Fostering economic policy coordination in Latin America: the REDIMA approach to escaping the prisoner's dilemma

This work attempts to assemble and synthesize some results of the first phase (2000-2003) of the REDIMA project implemented in Latin America by ECLAC in cooperation with the European Commission, which provided technical support as well as co-financing for the project. REDIMA is the acronym of the Spanish and Portuguese name of the Macroeconomic Dialogue Network (Red de Diálogo Macroeconómico), which was conceived and implemented in the three main subregions of Latin America between the end of 2000 and end of 2003 by the ECLAC- United Nations headquarters in Santiago, Chile. This volume is intended mainly for Latin American experts involved in setting the macroeconomic policies of their respective countries, but it should also be of interest to a broader public concerned with regional integration options and strategies. It aims to provide some useful elements for addressing specific issues related to coordinating policies among sovereign nations in a world undergoing globalization and subject to increasing uncertainty. It is not constructed as an analytic treatise. The book has a twofold objective: to provide clear positions regarding options for Latin American integration (on the basis of the author's personal analysis, which, in turn, stems from his own professional experience both at the European Union and in Latin America), and to publicize the REDIMA experiment, as well as the momentum behind it and the proposals issued through it. In addition, the book hopes to elicit reactions from readers and promote an exchange of ideas among policy makers, experts and citizens, and thus encourage the formulation of feasible courses of action in Latin America. More than arriving at normative conclusions, my purpose in staking out positions and debating issues is to encourage endogenous processes appropriate to each subregion and use the experience gained by REDIMA. The book is structured as follows: given the theoretical results and the indisputable fact that the greatest obstacle to policy coordination lies in the lack of appropriate consensus-based models for understanding reality (underlying models) -a problem which has no short-run solution- attention is focused on practical examples and on the attempts frequently made in this direction (the Bretton Woods system, the Group of Seven [G-7], the European Monetary System [EMS] and the European Economic and Monetary Union [EMU], in which the euro is the common currency) to draw some initial lessons (chapter I). This effort also examines the prisoner's dilemma situation that hinders cooperation (chapters II and III). The examples given in these chapters make it possible to pinpoint the specific elements behind the success of the European experiment of encouraging national decision makers to welcome cooperative strategies (chapter IV). The European Union case shows that escaping planned "centralist coordination" through successive "trials and errors" -a pragmatic scheme based on a dialogue between autonomous actors gradually creating mutual trust- and recognizing that each government legitimately tends to act in its own interest made it possible to arrive at a minimum consensus regarding the content of policies and at an acceptance of some basic common rules. In the European process, this kind of dialogue stimulated self-discipline to protect countries' own legitimate national interests (market-based rewards for or sanctions against national political decision makers). Next, the book attempts to identify the essential principles allowing the prisoner's dilemma to be overcome (chapter V). In the European case, rather than being devised according to a broad institutional plan, the solution emerged from the development of personal contacts among policy makers within a collective effort to monitor each economy from a regional perspective, thereby allowing it to be viewed as a continuous game, which, it was hoped, would enhance the credibility of domestic policies. This multi-faceted approach created specific incentives for individual participants to cooperate at the regional level, thereby creating a positive-sum game in which the positive outcome increased with the iteration of the game. Hence, the prisoner's dilemma was resolved through the dynamics of the game: that players had to meet over a long and undefined period, that they could not escape the consequences their decisions had on fellow participants, that the incentives to defect diminished over time and were commensurate with the strengthening of integration, that players learned more and more about each other, that rewards and sanctions were administered progressively and allowed the balance of benefits and costs to be identified, reducing uncertainty regarding the results of cooperation -all these factors implied that the cost of non-cooperation rose rapidly with time, and positive outcomes increased with the iteration of the game. Next, the applicability of these general principles to Latin America is examined, allowing the REDIMA political-economy approach to be introduced (chapter VI). In particular, the contextual differences between the European and Latin American integration processes are examined. This leads to an identification of the three essential obstacles to regional cooperation in Latin America (chapter VII). The book builds on these elements to present the key guidelines stemming from the REDIMA political-economy approach for escaping the prisoner's dilemma (chapter VIII). To conclude on a practical note, the preceding analysis is summarized through an examination of exchange-rate regimes (ERRs) and policies, in order to formulate some concrete proposals for debate (chapter IX). In particular, since "corner solutions" for the choice of exchangerate regime imply either a lack of flexibility or a lack of robustness, a regional cooperation scheme could, under specific conditions, provide the countervailing powers, or "checks and balances", that would lend credibility without a loss of flexibility. To complement this information, Phase 1 of the REDIMA project and its implementation are briefly evaluated (chapter X).""