was represented by the Bretton Woods system, which involved new international financial institutions, such as the IMF and the International Bank for Reconstruction and Development (IBRD), otherwise called the World Bank. In addition, since the 1960s, countries with strong financial interests have established various forums for similar goals, including the Group of Seven (G-7), through which the political and financial leaders of the major powers can join together to discuss matters important to their economic growth and stability. These institutions have helped establish in the global economy a certain level of consensus and a moral code, guiding the actors' behavior.
Although these institutional arrangements have facilitated crisis management on the international level, still state actors have to agree on the implementation of crisis management and on increased funding for countries in crisis. The importance of such agreements is obvious in the case of the G-7, but it is also critical for the IMF, where the members of the executive board- delegates from member countries who hold different shares of voting power generally based on the amount of a country's capital subscriptions to the institution-discuss and vote on important decisions. Furthermore, the commitments of major creditor governments vary significantly depending on the government's positions on respective financial crises. Because the institutions (especially the IMF and the World Bank) represent a disproportionately large influence of the U.S. government, the motivation of major supporting governments to follow (or not to follow) the U.S. lead becomes even more important. Scholars of international relations thus have to start with an analysis of the motivations that bring state actors to decide to cooperate (or not) in financial crisis management.
Various strands of explanation for states' cooperative behavior already exist, ranging from international systemic accounts to unit-level analysis. However, each cluster of explanation manifests some weakness logically and empirically as it tries to account for the behavior of nonhegemonic major powers, particularly Japan, in international financial crisis management. In the following sections of this chapter, I outline the challenges facing existing explanations and then pose the two core hypotheses in this study: the importance, in international financial crisis management, of the "joint product" nature of public goods and of transnational linkages motivating state actors. These hypotheses constitute encompassing categories under which various specific dynamics and factors are organized. They thus provide clues regarding the analysis of international public goods supply.
Existing Explanations
Regarding international cooperation and provision of international public goods, three types of arguments have been developed in the literature to explain the behavior of either nonhegemonic powers in general or Japan in particular. These include a systemic explanation; an explanation based on the power of regionalism; and an outside-in explanation of foreign policy formation, including Japan's "reactive state" thesis. These explanations, it appears, help account for the general tendency of these powers to act in some kind of concert. When it comes to the powers' variant behavior in financial crisis management, however, these explanations leave a theoretical gap.
The Systemic Explanation
A hegemon provides international public goods to help maintain world stability that benefits all states, including the hegemon. The theory of hegemonic stability was empirically challenged when it became increasingly clear that despite the decline in the early 1970s of the dominant and unchallenged post- World War II hegemony of the United States, the world was not facing major economic collapse. On the contrary, a certain level of international economic stability persisted. Various scholars have explained this continuing relative stability by analyzing how the anarchic nature of international relations has been overcome or modified by collective action.
The analysis of hegemonic behavior in the provision of public goods splits into two camps. On one hand, the "benevolent" version of hegemonic stability theory argues that there is usually an exploitation of a large player by small players, in which the hegemon contributes a disproportionately large share of public goods provision. On the other hand, the larger country, which is assuming the leadership role, can become a "predatory" hegemon and manipulate or coerce the smaller countries to cooperate. Intellectual neglect still exists in the analyses of why nonhegemonic countries sometimes support and other times do not support the hegemon.
Many scholars consider cooperation among major powers as a key explanation for the stability and maintenance of a certain level of public goods supply. It is clear that scholars' views on the world and on the fundamental logic of state actions largely determine their judgment of the origin of international cooperation. Some scholars from a liberal tradition note that the reciprocal effects emerging from various transnational institutional linkages and issue linkages in the world under "complex interdependence" can provide grounds for international cooperation. Such conditions as a small number of actors, long-term reciprocal relationships, and the existence of "epistemic communities" increase these possibilities. Scholars from the realist and neorealist perspective claim that international cooperation of a liberal institutionalist style would be largely impeded even with the existence of international economic exchanges, because states desire to obtain "relative gains" in relation to other countries, particularly rivals. Grieco emphasizes that unless there is a balanced distribution of gains, states have a hard time achieving international cooperation.
Scholars looking at the systemic structure of international relations emphasize the existence of international regimes or of a set of "implicit or explicit principles, norms, rules, and decision-making procedures around which actors' expectations converge in a given area." However, despite efforts made in the past to set up arrangements to secure international financial crisis management, power relations and interests of creditor governments still dominate decision making, leading to case-by-case responses. Thus, the international regime argument falls somewhat short of explaining cooperation in the issue area of crisis management.
Scholars focusing on the motivations of major powers emphasize the possibility of collective action among an intermediate group in the absence of a clearly dominant single hegemon. Snidal argues that if the size distribution among a few subhegemons (e.g., Japan and Germany) is arranged in such a way that these countries find it beneficial to collaborate with the declining but still most powerful hegemon (the United States), a "k-group" can form to provide the public goods needed in the world. The question is, however, whether we can always count on these major powers to agree with each other when the real or expected benefits accrued through collaboration are either unclear or very one-sided. Moreover, how could one account for the variance in a "k-group" member's behavior when the costs arising from a systemic collapse would be the same?
Furthermore, the power relations within the "k-group" are not uniform. Asymmetry of power determines, in part, the willingness of major powers to cooperate in crisis management. This power asymmetry in the world and the influence (or power) of each state are channeled through two somewhat distinctive conjunctures: the country's structural powers and its relational powers. The advocates of this distinction define relational power as "the power of A to get B to do something they would not otherwise do," and they maintain that structural power "confers the power to decide how things shall be done, the power to shape frameworks within which states relate to each other, relate to people, and relate to corporate enterprises." Consequently, asymmetry of power means not only that a superpower larger and more powerful than others can coerce smaller countries to do what it wants them to do but also that international structures and institutions in different issue areas can be set up in a way that significantly benefits the large and powerful. This point is relevant in discussing the dynamics in the IMF at times of international financial crisis. Moreover, the type of power that a state possesses could vary depending on issue areas or geographic regions.
In sum, the systemic explanation of international cooperation falls short of satisfactorily explaining the collective action outcome and behavior of state actors involved. It is thus important to analyze specific cases of cooperation and noncooperation to determine which factors go into a state's logic and how they translate into its actions.
Regionalism
Regionally based financial crisis management, in which a regionally dominant power commits exclusively or most actively to the crisis solution, is an alternative to a global or a multilateral arrangement. It would increase the motivation of a creditor government in the region, as the government's interests in stabilizing the economy are often greater and better-defined in the regional economy than in the global one. Regional interests in the face of financial crisis may lead to an arrangement of less collaboration or to some kind of geographical division of labor among major powers seeking to secure financial stability.
From the 1960s until the 1980s, theories on regionalism were limited to empirical cases from Western Europe, but they expanded globally in the 1990s, as the cold war ended and various regional integration efforts began to materialize in regions beyond Europe (e.g., the North American Free Trade Agreement [NAFTA], the Asia Pacific Economic Cooperation [APEC], and Mercosur). Furthermore, the regionalism of the 1990s not only involved integrationist movements among the industrial countries but also the north-south linkage of three major economic areas-the United States with Latin America, Japan with Asia (particularly Northeast and Southeast Asia), and recently Western Europe with Central/Eastern Europe and Russia. Scholars began to examine why it is arguably more desirable to arrange international economic matters (and security matters) on regional bases rather than on a global basis. These discussions might be relevant to the analysis of major powers' response to financial crises emerging in their respective backyards.
Regionalism is considered a con×ict-minimizing way to organize state relations, particularly in trade. Trade arrangements in the form of "minilateralism" (within a small group of countries, as in the case of the post-1985 European Community) should facilitate careful allocation of costs and benefits arising from trade and thus should benefit participating states more, particularly when a hegemon, the main supporter of multilateral trade, is experiencing decline. Due to lower transaction costs derived from close distance and already existing economic, political, and social ties, regional grouping is the most appropriate structure for this minilateralism, in which cooperation is more likely to take place. Moreover, if public goods produced through regional arrangements are excludable (against extraregional countries), a regional hegemon can emerge to supply such regional public goods.
The logic of regionalism does not, however, fit well when explaining international financial relations and thus does not seem to satisfactorily explain the behavior of creditor governments in financial crisis management. The relatively more global (rather than regional) nature of financial transactions compared to trade makes the argument of regionalism much less effective. Evidence from recent international financial crises arising in developing countries shows that formal and regionally based crisis management in the form of lender-of-last-resort arrangements are still incomplete. The most advanced case of such an arrangement is the North American Framework Agreement (NAFA), signed (after the conclusion of NAFTA) among the United States, Canada, and Mexico and providing a $6 billion swap arrangement among the three countries. Some relatively small financial crises might be contained within a region. However, any large crisis with potential extraregional contagion effects (as observed in many of those major financial crises in the past two decades) would require a global solution. Thus far, empirical evidence indicates that creditor governments have been involved in extraregional crisis management despite high transaction costs and limited economic, political, and social ties. Specific to this study, Japan's active involvement at the final stage of the Latin American debt crisis and its passive position vis-à-vis the U.S. active initiative during the second phase of the Asian financial crisis (the Indonesian and Korean crises) requires a more appropriate explanation than regionalism.
Continues...
Banking on Stability: Japan and the Cross-Pacific Dynamics of International Financial Crisis Management available in Hardcover
Banking on Stability: Japan and the Cross-Pacific Dynamics of International Financial Crisis Management
by Saori N. Katada
Saori N. Katada
- ISBN-10:
- 0472112112
- ISBN-13:
- 9780472112111
- Pub. Date:
- 08/21/2001
- Publisher:
- University of Michigan Press
- ISBN-10:
- 0472112112
- ISBN-13:
- 9780472112111
- Pub. Date:
- 08/21/2001
- Publisher:
- University of Michigan Press
Banking on Stability: Japan and the Cross-Pacific Dynamics of International Financial Crisis Management
by Saori N. Katada
Saori N. Katada
Hardcover
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Overview
Saori N. Katada examines international financial stability in the aftermath of financial crises—and how such stability is maintained through collective action among major financial powers across the Pacific, the United States, and Japan. She explores the important role that financial support by the Japanese government played in solving the Latin American debt crisis in the 1980s, as well as its lack of support for the Mexican rescue in 1994—95 and its inconsistency during the recent Asian financial crisis.
Banking on Stability looks at Japan's willingness to cooperate financially with the United States—its most important trade partner—in cases where such compliance yields an improvement in relations. Katada argues that the Japanese government carefully weighs the benefits arising in international and domestic realms when taking on the role of collective crisis manager and concludes that Japan is no exception in having private gain as a central motivation during international financial crises.
Saori Katada is Assistant Professor, School of International Relations, University of Southern California.
Banking on Stability looks at Japan's willingness to cooperate financially with the United States—its most important trade partner—in cases where such compliance yields an improvement in relations. Katada argues that the Japanese government carefully weighs the benefits arising in international and domestic realms when taking on the role of collective crisis manager and concludes that Japan is no exception in having private gain as a central motivation during international financial crises.
Saori Katada is Assistant Professor, School of International Relations, University of Southern California.
Product Details
| ISBN-13: | 9780472112111 |
|---|---|
| Publisher: | University of Michigan Press |
| Publication date: | 08/21/2001 |
| Edition description: | First Edition |
| Pages: | 328 |
| Product dimensions: | 6.00(w) x 9.00(h) x 1.40(d) |
About the Author
Saori Katada is Assistant Professor, School of International Relations, University of Southern California.
Read an Excerpt
Banking on Stability: Japan and the Cross-Pacific Dynamics of International Financial Crisis Management
By Saori N. Katada
University of Michigan Press
Copyright © 2001 Saori N. KatadaAll right reserved.
ISBN: 0472112112
Chapter 1 - The Motivation to Cooperate, Lead, and Follow
Financial crisis management comes in various forms, including emergency financial resources (rescue packages) and intervention of public institutions (the IMF or creditor governments) to influence the behavior of the market one way or another and restore international financial stability. Globally, such crisis management is important to avoid further repercussions and international financial disasters. It may thus be considered an international public good. In the last two decades, the IMF has usually been in the forefront of international financial crisis management, but the IMF lacks coercive power, particularly against private creditors, and it fails to maintain sufficient funds to deal with crises on its own. Thus, the active involvement of various financial actors, especially major creditor governments, becomes imperative. Several factors, however, make state actors reluctant to take up this role.
The first disincentive discouraging collective action in crisis management comes from the very nature of a public good and the problem of funding supply, considering that some entity or entities have to shoulder the costs of public goods. A public good is a good that cannot exclude noncontributors from enjoying the benefit of added funds. In these circumstances, the incentives to free ride are high; so are the disincentives to contribute. Although crisis containment aims to provide international financial stability at critical moments, the fungibility of added liquidity through bailout operations makes creditors reluctant to commit their funds. In addition, uncertainty regarding the payoff from crisis management leads to noncontribution. Major creditor governments that want to stabilize debtor economies and improve their external balance might emphasize the global repercussions and systemic risks arising from a crisis. However, there is always the suspicion that a creditor government may be promoting the "public good" of international financial stability while actually trying to secure its own "private goods" in the forms of direct economic payoffs and political gains. This suspicion is even stronger when creditor governments are concerned about their relative gains vis-à-vis other governments, which discourages active involvement.
The second factor that discourages state actors from becoming involved in active cooperative management are the uncertainties and criticisms associated with the impact of financial crisis management involving rescue packages. Some conservative critics of financial rescues argue that rescue operations by public institutions (creditor governments and the IFIs) create a typical moral hazard problem. Bailouts invite moral hazard problems for debtors as well as for lenders and investors. Uneasiness and uncertainty also arise because of multiple perspectives on the desired modality of financial crisis management and crisis solutions.
The third and quite obvious factor discouraging involvement is that government actions might invite taxpayer resistance. Financial rescue packages or extensions of loan repayments provided by governments require additional financial commitments to countries with financial problems. Rescue packages are provided either in the form of direct participation using the country's official funds (bilateral) or in the form of increased capital contributions to IFIs, such as the IMF and the World Bank (multilateral). In many countries, taxpayers in general object to financial bailout packages designed to help debtors, especially when taxpayers have no strong affinity or commitments to the debtors. They also object to assisting investors from their home country who, in the taxpayers' view, misjudged their investments. In turn, when asked to increase their financial commitment to problem debtors, private financial institutions wanting to exit promptly and with as little loss as possible from bad loans and risky investments also resist cooperating with creditor governments.
Finally, because of the tendency toward regional concentration of various economic activities, such as trade and foreign direct investment (FDI), the major regional power usually becomes the first candidate to take the lead in a rescue plan and to commit the largest amount of its own funds. But regional economic crises are usually closely connected to the economic conditions of the regional power, and those regional powers that are most motivated to take initiative might be in an economically weak position to proceed in this manner. This has commonly occurred when financial crises have originated in emerging market countries like Latin America and Asia. For example, the United States was constrained by its budget and trade deficits in the 1980s, when Latin America was in a desperate need for financial assistance. Japan, meanwhile, was criticized for not doing enough for Asia due to Japan's own economic problems at the time of the 1997-98 Asian crisis. As a regional crisis begins to affect global financial activities, the critical question becomes, who else-if anyone-will participate in the collective management of the crisis? Under these circumstances, tensions can occur between the regional power, which is more interested in its private returns, and other participants of the collective action, hindering successful crisis management.
Besides the production of international financial stability through the containment of panic and the provision of financial support to countries in crisis, collective action among creditors can be effective in urging "discipline" on debtors. Creditors, both public and private, have an ultimate interest in making debtors pay back what they owe. Creditors are at a disadvantage if they negotiate separately with various debtors, because that allows debtors to play one creditor against the other. This can create a typical case of a prisoner's dilemma among creditors. In a prisoner's dilemma situation, the creditors' best solution is to cooperate among themselves to impose stricter adjustment and payment conditions on a debtor, but creditors wanting to extract better repayment from the debtor might allow more lenient conditions without knowing what others are doing simultaneously. A simple bidding war might take place, thus enabling the debtor to extract favorable deals. Because they are concerned about international financial stability and with making the debtors follow the established rules of the game, creditor governments have every interest in preventing such a scenario.
One way of getting around the difficulties of establishing a unified front for collective action in financial crisis is through institutionalization. In the 1940s, having regretted that World War II resulted from a failure to adequately respond to the financial and economic crises after the Great Depression, the major economic powers, led by the United States, installed a new design of international cooperation for trade liberalization and balance-of-payments support under a fixed exchange rate regime. The latter was represented by the Bretton Woods system, which involved new international financial institutions, such as the IMF and the International Bank for Reconstruction and Development (IBRD), otherwise called the World Bank. In addition, since the 1960s, countries with strong financial interests have established various forums for similar goals, including the Group of Seven (G-7), through which the political and financial leaders of the major powers can join together to discuss matters important to their economic growth and stability. These institutions have helped establish in the global economy a certain level of consensus and a moral code, guiding the actors' behavior.
Although these institutional arrangements have facilitated crisis management on the international level, still state actors have to agree on the implementation of crisis management and on increased funding for countries in crisis. The importance of such agreements is obvious in the case of the G-7, but it is also critical for the IMF, where the members of the executive board- delegates from member countries who hold different shares of voting power generally based on the amount of a country's capital subscriptions to the institution-discuss and vote on important decisions. Furthermore, the commitments of major creditor governments vary significantly depending on the government's positions on respective financial crises. Because the institutions (especially the IMF and the World Bank) represent a disproportionately large influence of the U.S. government, the motivation of major supporting governments to follow (or not to follow) the U.S. lead becomes even more important. Scholars of international relations thus have to start with an analysis of the motivations that bring state actors to decide to cooperate (or not) in financial crisis management.
Various strands of explanation for states' cooperative behavior already exist, ranging from international systemic accounts to unit-level analysis. However, each cluster of explanation manifests some weakness logically and empirically as it tries to account for the behavior of nonhegemonic major powers, particularly Japan, in international financial crisis management. In the following sections of this chapter, I outline the challenges facing existing explanations and then pose the two core hypotheses in this study: the importance, in international financial crisis management, of the "joint product" nature of public goods and of transnational linkages motivating state actors. These hypotheses constitute encompassing categories under which various specific dynamics and factors are organized. They thus provide clues regarding the analysis of international public goods supply.
Existing Explanations
Regarding international cooperation and provision of international public goods, three types of arguments have been developed in the literature to explain the behavior of either nonhegemonic powers in general or Japan in particular. These include a systemic explanation; an explanation based on the power of regionalism; and an outside-in explanation of foreign policy formation, including Japan's "reactive state" thesis. These explanations, it appears, help account for the general tendency of these powers to act in some kind of concert. When it comes to the powers' variant behavior in financial crisis management, however, these explanations leave a theoretical gap.
The Systemic Explanation
A hegemon provides international public goods to help maintain world stability that benefits all states, including the hegemon. The theory of hegemonic stability was empirically challenged when it became increasingly clear that despite the decline in the early 1970s of the dominant and unchallenged post- World War II hegemony of the United States, the world was not facing major economic collapse. On the contrary, a certain level of international economic stability persisted. Various scholars have explained this continuing relative stability by analyzing how the anarchic nature of international relations has been overcome or modified by collective action.
The analysis of hegemonic behavior in the provision of public goods splits into two camps. On one hand, the "benevolent" version of hegemonic stability theory argues that there is usually an exploitation of a large player by small players, in which the hegemon contributes a disproportionately large share of public goods provision. On the other hand, the larger country, which is assuming the leadership role, can become a "predatory" hegemon and manipulate or coerce the smaller countries to cooperate. Intellectual neglect still exists in the analyses of why nonhegemonic countries sometimes support and other times do not support the hegemon.
Many scholars consider cooperation among major powers as a key explanation for the stability and maintenance of a certain level of public goods supply. It is clear that scholars' views on the world and on the fundamental logic of state actions largely determine their judgment of the origin of international cooperation. Some scholars from a liberal tradition note that the reciprocal effects emerging from various transnational institutional linkages and issue linkages in the world under "complex interdependence" can provide grounds for international cooperation. Such conditions as a small number of actors, long-term reciprocal relationships, and the existence of "epistemic communities" increase these possibilities. Scholars from the realist and neorealist perspective claim that international cooperation of a liberal institutionalist style would be largely impeded even with the existence of international economic exchanges, because states desire to obtain "relative gains" in relation to other countries, particularly rivals. Grieco emphasizes that unless there is a balanced distribution of gains, states have a hard time achieving international cooperation.
Scholars looking at the systemic structure of international relations emphasize the existence of international regimes or of a set of "implicit or explicit principles, norms, rules, and decision-making procedures around which actors' expectations converge in a given area." However, despite efforts made in the past to set up arrangements to secure international financial crisis management, power relations and interests of creditor governments still dominate decision making, leading to case-by-case responses. Thus, the international regime argument falls somewhat short of explaining cooperation in the issue area of crisis management.
Scholars focusing on the motivations of major powers emphasize the possibility of collective action among an intermediate group in the absence of a clearly dominant single hegemon. Snidal argues that if the size distribution among a few subhegemons (e.g., Japan and Germany) is arranged in such a way that these countries find it beneficial to collaborate with the declining but still most powerful hegemon (the United States), a "k-group" can form to provide the public goods needed in the world. The question is, however, whether we can always count on these major powers to agree with each other when the real or expected benefits accrued through collaboration are either unclear or very one-sided. Moreover, how could one account for the variance in a "k-group" member's behavior when the costs arising from a systemic collapse would be the same?
Furthermore, the power relations within the "k-group" are not uniform. Asymmetry of power determines, in part, the willingness of major powers to cooperate in crisis management. This power asymmetry in the world and the influence (or power) of each state are channeled through two somewhat distinctive conjunctures: the country's structural powers and its relational powers. The advocates of this distinction define relational power as "the power of A to get B to do something they would not otherwise do," and they maintain that structural power "confers the power to decide how things shall be done, the power to shape frameworks within which states relate to each other, relate to people, and relate to corporate enterprises." Consequently, asymmetry of power means not only that a superpower larger and more powerful than others can coerce smaller countries to do what it wants them to do but also that international structures and institutions in different issue areas can be set up in a way that significantly benefits the large and powerful. This point is relevant in discussing the dynamics in the IMF at times of international financial crisis. Moreover, the type of power that a state possesses could vary depending on issue areas or geographic regions.
In sum, the systemic explanation of international cooperation falls short of satisfactorily explaining the collective action outcome and behavior of state actors involved. It is thus important to analyze specific cases of cooperation and noncooperation to determine which factors go into a state's logic and how they translate into its actions.
Regionalism
Regionally based financial crisis management, in which a regionally dominant power commits exclusively or most actively to the crisis solution, is an alternative to a global or a multilateral arrangement. It would increase the motivation of a creditor government in the region, as the government's interests in stabilizing the economy are often greater and better-defined in the regional economy than in the global one. Regional interests in the face of financial crisis may lead to an arrangement of less collaboration or to some kind of geographical division of labor among major powers seeking to secure financial stability.
From the 1960s until the 1980s, theories on regionalism were limited to empirical cases from Western Europe, but they expanded globally in the 1990s, as the cold war ended and various regional integration efforts began to materialize in regions beyond Europe (e.g., the North American Free Trade Agreement [NAFTA], the Asia Pacific Economic Cooperation [APEC], and Mercosur). Furthermore, the regionalism of the 1990s not only involved integrationist movements among the industrial countries but also the north-south linkage of three major economic areas-the United States with Latin America, Japan with Asia (particularly Northeast and Southeast Asia), and recently Western Europe with Central/Eastern Europe and Russia. Scholars began to examine why it is arguably more desirable to arrange international economic matters (and security matters) on regional bases rather than on a global basis. These discussions might be relevant to the analysis of major powers' response to financial crises emerging in their respective backyards.
Regionalism is considered a con×ict-minimizing way to organize state relations, particularly in trade. Trade arrangements in the form of "minilateralism" (within a small group of countries, as in the case of the post-1985 European Community) should facilitate careful allocation of costs and benefits arising from trade and thus should benefit participating states more, particularly when a hegemon, the main supporter of multilateral trade, is experiencing decline. Due to lower transaction costs derived from close distance and already existing economic, political, and social ties, regional grouping is the most appropriate structure for this minilateralism, in which cooperation is more likely to take place. Moreover, if public goods produced through regional arrangements are excludable (against extraregional countries), a regional hegemon can emerge to supply such regional public goods.
The logic of regionalism does not, however, fit well when explaining international financial relations and thus does not seem to satisfactorily explain the behavior of creditor governments in financial crisis management. The relatively more global (rather than regional) nature of financial transactions compared to trade makes the argument of regionalism much less effective. Evidence from recent international financial crises arising in developing countries shows that formal and regionally based crisis management in the form of lender-of-last-resort arrangements are still incomplete. The most advanced case of such an arrangement is the North American Framework Agreement (NAFA), signed (after the conclusion of NAFTA) among the United States, Canada, and Mexico and providing a $6 billion swap arrangement among the three countries. Some relatively small financial crises might be contained within a region. However, any large crisis with potential extraregional contagion effects (as observed in many of those major financial crises in the past two decades) would require a global solution. Thus far, empirical evidence indicates that creditor governments have been involved in extraregional crisis management despite high transaction costs and limited economic, political, and social ties. Specific to this study, Japan's active involvement at the final stage of the Latin American debt crisis and its passive position vis-à-vis the U.S. active initiative during the second phase of the Asian financial crisis (the Indonesian and Korean crises) requires a more appropriate explanation than regionalism.
Continues...
Excerpted from Banking on Stability: Japan and the Cross-Pacific Dynamics of International Financial Crisis Management by Saori N. Katada Copyright © 2001 by Saori N. Katada. Excerpted by permission.
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