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The West cannot afford another financial crisis — so I said in the closing pages of my book Global Discord (PUP, 2022). A lot of good that did! In spring 2023, a large regional bank failed in California without the authorities having a plan for how to mount an orderly resolution, and one of the largest banks in the world failed in Switzerland only for the authorities to abandon the plan they had supposedly worked on for years. While much of the subsequent debate has concerned dereliction in the US and disturbing questions about competence in Switzerland, the bigger picture has been lost: these developments play into the fractious international political situation.
With the hard-knuckled US debt-ceiling debate playing out again in Washington DC, there might well be more of this finance-meets-geopolitics novelty ahead. A technical default would surely prompt some foreign exchange reserves managers to shade down their holdings of dollar-denominated assets, putting a dent in the world’s premier reserve currency and all that rests on it, including for many a vital security blanket. It is not obvious Washington’s denizens grasp that.
Policy myopia is hardly limited to the West, however, as illustrated by border skirmishes in Asia and other episodes. We are, it must be underlined, well past the point where the political costs of policy mistakes stay at home, or affect the wider world only via the kinds of spillovers familiar to economists. They also play into the epoch-making ideological contest that has been brewing for years, affecting international relations near and far. In consequence, the mechanisms for international cooperation and coordination familiar for over seventy years are in jeopardy.
We are, it must be underlined, well past the point where the political costs of policy mistakes stay at home, or affect the wider world only via the kinds of spillovers familiar to economists.
International regimes and organisations are inevitably shaped by - and operate in the shadow of - the more elemental forces, whether a balance of power or hegemony, that maintain peaceful coexistence among the major hard powers. Given Stalin walked the old Soviet bloc out of the Bretton Woods institutions and the GATT shortly after their founding, the prevailing economic regimes grew to reflect the loosely common outlook of liberal market economies. Lately, however, the WTO trade system has already struggled to cope with the rise of a great power in which state, party and commerce are blurred. And the international monetary and financial system hardly caters for an aspiring world reserve currency issued by a power with a fundamentally different political ideology.
More generally, those international regimes that give every member a veto over policy change risk being moribund, as the WTO’s predicament suggests. Other fields, where there is space for multiple suppliers of public goods, such as development finance, face the prospect of sustained competition among organisations claiming universal mandates. By contrast, where, as in the monetary system, a lingering status quo reflects organic network effects (the dollar) and inorganic weighted-voting (the IMF), we can expect frustration from any new superpower, presenting mighty problems for the organisation’s leadership.
Also on the Forum Network: Six Faces of Globalization: Who Wins, Who Loses, and Why It Matters
In this piece, A. Roberts and N. Lamp explain why dissecting various narratives regarding globalisation is crucial to better understanding its real impacts on society as a whole.
As the different emergent blocs pull back from each other, there is much talk of the costs of decoupling, and rightly so if prudence tips into wanton protectionism. Judging the boundary between sensible precaution and folly will not be easy. Recently, the managing director of the IMF warned that decoupling could take $1.5 trillion off global GDP. To almost any sane person, that sounds gigantic. But is it? Annual world GDP (output, spending, income) is just under $100 trillion. For many years, its growth has averaged over 3%, meaning a $1.5 trillion fall in the level of world GDP would be less than six-months growth. Might we not think that a price — an insurance premium — worth paying if it plausibly reduced the probability of hot conflict, or the costs to us if there were to be war of some kind? While business people might think of efficiency as pertaining to only good states of the world (when the sun is shining), the economist’s idea of efficiency spans all states of the world, including bad ones. Insurance is at the very heart of efficiency. When the stakes are highest, it is not crazy, and may well be wise, to adopt a strategy that seeks to minimise the costs from plausible disasters, even at the price of lower aggregate incomes.
When the stakes are highest, it is not crazy, and may well be wise, to adopt a strategy that seeks to minimise the costs from plausible disasters
That way of thinking does not banish cooperation. But it does mean we can afford to cooperate more deeply with those whom we fear least, and have most in common. In a world of concentric cooperation circles, collective action would be at its most basic where little more than peaceful coexistence is the aim, and more ambitious where thicker norms, including basic rights, are shared.
What matters to that is less a shared history (or civilisation) than shared ways of thinking about legitimate domestic government and legitimate relations among states and peoples. I believe that this gives two groups of countries a vital role in the coming decades. One is the group of rich Confucian-heritage states that embraced and practice constitutional democracy with the rule of law — most obviously, South Korea and Japan — since they demonstrate that it is possible to adopt and adapt western political models without losing their sense of history, traditions and identity. The other group, at a different stage of economic development, comprises those democracies that, because they have gigantic populations, will themselves become powers if they can sustain reasonably robust growth for a few decades. The obvious example is India.
For now, the extant powers will need to steer according to three principles. First, reduce over-dependence on non-friendly states where, otherwise, the costs could jeopardise a way of life. Second, remember to maintain friendly relations with as many peoples as possible across the planet, helping their development without imposing our politics. And third, avoid home-grown mistakes, which is possible only if leaders and legislators grasp the stakes, and move away from the comfortable but complacent world of policy silos. The connecting thread is the need to put wishful thinking behind us, without lurching to the opposite.
Meanwhile, international organisations might need to become less entrepreneurial, give up proselytising one (universalist liberal) vision of how decent states should organise their domestic way of life, and focus instead on competently delivering their core mandates. That will sound unambitious to some, but sticking with a pluralist liberalism has the virtue of hard-headed realism without ditching morality.
Find out more about Global Discord: Values and Power in a Fractured World Order by Paul Tucker (2022, Princeton University Press)
In Global Discord, Paul Tucker lays out principles for a sustainable system of international cooperation, showing how democracies can deal with China and other illiberal states without sacrificing their deepest political values.
Drawing on three decades as a central banker and regulator, Tucker applies these principles to the international monetary order, including the role of the U.S. dollar, trade and investment regimes, and the financial system.
The Organisation for European Economic Co-operation (OEEC) was created in 1948. Bringing together 18 countries in Western Europe following the devastation of the Second World War, this nascent precursor to the OECD laid the foundations for lasting co-operation, shared development, and open trade that continue to this day and whose goals remain as relevant as ever 75 years later.
Over the next 60 years, the OECD’s membership would grow to 38, including countries from Latin America, Asia and the Pacific, fulfilling its mission of supporting countries to find common solutions to common challenges. Through international co-operation and shared values, the OECD’s goal has been to drive forward better policies for better lives – building on the legacy of the OEEC, whose founding principles remain more relevant than ever.