Ruling the World

Ruling the World

Ruling the World POWER POLITICS AND THE RISE OF S U P R A N AT I O N A L I N S T I T U T I O N S

LLOYD GRUBER

P R I N C E T O N P R I N C E T O N ,

U N I V E R S I T Y N E W

J E R S E Y

P R E S S

Copyright © 2000 by Princeton University Press Published by Princeton University Press, 41 William Street, Princeton, New Jersey 08540 In the United Kingdom: Princeton University Press, Chichester, West Sussex All rights reserved

Library of Congress Cataloging-in-Publication Data Gruber, Lloyd, 1964– Ruling the world : power politics and the rise of supranational institutions / Lloyd Gruber. p. cm. Includes bibliographical references and index. ISBN 0-691-01040-4 (cl. : alk. paper) — ISBN 0-691-01041-2 (pb : alk. paper) 1. International relations. 2. International cooperation. 3. Supranationalism. 4. Balance of power. I. Title. JZ1308 .G78 2000 327.197 21—dc21 99-04063

Sources for figures: 6-1. IMF, Direction of Trade Statistics Yearbook, 1989; 6-2. IMF, Direction of Trade Statistics Yearbook, 1989 and World Bank, World Development Indicators, CD-ROM; 6-3. OECD, Economic Outlook—Historical Statistics, various years; 7-1. Adapted from Hart 1990, 71, table 12; 7-2. Adapted from Conroy and Glasmeier 1992/93; 7-3. Banco de México; 8-1. IMF, International Financial Statistics; 8-2. IMF, Direction of Trade Statistics Yearbook, 1984; 8-3. IMF, International Financial Statistics; OECD, Historical Statistics; 8-4. OECD, Economic Outlook—Historical Statistics, various years; 8-5. OECD, Economic Outlook—Historical Statistics, 1960 – 1990 (1992); 8-6. OECD, Economic Outlook—Historical Statistics, 1960–1990 (1992); 9-1. OECD, Economic Outlook—Historical Statistics, various years; 9-2. IMF, International Financial Statistics; 9-3. IMF, International Financial Statistics, CD-ROM; 9-4. OECD, Economic Outlook—Historical Statistics, various years; 10-1. Adapted from Riker 1996, 19, fig. 2-1. This book has been composed in Postscript Sabon The paper used in this publication meets the minimum requirements of ANSI/NISO Z39.48-1992 (R1997) (Permanence of Paper) www.pup.princeton.edu Printed in the United States of America 1

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LIST OF FIGURES

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LIST OF TABLES

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PREFACE AND ACKNOWLEDGMENTS

1. Introduction: From Anarchy to Organization PART I: WHY DO NATIONS COOPERATE?

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2. Institutions, Collective Action, and the Prospect of Mutual Gain

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3. Winners and Losers: The Case for Theoretical Reorientation

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PART II: HOW DO NATIONS COOPERATE?

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4. The Efficiency Rationale for Supranational Governance

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5. Broadening the Debate: The “Power Politics” of Institutional Design

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PART III: NORTH AMERICAN TRADE 6. Jump-Starting the Free Trade Bandwagon 7. NAFTA and Beyond: Is Free Trade Contagious? PART IV: EUROPEAN MONEY

93 95 122 169

8. Winners and Losers in the European Monetary System

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9. Rigging the System: Why Did the EMS Take the Form It Did?

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PART V: CONCLUSIONS

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10. Rethinking International Cooperation

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BIBLIOGRAPHY

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INDEX

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L I S T

O F

F I G U R E S

2-1.

The Positive-Sum Logic of Neoliberalism

18

2-2.

The Collective-Action Paradigm: A Utility Representation

30

2-3.

The Collective-Action Paradigm: Integrating Power into the Analysis

31

3-1.

Power as Coercion

35

3-2.

An Alternative Model of Power Bargaining

36

3-3.

Go-It-Alone Power

39

3-4.

Cooperation as a Game of Winners and Losers

44

3-5.

The Cooperation Game, Stage Two

49

3-6.

Go-It-Alone Power as a Bargaining Tactic

51

4-1.

The Prisoners’ Dilemma

64

4-2.

The “Battle of the Sexes” Game

77

6-1.

Geographic Distribution of U.S. and Canadian Trade, 1987

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6-2.

Trade as a Share of U.S. and Canadian GDP, 1987

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6-3.

Indicators of Canadian Economic Performance, 1984–1993

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7-1.

U.S. Merchandise Imports from Canada and Mexico, 1979–1987

133

Ratios of Real Income per Capita in Mexico, the United States, and Western Europe, 1960–1988

149

Mexico’s Attractiveness as a Site for Foreign Investment, 1987–1996

150

8-1.

Monthly Exchange Rates in Germany, 1970–1980

176

8-2.

France and West Germany’s Major Trading Partners, 1978

185

8-3.

UK-ERM Interest Rate Differentials, 1979 –1993

188

8-4.

Consumer Price Inflation in Italy, 1977–1990

195

8-5.

Exports as a Percentage of GDP in Germany and Italy, 1960–1990

206

A Comparison of Growth Rates in Germany and the United Kingdom, 1978–1990

208

7-2. 7-3.

8-6. 9-1.

Inflation in France and Its Major European Trading Partners, 1974–1993 231

9-2.

The D-Mark/Franc Exchange Rate, 1974–1994

235

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9-3.

Interest Rates in France and Germany, 1976–1994

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9-4.

Annual Unemployment Rates in France and Other Major European Countries, 1976–1994

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Riker’s Spatial Representation of Alternative Possible Constitutions

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10-1.

L I S T

6-1.

O F

T A B L E S

U.S. Antidumping and Countervailing Duty Investigations Initiated against Canada, 1979–1986

102

7-1.

Foreign Direct Investment in Mexico, 1989

130

7-2.

Mexico’s Major Trading Partners, 1989

131

7-3.

U.S. Antidumping and Countervailing Duty Investigations Initiated against Mexico, 1979–1990

132

Areas of Intense Competition between Mexican and Canadian Manufactured Exports to the United States, 1987

134

Areas of Greatest U.S. Import Growth from Mexico, 1985–1987

137

Popular Vote in Italian Parliamentary Elections, 1953–1983

198

Election Results Immediately before and after Italy’s Entry into the EMS: A Closer Look

199

The Symmetry of Business Cycles in the European Community, 1965–1979

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Cumulative Change in Bilateral Real Exchange Rates of Italy, France, and West Germany, 1979–1990

205

The Symmetry of Business Cycles in the European Community, 1965–1990

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7-4.

7-5. 8-1. 8-2. 8-3. 8-4. 8-5.

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The last few decades have witnessed an outburst of international cooperation and institution building unlike anything seen in previous years. While monetary and trade institutions have received the lion’s share of attention, the trend actually extends well beyond the economic arena, with new regional and multilateral initiatives proliferating in areas as diverse as foreign aid, health policy, human rights, the environment—even national security. But that’s really only the beginning, for many of these new initiatives do not look at all like the ones we are used to seeing. The difference is not just that they tend to be “wider,” often (like the North American Free Trade Agreement) spanning countries at vastly different levels of economic development. Nor is it simply that they bear more directly upon matters of domestic policy, their “deeper” provisions covering everything from antitrust law and pollution standards to basic questions of fiscal, monetary, and industrial policy. As striking as these differences may be, the most important departure from the regional and multilateral agreements of past years is that, with few exceptions, today’s agreements come equipped with their own built-in governance structures (cf. Williamson 1985). The result has been an extraordinary—perhaps unprecedented—transfer of policymaking prerogatives from individual nation-states to a host of new, higherlevel political institutions. If you think this is cause for celebration, you are not alone. Within the academic community (and not only among specialists in international relations), the notion that political institutions are mutually beneficial arrangements—that they would never come into existence, much less grow in size, stature, and assertiveness, were they not “Pareto-improving”—is today’s conventional wisdom. But is it really true? This book has a few basic purposes. The first is to suggest why I think this emphasis on interstate cooperation’s positive-sum consequences may be leading scholars of international relations down the wrong theoretical path. To be sure, history records few examples of multilateral institutions being foisted upon unwilling signatories. But the fact that membership in a cooperative arrangement is voluntary does not mean that that arrangement necessarily works to everyone’s advantage. Some cooperators, be they individuals or nations, may have a strong preference for the original, noncooperative status quo. The question, of course, is why these participants—the losers—would ever be willing to assume membership in such an arrangement. After all, it is not as if their partners—the arrangement’s beneficiaries—could prevent them from opting out. If the losers do not withdraw, one must conclude that it is because they choose not to withdraw. So why, then, would they ever make this (voluntary) choice? Stripped to its essence, my explanation is that the losers know the supra-

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national arrangements they dislike are perfectly capable of functioning without them. While they themselves would like nothing more than to see these arrangements disappear, they realize that (1) there are other actors for whom supranational decision-making structures really are beneficial and (2) these other actors would continue to benefit from these structures even if they, the winners, were their only members. The fact that the winners would still realize welfare gains relative to the initial status quo affords them a kind of “go-it-alone power,” the importance of which—indeed the very existence of which—has been overlooked by previous scholars. This is not a trivial oversight. If I am right, a great deal of the supranational activity we have seen in recent years—the continuing frenzy of interstate deal making, treaty signing, and institution building—is a product of just this sort of go-it-alone dynamic. Not that go-it-alone power is always present, of course. When, exactly, is it most likely to operate? And what, precisely, are its consequences? How, in short, does go-it-alone power work? After introducing the concept, I go on to explore its inner logic, clarifying how it differs from that of other types of power and suggesting how these differences in turn point the way toward a broader, more balanced perspective on international cooperation. What emerges from this discussion is a new way of thinking not only about cooperation’s consequences—who wins and who, if anyone, loses—but also about the form it takes as well as the distinctive paths by which it occurs. Why have the relatively “thin” intergovernmental treaties and agreements of earlier years been giving way to “thicker” supranational arrangements? How can we account for these arrangements’ (differing) internal structures? Why does the process of institutional enlargement so often seem to take on a life and momentum of its own? My claim is that go-it-alone power has implications for how we go about addressing all of these questions, and others as well. If elucidating the theory of go-it-alone power is my first purpose, demonstrating how it works in practice is my second. To that end, I take a fresh look at the political origins and structures of the North American Free Trade Agreement (NAFTA) and European Monetary System (EMS). When it comes to global economic relations, the forging of these two interstate arrangements—the first an historic and, to most observers at the time, quite unexpected trade pact between Canada, Mexico, and the United States; the second an equally historic (and no less surprising) exchange rate regime involving all of the major economic powers in Western Europe—would have to rate among the postwar period’s most important international developments. The prevailing view is that they were also among the most successful: Nearly everyone seems to think that the launching of NAFTA (in the early 1990s) and the EMS (in the late 1970s) made it possible for their respective member governments to overcome collective-action problems in the pursuit of “gains from exchange.” My own view is that this line of thinking fundamentally misunderstands what NAFTA and the EMS were about. For if the criteria for “gains” are de-

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fined in Pareto terms—did the inaugurations of NAFTA and the EMS improve each of their members’ welfare relative to the state of affairs that existed beforehand?—matters are not so simple. While it is true that the creation of these arrangements did further the economic and political objectives of their respective “enacting coalitions,” other member states acceded to them, I will argue, only because they lacked a better alternative. Though eager not to be left behind, the latter states (or, more precisely, the individuals and parties presiding over their governments) nonetheless fully expected to incur utility losses as a result of their participation. If, in other words, it had been within their power to restore the noncooperative status quo— which, unfortunately for them, it was not—these NAFTA and EMS signatories would have gladly, indeed enthusiastically, done so. As will become clear as you move through the chapters that follow, this is not simply a study of international economic relations. While my substantive analysis focuses on the politics of North American trade and European money, my theoretical arguments are much broader, touching as they do upon issues of long-standing interest to students of domestic politics, organization theory, public policy—even political philosophy. In short, this is not a book about the “power politics” of international institutions. It is a book about power, cooperation, and institutional design in general. ?

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This study is the culmination of a research project that I began . . . well, let’s just say several years ago and leave it at that. Along the way, I have benefited from the extraordinary generosity (not to mention patience) of a great many friends, colleagues, and students. Within this group, I owe a special debt to my three dissertation advisers, Geoffrey Garrett, Stephen Krasner, and Terry Moe. My acquaintance with Geoff dates back to 1986 when, as fate would have it, the Oxford college in which I had just taken up residency appointed him to be its new tutor in Politics. I took a tutorial from Geoff that autumn and, though I had originally come to England to pursue a graduate degree in sociology, immediately changed my field of study. Had it not been for that tutorial—and for Geoff’s strong encouragement later that summer—I doubt that I would have gone on to pursue a Ph.D. in political science upon returning to the United States, and I might not have pursued an academic career at all. My other two advisers, Steve and Terry, also deserve special thanks. Always prompt and incisive, their feedback was especially valuable in the early stages of this project when, in between (and sometimes during) sets of tennis, they helped me grapple with the ideas and arguments that have since made their way into this book. Among the other Stanfordians upon whom I inflicted early drafts of this work, Delia Boylan, John Ferejohn, Brian Gaines, Judith Goldstein, and Barry Weingast were especially giving of their time and seemingly boundless creative energy. As if my accumulated debts were not already large enough, I have, since

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moving to the University of Chicago, incurred even more. I am particularly indebted to Charlie Glaser, the best foil a woolly-headed “institutionalist” could ever hope to have as a colleague—and also, I hasten to add, the most loyal and supportive of friends. Another of my debts, one I gladly continue to accrue, is to PIPES, Chicago’s Program on International Politics, Economics, and Security workshop. With Charles Lipson and my Harris School colleague Duncan Snidal at the helm, PIPES has made studying international relations at Chicago a thoroughly enjoyable experience, offering a weekly reminder of why I got into this business and why (most of the time, anyway) I still love it. Others around the Chicago campus who deserve special mention are Delia Boylan (again), Sven Feldmann, Thomas DeLeire, Howard Margolis, Brian Portnoy, Alex Thompson, and Stephen Walt, all of whom have taken the trouble to read parts of the manuscript and offer their suggestions for making it better. Among the many institutions that have supported my research, I want to single out the Massachusetts Institute of Technology, whose political science department was kind enough to offer me a visiting research fellowship in 1996–97. I am particularly appreciative of the encouragement I received that year from Stephen Ansolabehere, Eugene Gholz, Jeff Lewis, Richard Locke, Kenneth Oye, and James Snyder—as well as from Harvard scholars Jeffry Frieden and Lisa Martin, who were no less willing to answer my questions and suggest ways of clarifying particular points. Others who have commented on various aspects of my work over the years include James Caporaso, Stephanie Golob, Miles Kahler, Peter Lange, Helen Milner, Thomas Oatley, Ronald Rogowski, Arthur Stein, Ronald Wonnacott, and several anonymous reviewers, all of whom went well beyond the call of duty. Generous financial support for this project has been provided by the National Science Foundation, the MacArthur Program on International Peace and Security, the George P. Schultz Canadian Studies Program, the Andrew W. Mellon Foundation, and the North America Forum of the Institute for International Studies at Stanford University. The financial assistance of all of these organizations is greatly appreciated. In drafting the final version of the manuscript, I have had the distinct pleasure of working with Malcolm Litchfield, the editor in chief at Princeton University Press, as well as Peter Meyerhoff, Elizabeth Rourke, and my wonderful copy editor, Cindy Crumrine. For Cindy’s help in smoothing out the rough edges of my prose, I am deeply grateful—and believe me, dear reader, you should be too! Finally, I cannot even begin to express my gratitude to my wife, Delia Boylan, without whose support and companionship—and, yes, nudging—this book would never have been finished. Lest there be any doubt, Delia, this book is for you.

Ruling the World

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Introduction: From Anarchy to Organization Without cooperation, we will be lost. Without institutions there will be little cooperation. And without a knowledge of how institutions work— and what makes them work well—there are likely to be fewer, and worse, institutions than if such knowledge is widespread. —Robert O. Keohane

A CALL FOR THEORETICAL REORIENTATION If supranational structures like the World Trade Organization, the European Monetary Union, and NAFTA have recently been “spreading like wildfire,”1 it is because they make it easier for states to cooperate—and in a world of rapidly increasing interdependence and complexity, the more interstate cooperation, the better. Inasmuch as there is a conventional explanation for the rise of supranational institutions, surely this is it. It’s true that the last several years have seen questions about the role of power, distributional conflict, bargaining, and coercion rise to the top of the cooperation literature’s analytical agenda.2 So far, however, few of the theorists responsible for this shift have thought to challenge the view, most closely associated with the “neoliberal” scholar Robert Keohane, that international cooperation—and hence international institutions—are fundamentally good things. Thus, while “neorealists” complain that Keohane’s theoretical orientation minimizes the importance of interstate disputes over the distribution of collective benefits (see esp. Grieco 1993 and Krasner 1991), they, too, assume that the cooperative equilibria that emerge once these distributional conflicts are resolved leave all participants, strong and weak alike, at least as well off as they would have been had the original, precooperation status quo remained in effect. In many ways, this convergence in liberal and realist opinion is a sign of theoretical progress. The underlying explanatory logic of the new liberalrealist research agenda has the virtue of being firmly anchored in rational 1

See, e.g., Whalley 1993. See, among many others, Grieco 1990; Krasner 1991; Garrett 1992; Knight 1992; Oye 1992; Morrow 1994; and Fearon 1998. 2

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choice foundations, and there is little question that its emphasis on possibilities for (and impediments to) mutual gain captures a great deal of what is going on.3 As productive as it has been, however, the line of theory developed by Keohane and subsequently elaborated by Stephen Krasner, Joseph Grieco, and other scholars has led to an overemphasis on the mutual-gains side of international cooperation. For while the prospect of collective gain may well be driving some of the action, there is a winners-and-losers dimension to recent developments that may, in many cases, be even more important. Might a number of the supranational arrangements we keep hearing about—even ones as “successful” as NAFTA and the newly reinvigorated European Monetary System (EMS)—end up working to the disadvantage of some of their participants? Although this conclusion runs directly counter to the positive-sum view of international cooperation that dominates today’s theoretical mainstream, the model of cooperation set forth in this book raises the possibility that, indeed, only some—perhaps a small fraction—of the supranational institutions that get created and endure actually benefit all of their signatories. To be clear, the issue here is not simply one of relative gains and losses. The NAFTA and EMS losers were indeed made worse off in relative terms—they did not benefit as much as the winners—but they were also worse off (or so I shall argue) in a more fundamental absolute sense. Had it been within their power to return the world to the original “noncooperative” status quo, they would have been only too delighted to do so. As we will see, the task of adducing evidence for this winners-and-losers perspective is complicated by a number of factors, not least of which is the need to imagine a world in which the cooperative arrangements in question had never gotten off the ground. What would the “utilities” of each cooperation partner have been if, for some reason, these arrangements had never materialized? Might some of these partners have been better off in this noncooperative (albeit hypothetical) situation? Counterfactual questions of this sort are inherently problematic, making it difficult to offer a definitive answer. That said, these methodological difficulties do not explain—and they certainly do not justify—the literature’s enduring preoccupation with the positive-sum consequences of international cooperation. Insofar as previous scholars have misconstrued the driving forces behind such far-reaching cooperative arrangements as NAFTA and the EMS (as I believe they have), the problem has far more to do with deficiencies in our theoretical understandings of cooperation and institution building than it does with any empirical or purely methodological limitations. If we really want to understand why supranational institutions are “ruling the world,” we will first have to broaden our current theories of collective action, extending their logic in ways that acknowledge and incorporate the possibility of both winners and (absolute) losers. That is what I hope to do in this book. 3

Cf. Olson 1965.

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Power Politics and the Institutionalization of International Relations So what, then, is the logic of (international) collective action? Few questions in the study of international politics are more basic or, indeed, more relevant to the concerns of today’s heads of state. And yet even after years of research, and despite the glaring policy significance of the issues involved, the truth is that we are still some distance from a completely satisfactory answer. It is tempting to think that this is because our empirical base is too limited, as if the deficiencies in our theoretical understanding of recent international developments could be overcome by simply piling up more facts or locating new sources of data. In fact, scholars of international relations and comparative politics have already accumulated a vast amount of information about interstate cooperation and institution building in Western Europe and the Americas, the two regions of the world in which current trends toward supranational governance have made greatest headway. Much is known, too, about the emergence of global arrangements like the General Agreement on Tariffs and Trade (GATT), whose member states recently established a new World Trade Organization (WTO) for the express purpose of mediating and resolving their future trade disputes. But while the literature is quite good at describing these momentous achievements,4 it has been markedly less successful at explaining why they occurred, and thus at telling us what sort of developments we ought to expect in the future. To this point, the newfound enthusiasm for supranational institutions—and for interstate collaboration more generally—has remained something of a mystery. This book traces the problem to a widely overlooked conceptual bias in the academic literature. Until now, most scholars have taken the view that international institutions, whatever their distinctive purposes or politics, are fundamentally welfare improving. Underlying this view is a simple two-step logic wherein institutions facilitate international cooperation (step 1), and cooperation in turn facilitates “utility gains” for each participating state or government (step 2). For well over a decade now, this positive-sum analytical orientation— most forcefully articulated in Robert Keohane’s groundbreaking book After Hegemony (1984)—is what has guided empirical inquiry in the study of international cooperation. Not that all has been sweetness and light, of course. Over the past few years, in particular, the disagreements among contributors to the “cooperation under anarchy” literature have been numerous, their internecine controversies heated and intense. Thus far, however, the debate inspired by After Hegemony has focused almost exclusively on the first leg of the institutions → cooperation → mutual-gains two-step: How, exactly, do institutions help their signatories overcome obstacles to collective action? Is it by weakening their incentives to free ride (as Keohane himself proposed), 4

See, e.g., Kahler 1995.

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or do institutions work their magic in other ways—by providing “focal points,” for example, or by altering the identities, and hence the underlying preferences, of the state actors who participate in them?5 But what about the second link in Keohane’s causal chain? Must international cooperation always leave each actor better off than it was in the initial, pre-cooperation status quo? While most scholars see international institutions as efficient, Pareto-improving responses to collective-action problems, this is not, it turns out, the only logical possibility. To demonstrate this point, the next chapter begins laying out a very simple theoretical model in which two states—the ultimate beneficiaries of cooperation—encounter an exogenous shock of some kind, be it a sudden shift in their relative “structural” positions or, more likely (since structural shifts tend to occur rather slowly), a sudden change in one of the state’s preferences, perhaps itself a consequence of a recently held election. In the wake of this shock, our two prime movers—neither of which had previously been inclined to coordinate its policies with the other—observe that they now have certain interests in common and thus could benefit, potentially a great deal, by structuring their future interactions in accordance with a common set of mutually agreed upon rules and procedures. In moving toward a more cooperative relationship, the two states (or, more accurately, their respective leaders) believe they will be able to pursue their joint interests more effectively than would otherwise be the case.6 What are their joint interests? Expanding the total pool of customers available to each other’s domestic producers is one possibility. Alternatively, the two states—let’s call them A and B—may be hoping to reduce the probability of their subsequently becoming embroiled in a costly military conflict. For present purposes, however, what matters is less the specific nature of A and B’s common interests than the fact that the cooperative arrangement they devise—their new multilateral regime—permits these interests to be realized. Having identified the motivations of the regime’s prime movers, I then take a look at the loser’s side of the story: Why might other actors in the international system choose to take part in the new regime established by A and B, its “enacting coalition”? Note that the motivations of these other cooperators may be very different from those of the regime’s original sponsors: although the prime movers have an understandable interest in complying with what is, after all, “their” regime, that same regime need not further the interests of other states. In contrast with A and B, who comply because they anticipate utility gains relative to the status quo, these other states—call them C and D—may actually prefer the original, noncooperative state of the world. But why, then, would C and D ever agree to come onboard? The an5

The preference-altering “transformational” impact of EU membership is explored in RisseKappen 1996, and Sandholtz 1993. On the logic of focal points, see Garrett and Weingast 1993. 6 Although conceptualizing the beneficiaries of cooperation as states or nations is fine for present purposes, I will argue later on that it is better to think of the prime movers not as states but as governments; cf. Moravcsik 1998.

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swer “because A and B make them” is too simple. What we would like to know, of course, is how A and B do this. How, precisely, do our two enactors succeed in getting other states or governments—some of whom would be perfectly content with the status quo—to agree to cooperate? The plot thickens. One possibility is that A and B resort to force, threatening these other actors (i.e., C and D) with economic sanctions or other forms of direct coercive pressure. These days, however, one rarely finds states being forced to take part in new multilateral ventures. To the contrary, states often line up to be admitted into cooperative institutions whose current members do not even want them. Are we therefore to conclude that international cooperation and institution building really are mutually beneficial affairs, that (absent blatant acts of coercion) everyone involved really does expect to derive utility gains relative to the status quo ante? Not necessarily. The fact that cooperation and institution building are matters of voluntary choice does not imply that the institutions in question raise (or even that their signatories expect them to raise) their baseline utilities. Given the losers’ preference for a world in which these arrangements did not exist, theoretical inquiry properly begins with the disruption of the initial, pre-cooperation status quo. How might the winners succeed in removing this status quo from the choice sets of the losers? While engaging in coercive diplomacy is one way, there is often, I will argue, an easier alternative: the new regime’s beneficiaries can simply “go it alone.” By pursuing this line of argument, this book shows how institutionalized cooperation by one group of actors (the winners) can have the effect of restricting the options available to another group of actors (the losers), altering the rules of the game such that members of the latter group are better off playing by the new rules despite their strong preference for the original, precooperation status quo. Once the winners seem likely to establish their new cooperative structure—something they would do even if they were destined to be its only members—the losers conclude that being left out would be even worse than joining. Their entry decisions are, in this sense, purely voluntary; indeed, the losers may well plead to be admitted into the new arrangement. And yet, despite their unabashed enthusiasm for inclusion, the losers would actually be much happier if this arrangement had never been created. While everyone who studies international cooperation is aware that power “matters,” most of the time it is either bargaining power (e.g., Fearon 1998; Krasner 1991; Oye 1992) or coercive power (e.g., Martin 1992a, O. Young 1983) that they have in mind. What I am talking about here, by contrast, is an altogether different kind of power, one that, unlike bargaining power, yields absolute—not just relative—losers and yet does not, like coercive power, require the winners to force their opponents into submission. At no point does anyone in the power-politics model I put forward coerce, or even attempt to coerce, anyone else. Nor, for that matter, do the beneficiaries of

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politics.”7

cooperation engage in “linkage The winners do not get the losers to acquiesce by compensating them (via side-payments) in some other sphere of interaction. The losers acquiesce because they know that the winners are in a position to proceed without them. In a myopic sense, of course, the losers really are better off cooperating. Yet—and this is the important point—that is only because the winners have presented them with a fait accompli. The resulting cooperative regime is not, then, the Pareto-improving outcome it outwardly appears. On the contrary, even when all cross-issue deals and side-payments are taken into account, the losers would still be happier if the original, noncooperative status quo had never been disrupted. Faced with a choice between joining the winners’ new cooperative system or being completely shut out, the losers enthusiastically submit their applications for membership. They do so, however, only because the winners’ actions have had the effect of removing the status quo from their choice sets, leaving them with what they view as a bad option (cooperating with the winners) and an even worse alternative (incurring the costs of exclusion). While this perspective offers a new way of thinking about why nations cooperate, it also provides new insight into how they cooperate. Among other things, for example, it suggests that the institutional preferences of certain cooperators (the governing officials who make up the enacting coalition) are likely to count for a great deal—and those of other cooperators, and of the collectivity as a whole, for practically nothing. Given the enacting coalition’s ability to proceed unilaterally, its members do not really need to take anyone else’s preferences into account at all. Whichever forms of cooperation they prefer will be the ones adopted in the end, whether or not these forms are conducive to the interests of other regime participants. But of course this simply moves the analysis back a step: Which kinds of institutional structures would the first group of participants—the enactors—tend to find most attractive? The obvious answer is the kinds that are most likely to endure. But this begs the question: endure what? What future uncertainties or threats might the enactors be particularly concerned about, and therefore try especially hard to mitigate, as they go about the task of designing “their” institutions? One might think that their greatest concern would be the possibility that one (or more) of the governments that made up the enacting coalition might refuse to hold up its end of the deal. Yet—as I am by no means the first to point out8 —the international relations literature has tended to exaggerate the vulnerability of cooperative arrangements to free riding and other forms of opportunistic behavior. If the rules of the game are clear, if compliance is easily monitored, and, most importantly, if the future stream of cooperative benefits or “payoffs” is expected to be substantial, members of the enacting coalition would presumably have strong incentives to honor one another’s commitments from the outset. 7 8

Cf. Frieden 1994; Garrett 1994; Martin 1992a and 1994; and Sebenius 1983. See, e.g., Grieco 1988.

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In fact, when it comes to the issue of regime durability, the real questions have less to do with the incentives of the enacting coalition than with the incentives of its domestic successors. Although the aforementioned benefit stream may be large for the political elites who make up the enacting coalition, it may be small, or even nonexistent, for the officeholders who succeed them. Consequently, the latter might wish not just to “defect” from the cooperative regime, but to destroy it altogether. While this would deny the beneficiaries of cooperation the utility gains they might otherwise have enjoyed, in the end cooperation is like beauty: its value is in the eye of the beholder. Insofar as their domestic opponents have their own conception of what it means to be “better off,” the governments that comprise the enacting coalition have a stake in finding a way to discourage one another’s internal successors from abandoning the international arrangement that they, the prime movers, are about to create. Why, it might be asked, wouldn’t the enacting coalition’s go-it-alone capabilities afford sufficient protection against this possibility? Wouldn’t the fear of exclusion suffice to keep the newly empowered “beholders” from sabotaging international regimes they dislike and whose initial creation they opposed? The answer is no—at least not necessarily—for unlike the enacting coalition’s external enemies (the losers in other countries), the coalition’s internal enemies (its domestic opponents) would be in a position to single-handedly bring down its new cooperative structures. Should they wish to do this, their withdrawal from these structures is all that would be necessary, since without their ongoing participation, the regimes in question would effectively cease to exist. And because these regimes would no longer exist, the “fear of exclusion” could hardly be expected to operate as a reliable deterrent. This is not to say that the losers would incur no costs in opting out of (and thereby destroying) the regimes they inherited upon taking office, particularly if these arrangements had already been up and running for some time. Indeed, the prime movers could be counted upon to try to make these costs— the price that their (potentially) hostile successors would pay for exercising their “exit options”9 —as high as possible. The flip side is at least as important, however, for one would also expect the enactors to try to reduce the costs to their regime’s would-be destroyers of staying in the regime. In short, the go-it-alone coalition’s interest in co-opting their domestic opponents might well influence the types of cooperative institutions they devise, inclining them toward “thicker” arrangements whose terms are not fully specified at the outset and thus leave the losers some (albeit limited) scope for ex post changes in the initial rules of the game. This, it seems to me, is exactly what logic would suggest. The problem with fully specifying the terms of cooperation ex ante is not that it would be more time-consuming, and hence less efficient, than allowing for subsequent revisions or “clarifications” over time. The problem is that it would deny the enacting coalition’s domestic successors any opportunity to moderate these 9

The phrase is Hirschman’s (1970).

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terms, reformulating—or simply reinterpreting—them in ways intended to make their continued participation in the regime somewhat less burdensome than it would otherwise be. It is for this reason, I will argue, rather than out of the (narrowly construed) efficiency considerations emphasized by previous scholars, that the contractual terms embodied in many of today’s international treaties take the supranational forms they do. Delimited though it is, the flexibility afforded by such arrangements works to co-opt the enacting coalition’s domestic opponents, reducing their propensity to mount a serious challenge to the new regime if, in future years, they should ever get the opportunity. All of this presumes, of course, that the utility consequences of interstate cooperation may differ radically depending on which parties, or even which individuals, happen to control domestic public authority. Allowing that internal leadership changes and government turnover can bring about abrupt shifts in “state” preferences certainly complicates matters, requiring as it does that the analyst peer inside the black box of domestic politics. In this case, however, the analytical payoff is well worth the effort. For if I am right, the realist view of states as internally undifferentiated units10 threatens to obscure what may well be the central motivating force behind the ongoing supranationalization of international cooperation: the vicissitudes of domestic politics inside the pivotal “enacting” states. In sum, power may permeate and infuse international cooperation just as it permeates and infuses international conflict. In the case of conflict, however, relations among nations are not strictly voluntary, and so the means by which the strong exercise power over the weak—outright bullying, brute force, and the like—are more transparent. Make no mistake: there are important differences between go-it-alone power and what might be termed structural or institutional power. Whereas the victims of go-it-alone power are “outsiders”—public officials in countries located outside the enacting coalition—the losers in the case of institutional power are “insiders”—the enacting coalition’s domestic successors. Other differences have to do with the powerful actors’ intentions. In one case (go-it-alone power) the pressure that is brought to bear on the losers is inadvertent; in the other case (institutional power) the enacting coalition goes out of its way to alter the losers’ decision-making calculus, deliberately moderating the costs of cooperation on actors who, were they to exit the cooperative arrangement in question, would effectively bring about its demise. As important as these distinctions are, however, my main concern is with the more fundamental point that power’s influence on international affairs may be far more pervasive than many scholars, including even many hard-nosed realists, currently appreciate. Whether one is talking about go-it-alone power or institutional power, the end result is the same: Without in any way being bullied or coerced, governments choose to participate in cooperative international arrangements they genuinely, and intensely, dislike. 10

See esp. Waltz 1979.

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The Plan of This Book Are all of the participants in today’s international institutions truly better off than they were in the pre-cooperation status quo, or can cooperative institutional arrangements spread like wildfire even when their most ardent “supporters” fully expect to get burned in the process? How much of the current trend toward collective decision-making, institutional flexibility, and delegated authority is being driven by efficiency considerations, and how much by power politics? The first four chapters of the book provide the theoretical groundwork necessary for answering these questions. Chapters 2 and 3 offer a new perspective on the question “why do states cooperate?” After sketching out the conventional explanation for the recent proliferation of cooperative initiatives, I introduce a simple model to demonstrate how an apparently clearcut case of voluntary cooperation may in fact represent an instance of go-italone power. In this model, the weak cooperate only because the strong present them with a fait accompli. This basic framework is further developed in chapters 4 and 5, where the focus shifts from the question of why nations cooperate to that of how they cooperate: Is there a power politics of institutional design and, if so, how might its internal logic differ from that of the efficiency-centered perspectives we have grown accustomed to seeing in the literature? The next four chapters supplement this theoretical discussion with analyses of two of the most important developments in the history of regional trade and monetary relations: the inaugurations of NAFTA (chapters 6 and 7) and the European Monetary System (chapters 8 and 9) during the mid1990s and late-1970s, respectively. In offering these case studies, I hope to show more concretely how theories of international cooperation that fail to appropriately integrate power into their larger explanatory edifice can end up obscuring more than they reveal. At the same time, however, these case studies also serve an additional purpose: They allow me to explore some of the many interesting nuances and subtleties in the book’s larger theoretical argument. Before launching directly into this argument, I should alert the reader to some of the empirical difficulties that it presents. One of these has already been noted: the outside observer must determine how well off a particular member government would have been if, counterfactually, that government had not joined the cooperative arrangement in question. To perform this sort of welfare comparison, the analyst needs to know (among other things) what that government’s leaders were originally seeking to accomplish during their tenure in office. At some point, therefore, the analyst is forced to specify the underlying preferences of the relevant government actors. This is admittedly a complicated task. On the other side of the coin, however, those scholars who embrace the conventional wisdom on international cooperation—that, as Keohane puts it in After Hegemony (1984, 88), “[international] regimes are developed . . . because actors in world politics believe that with such

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arrangements they will be able to make mutually beneficial agreements that would otherwise be difficult or impossible to attain”—seem to have no difficulty assuming (i.e., without even attempting to specify the underlying state or government preferences) that collective action, when it occurs, is in fact “mutually beneficial.” In any event, the fact that the book’s core hypotheses are difficult to test does not mean they are impossible to test. To the contrary, parts III and IV offer a whole series of tests, albeit ones that are more suggestive than definitive. The NAFTA and EMS stories I flesh out below may not qualify as “crucial cases” for my theoretical argument. At the same time, however, it would certainly have been possible for my investigations of these cases to turn up no evidence whatsoever either that defensive considerations—rather than any expectation of positive-sum gain or fear of coercive sanctions—were what motivated some of the participants in NAFTA and the EMS to take part, or that these signatories would actually have been better off, in the sense that their governments would have been less disadvantaged politically, had the pre-cooperation (i.e., pre-FTA or pre-EMS) states of the world remained in effect. The fact that I do turn up such evidence, while it may not prove the empirical validity of my theoretical claims beyond any doubt, does at least lend them plausibility—which, given the counterfactual and preference-specification problems noted earlier, may be all one can reasonably expect at this stage of the game. Let me note, finally, that in mapping out the logic of go-it-alone power, I am not seeking to account for international cooperation in any particular issue-area or geographic region. To be sure, I believe the theoretical approach developed here offers important new insights into the origins and structural foundations of NAFTA and the EMS. In singling out these two cases, however, I do not mean to suggest that this approach is applicable only to North America and Western Europe or only to cases of economic cooperation. In fact, though I dwell here upon the NAFTA and EMS experiences, there is every reason to think that the book’s larger analytical framework can also be used to shed light on other (e.g., non-Western, noneconomic) kinds of supranational institutions, and even other kinds of domestic institutions.11 In much of what follows, however, I deliberately set aside these “generalizability” concerns so as to keep the analysis as clear and simple as possible. 11 The latter strikes me as a particularly promising avenue for future research (see chapter 10). Indeed, much of what I will have to say on the subjects of power, cooperation, and institutions was foreshadowed in the work of an “Americanist,” the great E. E. Schattschneider. See esp. Schattschneider 1960. That the concept I term go-it-alone power bears a strong family resemblance to Schattschneider’s notion of agenda power will become apparent as we go along. Nevertheless—and for reasons I discuss at some length in chapter 3—these are not the same concepts. Quite the contrary, the differences between go-it-alone power and Schattschneider’s earlier conceptualization are as noteworthy, it seems to me, as their similarities.

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Institutions, Collective Action, and the Prospect of Mutual Gain THE NOTION that international institutions are worthy of close examination first gained broad acceptance during the early postwar years. Over the course of the 1960s and 1970s, however, the consensus among scholars shifted 180 degrees. As structural realism came to supplant the largely descriptive institutionalist traditions of the 1940s and 1950s, the supranational organizations that had once been the major focus of attention—principally, the United Nations—were deemed irrelevant or “epiphenomenal.” For realists, power and interests were the predominant forces driving world politics. Institutions were seen as mere facilitators, translating the interests of powerful states directly and unproblematically into international outcomes.1 It would be natural to suppose that this movement toward an institutionfree, balance-of-power theory of international relations arose as a reaction to theoretical deficiencies in the institutionalist literature of the 1940s and 1950s. And, indeed, much of this literature was deficient, with scholars analyzing organizational rules and procedures indiscriminately, almost never pausing to ask where they came from or how, if at all, they influenced or constrained the behavior of member states.2 Only recently, however, have realists felt the need to justify their neglect of institutionalist scholarship.3 From an empirical standpoint, supranational institutions just did not seem to matter very much, as states often violated their institutional obligations with impunity. Nor were realist scholars alone in thinking that institutions could be safely omitted from the analysis of politics. Proponents of pluralist theory (e.g., Truman 1951) also tended to leave institutions out of their larger explanatory framework. By the mid-1980s, though, institutions had once again begun to emerge as a subject of interest among students of international affairs. And this time things were different: Unlike their intellectual forebears, proponents of the “new” institutionalism recognized the importance of grounding their analysis in an overarching theoretical framework. Robert Keohane stands as the leading figure in this effort to go beyond the legalistic, institution-by-institution approach characteristic of earlier institutionalist thinkers. Initially dubbed “regime theory,” the voluminous litera1 The locus classicus of realist thought is Kenneth Waltz’s Theory of International Politics (1979). Other major works in the realist tradition include Carr 1946; Morgenthau 1958; and Waltz’s earlier book, Man, the State, and War (1959). 2 For a more charitable assessment, see Martin and Simmons 1998. 3 See, e.g., Mearsheimer 1994/95.

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ture spawned by Keohane’s took direct aim at Waltz and other realists who, in their preoccupation with international conflict and the balance of power, had failed to conceive of interstate cooperation as anything more than the spontaneous formation of status-quo-preserving, marriage-of-convenience alliances. Since rechristened “neoliberal institutionalism” (Grieco 1988), regime theory has become the theoretical point of departure for the bulk of all academic writing and research on the institutional developments of the 1980s and 1990s.5 The purpose of the next four chapters is to subject this literature to critical theoretical scrutiny. While others have engaged in similar efforts, much of their criticism has focused on what I regard as secondary issues. Thus, proponents of the new institutionalist paradigm are often taken to task for failing to adequately integrate the role of ideas, identity formation, and culture into their larger explanatory framework.6 While a source of concern, however, this is not, it seems to me, a crippling defect. Nor is the problem that international institutions do not really “matter,” in the sense of having a major (independent) impact on the flow of world events.7 Insofar as the institutionalist paradigm is deficient, the fault lies primarily, I will argue, in its theoretical one-sidedness: Why assume that multilateral institutions always and everywhere facilitate mutual gains? Though it is true that states throughout the world are scurrying to join such institutions—or, when shut out, are rushing to create new, smaller-scale institutions of their own—one cannot assume that the resulting “progression” from anarchy to organization is therefore welfare enhancing. Undergirded by rational choice assumptions about state behavior, the model of international cooperation I will introduce in this part of the book raises the possibility that the past several years’ frenzy of supranational activity, rather than fostering peace and prosperity, will end up working to the great disadvantage of some (perhaps most) participating nations.

Back to Basics: Why Do States (Sometimes) Engage in Collective Action? The publication of After Hegemony (1984) could not have been better timed. Emboldened by their success in revolutionizing the study of economic organization, rational choice theorists were about to launch a series of forays into other disciplines. In the field of international relations, Keohane’s justly celebrated book paved the way. 4

Esp. by Keohane 1984. Among the major works within this tradition are Keohane 1984; Kupchan and Kupchan 1991; Lipson 1984; Martin 1992a; Milner 1997; Moravcsik 1998; Snidal 1985b; and Yarbrough and Yarbrough 1992. See also the contributions to Krasner 1983, and Oye 1986a. 6 See, e.g., Goldstein and Keohane 1993; Katzenstein 1996; and Wendt 1994. 7 Cf. Mearsheimer 1994/95. 5

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The starting point for the book’s argument is a simple observation: Policies and events originating in one nation often have large—albeit indirect— effects on the welfare of citizens and governments in other nations.8 Sometimes these spillover effects are mutually beneficial: If German economic policy makers succeed in boosting Germany’s domestic living standards, German consumers have more money to spend on goods and services, and French workers who specialize in producing exports for the German market enjoy a windfall. Other times, however, these spillovers are unwanted, as when a currency devaluation in the United States reduces the competitiveness of U.S. imports from Europe, prompting European countries to devalue their own currencies, thereby precipitating a further devaluation by the United States, and so on. In situations where independent policy making would give rise to what economists call “negative externalities,” Keohane drew the not unreasonable inference that nations would be better off actively coordinating their policies. Thus, the political leaders of country A could agree not to pursue policies harmful to country B so long as their political counterparts in country B refrained from undertaking policies harmful to country A, and vice versa. At bottom, then, cooperation is about reciprocity. As Keohane (1988, 380) writes: “When cooperation takes place, each party changes his or her behavior contingent on changes in the other’s behavior.”9 The result of this exchange—of what Helen Milner (1997, 7–8) characterizes as “the adjustment of one state’s policies in return for, or anticipation of, the adjustment of other states’ policies”—is that all parties end up better off. But if all parties benefit, why haven’t state leaders always been as willing to cooperate as they are today? Drawing on Keohane’s work, neoliberal theorists give two answers. The first is that nations today are more interdependent than they used to be, and thus the potential for negative externalities is greater—as, it follows, are the prospective benefits of multilateral cooperation—than was the case in previous years.10 That said, these benefits may not be sufficient, at least not in themselves, to induce the kinds of mutually beneficial policy adjustments that would leave all states better off. While there are many reasons for this, Keohane and his followers emphasize the potential for ex post defections: A state that suspects its cooperative overtures will not be reciprocated will rationally avoid making these overtures in the first place.11 This line of analysis suggests a second reason for the recent proliferation of new multilateral arrangements. Part of the explanation may be that the “knowledge of how institutions work—and what makes them work well” (Keohane 1988, 393) is becoming more prevalent. By using this knowledge to design “better” institutions, national leaders have ensured that the one8

Cooper 1980 and 1986. Emphasis in the original. See also Keohane 1984, 12 and 51– 52. 10 See, e.g., Milner 1997, 59. 11 Cf. Olson 1965, as well as Hardin 1982. 9

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Figure 2-1. The Positive-Sum Logic of Neoliberalism

shot payoff available to opportunistic defectors amounts to something less than the ongoing stream of collective benefits available to long-term cooperators, the result being utility gains for everyone involved. Neoliberal theorists can be credited with putting forward a cogent explanation for recent developments, one that is grounded in clear, deductive reasoning. Before we accept that explanation’s universal validity, however, it is worth taking a moment to consider the second link in its implicit causal chain (Figure 2-1). Is it not conceivable that institutionally-mediated cooperation, rather than resulting in the realization or “capture” of collective gains, works exclusively to the benefit of the actors who set the process in motion, increasing their power and prosperity at the expense of other actors who participate only because they have no better option? Not only is this conceivable—it is often, I would argue, exactly what happens. Thus far, however, neoliberal theory’s supposedly tough-minded realist critics have taken a different line of attack. Instead of questioning whether multilateral cooperation does in fact help states “manage” globalization, realists have devoted their energies to showing that—the presence of international institutions notwithstanding—cooperative interstate relations are next to impossible to sustain, at least on a voluntary basis, for any significant length of time. Realists, in other words, have taken issue with the first arrow shown in Figure 2-1, not the second.12

The Realist Assault on Neoliberal Theory In the years following the publication of After Hegemony, Keohane’s claims about the role of institutions in facilitating cooperation among nations 12 In concentrating here on neoliberal and realist perspectives, I necessarily give short shrift to other approaches within the study of international cooperation. Two that deserve mention are critical theory (Finnemore 1996; Kratochwil and Ruggie 1986; Wendt 1987 and 1992) and neofunctionalism (E. Haas 1964; Nye 1971; Keohane and Hoffmann 1991). Proponents of these approaches criticize neoliberals and realists alike for (among other things) taking the underlying preferences of international actors as fixed and exogenously given. I will discuss this objection, as well as my own views on the sources and consequences of “preference instability,” in the analysis to follow; see esp. chapter 5.

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emerged as the subject of intense controversy, inspiring a lively, sometimes rancorous debate between neoliberal scholars, who were broadly sympathetic to Keohane’s thesis, and realist scholars, who took the view that international institutions were essentially irrelevant. At first, as mentioned earlier, those in the latter camp felt little need to justify their position. Again, realists have always been more interested in understanding what states can do to preserve the status quo than in exploring how, by devising appropriate multilateral institutions, they might be able to make things better (and, as an empirical matter, none of the multilateral arrangements created in the immediate aftermath of the Second World War seemed to be having an especially large impact anyway).13 While numerous countries participated in institutional arrangements like the GATT, the European Community, and the UN, realists doubted that any of these arrangements would ever be permitted to encroach upon their member states’ freedom of maneuver—at least not in any serious or meaningful way.14 By the mid-1980s, however, these and other multilateral institutions had begun playing a significant role in the flow of regional and global developments, and realists seemed increasingly out of step with the world around them.15 At that point, realist critics of neoliberal theory could have retreated from their hard-line, anti-institutionalist position in favor of a more nuanced perspective. After all, the acknowledged father of neorealism, Kenneth Waltz, had never seen any reason why the logic of anarchy should prevent countries from behaving in neoliberal fashion, even if the resulting “rules, institutions, and patterns of cooperation [were all likely to be] limited in extent and different from what they might otherwise be.”16 But engaging in the messy business of distinguishing institutions that effectively promoted cooperation from those that were merely epiphenomenal was not what most realists had in mind. Instead, they continued to insist that international institutions had little (independent) impact on world politics, and that liberals who argued otherwise were relying upon “faulty logic.”17 Where, exactly, did liberals go wrong? According to one line of realist criticism, it was in neglecting the importance of “relative gains.”18 So much attention has been lavished on the relative-gains critique that the liberal-realist debate of the past several years is sometimes equated with the controversy over relative gains.19 Casting the debate in this way is a mistake, however, for this was but one flank in a larger realist offensive. 13

Jackson 1989; P. Taylor 1983. See, e.g., Waltz 1979, 115 –16. 15 Cf. Ruggie 1992. 16 Waltz 1986, 336. 17 Mearsheimer 1994/95. 18 See esp. Grieco 1988 and 1990. 19 See, e.g., D. Baldwin 1993. 14

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Are International Agreements Enforceable? For many realists, an even bigger problem with neoliberal theory was its failure to explain how cooperating nations overcome the practical difficulties of treaty enforcement and compliance.20 According to Keohane, multilateral cooperation actually required little more than that each partner be able to distinguish fellow cooperators from free riders. Once these distinctions were clear, the assumption was that each participant would take it upon itself to reward the former and penalize the latter, all in a strictly decentralized fashion.21 In fact, this assumption was crucial, for if prospective free riders did not expect to be punished, the whole cooperative system would break down, preventing everyone—free riders and cooperators alike—from enjoying the ensuing benefits of policy coordination. To be effective as a deterrent, however, sanctions (against free riders) often need to be leveled by a large number of (cooperating) countries. Naturally, this raises the possibility that each member of the coalition of potential sanctioners will attempt to “pass the buck,” thereby impeding the decentralized enforcement mechanism so fundamental to the success of long-term cooperation. And the danger of buck-passing aside, what incentive would goodfaith cooperators have to impose retaliatory sanctions anyway? By the time their coalition partner had defected, it would already be too late; the damage would already have been done. This line of reasoning is consistent with one of the central tenets of realist theory, namely, that the kinds of enforcement problems so easily addressed in a domestic setting are intractable in an international one. In most domestic societies, impediments to enforcement created by collective-action and “time inconsistency” problems are mitigated by the coercive power of the state. When citizens or private corporations violate the law or fail to live up to contractual obligations, various state agencies (local police, national law-enforcement bodies, the courts) spring into action and the malefactors are made to pay for their crimes. By contrast, the anarchic setting of world politics has no police force, no judicial system, and no overarching legal order to ensure that those who violate the terms of their agreements will be prosecuted. Such violations may be “against the law,” and the nations that commit them may even face a serious risk of detection, but given the difficulties in organizing international sanctions,22 retaliation is rarely either swift or certain. Not only might deterring free riders in the international environment prove difficult, but the consequences for a cooperating nation of being victimized could be catastrophic. Here, too, realists draw a sharp distinction between the realms of domestic and international politics. In addition to safeguarding contracts, property rights, and the like, a primary function of 20

Cf. Morgenthau 1958. Chapter 4 provides a more detailed discussion of this point. 22 See, e.g., Gilpin 1984; Hufbauer and Schott 1985. 21

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any domestic legal order is to penalize anyone who attempts to inflict bodily harm against his or her fellow citizens. One consequence is that people entering into purely domestic transactions need not fear for their physical safety. By contrast, when transactions occur across national boundaries (in other words, in the absence of a higher legal authority), a determined free rider could resort to military action, threatening the very survival of its transaction partners: not content to usurp their wealth and resources, an outlaw nation could encroach upon their sovereignty as well. The high risks and serious consequences of exploitation are both recurrent themes in realist thought. Realists do not claim that international cooperation is impossible, only that in a world where states cannot be compelled to keep their promises and free riders can wreak havoc, the incentives for states to enter into reciprocal international arrangements are weak at best. As for the multilateral schemes that have been springing up in recent years, these are hollow shells: If countries join, argue realists, it is only because they know they will not be asked to do anything they would not be doing anyway—and if they ever were, they could extricate themselves from their supposedly “binding” treaty commitments at little or no cost. Realists have adduced numerous historical examples in support of these claims. Among the most widely cited is the International Energy Agency.23 Though the IEA was the main empirical referent for the neoliberal arguments put forward in After Hegemony, during the 1974–81 period on which Keohane’s analysis focused, the cooperative regime over which the organization presided actually had little independent impact on the behavior of its members, a fact that (as realists have delighted in pointing out) Keohane himself concedes at various places in the book.24 Similar questions have been raised about the ostensible behavioral impact of membership in higher-profile organizations such as the United Nations and International Labor Organization.25 Finally, there are several prominent cases of states withdrawing from cooperative institutions altogether, as when, in 1984, an overreaching International Court of Justice led the United States to temporarily withdraw its prior acceptance of ICJ jurisdiction in disputes over U.S. policy toward Central America.26 On the other hand, not all regional and multilateral organizations are as costless to exit as the ICJ, ILO, and IEA. Granting that appearances are often deceiving, an inspection of recent history suggests that government leaders do sometimes allow themselves to become enmeshed in collaborative international arrangements from which they can withdraw only at what they (or their successors) perceive to be very high political costs.27 The fact that this 23

Cf. Grieco 1993, 308; Mearsheimer 1994/95, 25. Keohane 1984, 16 and 236. 25 See, e.g., Krasner 1985. 26 Abbott and Snidal 1998, 23. 27 As further evidence that “multilateralism matters,” some analysts would cite the enormous amounts of time and attention that go into “preparing, drafting, negotiating, and moni24

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is so—that the anarchic nature of the international system has apparently not prevented states from negotiating enforceable long-term cooperative agreements—suggests that realists greatly exaggerate the domestic-international distinction.28 Certainly, the police powers of the state do make the domestic setting a more hospitable place to do business. But the fact that domestic polities have laws against breaching contractual agreements only partly explains why domestic transactions are safer. Though the threat of state coercion may deter some would-be free riders, it cannot be expected to deter all forms of disorderly behavior. As an enforcement mechanism, coercion just does not work very well—or not, at any rate, well enough to produce the degree of stability and cooperation one finds in most domestic societies. Notwithstanding numerous imperfections in the administration of justice, domestic citizens and firms routinely comply with long-term relational contracts that would be difficult or impossible to enforce in a court of law. They comply, in some cases, even when a flagrant violation by one party would spell catastrophe for the others. In short, the international system’s absence of a higher legal authority does not appear to be as significant as realists make it out to be. This observation points to a major weakness in the realist critique of decentralized enforcement: realists are simply wrong to assume that the risks of international cooperation necessarily outweigh the benefits. In theory, the accumulated gains that two or more nations expect to derive from their cooperative relationship may be great enough to offset—and could themselves serve to mitigate—the risks of exploitation by an opportunistic free rider, particularly if states that renege on their promises can be easily identified. Not wishing to forfeit the long-term benefits of cooperation, a prospective free rider might rationally forgo its opportunity to defect, thus giving rise to a sort of virtuous circle: the lower the perceived risk of being double-crossed by an opportunistic free rider, the higher the value each party will place on its ongoing relationship, and hence the lower each party’s propensity to free ride, and so on. Realism’s Second Line of Attack Issues concerning the fragility of decentralized enforcement are brushed aside by Grieco and other scholars in the vanguard of realism’s other, more recent line of attack. It is not that they believe the enforcement of international agreements is easy, but rather that it is, in their view, a second-order toring treaty obligations” (Chayes and Chayes 1993, 186– 87). Why, if states could costlessly terminate their multilateral obligations, would one find so much pushing and hauling among national leaders and their designated negotiators? Of course, realists could counter that so much attention is lavished on the design of multilateral arrangements precisely because each signatory wants to make absolutely certain that its obligations impose few if any meaningful constraints on its freedom of action. 28 Milner 1991; Powell 1992; Snidal 1996.

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problem. Before state leaders get around to considering whether an agreement would be “self-enforcing,” they first ask whether the cooperative outcome produced by that agreement would work to their advantage. If they conclude that it would not—that the new arrangement would not in fact leave them better off—they will steadfastly refuse to take part and, consequently, the arrangement will never see the light of day.29 The thrust of Grieco’s argument is that international cooperation is far less extensive than neoliberals have made it out to be because states have concluded that participation in cooperative regimes—even perfectly enforceable ones—would do more to undermine than to promote their national interests. What are these interests? What would it take for a cooperative arrangement to be truly Pareto-improving? According to Grieco, two conditions would be necessary. First, the arrangement would have to afford each of its member states “absolute” gains—that is, gains vis-à-vis the initial, precooperation status quo. Second, the gains would need to be distributed in a manner that did not interfere with any member’s efforts to maintain its relative position within the international distribution of power. It is this latter, “relative-gains” constraint that Grieco emphasizes in his own research, and that he faults Keohane and other neoliberals for having omitted from theirs.30 The methodology employed in Grieco’s analysis has been subjected to a barrage of criticism. To capture the notion that security concerns can lead countries to forgo agreements that seem mutually beneficial on other grounds, Grieco treats nations as maximizers of a combination of absolute and relative gains.31 Critics argue that Grieco is wrong to incorporate states’ concerns about their relative positions (i.e., relative to the positions of their cooperation partners) directly into their utility functions, and that states should instead be analyzed as if they wish to maximize absolute gains alone. This is a reasonable suggestion. After all, Grieco is not claiming that states care about their relative status for its own sake. If states worry about their partners’ absolute payoffs, it is because they fear that by falling too far be29 It is worth emphasizing that the two realist critiques, though distinct, are not mutually exclusive. Thus, for example, John Mearsheimer’s (1994/95) study draws more or less equally on both. When criticizing proponents of collective security, Mearsheimer relies primarily on arguments about the theoretical and practical limitations of decentralized enforcement. In contrast, his critical analysis of neoliberalism (which he sees as a distinct school of institutionalist theory) is essentially a restatement of the relative-gains argument discussed here. 30 Waltz was among the first to raise the possibility that because states care greatly about the distributional allocation of gains, international transactions are less frequent than they might otherwise be. See esp. Waltz 1979, 115 –16. The same theme was later expanded upon by Joanne Gowa (1986, 172–79) and Oran Young (1986, 118 –19). Joseph Grieco (1988 and 1990) then picked it up, developing it into a full-blown critique of neoliberal theory. Echoing Waltz, Grieco sees the anarchic nature of the international system as predisposing all states to “worry at the extreme that today’s friend may be tomorrow’s enemy in war, and thus . . . that achievements of joint gains that advantage a friend in the present might produce a more dangerous potential foe in the future.” Grieco 1990, 28 –29. 31 Cf. Stein 1990, chap. 5.

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hind they run the risk of incurring more than offsetting absolute losses at some point in the future. In this view, Grieco’s argument is really about “a tradeoff between short term absolute gains (i.e., immediate payoffs from cooperation) and long run absolute gains (i.e., security over the long haul).”32 These modeling deficiencies are rather easily corrected, at least in principle. The real problem with the relative-gains critique of neoliberalism is not that its basic logic is unsound. The problem, rather, is one of empirical robustness: Are relative-gains fears widespread enough to justify Grieco’s sweeping indictment of neoliberal theory? Grieco himself concedes that relative-gains considerations do not necessarily impede cooperation. In fact, logic suggests they would do so only when the disproportionate gains enjoyed by the relative winners could be easily put to use in ways that threatened the political and territorial integrity of the relative losers. How often will this be the case? There are, of course, some circumstances in which relative-gains considerations would pose no obstacle whatsoever. The onus is thus on proponents of the relative-gains critique to show that such instances are exceedingly uncommon. Yet this is exactly what proponents do not do. In fact, Grieco goes out of his way to show how built-in side-payments and various other institutional devices can be incorporated into international agreements from the outset to ensure that their fruits are distributed in an equitable fashion, with no one signatory deriving a disproportionately large share of the absolute gains these agreements make possible.33 If using compensatory mechanisms to equalize the distribution of benefits is as easy as Grieco suggests, it is hard to see how relative-gains considerations could pose a particularly serious impediment to cooperation. For the sake of argument, however, let us suppose that relative-gains differentials were altogether impervious to these kinds of equilibrating devices. In that case, the prospects for cooperation would depend, among other things, on the would-be relative losers’ sensitivity to these differentials. In Grieco’s game-theoretic analysis, this sensitivity is indicated by the parameter k: the higher a state’s k-value, the greater its concern for avoiding relative losses, and hence (holding other variables constant) the lower its propensity to cooperate. But while proponents of the relative-gains critique have an obvious stake in showing high ks, the reality is that many international agreements have little direct impact, either positive or negative, on the security interests of the states that enter into them. There are two reasons for this. One has to do with the particular kinds of issues they address. As a rule, for example, international agreements concerning matters of economic or environmental policy tend to produce fewer security externalities—and are therefore perceived as “safer”—than agreements concerning matters of stra32

Snidal 1991, 704. See also Powell 1992 and 1993. One of Grieco’s favorite examples is the “divergence indicator” of the European Monetary System. See chapter 9 below. 33

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tegic or military policy (Lipson 1984). The second, more important reason is that many states, even ones whose own military arsenals are relatively modest, have the luxury of taking their security more or less for granted, a luxury they enjoy because their territories just happen to be of strategic importance to a larger superpower. Also important in lessening security-related concerns about relative losses is the stabilizing impact of nuclear weapons, a factor inexplicably left out of Grieco’s otherwise careful analyses of the GATT and EMS (see below).34 Beyond the “Relative-Gains” Debate There are many reasons for dismissing the relative-gains critique of neoliberal theory as an empirical irrelevance. Few would argue with Grieco’s assertion that interstate cooperation is a tricky business. But to attribute this fact to states’ concerns about relative gains is to make a much stronger claim, one that requires the analyst to demonstrate (albeit counterfactually) that a great many perfectly enforceable collaborative interstate ventures never come into existence because (1) at least one member fears it would incur a relative loss and (2) the relative losers would suffer a marked decline in their ability to defend against potential foreign aggressors. While one can make a compelling case that this logic applies to (the dearth of) trade initiatives between Eastern- and Western-bloc nations during the Cold War years,35 Grieco would push the argument further. In his view, relative-gains considerations were the major reason negotiators for the United States and the European Community failed to agree to a coordinated reduction in nontariff barriers during the Tokyo Round of the GATT.36 This is a most peculiar claim. When the Tokyo Round was completed in 1979, the United States was certainly not in any danger of being attacked by its European allies, at least not at any point in the foreseeable future. And European countries (the relative losers in Grieco’s analysis) had even less reason to fear an imminent assault by their partner across the Atlantic.37 34 See, e.g., Grieco 1990, 222–23. As numerous scholars have noted, the existence of nuclear weapons gives defensive strategies a major advantage over offensive ones. See, among others, Glaser 1990; Jervis 1978; and Waltz 1990. 35 Gowa 1994. See also Mansfield 1994. 36 Grieco 1990. 37 When it comes to evaluating Grieco’s empirical claims, even John Mearsheimer, whose own debunking of neoliberal theory draws its ammunition from Grieco’s theoretical arguments (see, e.g., Mearsheimer 1994/95, 12–13 and 19 –24), can be counted among the skeptics. In the course of examining the prospects for peace in post-Cold War Europe, Mearsheimer considers, but then explicitly rejects, the view that relative-gains fears were responsible for undermining transatlantic economic cooperation prior to the collapse of the Soviet Union (Mearsheimer 1990, 45–47). With the United States self-interestedly using its power to guarantee political and economic stability throughout the Western alliance, member states of the EC had the luxury, in Mearsheimer’s view (cf. Walt 1987), of focusing single-mindedly on the pursuit of wealth and other (absolute) objectives. To be sure, Mearsheimer believes all of this could change now that the Cold War is over and the U.S. strategic interest in creating a bulwark against the Soviet threat

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To be fair, Grieco’s is not the only study purporting to adduce concrete evidence for the relative-gains position. Proponents also point to Michael Mastanduno’s detailed examination of U.S. responses to Japanese industrial targeting during the late 1980s. Mearsheimer, for example, cites the Mastanduno study (1991) as evidence that “concern about relative gains . . . was an important factor in shaping American policy towards Japan in three cases: the FSX fighter aircraft, satellites, and high-definition television.”38 Here too, however, there are good reasons to be skeptical that security-related relative-gains concerns are what really drove U.S. policy. To make a credible case, one would need to argue, first, that America’s ability to prevail in a future Japanese-American confrontation was in doubt and, second, that Japan would have been able to launch a discernibly more effective campaign against the United States if it had been permitted to co-develop a new fighter jet, acquire a market niche in satellites, or win the race to develop a better television. Each of these claims stretches the imagination. What, then, accounts for Mastanduno’s positive findings?39 In fact, all three cases were part of a broader American effort aimed at counteracting Japanese strategic trade policy for purely economic reasons. Mastanduno is explicit on this point: The immediate concern was not military security, but economic well-being. Some U.S. officials feared that certain patterns of economic interaction with Japan, even though mutually beneficial in absolute terms, would bring relatively greater economic benefits to Japan and over time work to the detriment of America’s competitive position in the development and application of advanced technology. In response to this concern, a series of “strategic” policies emerged for consideration, including technology restrictions in aircraft, the disruption of Japan’s home market sanctuary in satellites, and the promotion of American firms in the competition to develop [high-definition television].40

In effect, members of the U.S. Congress and their supporters in the Bush administration invoked “national security” as a pretext for torpedoing a series of U.S.-Japanese agreements that might have cost jobs, reduced profits, or otherwise proved damaging to the short-term economic interests of their constituents.41 is no longer as transparent. If, in the future, relative-gains fears do become salient, he, following Grieco, would predict a precipitous decline in economic collaboration between the United States and the EU. Not all scholars agree with this assessment, however. The obvious criticism is that it fails to give sufficient weight to the logic of mutually assured destruction. On the continuing dominance of defensive weaponry and its relevance to post-Cold War European security, see, among others, Glaser 1994/95; Levy 1990; and Van Evera 1990/91. 38 Mearsheimer 1994/95, 21. 39 Strictly speaking, only some of Mastanduno’s findings were “positive.” In the case of highdefinition television, for example, his study concluded that relative-gains considerations “affected U.S. policy only modestly, if at all.” Mastanduno 1991, 75. 40 Mastanduno 1991, 109. 41 It is perhaps revealing that the agencies most directly responsible for “defending the na-

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So what remains of the realist assault on neoliberal theory? Why, exactly, is “cooperation under anarchy” so much more problematic than neoliberals have led us to believe? The answer offered by Mastanduno is that it poses a domestic-political rather than a security risk: Government leaders refuse to take part in multilateral initiatives for fear of incurring the wrath of politically influential domestic constituencies. After years of searching for the fatal flaw in neoliberal theory’s causal structure, is this the best that realists can do? After all, the new realist critique is hardly devastating. On the contrary, it would appear to lay the foundations for a new higher-order, liberal-realist consensus. Multilateral cooperation is possible, so the argument would run, if (but only if) three basic conditions are satisfied. First, to ensure that all of the relevant cooperative exchanges are “self-enforcing,” each participant must be able to clearly distinguish between cooperators and defectors. Second, any institutions established for this purpose must be designed in ways that safeguard their member states’ vital security, including, most importantly, that of any “relative losers” who would otherwise find it too risky to participate. And finally, the entry into force of these institutions must afford each participating government greater domestic political gains than domestic political losses.

The Emerging Liberal-Realist Consensus Although neoliberals and realists often seem to revel in controversy, both camps have recently begun moving toward something like the consensus position I have just outlined. The result is that international institutions are increasingly seen—even by many realists—in neoliberal terms. As Grieco declares in the closing pages of his book, “international institutions do matter for states as they attempt to cooperate.”42 As for why cooperation itself matters, Grieco takes the answer to be self-evident: Multilateral cooperation helps states further their common interests (recall the second arrow in Figure 2-1). Indeed, were it not for the prospect of realizing utility gains, state tional interest” tended to be the least, not the most, sensitive to relative gains. In the case of the April 1989 aircraft agreement, for example, the State and Defense Departments were strongly in favor of Japan’s being allowed to co-develop the FSX fighter jet with General Dynamics, a U.S.-based corporation. Indeed, officials in these departments were the ones who drafted the memorandum of understanding that those who were sensitive to the relative-gains issue, including interest groups, lobbyists, and members of Congress, subsequently fought to overturn (Mastanduno 1991, 86). The story is much the same with satellites and high-definition television: in each case, opposition to the proposed arrangements came not from the parts of the government that had reason to take an interest in the welfare and security of the country as a whole—the State Department, the Department of Defense, the Office of Management and Budget, the Council of Economic Advisors—but from officials at the Department of Commerce and the Office of the United States Trade Representative, as well as from individual members of Congress. 42 Grieco 1990, 233 – 34, emphasis in the original.

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leaders would never join multilateral institutions, much less take an active role in creating them—or so Grieco, echoing much of the literature, seems to assume. Since no one can force a state to coordinate its policies, if two states cooperate it must be because their leaders believe that doing so will ultimately work to their mutual advantage. Of course, some analysts are more strongly wedded to this way of thinking than others. Regarding the use of force, for example, the legal scholar Oran Young (1983) draws a distinction between voluntary and “imposed” (i.e., nonvoluntary) regimes, and even Keohane allows that international cooperation may not always be “benign.”43 Rarely, however, do the members of multilateral institutions in the real world attempt to coerce unwilling signatories into joining. To the contrary, states frequently seek admission into institutions whose current members do not even want them—an observation that sits rather uneasily with Young’s emphasis on imposition, coercion, and involuntary action.44 As for Keohane’s assertion that cooperation is not always benign, the losers he seems to have in mind are states located outside the cooperative regimes in question. One example here would be the OPECsponsored oil cartel of the 1970s, a regime that imposed untold losses on the United States and other nonparticipating countries.45 Note, however, that from the standpoint of the oil regime’s insiders, membership was most assuredly welfare enhancing. In this context, Keohane’s remarks are quite consistent with his larger claims about the role of institutions in lowering transaction costs and mitigating problems of market failure.46 43

See, e.g., Keohane 1984, 72. Donald Puchala and Raymond Hopkins (1983, 66) are particularly emphatic on this point: “[Regimes] distribute rewards to the advantage of some and disadvantage of others, and in so doing they buttress, legitimize, and sometimes institutionalize international patterns of dominance, subordination, accumulation, and exploitation.” A similar line was taken by the original proponents of hegemonic stability theory, who viewed the multilateral arrangements established in the immediate aftermath of World War II as devices for promoting the interests of the United States and not, or at least not necessarily, those of weaker, nonhegemonic states (Gilpin 1975; Krasner 1976). In recent years, however, a more “benevolent,” public-goods variant of hegemonic stability theory has come to supplant the “malevolent” rendering put forward in the mid-1970s by realists Robert Gilpin and Stephen Krasner. Today, the hegemon’s role is seen as one of establishing and maintaining institutions that advance the interests of all (or nearly all) states in the system, not just its own. See, e.g., Keohane 1980; Snidal 1985b; and Martin 1992a. 44 To be sure, Young’s discussion of “imposed orders” does not concentrate only on coercion and imposition. He is well aware that co-optation and the manipulation of incentives, phenomena that are clearly related to the argument I develop here, also play a role. See esp. O. Young (1994). 45 “Indeed,” writes Keohane in After Hegemony (1984, 73), “some regimes (such as alliances or cartel-type regimes) are specifically designed to impose costs on nonmembers.” Similarly, Helen Milner (1997, 6 n. 1) suggests that “cooperation may just be collusion, a way of fixing prices to increase one’s profits.” 46 Cf. Coase 1937 and Williamson 1985. It is not surprising that After Hegemony’s discussion of the potentially welfare-reducing effects of international cooperation is as brief as it is, nor that these passages have been all but ignored in the extensive body of research inspired by Keohane’s work. After all, the emphasis throughout After Hegemony—and echoed in Keohane’s

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As these larger claims continue to take root, the debate between neoliberal and realist scholars appears to be entering a new, more conciliatory phase. No longer, it seems, are Keohane’s ideas about the possibility of “cooperation under anarchy”—or about the potential role of multilateral institutions in facilitating it—the hotly contested issues they once were. Instead, what is needed, virtually everyone now seems to agree,47 is a better understanding of where international institutions come from and why they take the distinctive forms they do. In working aggressively toward this goal, realists can be expected to place particular emphasis than neoliberals will on the influence and dynamics of state power. (A case in point is a much-discussed article by Stephen Krasner; see below.) But while realists may be especially attuned to the distributional struggles that attend the design and evolution of institutions, their insights in no way constitute a frontal challenge to neoliberal theory. Rather than seeking to destroy neoliberalism’s theoretical edifice, realists are now themselves actively building upon it. To see this more clearly, consider Figure 2-2, a stylized utility representation of what I term the “collective-action paradigm.” The vertical axes of the three diagrams in this figure indicate the preferences of actor Y, with points (utility imputations) located toward the top of each diagram corresponding to Y’s most preferred outcomes or states of the world. The preferences of a second actor, X, are arrayed along the horizontal axes, with X’s utility rising as one moves toward the right of the diagrams. Proponents of the collective-action paradigm hold that institutions facilitate cooperation—in this case, between X and Y—the end result of which is an improvement in the utilities of each cooperator (if not necessarily those of other actors) relative to the initial noncooperative status quo, SQ. But the fact that cooperation would help X and Y escape a plainly suboptimal situation does not tell us how X and Y will cooperate. The diagrams displayed in Figure 2-3 are meant to capture the distributional conflicts that can arise when actors are confronted with numerous Pareto-improving possibilities.48 Insofar as efficiency considerations militate against frequent renegotiation of cooperative rules and procedures, high stakes may be involved in the resolution of seemingly trivial matters of equilibrium selection and institutional design. In the end, however, it is reasonable to assume that powerful states will exert greater influence over this process than weaker states will and that,

subsequent writings (see, e.g., Keohane 1988)—is on how, by devising appropriate institutions, actors in the international system may be able to overcome collective action problems and thus succeed, the famous skepticism of realists notwithstanding, in securing peace and prosperity. Had Keohane instead emphasized the point I am making—namely that cooperation and institution building may, in certain circumstances, leave some insiders worse off—it is fair to say it would have weakened the thrust of his larger theoretical enterprise. 47 Abbott and Snidal 1998; Koremenos, Lipson, and Snidal 1999; Martin and Simmons 1998. 48 Cf. Krasner 1991.

Figure 2-2. The Collective-Action Paradigm: A Utility Representation

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Figure 2-3. The Collective-Action Paradigm: Integrating Power into the Analysis

consequently, any institutional arrangements that emerge will conform more closely to the preferences of the powerful than to those of the weak.

Conclusion A key assumption in all of this is that the weaker actor, though it fails to obtain its most-preferred equilibrium, is still made better off. Even if X does not do nearly as well as its cooperation partner, Y, the onset of cooperation nonetheless generates welfare gains for both actors relative to the initial status quo. The implication of Krasner’s work is that all regime participants, no

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matter how strong or weak, end up better off as a result of having coordinated their policies. So what is wrong with this line of analysis? Nothing, if one shares the dominant view that institutions arise to solve collective-action problems. Yet the fact that the members of a particular institution are willing to coordinate their policies should not be taken as an unambiguous sign that all of these members see the institution as an improvement on the status quo ante. It is time to consider another possibility.

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Winners and Losers: The Case for Theoretical Reorientation AS THE INTELLECTUAL AGENDA begins to transcend the liberalism-versusrealism debate of the past several years, there is for the first time the promise of a truly comprehensive “grand theory” of international cooperation. So far, however, the scholarly analysis of supranational institutions—like that of international institutions more generally—has been framed as a debate between those who view these institutions as vehicles for mitigating collective action problems (the “liberal” position) and those who dismiss them as little more than window dressing (the “realist” position). And yet logically speaking there is, and has always been, a third alternative. Having previously suggested as much, I now want to make this alternative conception explicit, clarifying its core theoretical foundations and drawing out what I consider to be its most important logical implications for the study of international cooperation. A good place to begin is by taking a closer look at what scholars mean when they speak of “power” as a motivating force in international relations. Even if it is true that power’s importance derives from its role in determining which point along the Pareto frontier is chosen,1 that still leaves open the question of how, exactly, power does this. Or to put it in terms of Figure 23: How does actor Y (the more powerful actor) get its partner, actor X, to agree to a cooperative equilibrium that is closer to Y’s ideal point than it is to X’s?

Power and Bargaining The last decade has witnessed an explosion of research on the nature and dynamics of interstate bargaining.2 Virtually all of this work draws, either explicitly or implicitly, upon Albert O. Hirschman’s groundbreaking study, National Power and the Structure of Foreign Trade (1945). Although Hirschman focused on trade relations, his central variable—the differential opportunity costs of noncooperation—plays a central role in all bargaining relationships. 1

Krasner 1991. Among the major contributions are those of Fearon 1998; Friman 1993; Krasner 1991; Milner 1997; Morrow 1994; Oye 1992; Putnam 1988; and Wagner 1988. Of particular interest has been the influence of bargaining on the evolution of the European Community. See, among many others, Garrett 1992; Moravcsik 1991 and 1998; P. Taylor 1982. 2

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The underlying logic is straightforward: The lower a negotiating partner’s potential gains from cooperation relative to the status quo, the greater is that partner’s capacity to “hold out” for its most-preferred cooperative equilibrium.3 By this logic, negotiations over matters of institutional design should result in structural biases that favor a new institution’s least enthusiastic participants. If a signatory is willing to incur a high risk of non-agreement, its input in bargaining over the structure of a proposed institution will tend to be greater, as will its share (relative to the shares accruing to other signatories) of any cooperative benefits made possible by the institution’s creation. This line of argument is widely invoked to explain why nearly all multilateral institutions display a built-in bias toward certain signatories. Why are some member states entitled to a substantially larger share of the cooperative gains than others? Following Hirschman, Stephen Krasner and other scholars would direct our attention to differences in each state’s initial “tolerance” for the status quo ante, the intuition being that a government with a high tolerance for the pre-cooperation status quo would be able to assume a higher risk of non-agreement. Conversely, a nation whose leaders were impatient for change would be likely to acquiesce rather quickly, since to reject the proposals put forward by its negotiating partners would be to perpetuate a status quo it was eager, if not desperate, to overturn. Yet this is not the only possibility. In some cases, Y’s bargaining strength may owe less to its being happy with the status quo (or less unhappy than X is) than to the fact that Y, unlike X, can alter that status quo unilaterally. What if, at the onset of negotiations, Y were to establish a credible “threat point,” as in Figure 3-1? In this figure, Y’s unilateral move results in an outcome that benefits all cooperators with respect to the initial status quo: the utilities of X and Y are both higher than they were at the onset of negotiations. Logically, though, there is no reason to think that coercive power plays of this kind will always result in Pareto improving outcomes. Coercive cooperation (cf. Martin 1992a) is one possibility; but so, too, is the Pareto-inefficient outcome depicted below, in Figure 3-2. Here, Y’s threat to impose sanctions or other penalties against noncooperators induces an equilibrium situated in the upper-left-hand quadrant: an improvement on the status quo for Y but a substantial setback for X.

Power, Bargaining, and Coercion There was a time when questions concerning the potential role of force and intimidation as instruments for inducing compliance with international regimes were at the forefront of scholarly debate among students of international cooperation. At the center of that debate were the three “Bretton 3

Cf. Raiffa 1982; Rubinstein 1982 and 1985; Sutton 1986.

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Figure 3-1. Power as Coercion

Woods” institutions—the World Bank, the International Monetary Fund, and the GATT—whose creation in the late 1940s and early 1950s laid the foundations for the open trading system that flourished in the decades following World War II. By creating foreign markets for U.S.-produced goods, this system furthered U.S. interests and values. In many countries, however, political elites took a more negative attitude toward free trade, fearing that shocks emanating from the global economy would give rise to social unrest and, in so doing, further undermine their already tenuous hold on domestic political authority. Why, then, did these elites agree to take part in the Bretton Woods institutions? Of crucial importance for some scholars was the ability of the United States to apply coercive pressure against “smaller” (nonhegemonic) states in the system.4 The fact that the United States emerged from the war as the world’s dominant economic power afforded it tremendous leverage. As the world’s largest consumer and producer of traded goods, the United States 4

See, e.g., Gilpin 1975 and Krasner 1976.

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Figure 3-2. An Alternative Model of Power Bargaining

could threaten to close off its market to nations that did not share its commitment to multilateral norms and principles. U.S. officials also had recourse to other forms of leverage, such as denying other countries vital military or economic assistance.5 The strategic use of coercion has also been explored in recent work on 5 The original proponents of this “malevolent” strand of hegemonic stability theory were not always clear about the source of the hegemon’s leverage. Krasner, for example, devoted as much attention to the strategic manipulation of positive inducements (e.g., the offer of foreign aid for postwar reconstruction) as he did to negative sanctions, thus implying that regime compliance may not have been so harmful after all. Krasner 1976, 52; cf. Haggard and Simmons 1987, 502, and Lake 1993, 469. For analytical purposes, positive inducements—or, in common parlance, bribery—must be distinguished from threats. The implementation of a threat worsens the recipient’s welfare relative to the status quo ante. In this respect, threats are inherently coercive, even if the fear of being subjected to them leads actors to coordinate their behavior in mutually beneficial ways. This stands in marked contrast to positive inducements: the delivery of a promised side-payment enhances the recipient’s welfare relative to the status quo. While threats and side-payments

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linkages.”6

“strategic cross-issue Consider the above-mentioned study by Lisa Martin. In contrast with Krasner and Gilpin’s “malevolent” hegemon, Martin’s hegemon supplies a public good (see Figure 3-1 above).7 The hegemon’s interests are nonetheless in conflict with those of its smaller partners, for the hegemon is better off if subordinate states help defray the cost of supplying the public good, whereas the latter are better off letting the hegemon bear the entire burden. Because the hegemon places a high value on the public good it provides, it cannot credibly threaten to withhold its own contribution as a way of inducing its partners to pay their fair shares. Martin’s insight is that there may be other, more effective (but equally coercive) means of eliciting contributions that would not harm the hegemon’s own interests as much. If the hegemon would like other states to contribute to public good P1, it can threaten to withhold its contribution from public good P2, where P2’s provision is less important to the hegemon and hence could be given up more easily. As Martin concedes, however, efforts to link the provision of disparate goods may themselves raise questions of credibility, since they would require the hegemon to explicitly coordinate its policies across different issue areas. In fact, credibility problems can thwart virtually any attempt to exert one’s will by deploying sanctions or other types of coercive pressure. This is because the application of sanctions nearly always imposes high political and economic costs on the international actors doing the sanctioning.8 While it is true that these costs could be lower than the benefits the sanctioner expects to derive from its act of coercion, the sanctioner, in calculating the costto-benefit ratio, would need to take explicit account of the target’s likely response. And if the target is intent on standing firm, the costs of applying coercive pressure against it could easily exceed the would-be sanctioner’s expected benefits—a point noted long ago by John Harsanyi (1965), Anatol Rapoport (1960), and Thomas Schelling (1960), among others. In short, scholars have known for quite some time that, to be effective, “compellent” threats must be credible. And yet we also know that coercion is costly—sometimes hugely so—for coercer and coercee alike. In the end, are often treated as two sides of the same coin (cf. Martin 1993, 416–17), it is only the former that entail the exercise of power by one actor over another. For more on the distinction between “threats” and “offers,” see Wertheimer 1987, 204 – 6. 6 See particularly Frieden 1994; Martin 1992a. 7 The role of coercion as an instrument of cooperation is no less important to proponents of the “benevolent” variant of hegemonic stability theory (like Martin) than it is to proponents of the earlier malevolent school. The difference is that the benevolent hegemon coerces its subordinates—by imposing penalties for protectionist practices, enforcing international property rights, and the like—for their own good. See the useful discussions in Snidal 1985b and Lake 1993. 8 A good example here is the disruption of normal trade flows that occurred in the wake of the U.S. grain embargo of the Soviet Union during the 1970s. One consequence of the boycott was a rise in short-term unemployment among a small but politically powerful segment of the U.S. population.

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therefore, coercion has major limitations as an instrument of power. This might seem an obvious point, but many studies of “power politics” nonetheless fail to appreciate its significance.9

How Go-It-Alone Power Differs from Coercion This, then, is the big lesson to be drawn from Figure 3-2: If actor Y’s only means of obtaining an outcome outside the Pareto set were to apply coercive pressure against actor X, such outcomes would probably not occur very often, for the act of applying this pressure would reduce Y’s own utility (note the positioning of the threat point below the initial status quo SQ). This, of course, reduces the credibility of Y’s coercive threats. And if Y’s threats are not credible, X will continue to regard SQ—and not Y’s threat point—as the appropriate baseline when deciding whether Y’s institution would leave it “better off.” At the same time, however, it would be wrong to conclude that because coercion is problematic—and because, as an empirical matter, most cooperative arrangements are entered into voluntarily—these arrangements are necessarily welfare improving. Consider the following alternative. In Figure 3-3, circumstances unique to actor Y are altered—due, perhaps, to a sudden change in Y’s domestic political leadership—such that this actor (the ultimate winner) would now be better off changing its initial behavior regardless of how actor X (the ultimate loser) chooses to respond. In this case, actor Y’s threat is wholly credible precisely because it is not really a “threat,” that is, Y’s action is not directed against X. Indeed, if X were to reject Y’s proposed form of cooperation, Y would simply “go it alone.” And yet the final outcome in this figure is precisely the one that Y sought to obtain in the previous figure. In the end, X is induced to participate in a coop9 On the limitations of economic sanctions as instruments of foreign policy, see Bayard, Pelzman, and Perez 1983; Gilpin 1984; Hufbauer, Schott, and Elliott 1990; and Pape 1997. Each of these studies factors in the potential costs of sanctions to the sanctioning country. These are not, however, the only determinants of success or failure. Whether a trade boycott is likely to result in the discontinuation of the practices that provoked it will also depend upon the vulnerability of the target country, which is itself a function of the demand elasticity of any goods previously imported by that country and the availability of alternative sources of supply. Also important are noneconomic considerations: the degree to which public officials are insulated from civil unrest, the domestic political costs of backing down, national pride, and so on. Two target countries may show differing degrees of resolve in the face of equally strong external pressures. For a discussion of why governments continue to resort to economic coercion despite copious empirical evidence that sanctions seldom have a major impact on the policies of their intended targets, see Kaempfer and Lowenberg 1992 and esp. D. Baldwin 1985. Most explanations focus on the influence of domestic interest groups. In mobilizing support for sanctions, these groups may be more interested in transmitting signals to political authorities in their own countries than in altering the policies of target countries.

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Figure 3-3. Go-It-Alone Power

erative arrangement that sharply lowers its utility relative to the status quo ante. Why? Because it recognizes that Y’s unilateral actions have removed that status quo—as well as the cooperative equilibrium that X itself prefers—from the set of feasible alternatives. What distinguishes go-it-alone power from coercive power (i.e., where the winners directly threaten the losers) is that, in the former case, the winners possess a “dominant strategy,” meaning simply a choice that is optimal regardless of the choices made by others.10 Given Y’s go-it-alone potential, how does X decide what to do? The answer is that it compares the disutility of accepting Y’s offer with the disutility of SQ9, the new status quo that would ensue if Y were to proceed unilaterally (as it surely would given its new incentive structure). Confronted with a pair of unattractive alternatives, 10

Luce and Raiffa 1957, 77–79.

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X rationally chooses the option with the lowest disutility and agrees to coordinate its policies in accordance with Y’s preferred set of rules and procedures.11 Because the actions undertaken by Y, the initiator and beneficiary of this process, are not contingent upon the actions of X, the loser, the voluminous literatures on strategic interaction and threat credibility may capture only a small part of what is actually going on. In a sense, the credibility issue does not even arise, since Y’s unilateral actions impose no costs on Y itself. Even if X were to “stand firm,” Y would still be better off proceeding on its own. Given that X can do nothing to prevent this, there may not in fact be any need for Y to link issues or otherwise continually deploy (or threaten to deploy) coercive measures against it.12 Of greater potential relevance here are arguments dating back to the 1950s and 1960s about the exercise of influence through “agenda control.” An important contribution to this earlier debate was the simple—in retrospect, too simple—definition of power postulated by Robert Dahl in his famous 1957 article, “The Concept of Power.” Actor A exercises power over actor B, argued Dahl, to the extent that A succeeds in getting B to do something that B would not otherwise do. Attention immediately turned to the question of means: How, exactly, is A able to pull this off?13 On one side of the debate were early proponents of pluralist theory, including Dahl himself. At the risk of oversimplification, pluralists held that the key to A’s getting B to alter its behavior was A’s greater ability to mobilize a coalition in support of its preferred policy alternatives and, in so doing, obtain their passage into law.14 Other scholars criticized pluralists like Dahl for concentrating exclusively upon A’s ability to defeat B in head-to-head 11 It is worth emphasizing that the moves displayed in Figure 3-3 are not the only possible explanation for cooperation. I will return to the question of my argument’s “conditionality” later on in this chapter and, indeed, at many points throughout this book. See esp. chapter 10. 12 To be clear, Y’s go-it-alone potential would not deny X a choice. Strictly speaking, the losers in a power play always have a choice. The problem is that, if the winners’ threats are credible, all of the available options—as in the proverbial “your money or your life”—are worse than the status quo ante. By the same token, declining to participate in Y’s proposed arrangement would remain an option for X. The problem is that the utility consequences of nonmembership would now be considerably worse for X than before Y—whether by successfully engaging in coercive diplomacy or, as in the present case, by simply acquiring the capacity to go it alone—engineered a shift in the status quo. On the general point that some actors in the international system may be able to achieve their will by removing the status quo from the choice sets of other actors, see also Oatley and Nabors 1998. While I am (obviously) sympathetic to this line of inquiry, Oatley and Nabors do not develop its underlying logic in the systematic fashion I do here and, perhaps as a consequence, fail to appreciate that their “redistributive” outcomes may be a product of behavior that is inadvertent rather than intentional. 13 For a brief but incisive review of the ensuing debate, see Lukes 1974. 14 Hence Dahl’s method of inquiry in Who Governs? was “[to] determine for each decision which participants had initiated alternatives that were finally adopted, had vetoed alternatives initiated by others, or had proposed alternatives that were turned down. These actions were then tabulated as individual ‘successes’ or ‘defeats.’ The participants with the greatest propor-

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contests between each other’s preferred alternatives. The best known argument for broadening Dahl’s conception of power remains that of Peter Bachrach and Morton Baratz.15 According to Bachrach and Baratz, a less visible, but no less pervasive, way of exercising influence is for A to deny B the opportunity to vote for alternatives that would undermine A’s interests were they to be adopted: Of course power is exercised when A participates in the making of decisions that affect B. But power is also exercised when A devotes his energies to creating or reinforcing social and political values and institutional practices that limit the scope of the political process to public consideration of only those issues which are comparatively innocuous to A. To the extent that A succeeds in doing this, B is prevented, for all practical purposes, from bringing to the fore any issues that might in their resolution be seriously detrimental to A’s set of preferences.16

In raising the possibility that actors may be able to exert their will without directly threatening their opponents, the model of go-it-alone power set forth here bears a strong resemblance to the notion of agenda control elaborated by Bachrach and Baratz.17 There are differences, to be sure. In practice, for example, scholars sympathetic to Bachrach and Baratz’s approach have tended to focus on the ways in which agenda setters limit the choice set by changing the underlying preferences of other actors—or, as Bachrach and Baratz put it in the passage quoted above, by “creating or reinforcing social and political values.”18 In contrast, the model of go-it-alone power depicted in Figure 3-3 holds fundamental preferences (i.e., interests) and payoff structures constant.19 tion of successes out of the total number of successes were then considered to be the most influential.” Dahl 1961, 336. 15 Bachrach and Baratz 1962. Cf. Schattschneider 1960. 16 Bachrach and Baratz 1962, 948. 17 Although Bachrach and Baratz’s insights are applicable to a variety of settings—including, as I suggest here, the setting of international relations—subsequent investigation of the “two faces” of power has tended to concentrate on decision making (and non-decision making) within national legislatures. The idea that domestic political actors can wield power not only by mustering broad-based support for legislative initiatives they wish to see enacted but also by altogether excluding certain issues from the legislative agenda has played an especially prominent role in the analysis of congressional committees in the United States. That said, Shepsle and Weingast (1981) would argue that the extensive powers enjoyed by each committee chair within her committee’s policy domain are in the collective interest of all members of Congress. Given the potential for indeterminacy in majority-rule settings with unconstrained voting, all members are better off ceding agenda control powers to the chair—and, by implication, acquiescing in the passage of the chair’s preferred legislation—than insisting upon the right to vote for any proposal they wish and (potentially) setting off a never-ending majority-rule cycle. In this view, it was precisely the specter of “chaos” that led the U.S. Congress to set up the committee system in the first place. 18 See, e.g., Baumgartner and Burns 1975; Baumgartner, Buckley, and Burns 1975; Gaventa 1980; Lukes 1974. 19 In questioning whether fundamental preference change accounts for the loser’s decision to cooperate, I do not mean to imply that “national interests” are somehow fixed or immutable.

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Another difference concerns the purposes for which agenda-setting powers are put to use. For many years, conservative “outliers” in Congress (mostly southern Democrats) used their control over key congressional committees to ensure that the legislative status quo would persist in the face of strong outside resistance, for example, by preventing liberal initiatives from coming up for a vote. In contrast, the agenda setters in Figure 3-3 achieve their will not by preserving the status quo but, to the contrary, by removing it from the set of feasible alternatives.20 At a more fundamental level, however, the logic of go-it-alone power is quite compatible with more traditional, Bachrach-and-Baratz-like arguments about the strategic manipulation of alternatives. One similarity is that changes in the loser’s behavior are viewed, in both cases, as a function of actions taken by the winners: the losers see themselves as victims of a “power play.”21 But the parallels run deeper still, for these power plays are not overt, as they are in the pluralist models criticized by Bachrach and Baratz, E. E. Schattschneider, and others. The winners achieve their objectives neither by outvoting their opponents nor—of greater relevance here—by engaging in blatant acts of coercion or intimidation. As the agenda-control literature reminds us, there are other, less transparent (but potentially no less effective) means of exercising leverage. A similar theme runs through Marxist theories of exploitation.22 When workers submit to capitalist institutions, it is not because anyone holds a gun to their heads. It is because their employers exercise exclusive control over the resources necessary for human survival, a privilege they enjoy as a result To the contrary, the fact that these interests can shift radically over time, often in response to electoral outcomes, offers important clues into why the winners might go to the trouble of establishing institutions in the first place. The relationship between political turnover and institutionalization is explored in chapter 5. For empirical applications to NAFTA and the EMS, see chapters 6 and 9, respectively. 20 Relatedly, the utility of the losers in many agenda control arguments is presumed to be lower than it might have been in some hypothetical—typically idealized—state of the world; cf. Biersteker 1993. Here, by contrast, the status quo that is removed from consideration is one that actually existed—and, indeed, would have persisted but for the winners’ go-it-alone capabilities. 21 This is not, of course, the only possibility. In theory, the losers could also be victimized by broader technological or “systemic” changes that the winners themselves played little or no direct role in bringing about. While such explanations may be valid in particular cases, it should be noted that they do a poor job of accounting for the two cases of cooperation that are examined later in this book. In the case of the EMS, for example, government support for the system is sometimes ascribed to an uncoordinated yet nonetheless dramatic increase in crossnational capital flows (Frieden 1991; Andrews 1994). The reality, however, is that the transition to a world of highly mobile capital was only just beginning to take place when, in 1978, Italy “surrendered” control over its exchange rate. Had it not been for the imminent prospect of a Franco-German exchange rate pact, it is doubtful that the Italian government would have deviated from its previous policy of using currency depreciation to stimulate output and employment. See chapter 8 below. 22 See, e.g., G. Cohen 1979, and Elster 1983; cf. Perrow 1986, 224 – 36.

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of having earlier, and in some cases quite fortuitously, accumulated sufficient quantities of capital. For Marxists, workers are indeed better off selling their labor power, but that is only because the alternatives with which they are presented—unemployment, impoverishment, starvation—would be even worse. The notion that political actors can impose their will on others unwittingly, without resort to brute force, is also central to arguments about the effects of U.S. market power during the nineteenth century. Scott James and David Lake (1989, 7–8) have observed that when the U.S. government unilaterally reduced its tariffs on cotton in 1846, cotton exporters located in countries outside the United States experienced a windfall. Newly enriched, these exporters in turn put pressure on their own governments to open up their economies. According to James and Lake, the resulting alteration in the economic policies pursued by America’s trading partners ended up working to the advantage of the U.S. officials who, without foreseeing the consequences of their actions, set the process in motion. Public officials also enjoy significant market power domestically. Given the vast sums spent by U.S. federal, state, and local authorities, even small changes in public sector purchasing priorities (e.g., the adoption of new laws requiring all government-procured automobiles to be equipped with special safety features) can lead private providers to implement costly changes in the profile of goods and services they produce.23 If the public sector were not such a large consumer, shifts in the status quo brought about by its unilateral—but, again, noncoercive—actions would be less likely to induce private firms to make these expensive adjustments.

Go-It-Alone Power as a Simple Three-Player Game To illustrate the logic of go-it-alone power somewhat more formally, Figure 3-4 depicts the first stage of a rudimentary extensive-form game, its payoff structure deliberately configured such that deviating from the status quo constitutes a dominant strategy for two of the three participants. (The first number indicates player A’s payoff, the second number B’s payoff, and so on. The higher the number, the larger is that player’s payoff relative to the status quo.) JUMP-STARTING THE COOPERATION BANDWAGON

In the story that corresponds to the game tree in the figure, there are in fact two winners, players A and B. Player C is the loser. At the beginning of play, an exogenous development of some kind—the abrupt departure from office of one of A’s major ruling parties, for example—causes the original (noncooperative) status quo to deteriorate in the eyes of A’s political leadership. 23

See, e.g., Vogel 1995.

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Figure 3-4. Cooperation as a Game of Winners and Losers

To redress the problem, A tries to elicit B’s entry into a new cooperative arrangement.24 Because the actual emergence of this arrangement does not occur unless and until B accepts A’s new offer, how B chooses to respond in the initial period is crucial. (The term initial is used loosely here. If each actor is fully rational and enjoys perfect information about the strategic constraints under which others make decisions—if, in other words, each actor can anticipate exactly how others will behave at every given moment—then any decisions about whether to cooperate should occur instantaneously.) A’s inability to shift the status quo on its own is reflected in the game’s payoff structure: if B were to refuse A’s entreaty, (1) the path of action would follow the uppermost branch of the game tree, (2) each of the three players would continue to receive its status quo payoff, and (3) the state of the world would remain unchanged. As the game has been constructed, however, it would be irrational for B to refuse A’s offer. Assuming that player C lacks sufficient resources to “buy off” player B—that is, by offering it side-payments in an effort to prevent its moving first with A (cf. Sutton 1986)—B’s entry would afford utility gains not only for A, but for B as well. In this myopic sense, the establishment of the cooperative regime would represent a clear Pareto improvement: cooperation would improve both A’s and B’s utilities relative to the preexisting status quo. 24 Some readers may find my use of the term go-it-alone power a bit misleading in this threeplayer context, since it is not a single winner (e.g., a United States or a Japan or a Germany) but a collection of winners—what I earlier referred to as the “enacting coalition”—that goes it alone. I recognize the potential for confusion here and would be open to substituting a better, more precise formulation. I should note, however, that the expression go-it-alone power is appropriate so long as one conceives of the winning coalition as just that: a coalition.

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In fact, B would be better off agreeing to A’s request regardless of the move taken by actor C. If C were to join A’s proposed arrangement, A and B would derive their highest payoffs: 3 and 5, respectively. Yet even if C were to decline, A and B would continue to receive positive payoffs—1 and 3, respectively—and hence A and B would still be better off (albeit somewhat less so) than if B had scuttled the whole affair by declining A’s initial offer.25 Inasmuch as it would be rational for B to join irrespective of C’s decision, B may be said to possess a dominant strategy. Indeed, for B, the prudent course of action is to enter A’s preferred arrangement regardless of C’s decision. Now consider the decision-making calculus undertaken by actor C . However greatly C may dislike the new cooperative arrangement, the outcome that C prefers—a perpetuation of the status quo—has ceased to exist as a feasible alternative. The reversion point that C must take into account in reaching its decision is not SQ but SQ9, the outcome that would ensue if C were to opt out. Under this new status quo, C would obtain a payoff of 23. Henceforth, it is this payoff, rather than the status quo payoff of zero, that would constitute the appropriate baseline for comparison. The fact that C was happy with the previous status quo, SQ, no longer has any practical relevance. Instead, the choice that C faces is between two—and only two—alternatives: enduring the new status quo (i.e., settling for a payoff of 23) or joining the new regime (i.e., reducing its losses by accepting a payoff of 21). While C would be foolish not to enter the regime under these circumstances, its decision to join would in no way constitute evidence of collective-gains-seeking behavior. If C were allowed to choose between the noncooperative status quo, on the one hand, and the cooperative arrangement that emerges as the game’s equilibrium, on the other, it would gladly “settle” for the former. After all, a zero payoff, if obtainable, would be better than a loss of 1. C’s acquiescence is best viewed, then, as the outcome of a choice between two evils. Rather than seeking collective gains, C merely wishes to avoid a fate even more unpleasant than participating in A’s and B’s regime— namely, being excluded from it. IF A AND B BUILD IT, WILL C COME?

Nothing I have said thus far should be taken to mean that cooperation always looks like this. Whether it does or not will depend on a number of contextual considerations, the four most important of which are the following. 25 Implicit in the payoff matrix is an assumption that actor B enjoys a bargaining advantage over actor A—an advantage that B enjoys by virtue of A’s greater dissatisfaction with the situation that exists at the beginning of play—and that B uses this advantage to obtain a cooperative arrangement that produces greater gains (relative to the status quo) for itself than it does for A, the demandeur. In this way, the model takes into account the possibility that the gains from institutionalized cooperation may flow disproportionately toward those parties who were least unhappy with the noncooperative status quo and who could, as a result, hold out longest for their most-preferred outcomes. Cf. Hirschman 1945, and Krasner 1991.

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Degree of Divergence in the Actors’ Underlying Preferences. Do actors in the system disagree about the desirability of the good that the cooperative arrangement under consideration is meant to provide? For the payoff structure depicted in the above matrix to correspond to empirical reality, the good in question must look “bad” to certain actors in the system. While this might not be true for all goods, coming up with examples of goods whose provision would benefit all actors in the system is harder than one might think (see below). Spillover Effects. Does provision of the good produce externalities for actors not participating in the cooperative arrangement and, if so, are these externalities negative or positive, large or small? For the argument to obtain, these externalities must be negative and large, which is why the losers are so eager to participate. That is not the only possibility, of course. Others include no externalities (private goods) and positive externalities (public goods); in addition, the spillover effects on outsiders—Kenneth Oye (1992) labels these “divertable” externalities—could be negative, but too small to induce entry. Holdup Potential. Are the actors who benefit from the good’s provision capable of supplying it by themselves? The argument above requires that the beneficiaries be able to provide the good on their own, that is, without any contribution from the losers. If, alternatively, the losers were able to form a blocking coalition or “counter-union,” the good would not be supplied at all. Expansion Potential. Are the beneficiaries of the good better off expanding “their” cooperative arrangement or keeping it exclusive? For my argument to apply, the prime movers cannot be worse off if the good they produce is consumed by additional actors. Alternatively, one can think of a “club good,” where the beneficiaries would prefer to keep other actors from enjoying the fruits of their cooperation (i.e., the privileges of membership) lest they dilute their own gains by spreading them too widely.26 Each of these variables is prior to, and therefore independent of, the particular cooperative arrangement or system that emerges, and there is no inherent reason why the values they assume cannot differ from good to good. Nor should one be surprised to find their values fluctuating over time as (for example) the domestic political priorities or capabilities of the actors in the system are altered for “exogenous” reasons. While the argument I have been making is a conditional one, however, it should be noted that none of the necessary conditions is especially restrictive or demanding. This is certainly true for the holdup and expansion variables. As for the spillover variable, Oye (1992, 17) contends that divertable externalities are already “pervasive 26

For further analysis of club goods, see Buchanan 1965.

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in international commercial and financial affairs.” Finally, cases in which actors disagree over the desirability of the “good” in question are also quite common, even when the good is something as seemingly noncontroversial as a coordinated reduction in nontariff trade restrictions or the stabilization of intraregional exchange rates.

Power Politics and the Dynamics of Exclusion The purpose of my discussion thus far has been to ask whether cooperative regional or multilateral arrangements necessarily leave their member states better off. My claim is that, in certain circumstances, some states may find it rational to take part in such arrangements even when they would greatly prefer the original, pre-cooperation status quo. What keeps these states— the losers—from opting out? The answer, put simply, is their fear of being left behind. What tips the balance for these participants—what motivates them to integrate their policies with those of the winners—is not the prospect of mutual gain so much as the absence of any better alternative. Loath to exclude themselves from the regional and multilateral regimes appearing around them, the losers decide it is in their own interests to cooperate. But they do so despite, not because of, these regimes’ utility consequences. Given this line of reasoning, we should not be at all surprised to find national governments “enthusiastically” joining institutional arrangements that leave them worse off than they would have been had those same institutions never been created. Nor would it be suprising to find governments continuing to participate in these institutions even after—perhaps long after—their deleterious consequences have become common knowledge. But that is not all. If the power-politics perspective elaborated here is on the right track, one would also expect to find the process of institutional enlargement taking on a life of its own. As it happens, the process by which international institutions take on new members is nearly always characterized by a “bandwagoning” dynamic rather than by a slower, more incremental evolution. The fact that this is so—that the enlargement process seems to naturally build momentum as it proceeds—is also, I would argue, firmly rooted in the logic of go-it-alone power.27 To see this more clearly, return to the extensive-form game presented in Figure 3-4 and consider what happens once C agrees to enter into a cooperative arrangement with A and B. By jumping on the bandwagon, C triggers another shift in the reversion point, thus raising the possibility that a fourth actor— 27 The contrast between balancing and bandwagoning behavior is developed in Waltz 1979, 125–28; Walt 1987; Christensen and Snyder 1990; G. Snyder 1991; and Martin 1992a, 41– 43. I follow Martin in using the term bandwagoning to refer to a process or dynamic. Other authors employ the term to indicate an outcome, e.g., the kind of alignment structure that occurs when—in violation of classical balance-of-power theory—weak states form alliances with their chief military rivals.

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one who may be even more strongly averse to membership in the proposed regime—would also be better off coming on board. If involvement in the new regime were limited to A and B, this fourth actor might rationally refuse to join it. Now, however, it is confronted with the prospect of exclusion from an arrangement whose members either already or will soon include not just A and B, but A, B, and C. Moving along this evolutionary path-dependent trajectory, A and B’s capacity to remove the status quo ante from a third actor’s menu of alternatives could limit the strategic alternatives available to a fourth actor such that it too would be better off joining than remaining on the outside. Nor would this process cease with the fourth actor’s entry, as its decision to vest authority in the new regime would shift the status quo yet again, thus conceivably tipping the balance for a fifth actor, and so on. This simple dynamic is captured in Figure 3-5, a one-stage extension of the game tree presented in the preceding figure. In this second stage of the game, a fourth actor, D, must decide whether to submit to A and B’s preferred institutional arrangement, a decision it reaches by weighing the likelihood of participation by C and the attendant costs of exclusion (D’s payoffs are indicated by the fourth number enclosed in parentheses). As before, active support and participation from A and B are all that is required for the new regime to become established. C’s behavior has no bearing on the issue, as the regime could survive perfectly well even if C elected to remain an outsider. In another respect, however, C’s response is crucial. Suppose there is a fourth actor, D, with which C has a preexisting bilateral relationship. Consider D’s strategic options. In responding to the actions taken by A and B, D must take into account the expected utility of two different scenarios: (1) C stands firm or (2) C acquiesces. If C stands firm and refuses to join A and B’s regime, D would be wise to refuse entry as well. In that case, D would incur a loss of 1 relative to the status quo—a decrease in its utility, but not as severe a cost as the 2-unit decrease it would incur by joining in C’s absence. As we have seen, however, C’s ordering of preferences disposes it toward entry. Indeed, C would be inclined to join irrespective of D’s choice. If C stayed out, it could do no better than 23, whereas if it entered it could do no worse than 22, the payoff it would receive if both C and D—rather than C alone—were to enter. The bottom line is that joining the new regime is now a dominant strategy not just for B, but for C as well.28 28 Note that Figure 3-5 has C suffering a loss upon D’s entry. To examine the case in which C’s utility is enhanced by D’s participation, one could simply invert C’s preference ordering such that the cooperative stage-two equilibrium was now preferable to SQ0 (i.e., C would be better off if D took part in the proposed arrangement than if only A, B, and C did). While this modification would not alter D’s choice (see below), it does raise an interesting possibility: If each additional signatory reduces C’s losses by, say, one unit, then—assuming A and B are willing to admit several new members into “their” institution—C might well be able to recoup all of its losses relative to the status quo ante.

Figure 3-5. The Cooperation Game, Stage Two

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That D would have been able to obtain a better (but still negative) payoff under SQ9 is quite beside the point. From the moment C acquires a dominant strategy, D must take as its point of reference SQ0; that is, it must assume that membership in the new institutional arrangement will include at least A, B, and C. Given this certainty, D faces mounting pressure to settle for a cooperation payoff of 23, thus avoiding the even lower exclusion payoff of 24. Although the interaction depicted in the figure involves only four actors, it is easy to see how additional actors might get swept up in the process as D’s entry into A and B’s preferred institutional structure triggers yet another shift in the status quo. With each such move—from SQ to SQ9, from SQ9 to SQ0, from SQ0 to SQ-, and so on—the “attractions” of regime membership become stronger. They become so strong, in fact, that actors whose political and economic priorities are wholly different from A’s or B’s (or for that matter C’s or D’s) may conclude that they too are better off joining the regime in question. While the resulting cooperation would likely further the interests of the actors who set the bandwagon in motion (in this case A and B), other signatories—those whose chief motivation in joining was the fear of being left behind—could end up worse off than if SQ, the pre-cooperation status quo, had never been altered.

Meeting Some Objections Determining the extent to which the model of cooperation presented here provides an accurate accounting of recent developments is no easy task. As noted earlier, much of the challenge stems from the methodological difficulties involved in counterfactually deducing what the reaction of the losers would have been if the winners had been unable, or perhaps just unwilling, to proceed on their own.29 Go-it-alone power is usefully conceptualized as a two-step process. In step one, depicted by the arrow in Figure 3-3 pointing from SQ to SQ9, the Y’s commit themselves to establishing a new cooperative regime. In step two, the action shifts to the X’s, who request (and are granted) admission into this new arrangement. These actors do not view their accession as a move toward the Pareto frontier. Quite the contrary, if they could abolish the regime and restore the original status quo, they would gladly do so. From the standpoint of the new entrants—the X’s—accession is simply the lesser of evils. The utility consequences of accession deserve close scrutiny at this point. For while my power-politics model highlights the downside potential of goit-alone power, there is no reason why the final outcome must fall within the upper-left-hand quadrant. Perhaps by jumping on the cooperation band-

29

On the prevalence of counterfactuals in theory testing, see Fearon 1991.

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Figure 3-6. Go-It-Alone Power as a Bargaining Tactic

wagon, X, the would-be loser, more than compensates for the negative externalities of Y’s initial move. Go-it-alone power is, in this view, a fairly innocuous bargaining device, one that the Y’s deploy in order to obtain a cooperative equilibrium as close as possible to their ideal point (Figure 3-6). As in previous examples, the construction of the new arrangement benefits Y, the prime mover; hence, all the action takes place above the horizontal axis. Note, however, that the cooperative arrangement that is finally established represents a utility gain for the “losers” as well. Were it not for the winner’s initial power play, the transition to this Pareto-improving equilibrium would not have been possible at all. Figure 3-6 thus depicts a second, more circuitous path to the distributional outcomes analyzed by Krasner, Grieco, and others (cf. Figure 2-3). As is the case for go-it-alone power, the winner’s unilateral action creates a negative externality; the establishment of a new reversion point—SQ9—diminishes the loser’s utility relative to the initial status quo. In this case, however, the externality is completely eliminated, not just reduced or mitigated. Once the

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prospective loser cedes the demands of the winners, the outcome moves from the upper-left-hand to the upper-right-hand quadrant, and all participants benefit. Thus, one can make explicit use of go-it-alone logic and yet still view interstate cooperation in positive-sum terms. Consider the oft-heard claim that Britain would never have agreed to the 1986 Single European Act (SEA) but for its fear of being denied a voice in collective decisions regarding the future of Europe. Even if this is correct, it does not mean that the SEA necessarily left British authorities worse off in terms of the pre-SEA status quo ante. After careful scrutiny, for example, Andrew Moravcsik concludes that the institutional reforms embodied in the SEA actually worked to the advantage of the British, whose demands were satisfied on matters ranging from voting procedures (qualified majority on “internal market” decisions only) and economic principles (mutual recognition) to the scope of the agreement itself (nonincorporation of the Social Charter). In opting out of the agreement, Moravcsik writes, the Thatcher government would have been forgoing “substantive gains.”30 From this perspective, the exclusionary threats issued by Britain’s European partners were a welcome development, since the country’s Conservative government would otherwise have continued to hold out for an even better (i.e., even more market-oriented) agreement, the result being no agreement—and hence no “substantive” benefits— at all.31 To be sure, in his book’s theoretical discussion of bargaining Moravcsik allows for the possibility that an EU member like Britain, when confronted with an exclusionary threat, could end up signing an agreement that made it absolutely worse off.32 Moravcsik seems to think that this line of argument is consistent with, and indeed can be subsumed under, his “liberal intergovernmental institutionalist” model of state behavior. Yet what most clearly distinguishes that model from other approaches—and on this Moravcsik is quite explicit—is the causal weight it ascribes to state preferences. What accounts for the variation we observe in the willingness of states, in Europe and elsewhere, to integrate their policies? The answer given by intergovernmental institutionalists is straightforward: States integrate when— but only when—the individuals who preside over their governments believe that closer cooperation will advance their underlying interests. As intergovernmental institutionalism’s leading proponent, Moravcsik is theoretically 30

Moravcsik 1998, 376. Was the British government’s fear of exclusion really the decisive factor in its (ostensibly) Pareto-improving accession to the internal market? The jury, it seems fair to say, is still out. On one interpretation, British authorities not only did not feel threatened with exclusion; they actually drove the negotiations. That is, the UK’s Conservative government skillfully used its lack of enthusiasm toward integration—and resulting tolerance for the pre-SEA status quo—to extract concessions from its European partners. This line of analysis is consistent with Moravcsik’s assessment that the British were even more satisfied with the negotiated outcome than were the French and the Germans. See esp. Moravcsik 1991, 49. 32 Moravcsik 1998, 61– 64. See also Moravcsik 1991, 26. 31

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committed to defending this view. For if the forward progress of European integration were not congruent with the underlying interests of each EU member government—if, to the contrary, the process of European integration prevented the leaders of some EU states from achieving the ideological, economic, or political goals they had originally set for themselves—it would be hard to argue that the underlying preferences of ruling governmental coalitions were in any sense fundamental, let alone decisive. Empirically, then, Moravcsik has a strong stake in showing that the British authorities who signed the SEA, though faced with the prospect of exclusion, nonetheless succeeded in realizing their distinctive (market-oriented) preferences. But how confident can we be that he is right? In keeping with his liberal orientation, Moravcsik would have us situate the threat-induced SEA within the upper-right-hand quadrant of any utility mapping. But for all of the reasons discussed earlier, we cannot simply assume that the establishment of an institutional threat point will translate every time into a Pareto-improving equilibrium. Perhaps the level of economic integration necessitated by the SEA-mandated internal market so far exceeded Europe’s “lowest common denominator” (in Moravcsik’s terminology) that some government signatories—including the British Conservatives—would actually have preferred the original, pre-SEA status quo. Perhaps, in other words, the internal market equilibrium properly belongs in the upper-left-hand quadrant, with the utilities of the equilibrium’s Franco-German beneficiaries arrayed along the vertical axis, and those of the British government (and of any other absolute losers) along the horizontal axis. Unfortunately, the task of distinguishing positive-sum from non-positivesum equilibria, though straightforward in theory, may be quite difficult in practice. Before an outside observer can say definitively whether a particular member government is better or worse off because of its involvement in a particular institution, he or she must know how well off that government would have been if, counterfactually, that institution had never been made it into existence. To perform this sort of welfare comparison, however, one would first need to know (among other things) what that government’s leaders had originally set out to accomplish during their tenure in office—and the task of specifying the “underlying” preferences of government actors is rarely a simple matter. But that does not mean it is impossible. The temptation, of course, is to rely on what government leaders tell us: If they declare themselves to be better off, why is that not sufficient evidence of the salutary effects of membership? There are many reasons one should be wary of taking such declarations at face value, and not just because the rhetoric of political discourse often fails to mirror the reality. A government may want desperately, and understandably, to participate in a cooperative arrangement from which it is in danger of being excluded, even if that same government (and its domestic constituencies) would prefer that the arrangement in question had never been established. If there is a lesson here, it is that public outpourings of sup-

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port from a cooperative institution’s leading enthusiasts can be both genuine and deeply misleading at the same time. But surely, it might be argued, if a member government complains bitterly about its institutional affiliations, it cannot possibly be better off. Even here, however, one must be careful lest a government’s public pronouncements be mistaken for its true beliefs. Why might a winner find it advantageous to portray itself as a loser? One possibility is that its misrepresentation is simply a ploy to strengthen its initial bargaining position. If a winner can persuade its negotiating partners that it is actually a loser (i.e., would prefer the status quo ante), then, assuming its partners are incapable of going their own way, they are more likely to offer it a better bargain, modifying institutional structures or piling on concessions so as to tip the balance in the winner’s favor. By this logic, all parties to the negotiations—winners and losers alike—should downplay the benefits they expect to derive from any proposed agreement, exaggerating the strength of domestic opposition to particular provisions, if not to the agreement as a whole. This is nothing more than basic bargaining strategy.33 Note, however, that if the incentives to dissemble were strictly for bargaining purposes, the advantage to be gained in falsely misrepresenting oneself as a loser would disappear as soon as a deal were struck. Once the terms of the agreement had been fleshed out and the new institutional arrangement entered into force, the logical move would be for each participant to proclaim victory, taking credit for the hard-won “concessions” it had extracted from its fellow signatories during prelaunch negotiations. And yet government leaders often speak derisively about institutions in which they have been participating for years. Why might government leaders be inclined to exaggerate the true costs of their current institutional affiliations? The reason, say skeptics, is to deflect responsibility for policies they privately desire—and, indeed, were planning to pursue anyway—but for which they fear there may be little domestic support. In this view, international institutions are actually political assets, for though they do not dictate policy, their detractors can use them politically as scapegoats. The European Monetary System was used in precisely this way, the economist Paul Krugman (1994, 185) has argued, as justification for “the 33 Schelling 1960. Whether and how internal political constraints may affect the outcome of international negotiations is a central question in the literature on “two-level games” (Putnam 1988; see also Evans, Jacobson, and Putnam 1993 and Milner 1997). Of primary interest since the publication of Putnam’s study has been the issue of credibility: Government negotiators might swear up and down that their hands are tied by domestic pressures “back at home,” and yet, if this were not actually the case, wouldn’t their negotiating partners know it? One solution would be for governments to deliberately tie their own hands. Thus, domestic leaders could go before their home constituencies to declare not only that they opposed the terms of an international agreement under consideration, but that to sign the agreement in its current form would be an act of gross incompetence. On how public officials increase their bargaining leverage internationally by deliberately incurring “audience costs” domestically, see Martin 1993 and Fearon 1994.

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swallowing of unpleasant economic medicine.” The reality, according to Krugman, is that European governments would have consumed this medicine—raising interest rates and fighting inflation to keep the value of their currencies from falling against the German D-mark—even if the EMS had not “forced” them into it.34 But rather than take the political heat for the ensuing unemployment, government officials in countries like Italy and France sought to pin the blame on the exchange-rate regime. A similar story is sometimes told about the International Monetary Fund: Government leaders are said to invoke IMF conditionality as a way of justifying the hardship imposed by economic policies they would have had to pursue anyway.35 And like the IMF, the Group of Seven (G-7) and its offshoots are said to afford similar opportunities for blame avoidance, a fact that may account for international summitry’s enduring appeal among political elites in countries around the world.36 Yet while all public officials have an interest in deflecting blame for unpopular policies, the institutions-as-scapegoats thesis goes one step further. If proponents of the thesis are correct, these officials do not just try to deceive their constituents; they actually succeed! This is a most curious claim, for the notion that citizens are somehow tricked into thinking the institutions are responsible for their hardship presumes that they are not clever enough to realize what their leaders are doing—namely, ducking responsibility for the unpleasant side effects of their preferred policies. If European members of the EMS had been trying, as Krugman (1994, 185) says, to “[cloak] a policy of high unemployment . . . under a less brutal-seeming label,” their domestic constituents surely would have caught on at some point and, just as surely, would have penalized them for it. Not only does Krugman offer no reason for supposing otherwise, but his depiction of government supporters as dupes sits uncomfortably with a vast body of empirical research demonstrating that citizens, like markets, are not easily fooled.37 34 There is little reason for accepting this claim. If the EMS had not been established, it is highly unlikely that inflation fighting would have been the “dominant priority” (Krugman 1994, 187) of the center-left and socialist governments that held office in Italy and France during the 1980s. Chapters 8 and 9 offer an in-depth discussion of government priorities in both countries, as well as in Germany and the United Kingdom. 35 E.g., Kahler 1992. 36 Cf. Putnam and Bayne 1986. Consider the situation facing Helmut Schmidt, the host of the 1978 gathering of G-7 leaders in Bonn, West Germany. As the standard-bearer for the German Social Democratic party, Schmidt was naturally inclined toward growth-oriented policies benefiting German workers. Nevertheless, he was also aware that his preferred budgetary stimulus would impose a substantial financial burden on his country’s famously inflation-averse business and banking sectors. The timing of the Bonn Summit was, in this sense, quite fortuitous, for it allowed the chancellor to cast his stimulus package as the product of unrelenting outside (especially American) pressure, when in fact it was a straightforward act of redistribution. In this view, “the chancellor ‘let himself be pushed’ into a policy he privately favored.” Putnam 1988, 429. 37 On the difficulty of putting the wool over the public’s eyes, see, among many others, Popkin 1994.

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There is, then, at least some basis for thinking that government leaders who complain of being “forced” to pursue policies that leave them worse off may actually be telling the truth. Even if complaints of this sort are not always justified, we would be unwise to dismiss them out of hand. To assume that governments criticize international institutions solely for the purpose of scoring political points is to suggest that their constituents are incapable of seeing through their leaders’ self-serving attempts at obfuscation. But the justification for taking the losers’ protestations seriously is not just that the microfoundational underpinnings of the institutions-as-scapegoats thesis are murky, to put it mildly. One can also question its implicit assumption that the protesting governments’ institutional commitments do not really matter—that from a practical (as opposed to a public relations) standpoint the institutions at issue are irrelevant. Will this always be the case? Perhaps the institutions being complained about really do (1) limit their member governments’ policy options and (2) do so in ways that are fundamentally at odds with the policy priorities of the governments doing the complaining. What are these priorities? While there is no simple method for answering this question, one can safely assume that the partisan attachments, ideological beliefs, and electoral interests of the individuals who hold office at a particular point in time will all play a role in the “formation” of their underlying preferences.38 Identifying the ideological and partisan loyalties of government officials is often straightforward. The difficulty comes in ascertaining their electoral interests. All too often, scholars interested in deriving an objective measure of “state” welfare bias their analyses toward long-run, national-welfare considerations. True, a government that presides over a steadily deteriorating economy is a government in deep political trouble.39 But while governing elites cannot afford to completely disregard the long-term effects of their actions on society as a whole, incumbent politicians are likely to be especially attuned to the short-term interests of their “core” constituencies.40 Whatever their interest in increasing the long-term welfare of all citizens, democratically elected officials can retain office only so long as they successfully respond to the demands of those segments of the wider public upon whom they rely for electoral and financial support. Not only will these individuals and groups often have short time horizons, but they are also likely to be pre38

Frieden and Rogowski 1996; Ikenberry, Lake, and Mastanduno 1988; Milner 1997; Moravcsik 1998; Simmons 1994. 39 On the relationship between aggregate economic performance and electoral success in the advanced industrialized democracies, see Kramer 1971; Hibbs 1987; Tufte 1978; Kiewiet and Rivers 1984; and Alesina and Rosenthal 1995. That such a powerful relationship should exist is not surprising: in no stable democracy has the traditional constituency of either the left or the right ever been large enough to guarantee reelection on the basis of “pure” partisan strategies. On this last point, see Przeworski and Sprague 1986. 40 See, e.g., Alesina 1989; Garrett and Lange 1995; Hibbs 1987.

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occupied with increasing their individual shares of society’s aggregate wealth and resources.41 Much the same is true for authoritarian societies: Authoritarian rulers are likely to put the interests of certain societal actors—namely, those with the potential to stage palace coups, organize grass-roots revolutions, or otherwise jeopardize ruling elites’ personal security—above the interests of the country as a whole.42

Conclusion It follows that to accurately assess the utility consequences of a country’s participation in a given agreement or institution, we may first need to learn something (perhaps a great deal) about what motivates that country’s public officials. Who, in particular, are their most influential constituencies? And what, exactly, do these groups and individuals—be they corporate managers and directors, small business owners, labor unions, farmers, or residents of particular geographic regions—want and expect from “their” government? Only rarely can governing elites afford to sacrifice the immediate material well-being of their core constituencies for the sake of longer-run or more diffuse societal gains. If these constituencies suffer costs as a result of their government’s involvement in an international accord, pact, treaty, or organization—whether because of high transition costs, greater susceptibility to macroeconomic shocks, or other reasons—it is reasonable to assume that the officeholders who represent them will suffer as well. 41 42

Olson 1982. Bates 1981; Linz 1975.

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The Efficiency Rationale for Supranational Governance IF THE MODEL of cooperation I have just set forth has any merit, we should not be surprised to find cooperative multilateral arrangements imposing absolute utility losses on some member states—even ones whose leaders are outwardly enthusiastic about joining. None of this would be particularly controversial were it not for the mainstream literature’s continuing preoccupation with the mutual-gains side of international cooperation. If, however, we were to shift the theoretical focus to the losers’ side of the story, I am confident we would quickly arrive at a more subtle—and ultimately more convincing—answer to the question “why do states cooperate?” Having argued as much, I now want to suggest how the winners-andlosers approach I have been developing might be used to shed light on the related, albeit analytically distinct, question of how states cooperate. As noted in the introduction, many of today’s international agreements look fundamentally different from those we are used to seeing. It is not simply that, as Robert Lawrence (1996) and others have pointed out, they impinge more directly upon matters of domestic policy, their terms covering everything from environmental and worker safety standards to basic questions of fiscal, monetary, and industrial policy. At least as important is the fact that many, if not most, of the interstate agreements signed in recent years have enhanced the power and prerogatives of supranational institutions. What are supranational institutions? As the literature has not yet settled upon a precise definition, let me offer one of my own. For the purposes of this book, supranational regimes can be understood as having two defining features. First, the substantive provisions of their underlying agreements— the basic terms of cooperation embodied in the founding charters of the WTO, the EMS, and NAFTA, for example—are considerably more openended than those found in ordinary agreements, the provisions of which may have been fully specified (inasmuch as this is possible) during the initial round of negotiations. The second defining attribute of a supranational regime has to do with procedural matters. Rather than leaving it up to each individual signatory to determine how the terms of cooperation apply in a given situation, the parties to a supranational regime agree ahead of time to render these determinations in accordance with a well defined—and prespecified—collective decision-making procedure. It is this procedure that the regime’s member states adhere to as they go about the task of “filling in” their agreement, interpreting its (broadly worded) provisions in light of specific cases and unforeseen contingencies.

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Not all supranational regimes adopt the same procedure, of course. Some require all member states (or their representatives) to enter directly into collective deliberations; others delegate the task of resolving disputes to an impartial third party.1 In the larger scheme of things, however, these differences—though certainly worth exploring—are of secondary importance. It is not the fact that supranational governance structures exhibit variation that is puzzling; it’s the fact that they exist at all. For every time a party to a supranational agreement submits to a higher-level decision-making process, it is forfeiting the right to decide for itself (i.e., unilaterally) how that agreement is to be interpreted and applied over time. Why would a “sovereign” state— or, more precisely, the collection of individuals who exercise governmental authority within it—ever be willing to relinquish that prerogative? This part of the book proposes an answer that, while firmly grounded in rational choice foundations, nonetheless differs quite markedly from the literature’s traditional way of thinking about how nations cooperate. In this chapter, I take a detailed look at what international relations scholarship has had to say on the subject of institutional design, and on the “politics of structural choice” (Moe 1990b) more generally. Then, in chapter 5, I put forward my own perspective, one that flows directly out of the theoretical logic I began fleshing out in the first part of the book. While students of international relations have tended to emphasize the collective efficiency rationale for supranational governance, delegated authority, and the like, the analysis presented in chapter 5 raises an altogether different possibility: that the actors responsible for setting the cooperation bandwagon in motion—the enactors—may be less concerned that “their” regime maximize the collective good than that it be able to survive once they, its (sole?) beneficiaries, no longer hold power domestically. After developing this line of argument, I lay out some broad hypotheses to be examined in subsequent chapters.

Supranational Institutions as Vehicles for Collective Action In recent years, the stature and assertiveness of international institutions have increased to the point where supranational authorities now perform many decision-making tasks once undertaken directly and exclusively by individual states. This shift has been both sudden and dramatic. Throughout much of the postwar period—and indeed throughout much of recorded history—supranational entities were afforded little or no independent role in the formulation of state policy.2 Starting in the late 1970s, however, the dis1 The question of what may account for this variation is taken up below, first at a theoretical level, here and in chapter 5, and then empirically, with explicit reference to North American trade and European money, in chapters 6 and 9 respectively. For other recent work in this line of research, see Abbott and Snidal 1998; Kahler 1995; Yarbrough and Yarbrough 1990 and 1992; and the contributions to Koremenos, Lipson, and Snidal 1999. 2 Jackson 1989; P. Taylor 1983.

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cretionary powers enjoyed by supranational institutions began to increase beyond anything seen in previous years. The result has been a marked trend toward the collective management and supervision of interstate relations. Already, according to some accounts, the “anarchy” that once characterized the international system has given way to a complex web of overlapping supranational networks and a nascent “community of nations.”3 Even if this is overstated—we are still a long way from anything remotely resembling a World Parliament—few political analysts, let alone diplomats or public officials, would dispute that a fundamental change is underway. And unlike the “exogenous” constraints on state action imposed by the integration of world financial markets (where a country’s leaders can plausibly claim to be swimming in currents whose direction and strength they do not control), the constraints imposed by the proliferation of supranational decision-making structures are a product of political choice. Each time government officials agree to abide by the determinations of a higher international body, they are making a conscious decision to give up direct control over the policy-making process. Why would they ever be willing to do this? Having long been interested in the nexus between institutions and cooperation, Robert Keohane and other so-called neoliberal institutionalists believe they are well equipped to explain why supranational institutions have emerged as today’s preferred instrument for managing interstate relations.4 In their view—one neoliberals share with other proponents of the “new” institutionalism5 —institutional choice is ultimately guided by efficiency considerations, with groups of actors (here, states or governments) struggling to choose whichever institutional forms will enable them most effectively to respond to market failures, mitigate collective-action problems, and generally further their common interests. This line of analysis begins with the observation that certain policy objectives—even seemingly “domestic” ones like generating economic prosperity—are difficult for nations to achieve on their own. From this it is but a short step to the conclusion that, by acting in concert, national governments can significantly improve their collective welfare; if all make the necessary behavioral adjustments, all benefit. True, these behavioral adjustments might not look so beneficial to outsiders. But for those on the inside—that is, for the cooperators themselves—the move to a coordinated outcome would represent a clear Pareto improvement, leaving each of them at least as well off as it was under the previously existing (noncooperative) status quo. So far, so good. The problems come when cooperation fails to emerge 3

See, e.g., Lebow 1994. Proponents of realist theory make no such claims. As noted in chapter 2, realists spent many years insisting that international institutions had no appreciable impact on the prospects for cooperation among nations or, for that matter, on international politics generally. 5 March and Olsen 1990. 4

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Figure 4-1. The Prisoners’ Dilemma

spontaneously. To explain why the prospect of collective gain may not be sufficient to induce the kinds of mutually beneficial policy adjustments that would leave everyone better off, theorists invoke the well-known “prisoners’ dilemma.” Two suspects imprisoned by the police—both implicated in the same crime (and both guilty)—must decide whether to lighten their sentences by testifying against each other. Interrogated separately and therefore unable to communicate, the prisoners are told that if they both defect (i.e., turn state’s evidence), both will be sentenced to three years behind bars. If instead they cooperate (i.e., neither prisoner “rats out” the other under questioning), the authorities will be forced to convict them on a lesser charge, punishable by only one year in jail. By cooperating, then, the prisoners can avoid the longer sentence—read: lower payoff—they would receive were they both to defect (contrast the 5–5 and 0–0 payoffs depicted in Figure 41). On the other hand, if only one of the prisoners defects, that prisoner will immediately be set free (thereby obtaining the game’s highest possible individual payoff), while his cooperating partner—the “sucker”—will have his sentence increased to ten years (the game’s lowest payoff). Now imagine that you are one of the two prisoners. If you believe your partner will betray you, you are surely better off betraying him as well; that way you avoid the possibility of a ten-year sentence, that is, the sucker payoff. In fact, it would make sense for you to give evidence against your partner even if you thought

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he was likely to keep mum, for in that case you would secure your immediate release, as opposed to having to spend a year in jail. Assuming your partner reasons as you do, he too will defect “no matter what,” thus guaranteeing that the two of you end up spending three years behind bars. And yet, had you both cooperated, you and your partner could have obtained a lighter (one-year) sentence. Hence the dilemma: Your individually optimal strategies lead you to a collectively suboptimal outcome. By precisely the same logic, the fear of being “suckered” can make it difficult for a group of individually rational states (or governments) to coordinate their policies even when doing so would leave each member of the group unambiguously better off.6 Logic suggests that such fears would be particularly intense in cases where, for cooperation to succeed, one of the group members would have to make the first move, altering its policies before its partners were called upon to do so. All things equal, one would also expect to find nations behaving in a collectively suboptimal fashion when the cooperative outcome required some parties to invest in specialized, or “dedicated,” assets that could not easily be converted to other uses if their partners were later to renege. Consider an example from trade: Even if two neighboring countries could improve their collective welfare by establishing a free trade zone, the leaders of each country might nonetheless be reluctant to take the first step since, were their counterparts to reintroduce trade restrictions ex post, any private firms that had arisen exclusively to service the other country’s market would be forced to make the costly switch to other markets or sources of supply. Though the owners, managers, and workers employed in these firms would presumably be hardest hit, the rise in transitional unemployment caused by the unilateral defector’s opportunism could also have distinctly political costs for the leaders of the exploited partner— costs these leaders could avoid by refusing to liberalize in the first place. To be sure, the officials who anticipated being exploited could threaten to retaliate against their partners should the envisaged cooperative gains fail to materialize. In principle, then, the expectation of future reprisals and loss of reputation could in itself be sufficient to keep everyone in line.7 That’s the good news. The bad news is that this “Axelrodian” path to cooperation can only work if each partner is able to distinguish the opportunistic behavior it seeks to deter from the cooperative behavior it wishes to encourage. This is where formal institutions enter the story.

The Information Argument Of all those institutional functions that neoliberal theorists have identified as having a salutary effect on the prospects for cooperation, those involving 6 7

See, e.g., Conybeare 1984; Gowa 1986; and Lipson 1984. Axelrod 1984. See also M. Taylor 1987.

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the collection and distribution of information are considered to be the most important.8 Why? Because it is only when actors are able to distinguish cheaters from cooperators that they can be expected to appropriately dole out punishments (to opportunists) and rewards (to fellow cooperators) in subsequent rounds of the “game.”9 It is fair to say that Axelrod initially underestimated the importance of these informational requirements. Thus, after conceding that “recognition and recall” are both critical to the success of collective action, his book The Evolution of Cooperation quickly dismisses their practical significance, noting that the informational demands of strategies like tit-for-tat, which “respond only to the recent behavior of the other player,” are so limited that even bacteria can fulfill them. “And if bacteria can play games,” writes Axelrod (1984, 174), “so can people and nations.” But while its informational requirements may be low compared to those of other strategies, even tit-fortat requires the players who deploy it to be able to identify whether their 8

See particularly Keohane 1984, chap. 6. Collecting and distributing information are not, however, the only tasks that institutions perform. Perhaps the best-known proposition to emerge from the literature spawned by Keohane’s work is that international institutions increase the frequency of diplomatic interactions (see, e.g., Axelrod and Keohane 1985, 248 – 50). There are problems with this line of analysis, however. It’s true that if the participants in a collective endeavor doubt that they will meet again, the threat of retaliation will not be very useful as a deterrent to free riding. For this reason, the expectation of future interactions may well be essential for the maintenance of cooperation along the lines suggested by Axelrod and others (cf. Kreps et al. 1982; Kreps and Wilson 1982). On the other hand, it is hard to see why international institutions would be necessary for enhancing the iterativeness of international exchange. While institutional rules frequently stipulate that state leaders meet at regular intervals, states would surely continue to interact even if their leaders were not required to engage in the kinds of institutionalized, face-to-face encounters that make front-page news. Another standard refrain in the regimes literature is that institutions promote cooperation by facilitating cross-issue linkages (e.g., Tollison and Willett 1979). The greater the dimensionality of a cooperative relationship, the greater will be each side’s capacity to reward compliance and penalize noncompliance. But while it is surely better to have more avenues for making threats or offering bribes than fewer, the people who routinely invoke this argument usually have something more in mind. What they claim is that issue linkage is itself largely a consequence of institutions—that “without international regimes linking clusters of issues to one another” (Keohane 1984, 91), the task of negotiating side-payments is simply too difficult for groups of states to manage effectively on their own. But is this really true? The most enduring postwar example of the linkage concept is the EC’s bundling of the Common Market, a customs union for trade in industrial goods designed to appease German manufacturers, with the Common Agricultural Policy (CAP), an agricultural price support scheme that has worked primarily to the advantage of French farmers (see, e.g., Sandholtz and Zysman 1989). Few would deny that the striking of this deal during the 1950s improved the credibility of each side’s retaliatory threats. If Germany were to renege on a promise to cooperate with France in another policy area, France now had the option of excluding German manufactured goods from its market. Conversely, if France failed to deliver in a Franco-German cooperative venture, Germany could choose to withhold its contributions to the CAP. But France and Germany might well have struck the same deal outside the context of the EC, thus raising the question of whether the EC’s role in the linkage was really all that significant. 9

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partners have cooperated or defected in their most recent move of the game. This might not be difficult for bacteria, but for people and nations it can be quite a complicated matter. In fact, virtually all transactions between human agents entail some degree of privately held information. That said, imperfect (or asymmetric) information is likely to pose a greater impediment in some situations than in others. Thus, for example, it is more likely to pose a problem if the actors involved in the transactions at issue have failed to go beyond strictly informal agreements or understandings. Unless acceptable standards of behavior have been clearly defined at the outset, it may be difficult for each participant in a reciprocal relationship to determine at any given point in time whether its transaction partners are complying with the strategies they are meant to be following.10 Or take the case where the realization of collective gains would require the compliance of a large number of diverse actors. In multiplayer games, there is always a chance that one player will misinterpret defection by a second player as cheating when in fact the second player is merely retaliating against a third player for committing an unwarranted defection in a previous round.11 Translating to the world of international relations, this suggests that multilateral cooperation efforts could come to a grinding halt even— depressingly enough—when all of the nations involved are faithfully and consistently adhering to their assigned strategies.12 And similar difficulties could arise in a strictly bilateral interaction. Suppose, for example, that effective control over the policy realm in question were to change hands within one of the parties to a bilateral agreement at some point after the “game” has commenced. In that event, the other party might find itself lacking vital information about how its new transaction partner had behaved in its prior dealings, and thus whether that new partner was likely to prove as reliable a cooperator as its domestic predecessors had been before their ouster.13 In “noisy” environments like these, neoliberals suggest that international institutions can play a useful role in formalizing the initial terms of cooperation, monitoring subsequent behavior, and efficiently transmitting information about each party’s past and present records of compliance. Once it is clear that opportunists will be detected and their identities revealed, the tit-for-tat logic of decentralized enforcement then takes over. Rather than having the institution punish the defectors directly, each individual partner, acting in its own self-interest, takes that task upon itself, thus securing the 10

Lipson (1991) takes the opposite view, arguing that formalization impedes rather than promotes cooperation. 11 Bendor 1987; M. Taylor 1987. 12 Cf. Oye 1986b, 18 –20. 13 Downs and Rocke (1995) discuss some of the strategies that mutual-gains-seeking cooperators might use to surmount this particular source of uncertainty. The next chapter offers further analysis of the relationship between domestic politics and the formation of international institutions, a topic that, as Downs and Rocke correctly note, does not fit comfortably within the unitary-actor framework of most international relations theory.

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fruits of long-term cooperation in highly uncertain situations where collective action would not normally be possible. The upshot of this line of analysis is that where international institutions exist and operate as intended— clarifying expectations via written charters, accords, pacts, and the like; keeping each member state apprised of how its partners are behaving; and should there be an unwarranted defection, clearing up any ambiguity about the identity of the true culprit(s)—international cooperation may not in fact be so difficult to achieve (or to sustain) after all.14 At first blush, this perspective would seem sufficient to account for the institutional developments to which I referred earlier. Delve beneath the surface, however, and the standard account quickly runs into problems. For even if one accepts the basic thrust of neoliberal institutionalist theory—that formal institutions facilitate collective gains by helping states overcome obstacles to cooperation—the powers delegated to today’s international institutions often go well beyond what many of the theory’s original proponents had in mind. In fact, neither Keohane nor his followers ever developed anything that can be called a theory of delegation. Nor, when one considers their objective, is this especially surprising. In a sense, neoliberals have always been more interested in doing just the opposite—that is, in demonstrating that international institutions could significantly improve the prospects for interstate cooperation despite their lacking the kinds of discretionary powers enjoyed by domestic-level institutions. Indeed, for neoliberals to attribute such powers to international institutions would have been to suggest that the interstate system was not truly anarchic—a position that, following Keohane, these theorists had explicitly disavowed (partly, perhaps, out of deference to their tough-minded realist “opponents,” who were likely to dismiss it out of hand). In any event, most neoliberal scholars took the view that institutions could promote cooperation without doing much more than expediting the flow of information. Prospective cooperation partners needed some assurance that major defections would be detected and the identity of their perpetrators exposed. But as long as appropriate surveillance structures were established to meet these (minimal) requirements, it would be in everyone’s own interests to cooperate. For now, any transaction partner who violated the rules would face a considerable risk of retaliation, and thus of ending up worse off than if it had chosen to obey these rules (i.e., to cooperate) all along.15 In this view, the vesting of authority in supranational bodies and con14 Along these lines, a provocative study by Milgrom, North, and Weingast (1990) suggests that purely informational mechanisms may be able to sustain cooperation even in the extreme case where none of the players has ever encountered its current partner before or expects to do so again in the future. 15 The idea that international cooperation ultimately requires little more than the collection, processing, and transfer of information may be one reason for neoliberal theory’s enduring appeal among American academics and policymakers. For a related argument, see Mearsheimer 1994/95, 47–49.

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comitant loss of national autonomy are wholly unnecessary. The fact is, however, that very few of today’s international institutions operate merely as collectors and transmitters of information. In addition to serving as watchdogs, passively monitoring compliance with whatever rules of the game their member states have agreed to uphold, most of these institutions also empower supranational entities of one kind or another to modify these rules—or to clarify their “true” meaning—once they have taken effect. In some cases, it is only a slight exaggeration to say that these entities dictate what their members can and cannot do. At first, this trend toward supranational governance was primarily a regional phenomenon.16 In recent years, however, the trend has begun to encompass a number of global regimes as well. The General Agreement on Tariffs and Trade is just one recent example. Since the Uruguay Round was “completed” in 1994, virtually every major trading nation in the world has committed itself to lowering tariffs and eliminating quantitative trade restrictions.17 The 1994 treaty also went a considerable distance toward removing nontariff impediments to trade, such as those resulting from differing national health and safety standards and lax enforcement of intellectual property laws. While these were important departures, however, the new supranational decision-making structure established by the treaty is surely its most remarkable achievement.18 The institutional details of the GATT’s new World Trade Organization (WTO) have been well described elsewhere.19 In addition to serving as a forum for regularized biennial meetings of top trade officials, the WTO also provides for a new secretariat, director general, and other institutional trappings originally intended for the GATT but delayed indefinitely when the U.S. Congress refused to support the creation of the so-called International Trade Organization (ITO) in the late 1940s. Most importantly, though, the WTO is entrusted with the task of adjudicating trade disputes among its member states.20 While the pre-Uruguay GATT provided similar mecha16

Two excellent analyses are those of Haggard (1997) and Kahler (1995). Formally signed in April 1994, the Uruguay Round represented the eighth, and most ambitious, expansion of the GATT since its establishment in 1947. The cornerstone of the regime is the most-favored-nation (MFN) principle: any trade concession offered to one signatory, such as a reduced tariff or the privilege of opening a bank, must be granted to every other signatory. As of 1996, more than 120 nations have agreed to this rule, leaving China the only major country denied the benefits of the GATT’s unconditional MFN status. Participants in the Uruguay Round have agreed to cut their tariffs by an average of one-third, and many quantitative restrictions on imports have been abolished outright. (The quotas that remain are scheduled to be replaced by tariffs, which are to be reduced or phased out over time.) While the vast bulk of world trade falls under the rubric of the new GATT, some important sectors—most notably shipping, telecommunications, and financial services (e.g., banking, insurance, and securities)— were permitted to operate outside the system’s unconditional most-favored-nation framework. 18 See, e.g., Whalley and Hamilton 1996. 19 Jackson 1994; Lowenfeld 1994. 20 The provisions concerning dispute settlement are contained in Annex 2 of the Uruguay treaty. For the text, see General Agreement on Tariffs and Trade 1994. 17

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nisms, custom dictated that the recommendations of GATT mediators take effect only when approved unanimously by the executive committee of the body’s full membership.21 By granting the would-be loser a veto over the final decision, this de facto consensus rule prevented the GATT from playing the “governance” role currently enjoyed by the WTO. Now, if a WTO arbitration panel determines that a particular signatory is engaging in GATTillegal activities, that signatory’s only practical recourse is to appeal the decision to an appellate body whose decisions cannot be overturned except by the unanimous consent of all WTO member states. Barring this unlikely development, the original panel’s recommendations take effect, the objections of the GATT transgressor notwithstanding.22 While most apparent within the realms of trade and finance, the movement toward supranational governance has also begun to make inroads into national security policy. A case in point is the once-obscure Conference on Security Cooperation in Europe. At its founding in 1975, the Vienna-based Conference was little more than a forum for East-West dialogue structured by a collection of loosely connected security and human rights agreements. Beginning in the early 1990s, however, members began calling upon their institution to play a more active role in mediating European conflicts.23 The result was the signing of a 1994 agreement aimed at bolstering the dispute resolution apparatus of the regime, which has since been upgraded from a “conference” to a full-fledged “organization.”24 The OSCE and WTO are just two manifestations of a wider trend toward international agreements whose initial terms and provisions are intended to be somewhat flexible. The qualifier somewhat is important here, for while these terms and provisions may not be as rigid as those embodied in previous agreements, they are not totally flexible either. Instead of letting individual member states alter (or reinterpret) the terms of cooperation unilaterally, many of today’s international agreements set forth explicit rules—procedures negotiated and incorporated into the agreement ex ante—for changing these terms ex post. While some international treaties provide for more elaborate collective decision-making bodies than others, the very fact that 21

Jackson 1994; Pescatore 1993. Does the absence of sanctioning power mean that WTO member states can freely ignore negative rulings against them, and hence that these rulings “do not matter” after all? Not necessarily. While it is true that the losing party is perfectly free to disobey the recommendations handed down by the organization, such a flagrant violation would warrant the suspension of concessions by other WTO member states. As these other states raised their tariffs against the exports of the defector, the costs for the defector in terms of reduced market access could quickly begin to outweigh the benefits of standing firm. See, e.g., Whalley and Hamilton 1996, 115. 23 Heraclides 1993. 24 Greenhouse 1994. The negotiating partners at the 1994 Budapest summit also authorized the OSCE to supply peacekeepers on an as-needed basis to areas of brewing hostilities in the former Soviet Union—a measure explicitly designed to reduce the peacekeeping burden of the United Nations, an international organization that is currently in the midst of its own transformation into a full-fledged supranational governance structure. See, e.g., Durch 1996. 22

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such bodies exist poses something of a problem for Keohane and other neoliberal theorists. How could it possibly be in a state’s interests to submit to a “higher” supranational authority? The remainder of this chapter tells the story of how some scholars, sympathetic to the logical structure and normative thrust of neoliberal theory yet disappointed by its inability to account for the rise of full-blown supranational governance structures, went in search of new theoretical tools. What they discovered is exactly what analysts of American politics found when they went on a similar quest in the 1980s: the new economics of organization.25 For those on the frontiers of this research effort, the new economics of organization holds the promise of bringing the study of international institutions back into line with empirical realities. At the same time, however, it also vindicates the core intuition of neoliberal theorists—and, if one takes their rhetoric seriously, that of many policy makers as well—that institutions are somehow fundamental to the pursuit of international cooperation.26

The Incomplete Contracting Argument It might be instructive at this point to distinguish between two different types of contractual arrangements. First are those in which the parties—be they buyers and sellers transacting in a marketplace or nations interacting within the international system—agree ahead of time to a fixed set of rules and, if necessary, establish appropriate surveillance mechanisms to discourage opportunism. These arrangements are the bread and butter of neoliberal theory. A second type of contract is nearly identical to the first except that the contracting parties explicitly allow for subsequent changes in the initial terms of cooperation, specifying that any disagreements concerning the nature of these changes be settled by a higher authority rather than, as would ordinarily be the case, through an essentially open-ended, extra-institutional process of direct bilateral bargaining and negotiation. In both types of contracts, signatories agree to limit their freedom of action. Yet while neoliberal theorists have been singularly attentive to the first type, it is the second type that, in today’s international arena, is fast becoming the more prevalent. Recognition of the yawning gap between (neoliberal) theory and reality has led in recent years to an exciting new round of theoretical innovations and refinements. As has long been the case within the study of American politics, questions about the formation of collective decision-making institutions—and about the creation of governance structures more generally—are thus now emerging as a focus of lively discussion within the study of inter25

Moe 1984; Shepsle 1986; Weingast and Marshall 1988. Realists, it seems fair to say, are skeptical. While they concede that regional and multilateral governance structures may be flourishing in some areas, they insist that states will never allow this new trend—if indeed it is a trend—to extend to security structures like NATO and the UN. 26

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well.27

national relations as Often using the European Union as a reference point, contributors to this body of work suggest that cooperation under conditions of rapid political, economic, and technological change may in fact necessitate a transfer of national policy-making prerogatives to supranational entities. This work thus shares neoliberal theory’s overarching emphasis on efficiency as the central motivating force behind institution building. The difference is that it seeks to explain why national governments are often willing to “pool” their sovereign authority—a possibility that neoliberal theorists never seriously entertained, much less sought to incorporate into their larger explanatory model. To explore this phenomenon, contributors to the new literature draw extensively upon economic theories of hierarchy, organization, and firm structure, none of which take the institutional requirements for cooperation to be as easily satisfied as Keohane and others had envisaged.28 True, institutional agents may well be necessary to perform the tasks of monitoring compliance and identifying defectors. But as long as each cooperation partner is clear about what is permitted and forbidden, these tasks can be carried out fairly easily. To proponents of the new economics of organization, the real challenge lies in ensuring that the partners really are clear about what is permitted and forbidden—and at all times, not just at the beginning of the process.29 In international relations, questions about what it means to “cooperate” or “defect” are endemic. In part, this is because the individuals who negotiate international agreements are often guided by time-sensitive domestic political concerns, and so rush into deals without taking the time to set forth their terms as carefully as might be the case in less political environments. Under pressure to accommodate a multiplicity of conflicting domestic interests, these negotiators may also view the incorporation of vague language and loopholes as a necessary evil without which their new accord would stand little chance of being ratified back at home. There is, in short, good reason to think that international “contracts” would be particularly susceptible to differing interpretations of each party’s rights and obligations. But some degree of imprecision or incompleteness is inherent in all agreements, at least all those intended to endure for more than a very short period of time. In a world of rapid political, economic, and technological change, it is simply not possible to determine ahead of time which types of conflicts and questions will arise over the lifetime of a long-term contractual 27

Garrett and Weingast 1993; Moravcsik 1998; Yarbrough and Yarbrough 1992. See, e.g., Williamson 1985; Milgrom and Roberts 1992. While economists address issues of structure and control as they arise in the private sector, proponents of the new economics of organization note that these same issues also arise in political settings, even if the institutional forms taken by political organizations tend to differ, in some cases quite fundamentally, from those of organizations (e.g., firms) located outside the public sector. See Dixit 1996; Lipson 1985; Moe 1984; North and Weingast 1989; and Weingast and Marshall 1988. 29 Cf. Grossman and Hart 1986; Kreps 1990; and Milgrom and Roberts 1990. 28

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relationship between two states. And even if it were, the contracting parties (i.e., the individuals who preside over the governments of these states) would not necessarily have the information, let alone the time, to specify appropriate responses for each one. Before deciding on an appropriate response, these parties would first have to consider whether the particular rule violation in question was the product of deliberate malfeasance rather than an inadvertent, and thus innocent, misreading of their agreement. Only in the former case—and perhaps not even then—would retaliation against the defector be warranted. By the same token, there would be little point in retaliating against a party whose failure to adhere to the letter of an agreement was due to limited resources rather than to a lack of political will.30 Lacking any independent authority, neoliberalism’s watchdog agencies would be unable to render such distinctions, leaving the door open for each party to the agreement to read its (ambiguous) provisions as it pleased. Alternatively, the parties to an international pact or treaty could agree ahead of time that a particular set of collective decision-making procedures would be followed whenever a dispute over a particular clause or provision in the agreement needed adjudicating. Otherwise, an unstructured and openended—hence time-consuming—bargaining process would be necessary each time there arose a new set of circumstances not explicitly covered by the (unavoidably indeterminate) language of the agreement.31 In the course of trying to resolve these contractual ambiguities to everyone’s satisfaction, international cooperation could quickly devolve into chaos. As in traditional neoliberal theory, the institutions envisaged by proponents of the new economics would play a crucial role in bolstering decentralized enforcement mechanisms based on reputation and reciprocity. But 30 This issue often arises in the case of environmental treaties, where compliance may require a higher level of technical sophistication and financial or bureaucratic wherewithal than the treaty’s poorer signatories actually possess. See Chayes and Chayes 1993, 188 – 95. 31 The problem with open-ended bargaining is not only that it is time-consuming. There are in fact a whole range of costs associated with unstructured (e.g., market) interactions—costs that may account for the fact that so much economic activity takes place within large, vertically integrated firms (Coase 1937; Klein, Crawford, and Alchian 1978; Williamson 1985). Of particular interest in the contracting literature are the inefficiencies that arise when certain parties to a transaction would be required to invest in relation-specific assets, thus making themselves vulnerable to the “holdup” problem ( Joskow 1985). In the international relations literature, this idea lies behind much of Albert O. Hirschman’s work (e.g., Hirschman 1945 and 1970); see also Waltz 1979, 106–7; Frieden 1991, 434– 40; and Yarbrough and Yarbrough 1990 and 1992. Note that the issue here is not asset specificity per se but its (potential) asymmetry. Suppose that party A’s ability to exit the transaction were to decline faster than party B’s. Party B would then be in a position to decide unilaterally how unforeseen contingencies would be dealt with, a prospect that might lead A to refuse to cooperate in the first place. If, on the other hand, A were assured ahead of time that all future disputes would be handled “fairly”—that is, according to a set of previously agreed upon rules and procedures rather than through an essentially open-ended bargaining process—this holdup problem (and concerns about “exit options” and “sunk costs” more generally) would no longer pose as great an obstacle to successful longterm contracting.

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rather than passively relaying information between members, these institutions would serve as full-fledged governance structures, their mandates extending beyond fact-finding to encompass evaluation (determining whether an ambiguous provision or rule has been violated and, if so, whether the breach was committed inadvertently or by design) and recommendation (deciding what each party must do to make amends). In the interests of cooperation, national leaders would transfer their discretionary authority to a predesignated supranational intermediary or decision-making structure, giving it license—within certain contractually specified boundaries—to act as their agent, resolving any unforeseen developments that might happen to arise over the lifetime of their (i.e., the government-principals’) ongoing relationships.32 Thus far, empirical applications of this perspective have been limited, with Europe’s construction of a supranationally administered internal market (its so-called 1992 agenda) receiving by far the most attention.33 That the empirical focus of this literature should be so narrow is curious given that the emergence of statelike international institutions has occurred in other domains of state interaction besides trade. Later on I will try to suggest what a “new economics” account of the Canada-U.S. free trade pact and European Monetary System might look like (see chapters 6 and 9, respectively). For now, I merely want to underscore the point that the new economics of organization has broad applicability to a much wider class of phenomena. It is sometimes argued, for example, that trade liberalization on a global scale requires a hegemon to ensure compliance.34 From the perspective of the new economics, however, it is hard to see why the Axelrodian reputational mechanisms discussed earlier—if bolstered by a well-crafted supranational governance structure—could not support broad-based compliance with multilateral trade liberalization schemes nearly as well as smaller-scale arrangements involving two or three countries. While proponents of the new economics have yet to extend their analysis to the prospects of the WTO, it is a safe bet that when they do they will place little if any weight on the organization’s role in oversight and monitoring. If the authority of the new trade organization were limited to this—if it permitted each member state 32 The authority exercised by the agent over—but ultimately for the benefit of—its principals is always assumed to be limited. As Coase writes in his classic 1937 essay, “For [a] series of contracts is substituted one . . . whereby the factor, for a certain remuneration . . . agrees to obey the directions of an entrepreneur within certain limits. The essence of the contract is that it should only state the limits to the powers of the entrepreneur. Within these limits, he can therefore direct the other factors of production.” Coase 1937, 391, emphasis added. Coase’s idea here has obvious parallels with Herbert Simon’s (1947) “zone of acceptance”; see also Barnard 1938. 33 While the geographical scope of Beth and Robert Yarbrough’s work (see esp. Yarbrough and Yarbrough 1992) is somewhat broader—their book has a brief discussion of the CanadaU.S. Free Trade Agreement, for instance—they, too, concentrate on the politics of European trade. 34 Gilpin 1975 and 1981; Kindleberger 1973; Krasner 1976.

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to render its own interpretation of the rights and obligations of the parties— the prospects for multilateralism would be little better under the new trade regime than they were under the GATT regime it supplanted. With no mechanism to clarify the terms of an enormously complicated treaty, disagreements over what constituted cheating would be likely to erupt into spirals of retaliation and counter-retaliation, threatening each time to send the world back to a more protectionist trade environment. And differences over matters of interpretation were indeed, on many accounts, what finally stalled progress toward liberalization under the GATT regime that preceded the WTO. The problem with the GATT was not, primarily, the absence of a hegemonic enforcer. The idea all along was that the regime would be self-enforcing—and had the appropriate structural arrangements been in place, there is little reason to believe that it would not have been. Nor can GATT’s failures be attributed to defective monitoring— though, to be sure, there was considerable room for improvement in the regime’s Trade Policy Review Mechanism (TPRM), which was established in 1989 to gather data on “the general effects of national trade policies” rather than on compliance per se.35 Rather, the main shortcoming of the GATT, as Finger (1991) and other trade analysts point out, was that its various codes, despite their considerable length and detail, remained highly ambiguous. As such, they afforded ample room for differing interpretations and selective utilization, the most prevalent form of shirking being the erection of nontariff barriers. (GATT codes covering nontariff barriers were necessarily more ambiguous than those regulating tariffs.) Now that an elaborate dispute resolution system has been established to resolve confusion over the meaning of “less than fair value,” “serious injury,” and other vague but crucial terms, proponents of the new economics should be predicting an unprecedented expansion in the flow of goods and services throughout the global marketplace.36 35

Abbott and Snidal 1998, 17; General Agreement on Tariffs and Trade 1994, Annex 3. The inauguration of the WTO would thus seem to contradict the traditional view that multilateralism can occur only in the presence of a global hegemon. That two leading advocates of the new economics of organization would continue to subscribe to this view seems odd (cf. Yarbrough and Yarbrough 1992, 103 – 4). As the quintessential multilateral trade organization appears to be taking on the attributes of a very large “minilateral” regime, the Yarbroughs’ distinction between mini- and multilateralism no longer seems apt: Virtually all significant steps toward liberalization are presently taking place within the context of nascent supranational— i.e., minilateral—institutions. By the same token, one could question the utility of the authors’ distinction between minilateral and bilateral arrangements. Invoking standard neoliberal arguments, the Yarbroughs suggest that watchdog or monitoring institutions may be sufficient to ensure compliance with free trade pacts involving no more than two or three nations, thus implying that bilateral agreements can be effective even when they do not incorporate governance structures for dispute settlement. This line of reasoning does not mesh with the new economics perspective the Yarbroughs claim to embrace, however. It may also be empirically unwarranted, as efforts to liberalize trade bilaterally—but not minilaterally (i.e., with no ex ante provision for the adjudication of disputes)—have rarely endured or made much difference to world trade flows. Notwithstanding their obvious importance, questions about the practical implications of 36

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The Multiple Equilibria Argument Although the analytics and implications of the prisoners’ dilemma continue to fascinate theoretically oriented students of international cooperation, the last several years have seen the theoretical spotlight shift toward the less well understood (or at any rate less familiar) coordination dilemma. Ironically, this shift in focus was prompted by the work of a self-proclaimed realist, Stephen Krasner, whose 1991 study of the global telecommunications industry called attention to a new kind of collective-action problem, one that Keohane and other neoliberal researchers had tended to relegate to secondary status.37 Historically, as was noted at the beginning of chapter 2, much of the controversy between neoliberals and realists centered around the issue of enforcement, with neoliberals proposing—and realists disputing—various solutions to the problem of how to keep nations from reneging on international agreements once they have taken effect. That the problem of enforcement emerged as a hot topic of debate was only natural, for international cooperation is possible only insofar as the parties involved trust each other to keep their promises. Strictly speaking, however, the types of difficulties that arise in trying to ensure that all parties do in fact follow through are second-order problems. The initial problem is getting a group of would-be cooperators to make these promises in the first place. Why, in practice, might this prove to be a major hurdle? To simplify matters, let us assume that any agreement a group of actors might enter into would be enforceable—that is, there is no possibility that anyone will be suckered once the agreement comes into force—and that each party to the negotiations knows this to be the case. Why, despite this knowledge, might the group of would-be cooperators still find it difficult to strike a deal? One reason may be that some parties to the negotiations believe their future cooperation partners would reap a disproportionate share of any ensuing joint gains.38 The world envisioned by Grieco and other realists is one different institutional arrangements—how the forms they take might influence whether, when, and where trade liberalization occurs—receive hardly any attention in the Yarbroughs’ treatment. 37 The question of whether to classify coordination problems as a particular type of collective-action problem or as a distinct analytical category raises a host of knotty conceptual issues. The defining attribute of a collective-action problem is that individual and collective rationality are at odds: the utility-maximizing course of action for each member of a collectivity produces an outcome that is patently suboptimal from the standpoint of the collectivity as a whole. In some coordination games (e.g., “chicken”), however, it is unclear what utility maximization for each player would entail. Within the international relations literature, Stein (1983) and Snidal (1985a) offer two early and illuminating treatments of these and related issues; Stein, for example, draws a sharp distinction between “dilemmas of common interests” (collective-action problems) and “dilemmas of common aversions” (coordination dilemmas). 38 Grieco 1990.

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Figure 4-2. The “Battle of the Sexes” Game

in which these kinds of “relative-gains” concerns are both serious and pervasive, and in which (as a result) security-conscious states encounter few opportunities for mutually beneficial deal making. Yet careful analysis of the coordination dilemmas highlighted in recent work by Krasner and others raises a different possibility: Perhaps reaching agreement is difficult because states encounter too many, not too few, opportunities for collective gain. Since the publication of Krasner’s 1991 study, a number of scholars have begun taking a closer look at this issue.39 Most begin by noting that firstorder obstacles to cooperation are most severe in cases where the available Pareto-improving equilibria from which the group of would-be cooperators must choose are distributionally distinct. For this reason, scholars have tended to view the problem in terms of a “battle of the sexes” game.40 The story behind this game, one rendering of which is depicted in Figure 4-2, runs as follows. A man and a woman must decide how to spend their upcoming vacation. One possibility would be to go hiking together in the mountains (see the upper-left-hand cell of the figure). This alternative would be the man’s most-preferred outcome but the woman’s second choice. Conversely, a vacation spent together at the beach (the lower-right-hand cell) would be the woman’s most-preferred outcome but the man’s second choice. And, fi39 40

See, e.g., Fearon 1998; Garrett and Weingast 1993; Martin 1992b; and Morrow 1994. E.g., Krasner 1991, 339 – 42.

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nally, either of these outcomes would be preferable to vacationing separately, that is, to ending up in one of the other two cells of the matrix.41 Because both players prefer to spend time in each other’s company, there would be little point in either one’s defecting unilaterally. If, for example, the man were to head for the mountains after he had promised to meet the woman at the beach, he would simply be lowering his own payoff, effecting a switch from his second-most-preferred outcome (the lower-right-hand cell) to his third (the cell located in the lower left). But the fact that there is no incentive to cheat in a battle of the sexes game and that, as a result, monitoring and enforcement issues do not arise does not mean that cooperation between the two parties is therefore unproblematic. To the contrary, cooperation could fail to emerge even if neither player faced the slightest prospect of being double-crossed. However badly the man and woman in Figure 4-2 might wish to share each other’s company, they would first need to address—and resolve—the thorny issue of how to share each other’s company, whether by joining each other at the beach (the woman’s first choice) or by hiking together in the mountains (the man’s first choice). If both players were to hold out for the equilibria they most strongly preferred, the result would be an outcome desired by neither player, with each ending up worse off than needed to be the case. Having belatedly come to appreciate the potential seriousness of this “multiple equilibria” impediment to cooperation, scholars of international relations are now moving energetically to explore its implications for supranational governance. Might supranational arrangements foster collectively desirable outcomes by limiting the number of potential equilibria?42 One possibility is that institutions provide “focal points” along the lines previously suggested by Thomas Schelling.43 Common sense suggests that this focusing role would be of greatest importance in situations similar to the battle-of-the-sexes-type sce41 While most scholars use the battle-of-the-sexes game as a springboard for exploring the causes of suboptimal behavior (see below), Krasner uses the game to make the point depicted in Figure 2–3: namely, that when the distributional conflicts engendered by interstate cooperation are finally resolved, the resulting equilibrium is likely to benefit powerful states a lot and weak states only a little. For Krasner, the issue is not how to get to the Pareto frontier—at no point does he entertain the possibility that states confronting multiple equilibria might, for this reason, fail to coordinate their activities—but rather, as discussed in chapter 2, which point along that frontier is selected. 42 I should point out that the difficulty of striking agreement when multiple paths to cooperation are possible is not unique to the battle-of-the-sexes game. Although Axelrod did not emphasize the point in The Evolution of Cooperation (1984), game theorists have known for some time that the iterated prisoners’ dilemma analyzed by neoliberal analysts has a potentially infinite number of stable solutions, ranging from permanent defection by all parties to permanent cooperation (see, e.g., Fudenberg and Maskin 1986). Even together, of course, the prisoners’ dilemma and battle-of-the-sexes games hardly capture the full range of strategic settings that nations encounter, and many important political interactions conform to neither game’s basic structure. For a useful survey of additional games and their relevance to international politics, see Martin 1992b. 43 Schelling 1960, esp. chap. 4; cf. O. Young 1994, 110 –11.

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nario just described, in which the underlying preferences of each would-be cooperator differ. Yet even if what these actors confronted were a “pure” coordination dilemma (i.e., even if they placed the same value on each of the Paretoimproving equilibria they were considering), it is still possible that they would be better off ceding agenda-setting powers—that is, the right to designate the initial terms of agreement—to a third party. The point is sometimes illustrated with reference to the agenda-setting powers exercised by the European Commission, most transparently during negotiations over the landmark Single European Act of 1986. By the mid1980s, all twelve member states of the European Community had recognized the importance of reinvigorating the integration process. Attitudes about what the “new” EC should look like nonetheless varied from one government to the next. Thus, while British Prime Minister Margaret Thatcher strongly favored the minimalist form of integration enshrined in the principle of mutual recognition—any good or service that can be sold in one country must be available for sale in all member countries—her more interventionist German counterpart, Chancellor Helmut Kohl, emphasized the need for increased harmonization of EC-wide health and safety standards, tax policy, and political decision making. On some accounts, it was in order to ensure that their competing visions would not prevent the process of integration from moving forward that Thatcher, Kohl, and other European leaders allowed the commission to dictate the integration agenda.44 The result, thanks in large measure to the catalyzing effects of the commission’s detailed directive on the internal market (the 1985 “White Paper”), was a pro-integration agreement that, while pleasing no one perfectly, was better than ceaseless intergovernmental wrangling and no agreement at all. To be sure, a supranational third party was not strictly necessary in this case. Instead of granting such wide latitude to the EC Commission, the governance structure established by the twelve EC nations might have assigned a single nation—a France or a West Germany, for example—the task of deciding which vision(s) of European integration would be voted upon by the group as a whole. But of course that is not the governance structure the EC’s member states chose to create. Like many international agreements, the Treaty of Rome (the founding charter of the European Community) vested agenda-setting powers in a set of largely autonomous supranational decision-making institutions and agencies. Given the alternative—granting one’s negotiating partner total control over the process of equilibrium selection— it is not hard to see why. Conclusion While the (ex ante) agenda-setting tasks performed by international institutions have only recently emerged as a topic of serious scholarly investigation, 44

See, e.g., D. R. Cameron 1992b; Garrett 1992; Pollack 1997.

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there is a common thread linking this work with the earlier, albeit still relatively recent, tradition of analyzing supranational institutions as referees in (ex post) interstate disputes. Both approaches suggest that successful cooperation often requires something more than the existence of well-functioning information clearinghouses. What it requires, particularly in situations characterized by high uncertainty, is the construction and empowerment of higher-level, quasi-sovereign governance structures. Once established, these structures do the necessary work of clarifying the rules of the game in cases where the provisions contained within the international agreements at issue are ambiguous or “incomplete.” And where states run the risk of getting bogged down in battle-of-the-sexes-like coordination problems (and thus of forfeiting the gains from cooperation altogether), governance structures may also be permitted, indeed encouraged, to directly formulate the terms of the agreements themselves. Or so, at any rate, the argument runs.

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Broadening the Debate: The “Power Politics” of Institutional Design

THE INTERWEAVING of neoliberal theory and the new economics of organization is a relatively recent phenomenon, and as with all research endeavors in their early stages of development, a great deal of work remains to be done. That said, contributors to the literature are confident that they are at least on the right track. I am less convinced. For while these contributors can be credited with putting forward a cogent explanation for the recent proliferation of supranational regimes, theirs is not the only explanation. In what follows, I lay out an alternative perspective, one in which the actor or (more commonly) actors who set the cooperation bandwagon in motion are free to impose their own institutional choices on other actors in the system. Because the “enacting coalition” can shift the institutional status quo unilaterally, its members do not need to take account of their current partners’ institutional preferences. When it comes to matters concerning institutional design, the enacting coalition is in the driver’s seat, and everyone else better look out.

The Importance (to the Winners) of Entrenching the New Status Quo For the sake of argument, let us assume that this is the case—that, in other words, certain states would be likely to join virtually any institutional arrangement that their more powerful neighbors might choose to establish. Now the theoretical task becomes one of explaining why, despite their holding a dominant position, the actors who constitute the enacting coalition might want to do their bidding through supranational structures that afford other actors, including their opponents (i.e., the losers), an opportunity to voice their complaints. In fact, such structures do not just permit the losers to voice their disagreements; they also ensure that the losers get to play some role, however institutionally delimited or circumscribed, in determining how these disagreements are ultimately resolved. By doing this—granting actors who prefer the pre-cooperation status quo some scope to pursue their own (very different) interests—the members of the enacting coalition would seem more likely to diminish than to enhance their own gains from cooperation. Why grant their regime’s opponents any input at all? Expanding upon the argument of chapter 3, let me suggest that the win-

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ners’ motivation for offering the losers some (albeit limited) means of addressing their concerns is the belief that this will weaken the losers’ “natural” inclination to abandon the arrangement at the first available opportunity. Because the A’s and B’s in Figure 3-5 want the arrangement they create to endure, they purposely structure it in a way that mitigates the adverse consequences of participation for would-be defectors. Of course, some losers—the C’s and D’s, for example—would pose relatively little risk of defection. As long as the alternative of nonmembership would be worse for these actors than cooperation, they could be relied upon to comply with A and B’s new regime. And even if the C’s and D’s were to go ahead and exit, the A’s and B’s would still be better off with respect to the initial status quo. In short, even if their cooperation partners in other countries disliked the arrangement that was being “forced” upon them, this fact alone would probably not be viewed by the prime movers as a major threat to their new regime’s long-term survival. After all, these partners are caught between a rock and a hard place (as the enactors would surely appreciate), since opting out of the regime would be even worse for them than allowing the enactors to go it alone. Suppose, however, that a member of the enacting coalition itself were suddenly turned out of office by a political party that strongly disapproved of the cooperative arrangement it had inherited. In that event, the beneficiaries of the arrangement, including the original coalition of governments responsible for creating it, would have a serious problem on their hands. For now the list of “losers” would include an actor whose future departure from the new regime would be sufficient in and of itself to severely disrupt its operation, if not single-handedly bring about its demise. That being the case, the regime’s original sponsors would presumably have a strong interest in finding some way to mitigate the suffering experienced by their internal enemies, particularly, again, those who might one day be in a position to destabilize and subvert their collective achievement.1 The new enthusiasm for supranational governance is, in this view, a direct outgrowth of increasing domestic political instability. Even if two or more “states” have been cooperating with each other for an extended period, there is always a possibility that one of them will one day find itself confronted with an unfamiliar partner—a country presided over by an entirely new group of individuals. Not only might these new individuals (the incoming domestic elites) be playing the game for the first time; they would also be 1 Not that these beneficiaries would need to drop the costs incurred by their domestic opponents all the way to zero (cf. Moe 1990b). Once the enactors’ new decision-making structure was up and running, the costs to the losers of abandoning it would have a natural tendency to rise over time. As a result, the A’s and B’s would not need to offset the burden of participation to the point that their successors ended up better off than before the initial (noncooperative) status quo had ever been removed from their choice sets. The next section offers a more complete discussion of this point.

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bringing to the table their own set of political priorities—policy objectives that might differ substantially from those embraced by the governments that held power when the regime was first proposed and its terms ironed out. Two additional points are worth making here. First, the prospect of new leadership—whether precipitated by a peaceful election or a violent coup d’état—would be a source of concern even if the prime mover behind a new international arrangement were to consist of a single state or government. If, instead of a multinational coalition (A and B), the prime mover were a singular entity (A or B), that entity’s desire to shield its policies from future shifts in its internal political orientation could itself be sufficient inducement for “supranationalizing” the policy process. Perhaps this can explain why domestic officeholders in the United States have often been willing to exert their power at one remove—through multilateral institutions such as the United Nations and the World Bank—rather than through more direct forms of control.2 Second, although government turnover is the “internal” threat upon which I have been focusing thus far, within-government preference shifts are certainly also possible, as it is not uncommon for governments to abandon the policy objectives their leaders espoused upon first taking office.3 Whatever the underlying reason for this—whether government policy reversals are driven mostly by external developments (e.g., changing global economic conditions) or internal ones (e.g., a party revolt that culminates in the ouster of a standing government’s top officials)—the very possibility of such swings is likely to weigh heavily on the minds of the original prime movers. Like the threat of government turnover, then, the possibility of radical policy U-turns is something the institution’s creators would surely want to take into account. In tailoring new supranational institutions to meet these threats, the winners would be taking the long view, adjusting their current choices in light of domestic developments that would not yet have occurred. In this sense, their behavior is farsighted, oriented less toward their current political opponents than toward the (domestic) losers of the future. As for altering the behavior of the losers in other countries, this is less important since, given their constrained choice sets, these losers—the C’s and D’s—would be foolish to exit the institutional arrangements engineered by the prime movers, and waging an all-out war against them would be pointless. In sum, one should not be surprised to find the institutional choices made in the initial period being driven primarily by expectations about subsequent periods, and specifically about what might happen were the members of the current enacting coalition to be supplanted by a group of actors whose pol2

A different argument is that the United States is attracted to quasi-autonomous multilateral institutions because they veil or “legitimate” its domination of the postwar international system. Krasner 1985, 62 and 77; see also Abbott and Snidal 1998; Baumgartner and Burns 1975; Block 1977. 3 Kitschelt 1999; Stokes 1999.

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icy objectives differed radically from their own. By lowering the costs of compliance, the original coalition members would be hoping to delay—and ideally prevent—tomorrow’s dominant actors from abrogating any preexisting treaty obligations or, even worse, forming a new enacting coalition of their own.

Implications for Institutional Design How do the winners’ interests in “freezing” their achievements influence the types of cooperative arrangements they create? Might these interests predispose them toward more elaborate—and more flexible—supranational structures than efficiency considerations alone would dictate? This, I have just argued, is exactly what one ought to expect. By delegating decision-making responsibilities to a set of mediating governance structures, the enacting coalition reduces the burden of participation in its new regime, thus ensuring (it hopes) that the regime will continue to operate long after the power held by the coalition’s individual members has waned or been usurped by internal challengers. To entrench the new cooperative status quo, the winners are actually better off providing their domestic successors some means of influencing—presumably to their own advantage—the original terms of cooperation. And this, I have argued, makes for cooperative agreements that are considerably more flexible than would otherwise be efficient. That is not the end of the story, though, since the most flexible agreement would be one in which each party could interpret the rules however it wished. Indeed, dropping the costs of compliance to zero—by, say, making it possible for signatories to renegotiate the terms of a treaty from the ground up—would provide the enacting coalition with the greatest protection against its regime’s would-be destroyers. At the same time, however, this would come at the price of completely eliminating the benefits that accrue to members of the enacting coalition itself. In fact, the enacting coalition would not need to pay this price. In most cases, simply moderating the costs of participation should suffice. The reason is that there are often costs to “opting out” of well-established cooperative arrangements, even for participants who would have preferred not to have these arrangements in the first place. This assertion is, of course, somewhat controversial. According to Susan Strange (1983, 345), “All those international arrangements dignified by the label regime are only too easily upset when either the balance of bargaining power or the perception of national interest (or both together) change among those states who negotiate them.” The implication of Strange’s remarks— that international arrangements are inherently different from domestic arrangements—would seem consistent with a vast body of research on the durability of domestic regulatory regimes within the United States. As numerous scholars have pointed out, the prime movers behind such regimes

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had the luxury of embedding them within an overarching legal framework. Henceforth, future officeholders who wished to abolish them had to engineer the passage of new legislation. And in the United States—a separation of powers system characterized by a multiplicity of veto points—that is never an easy task.4 But even if legal injunctions against the destruction of newly established routines and institutions are unlikely to work as well in the nonhierarchical, anarchic environment of international politics, that does not mean that international regimes are as “easily upset” as Strange would have us believe. While it may be harder to insulate international structures, the evidence suggests that it is not impossible.5 This should not be surprising. After all, domestic political institutions often display a remarkable degree of staying power even in countries characterized by highly majoritarian systems of government. The impressive durability of an institution like Britain’s National Health Service cannot be attributed to formal checks on the exercise of public authority, since, if it so desired, a newly installed British government could readily obtain passage of new legislation calling for wholesale changes in the institutional status quo. In Westminster-style democracies, legal prohibitions against tampering with or destroying existing bureaucratic structures are a weak deterrent at best.6 And yet even in a country like the United Kingdom—where current power holders are free (in a legal sense) to abandon or replace institutional arrangements they dislike—domestic structures routinely outlive the constellation of actors who created them.7 What this suggests is that new organizational structures can be shielded from the vicissitudes of domestic politics even when they cannot be embedded in “legislative concrete” (to use Moe and Caldwell’s terminology). But what, precisely, is the source of this tendency toward inertia, this institutional stickiness? In some cases, the mere passage of time may be sufficient to protect a new institutional arrangement from its would-be destroyers. As Oliver Williamson and others have noted, the longer an ongoing cooperative relationship has been in existence, the greater—holding other factors constant—will be the cooperation partners’ mutual interests in keeping the relationship going.8 Not only does length of association breed familiarity; it also affords opportunities to those in the relationship to adapt to nuances in individual styles and characteristic modes of operation. Long-standing transaction partners are likely to have a difficult time locating suitable replacements. This basic principle applies in the present context, as well. Whatever the distributional consequences of a particular international agreement or treaty, the longer it has been in existence, the higher the value will government sig4

Cowhey 1993; Moe 1990b; Tsebelis 1995. See, e.g., Goldstein 1993; Keohane 1984; Krasner 1976; and Stein 1983. 6 Shugart and Carey 1992; Weaver and Rockman 1993. 7 Moe and Caldwell 1994. 8 See esp. Williamson 1985. 5

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natories—as well as private actors—typically place on its continuation, and hence the lower the losers’ propensity to terminate or otherwise disrupt it if they are ever given the chance. Altering long-established procedures and routines would require the losers to make costly behavioral adjustments. Entirely new sets of procedures and routines would need to be formulated and executed, along with corresponding changes to domestic legislation, wage contracts, product standards, and the like. Any time and decision costs that had been invested in figuring out how to behave under the old governance arrangements would be irretrievably lost. But the costs to the losers of uprooting long-standing cooperative systems could be greater still. After all, the longer a cooperative arrangement has been in effect, the more likely it is to have spawned powerful new actors who either did not exist prior to the arrangement’s entry into force (e.g., new government agencies created specifically to oversee a member country’s involvement in the arrangement) or who did exist but lacked political clout (e.g., industries and investors who benefit directly from the arrangement). The emergence of these new stakeholders could cause even the most stalwart opponents of the enacting coalition’s cooperative initiative to think twice about tampering with it if and when they were to someday take power themselves. For once the initiative had generated its own independent constituency—as, for example, the GATT generated a constituency among export producers9 —political opponents would have to consider whether the benefits of destroying the new arrangement (or removing its bias in favor of the original enacting coalition) would offset the costs of alienating the new breed of stakeholders it had acquired since coming into existence. Over time, then, there is a natural tendency for all cooperative arrangements to develop new, ever-expanding bases of support. In the absence of major interventions, however, constituency building typically proceeds rather slowly, occurring over decades rather than years or months. This, of course, poses something of a problem for the prime movers, who would like their new institutional creation to be surrounded as quickly as possibly with a broad-based and growing coalition of supporters. Given the immediacy of their concerns—even in a highly stable democracy like the United States, major partisan swings can occur (at least potentially) every two years—the prime movers would surely want to pursue every available means of expediting this “natural” constituency-building process.10 9

Destler 1992; Destler and Odell 1987; Oye 1992. While the “neofunctionalist” perspective on regional integration also emphasizes the importance of constituency building (Haas 1964; Nye 1971), neofunctionalists are inclined to dismiss the role of purposive action on the part of integration’s key beneficiaries (see, e.g., Streeck and Schmitter 1991). Much debated (see esp. Moravcsik 1998) has been the question of whether the French and German leaders who spearheaded the initial drive toward European unification after the war shared the view—held at the time by a number of prescient European intellectuals (see, e.g., Mitrany 1966; Monnet 1978)—that the integration process upon which Europe was soon to embark would develop its own momentum. A similar dispute concerns the recent development of a pro-integration constituency among domestic lawyers and judges within many 10

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Other Strategies for Co-opting a New Regime’s Would-Be Destroyers One way of doing this would be to deliberately hold down the initial costs of the new arrangement, preventing the bulk of the costs from kicking in until after the dust has settled and expectations have begun to adjust. To this end, new treaties could be designed to take effect gradually rather than all at once. Trade agreements often take this form, with allowances for step-bystep implementation and phased-in concessions granted to especially sensitive sectors or even whole countries. The prime movers could also design their regime specifically to ensure that its domestic beneficiaries included a wider-than-usual cross-section of each signatory’s population. A widely employed method for broadening a regime’s clientele involves the interweaving of numerous sector- or industry-specific agreements into a single comprehensive package. In addition to economizing on transaction costs,11 the linking of disparate agreements in this fashion has the effect of enlarging the potential numbers and geographic diversity of new stakeholders. Henceforth, though the enacting coalition’s political successors might complain—quite legitimately—of being made worse off, any attempt to wipe out the entire package and start anew would likely be greeted by strong and vocal opposition. As a further means of accelerating the constituency-building process, the prime movers could make use of the “bully pulpit,” launching an aggressive publicity campaign directly linking their regime to principles and values embraced by their societies and, even better, by the global financial community. Here, too, the purpose would be to enlarge the pool of potential stakeholders, thereby tempering the destructive zeal of regime opponents who might one day be in a position to subvert the new institutional status quo.12 Yet another means to this end would be to impose a higher-than-usual legal threshold for amending the core rules and principles embedded within the enacting coalition’s original agreement. These higher “renegotiation European countries. On one side are neofunctionalists, who stress the role of accident and happenstance in promoting this convergence of opinion (Burley and Mattli 1993; Mattli and Slaughter 1995). On the other side are “neorationalist” critics of neofunctionalism, who insist that the emergence of support for integration within Europe’s legal community was foreseen, and possibly engineered, by the government leaders who launched the integration process back in the 1950s (Garrett 1995; Garrett, Kelemen, and Schulz 1998). 11 Keohane 1984, 91; Martin 1993; Yarbrough and Yarbrough 1992, 76 –78. 12 Note that for a publicity campaign of this kind to succeed in mollifying the new ruling elites who assume power after the original prime movers have departed, it would not need to alter these elites’ core identities or values. If the enacting coalition’s political successors refrain from destroying the institutional system they inherit, it may be that they simply do not wish to excite the financial markets or appear on the “wrong side of history,” not that they have somehow been indoctrinated or socialized into believing that the establishment of the new system was a good idea after all. The contrasting view—that membership in institutions generates normative and ideational consensus—is discussed in chapter 10.

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costs” would have the effect of restricting the prime movers’ successors to a dichotomous choice between outright annihilation of the agreement or total acceptance. This was almost certainly on the minds of the U.S. diplomats who crafted the United Nations in the aftermath of the Second World War. It is important to recall that at the UN’s inception in the mid-1940s, there was strong opposition to the organization within all five of the nations that were to become permanent members of the Security Council. While the “internationalists” were setting policy in 1945, their tenuous hold on power meant that the political situation had the potential to change dramatically within a matter of years, if not months.13 It was at least partly for this reason that the internationalists were willing to encumber their new organization with a high threshold for fundamental institutional reform.14 Finally, and perhaps most importantly, the enacting coalition could make a special effort to hasten the launch of its new organizational creation, particularly if the enactors had reason to believe their dominant position would be short-lived. There would certainly be costs to hasty action, as, indeed, there would be costs to all of the insulation devices discussed here. Setting an early date for passage and ratification of a new treaty would mean limiting the amount of time available for scrutinizing alternative proposals, and hence for allowing the winners to determine exactly which scheme would stand the best chance of advancing their interests. The schemes adopted would also be more likely to enter into force before all of the relevant procedural details and contingencies had been clearly specified and rendered internally consistent. These costs, however, would need to be set against the benefit to the prime movers of getting something “out there” as quickly as possible—even if that something did not accord quite as closely with their underlying preferences as another institutional arrangement that might have been chosen. The sooner their new structure was up and running, the sooner would citizens, interest groups, and members of the global financial community begin developing a vested interest in its perpetuation—and the greater, therefore, its prospects of withstanding a future decline in the enacting coalition’s power. 13

Cf. Keohane 1984, 118. Encumber is the right word here, for though it might work well as an insulation device, a high threshold for institutional reform does not come without costs. In the case of the UN, the effect of raising barriers to full-scale change in the UN’s basic architecture has been to reduce the organization’s capacity to adapt to fundamental shifts in the geopolitical balance of power. A nice illustration is the UN’s response to the emergence of Japan and Germany as major economic and (to a lesser extent) military powers. Although one can make a strong case that awarding Japan and Germany permanent seats on the UN Security Council would enhance the organization’s ability to serve as an engine for genuine collective security, any reallocation of Security Council seats would require a supermajority vote (two-thirds) in the General Assembly, ratification by national parliaments, and, most importantly, the support of the council’s existing members. Whatever the merits of the case for Japanese or German accession, the formal rules of the organization grant numerous actors—ranging from the five nations currently in possession of permanent council seats to the long list of aspiring council members from the developing world—a legally entrenched right to say no. 14

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Power Politics and Institutional Variation If my analysis to this point is correct, power may well turn out to be the most important driving force not just behind the recent profusion of cooperative international arrangements, but also behind the profusion of particular kinds of cooperative arrangement: those in which permanent supranational governance structures give all signatories a voice, either directly (via supranational working groups and other collective decision-making bodies) or indirectly (through the creation of independent dispute resolution mechanisms and the like). To be sure, one would not always expect power to be the crucial explanatory variable; nor, even in cases where a power-politics approach did capture the essence of what was going on, would efficiency considerations be altogether irrelevant. Nevertheless, insofar as certain actors in the international system possess what I have termed go-it-alone power, one should not be surprised to find these actors establishing supranational governance structures for the express purpose of locking in or “congealing” their distinctive tastes or preferences.15 And if this is right, one would also expect the prevalence of such arrangements to vary from case to case depending (most importantly) on the strength of the original enactors’ domestic opposition. If, for example, the enactors’ cooperative agenda initially enjoyed widespread support “back home”—or if support for it were weak but all of the countries involved were autocracies16 —one would not expect the resulting cooperative arrangement to afford much scope for collective decision making or provide avenues for quasiindependent dispute settlement. Yet even where the cooperative structures established by the winners did afford such flexibility, we would still predict the losers to be worse off than they were under the original, pre-cooperation status quo. True, the prime movers would have incentives to accommodate the interests of the losers in various ways. But particularly if the winners were successful in their efforts to bolster the inertial tendencies of the cooperative arrangements they created, they would not need to raise the losers’ utilities by very much. From this, one can hypothesize that the supranational structures engineered by the winners, though designed to appease the losers, would nonetheless circumscribe the latter’s ability to modify the terms of the initial agreement. As noted earlier, formal rules making it difficult to dislodge or overturn an international agreement would be attractive to the agreement’s beneficiaries insofar as these rules discouraged future losers from abrogating the terms of the agreement prematurely (or from establishing an entirely separate arrangement more to their liking). In addition to serving as an insulation device, however, a high threshold for fundamental institutional reform would also benefit the agreement’s initial sponsors in another way: by limiting the 15 16

The term “congealing” is borrowed from Riker 1980: 445. Cf. Przeworski 1985.

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losers’ ability to alter the terms of this agreement in more than a superficial fashion. Thus, even when supranational mechanisms afford each party to an agreement some input into organizational decision making, this input is likely to be restricted to secondary issues or matters of interpretation—or so, again, the analytical framework set forth above would lead us to expect. Note, finally, that the purpose of supranational governance in all of this would not be to deter “cheaters” but, rather, to deter the enacting coalition’s successors from mounting a serious challenge to the new regime if they should ever get the opportunity. As we have seen, neoliberals and realists alike have tended to exaggerate the vulnerability of cooperative institutions to free riding. As long as the stream of “benefits” (relative to the available alternatives) is sufficiently large, participants will find it in their own interests to comply with institutional rules and norms. In fact, when it comes to institutional fragility, the real problem is that this benefit stream may be large for the political elites who make up the enacting coalition, but not for the officeholders who succeed them. To the contrary, the same institutional arrangement that is advantageous for the former may inflict untold damage upon the latter, in which case the latter—the enacting coalition’s domestic successors—will want not just to “defect” from the arrangement, but to destroy it altogether. By sabotaging the regime (or redirecting it toward very different purposes), these successors would be forfeiting neither individual nor collective gains. Like beauty, the value of cooperation is ultimately in the eye of the beholder.

Supranational Governance in Trade and Money: Two Cases that “Matter” To argue that go-it-alone power may be the driving force behind international cooperation and institutional choice is one thing; to demonstrate that it is the driving force is, of course, quite another. In the next four chapters I take up this challenge by examining the origins and structural characteristics of two particularly important recent multilateral initiatives—the North American Free Trade Agreement and the European Monetary System. Relying as they do upon counterfactual analysis and after-the-fact assessments of “state” utilities, these case studies do not constitute a definitive proof of my theoretical arguments. Unfortunately, the theoretical propositions introduced in this book do not easily lend themselves to testing via quantitative or other, more “definitive” techniques. That said, it would be wrong to conclude that my arguments are somehow impervious to empirical verification. In fact, aptly chosen and well-constructed case studies can go a long way toward compensating for these limitations.17 With this in mind, I have decided 17

See, e.g., Bates et al. 1998.

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to concentrate the book’s empirical spotlight on cases where the potential payoff is highest. NAFTA and the EMS are two such cases. Among other things, they are both examples of economic cooperation, and—to this point, at least—the depth and overall policy impact of economic arrangements have far exceeded the depth and impact of cooperative arrangements in other, noneconomic spheres of interstate interaction.18 By focusing on two cases where cooperation clearly “mattered,” I can move directly to an examination of what these cases tell us about the theoretical questions at issue—that is, about how interstate cooperation emerged and why it took the particular institutional form it did.19 Taken together, the EMS and NAFTA also afford my analysis considerable breadth in terms of regional and issue coverage. In this respect, my study departs from the customary practic