AN INTERNATIONAL ORGANIZATION THAT WORKS: THE OECD AND THE ECONOMIC POLICY COORDINATION INSTRUMENT Shortly after the end of WW II, as the countries of the Great Alliance were splitting into the two opposed camps of the Cold War, and the rosy hopes of the UN, the World Bank, the IMF, and the World Trade Organization were aborted or stalemated, Richard Gardner wrote a seminal study of the causes of this breakdown. His Sterling Dollar Diplomacy attributed this failure to three causes: "Legalism," which he defined as the unfounded belief that by agreeing on a legalistic framework the international community had solved a problem; "Economism," by which he meant that once a problem had been cast in terms of agreed economic theory it was fully understood and could be dealt with without further regard to the social and political environment in which the problem had arisen; and "Universalism," which he saw as the naive post-war belief that all problems of mankind could be handled within a single framework without regard to geographic and cultural differences, viz. the UN and its associated agencies. In response to these failures, a number of specialized, often regionally-based organizations were created, usually concentrating on pocketbook issues, e.g. the Europe-centered Marshall Plan, and later the European Economic Community and European Free Trade Area. By avoiding the problems of Universalism and Legalism, these undertakings experienced considerable, and in some cases phenomenal success. By 1960, the Organization for European Economic Cooperation (OEEC) -- the agency which administered the Marshall Plan -- had accomplished the reconstruction of Western Europe and the question arose whether to dissolve the organization or devote its highly qualified secretariat and impressive track record to other tasks. A group of "Wise Men" including Robert Schumann recommended restructuring the OEEC into a more broadly based Organization for Economic Cooperation and Development (OECD) which would preserve the secretariat, extend the organization's valuable consultative role and statistical publications to include such other highly industrialized democracies as the United States and Canada, and add a committee to coordinate the Development Aid activities of the member countries. Within a few years, Australia and New Zealand had also joined the OECD and Japan adhered shortly thereafter. The OECD just celebrated its silver anniversary and it would be informative to take a look at some of the problems the organization has grappled with over the past quarter century to see what might account for its successes and failures and what lessons might be learned about the applicability of the Gardner criteria in what is perhaps the most successful economic organization in the world: one which includes the 21 most advanced industrial countries plus Spain, a bridge to the Arab world; Yugoslavia, a reformist communist economy; and Portugal, a link to the Third World. Little regarded or understood by many otherwise well-informed scholars and world statesmen, the OECD accounts for upwards of 70 percent of non-communist world trade and has (with a sad relapse during the Carter Administration due to ignorance of the functions of this important body) kept the industrial world on a virtually uninterrupted and historically unparalleled growth path for twenty-five years. Our recent text, The International Economic Policy Coordination Instrument: Some Considerations Drawn from the OECD Experience (New York: University Press of America, 1985), found that the OECD has made three particularly significant contributions to economic theory. First, it has validated the significance of the international economic policy coordination instrument identified by Harry Mundell, Richard Cooper, and others as a valuable tool of economic policy supplementing monetary policy, fiscal policy, and trade policy and, through enhancing their effectiveness, amounting in effect to a fourth policy instrument. Second, the close examination of issues related to non-tariff barriers within the OECD has provided a distinctly sharper insight into the theory of second best and how when one country gets ahead of the others in its liberalization policy this can lead to a deterioration, not an improvement in world welfare. Third, the OECD has given renewed importance to the concept of Political Economics as a distinct field of study. The quasi-political negotiating process within the OECD, condemned by marginalists as a contamination of economic theory, can now be seen as the essence of the "higgling and bargaining behind the curves" which Professor Alfred Marshall now so many years ago understood to be basic to economic analysis. Indeed, in our text we define Economics as "an impartial politics applied to the non-human objects of our environment," while, conversely, we see Politics as "the economizing of relationships between human beings in the social context of national and international affairs." Looking in detail at some of the problems confronted within the OECD, we first examined the OECD Growth Target adopted as the organization's first objective during its 1960-1970 Development Decade. After a somewhat exhaustive look at the different reasons which motivated the several member countries to favor the Growth Target (which boil down in essence as a propagandistic riposte by the West to Krushchev's threat to bury the West economically), and the practical negotiations leading to its adoption, we arrived at a profoundly deeper understanding of the relationship of economics and political negotiation, why Gardner condemned simon-pure "Economism" as a major fallacy of applied economics, and why Professor Marshall encouraged economists to look carefully at the higgling behind the curves. Next, we looked at the OECD's attempt to grapple with a burden sharing formula as a means to reinforce the efforts of the Development Assistance Committee to coordinate and strengthen the development aid activities of member states. Here we found that the lack of an agreed theoretical basis for what in fact constitutes aid precluded consensus and caused the exercise to founder--one of the few examples of a clear OECD failure. On this basis we identify some implications for other international organizations and caution the OECD to avoid insofar as possible future problems where theoretical understanding is insufficient to underpin agreement. Third, we looked at the efforts of the OECD to eliminate or reduce non-tariff barriers to trade, particularly in the realm of invisible transactions. We learned that substantial theoretical differences between the European and North American outlook (with Britain often in the middle ground), again gave rise to serious problems. Unlike the Burden Sharing problem, however, the theory of the second best proved of vital importance in reducing differences. The U.S., discovering that getting too far out in front of the crowd to set an example can lead to a deterioration in the world trade and payments balance and a reduction rather than an improvement in world welfare, eventually drew back and introduced such marginal controls as the Interest Equalization Tax and the tax deferral provisions of the World Export Corporation Act. We see this experience as of high significance for the future as pressures increase in the U.S. and elsewhere for more protectionism. While we are not ourselves of the protectionist persuasion, and with most other economists fear the possible major trade-inhibiting effects of neo-Smoot-Hawley legislation, we believe that world prosperity might in fact be improved by moving to a second best position higher than that which we presently enjoy by carefully calculated reduction of the disparities now existing between certain of the highly protectionist economies of the world and more open economies. Fourth, we look at another area of substantial OECD success--now somewhat dimmed by the major recession which followed the Carter Administration neglect of the international economic policy coordination instrument--the major innovation developed by the OEEC during Marshall Plan days and which has, above all, contributed to the outstanding OECD record of success. Short-term forecasting was first attempted by the OECD in 1964 when the Organization called together technical level forecasters from each of the member countries and found that despite differences in approach they could speak to each other usefully because of the reflexive importance the plans and expectation of the major OECD countries had on each other's forecasts and those of the smaller member countries. Taking into account the forecasts of partner countries given during the first day of the exercise, technicians could come back the second day with revised forecasts which provided a far more accurate reading of the likely track of their economies for the coming year. When President Carter ceased sending his Chairman of the Council of Economic Advisors to these semi-annual meetings, they lost much of their significance to other countries which, in turn, began sending unauthoritative second level officials to meetings. When the 1982 recession, the worst since that of the thirties, caught President Reagan without warning, he and his economic advisors quickly re-invented the wheel and sent SEVEN cabinet level participants to the next OECD Ministerial meeting, as if the quantity of high level participants could make up for four years of neglect (in 1986 the United States was even more heavily represented). We next examined the international energy situation, another area where, after a late start, the OECD has demonstrated significant success. Through its affiliate, the International Energy Agency, conservation and substitution measures have been adopted which have, as it presently appears, broken the back of the OPEC cartel more quickly and more effectively than many had believed possible. We review the reasons for the recognition delay and enumerate and evaluate the measures taken. Finally, we looked at another area of failure, the international debt situation. We exonerated the Secretariat from blame. They collected and published the data as the appalling level of debt mounted. And they periodically brought the matter to the attention of political leaders who continued to believe that this was all positive dollar recycling until the massive debt of Mexico required renegotiation and the partial moratoriums announced by Venezuela and Brazil forced those organizations with primary responsibility, e.g. the IBRD and IMF to take notice. We examine why this situation was permitted to happen. And we note the failure of the World Bank and the Monetary Fund which were created to "drive the money changers out of the temple of international finance" to prevent the same commercial bank money lenders from creeping back through the rear window. In conclusion, we look briefly to the future. We find that the Gardner criteria are still significant and that the areas of OECD success have largely been where it avoided these pitfalls. We see a vitally significant role for the OECD as unforeseeable problems continue to arise. And we express the hope that the lessons learned by neglecting the International Economic Policy Coordination Instrument during the late `70s--which led to the worst unemployment since the Great Depression--have been indelibly relearned. We urge that the value of regular exchanges of plans and expectations among top-level Finance, Economics, and Trade Ministry officials, who represent the countries responsible for upwards of 70 percent of Free World commerce, will never again be forgotten. We also raised the question of how emerging industrial nations, e.g. Brazil, Mexico, Hong Kong, and Korea are to be accommodated to take full advantage of the Economic Policy Coordination Instrument. Should the OECD be enlarged again, possibly attenuating its record of success by falling into the Gardner error of Universalism? Or might parallel regional organizations be attempted, risking failure through lack of experienced secretariat personnel and the absence of the Marshall Plan success track impetus? We hazard no answer to this question, but alert statesmen among both the economically advanced member countries of the OECD and the aspiring upper middle tier nations that they must begin to focus on this issue without delay. We conclude with some words of caution, based on the OECD experience, with respect to the current rise in protectionist sentiment. We think that the simplistic pro and con attitudes expressed by most economists who have testified before congressional committees are inadequately nuanced in terms of our contemporary understanding of second best theory.