Governance Falls Behind Globalization

Since the end of the Second World War and until the final decade of the last century, sometimes with great and powerful strides, at other times rather erratically, nations had reached agreements to construct the international governance that has been supportive of modern economic integration.

The United Nations, the Bretton Woods institutions and the World Trade Organization at the global level, and the European Union and North American Free Trade Agreement at the regional level – among many other international arrangements – are examples of the institutions created by nation states and from which contemporary governance emerged. This governance, however, is vulnerable on two fronts.

One has to do with the fact that the decisions, policies and actions that have delivered this governance can be reversed. Consequently, globalization can be slowed, even reversed to some extent, at the discretion of political leaders, influenced by a host of factors ranging from leaders’ own particular ideologies to pragmatic accommodation to pressures from influential interest groups or public opinion in general.

The other vulnerability stems from the huge gap that has grown between governance itself and economic globalization. The former propelled the latter up to the 1980s, but since then economic globalization, running on the steroids of modern technology and the emerging countries’ vigor, has moved much faster – well ahead of global governance.

At the dawn of the 21st century there were already numerous voices of concern about insufficient governance for globalization. Observers noted that as economic interdependence was increasing, its potential benefits would also increase, but so would the speed and strength of the effects that a disturbance anywhere could have on the rest of the global economy. The various financial crises of the 1990s made clear that the world had no fully satisfactory mechanisms to counter global economic shocks.

It was equally evident that the integration of markets, while clearly beneficial for many, could also lead to mounting frictions and a sense of unfairness and frustration in those either left behind or displaced by the forces of globalization. Likewise it was rightly alleged that the world had no formal institutional mechanism to ensure that voices representing all relevant peoples and places could be heard in the discussion.

Despite the fact that developing countries were already rapidly increasing their shares in world production and trade, global economic decision-making remained overly concentrated in a few advanced countries. In fact, the international community, for a number of important issues, had no commonly agreed instruments or procedures for deciding who did what and, for some global public goods, practically no agency had effective authority. Existing agencies struggled to respond to problems for which they were ill equipped or lacked a precise mandate.

There was also full awareness that some forums available at the time to address systematically a variety of global economic issues were too restrictive in their membership – like the Group of Seven plus Russia. Others – like the committees of finance ministers and central bankers convened periodically by the International Monetary Fund and the World Bank – lacked the political clout to make authoritative decisions.

Unfortunately if one were asked to produce anew a diagnosis on the state of global governance today, practically everything opined more than a decade ago would be valid, with two serious complications: First, the gap between globalization and governance, far from narrowing, has become much wider. Second, the international system basically remains the same, for the various attempts to reform critical aspects since the beginning of the century have failed miserably.

The governance gap became brutally patent with the 2008 financial crisis and its aftermath that is still with us. Although some of the root causes of the crisis could be considered strictly domestic-policy decisions in the countries where it erupted, ultimately the crisis happened because the key players in the global economy failed to address significant issues stemming from the intensification of globalization, despite the fact that those issues had been identified early on as threats to international financial stability.

Well before the outbreak of the subprime crisis in the summer of 2007, there had been voices warning that global macroeconomic imbalances – massive borrowing by some countries and massive lending by others – would eventually transform into a serious disturbance to the international financial system and that the only way to prevent this outcome was to fix such imbalances by means of closer cooperation among the deficit and surplus countries.

Nor was there a lack of voices stressing the urgency of international action to update the regulation and supervision of financial institutions in light of deepening financial globalization. The formation of the G20 at the leaders’ level, despite the dramatic circumstances triggering it in the fall of 2008, looked promising. It seemed that at last leaders of the world’s largest economies would take up the challenge of filling the governance gap.

So far, however, the G20 has been incapable of dealing with the key issues on the agenda of its own making. Although perhaps too soon to declare G20 a complete failure, it remains far from earning its self-designated title of “premier forum for international cooperation.”

Actually, the global economy seems to be on a collision course. The recovery in developed countries like the United States and Japan is halting, while much of the European Union has fallen into a second recession and faces huge sovereign debt burdens, the threat of bank failures and the possible collapse of the monetary union. The emerging economies have been doing better, but their growth is weakening and will be seriously at risk if the situation in the developed countries continues to worsen.

The G20’s failure to honor its reasonable and indispensable commitments is truly worrisome. Addressing the great crisis of 2008-2009, which is still very much alive, in a cooperative way is the litmus test of whether the international community is capable of managing the shift in the economic and geopolitical power that is taking place. So far the G20 is flunking that litmus test. Frankly, it is a disgrace that despite the evidence that cooperation is in the national interest of all states, achieving it continues to be elusive.

This disgrace is not only about the G20. It is unbelievable how the European Monetary Union, and with it the entire European Union, has been about to fall off a precipice over the last two years, due to the incapacity to close the gap between economic integration and governance.

The predicament posed by the coexistence of a world integrated by Westphalian sovereign nations and a world with an overwhelming need to achieve deep international coordination to tackle problems of common interest, far from being resolved, has been exacerbated. Paradoxically, because of the difficult economic situation, which to be mended requires even more international cooperation, the domestic political obstacles to deliver this cooperation have become more immense, not less difficult, to overcome. This means that political leaders will have to excel within the next few years to adapt their governments and societies to the new demands of domestic and international governance to contend with the new demands stemming from globalization. The alternative – to forgo the benefits of economic interdependence – would be a much more painful course of action for all.

(Ernesto Zedillo is director of the Yale Center for the Study of Globalization and former president of Mexico. This is reprinted with permission fromYaleGlobal.)