Economic relations among national governments can be viewed as ranging along a spectrum from open conflict to integration, where governments set policies jointly in a supranational forum to which they have ceded a large measure of authority. At the midpoint of the spectrum lies policy independence, in which governments simply take the policies of other governments as given, attempting neither to influence them nor be influenced by them. Between independence and integration lies coordination - joint problem identification and pursuit of mutually beneficial ways of achieving national objectives. There are a variety of forms of cooperation, such as information exchange, consultation and mutual encouragement to adopt certain strategies or policies. Consultation lies closer to independence than true coordination; it is more informal, less binding and essentially involves sharing views and information without actually tying policies to formally agreed norms.

In the light of the spillover effects where part of the benefit or cost arising from the policy decision of one country affects others, there is a felt need in today's increasingly integrating world for governments to consult with each other and attempt to coordinate their actions to take these linkages into account. In theory, they should then be better off than if they had acted independently. This argument becomes even more compelling in the light of recent rapid advances in information technology and the integration of financial markets discussed earlier.

There are several steps needed for effective international cooperation:⁵

• A common understanding of the objectives that are being pursued
• An appreciation of the nature of the economic environment within which national economies interact
• An analytical framework for assessing the international impact of the economic policies and the performance of individual countries
• A set of procedures that allow international considerations to be taken into account properly in framing national policies

• Surveillance, using statistical (also called "objective") indicators for the projection of the effects of economic policies and for measuring actual performance, to assist in assessing the emergence of internal and external disequilibria
• Policy objectives and guidelines developed in the light of existing knowledge about the linkage between goals and policies, against which the member countries' economic performance can be appraised and remedial changes recommended, if necessary
• Adoption of recommended policy changes

Monitoring is the process of comparing the target variables against actual performance. Therefore, one must necessarily undertake monitoring when performing surveillance, that is, monitoring is an essential component of surveillance.

Determining the targets for these variables or their paths can be done using quantitative projection methods. Sometimes, on top of the target variables, the set of instruments that countries use to achieve their targets, such as open market operations, public-sector expenditure and tax rates that are controlled by monetary and fiscal authorities, may be quantified and monitored. In many cases targets include intermediate variables such as interest rates and exchange rates, nominal income and growth of monetary aggregates. International targets may refer to what in the domestic economic context would be intermediate variables, such as reduction of current account deficits, stabilization of exchange rates, or reduction of protectionist pressures. Monitoring is used to provide policy analysis of why targeted paths were successfully attained or not or to give an early warning of a potential crisis situation. Adequate monitoring can lead to improvements in the ability of governments to recognize warning signals early and to act swiftly.

Monitoring can and should take place at different levels of policy-making as economies are made up of several subsectors: real, financial, fiscal etc. The implications of the interrelationships between these subsectors for the overall economy also need to be considered. Thus a monitoring hierarchy may consist of at least two levels: monitoring at the level of the sectors and at an overarching economy-wide level.

In the aftermath of the recent crises, as domestic policy makers, IMF and other multilateral institutions came to grips with the apparent failure of surveillance to foresee them, there has been a movement towards countries adopting internationally developed codes or standards in a number of areas affecting the operation and supervision of financial markets. The most developed of these so far is the Basel capital adequacy standard, although standards or codes on transparency, fiscal, financial and monetary policies, stock markets, accounting systems, bankruptcy etc. are being developed. Such codes and standards can provide clear parameters for monitoring exercises in the financial sector.

An important element in a successful economic coordination framework is a set of policy guidelines developed to conduct surveillance of members' policies and performance and to identify the need for remedial action. The G-7 practice has been to make policy commitments and exchange rate objectives public through communiqués issued at ministerial meetings. In this exercise, exchange rate commitments are analysed first, together with the measures that were used for comparing commitments with actual performance; this is followed by an analysis of the norms that were used in judging the need for changes in macroeconomic policies.

The third element of successful coordination is to find means to encourage remedial policy action once the need for it has been identified. In theory, this can involve peer pressure from other countries, bargaining to accomplish linkage with other desired objectives, or retaliation for failure to take the remedial action. From the above, it is clear that the ultimate effectiveness of any form of international economic cooperation has to be judged by the ability of such efforts to influence the behaviour of countries.

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Footnotes:

⁵ A. Crockett, "Strengthening international economic cooperation: the role of indicators in multilateral surveillance", IMF Working Paper, No. 76 (Washington DC, 1987).

⁶ The seven countries are Canada, France, Germany, Italy, Japan, the United Kingdom and the United States.

⁷ The G-7 consultation process began as the Group of Five process in 1985, in which the economic leaders of the five major industrialized countries met and discussed policy coordination matters in an informal setting.