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Yaroslav Lissovolik

Chief Managing Director of Sberbank, Head of analytical Department of global markets Sberbank Investment Research, RIAC Member

Since the mid-20th century the world’s economic architecture has largely been taken for granted, partly due to the rising role of developed economies and the mounting impulses of economic openness promoted by international institutions. Throughout the past decade, however, the current system of governance in the world economy started to encounter systemic bottlenecks and limitations as exemplified by rising inequality as well as declining economic growth rates. These developments call into question the seamlessness and finality of the current construct of global economic architecture. The question that arises then is whether the current system is economically efficient and what steps could be undertaken to bring the governance framework more into line with the challenges posed by changing conditions in the world economy. 

Since the mid-20th century the world’s economic architecture has largely been taken for granted, partly due to the rising role of developed economies and the mounting impulses of economic openness promoted by international institutions. Throughout the past decade, however, the current system of governance in the world economy started to encounter systemic bottlenecks and limitations as exemplified by rising inequality as well as declining economic growth rates. These developments call into question the seamlessness and finality of the current construct of global economic architecture. The question that arises then is whether the current system is economically efficient and what steps could be undertaken to bring the governance framework more into line with the challenges posed by changing conditions in the world economy. 

In fact, signs of a systemic malfunction in the global governance framework go beyond the standard references to global imbalances, inequality and the “new normal” of slower growth rates for longer. No less worrisome are the gaps associated with the lack of capacity to deal with environmental and technological challenges as well as declining productivity momentum. Another issue is the lack of efficiency in the use of resources as pointed out in a recent research paper by Milligan et al (2018), with authors calling for regional agreements to play a greater role in bridging global governance gaps. 

According to Milligan et al (2018), “major gaps remain in cooperative resource management across spatial jurisdictional boundaries at national, regional and international scales. These gaps contribute to: inefficient use of land (UNEP, 2014a), water (UNEP, 2012b) and various other resources; transboundary pollution (Lee et al., 2016); uncoordinated regulation by governments of transnational actors; and tensions and conflict associated with competing or conflicting claims to resources (UNFT, 2012, Schofield, 2012). An illustrative example of scale of resource cooperation challenges is that 158 of the world’s 263 transboundary water basins lack any type of cooperative management framework (WWAP, 2015)” 

Another illustration of the breakdown of the current system is of course the propagation of protectionism, bilateralism and the weakening of global multilateral institutions such as the WTO. There are also notable omissions in governance with respect to the lack of integration of regional institutions into the global governance framework, which significantly limits the capability of the world economy to launch new liberalization initiatives or coordinated spending to prop up global growth. The lack of integration of regionalism into the global governance framework leaves too much scope for national egoism and severely limits the ability of the world economy to deal with downturns in a coordinated and comprehensive manner. 

The problems of an inefficient global governance system are exacerbated by currency wars and rising protectionism as represented by large-scale export subsidies, import tariffs, as well as a plethora of other restrictive measures. This in turn has resulted in a prioritization of import-substitution and export-oriented sectors at the expense of greater spending on areas such as infrastructure or human capital development. During the high-level “Dialogue of continents” forum held in Hamburg in October this year the issue of the misallocation of resources in the global economy (partly as a result of excesses in industrial policy and protectionism) was discussed with respect to the possible explanations behind the deterioration in the global economy’s growth figures. 

The broader problem for the global governance system whose structure largely still reflects the fundamentals of mid-20th century world economy is the emergence of new players that are either global or mega-regional in scale. The advent of mega-regional blocks (TPP-11, possible deal on RCEP, Africa’s continental free trade area) in the past several years will undoubtedly raise the pressure to change the current system towards a greater role for regional institutions. Another challenge is the rising dominance of transnational corporations in the services and high-tech sectors, whose regulation thus far cannot be effectively implemented at national, regional or global levels. Whether a whole new technological governance layer in the world economy is needed to address the challenges of excessive market power, technological imbalances, cybersecurity, etc may be an issue to explore for policymakers in the coming years. 

Even more broadly, what is the key priority for the world community in revamping the global economic architecture? Should economic efficiency be the overriding guide or should the global community be more concerned about the direction of equity, sustainability, inclusiveness and other indications of the “global moral compass”? The truth of the matter is that the current framework has problems on both counts – both efficiency and sustainability indicators demonstrate substantial gaps. In view of the critically high levels of inequality, of greater importance at this juncture may be the prioritization of lowering imbalances across countries and regions – the UN Development goals, most notably those pertaining to human capital development, need to be accorded greater weight. 

In this regard, perhaps the most acute problems in terms of sustainability and inclusiveness of global economic development relate to the imbalances and inequalities along the North-South axis that are not only persistent, but widening. In terms of governance, existing multilateral institutions have proven to be slow in adjusting member country weights in voting structure to the significant increase in the share of some of the developing countries in the world economy. There is also the sizeable gap between developed and developing nations not only in terms of income levels, but also the scale of involvement in integration projects across the globe. The exponential growth in technological development, including AI, may exacerbate the technological and development gaps between the North and the South.    

In sum, the fundamentals of the world economy have changed tremendously in the past several decades and the “superstructure” of global governance needs to reflect these shifts. More frequently than not instead of pointed discussions on transforming global governance one observes a tacit longing for a return to the governance model that prevailed in the preceding several decades perhaps in the hope that the swings in the US electoral cycle could majestically reassemble the world order of the past. Such hopes of foregoing any changes in the global economic architecture are misplaced given the disconnect between the inertia of global governance and the acceleration in the technological and geo-economic transformation of the world economy. Rather than walking several decades back in time, the world’s governance framework needs to be at least in synch with the massive qualitative changes that have taken place since the 2008-2009 crisis.    

Reforming the global governance system needs to start with the diagnostics of inefficiencies as well as development and regulatory gaps. Most importantly we need a global governance framework that is capable to adjust and reform its operations in an inclusive manner with due regard to the constantly changing conditions and fundamentals in the world economy. Such a framework is likely to emerge in case the world economy becomes more multipolar and more balanced across the main regions. At the same time the evolving changes in global governance also need to ensure continuity with respect to the role of multilateral institutions, such as the UN, the IMF, the World Bank and the WTO. New elements that are created within the global economic architecture need to support these institutions and work jointly to promote a more stable and inclusive system of governance.


Source: Valdai Discussion Club

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