BOOK REVIEW THE INTERNATIONAL ECONOMIC POLICY COORDINATION INSTRUMENT: SOME CONSIDERATIONS DRAWN FROM THE OECD EXPERIENCE By Dr. D.B. Timmins and Dr. William M. Timmins (London: University Press, 2 Henrietta Street, WC2E 8LU, 1986) Published during the Silver Anniversary of perhaps the most important, if among the least well-known international economic organizations, this book is a most timely and thoughtful, though somewhat controversial study. The principle author's interest in the Organization for Economic Cooperation and Development (OECD) began before the organization was born. As a junior State Department official he helped prepare the studies which convinced then Under Secretary of State George Ball to go to bat for enlarging and redirecting the Organization for European Economic Cooperation (OEEC--the operational arm of the Marshall Plan) into the more broadly based group which is today the OECD. He was a member of the first U.S. Permanent Delegation to the OECD in Paris, and later served as Deputy Director of the State Department Office in charge of OECD (and Common Market and European Political-Economic Affairs). Professor David Timmins has had the opportunity to track OECD activities from bottom to top and from both home office and field perspective. He helped formulate policy in Washington and implement it during negotiations in committee meetings in Paris across a quarter of a century. Following his retirement from the U.S. diplomatic service, he worked as a consultant to the International Energy Agency of the OECD and as Professor of Economics at the American University at Paris. He is currently Professor of Finance & Economics at the Instituto Technico de Estudios Superiores de Monterrey, widely considered to be Mexico's MIT. Co-author William Timmins is Professor in the Graduate School of Management of Brigham Young University, and has earlier served as Assistant State Planning Coordinator for long-range state planning, state of Utah; and Assistant Vice President, Center for Economic & Community Development, of the University of Utah. The authors' initial purpose in undertaking the study was to validate the views of Richard Gardner (former U.S. Ambassador to Italy) who, in his book Sterling Dollar Diplomacy published in 1947, attributed the failure to ratify the International Trade Organization (ITO) and the paralysis of the IMF and IBRD--the other UN-affiliated international economic organizations--to what he called "economism", "legalism", and "universalism". "Legalism" Gardner defined as the lawyer's belief that once something is written down and agreed upon in an international forum, it has real effect. "Economism" is the naive belief that economic policy can be decided absent attention to other significant social and political considerations. "Universalism" is the misplaced confidence that policies and programs acceptable to one society are applicable across the board. Things began looking up shortly after the dismal days of '47 in which Gardner published his study of the shortcomings of international economic policy coordination. The Marshall Plan achieved great success, the GATT was adopted in substitution for the ill-fated ITO, and the Common Market began demonstrating the power of regional cooperation, setting an example for the rest of the world. By mid-1960 the OEEC had accomplished the reconstruction of Europe and the time had come to conclude its work or rethink its activities. With the paralysis of the UN economic agencies on the one hand, and the extraordinary success of the OEEC in preparing comparable statistics and providing a forum for the exchange of policy intentions to guide national policy makers on the other, it was decided to reconstitute and enlarge the OEEC to include the United States and Canada. The new organization would take on the task of coordinating the economic policies of the developing nations of the world. Membership of Portugal and Turkey would provide bridges to the Third World, while Yugoslavia, as an associate member, would provide contact with Socialist Eastern Europe. Australia and New Zealand became members shortly after the OECD began operations, and Japan later joined to complete the current roster of "The Rich Man's Club." Not the least useful aspect of The International Economic Policy Coordination Instrument is its review of Gardner's findings in the light of better days. The Timmins' book is thoughtful, analytical, and persuasive--if somewhat disturbing in some of its findings. It is not a mere history of the OECD's first twenty-five years. It is, rather, an analysis of some six major policy issues with which the organization has grappled; why it has succeeded in some areas and failed in others. The authors put forward a strong argument that the political maneuvering and discussions in the OECD Council and Committees are not mere "static" from the standpoint of economic analysis, nor political contamination of the purer atmosphere of economics affairs, but a truly economic phenomenon worthy of study by economic theorists. Indeed, they assert, negotiations within international economic organizations such as the OECD are the essence of the "higgling and bargaining of the marketplace" to which the great neo-classical economist Alfred Marshall directed attention. The authors establish that international economic coordination, through contributing an additional degree of freedom to economic policy formulation, amounts to a fourth instrument of economic policy. supplementing monetary policy, fiscal policy, and trade policy. Following a chapter reviewing a number of not totally original theoretical considerations affecting the study, for which they cite such authorities as Meade, Tinbergen, Mundell, and Machlup, and after introducing the concept of the International Economic Policy Coordination Instrument, the authors develop two other new and theoretically significant concepts. The first, based on second-best theory, maintains that if a country gets ahead of its trading partners in liberalization, this will not necessarily lead to an increase in national and world welfare, as a naive free-trader might imagine. Indeed, through distorting the equilibrium of the international economy, it can lead to a third-best situation in which industries turning out goods which might most efficiently be produced in one country, are lost to less efficient competitors. In the chapter treating the operations of the Trade Invisibles Committee, they show how introduction of carefully considered "distortion offsetting", but non-protectionist, measures can recover a second-best position in which both national and world welfare are enhanced. The U.S. Interest Equalization Tax of 1965 and the Domestic International Sales Cooperation (DISC) legislation of 1971 are cited as examples of such measures. To be sure, when the less-liberal trade partner(s) see thought turning to action, they may drop their trade-distorting policies and/or open their frontiers, resulting in a first-best efficiency-maximizing outcome. In either event, national and world welfare can be enhanced by adoption of measures which an earlier generation of theorists would have considered simple "protectionism." A third intriguing new theoretical concept is that of "Social Product Differentiation." This idea parallels and extends that of Harvard Professor Edward Chamberlin, who some fifty years ago introduced the idea of Product Differentiation to explain the role of trademarks and advertising which are endemic to free market economies, but which had been ignored by the marginalist school. Timmins & Timmins, who examine the strongly-held insistence of Canada and many LDCs for less efficient economic systems in order to preserve a desired life-style, suggest that such a practice, if based on an informed trade off of other socio-economic goals, is no less a defensible economic decision than consumer preference for Kelloggs instead of Post Toasties or Chrysler products instead of Ford. Seeking to approximate the political and the economic, as is done within the forums of the organization which is the subject of their study, the authors define Politics as "the process of economizing relationships between human beings in a social context" and Economics as "an impersonal politics applied to the non-human objects of our environment." The authors explore the OECD's first failure, the inability to adopt an agreed formula for development aid burden sharing. This they attribute to (1) severe conflicts between national policy objectives, (2) the absence of theoretical agreement as to what constitutes aid, and (3) the theoretical difficulty of determining a comparable basis for calculating national wealth as a basis for establishing a nation's ability to pay. The Organization's first major success was the 1960-70 Growth Decade. The background discussion about how Kruschev's table thumping threat to "bury the West" and USIA Director Edward R. Murrow's search for an attractive PR theme for the Kennedy Administration coincided to stimulate adoption of the OECD Growth Target is a fascinating example of the close relationship of the political and the economic--the counter-theme of the study. A second success was the OECD Short-term Forecasting Exercise, which started fitfully, but has developed into one of the staple OECD menu items of our time. Despite the criticism forecasting has taken recently, the 1981-82 recession, the worst since the 1930s, and which many believe resulted from the all-but-abandonment of the coordination instrument during the Carter years, has given new importance to this OECD activity. The study proceeded to analyze the success of the International Energy Agency, an OECD associate organization whose policies are--as a result of the energy conserving measures it has studied and recommended--largely responsible for the falling gasoline prices we've been experiencing in recent months. Discussion then turns to another partial failure: the enormous LDC debt overhang. The highly talented Secretariat did their job, alerting country delegations and Economics and Finance Ministers to the growing problem. But Ministers, persuaded by off-base bankers that recycling oil country deposits to needy Third World borrowers was a solution to OPEC cash surpluses, rather than the basis for a new and more serious problem, let the matter slide. This is an example of the troops having done the reconnaissance, but the higher level strategists falling asleep on the job. The book concludes with a number of findings and recommendations. The authors suggest that the essentially negative Gardner criteria for successful international economic policy--i.e. avoid "economism", "legalism", and "universalism", remain relevant. They also consider that the OECD formula--discuss, negotiate, coordinate--is perhaps the best yet for minimizing policy conflicts and enhancing the effectiveness of the all-too-few economic policy instruments at the disposal of governments. They conclude that the probability of success for future attempts at major policy coordination will be enhanced where a) political will is high, b) national interests among Group of Ten member nations do not diverge significantly (the OECD operates by consensus, not majority vote, but "consensus", in effect means G-10 consensus), and c) a reasonably accepted theoretical framework exists on which to base policy. They add, however, that where a problem is sufficiently serious, policy action has often historically preceded theoretical understanding and has not infrequently provided the basis for later development of theory. They raise the question what is to be done with the Newly Industrialized Countries (NICs)--admit them to an enlarged OECD or create parallel new regional organizations. The authors believe that a decision cannot long be delayed. They reemphasize the implications of Social Product Differentiation, and warn that failure to do something about induced distortions in world trade and production will inevitably lead to outright third-best protectionism. The volume has been read by virtually all Permanent Delegations to the OECD and in Member State Finance and Economics Ministries. It is worthwhile reading for advanced students, professional international economics, and, above all, those government officials and policy-makers who may not yet have given it their attention. At a time when the 100th Congress is contemplating far-reaching new trade legislation, it is required reading for members of the Labor, Trade, and Joint Economic Committees and staffs.