Institutions and Cooperation in IR

Institutions and Cooperation in IR Robert O. Keohane: After Hegemony – Cooperation and Discord in the World Economy Mario Schulz

Main Ideas • States can cooperate under anarchical conditions • Regimes, i.e. international institutions, can facilitate cooperation and make anarchy predictable How does he get there? "Regimes contribute to cooperation not by implementing rules that states must follow, but by changing the context within which states make decisions based on self-interests."

Review: Realism • States are the principal actors • States are selfish (egoistic) and rational • The International system is defined by anarchy • Anarchy = Absence of a world government

Review: Prisoners’ Dilema • An important concept before we get into it. Remember: • Prisoner’s Dilemma: “Combination of mutual dependence and conflict’ of partnership and competition” • “Both players can benefit from mutual cooperation, but each can gain more from double-crossing the other one – that is, from ‘defection’ ” •  Actors fail to achieve a Pareto-optimal outcome, even though they share some interests

Review: Hegemony • To be considered hegemonic in the world political economy: • Access to crucial raw materials • Control major sources of capital • Maintain large market for imports • Hold comparative advantages in goods with high value added

Review: Institutions • Realists believe institutions are instruments of power players. • Institutionalism (branch of liberalism) assumes that institutions can facilitate good outcomes in IR, such as peace and cooperation.

Context: Why “After” Hegemony? • The book was published in 1984. • American hegemony is assumed to start in the 1940s. • Throughout the second half of the 20th century, American hegemony declines. • When thinking about his functional theory: How does it apply in today’s world?

Chapter 1 • The “Empirical Puzzle” • After World War II, a lot of cooperation, but also a lot of discord • The economy became more international: Inflation and unemployment can be ex- and imported now: Interdependence • The Book’s Focus • How cooperation can take place when common interests exist • Not how common interests can be created • What is under study? • Advanced market economies, where common interests are manifold

Chapter 1 • If all of realism’s assumptions were true, we would not observe cooperation on issues such as trade, financial relations, health, telecommunications, and environmental issues • Assertion: Not everything can be explained by power struggles and the balance of (military) power • If all of institutionalism’ assumptions were true, we would see less discord than we do • Assertion: Institutionalism is too naïve about power, and assigns too much independent causality to institutions and ideas.

Chapter 1 • Realist expectations after WWII: • Stable world economy due to US hegemony • See IMF/World Bank as outgrowth of US political hegemony • Institutionalist expectations after WWII: • Spill-over effect of cooperation into other areas of policy • See Washington Consensus as result of interdependence Expectations both do a good job at explaining observations. But what happens after 1960?

Chapter 1 • Realists would have expected decline in cooperation – lacking hegemony undermines the prospects of creating order • Institutionalism would have expected rising cooperation: More interdependence would necessitate more cooperation After 1960, US hegemony decreases (Japan rises, Europe unified.

Chapter 2: Politics, Economics, and the International System • Wealth and Power • Basically all world economics are political • What, then, is wealth? • Marketable means of want satisfaction • And Power? • Morgenthau’s definition: “Man’s control over the minds of other men”

Chapter 2: The Complementarity of Wealth and Power • Long-term complementarity between wealth and power • But domestic actors might favor short-term gain at the expense of long-term prosperity • “Defining international political economy in terms of the pursuit of wealth and power leads us to analyze cooperation in the world political economy less as an effort to implement high ideals than as a means of attaining self-interested economic and political goals.”  In other words, he maintains the basic ideas of Realism.

Chapter 2: Systemic Analysis of International Politics • Keohane says Waltz is right: • We can’t study IR without looking at the characteristics of the system, because the system defines states (constrains and enables them) • Hence: The book starts at the systemic level • However, he argues for the systemic study of regimes: • Regimes are where states meet and “talk” – hence they are an important component of the “system”

Chapter 2: Limitations of Systemic Analysis • Systemic analysis comes from micro-economics. • Assumes the actors: Firms • Assumes the system: Perfect competition • Infers choices: A rational egoist firm will make move X because of the systemic condition of competition • But IR is different from micro-economics  • Assumes the actors: States • Cannot assume the system. • Perfect competition (Anarchy?) • Oligopolistic (Semi-Anarchy?) • Monopolistic (Hegemony?) • In game theory, Oligopoly is a multi-exit game. That means: We cannot derive from preferences and system the behavior of the actor independent from other actors’ choices. • Hence: Strategic Interdependence  Actors decide on expectation of other actors’ behavior  Institutions allow for expectations about other actors’ behavior.

Chapter 2: Conclusions • We cannot expect determinate predictions about states behavior from systemic analysis • Institutions might give enough context to make these predictions • Institutions could be developed that allow for cooperation without making away with self-interest

Chapter 3: Hegemony in the World Political Economy Theory of Hegemonic Stability (Gilpin, Keohane 1980) • Order in IR is created by a single, dominant world power • Creation of institutions depends on this dominant state (1) • Maintenance of these institutions depends on continued support by the dominant state (2) • Argument put forth: • Hegemony neither necessary nor sufficient condition for cooperation (1 + 2) • Cooperation can work without sustained hegemony (2).

Chapter 3: Evaluating the Theory of Hegemonic Stability • In the theory of hegemonic stability (HST), a state can be a hegemon if it has: • Control over important raw materials • Control over sources of capital • Control over markets • Comparative advantages in high value-added goods • HST: More hegemony  More stability • Problem: Historically, HST only really confirms two cases. ___________________________________________________ • (Keohane suggests a refined version of this theory but this is not really relevant here)

Chapter 3: Military Power and Hegemony in the World Political Economy • Military dominance does not mean military world domination. • The hegemon needs enough power to sustain the system and prevent disruptions to it by adversaries. • When it comes to allies, military threats cannot be employed by the hegemon. • Interdependence between allies more complex: Multiple issues, multiple contact points, small role of military action • Therefore, focus on economic sources of power and economic origins of change.

Chapter 3: Marxian Notions of Hegemony • Marxian notions of hegemony • Creation of common interests among capitalist states strong enough to facilitate cooperation • Combination of realism with capitalism’s inherent contradictions • “Rivalry facilitating cooperation”  Fragile cooperation at best • Ideological hegemony

Chapter 3: Conclusions • HST often makes exaggerated claims • Dominance of one power is not sufficient and unlikely to be necessary for cooperation • Realism and Marxism give important insights though • Hegemony is related in complex ways to regimes • Hegemonic leadership depends on a certain form of asymmetrical cooperation • The hegemon does not rule and enforce laws vis-à-vis all other players • Material predominance does not necessitate hegemony • Hegemony and cooperation are not antithetical, they often are found in symbiosis.

Chapter 4: Cooperation and International Regimes • Again: Hegemony is important for the creation of regimes • Think: IMF/World Bank after WWII; Repeal of Corn Laws by the British • Cooperation can be beneficial, but it is hard to achieve • Just assuming that markets will solve problems will not work: • Governments always meddle with their domestic markets • Market failures would still necessitate cooperation • Again: Hegemony important for the creation of regimes. • But: Regimes do not decay linearly with the decay of hegemons “How do patterns of rule-guided policy coordination emerge, maintain themselves, and decay in world politics?"

Chapter 4: Harmony, Cooperation and Discord • Harmony: Basically Smith’s argument of the invisible hand. • Self interest  Individual actions  All actors can reach their goals • No negative externalities • Cooperation unnecessary • Cooperation: If harmony does not exist • Actions of individuals are brought into conformity by a process of negotiation (policy coordination) • "Intergovernmental cooperation takes place when the policies actually followed by one government are regarded by its partners as facilitating realization of their own objectives, as the result of a process of policy coordination”

Chapter 4: Harmony, Cooperation and Discord • Discord: Results in the absence of cooperation. • Actors do not adjust their policies to each others’ objectives; they see other actors’ objectives a hindering the attainment of their own goals. • See Figure 4.1 on page 53 • Harmony is apolitical, cooperation and discord are political. • Cooperation does not mean there is no conflict. “It takes place only in situation in which actors perceive that their policies are actually or potentially in conflict, or potential conflict. Without the specter of conflict, there is no need to cooperate”

Chapter 4: International Regimes and Cooperation • "To understanding international cooperation, it is necessary to comprehend how institutions and rules not only reflect, but also affect, the facts of world politics.” • Individual acts are not sufficient to understand patterns of cooperation. • The context an actor operates in will define his expectations and therefore affect his behavior

Chapter 4: Defining and Identifying Regimes • Defines regimes as a “set of implicit or explicit principles, norms, rules, decision making procedures around which actor's expectations converge in a given area of international relations. Principles are beliefs of fact, causation and rectitude. [Norms are standards of behavior defined in terms of rights and obligations. Rules are specific prescriptions or proscriptions for action. Decision-making procedures are prevailing practices for making and implementing collective choice]”

Chapter 4: Self-Help and International Regimes • It would be fundamentally misleading to belief that regime rules/norms are more powerful or important than domestic ones • World politics is decentralized” Self-help (based on sovereignty) will make the rules of regimes weaker than the rules of domestic societies • Suggests that regimes should not be thought of as a new world order beyond the nation state. • Rather: They should be “comprehended chiefly as arrangements motivated by self-interests: as components of systems in which sovereignty remains a constitutive principle”

Chapter 4: Conclusions • International regimes reflect discord and cooperation over time. • Hence, long-term patterns of behavior should be examined, not individual, isolated actions. • Regimes can be viewed as intermediate factors / intervening variables between fundamental characteristics of world politics (e.g. distribution of power) and the behavior of actors.

Chapter 5: Rational Choice and Functional Explanations • If there is no cooperation, it does not mean that this is due to a lack of mutual interests: Game theory demonstrates that even if actors have shared goals, they may fail to cooperate • Central idea of the book: Seeks to show how rational egoist model of the state can be upheld, and cooperation can nevertheless occur.

Chapter 5: Single-Play Prisoner's Dilemma and the Problem of Collective Action • Prisoner’s Dilemma: “Combination of mutual dependence and conflict’ of partnership and competition” • “Both players can benefit from mutual cooperation, but each can gain more from double-crossing the other one – that is, from ‘defection’ ” •  Actors fail to achieve a Pareto-optimal outcome, even though they share some interests. Table from balanceofeconomics.com

Chapter 5: Single-Play Prisoner's Dilemma and the Problem of Collective Action • The Problem of Collective Action is based on the same idea. • Recall from n Olson’s book and his preceding Logic of Collective Action: • Public goods are under-produced because the cost of individual contribution is high(er than the expected pay from it) • Hence, free-riding is the dominant strategy • Why do the Prisoner’s Dilemma and the Logic matter for this book? • Because of the “fallacy of composition” – the believe that the “sources of discord must lie in the nature of the actors rather than in the pattern of interaction” • The above is complicated, but very important. Questions?

Chapter 5: Limitations of Rational Choice Models: Choice, Anomie, and Ethics • Rational Choice creates an unreal and abstract world for analysis: • Power differences matter. Rational actions don’t mean voluntary actions. • Egoism doesn’t mean an individual thinks he exists independent of others (atomistic assumption of the individual in society) • Rationality must not be confused with egoism • Choice and Constraint: Actors can join regimes involuntarily. Power matters. • Egoism and Anomie: Prisoner’s Dilemma etc. assume that there are no bonding ties between individuals (what about fairness?) If both prisoners were in the Mafia, they would not confess! This would be very irrational. • Rationality and Ethics: Altruism does not have to be irrational. If I would feel forever guilty after confessing and want to commit suicide, I better not confess and rather go to prison for a while.

Chapter 5: Iterated Prisoner’s Dilemma and Collective Action in Small Groups • Collective action in small groups is similar to a repeated game of Prisoner’s Dilemma • If future rewards are known, defection is not the best strategy anymore • If governments negotiate on multiple issues at the same time, as in trade negotiations, this can have the same effect as playing the Prisoner’s Game multiple times, and result in reciprocity and a change in expectations of behavior. • Trade negotiations can be similar to small groups in Olson’s theory: They may be able to provide selective incentives and therefore sustain cooperation. Often, small numbers of states are engaged in such negotiations, and are comparable to a small group vis-à-vis the rest of the world.

Chapter 5: Egoistic Cooperation and the Creation of International Regimes • Recall: The existence of a hegemon is not sufficient or necessary for cooperation. • “Intensive interaction among a few players helps to substitute for, or supplement, the actions of a hegemon” • Even if a hegemon declines, states in a regime can benefit from cooperation within “dense policy spaces”, i.e. how closely related policies are to another.

Chapter 5: Functional Explanations and Theories of Market Failure • Rational choice leads us to look at opportunity costs. What does the actor forfeit for taking one course of action? • Institutions affect opportunity costs: • Functional Explanations account for causes in terms of their costs. Effect explains cause. • Following this logic: “Rational choice theory, as applied to social institutions, assumes that institutions can be accounted for by examining the incentives facing the actors who created and maintain them. Institutions exist because they could have reasonably been expected to increase the welfare of their creators” • This does not imply, however, that existing institutions are perfect for the purpose they serve.

Chapter 6: A Functional Theory of International Regimes Why US hegemony may have been a crucial factor in creating some existing regimes, and how they can continue to exist without US hegemony • Political Market Failure and the Coase Theorem • “Like imperfect markets, world politics is characterized by institutional deficiencies that inhibit mutually advantageous cooperation” • The conditions for the Coase theorem don't hold in world politics: there aren’t formal legal rules, there isn’t perfect information, and transaction costs are not zero. • Hence, we can conclude that regimes are created to create precisely these conditions

Chapter 6: How are International Regimes and Coase • Legal Liability: There is no formal legal liability in IR, but arrangements designed to establish stable mutual relationships. • Transaction Costs: International regimes reduce costs for favored bargains, increase costs for disfavored ones (GATT allowed for retaliation against some policies). More efficient system for setting up meeting, negotiations. • Uncertainty and Information: Asymmetrical information = some mutually advantageous deals may not be made because one actor knows more than the other. International regimes “help governments to assess others’ reputations by providing standards of behavior against which performance can be measured” • Moral Hazard: Agreements may cause risky behavior (bail-out problem). Think IMF? • Uncertainty: How will another in an agreement behave? If a state A is enthusiastic about cooperation, other states might be suspicious because it looks like state A stands to gain relatively more from cooperation.

Regimes and Market Failure: Regimes can be seen as being created in order to make Coase’s Theorem work.

Chapter 6: Compliance with International Regimes Why do governments seem to comply with regimes even if they seem to be constrained by them? • The Value of Existing Regimes: Regimes are hard to create. The risk of losing them through non-compliance may be a reason for compliance! • Networks of Issues and Regimes: States can expect retaliation (in other issues) if they do not comply. Other regimes that states benefit from may suffer from non-compliance in one regime. Considering their reputation might lead states to comply.  "Rational egoism can lead governments not only to make agreements, but to keep them even when they turn out poorly."

Chapter 7: Bounded Rationality and Redefinitions of Self-Interest • The ideal assumption of egoistical self-interest says that making decisions is costless. Bounded rationality relaxes this assumption. • Only so many different possibilities can be considered, only so many calculations made. Hence, decision-makers search for options only until they find one that lies above a “satisfactory level” – they “satisfice” rather than perfectly maximize. • Decision-makers adopt generalized rules and processes to reduce the costs of decision-making  Regimes create “rules of thumb” which to follow are less costly than perfectly rational maximizing utility, given the cost of decision-making.

Decision-makers fear the changing preferences of future decision-makers, and classical rationality does not account for this. • Governments change, and decision-makers may be inclined to commit their government to a set of rules that future governments have to adhere to. • Think: President A is a free-market liberal. He commits the country to membership in the IMF and World Bank and takes out loans with conditions. President B, a protectionist Marxist is elected. He is still bound by the IMF rules; president A protected himself against future preference change of the government. • Empathy: Actors might perceive others’ well-being as their own preference • If we consider that egoism can be relaxed to the extent that empathy plays a role in decision-making, then the possibilities of cooperation expand • Consider this: Regimes often have normative rules. Is it possible that they developed because it makes it “morally costly” for leaders to break them?

End of Theoretical Part. We can stop here?

Chapter 8: Hegemonic Cooperation in the Post-War Era • American Hegemony 1947-1971: Money, Trade, Oil • stable international monetary system • provision of open markets for goods • access to oil at stable prices • Bretton Woods and the creation of IMF and World Bank • Shortage of dollars in the international economy made the Marshall Plan necessary: While the US would have preferred renewed isolationism, hegemonic cooperation was not possible this way. • Also: The Marshall Plan did not demand reciprocal behavior from recipients. Short-term losses in exchange for long-term control.

Hegemonic Cooperation in Oil • US controlled oil so well that no formal regime was necessary • Control of Arab Oil, 1943-1948 • The Sterling-Dollar Oil Problem: "The nets of interdependence cast by a hegemon also entangle itself.” • Iran, 1951-54 - Intervention and the Consortium: "Political, military, and economic resources were used in combination with one another." Overthrew Mossadegh, installed the Shah with the help of a CIA-backed coup. • The Emergency Oil Lift Program, 1956-57: U.S. used its economic and political resources to pressure Britain and France enough to cope with the potential oil shortfall caused by the invasion of Egypt."... illustrates hegemonic cooperation at its apogee. The United States was able not only to stop the British-French-Israeli invasion... but... to induce European governments to decide on oil allocations.” • Mandatory Oil Import Quotas, 1959-73: reflects domestic political constraints inhibiting hegemonic cooperation.

Chapter 8: Conclusions • In trade and monetary policies, the US created international regimes. In oil, we established an informal company-run regime. • Complex interdependence emerged. The use of force between US, Europe, and Japan was out of the question. But this did not mitigate cooperation! • Maintaining hegemony necessitates certain policies. The US failed to institutionalize a Petroleum Regime, leading to price drops and depletion of domestic resources. Domestic special interest groups caused this. • This should ring a loud “Olson Bell”.

Chapter 9: The Incomplete Decline of Hegemonic Regimes • As US hegemony began to decline in the 1970s, the institutions from the 40s and 50s also began to decay, but not completely. • But cooperation still took place: • Hegemonic stability theory partially valid • Hegemonic decline makes cooperation harder but not impossible • But hegemonic stability theory does not capture that cooperation also benefits from regime qualities: expectations, transaction costs, and uncertainty

Chapter 9: Changes in International Regimes • Weakening regimes after hegemonic decline • US discouraged investment in foreign securities to protect the USD • GATT “failed”, there began to be growing tolerance toward “illegal” trade restrictions • The informal oil regime was challenged by host countries (OPEC) • Monetary and Trade Regimes • Even though the US abandoned the Gold Standard in 1971, and exchange rates became floating, the IMF still “rules” • The trade regime still resulted in lowering tariffs and quotas, but the purpose of the cooperation became more directed towards excluding Third World countries.

Chapter 10: The Oil Regime • International regimes cannot enforce rules like hierarchies do: They facilitate patterns of negotiation • Enforcement of rules is secondary – they are symbols and guidelines • “Centralized rule-enforcement by international organizations is a pipe-dream as long as the nation-state remains more 'obstinate' than 'obsolete.’” • Realists overlook the power of international organizations as facilitators of agreement!

Chapter 11: The Value of Institutions and the Costs of Flexibility • “Interdependence in the world political economy generates conflict.” Incompatible policies are pursued; discord ensues. Policies have to be adjusted to one another - cooperation is necessary. • We can assume that American hegemony will not be restored. There will have to be cooperation without hegemony – can the American institutions be sustained? • Regimes help distribute information, foster continued interaction, making reputation important, and foster exchange based on reciprocity.

Conclusions cont. • Information and power matter. Realism needs to be amended to account for the systemic value of institutions: They have an effect on how states pursue their interests. • The false conclusion is to think about IOs as hierarchical “peace through law” or world government. They facilitate rather than mandate, and help governments pursue their interests through cooperation.

Institutions and Cooperation in IR