By Pedro Sousa our Vice President,
The fourth in a series 4 articles entitled ‘The global economic disorder calls for a strengthened Global Economic Governance’
“The political problem of mankind is to combine three things: economic efficiency, social justice and individual liberty.” – John Maynard Keynes
4. THIS IS A GLOBAL ECONOMIC GOVERNANCE CHALLENGE
The most worrying and counterproductive issue we are facing is the “Race to the bottom” attitude by Russia and some countries in the developing world, with deliberate anti-West positioning instead of having constructive criticism and inputs to improve the economic situation of all. That creates further economic instability and makes everyone worse-off. In a difficult economic context, the path of least resistance can be to prioritize short-term national interests over long-term global ones, as has been seen many times in recent years. Political tensions can lead to face-offs and tit-for-tat sanctions, even when decision-makers recognize, intellectually, that each country is inflicting economic self-harm. Sanctions are taking the place of military strikes, competing trade regimes are replacing military alliances, currency wars are more common than the occupation of territory, and the manipulation of the price of resources such as oil is more consequential than conventional arms races. Economic warfare is undermining economic integration. Multilateral regimes are becoming regional rather than global. Edward Luttwak called it the rise of geo-economics, being both the antithesis and the greatest triumph of economic globalization. It is the overwhelming dependence of all countries on the global economy, which makes the threat of shutting them out so effective. Geopolitics is once again taking centre stage, with potential wide-ranging consequences for the global economy, politics, and society. What we see today is a pattern of persistent, multidimensional competition and the simultaneous weakening of established relationships, a trend that trickles down and spills over into multiple sectors and issues. The changing relationship between world powers has reduced the political energy available for tackling shared problems and chaos has arguably festered. The international community has largely failed to address any major global issue in recent years: global warming, barely dealt with the failure of the global economy, which has caused severe problems in North America and Europe, and violence has been left to fester in the Middle East. The shift in the global political order is evident in the rise of China and its uncertain role on the world stage. With the back and forth of economic sanctions, and Russia attempting to lead a Eurasian Union as a counterweight to the European Union, the next decade could be marked by Russia complaining and attempting to revise developments that took place during the years when it was perceived as weak and vulnerable. Far from improving conditions for its participants, the current pattern of geostrategic competition threatens to harm us all.
Yet in the face of potential de-globalization, rising nationalism and a deepening disbelief in multilateralism, the most important lesson is that we cannot remain passive. In this worldly order, we must manage both asymmetric and symmetric challenges together. Current times are making the case for strengthened global economic governance. There is a need for visionary heads of governments that will rise to this challenge and transform government policy to meet the needs of this age. We need more international cooperation, not less. Regional and global international bodies– G7, G20, OECD, UN, WTO, WEF, IMF, WB, ILO etc. – will be put to greater tests and must continue to create a confluence of private and public actors, civil society and academia in order to impress upon political leaders the importance of collective reflection. Emerging economies have become important global players and the growth engines of the world economy, participating at a higher level in international trade flows, as major international creditors, foreign direct investors, and centres of innovation. Thus, it is critical to make the global economic architecture more effective and involve major emerging economies and fast growing developing countries. There is more that can be done to enhance and support global economic governance, and indeed, to improve the rules-based international governance system. Cooperation among countries is crucial for economic global governance to work and so that we avoid facing economic disorder and unproductive economic conflicts. We live in an age where we have institutions with an enormous source of multidisciplinary information, with world economic think tanks and enough knowledge sharing to understand the challenges that we, the world, face. We must harness all our potential from the existing highly useful multilateral forums and institutions to focus on longer-term over the horizon issues, and use strategic foresight tools to enrich the global economy discussions. Upgrading our strategic foresight capabilities and gradually embedding foresight into its long-term analysis is crucial.
The 2008 financial crisis has markedly changed the landscape of global economic governance. During the 2008 financial crisis, the G20 was elevated to the global economic steering committee. In the early stages of the crisis, the G20 was an effective forum for crisis containment. However, more recently, the momentum for policy coordination has slowed, as the focus has shifted from preventing a calamity to avoiding future crises and supporting the nascent recovery. It seems as though the G20 has somewhat lost direction and momentum. Governments and policymakers have felt less need to act in unison and have rather refocused on their national agendas, as is their duty and primary function. Effective global governance is needed permanently, not just in crisis times. It is desirable to have more representative and effective global governance that, among other things, is equipped to prevent crises rather than just react to them. All in all, since the G20 took over responsibility for the global economy in late 2008, it has played an important role in limiting the likelihood of a bigger global recession, as it took on the role of coordinating macroeconomic policy. Although not perfect, such coordination was particularly strong at the initial stage of the crisis, as Nemat Shafik puts it: “Six major central banks announced, in an unprecedented move, a coordinated cut in policy rates in October 2008 to ease global economic conditions. The US Federal Reserve and 14 different monetary authorities established temporary US currency swap arrangements to mitigate dollar shortages in short-term funding markets. And the first ever G20 Leaders’ Summit was convened in November 2008 and led to a commitment to coordinated fiscal stimulus and a pledge to refrain from protectionism. These massive efforts meant that, instead of another Great Depression, we got the Great Recession, which actually is a significant achievement, given the possible counterfactuals.” In fact, the momentum was such that the Financial Stability Board (FSB) was created in 2009 with a mandate to develop and promote effective financial regulation. This was an agreement by the G20 members to begin a fundamental overhaul of global financial regulation. In order to address the origins of the crisis, there was – and there still is – an urgent need for world powers to promote a more transparent, safe, and resilient global financial system. Among those issues, failing to deal with too-big-to-fail institutions and regulating derivatives markets is still a potential hazard that could bring another crisis. Therefore, the progress that has been made must continue. Exchanging financial information, ensuring that capital requirements are met, and that liquidity levels are up to healthy numbers, are essentials of a 21st century financial system. In Europe, the European Stability Mechanism (ESM), the ECB’s Outright Monetary Transactions (OMT) framework were created, plus, the euro area made policy steps towards a full banking union which will strengthen the Eurozone and ease market stress. Nevertheless, more still needs to be done to ensure that the banking systems of all of the member countries are resilient to future financial crisis.
A forum of global economic governance needs to forge a strong common consensus and effectively co-ordinate across different fora. This is important for its credibility and influence at the global level. The present G20 format provides an opportunity for a genuine joint learning process between advanced and emerging economies and a full-fledged two-way exchange of experiences among them. The Turkish G20 presidency has prioritized inclusive growth and long-term investment in infrastructure, SMEs, low-income countries and sustainable development. The Australian Presidency growth and jobs agenda made some progress on a number of important aspects like national growth strategies; employment; Base erosion and profit shifting (BEPS) and Automatic Exchange of Information (AEOI); trade; investment, corruption, and infrastructure and development. The historic commitment to raise G20 GDP by at least 2% by 2018, the so-called “2 in 5” objective, is ambitious. We are still far from the G20’s objective of achieving strong, sustainable and balanced growth (the world economy grew at just over 3% in 2014, below its long-run average). Taking policy actions based on previously agreed commitments will be essential to the credibility of the G20, and G20 members need to recognise this as a group. The Accountability Assessment exercise and the peer review process in the Framework Working Group are good steps, but as sovereign states, countries retain the right to take actions aligned with their national interests. It remains uncertain whether peer pressure amongst G20 members would be sufficient to affect agreed policy changes across the board, such as the standstill on protectionist measures. Policymakers across the globe need to keep the momentum alive and seize the opportunity to strengthen global economic governance while memories of the crisis and the sense of urgency remain fresh. Indeed, there is a real danger that the window of opportunity for addressing some of the most challenging global issues might soon be closing.
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