By Howard Schneider
Washington Post Staff Writer
Thursday, November 25, 2010; 9:31 PM
If the Obama administration gets its way, world leaders will reshape their countries' policies to do what's in the longer-term interest of the global economy - even if it means short-term pain at home from reduced exports, higher taxes and other sacrifices.
But will politicians comply?
U.S. officials and other advocates of this approach say such unprecedented cooperation could boost the world economy and help distribute gains in a way that leaves each country better off than if it had acted in isolation. The world economy could grow over time by an additional $1 trillion if countries pursue well-synchronized policies, according to officials at the International Monetary Fund.
U.S. officials argue that the aim of the new framework, which leaders from top economies at a recent meeting in Seoul agreed to pursue, is realistic. They don't, for example, expect that they can create a world that is free of recessions. Rather, the aim is to come up with a set of common guidelines that major nations can agree would produce a healthier world economy and follow those guidelines in shaping domestic policy.
"Any policymaker is first and foremost concerned by his own economy," IMF Managing Director Dominique Strauss-Kahn said after the meeting. "But that is an old-fashioned way to look at economic policy." Strauss-Kahn said economic officials must become more aware of how their decisions affect the rest of the world.
Getting to that point might prove difficult. Economic policymakers often look for short-term benefits and are under pressure from domestic politics. These officials also seek to maintain the independence of their central banks and other government institutions.
The details of the approach are still to be worked out, with world finance ministers and the IMF hoping to produce a set of "indicative guidelines" next year. Those are likely to incorporate measures such as the value of a country's currency and the flexibility of its exchange rate, the size and nature of its trade with the rest of the world, the quality of its financial regulations, and its levels of government debt and borrowing.
By creating a neutral forum to help set such standards, U.S. officials could, for example, increase international pressure on China to allow more flexible exchange rates. So far, the United States has pressed for those on a bilateral basis, aiming to reduce the advantage Chinese exporters reap from an undervalued currency, but has had only limited success.
IMF officials have already produced a general critique of the major nations' economic policies - and found them to be based on overly optimistic assumptions. Moving to a more pointed, country-by-country critique won't be easy, Strauss-Kahn acknowledged. "Countries are not so happy when we come and finger-point," he said.
World leaders have recently - and repeatedly - demonstrated how adept they are at casting their domestic decisions as in the best interests of the world economy and how constrained they can be by local considerations.
The leaders of the United States and South Korea, for example, were unable to compromise this month on a free trade deal that both regarded as broadly beneficial but that also faced domestic opposition in both countries.
The U.S. Federal Reserve announced new policies it said would help the global economy by boosting the U.S. economy, but its actions drew fire from some countries on the grounds that it would help the United States at their expense.
Senior German officials, saying they were worried about the interests of the bond market, made public comments that helped set off a debt crisis in Ireland, putting much of Europe at risk.
The aim of the new approach discussed at the Seoul meeting has been captured in a phrase - "strong, sustainable and balanced growth" - that the Group of 20 top economic nations has enshrined as its goal. But that might describe an unattainable economic nirvana.
"It might be an impossible trinity," because growth that is overly strong might, almost by definition, be hard to sustain and not well-balanced around the world, said Kati Suominen, an economic analyst with the German Marshall Fund.
And although the G-20 nations may have set a precedent by agreeing to subject their domestic policies to a sort of economic group therapy, that's not the same as changing them.
"It is one thing to propose a framework and it is another to make it operational. It's a very courageous type of proposal, but to give teeth to that you need to make concessions in order to get the cooperation of others," said Domenico Lombardi, a former executive director at the IMF and a senior fellow at the Brookings Institution. "History does not really support the view that you can reach this."