Disruption in Global Economic Governance – Risse in der Globalen Wirtschaftsordnung

(At the invitation of the Chair of the Washington-based Emerging Markets Forum meeting in Tokyo on Oct.28-30 I gave a speech on the above topic. On Nov. 28, I gave asimilar lecture (in German) at the Austrian Institute of Economic Affairs (WIFO) on the occasion of my 75th birthday. The background paper can be uploaded from http://www.emergingmarketsforum.org/wp-content/uploads/2018/10/Global-Economic-Governance-for-web.pdf.)

In my presentation I argued that the multilateral system of global economic governance was in crisis, and that Western domination would come to a halt. I talked about the drivers of this process, of why global cooperation was necessary and about future issues to be considered in re-designing global governance.

The Drivers

The most obvious driver of the demise of global cooperation is the US withdrawal from various multilateral agreements (TPP, TTIP, the Paris Climate Accord, the Iran agreement, the recent migration pact, among others), their attack on the world Trade Organization, the imposition of tariffs on friends and foes on national secutrity grounds, and others more. President Trump’s recent speech at the UN General Assembly where he reiterated his disdain for global cooperation and professed once more his “America First” agenda proves the point.

But all this is overlaid by the fact that in global institutions (IMF, World Bank, also WTO) the  “West”, i.e. the industrial countries, who built these institutions after Word War II and have dominated them ever since, have failed to adjust voting rights and influence to shifting economic weights. Today, industrial countries together produce less than 50% of global output, while 25 years ago this share was around 2/3. Attempts by emerging and developing countries to gain more voting rights, access to financial means and influence on these institutions have continually been rebuffed. The latest “quota review” by the IMF has brought only minor changes, another quota review is in progress. The IMF is still – as ever – run by a European, the World Bank still – as ever – by an American. Emerging countries have “voted with their feet” and created their own institutions: the New Development Bank by the  BRICS countries, the Contingent Reserve Arrangement, the Asian Infrastructure Investment Bank, and others. These new institutions make the existing fragmentation of global governance even stronger.

A third driver is increasing disillusionment with the existing “system” of globalization, global governance, in the “West”: the rising inequality within countries, loss of job security, high unemployment, stagnating wages, the reduction in the share of wages in total output, and very strongly, the destruction of the environment and climate change – all these are attributed to this system, which is said to be dominated by neo-liberal profit motives, pushed by multinational corporations and the rich who profit from it. Increasingly violent protests agains G-7, G-20, IMF/World Bank Meetings have resulted. The rise of right-wing populist parties who promise an end to “globalism” and a return to “my country first”-nostalgia, lead to loss of confidence in the political process, in the “elites” and threaten social and political cohesion.

Why Global Cooperation?

The delivery of global public goods (climate, migration, security, economic stability, the fight against cross-border crime, tax evasion and money laundering) require joint, i.e. global action. No country alone can provide them, without agreements they will be under-supplied.

Global cooperation is necessary for the vast majority of small and developing countries: The strong do not need cooperation, they get their way anyway, witnout considering the effects on the other countries; also, if only 2 countries dominate, we know from economics that duopolies are inherently unstable, and their battle for domination can draw the whole world into an abyss.

The present time of vast technological developments (digitilization, artificial intelligence) is the time where the regulatory rules for the futures are being decided, see e.g. the ongoing fight for how the next G-5 technoligy will be developed. It is of utmost importance that joint rules are developed which also consider the interests of small and weak countries.

Future Issues

Here we need to talk about substance and instiutions. Frequently in discussions of future global governance, the all-important substance question is left out, but how the world economy and society will develop in the 21st century is of eminent importance for the citizens of the world. Their support of the global order is necessary for its sustainability.

In theory, the template for the future economic and trading system exists already in the form of the 2015 by all UN-members agreed Sustainable Development Goals. They give equal weight to economic, social and environmental objectives – even though they leave out how potenital conflicts between these three areas would be mitigated. Thus, Three E’s”: efficiency – equity – environment are important. Today, in international agreements (WTO rules, Free Trade Agreements, Double Taxation Agreements, etc.) the conomic goal dominates, often at the expense of equity and environmental considerations.

Further, much more input from civil society is necessary, both in the deliberation, but also in the decision-making processes of global rules. Political elites frequently benefit themselves from rules-making (corruption) and often do not take the interests of their citizens into account, unless they are supported by powerful lobbies. It would be also important to give more weight to sub-national political entities (states, cities) which frequently are setting examples in cross-border cooperation.

The excessive amount of destabilizing (short-term) capital flows needs to be reined in. Today for every transaction in the real sector, several hundred financial transactions are undertaken. This is destabilizing, as the financial crisis in Latin America, in East Asia and especially in the West (2008 ff.) have shown. In the same vain, efforts to stop money laundering and fight tax evasion must be stepped up.

Future rules must give much more consideration to the state of development, the cultural and historical heritage of countries. Infant-indstry arguments, industrial policy, public property, etc. are often important identification points for populations which they do not want to give up in the name of economic efficiency. In this way, the trend towards “regulatory alignment” in agreements must be re-considered.

Representations and voting shares in existing global governance institutions must be aligned to today’s economic weights, and diverse approaches to socio-economic developments must be accepted. There are legitimate value systems outside of the West. Only then is more capital for these institutions warranted.

Today, the fruits of trade and direct investment are shared very unequally. I propose to create a Compensation Fund to be funded by the proceeds from these activities, to be shared by both home and host country workers. I am not talking about cash payments, but of training of displace workers in home countries and of better wages or the building up of social protection systems in the host countries. This would go some way to even out the gains from trade and would make cross-border activities more acceptable to the populations.

As far as institutions and power are concerned, the only thing certain is that the Western domination of the global governance system is receding. It is most likely that multi-polarity will be the dreigning geo-political and also economic criterion of the next decades. This will make consensual global rules-setting very unlikely. Rather, it seems probable that in some areas “coalitions of the willing” might be formed, whose members want to proceed with agreements. Such caoalitions should remain open to accept future members. It seems likely that for such agreements to get traction, at least one strong member from the developed and one strong one from the emerging countries’ side should be included – but these two should not be allowed to set rules to their own benefit at the expense of all other countries.

Multi-polarity means also that Western “values” will no longer dominate. The West needs to recognize the existence and legitimacy of other value systems. Imposition of Western values on (all) other countries will disappear, but they should further persist in the West. An interest-based policy („Realpolitik“) is in order.

A future system of global economic governance will need to be wider in terms of substance by including with equal weights social and environmental objectives. It will be even more fragmented because fewer universal agreements are likely and since more and more institutions will be created, by like-minded groups of countries or non-governmental organizations (“vertical funds”).Still, it is to be hoped that common sense prevails that in our common world stewardship of creating a good life for all requires cooperation, if of new types.




Filed under Global Governance, Socio-Economic Development

2 responses to “Disruption in Global Economic Governance – Risse in der Globalen Wirtschaftsordnung

  1. alessandro Minuto Rizzo

    Dear Kurt, your piece on multilataralism is really inspiring. By the way…… all my best wishes with all my heart for your birthday. You remain in my heart

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