A New Era in Global Economic Governance

1. Reshaping the Pillars of Global Economic Governance


The Bretton Woods institutions are the organizations set up as the result of the United Nations Monetary and Financial Conference held in July 1944. Representatives of forty-four Allied nations met in Bretton Woods, New Hampshire, which led to the signing of the Bretton Woods Agreements. The World Bank and the International Monetary Fund were established and became known as the Bretton Woods institutions. The General Agreement on Tariffs and Trade (GATT), signed in 1947, was not formed at the Bretton Woods Conference. However, the participants at the conference contemplated the necessity of an international trade organization. The GATT, which set out a plan for economic recovery after World War II, by encouraging reduction in tariffs and other international trade barriers, is therefore one of the three mechanisms for global economic governance that comprise the Bretton Woods System. The Uruguay Round, completed in 1994, replaced the GATT with the World Trade Organization (WTO).


This paper argues that the objective of nations engaging with each other on trade and economic matters is to establish peace, security, and prosperity in the 21st century. Trade creates economic ties and generates more wealth; thus it contributes to peace and security, since nations that trade with each other do not go to war. An example is the European Union integration project. The same argument is true multilaterally: before the creation of Doha Round in 2001, developing and least-developed countries had been marginalized in the world trading system, which brought with it serious economic implications. In 2001 in Doha (Qatar), developing countries were promised inclusion in the world trading system in order to achieve a higher level of justice and equity in the world. That is why the Doha round is called the development agenda. The argument is that a more open and equitable trading system brings peace to the world and, in this sense, the Doha round should not be approached as a zero-sum game—as many developing countries seem to perceive it—but as a win-win situation.


In this sense, WTO Director General Pascal Lamy has argued that “traditional theories taught us that countries—like people—gain from trade because they are different, and that it is relative rather than absolute differences in production costs that make trade profitable. This last insight provides the vital intellectual underpinning for the argument that all countries can gain from trade—you only have to be more competitive in relative, and not absolute, terms across production activities to gain from trade. Understanding this reality has been indispensable to the efforts of many over the last six decades and more to build a more open and inclusive multilateral trading system” [Lamy, P. “The economics and politics of trade are inextricably linked,” available at http://www.wto.org/english/news_e/sppl_e/sppl107_e.htm]. Moreover, Pascal Lamy argues that trade is useful if it enhances the human condition. Realism and intellectual honesty require that we consider the costs and the politics associated with trade. If the beginning and end of the story was that trade was unconditionally beneficial to all and that the more we had of it the better, then governments would surely embrace it unilaterally and without question. And there would certainly be no need for the WTO Agreement to manage international trade relations [Ibid.].


On economic globalization, Dani Rodrik argues that neither globalizers nor antiglobalizers have got it right. While economic globalization can be a boon for countries that are trying to dig out of poverty, success usually requires following policies that are tailored to local economic and political realities rather than obeying the dictates of the international globalization establishment. In Rodrik’s book One Economics, Many Recipes: Globalization, Institutions, and Economic Growth (Princeton University Press, 2008), Rodrik provides an analysis of how successful countries craft their own unique strategies and what other countries can learn from them. To most pro-globalizers, globalization is a source of economic salvation for developing nations and, to fully benefit from it, nations must follow a universal set of rules designed by organizations such as the World Bank, the International Monetary Fund, and the World Trade Organization and enforced by international investors and capital markets. However, to most antiglobalizers, such global rules spell nothing but trouble, and the more poor nations shield themselves from them, the better off they are. Rodrik rejects the simplifications of both sides, showing that poor countries get rich not by copying what Washington technocrats preach or what others have done, but by overcoming their own highly specific constraints.

2. The Bretton Woods II/G-20

Aaditya Mattoo and Arvind Subramanian argue that “it is time to start working on a new agenda that really matters, rather than trying to resuscitate an inconsequential enterprise. The interests of a more diverse group of actors are now at stake. This calls for a new approach to international cooperation and the reallocation of responsibilities among international institutions. A Bretton Woods II offers exactly this opportunity” [Aaditya Mattoo and Arvind Subramanian, “From Doha to the Next Bretton Woods: A New Multilateral Trade Agenda,” Foreign Affairs, January/February 2009, pp. 15-26, at 26].


To achieve the goal of establishing peace, security, and prosperity in the 21st century, a new and better global economic governance framework is needed. The members of the G-20 are the finance ministers and central bank governors of 19 countries: Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, the United Kingdom, and the United States. The European Union is also a member, represented by its rotating presidency and the European Central Bank. To ensure that global economic fora and institutions work together, the Managing Director of the International Monetary Fund (IMF) and the President of the World Bank, plus the chairs of the International Monetary and Financial Committee and Development Committee of the IMF and World Bank, also participate in G-20 meetings on an ex-officio basis. The G-20 “promotes open and constructive discussion between industrial and emerging-market countries on key issues related to global economic stability” [See http://www.g20.org/about_what_is_g20.aspx].


“The G-20 thus brings together important industrial and emerging-market countries from all regions of the world. Together, member countries represent around 90 per cent of global gross national product, 80 per cent of world trade (including EU intra-trade) as well as two-thirds of the world’s population. The G-20’s economic weight and broad membership gives it a high degree of legitimacy and influence over the management of the global economy and financial system” [http://www.g20.org/about_what_is_g20.aspx]om. There is a widely shared assumption that a new G-20 group of nations may succeed the G-7. Enrique Rueda-Sabater, Vijaya Ramachandran, and Robin Kraft propose objective criteria (population and GDP) for deciding which countries should join the club. [Rueda-Sabater, E., Ramachandran, V. & Kraft, R. “A Fresh Look at Global Governance: Exploring Objective Criteria for Representation,” Center for Global Development, Working Paper No. 160, Washington, D.C., February 2009].


According to Jim O’Neill’s predictions, “rather than suggesting our [Goldman Sachs’s] BRIC [Brazil, Russia, India, and China] dream may be derailed by the global recession, the notion that the BRICs can become collectively bigger than the G-7 by 2035 is becoming more plausible” [O’Neill, J. “Why it would be wrong to write off the Brics,” Financial Times, Opinion, 5 January 2009]. The main difference between the G7 and the G8 (both coexist) is that the G8 deals with political matters and includes Russia as a member, whereas the G7 is for economic matters, and Russia is excluded. In this sense, leaders of the so-called G-20 have acknowledged the importance of expanding the voice of developing countries in the World Bank and in the International Monetary Fund. It follows from this statement that the Bretton Woods institutions, which are outdated, need to be reformed and improved.


The international trading system must also be reformed, given that it is experiencing a sudden, severe, and globally synchronized collapse. Protectionist forces have already emerged, and as the recession gets worse, they will strengthen. Although governments around the world are making efforts to stabilize their economies, stimulus packages should avoid generating new barriers against foreign products and services via local content requirements or other discriminatory provisions [See speech by EU trade commissioner Catherine Ashton, “Open trade and investment: driving global recovery,” 10 June 2009, available at http://ec.europa.eu/commission_barroso/ashton/speeches_articles/spca015_en.htm#top]. The international community should also continue to open up markets to trade and investment. It is through the engine of open trade and technological change that the world has witnessed an extraordinary period of wealth creation since the establishment of the WTO. The emerging economies of Asia and Latin America have benefited most—but even Africa has grown at an unprecedented 6%. It is through the engine of trade that the international community can ride its way out the current downturn [Ibid.]. Isn’t it time to propose a proper reform of global economic governance?

3. Multipolarity

The argument of multipolarity is elegantly described by Fareed Zakaria in his thesis about “the rise of the rest,” meaning that the rise of emerging economies to the top has dispersed power and complicated collective action [Zakaria, F. The Post-American World, Allen Lane, 2008]. In the case of the EU vis-à-vis the BRIC countries, what can the EU offer the BRIC countries to foster trust, a sense of cooperation and respectfulness, as well as a better multipolar framework of global economic governance? The EU can offer a large market, while the markets of the BRIC countries are of smaller economic relevance, except for the case of China where, according to predictions, China’s economy will overtake that of the U.S. by 2050 [YaleGlobal online, available at http://yaleglobal.yale.edu/display.article?id=7402]. And how will the EU manage the new phenomenon of moving from a global economic equilibrium, dominated principally by the EU and the U.S., to a new trend in which we have new voices and centers of gravity in the world economy? In this sense, there is certainly a need to reform the current Bretton Woods institutions.

4. The Rise of Regionalism

With the delayed and stalled Doha negotiation, multilateral trade governance seems to be in a stalemate. When the Doha Round was launched in November 2001, oil was $25 a barrel, a ton of rice cost $170, China’s current account surplus was two per cent of the country’s GDP, and U.S. financial institutions were at the vanguard of globalization. In January 2009, oil was $45 a barrel, rice pushed past $500 a ton, and China and the oil-producing states had trillions of dollars at their disposal. The U.S. financial system was in the midst of the worst financial crisis since the Great Depression of the 1930s [Aaditya Mattoo and Arvind Subramanian, “From Doha to the Next Bretton Woods: A New Multilateral Trade Agenda,” Foreign Affairs, January/February 2009].


In the context of a current global economic crisis and an unfinished WTO Doha Round, multilateralism is at its weakest point. Since July 2006 (the date of the Doha round of multilateral trade talks suspension), we have seen the obvious weaknesses and deficiencies of the multilateral trading system and, as a reaction, the proliferation of regionalism—although this has been happening for quite some time now—and bilateralism. What does this mean for the future of global economic governance?

5. Lack of Coordination between Multilateral and Regional Mechanisms

While the multilateral institutions governing the global economy are facing serious challenges in the effective governance of a globalized world economy, regional agreements and institutions such as the EU, the Association of South East Asian Nations (ASEAN), or free-trade agreements (FTAs), are rising as forces in the governance of the global as well as regional economy. An example is the recent conclusion of an FTA between ASEAN and Australia and New Zealand, becoming one of Asia’s largest trade agreements. The challenges are, therefore, not the lack of institutions (whether multilateral or regional) governing the global economy, but the lack of coordination between these multilateral and regional mechanisms.

6. Opportunities and Obligations of Emerging Economies

Major developing countries such as China should play a more prominent role in the international economic institutions and governance. For example, at the IMF, the voting power of each member is calculated on the basis of its donations. According to the IMF, China’s share of votes at the IMF is 3.66% of the total because it only contributes to 3.72% of the total funding [For a list of IMF members’ voting power, see International Monetary Fund, “IMF Members’ Quotas and Voting Power, and IMF Board of Governors,” available at http://www.imf.org/external/np/sec/memdir/members.htm#3]. The U.S. contributes to 17% of the funding, whereas the EU contributes to over 31% of the total funding. In this sense, the EU expects China to donate more money to the IMF and to assume a responsibility commensurate with the benefits it derives from the world trading system [European Commission, “Global Europe. EU-China Trade and Investment: Competition and Partnership,” p. 14]. Why? Because with greater political power and a greater voice comes greater responsibility.

7. Looking Ahead

What remains to be done? In my opinion, it is not about what, but how countries negotiate: developed countries should negotiate agreements more constructively, without patronizing, and instead accepting emerging economies as equal players in the current multipolar framework of global economic governance. This is difficult to achieve as there are differences among emerging economies: Brazil and India are not yet economic superpowers; they are only starting to grow into a more powerful role. Developed countries should try to foster this positive development in a cooperative stance and establish trust.


China behaves like a small country with little systemic effect and responsibility. Therefore, China’s attitude to multilateralism and responsibility in global economic governance is questionable. In this sense, developed countries expect China to assume a multilateral responsibility commensurate with the benefits it derives from the world trading system. Why? Because with greater power and a greater voice comes greater responsibility. Compared to India or Brazil, China’s role in the world trading system is rather passive both at the WTO’s dispute settlement system as well as in the Doha Round of multilateral trade negotiations. China therefore appears to lack an internationalist view to world trade affairs, being more focused on its internal development and on concluding many low-quality, politically motivated regional FTAs.