05/10/2017 07:37 AST
Next month, when finance ministers and central bank governors from more than 180 countries gather in Washington, DC, for the annual meetings of the International Monetary Fund and the World Bank, they will confront a global economic order under increasing strain.
Having failed to deliver the inclusive economic prosperity of which it is capable, that order is subject to growing doubts — and mounting challenges. Barring a course correction, the risks that today’s order will yield to a world economic non-order will only intensify.
The current international economic order, spearheaded by the US and its allies in the wake of World War II, is underpinned by multilateral institutions, including the IMF and the World Bank. These institutions were designed to crystallise member countries’ obligations, and they embodied a set of best economic-policy practices that evolved into what became known as the “Washington Consensus”.
That consensus was rooted in an economic paradigm that aimed to promote win-win interactions among countries, emphasising trade liberalisation, relatively unrestricted cross-border capital flows, free-market pricing, and domestic deregulation. All of this stood in stark contrast to what developed behind the Iron Curtain and in China over the first half of the post-war period.
For several decades, the Western-led international order functioned well, helping to deliver prosperity and relative financial stability. Then it was shaken by a series of financial shocks that culminated in the 2008 global financial crisis, which triggered cascading economic failures that pushed the world to the edge of a devastating multi-year depression. It was the most severe economic breakdown since the Great Depression of the 1930s.
But the crisis did not appear out of nowhere to challenge a healthy economic order. On the contrary, the evolution of the global order had long been outpaced by structural economic changes on the ground, with multilateral governance institutions taking too long to recognise fully the significance of financial-sector developments and their impact on the real economy, or to make adequate room for emerging economies.
For example, governance structures, including voting power, correspond better to the economic realities of yesterday than to those of today and tomorrow. And nationality, rather than merit, still is the dominant guide for the appointment of these institutions’ leaders, with top positions still reserved for European and US citizens.
The destabilising consequences of this obstinate failure to reform sufficiently multilateral governance have been compounded by China’s own struggle to reconcile its domestic priorities with its global economic responsibilities as the world’s second-largest economy. Several other countries, particularly among the advanced economies, have also failed to transform their domestic policies to account for changes to economic relationships resulting from globalisation, liberalisation, and deregulation.
As a result of all of this, the balance of winners and losers has become increasingly extreme and more difficult to manage, not just economically, but also politically and socially. With too many people feeling marginalised, forgotten, and dispossessed — and angry at the leaders and institutions that have allowed this to happen — domestic policy pressure has intensified, causing countries to turn inward.
This tendency is reflected in recent challenges to several features of the economic order, such as the North American Free-Trade Agreement, as well as America’s withdrawal from the Trans-Pacific Partnership and the UK’s renunciation of European Union membership. All are casting a shadow on the future of the global economic system.
America’s inward turn, already underway for several years, has been particularly consequential, because it leaves the world order without a main conductor. With n
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