Global Economic Governance: The Demand for New Patterns of International Economic Order

The world economy has perceived notable global challenges affecting the long term economic sustainability and stability of financial markets. The emergence of globalization has marked a period of rapid economic integration and interdependence among states, increasing the risks and vulnerabilities to external shocks in the international system. The recent financial crisis in 2008 reopens the debate to reestablish new ways of global governance and challenges the current understanding of collective management of the global economy. Furthermore, the decline of the United States systematic weight and the diffusion of power to states and non-state actors demand new patterns of global governance in an increasing multipolar world. It requires the further participation of new relevant actors to the decision-making process (Underhill et al, 2010). Thus, the global economic and institutional architecture developed by the west generates symptoms of skepticism, particularly in emerging countries, due to the lack of means to tackle financial and monetary challenges. It not only undermines the efficiency and capacity of the system but also the legitimacy due to the unequal distribution of costs and benefits. 

 

GLOBAL ECONOMIC GOVERNANCE

 

The deepening of financial interdependence through trade, investment and finance has made the world economy more compacted and integrated. The financial crisis in 2008 showed that shocks can be transmitted quickly, causing capital market turmoil and deep recessions (Subachi and Pickford, 2015). The provision of government-like functions, public goods and national policies are no longer sufficient to respond to transnational challenges. The main reason why global governance is needed is because there are different externalities that countries cannot internalize at the national level and this makes them unable to deliver effective solutions to transnational issues (Frieden, 2012). Therefore, global governance, as the collective action to manage common international challenges, must provide the mechanisms to strengthen the global financial architecture and safeguard financial stability. The absence of a supranational government encompasses the idea of global governance as the platform of systems for rule-making, problem solving and political coordination (Rosenau, 2000).

 

Nevertheless, the lack of collective coordination among countries perceived during the 2008 financial crisis raises doubts about the effectiveness and legitimacy of the current global economic order. The world economy possesses complex challenges in terms of global imbalances, reforming the economic architecture, providing greater inclusiveness for emerging markets and ensuring a sustainable economic landscape. Furthermore, the strong and unprecedented economic growth of emerging and developing countries (EMDCs) has undergone a process of transformation of the global economy, making evident the need to accommodate global governance to the increasing multi-centric world. Global collective action can provide the mechanisms for a gradual accommodation of these raising challenges or it may opt for the disintegration and a sharp change of direction with uncertain outcomes in the foreseeable future.

 

INSTITUTIONAL ARCHITECTURE

 

The establishment of the Bretton Woods institutions aimed to provide stability to the global economy following the great economic crisis of the1930s and the Second World War. Since then, the consolidation of the Four Pillars of global economic governance, being the International Monetary Fund (IMF), World Bank, World Trade Organization (WTO) and the recently established Financial Stability Board (FSB), have pursued a more stable global economy and a greater provision of public goods (Wouters and Odermatt, 2014).  This architecture is perceived as essential to provide a regulatory framework for economic governance, facilitating coordination of domestic policies and embodying norms and rules at the international level.

 

Nevertheless, the acceptability of the Bretton Woods institutions as the governance of the international economic system has been questioned over time. The fallout of the IMF in situations such as the Asian and Argentinean crisis in the late 1990s magnified the stigma of its assistance and role in these regions (Woods, 2010).  The subsequent response has been a more regional and bilateral initiative from these emerging economies to ensure greater financial independence from external shocks, exacerbating global imbalances. The emergence of the G20 following the 2008 financial crisis showed the desire to seek for further participation of emerging countries and epitomize a new order. The G20 has become the premier forum for international financial and economic affairs and it has consistently insisted for reforming the current global economic governance, reiterating the importance to keep it in the group’s agenda (Subachi and Pickford, 2015). Hence, the prominent role of the G20 triggered the need to change the dynamics of the current institutional structure.

 

Some progress has been made such as the reform of the FSB, reconstituting its structure and including the active participation of all the G20 members. Nevertheless, the slow pace of reforms conducted by the G20 on the global institutional design, especially the IMF, has meant the lack of tangible results. The need for consensus, unwillingness to establish a common agenda and the conflict of interest has limited the efficiency of the group to reestablish a new order. As a result, the four pillars of global economy still reflect a US dominated world order with the United States as one of the main opponents of the reforms to the international architecture. Thus, with the lack of real power of the G20 to establish a regulatory framework, the global economic structure remains US centric and may undermine the legitimacy and efficiency of the system.

 

LEGITIMACY AND EFFICIENCY

 

The rapid change of the global economy has given rise to new influencing powers such as China and India. As a result, this trend is putting pressure for a further reform of the international institutions seeking to reestablish the voting rights for a more equal distribution of power. The level of inclusiveness of the current economic system has been perceived to be very low, favoring a US led economic order and raising doubts on the legitimacy of the system, It is arguably too inflexible and the costs and benefits of the system are skewed towards the developed economies, leaving emerging markets unrepresented and with limited influence in decision making (Underhill, Blom and Mügge, 2010). Hence, while the decisions taken by the current institutional architecture may affect a wide range of interest worldwide, the accountability of those decisions remains limited.

 

Nevertheless，even though a greater participation of different actors and raising powers may be needed, it might undermine the efficiency of the decision making process as different actors may block, prolong or oppose key policies and processes. The international system has to identify ways to become more compatible and not overlap their responsibilities among the increasing number of actors. For instance, the fragmentation of the decision making on the G7/G10, IMF, World Bank, G20, FSB among others, overlap their responsibilities and do not provide a clear relationship between them (Underhill, Blom and Mügge, 2010). In addition, the lack of representation of non－state actors may increase the chances for the awakening of the civil society. Thus, a trade-off between legitimacy and effectiveness should reach a balance in order to provide greater inclusiveness in a multilayer system without undermining the effectiveness of decision making. The allocation of power should accommodate to the mutual and dynamic coexistence of these two concepts，providing a more stable and cohesive global economic system.

 

FRAGMENTATION AND NEW PATTERNS OF GLOBAL GOVERNANCE

 

The raising power of emerging economies, in particular China，threatens to reshape the international economic order and no longer allow a global economic governance influenced by the United States. The establishment of alternative institutions to the Bretton Woods system such as the Asian Infrastructure Investment Bank （AIIB）or the BRICS reiterates the trend towards a further fragmentation and regionalization of the economic order. The AIIB led by China seeks to extent its power in the region and spread a new block of economic influence in Asia (Subachi, 2014). As a result, it may contest with the already established Asian Development Bank (ADB) which is highly influenced by the United States and Japan, where China has a limited voice. Thus, the lack of representation of the current international setting is encouraging other countries to pursue their own interests and raise their voices through a parallel set of institutions. Nevertheless, it does little to address a more coordinated approach to global governance， proliferating and duplicating institutions and practices that may contradict and overlap policy responses.

 

In addition, the danger of a proliferation of international standards may transform a multi-polar world into a disconnected and chaotic set of norms that may lack of the compliance of the international community. As a result, free riding practices would become more common and the complex interconnectedness between countries would become a threat for the international system with further global imbalances and divergence of trade patterns. For instance, the further regionalization of the world economy with treaties such as the Transatlantic Trade and Investment Partnership (TTIP), in which China is not part, encourages a more bilateral and regional approach to trade, investment and finance (Subachi and Pickford， 2015). Hence, it undermines and hinders the cooperation towards a global framework that coerces countries to a common management of economic challenges.  The main difficulties remain vivid, encompassing conflicting interest among multiple actors and disrupting the efficiency of the world economic governance.