The Political Economy of International Cooperation. (Thema Nr 3 )

Transcription

1 Georg- August- Universität Göttingen Volkswirtschaftliches Seminar Prof. Dr. H. Sautter Seminar im Fach Entwicklungsökonomie und Internationale Wirtschaft Sommersemester 2000 Global Public Goods The Political Economy of International Cooperation (Thema Nr 3 ) Anne Pekmez Betriebswirtschaftslehre, 8. Semester

2 Contents 1. Introduction. page 1 2. Definitions and Background. page Definitions. page Background. page 2 3. Theories of International Cooperation. page Game Theory. page The Coase Theorem. page 5 4. How Does Cooperation Emerge? page Obstacles to International Cooperation. page Conditions for International Cooperation. page 9 5. The Role of International Regimes in Supporting Cooperation. page Definition and Role of International Regimes. page Creation of Conditions for International Cooperation by International Regimes. page Conclusion. page 13

3 1. Introduction In this work we will analyze the political economy of international cooperation, and by doing so we will find out how cooperation can, or does, take place in our contemporary world. This subject is embedded in the discussion about global public goods. In order to insure the creation and the presence of these global public goods, cooperation is a prerequisite. Through international cooperation protocols can be ratified which limit the global emissions of carbon dioxide, for example. Not only will all signatories profit from this policy decision, but also all non participants because the positive effects of this decision on the environment show the characteristics of public goods; non excludable and non rivalry. This means that a rational actor will hesitate to cooperate because he is sure to profit from this policy decision if all others participate and even if he does not. This short insight is enough for notions such as the problem of the free rider and the prisoner s dilemma to spring to mind, and consequently to make us realize how fragile cooperation is when it comes to public goods. This work will start off by setting clear definitions about the notions relevant to the political economy of international cooperation and will give the necessary information about the international arena in which cooperation should emerge and its characteristics. Secondly, we will consider two main theories which are relevant for international cooperation. On the basis of these theories we will then discover which obstacles stand in the way of cooperation and consequently deduce which conditions need to be fulfilled for cooperation to be able to take place. Lastly, we will take a closer look at international regimes and see how big a role they can play in creating the conditions for, and thus securing, cooperation. 2. Definitions and Background 2.1 Definitions Dealing with international cooperation and its political economy requires an understanding of notions linked to this subject. This first chapter should fulfill the function of setting a clear basis for the notions of importance in this work. The term which first springs to mind is cooperation. For Keohane, cooperation 1

4 requires that actions of separate individuals or organizations be brought into conformity with one another through a process of negotiation (...). A set of decisions is coordinated if adjustments have been made in them, such that the adverse consequences of any one decision for other decisions are to a degree and in some frequency avoided, reduced or counter balanced. 1 When dealing with cooperation it is important to differentiate between certain situations which reign in the environment. The situation of harmony and the one of discord imply different consequences for cooperation. The first case of harmony is a situation in which actors policies pursued in their own self-interest without regard for others automatically facilitate the attainment of others goals. 2 In this case cooperation is unnecessary because the classical economists competitive market with its invisible hand coordinates all actions in an optimal manner. 3 The opposite of harmony is discord and this situation is one in which each actors policies are regarded by others as hindering the attainment of their goals. 4 The situation of discord is relevant for cooperation. Without conflict there is no need to cooperate and consequently cooperation does not mean the absence of conflict, but rather a reaction to conflict or to potential conflict Background Earlier, the image of the cooperative agent as an altruist was the main figure of the theoretical reflections about the political economy of international cooperation. This view was more idealistic as it assumed that each agent taking part in cooperation would consider the preferences of others as his own. From this angle the basis for cooperation seemed more stable and the general attitude towards cooperation more positive. 6 Nowadays however, this idealistic view has been replaced by a more realistic one. This new theoretical basis acts as a barrier against wishful thinking and has adopted realistic conditions. The theory has accepted the assumption that states or individuals are self-interested and have conflicts of interests with one another. Opportunistic behavior is also considered and is finally an integrated part of the 1 Keohane, R. 1984, p Keohane, R. 1984, p See Keohane, R. 1984, p Keohane, R. 1984, p See Keohane, R. 1984, p See Verbeek, B. 1998, p

5 new theoretical basis. 7 The main role is now played by the rational egoist. This new figure in world politics assesses his own welfare without considering that of others. 8 Also the maximization of utility is the foremost goal. 9 Not only has there been changes affecting the theory due to a choice of a more realistic and characteristic figure to represent the typical actor in cooperation, but the reality, and more precisely the international environment, has also undergone some changes which set new challenges and pose new questions for the theory. The absence of hegemony is a striking feature of today s international arena. Hegemony is defined as the ability and the willingness of a single state to make and enforce rules. 10 Through its preponderance of resources one country is then powerful enough to control the compliance to essential rules and to play the role of a stabilizer. Today there is not one hegemon and it is not probable that this situation will reoccur in the future. 11 The situation which faces us in today s international environment is one of anarchy. In these circumstances cooperation cannot be enforced by outside agents 12 and there is a lack of common government (without however a war of all against all taking place) 13. This means that no central authority is present and that no one has the power to impose limits on the pursuit of national interests. 14 What do all these changes mean for the future of international cooperation? Is cooperation possible at all in an anarchic world full of rational egoists? These two conditions certainly make the achievement of cooperation more difficult, but although the scenario has a much more pessimistic touch, cooperation is still possible nowadays. Hegemony definitely had a positive influence on cooperation and facilitated its fulfillment, but it is not a necessary nor a sufficient condition for cooperation. 15 Therefore in this work, post hegemonic cooperation, and its necessary prerequisites, are in the spotlight. But before discussing the necessary conditions for post hegemonic cooperation it is important to understand the theoretical background underlying international 7 See Martin, L. 1999, p. 51 and See Keohane, R. 1984, p See Verbeek, B. 1998, p Keohane, R. 1984, p See Keohane, R. 1984, p.31and See Keohane, R. 1984, p See Keohane, R. 1986, p See Oye, K. 1986, p See Keohane, R. 1984, p

6 cooperation by reviewing the two most relevant theories in this field. We will see that these theories help us considerably in defining the necessary conditions. 3. Theories of International Cooperation. 3.1 Game Theory Several games are relevant to the world of politics but one which is of particular interest is the Prisoner s Dilemma. This game is the one that has been the best analyzed due to its significance in showing that under certain conditions rational actors are unable to reach the optimal solution despite certain overlapping interests. 16 The Prisoner s Dilemma shows why discord is prevalent and cooperation rare. The essence of the Prisoner s Dilemma is such that both participating players benefit more from cooperation than from mutual defection, but each player achieves the most successful outcome by defecting the other, provided that the other partner cooperates. 17 The two players each have two choices to make in each round, namely to cooperate or to defect. Each player must take his decision without knowing what the other will do. 18 The Prisoner s Dilemma is a formulation of a common situation in which what is best for each person individually leads to mutual defection, whereas the two participants would have been better off with mutual cooperation. Individual rationality leads to a worse outcome for both than would have been possible. 19 When the Prisoner s Dilemma is played only once or a finite number of times it is always rational for egoistic players to defect and cooperation fails. In this case players do not have an incentive to cooperate. This is especially true on the last move because the future plays no role at all and therefore cannot be influenced by the present. On the next to last move neither of the players will want to cooperate since they can both anticipate defection by the partner on the last move. 20 When one follows this line of reasoning, it is clear that the game will unravel all the way 16 See Keohane, R. 1984, p See Keohane, R. 1986, p See Axelrod, R. 1984, p. 7 and See Axelrod, R. 1984, p See Axelrod, R. 1984, p

7 back to mutual defection on the first move of any sequence of plays that is of known finite length. 21 This line of reasoning does not apply to players who will interact for an indefinite number of times. This case, named Iterated Prisoner s Dilemma, reflects the case in real life where one can never be sure when the last interaction will take place. With this prerequisite cooperation can emerge. The fact that players might meet again is crucial for the emergence of cooperation. This possibility of meeting again means that the decisions taken today not only determine the outcome of this present move, but might also have an effect on the future choices of the players. 22 The future can therefore cast a shadow back upon the present and thereby affect the current strategic situation. 23 Even if the future, and its potential gains, is less important than the present with its actual gains, it does play a role. 24 Thanks to this shadow of the future cooperation can become rational for egoists pursuing their own interests. Defection could seem unrewarding in the long run because short run gains obtained by defection will normally be outweighed by mutual punishment that will result in the long run. 25 The more important the outcome of future plays are, the more sensible it is to cooperate, since this positive behavior encourages cooperation on future moves. 26 We will see later on in this work that these views on cooperation and these incentives to cooperate also depend on the willingness of the opponent to retaliate against defection. This will lead us to consider one of the conditions for successful cooperation: reciprocity. 3.2 The Coase Theorem Another theory which is important for background knowledge related to international cooperation is the Coase Theorem. This theorem is linked to market failure and it refers to a situation in which outcomes of market-mediated interactions are sub-optimal. Here, the difficulties faced are not due to the participating actors behavior, but due to the structure of the system and institutions. Of importance in this discussion are transaction costs. Transaction 21 Axelrod, R. 1984, p See Axelrod, R. 1984, p Axelrod, R. 1984, p See Axelrod, R. 1984, p See Keohane, R. 1984, p See Keohane, R. 1986, p. 8. 5

8 costs (also including organization costs and costs of making side-payments) are all the costs which become relevant in an imperfect market when going through an economic process. The weaknesses and negative attributes of the system and its institutions impose transaction costs which then create barriers to effective cooperation among actors. Consequently institutional defects are in this case responsible for failures in cooperation. 27 Coase compares world politics to imperfect markets: both are characterized by institutional deficiencies that hinder mutually advantageous cooperation. Conflicts of interest are present and are said to arise partly due to externalities. These externalities imply that actors do not bear the full costs, or receive the full benefits of their own action. Coase showed that externalities alone do not inhibit cooperation and that even without a central authority problems of collective action could be overcome thanks to bargaining and mutual adjustment, - that is thanks to cooperation. In the case that central government would be present, the actor suffering from the negative externalities (pollution) would have a right to demand compensation from the actor causing the externalities. In the absence of government and bargaining, the egoistic actor causing the negative externalities would apparently have no reason to undertake such compensating action. However, Coase argued that if law or a decentralized self help system existed giving the polluter a right to pollute, then the problem could be solved in such a way that the actor suffering from the pollution would pay the polluter a certain sum. This sum would be greater than what the polluter would have to pay to reduce his externalities to zero, but less than what the actor suffering from the externalities would have to pay himself to avoid the negative effects of the externalities. This money should then be invested by the polluter in equipment to eliminate the externalities. Both parties would agree to such a bargain because they would both profit from it. This solution would be more economic than dealing with the costs of eliminating the externalities by one s self. 28 In order for Coase s theorem to be valid- that is to show the efficacy of bargaining and the possibility of cooperation without central authority- three conditions are necessary. Coase argues that a legal framework establishing liability for actions is needed, that perfect information must be available and that transaction costs should equal zero. Of course none of these conditions involving the market and institutions 27 See Keohane, R. 1984, p See Keohane, R.1984, p. 85 and 86. 6

9 are fulfilled in world politics. But these conditions need to be respected, at least to a certain extent, in order for cooperation to receive an impulse. We will deal with these conditions later when regarding the obstacles to remove in order to introduce cooperation. Without consciously designed institutions to overcome such obstacles, these existing problems will hinder cooperation at all levels. Here we notice that international regimes could play a positive role in creating the right environment in which cooperation could prosper How Does Cooperation Emerge? 4.1 Obstacles To International Cooperation. In the precedent chapters which dealt with the relevant theories we have already come to face with a few obstacles to cooperation. In today s environment lots of factors make cooperation difficult and it is necessary to remove or at least reduce these barriers in order to then introduce the conditions which facilitate cooperative behavior. First of all it is important to note that the post hegemonic and therefore anarchic situation in which the world finds itself, and the rational egoist which is the main figure at the center of our reflection, make the basis for cooperation more fragile. Conflicting interests also make cooperation more difficult, but represent a fact which needs to be accepted. What counts are not the conflicting interests but the necessary minimum coinciding interests. Short term thinking, especially in regard to profit, on the part of the actors is also a factor which is hard to influence. The agents need to develop a feeling for the shadow of the future and need to realize what an impact present decisions have on the future and its outcome. These characteristics (anarchy, rational egoism, conflicting interests and short term thinking) are part of the political landscape and need to be accepted. They should not be considered as obstacles that should be removed, but as obstacles which need to be overcome. On the other hand, problems mentioned by Coase like the lack of legal regulations, high transaction costs and insufficient information are areas where defensive action is possible. In respect to this action it is thought that international regimes have a 29 See Keohane, R.1984, p

10 role to play in diminishing the barriers to cooperative behavior. This will be handled later on in this work. Lack of legal regulation has a reverse effect on cooperation because it implies a lack of guidelines and of implicit handling rules. Such arrangements secure mutual expectations and give a certain starting basis to negotiations. Legal regulation, and especially the clear definition of property rights, is to be considered as a sort of information which gives cooperative processes guidelines. Consequently, the lack of legal regulation makes cooperation more difficult because the actors do not have a starting point to rely on. 30 High transaction costs hinder cooperation because they make the whole process of cooperation very costly. The higher the transaction costs, the more one is careful about entering a cooperation because more is at stake. On the international level one must realize that each subject of concern involves new partners from new countries, each with different methods and rules. All these factors make cooperation very costly in an imperfect arena. 31 On the other hand, Coase s assumption of zero transaction costs has been criticized because in this case, coalitions would all be unstable as endless recontracting would take place. 32 Transaction costs need not be zero, but must not be too high. The last factor mentioned as hindering cooperation was insufficient information. In regard to imperfect markets this is the biggest obstacle to cooperation. The most useful function fulfilled by a perfect market is the informational function. This lack of information in the situation of market failure is the reason for the huge uncertainty underlying actors actions. All participating actors are worried about the correctness of their decisions and the honesty of their partners. In our world of egoists pursuing individual interests this insufficient information creates a permanent fear of being deceived or double crossed. Imbedded in the problem of insufficient information is information asymmetry; some actors know more about a situation than others. This means that outsiders expect the bargaining result to be unfair and will therefore be reluctant to make agreements with insiders. If this suspicion is unfounded (that means the agreement would be mutually beneficial) this problem of information asymmetry is an obstacle to increasing welfare through cooperation See Keohane, R. 1984, p See Keohane, R. 1984, p See Keohane, R. 1984, p See Keohane, R. 1984, p

11 We have now seen which barriers stand in the way of cooperation and have understood which problems have to be overcome in order for cooperation to have a chance. In the next part of this work we will consider which precise conditions are needed for cooperation to be achieved and for cooperation to work at its best. 4.2 Conditions For International Cooperation The first fundamental condition for cooperation is the existence of common interests between the potential partners. 34 Without this common basis cooperation has no chance. Secondly, we saw from the Prisoner s Dilemma that an infinite number of games must underlie cooperation so that the shadow of the future starts influencing the game. Another condition which enhances cooperation is that only a relatively small number of actors take part in cooperation. The smaller the group, the better the actors can monitor each others compliance with rules and practices, and also the bigger the interdependence between one another s behavior and one another s welfare. 35 One of the conditions dictated by anarchy is that cooperation must respect the principles of sovereignty and self-help. This is absolutely fundamental since cooperation can depend neither on deference to hierarchical authority nor on centralized enforcement. Reciprocity is consistent with these two principles and is often invoked as being the appropriate standard of behavior which can produce cooperation among egoist sovereign states. The two essential dimensions of reciprocity are contingency and equivalence. 36 Thus, reciprocity refers to exchanges of roughly equivalent values in which the actions of each party are contingent on the prior actions of the others in such a way that good is returned for good and bad for bad. 37 Apart from the disadvantage of feuds being possibly never-ending, it has been proven that with such a strategy (also named Tit for Tat in the game theory) cooperation is most effectively induced and the highest payoffs are reaped See Keohane, R. 1984, p See Keohane, R. 1984, p See Keohane, R. 1986, p Keohane, R. 1986, p See Keohane, R. 1986, p. 9. 9

12 In order for the strategy of reciprocity to be successful two conditions are needed; sequential exchange is necessary and the monitoring of compliance must be possible. Sequential exchange is superior to simultaneous exchange because in the case of the latter obligations never exist and the exchange is balanced at every moment. These debts or credits which arise in the case of sequential exchange can increase confidence among members in the long run. Part of its superiority is due to the fact that more information can be collected about the behavior of the partners. 39 The second condition for the strategy of reciprocity is the monitoring of compliance. Before reacting accordingly to the partner s last action one must know if the partner defected or not. Again, information is in the center of our reflection. Information, in the form of standards to allow the measurement of compliance, is needed for reciprocity to be adopted. Linked to compliance are the influences of social pressure and of reputation. The bigger the importance of these notions, the higher the incentive to comply. If a government fails to comply, he knows that other governments will observe his behavior, evaluate it negatively and maybe take retaliatory action. 40 Under conditions of uncertainty and decentralization the reputation of states play a huge role. The reputation of an actor is considered when deciding whether or not he would be a good partner or not. Thus having a good reputation makes it easier for a government to enter into advantageous agreements. 41 All these factors; long term thinking, a small number of participants, infinite number of games, reciprocity, sequential exchanges, monitoring of compliance, social pressure and the role of reputation set optimal conditions for cooperation. We see that interwoven in some of these factors is the availability of information. The higher the transparence about actors behavior and its consequences, about the environment, about rules and expectations, the more certainty would reign and therefore more confidence would be present to underlie and support cooperation. Information plays an absolutely essential function for cooperation. In the next chapter we will see which role international regimes can play to help construct these optimal conditions for cooperation and we will discover their fundamental role in providing information. 39 See Keohane, R. 1986, p See Keohane, R. 1984, p See Keohane, R. 1984, p

13 5 The Role of International Regimes in Supporting Cooperation 5.1 Definition and Role of International Regimes In the precedent chapter we have noticed the potential for action by international regimes. International regimes are defined as sets of implicit or explicit principles, norms, rules and decision making procedures around which actors expectations converge in a given area of international relations. 42 We can deduct that these social institutions try to make human action conform to predictable patterns so that contemplated actions can go forward with some hope of achieving a relationship between means and ends. 43 Therefore, regimes or institutions do not attempt to reduce government autonomy, on the contrary, these institutions are seen as actors that acquire authority and powers only as a result of acts of delegation by their member states 44. It would be wrong to consider international regimes and organizations which constitute elements of them, as failed attempts to institutionalize centralized authority in world politics. 45 No centralized rule enforcement takes place but rules are there to serve as guidelines or standards for governments. International regimes are to be seen as an incentive to behave otherwise than would have been done- that is more cooperatively Creation of Conditions for International Cooperation by International Regimes. In this chapter we want to find out how exactly international organizations help create the conditions for cooperation to emerge. Three main functions stand out: creating a pattern of legal liability, changing the pattern of transaction costs and, the most important function, providing information. The first function mentioned involves legal liability. We know that international regimes cannot establish patterns of legal liability that are as solid as those developed within states, but bits and pieces of law do come out, even if they are of no great significance because they are subject to being overturned by actions of sovereign states. International regimes should be considered as quasi agreements: 42 Krasner, S. 1983, p Keohane, R. 1984, p Martin, L. 1999, p See Keohane, R. 1984, p See Keohane, R. 1984, p

14 they are unenforceable but do help organize relationships in mutual beneficial ways. Through these quasi agreements conventions are created which establish expectations about others patterns of behavior. Consequently, working relationships will be possible and parties will also be able to adapt their practices to new situations. 47 The second function involves altering the costs of transactions. In international organizations certain agreements are forbidden but without central government states can still implement such action. Their lack of legitimacy however, means that such measures are likely to be costly. Thanks to regimes the transaction costs of certain possible bargains have been increased, while the costs of others have been reduced. This means that incentives to violate regime principles are reduced and therefore cooperation has a more stable basis. 48 Also linked to transaction costs, regimes make it cheaper for governments to meet in order to negotiate agreements because they provide forums for meetings and secretariats that can act as catalysts for these agreements. Also, organization rules can be applied to a wide variety of issues which means that it is unnecessary to renegotiate them each time a new question arises. This implies that governments can benefit from potential economies of scale: once a regime has been established, the marginal cost of dealing with an additional issue will be lower than it would be without a regime. Again, we see that cooperation can benefit from this supportive administrative infrastructure. 49 The third, and the most important function, deals with information provision. Poor information can undermine the use of reciprocity to sustain cooperation. Indeed reciprocity requires that states can monitor each others behavior. This means that information provision about various aspects of the situation, including others actions and intentions, their beliefs, the relevant standards of behavior and the relationship between actions and outcomes is one of the keys to successful international cooperation. 50 International regimes may include organizations whose secretariats act not only as mediators but also as providers of unbiased information that is made available more or less equally to all members. By balancing out the 47 See Keohane, R. 1984, p See Keohane, R. 1984, p See Keohane, R. 1984, p See Martin, L. 1999, p

15 asymmetries of information international regimes can reduce the uncertainty. 51 For this provision of information international regimes can work together with non state actors like epistemic communities or non governmental organizations. 52 One specific method of providing information is the setting of constructed focal points. Originally focal points were solutions to problems that had an obvious nature to them. These constructed focal points however, are intentionally chosen by international actors and should serve the resolution of coordinating problems. Constructing focal points usually involves setting a standard and makes it possible to measure or judge other actors behavior in an objective way. 53 Apart from this provision function, the filtering of information should also be considered a task of secretariats: the quality of the information is just as important the quantity. 54 We can conclude that the relevant institutions do not modify the individual state interests, but that by changing the informational environment, they alter state strategies so that self interested states find it easier to cooperate with one another. 55 Thanks to international regimes, issues are clustered together in the same forums over a long period of time, governments are brought together into continuing interaction with one another, incentives to cheat are reduced and the value of reputation is enhanced. International regimes can establish legitimate standards of behavior for states to follow and provide ways to monitor compliance, they create the basis for decentralized enforcement founded on the principle of reciprocity. 56 Thus, organizations assist cooperation by creating the conditions which make agreements self-enforcing, this being an absolutely fundamental prerequisite in an anarchic situation where no outside enforcement is possible Conclusion. Through this work we first of all saw the characteristics of the actual international arena in which international cooperation should emerge and which figure was at the basis of our reflection; the rational egoist. We then went on to discuss the main relevant theories for international cooperation, concentrating on the Prisoner s Dilemma and the Coase Theorem. Based upon these theories we then observed the 51 See Keohane, R. 1984, p See Martin, L. 1999, p See Martin, L.1999, p. 56 and See Martin, L. 1999, p See Martin, L. 1999, p See Keohane, R. 1984, p

16 obstacles standing in the way of cooperation. These barriers lead us to consider which conditions were necessary for sustainable international cooperation and keeping these characteristics in mind, we went on to examine the role of international regimes in creating these conditions. We can conclude from this study, that the pursuit of self interest does not require maximizing freedom of action. On the contrary, the attainment of objectives may well be dependent of the commitment to institutions which make cooperation possible. 58 That is why intelligent and farsighted leaders recognize that under certain conditions international regimes may even be necessary to the fulfillment of their self interest in a world where the political economy is characterized by a growing interdependence. These international institutions could be of increasing help for states that wish to solve common problems and pursue complementary issues without subordinating themselves to a hierarchical system. 59 One should always keep in mind however, that cooperation does not necessarily have an all-round positive effect. Non members can be disadvantaged, for example in the case of cartels or other such groupings. One should always consider the benefits and the costs in general and not just for the involved actors. The moral value of cooperation should also be evaluated: international regimes can be advantageous for the creators but not necessarily for global welfare. 60 Cooperation has always been part of the fundament of our civilization and its role, especially in a global society like ours nowadays, will continue to increase. Above all, the fact that development cooperation has ceased to be thought of as a direct transfer of resources, but is now considered as a problem of providing global public goods, means that cooperation has taken on an even higher meaning See Martin, L. 1999, p See Keohane, R. 1984, p See Keohane, R. 1984, p See Keohane, R. 1984, p See Martin, L.1999, p

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