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Advice on strategic issues for governments

Bretton Woods redux

David Skilling
25 November 2011

There are regular claims that in a complex and inter-connected global economy, reliance on national decision-making is increasingly insufficient and that some form of global economic management is required. In the context of the intense process of globalisation currently underway, this week’s Observer considers how and where we should strike the balance between global governance and national policy decision-making.

Form should follow function
The practical reality is that substantial progress on global governance is unlikely given the large differences in national interests, as evidenced by the state of global trade and climate change negotiations as well as the lack of progress by new institutions like the G20. But these practical difficulties reflect a more fundamental issue: it is not clear that proposals for global governance reflect the actual functioning of the global economy. I’d highlight three factors in this regard. First, as I have noted previously, the intense process of globalisation is placing real pressure on advanced economies (e.g. income distribution, sector competitiveness, increased exposure to shocks). In response, governments will increasingly seek to manage the impact of globalisation on their domestic economies in ways that will vary according to national context. Second, the world is demonstrably not flat, and globalisation is being built at a regional level. For powerful economic reasons, global economic activity has a strong regional flavour; about two thirds of exports from EU countries are intra-EU, for example. And at an institutional level, regional integration and coordination is running well ahead of global developments. And third, progress on global issues like trade and climate change is increasingly being made through ‘coalitions of the willing’ that are assembled around shared interests. Multi-speed approaches may become more common than multilateral approaches.

These three factors suggest that the response to a complex, inter-connected global economy may need to be more bottom-up than it is top-down global governance. It is exactly the intensity of globalisation that demands a differentiated, granular approach rather than a more uniform global approach. Context matters. We may live in global world, but policy is local. The implication is that global institutions should reflect the bottom-up functioning of the global economy by balancing a multilateral rules-based system with space for national policy autonomy, and by coordinating the emerging regional and coalition-based arrangements in an open architecture.

Bretton Woods redux
These observations suggest that rather than searching for a Bretton Woods 2.0, Bretton Woods 1.0 may be a better guide. The original Bretton Woods system provided space for national policy autonomy and was relatively light touch. The world has changed enormously in the 60 years since, but these principles remain appropriate. The global system should accommodate national policy variation so that countries can experiment and innovate to deliver quality outcomes. A multilateral rules-based system has served the world well, and a baseline of global standards is required to guide international interactions, but these should not intrude very far into areas that are legitimate areas of national decision-making. This is clearly a matter of judgement, but some of the current proposals around trade or financial market regulation seem to push too far. A globally connected world requires some rules, but these should be relatively light-touch rather than strongly prescriptive.

In terms of global architecture, the focus should be on managing a network of coalitions of countries who want to make more rapid progress on issues rather than ongoing investments in achieving comprehensive multilateral solutions. The international system will need to become more flexible to manage a diverse range of groupings, and to ensure that these groupings are open and inclusive rather than closed and adversarial. The primary governance challenge here is a relatively modest one, which is to develop a lightly structured approach to managing up a fragmented, bottom up world. Individual countries should invest in coalitions of the willing and on building strong regional architecture. The TPP (Trans-Pacific Partnership) is a good example of this; instigated by small countries, but now including larger countries and generating more momentum than the Doha Round.

In praise of moderation
In addition to being better calibrated to underlying realities, and therefore more likely to happen, this approach is also likely to lead to superior outcomes than more ambitious attempts at global governance. First, providing space for a diversity of national policy approaches will allow for competition between these approaches and will support policy innovation and the development of new ideas. Given the deep uncertainty about what works, I have argued previously that greater emphasis should be placed on policy discretion than on rules. Second, a more bottom-up approach increases the resilience of the global system by limiting the extent to which shocks reverberate around the global system. Exactly because the world is so inter-connected, throwing sand in the wheels – by allowing for different approaches to issues like financial market regulation at a national level – is no bad thing. A common approach may be more efficient in the short run, but may increase the likelihood of the system ‘blowing up’. Third, a bottom-up approach enhances welfare by making it more likely that national policy reflects local preferences on how to make trade-offs between equity and efficiency, how much risk to accept, and so on. Such a system is likely to command greater public support.

In a complex world, my sense is that the goal should be thoughtfully managing emerging issues rather than global redesign. This is particularly so given the conspicuous absence of shared ideas about how to solve major global issues. Humility should be a guiding design principle. Over-reach – trying to design a grand solution – is likely to lead to a less robust and sustainable set of arrangements. A looser, messier, less ambitious form of global architecture seems better suited to global realities and ought to be where investments of intellectual and political energy are made.