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The world economy is entering a new phase, in which
achieving global cooperation will become
increasingly difficult. Most developed nations, now
burdened by high debt and low growth and, therefore,
preoccupied with domestic concerns, are no longer
able to set global rules and expect others to fall
into line.
Rising powers such as China and India place great
value on national sovereignty and non-interference
in domestic affairs. This makes them unwilling to
submit to international rules and, thus, unlikely to
invest in multilateral institutions.
As a result, global leadership and cooperation will
remain in limited supply, requiring a carefully
calibrated response in the world economy’s
governance, specifically, a thinner set of rules
that recognises the diversity of national
circumstances and demands for policy autonomy. But,
discussions in the Group of 20 Major Economies
(G-20), World Trade Organisation (WTO), and other
multilateral fora proceed as if the right remedy
were more of the same: more rules, more
harmonisation, and more discipline on national
policies.
Economic policies come in roughly four variants. At
one extreme are domestic policies that create no
spillovers across national borders. Education
policies, for example, require no international
agreement and can be safely left to domestic
policymakers.
At the other extreme are policies that implicate the
“global commons”: the outcome for each country is
determined not by domestic policies, but by the sum
total of other countries’ policies. Greenhouse gas
emissions are the archetypal case.
In such policy domains, there is a strong case for
establishing binding global rules, since each
country, left to its own devices, has an interest in
neglecting its share of the upkeep of the global
commons. Failure to reach global agreement will
condemn everyone to collective disaster.
Between the extremes are two other types of policies
that create spillovers but that need to be treated
differently. First, there are “beggar-thy-neighbour”
policies, whereby a country derives an economic
benefit at the expense of other countries. For
example, its leaders restrict the supply of natural
resources in order to drive up prices on world
markets, or pursue mercantilist policies in the form
of large trade surpluses, especially in the presence
of unemployment and excess capacity.
Because beggar-thy-neighbour policies create
benefits by imposing costs on others, they, too,
need to be regulated at the international level.
This is the strongest argument for subjecting
currency policies or large macroeconomic imbalances
to greater global discipline than currently exists.
Beggar-thy-neighbour policies must be distinguished
from what could be called “beggar-thyself” policies,
whose economic costs are borne primarily at home,
though they might affect others, as well.
Consider agricultural subsidies, bans on genetically
modified organisms (GMOs), or lax financial
regulation. While these policies might impose costs
on other countries, they are deployed not to extract
advantages from them, but because other domestic
policy motives, such as distributional,
administrative, or public health concerns, prevail
over the objective of economic efficiency.
The case for global discipline is quite a bit weaker
with beggar-thyself policies. After all, it should
not be up to the global community to tell individual
countries how they ought to weigh competing goals.
Imposing costs on other countries is not, by itself,
a cause for global regulation.
Indeed, economists hardly complain when a country’s
trade liberalisation harms competitors. Democracies,
in particular, ought to be allowed to make their own
mistakes.
Of course, there is no guarantee that domestic
policies accurately reflect societal demands. Even
democracies are frequently taken hostage by special
interests.
The case for global rulemaking takes a rather
different form with beggar-thyself policies and
calls for procedural requirements designed to
enhance the quality of domestic policymaking. Global
standards pertaining to transparency, broad
representation, accountability, and the use of
empirical evidence do not constrain the end result.
Different types of policies call for different
responses at the global level. Too much global
political capital nowadays is wasted on harmonising
beggar-thyself policies, particularly in the areas
of trade and financial regulation, and not enough is
spent on beggar-thy-neighbour policies such as
macroeconomic imbalances.
Overambitious and misdirected efforts at global
governance will not serve the world well at a time
when the supply of global leadership and cooperation
is bound to remain limited. |
