22
2013-2014 PAPER SERIES NO. 6 WHITHER GLOBAL ECONOMIC COOPERATION? Bartlomiej E. Nowak, Joachim Herz Stiftung Fellow

Whither Global Economic Cooperation?

Embed Size (px)

DESCRIPTION

This paper seeks to examine the key features of a diffusing world order and how it will influence global public policies.

Citation preview

Page 1: Whither Global Economic Cooperation?

2013-2014 PAPER SERIES

NO. 6

WHITHER GLOBAL ECONOMIC COOPERATION?Bartlomiej E. Nowak, Joachim Herz Stiftung Fellow

Page 2: Whither Global Economic Cooperation?

© 2014 Transatlantic Academy. All rights reserved.

No part of this publication may be reproduced or transmitted in any form or by any means without permission in writing from the Transatlantic Academy. Please direct inquiries to:

Transatlantic Academy1744 R Street, NWWashington, DC 20009T 1 202 745 3886F 1 202 265 1662E [email protected]

This publication can be downloaded for free at www.transatlanticacademy.org.

Transatlantic Academy Paper SeriesThe Transatlantic Academy Paper Series presents research on a variety of transatlantic topics by staff, fellows, and partners of the Transatlantic Academy. The views expressed here are those of the author and do not necessarily represent the views of the Transatlantic Academy. Comments from readers are welcome; reply to the mailing address above or by e-mail to [email protected].

About the Transatlantic AcademyThe Transatlantic Academy is a research institution devoted to creating common approaches to the long-term challenges facing Europe and North America. The Academy does this by each year bringing together scholars, policy experts, and authors from both sides of the Atlantic and from different disci-plinary perspectives to research and analyze a distinct policy theme of transatlantic interest. The Academy was created in 2007 as a partnership between the German Marshall Fund of the United States (GMF) and the ZEIT-Stiftung Ebelin und Gerd Bucerius. The Robert Bosch Stiftung and the Lynde and Harry Bradley Foundation joined as full partners beginning in 2008, and the Fritz Thyssen Stiftung joined as a full partner in 2011. The Joachim Herz Stiftung and the Volkswagen Stiftung joined in providing addi-tional support in 2011, as did the Aurea Foundation and the Hungary Initiatives Foundation in 2013.

About the Joachim Herz Stiftung FellowshipThe Joachim Herz Stiftung Fellowship at the Transatlantic Academy is a full-year fellowship reserved for promising young scholars in the fields of law, business administration, economics, medicine, or the natural sciences. During their time at the Academy, Joachim Herz Stiftung Fellows work with the other fellows on the Academy’s collaborative report, conduct their own research, and present to audiences of analysts and government officials in the Washington area. The Joachim Herz Stiftung Fellowship is made possible by a grant from the Joachim Herz Stiftung of Hamburg, Germany.

Page 3: Whither Global Economic Cooperation?

Whither Global Economic Cooperation?

Transatlantic Academy Paper Series

July 2014

Bartlomiej E. Nowak1

1 Dr. Bartlomiej E. Nowak is a Joachim Herz Stiftung Fellow at the Transatlantic Academy. He is a political scientist with a Ph.D. in economics from Warsaw School of Economics. Nowak is an assistant professor at the Vistula University in Warsaw, where he teaches courses on global governance and international political economy. He has served as executive director at the Center for International Relations (Warsaw, 2010-13) and has worked in the European Parliament (Brussels-Strasbourg, 2004-09) as the head of the cabinet of Vice-President Janusz Onyszkiewicz.

Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1

Interdependence and Cooperation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4

Governing Globally . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6

The Legitimacy Problem of a Diffusing World Order . . . . . . . . . . . . . . . . . . . . . 9

Variable Geometries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15

Conclusions and Policy Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . 17

Page 4: Whither Global Economic Cooperation?

Whither Global Economic Cooperation? 1

Introduction1

We are witnessing the emergence of a new, more fragmented and decentralized world economic order, in which global multilateral institutions play only a limited role alongside regional orders and national strategies.

The financial crisis of 2008 and beyond proved just how interdependent the world now is and the need for strong global

cooperation. However, in key areas of global economic governance, such as finance, world trade, and development aid, regionalization is the overwhelming trend. This can lead us to “No One’s World,” in the words of Charles Kupchan,1 characterized by stronger competition between regions and/or nations and growing global ungovernability. The world clearly faces an adaptive challenge in order to continue the delivery of essential global public goods in the future.

Non-Western regions and states are increasingly attempting to bypass the institutions of global economic governance. They address economic problems increasingly through new channels, where the dominant position of the West is diffused.2 As a result, we are witnessing the emergence of a new, more fragmented and decentralized world economic order, in which global multilateral institutions — such as the International Monetary Fund (IMF), the World Bank, and the World Trade Organization (WTO) — play only a limited role alongside regional orders and national strategies. This poses a great challenge for the future of international cooperation. This paper seeks to examine the key features of a diffusing world order and how it will influence global public policies in a wider context.

The thesis on global multilateral gridlock has a solid base in recent literature. Thomas Hale, David

1 C.A. Kupchan, No One’s World: The West, the Rising Rest, and the Coming Global Turn (New York: Oxford University Press, 2012).

2 B.E. Nowak, “Economic Governance for a Diffusing Global Order,” in T. Flockhart, C.A. Kupchan, C. Lin, B.E. Nowak, P.W. Quirk, and L. Xiang, Liberal Order in a Post-Western World, Transatlantic Academy (May 2014), pp. 13-24, http://www.transatlanticacademy.org/publications/liberal-order-in-a-post-western-world.

Held, and Kevin Young explain that the “existing institutions solve some problems they were initially designed to address, but also fail to address problems which have emerged from the very global economic system they have enabled.”3

There is a popular tendency to announce the end of multilateralism and the unpleasant consequences that arise from this danger. Influential commentators describe the future as “every nation for itself ”4 or a “zero-sum world.”5 Indeed, in many ways, current global cooperation resembles the classical “club model” of multilateral cooperation,6 or as the 2013 Transatlantic Academy collaborative report argued, may be reminiscent of “minilateralism,”7 where there are different groups consisting of certain states but the lack of involvement of functional outsiders is a key political efficacy. Does that mean that the diffusing global order will be much more anarchic?

Although this paper does not deny that international cooperation is at a crossroads, it also stresses that we should be careful not to draw far-reaching conclusions. It argues that the

3 T. Hale, D. Held and K. Young, Gridlock. Why Global Cooperation is Failing When We Need It Most (Cambridge: Polity Press, 2013). p.10.

4 I. Bremmer, Every Nation for Itself. What Happens When No One Leads the World (New York: Portfolio/Penguin, 2013).

5 G. Rachman, Zero-Sum World. Politics, Power and Prosperity After the Crash (London and New York: Atlantic Books, 2011).

6 See R.O. Keohane and J.S. Nye Jr., “Between Centralization and Fragmentation: the Club Model of Multilateral Cooperation and Problems of Democratic Legitimacy,” John F. Kennedy School of Government, Harvard University, Faculty Research Working Papers Series (February 2001).

7 S. Benhabib, D. Cameron, A. Dolidze, G. Halmai, G. Hellmann, K. Pishchikova, and R. Youngs, The Democratic Disconnect. Citizenship and Accountability in the Transatlantic Community, Transatlantic Academy (May 2013), http://www.transatlanticacademy.org/publications/us-european-countries-taken-task-democratic-polarization-backsliding. See also M. Naim, “Minilateralism. The Magic Number to Get Real International Action,” Foreign Policy (June 22, 2009).

Page 5: Whither Global Economic Cooperation?

Transatlantic Academy2

More than ever, the national

interests of states are bound to

global politics. Unfortunately,

successful international

cooperation is still an exception

rather than a rule.

popular juxtaposition of “regionalism vs. global multilateralism” is not a useful framework to look at world affairs. The need for international cooperation is after all aimed at the delivery of public goods. These can be for example securing trade routes or global supply-chains, providing a stable monetary regime, providing collective security, containing the spread of infectious diseases, or mitigating the negative consequences of climate change.

Global public goods (GPGs) are those goods considered important to the entire international community but that cannot be delivered by unilateral action. Examples include global public health and climate change mitigation. These goods are best addressed through joint multilateral undertakings.8 The benefits of GPGs are non-excludable and non-rivalrous, meaning every nation should have access to them and be capable of benefiting from them. The theory of global public goods has its roots in rational methods of welfare economics where the supply should follow greater demand. From this perspective, the rational logic of globalization implies that it is in the interest of all countries that global problems are solved. The key obstacle to harnessing this logic is state sovereignty. Taking into account the absence of world government, GPGs can only be delivered voluntarily. There is no authority that could effectively enforce a sufficient supply of GPGs. Therefore modern scholars of GPGs tend to tailor the needed solutions on a case-by-case basis to every single policy area. This assumption has many advantages as cooperation focused on detailed areas is more likely to work.

8 International Task Force on Global Public Goods, “Meeting Global Challenges: International Cooperation in the National Interest. Towards an Action Plan for Increasing the Provision and Impact of Global Public Goods,” Working Paper prepared by the Secretariat (November 2, 2004).

But today, the interrelatedness of problems makes them also more and more difficult to manage via separate approaches. Furthermore, the provision of GPGs is at risk due to evident stalemate in all institutions of global economic governance.

This paper argues for a more comprehensive approach that avoids the pitfalls of both the thesis of multilateral gridlock and a singular treatment of every area of international politics. Sovereignty should not be treated as the only major explanatory factor of the existing gap between the supply and demand for GPGs. The problem is much larger and needs to take into account a vast array of factors explaining the state of the world order today. The below arguments give new incentives for a more comprehensive GPGs treatment that looks at the supply problem from a top-down global governance perspective. But it should be done in a way that can combine the bottom-up economic approach to GPGs and the top-down approach, which could trigger the incentives for greater GPGs supply in the future. The cross-cutting nature of today’s problems compels us to rethink the sovereignty thesis, bound in the realities of previous centuries, as being too narrow to explain the gap between GPGs demand and supply.

There are several reasons for this. First, the nature of the current interdependence is such that there are many national problems that can only be solved globally, but the keys to solving global problems are on the domestic level. Second, states have an increasing need for global solutions. If global problems are not solved, they will directly affect national economies and in some cases even threaten countries’ existence (like the problem of climate change for islands and low-lying coastal countries). More than ever, the national interests of states are bound to global politics. Unfortunately, successful international cooperation is still an exception rather than a rule. Third, the popular academic framework that juxtaposes regionalism

Page 6: Whither Global Economic Cooperation?

Whither Global Economic Cooperation? 3

with global multilateralism is becoming useless and misleading. We should rather think how to manage the network of variable geometries. The debate needs reframing. Fourth, one of the key causes for the regionalization of economic governance is the diminished legitimacy of the global organizations in the view of “emerging countries.” If this is not fixed, the future of global cooperation looks rather bleak.

Page 7: Whither Global Economic Cooperation?

Transatlantic Academy4

The “war on pollution” that

was declared by Chinese Prime

Minister Li Keqiang is another

example how global solutions

are made in practice on the domestic level.

Interdependence and Cooperation 2The 2010 collaborative report of the U.S.

National Intelligence Council (NIC) and the EU Institute for Security Studies (ISS), Global

Governance 2025: At a Critical Juncture, argued that there is a growing demand for effective global governance, which arises from the increasingly deeper interdependence and interconnectedness of problems and the ever-deepening links between domestic and international politics.9 It is a popular thesis, which implies that tackling global challenges should be in the profound national interest of all countries, while “free-riding” should be less of an option.

One of the key characteristics of 21st- globalization is in the very nature of interdependence: the straightforward link between national and global actions. There are many national problems that can only be solved globally, but the keys to solving global problems are on the domestic level. In a recent example, the post-Bali WTO agenda assumes a very domestically driven policy process where the external actors have limited influence (i.e. the reduction of supply-chain barriers, cutting red tape, or the regulation of services). The “war on pollution” that was declared by Chinese Prime Minister Li Keqiang is another example how global solutions are made in practice on the domestic level. The Chinese prime minister said that “environmental pollution has become a major problem, which is nature’s red-light warning against the model of inefficient and blind development”10 and it should be fought with the same determination as the war on poverty. The Chinese government long resisted international cooperation on climate change, but today China’s economy is directly affected by the problem.

9 National Intelligence Council/European Union Institute for Security Studies, Global Governance 2025: At a Critical Juncture, Washington, DC/Paris (September 2010), p. 4.

10 Financial Times, “China declares war on pollution” (March 5, 2014)

This kind of international provision, which is strongly dependent on domestic actions, asserts that there is a political determination on the national level and that effective domestic institutions exist and are capable of implementing these reforms, despite potential “veto points” embedded in the domestic political process. If states do not deliver national solutions and reforms, the global agenda will fail. This condition changes the logic of solving global problems and requires much more innovative thinking about global governance.

In this context, the global agenda clearly needs an update. There are many more problems that can only be solved globally, but they are not tackled by the organizations that govern the world system. For example, without global cooperation, the problem of currency manipulation cannot be controlled. Regionalism cannot give a sufficient response. Countries that are victims of “beggar-thy-neighbor” policies should be deeply interested in global regulations. One year ago, the finance ministers of the G20 agreed not to use their exchange rate to boost their countries’ competitiveness. Today, instead of strengthened cooperation, we have a “currency Cold War” at best.11 The G20 evidently does not play its role. Here is the space for the G20, the IMF, and the WTO to act. They must rethink their objectives and functions for the 21st century.

It is also ironic that the long-known problem of world macroeconomic imbalances, which John Maynard Keynes warned about decades ago, remains without a workable solution today and so greatly contributed to the crisis of 2008 onwards. In 2006-07, before the crisis occurred, the IMF tried to address this problem through mutually advantageous adjustments in policies. It gathered the most important players (the United

11 Financial Times, “Currency Cold War is starting to heat up” (May 16, 2014).

century

Page 8: Whither Global Economic Cooperation?

Whither Global Economic Cooperation? 5

States, eurozone countries, China, and Japan), for “multilateral consultation” that produced no results. The states of the world would clearly be better off if they found global solutions.

The immensely rapid mobility of capital and tax evasion are other global challenges directly affecting states. Some European countries wanted to tackle this problem regionally with a financial transaction tax, but the EU failed to find unanimity and the agreement of only 1112 countries cannot resolve the issue and will rather undermine their own competitiveness. For this tax to be effective, it would have to be addressed by the full EU at a minimum, or better yet, through a transatlantic bargain. But there are too many countries that see it as too costly. These states that did not sign up for closer tax cooperation think that they can benefit with additional capital inflow at the expense of neighbors. This is a perfect example not just of the problem of basic solidarity, but of all the paradoxes entailed with international cooperation.

Such challenges always appear when there are no immediate existential threats to states. There are

12 In January 2013, the group of 11 countries (France, Germany, Spain, Portugal, Italy, Belgium, Austria, Slovakia, Slovenia, Greece, and Estonia) decided to use “enhanced cooperation,” an infrequently used EU procedure whereby a minimum of nine member states establish advanced integration or cooperation within EU structures without all member states being involved, to tax 0.1 percent of the value of any trade in shares or bonds and 0.01 percent of any financial derivate contract.

additional obstacles for efficient international coordination: countries are affected by different global problems to a very different extent, their responses will have domestic economic consequences that political leaderships must face, and collective action is always prone to free-riding.

Jonathan Ostry and Atish Ghosh explain that the coordination gap is caused by three factors: 1) policymakers rarely think in terms of trade-offs across their objectives; 2) there is a lack of shared perceptions about the economic situation, the desirable model, and the cross-borders transmission effects of policies; and 3) there are big asymmetries in country size.13 In this context, Barry Eichengreen lists four conditions for international cooperation to take place: 1) when it centers on technical issues; 2) is institutionalized; 3) is concerned with preserving a policy regime instead of changing it; and 4) it is appropriately timed to avoid tensions between nations.14

13 J.D. Ostry and A.R. Ghosh, Obstacles to International policy Coordination, and How to Overcome Them, IMF Staff Discussion Note SDN/13/11 (Washington DC, December 2013).

14 B. Eichengreen, “International Policy Coordination: The Long View,” Research Paper, University of California-Berkeley (September 2011).

Countries are affected by different global problems to a very different extent, their responses will have domestic economic consequences that political leaderships must face, and collective action is always prone to free-riding.

Page 9: Whither Global Economic Cooperation?

Transatlantic Academy6

The anticipated change in [Fed]

policy caused enormous volatility

in emerging markets such

as Brazil, India, Indonesia, Turkey, and South Africa,

weakening their currencies and

causing an outflow of funds.

Governing Globally3In hindsight, the system of global governance

today looks quite favorable. It is true that the 2008 economic crisis has proven both the

resiliency of the current system and the strong need for more advanced international cooperation.15 In the assessment of the Bank of International Settlements, decisive action by central banks was “probably crucial in preventing a repeat of the experiences of the Great Depression.”16 The Western central banks for the first time coordinated their management of interest rates and liquidity allocation through the reactivated swap network, which attempts to manage currency mismatch in the balance sheets of big international banks and financial institutions.17

However, it is also true that as the feeling of crisis waned, effective international cooperation decreased as well. When the acute 2008 economic crisis demanded an urgent response, the G20 superseded the less representative G8 and its leaders achieved the consensus that no other systematically important financial institution should be allowed to fail and that they should avoid protectionism in their policy responses. The G20 started to delegate tasks and resources to existing multilateral institutions. It even crowned itself the “premier forum for […] international economic cooperation.”18

Indeed, the G20 became an effective preventer of deeper financial crisis, not just a responder. But soon after, the G20 failed in its role as the coordinator for a global agenda. The main reason

15 D.W. Drezner, The System Worked: How the World Stopped Another Great Depression (New York: Oxford University Press, 2014).

16 Bank of International Settlements, 82nd Annual Report (February 24, 2012), pp. 41.

17 E.M. Truman, “Enhancing the global safety net through central-bank cooperation,” VoxEU.org (September 10, 2013).

18 Final declaration of the G20 Summit in Pittsburgh (September 25, 2009).

is because it is simply a loose form of international cooperation and its decisions are non-binding. Similarly, the Financial Stability Board (FSB), established after the 2009 G20 London summit, is also a very specific institution that does not have a legal mandate, coercive power, or any formal process that would include all countries.

Though the G20 and FSB pretend to be key institutions of global economic cooperation, there was no real coordination of fiscal stimulus and monetary and fiscal adjustment on the international level. There was also no international cooperation and solidarity when the U.S. Federal Reserve suggested in May 2013 that it would significantly reduce its post-financial crisis bond-buying program of “quantitative easing,” thus raising yields on longer-maturity U.S. bonds.19 The anticipated change in policy caused enormous volatility in emerging markets20 such as Brazil, India, Indonesia, Turkey, and South Africa, weakening their currencies and causing an outflow of funds. Nevertheless, Fed Chairwomen Janet Yellen, during her testimony to the U.S. Congress in February 2014, stated openly: “We have been watching closely the recent volatility in global financial markets. Our sense is that at this stage these developments do not pose a substantial risk to the U.S. economic outlook.”21 At a minimum, the Fed should at least openly communicate its intentions, in order to give some time to other economies to prepare for such circumstances. The desirable step, however, would be that the central

19 B. Steil, “Taper Trouble: The International Consequences of Fed Policy,” Foreign Affairs (July/August 2014).

20 D. Lombardi, P. Silklos, and S. St. Amand, A Failure to Cooperate? Raising the Risks and Challenges of Exiting Unconventional Monetary Policies, Policy Brief no. 35 (March 2014), Centre for International Governance Innovation.

21 J. Yellen, Semiannual Monetary Policy Report to the Congress, Fed Chairwoman testimony to the Committee on Financial Services, U.S. House of Representatives (Washington, February 11, 2014).

Page 10: Whither Global Economic Cooperation?

Whither Global Economic Cooperation? 7

banks of the biggest international players take a much broader view into account when it comes to possible repercussions of their actions, rather than simply a purely national view.

Harold James observed that the crisis and the new roles that central banks had to undertake22 have made them paradoxically more nationally focused.23 Central banks should extend their domestic mandates in order to bear greater responsibility for the global situation. The G20 should encourage this effort. Raghuram Rajan argues that the most important central banks should be held accountable for spillovers in order to avoid adverse effects on other economies.24 But the latest financial crisis did not change the basic attitude: national interest always prevails over more abstract international cooperation. The fact that the net domestic benefits from unilateral action are rather small while the losses arising from spillover effects to other economies are much bigger does not matter much to decision-makers.

The G20, which was touted as a rising star of international system by the advocates of global governance, has demonstrated its limits as the coordinator of collective actions. Some optimistically argue that G20 membership is based on systemic significance, and its countries have both connectivity and capability in global economic governance. Therefore it could become the primary forum of global cooperation.25 But with hindsight, it has only ensured an effective ad hoc crisis response. Under the circumstances of a crisis that

22 Most importantly: preemptive role and financial supervision. In the past, the central banks were dealing with monetary and price stability, exchange rates, and financial stability.

23 H. James, “International Cooperation and Central Banks,” VoxEU.org (October 8, 2013).

24 R. Rajan, “Containing Competitive Monetary Easing,” Project Syndicate (April 28, 2014).

25 J. Kirton, G20 Governance for a Globalized World (Farnham-Burlington: Ashgate, 2013).

is not acute but rather creeping, without a sense of urgency, collective action is much more difficult. The fact that the G20 is much more representative than the former G8 — its countries represent today 85 percent of global economic output, 80 percent of global trade, and 66 percent of global population — cannot be overestimated. It is still a loose form of international cooperation, which invites members to its club on the base of unwritten and rather controversial criteria. In the long term, the G20 cannot be sustainable without developing common norms, institutional experience, and resources. Though the latter can be achieved over time, it is very unlikely that this setting will produce the needed robustness without common underlying values.

The rational argument, based on economic logic, would rather suggest that the future of global cooperation is bright. There is no doubt that states are today in greater need of such cooperation. They are negatively affected by globalization in the sense that they have lost national control over policy outcomes. Therefore they should seek to regain collectively what they have lost individually. IMF Managing Director Christine Lagarde underlines that the countries of the world should be thankful to multilateral global cooperation and its instruments for preventing a global Great Depression and a wave of protectionism. From her point of view, the world does not have a choice and a “new multilateralism is non-negotiable.”26 In reality, however, it is far from obvious. When the circumstances of crisis are missing, the incentives to cooperate internationally are smaller.

The key question had not changed over time: how to ensure the successful management of medium-term problems that are looming on the horizon.

26 C. Lagarde, “A New Multilateralism for the 21st Century,” The 2014 Richard Dimbleby Lecture, International Monetary Fund (2014).

The G20, which was touted as a rising star of international system by the advocates of global governance, has demonstrated its limits as the coordinator of collective actions.

Page 11: Whither Global Economic Cooperation?

Transatlantic Academy8

International policy coordination can be compared to the Loch Ness monster: “much discussed but rarely seen.”27 It usually appears in response to an acute crisis, but otherwise it is elusive. The cost of collaborative action may simply become too high over the long term, making periods of extended cooperation unsustainable. But probably the biggest challenge facing the world today is the impaired legitimacy of global governance.

27 O. Blanchard, J.D. Ostry,and A.R. Ghosh, “International Policy Coordination: The Loch Ness Monster,” IMFdirect (December 15, 2013).

Page 12: Whither Global Economic Cooperation?

Whither Global Economic Cooperation? 9

When the IMF was created in 1945, the United States was world’s largest creditor; today it is the largest debtor, along with European Union member states.

The Western countries have benefited from the post-war global economic order, as it reflected their own preferences in distribution

of benefits. They openly pursued a policy of exceptionalism when the rules infringed too much on their own interests. In such circumstances, they could simply threaten an exit from the system and withhold the delivery of GPGs, which implied a much worse situation for the rest of the world. For the West, this situation was natural and reflected the division of power of the time. In order to compensate the weaker states, the West used to make side payments in the form of finance, development aid, or trade.28 However, the “rest” saw this as arrogance.

Today there is an enormous level of resentment against the Western-led liberal international order. Dominique Moisi calls it the “geopolitics of emotion.”29 It is not simply caused by the unjust rules of the world system. The emerging powers are fully aware that they have been beneficiaries of the post-war world order and its anchoring institutions. With hindsight, they are the winners of the globalization process. They also realize that they cannot replace the West’s leadership in providing GPGs. Nor they are willing to contribute more to the governance of the globe. The problem is different.

When the IMF was created in 1945, the United States was world’s largest creditor; today it is the largest debtor, along with European Union member states. The rise of the “BRICS”30 and “Next

28 R. W. Stone, Controlling Institutions: International Organizations and the Global Economy (Cambridge: Cambridge University Press, 2011).

29 D. Moisi, The Geopolitics of Emotion: How Cultures of Fear, Humiliation and Hope are Reshaping the World (New York: Anchor Books 2009).

30 Brazil, Russia, India, China, and more recently South Africa.

11,”31 despite the lack of common values between these countries or even economic commonalities (except the size of the market), is changing the world’s geography of economic power. According to estimates by Arvind Subramanian and Martin Kessler, China is “the first mega-trader since Imperial Britain,” even bigger than the United States, Japan, and Germany at the peak of their power. 32 By some measures, China will even very soon overtake the United States as the largest economy in the world.33 Today middle-income countries’ share of world GDP measured by income level is almost equal to that of high-income states. Furthermore, the advanced Western economies were damaged the most by the global economic crisis that began in 2008. As a high-level Indonesian official amonishes, “Look at you: the Western-led international economic institutions advised Asia very poorly during the economic crisis of 1997. For us it was formative experience. Then the crisis of 2008 was caused by the West’s ill-designed economic governance and models. The West doesn’t really have the strongest cards today.”34

The problem is that the change of economic power in the world is not followed by the change of power within the institutions governing the world system. As one observer noted, the irony is that “solvent

31 According to Goldman Sachs: Bangladesh, Egypt, Indonesia, Iran, South Korea, Mexico, Nigeria, Pakistan, Philippines, Turkey, and Vietnam.

32 A. Subramanian and M. Kessler, “The Hyperglobalization of Trade and Its Future,” Working Paper 13-6, Peterson Institute for International Economics (July 2013), p. 9.

33 International Comparison Program, Purchasing Power Parities and Real Expenditures of World Economies: Summary of Results and Findings of the 2011 International Comparison Program (Washington, DC, International Bank for Reconstruction and Development/The World Bank, 2014).

34 Author interview in Jakarta (March 25, 2014).

The Legitimacy Problem of a Diffusing World Order4

Page 13: Whither Global Economic Cooperation?

Transatlantic Academy10

From the point of view of emerging

economies, the financial crisis of 2008 was a major blow to

the West and the IMF. It appeared that the IMF had

almost become a fund for European

economies that had been

managed irresponsibly.

Asians still don’t have the power and the near-insolvent West still rules.”35

The emerging countries have continuously called for democratization of international governance and greater equality. These calls could be left unanswered by the West without serious consequences for decades. It is because the non-Western economies were beneficiaries of the system as well, since the West was ensuring a relatively stable anchor through its dominant economic and political position. Today, when the West is in relative decline while the “rest” is on the rise, the reform of global international organizations is getting even harder. For example, the United States is the only country that holds the veto for any major decision in the IMF. Though under a proposed reform this situation did not change,36 the reform is still blocked by the U.S. Congress due to unrelated and purely domestic issues. As a result, Russia, China, Brazil, and India more or less openly called for the IMF to move ahead without U.S. resources. Even the G20 issued an ultimatum to the United States, warning rather unambiguously that it risks being left aside: “If the 2010 reforms are not ratified by year-end, we will call on the IMF to build on its existing work and develop options for next steps.”37

From the point of view of emerging economies, the financial crisis of 2008 was a major blow to the West and the IMF. It appeared that the IMF had almost become a fund for European economies that

35 A. Subramanian, “Asia, Europe, and the IMF,” Business Standard (May 26, 2010).

36 The U.S. share would only drop marginally from 17.7 percent to 17.4 percent while the Europe’s share would drop from 60 percent to 57 percent. Under this arrangement, 6 percent of total quotas would be shifted to emerging economies, and from among 24 IMF directorships an additional two would go from European to developing countries. The IMF’s equity capital would double to $720 billion.

37 Meeting of G20 Finance Ministers and Central Bank Governors, Communiqué (Washington, DC, April 10-11, 2014).

had been managed irresponsibly. The emerging countries became very reluctant to extend their credit lines, which constitute the biggest source of IMF financing. The level of mistrust has skyrocketed. Furthermore, the emerging economies were not interested in the IMF’s advice on financial sector reforms and made it clear that they are not willing submit again to the IMF’s adjustment programs.38 In order to avoid reliance on the Western-led Bretton Woods institutions, in 2009 the ASEAN+3 (a forum of the ten member states of the Association of Southeast Asian Nations plus China, Japan, and South Korea), developed the Chiang Mai Initiative Multilateralization (CMIM), worth $240 billion, and two years later established the ASEAN+3 Macroeconomic Research Office (AMRO).39 An initiative by the BRICS aims at creating a foreign exchange contingency reserve instrument worth $100 billion that would be an alternative financial source to the IMF during a financial crisis. While global finance had already been decentralized, in a short period of time it became even less manageable. At the same time, new problems appeared on the agenda that need to be tackled internationally, preferably on the global level. The enormous activity of sovereign wealth funds is completely blurring the borders between what is state and what is private. Nations need a serious dispute settlement mechanism in global finance. The IMF should rethink not only its shares of quotas and financial capacity, but also its agenda and functions within the evidently changing world economic order.

38 M. S. Khan, “Asia: Stepping Up from Regional Influence to a Global Role,” East Asia Forum Quarterly (October 2011).

39 The CMIM replaced the Chiang Mai Initiative (CMI), which was created in 2000 after the financial crisis in East Asia. The aims of the CMI included cooperation in four major areas: monitoring capital flows, regional surveillance, swap networks, and training personnel.

Page 14: Whither Global Economic Cooperation?

Whither Global Economic Cooperation? 11

The WTO became the victim of its own success, i.e. the continuing liberalization of world trade. It approached the point where trade-related issues were too difficult to resolve globally.

The World Bank is not in any better shape. It is today a competitor to other regional banks and wealthy countries that dispense aid. The emerging economies directed the biggest post-crisis capital infusions to regional institutions, i.e. the African Development Bank or the Asian Development Bank. Since 2008, regional banks have played a crucial role in securing emerging economies in the face of financial crisis contagion. The newly created BRICS Development Bank is intended to make funding for infrastructure in developing countries more accessible with much less conditionality attached. Today Brazil’s development bank BNDES has a bigger balance sheet than the World Bank. Clearly, the World Bank is on shaky ground with middle-income countries. They can borrow money not only from other institutions or states, but also quite cheaply on international capital markets. The original assumption that the developed countries give financial assistance to developing ones has gone into reverse. Under new president, Jim Kim, reforms are reshaping the World Bank as a “solution bank” that offers a kind of a global toolkit for development policy. This breaks the previous structure of management based on regional divisions. But it is questionable whether this new approach will allow the World Bank to bounce back to its previous level of influence.

The WTO is also struggling for relevance. There is no chance to complete the so-called Doha Development Round, which has become outdated since its launch in 2001 as the nature of world trade has transformed enormously. Today more than 70 percent of total service imports and more than 50 percent of manufactured imports are intermediate services or goods. At least 35 contractors from different parts of the world usually contribute to a one typical manufacturing company. The key to understanding trade today is in investigating the

world and regional supply chains of production,40 the flow of foreign direct investments (FDI) and the impediments to international flow of services. Previously, regional trade concerned “made-here-sold-there” goods, while today it concerns “made-everywhere-sold-there” goods as Richard Baldwin describes it.41 In the past, the rules of regional trade were mostly about discrimination. Today they are about enhancement of international production networks. The contemporary supply chain is a matrix of international flows of goods, services, capital, people, and ideas, where trade itself is not a number one issue. Bernard Hoekman estimates that reductions in supply chain barriers would bring six times more benefits in terms of global GDP growth than the removal of all import tariffs.42

In fact, the WTO became the victim of its own success, i.e. the continuing liberalization of world trade. It approached the point where trade-related issues were too difficult to resolve globally. Today the WTO applauds as a great success a modest package agreed at the Ninth Ministerial Conference in Bali in December 2013, aimed at trade facilitation. For those who see world trade traditionally, the deal may look like “Doha Lite and Decaffeinated.”43 But maybe it is a time for pause and the change of approach to the WTO. For critics, it is easy to imply that it suffered because of too much democratization and

40 R. Baldwin, M.Kawai, and G. Wignaraja (eds.), The Future of the World Trading System: Asian Perspectives, Centre for Economic Policy Research, Asian Development Bank Institute, London (2013).

41 R. Baldwin, Multilateralising 21st Century Regionalism (Paris: Organization for Economic Cooperation and Development, 2014).

42 B. Hoekman, Enabling Trade: Valuing Growth Opportunities, World Economic Forum, Davos (2013), p. 13.

43 Financial Times, “Up in the air: A failure to reach an agreement in Bali would threaten the future of multilateral trade” (December 3, 2013).

Page 15: Whither Global Economic Cooperation?

Transatlantic Academy12

The decomposition of the previously

Western-led order takes us to governance that

is much more network-based

than hierarchical.

handover of power from the West to the “rest.”44 As a matter of fact, the recent success of the Bali meeting — though small — would probably not have happened if the WTO chairmanship had not been handed over to emerging powers. It is also too easily forgotten that that the WTO’s biggest barriers are the EU Common Agricultural Policy and an equally protectionist U.S. agricultural policy. The transatlantic partners should finally look at themselves and stop blaming others for the stalemate.

The WTO, like other institutions of global governance, should really rethink its agenda. It is setting the global standard for trade in goods and services. It should deal with basic rules for investment as well. The WTO should focus on its deliberative and dispute-settlement functions and on effectively managing the liberalization of world trade via regional blocs, in order to consolidate them into a global framework at some later point of time. While it appears impossible to reach agreement on further rounds of global liberalization, 21st century trade is a success story thanks to regionalism. This does not have to be considered a contradiction to global multilateral solutions. In the last decade, almost 40 percent of preferential trade agreements (PTAs) included provisions on WTO+ issues45 (competition policy, intellectual property rights, investment, and movement of capital).46

World trade is also very different than a decade ago because of the increasing role of “E-to-E” trade (emerging markets to emerging markets). China and India trade less with advanced economies than

44 A. Subramanian, “Too Much Legitimacy Can Hurt Global Trade,” Financial Times (January 13, 2013).

45 These are commitments which are already within WTO agreements, but go beyond the WTO disciplines.

46 The WTO and Reciprocal Preferential Trading Agreements (Geneva: World Trade Organization, 2011).

with emerging markets. Even on international capital markets, we notice an unprecedented situation with a fast growing trade in bonds and equities that were issued by emerging countries and denominated in their own currencies. The 2013 UNDP Human Development Report has proclaimed “The Rise of the South” as one of the most important processes in the global economy.47

The diffusion of economic power in the world has enormous consequences for the global governance system. The decomposition of the previously Western-led order takes us to governance that is much more network-based than hierarchical. The hierarchic system for the delivery of GPGs was based not only on the hegemonic power of the major supplier but also on the legitimacy of the system in the view of dependent states. In other words, its fundamental assumption is that the weaker states would like to follow a leader and that they trust the strategic choices of the leader. Today this is not the case. Theoretically, the delivery of GPGs should take place on the most efficient level, suggesting an increasing role for global solutions. But this presumption is taken from economic models of governance that are based on economies of scale in the production of GPGs, spillovers, and externalities. As Kahler and Lake rightly argue, we should instead use a more political model that takes into consideration the preferences of actors and institutions.48 From this perspective, the provision of GPGs is more questionable.

The legitimacy of the global system is waning as increasingly powerful actors retain a limited say. If their voice is rarely successfully heard, the “exit”

47 Human Development Report 2013, The Rise of the South: Human Progress in a Diverse World (New York: United Nations Development Program, 2013).

48 M. Kahler, D.A. Lake, Economic Integration and Global Governance: Why So Little Supranationalism?, in: W. Mattli and N. Woods (eds.), The Politics of Global Regulation (Princeton and Oxford: Princeton University Press 2009), p. 250.

Page 16: Whither Global Economic Cooperation?

Whither Global Economic Cooperation? 13

The potential challenger of today’s global currency order, China, is very cautious about making the renminbi a global currency, as privilege and power are followed by greater obligations and responsibility.

option is still unfavorable to them, so they have chosen to weaken their “loyalty” to the existing system.49 It is one of the reasons why the emerging economies are not necessarily willing to contribute to the global system. It obviously decreases the chances for successful GPGs delivery.

It is sometimes argued that with the growing interdependence and interrelatedness of problems, the cost of extending the current multilateral regimes could prove to be lower than the cost of creating new ones.50 However, the latter already happens.

It is worth stressing that the emerging powers do not have any common position on the most important world affairs. They do not offer an alternative vision of the world or want to contribute more strongly than they do today. The potential challenger of today’s global currency order, China, is very cautious about making the renminbi a global currency, as privilege and power are followed by greater obligations and responsibility. Beijing has carefully studied the price paid by the U.S. dollar and the euro.51 The BRICS countries are not brought together by real similarities. They did not even have any united position toward the most important issue for which they most obviously should form an alliance: leadership in organizations of global economic governance. It recently seemed that for the first time there was a real chance for the overthrow of the West’s leadership in Bretton Woods institutions. The pressure was enormous and the non-Western candidates for office were better qualified than their Western counterparts.

49 On the links between exit, voice and loyalty, see: A.O. Hirschman, Exit, Voice, and Loyalty: Responses to Decline in Firms, Organizations, and States (Cambridge and London: Harvard University Press, 1970).

50 W. Molle, Governing the World Economy (London and New York: Routledge, 2014), pp. 33.

51 For example, the loss of control over exchange rate policy.

But in the cases of both the World Bank and the IMF, the West played the emerging powers against each other through a “divide and conquer” strategy. Ultimately, the national self-interests of challengers prevailed. As Armijo and Roberts argue, China is likely to treat the BRICS formula as an “outside option” that would allow for exerting greater pressure on current global economic governance settings.52 However, by emphasizing their ambiguity toward the current global governance system, the BRICS was able to achieve a certain level of institutionalization. The other countries have also supported China during the discussion on global imbalances and currency “manipulation,” labeling the West (the U.S. Federal Reserve, the European Central Bank, and the Bank of England) as an offender of international currency management standards.

To sum up, there is a growing consensus that the “unipolar moment” is over. The latest collaborative report of the Transatlantic Academy argued: “the long run of the West’s material and ideological hegemony appears to be coming to an end… The Western model no longer has a monopoly on the aspirations and plans of nations seeking to better their economic and political futures.”53 The institutions of world economic governance have to adjust to this new reality. Without reforms to enhance legitimacy, the world system will increasingly be more chaotic and less capable of managing international issues. The leadership of the Bretton Woods institutions should be based on merit, not on Euroatlantic origin. The U.S.-

52 L.E. Armijo and C. Roberts, “The Emerging Powers and Global Governance: Why the BRICS Matter,” in R. Looney (ed.), Handbook of Emerging Economies (New York: Routledge, 2014), forthcoming.

53 T. Flockhart, C.A. Kupchan, C. Lin, B.E. Nowak, P.W. Quirk, and L. Xiang, Liberal Order in a Post-Western World, Transatlantic Academy (May 2014), http://www.transatlanticacademy.org/publications/liberal-order-in-a-post-western-world.

Page 17: Whither Global Economic Cooperation?

Transatlantic Academy14

EU informal deal on the IMF and World Bank’s leadership, which is prohibitive for the most qualified candidates from the rest of the world, must finally come to an end. These institutions should follow the example of the WTO, now run by Brazilian diplomat Roberto Azevêdo.

In the not too distant future, the United States should give up its veto power in the IMF, while the EU should seriously take into consideration

having a single seat in institutions like the IMF or the UN Security Council. That may point the way to an interesting alternative where regions are more involved and represented in the institutions of global governance. It would give powerful leverage for starting a far-reaching reform of the whole system to make it more adjusted to the realities of the 21st century.

Page 18: Whither Global Economic Cooperation?

Whither Global Economic Cooperation? 15

The popular academic framework that juxtaposes regionalism vs. global multilateralism is useless and misleading. The key question is rather which rules and disciplines of international economic governance should be harmonized on the global level, and which on the regional?

Variable Geometries 5Though this paper agrees that in many

ways, the emerging new forms of global economic cooperation resemble the classical

“club model” of multilateral cooperation or “minilateralism,” it argues that it is frequently wrongly interpreted by experts. The popular academic framework that juxtaposes regionalism vs. global multilateralism is useless and misleading. The key question is rather which rules and disciplines of international economic governance should be harmonized on the global level, and which on the regional?

Regionalism is unavoidable and observable in all areas of global economic governance, and this is not necessarily a bad thing. Regional agreements are generally based on more similar assumptions between the countries and, frequently, more similar governance structures and a higher level of trust among the members of the group. It has clear advantages in today’s reality. For example, global value chain networks are mostly regional, so the governance responses to supranational problems must also be exercised on regional level. Most externalities occur on the regional level rather than the global so the incentives toward regional cooperation are rather natural.

But regional frameworks can prove economic self-sufficiency only to a limited extent. We must take into account that there are many problems, like currency manipulation, macroeconomic imbalances, food shortages, the rapid flow of capital, and tax evasion, that can only be tackled globally. Neither regional orders nor loose forms of cooperation like the G20 can effectively solve them.

Global multilateral institutions can deliver public goods in a way that is not attainable in other frameworks of cooperation. Their advantage is that they are open and based on rules. Therefore regionalism cannot be an alternative to global solutions. The two must complement each other.

Regionalism can be effective only if it coexists with a robust multilateral global framework. Instead of a threat to global multilateralism, regionalism can be treated as a second-best option. As Kenneth Heydon and Stephen Woolcock argue, the notion of regionalism in itself is today much less relevant and useful. Thus Jagdish Bhagwati’s famous “spaghetti bowl” concept describing the problem of tangled trade agreements is becoming outdated as a reference point. 54 In trade, for example, the “core entities” of preferential trade agreements are compatible with global solutions.55 Therefore the links between different orders, global and regional organizations, and the interactions governing them are of absolute importance.

This paper argues that the debate should be framed within the network of variable geometries. This term had originally emerged as a mode of governance in the EU,56 but it was also practically developed during the GATT/WTO’s subsequent rounds of negotiation. It aims at accommodating differences between nations, or different regional or global settings in a flexible and manageable way. The concept has some similarities with Richard Baldwin and Philip Thorton’s “multi-tier multilateralisation,”57 the idea of “open clubs”58 advocated by Jagdish Bhagwati, or Robert Lawrence’s proposal of “club of club”

54 K. Heydon and S. Woolcock, The Rise of Bilateralism. Comparing American, European and Asian Approaches to Preferential Trade Agreements (Tokyo/New York/Paris: United Nations University Press, 2009), p. 5.

55 Ibid, p. 4.56 Under this approach, the EU uses different terms: variable

geometry, two-speed Europe, Europe à la carte, closer cooperation, enhanced cooperation.

57 R. Baldwin and P. Thorton, Multilateralising Regionalism, CEPR Policy Report (2008).

58 J. Bhagwati, The World Trading System at Risk (Princeton: Princeton University Press 1991), p. 45.

Page 19: Whither Global Economic Cooperation?

Transatlantic Academy16

Regionalism can be a “building

block” or a “stepping stone” for global order only if at some

point of time it is consolidated into

global framework.

approach,59 which argue that some international clubs should be functional and devoted to single or intertwined issues. Supplementing the global economic governance setup with a network of variable geometries would help to push the further integration of the global economy and build beyond global governance gridlock while avoid the gloomy prophecy of deglobalization.

The basic requirement for variable geometries is that each such undertaking must be inclusive, i.e. all non-members who fulfill the criteria and are willing to join should be allowed. It poses the biggest risk for the agreements that are of universal coverage and that cover cross-issue areas. In order to avoid this, nations should accept the second principle, which requires that common minimum rules for regional orders are introduced by the global institutions and that they are binding on all. Global organizations should provide an anchor for increasingly differentiated regional orders. They should have not only a robust surveillance mechanism, but also play the role of assessor and judge for settlement of disputes. In other words, their primacy in the international system must be recognized and cultivated.

59 R.Z. Lawrence, Rule Making amidst growing diversity: A club of club approach to WTO Reform and new issue selection, paper prepared for the World Trade Forum 2004 (June 2004).

Regionalism can be a “building block” or a “stepping stone” for global order only if at some point of time it is consolidated into global framework. For example, trade “competitive liberalization” — as Robert Zoellick defined it — can be a way to bypass the current multilateral gridlock. It assumes further liberalization of trade in a way that regional blocks would create new standards or “golden rules” for cutting-edge areas. In other words, the regional agreements should be built and thought of as “WTO+.” From this perspective, global, regional and bilateral trade agreements will complement and reinforce each other.60 Then, at some point, the WTO should try to forge global consensus and consolidate the regional deals into a single agreement. The biggest challenge is obviously to avoid building blocks becoming stumbling blocks. Thus normative consensus on the primacy of global institutions is of the utmost importance. To accomplish that, international organizations must truly be reformed.

60 R. Zoellick, Free Trade and Hemispheric Hope, remarks before the Council of Americas (Washington D.C., May 7, 2001).

Page 20: Whither Global Economic Cooperation?

Whither Global Economic Cooperation? 17

The benefits of “global good” are not a convincing argument for domestic audiences. For politicians, it can be easier to explain how the lack of global action can directly harm their constituencies.

Conclusions and Policy Recommendations6

This paper argues that we clearly need a more holistic approach to the changing global governance order. This approach must take

into account all aforementioned factors. Therefore in the quest for appropriate responses, we should start with following questions: what is the nature of a new interdependence and what are the minimum requirements for effective international cooperation toward better delivery of global public goods? How can we combine global and regional multilateralism into a single framework in a way that makes the diffusing global order more manageable? How can we build a more inclusive and legitimate global economic order for the better delivery of global public goods, which would encourage emerging powers to contribute more extensively to solving global problems. The paper clearly states that despite growing interdependence and the side-effects of unresolved global problems that today affect many countries, strengthening international cooperation toward greater global public goods delivery is not easier than in the past. Here are some of the potential responses to the existing pitfall.

• On the level of discourse, an appeal is needed to both general global good or common destiny of all nations and their self-interest. Former WTO chief Pascal Lamy calls for a “declaration of global rights and responsibilities.”61 This is a positive step but not sufficient. The benefits of “global good” are not a convincing argument for domestic audiences. For politicians, it can be easier to explain how the lack of global action can directly harm their constituencies. They can use the logic of a “two-level game,” in which international negotiations between states take place simultaneously on both the domestic and international levels as

61 P. Lamy, “Global governance requires localizing global issues,” speech at the Oxford Martin School (March 8, 2012).

formulated by Robert Putnam,62 much more persuasively than in the past.

• Strong national institutions are essential for tackling global challenges, and this understanding should be much more deeply embedded in the functioning of global institutions. Most importantly, national institutions are responsible for the implementation of every single globally agreed policy. The deep understanding of national political logics and the truth that “one size does not fit all” is essential. For example, the IMF has already evolved and is concerned now with the level and roots of inequality on the national level. It thoroughly examines the political economy of reform and its societal impact, a significant difference from its behavior in the 1990s. During the eurozone crisis, it was surprising to see that the EU institutions (the European Central Bank and the European Commission) were more radical in their demands toward the indebted countries than the IMF.

• The problem of missing incentives for countries to provide GPGs can only be overcome by strong international institutions. Unreformed organizations will not be capable of delivering these incentives. In an age of multipolarity, it would be unrealistic to expect more pooling of sovereignty from states toward supranational actors. It is quite likely that delivery of global public goods in the future will be developed through customary law rather than by treaties or other big agreements. However, it is realistic to expect that global organizations can refocus, regain, and strengthen their legitimacy. They must be reformed both in

62 R. Putnam, “Diplomacy and Domestic Politics: The Logic of Two-Level Games,” International Organization 42: 427—460 (1998).

Page 21: Whither Global Economic Cooperation?

Transatlantic Academy18

The world desperately requires the

system of global governance to be profoundly

readjusted to a new reality. While there is a growing

intellectual consensus on

what should be done, there is

less willingness to follow through with appropriate

actions.

terms of the problems that they are dealing with and in terms of the share of power between the West and the “rest,” so that they finally reflect the world of 21st century.

• More than ever, there is a need for holistic approaches. Too easily the network of variable geometries may devolve into anarchy. Holistic thinking does not have to be in contradiction to multipolarity. While there is a growing normative diversity in the world, countries should at least recognize the principles that should govern their behavior in global, regional and national politics. It can be based on two points. First, regional orders are not equivalent to global solutions and cannot replace them. Regionalism can only be stronger when it exists within the resilient global system. Therefore keeping the links between national, regional, and global tiers is essential. Second, global solutions are driven by the principles of subsidiarity and proportionality. Policies should be exercised

at the lowest possible level of governance, from the local to the global, and international actions should only be complementary for the effective achievement of aims. This practice of supranational governance is derived from the European Union and can be applied elsewhere.

We live in a world that has converged enormously since the collapse of the bipolar system of the Cold War. Interdependence is much more advanced than ever before. However, convergence goes hand-in-hand with multipolarity. If serious reform of the system usually takes place after a breakdown, the incentives for change are even less, as the global governance system has worked rather well during the recent crisis. But the world desperately requires the system of global governance to be profoundly readjusted to a new reality. While there is a growing intellectual consensus on what should be done, there is less willingness to follow through with appropriate actions. If this situation continues, a plunge into chaos may become unavoidable.

Page 22: Whither Global Economic Cooperation?

1744 R STREET NW

WASHINGTON, DC 20009

T: 1 202 745 3886

F: 1 202 265 1662

E: [email protected]

WWW.TRANSATLANTICACADEMY.ORG