Chapter Four -- Managing Economic Interdependence

Challenges to Global Economic Governance

• Growing Interdependence

• Growth and Poverty

• Unused Human Potential

• The Environment

• Global Decision-Making

• The Case for Multilateralism

• Regionalism and Informal Multilateralism

Stability requires a carefully crafted balance between the freedom of markets and the provision of public goods.

The international community today faces enormous challenges in dealing with economic governance--challenges related to the growing interdependence of economies and civil society, the continued impoverishment of much of the world and the unused human potential that entails, and the increased realization of the threats to the environment and thus to planetary survival.

Growing Interdependence

While the world has become much more highly integrated economically, the mechanisms for managing the system in a stable, sustainable way have lagged behind. Today's much higher level of economic integration and resulting interdependence are in part due to improved communications. When the post-war system of global governance was being conceived and negotiated, television, computers, and international telephone systems had barely been introduced.

The conduct of business, methods of production, tastes, and life-styles have since changed out of all recognition. Contemporary advances in multimedia communications and information processing will contribute even further to the shrinkage of distance and acceleration of change. One remarkable manifestation of this interconnectedness is the spread, at enormous speed, of computer networks such as Internet, which now provide millions of users with instant communication.

The possibilities created by technology have been magnified by the remorseless logic of economic specialization and scale. Trade has consistently grown more rapidly than global output. Capital flows have grown even faster. During the last decade, foreign direct investment has been growing four times as fast as world trade. In some industries--cars, electronics, information processing--production is so globalized that it is no longer possible to pinpoint or measure nationality in any meaningful way. The Ford Motor Company, to cite but one example, has evolved from a predominantly US company with some overseas subsidiaries serving local markets to an integrated operation around regional subsidiaries that in Europe serve the Single Market and that produce a 'world car' through co-ordinated operations.

The last few years have seen a veritable explosion of portfolio investment by institutional investors--insurance companies, pension funds, unit trusts--in 'emerging markets' as stock markets become truly global in reach. People can trade in the world's leading currencies twenty-four hours a day and use a growing variety of financial instruments. In the field of finance, national frontiers have little meaning; 'the end of geography' is approaching.

That all this global economic integration has come to pass is in part a tribute to the relative order and stability of post-war economic governance, as well as to new technologies. Enormous opportunities are being created for societies and individuals to advance. But there are also imbalances and risks.

As economies become more interdependent, it is not only the opportunity for wealth creation that is multiplied, but also the opportunity for destabilizing shocks to be transmitted from one country to another. International co-operation has forestalled or mitigated some shocks (such as action taken after the 1987 stock market crash), but others (the debt crisis of the 1980s, for instance) have been allowed to gather momentum and inflict economic damage and social pain. No satisfactory mechanism exists to anticipate or respond promptly to future global shocks. The International Monetary Fund (IMF), which should be playing a major role in countering destabilizing shocks, is constrained by limited resources.

Both the dynamism and the instability of the process of global economic integration are linked to the fact that it largely originates in the private sector. Future stability requires that a carefully crafted balance be struck, nationally and internationally, between the freedom of markets and the provision of public goods. The pace of globalization of financial and other markets is currently outstripping the capacity of governments to provide the necessary framework of rules and co-operative arrangements to ensure stability and prevent abuses of monopoly and other market failures. National solutions to such failures within a globalized economy are severely limited.

Yet the structures of global governance required for pursuing public policy obligations in an interdependent world are underdeveloped. The multilateral trade regime of the General Agreement on Tariffs and Trade (GATT), for example, is only just beginning to negotiate agreements on cross-border flows generated by services and information-based industries, though these have been a major phenomenon for a decade. Much is being done to establish new structures of governance at a regional level, as in the European Union, but even this could not prevent the European Monetary System from being severely destabilized by large-scale capital movements.

A further concern is that the integration of markets does not necessarily occur harmoniously. Different systems of commercial law-making, tax, social welfare, bureaucratic decision-making, corporate governance, labour law, and much else have a bearing on how firms compete with those from other countries through trade and direct investment. Without good, clear rules that are widely accepted, there is 'systems friction' based on a sense of unfairness or incomprehension.

Growing economic interdependence brings in its wake freer trade in 'bads' as well as goods. International drug traffic, for example, now dominates the economies of a significant number of countries; it may even be worth more than trade in foodstuffs. Trade--illicit or licit--in arms, waste disposal, and human traffic, as in prostitution, have all become big global businesses.

Governments have learned that command-and-control systems of economic management do not work. But they have yet to develop--especially at a global level--effective, alternative tools of governance. With the agreement at Marrakesh to establish a World Trade Organization (WTO), there is at least the hope that such tools can now be fashioned.

Growth and Poverty

As noted earlier, a sophisticated, globalized, increasingly affluent world currently co-exists with a marginalized global underclass. The post-war system of economic governance has seen--and facilitated--the most remarkable growth in economic activity and improvements in living standards within human history. Despite an increase in population from 2.3 billion to 5.5 billion, per capita incomes on average are now around three times the level in 1950. Many indicators of social progress--infant mortality, literacy, life expectancy, nutrition--have improved significantly, at least in terms of global averages. When Britain became the first country to industrialize in the late eighteenth and early nineteenth centuries, it took six decades to double living standards; now China, among other countries, is accomplishing the same feat within ten years.

At the same time, people are increasingly aware--through better communication--of the global problem of continued poverty. The number of absolute poor, the truly destitute, was estimated by the World Bank at 1.3 billion in 1993, and is probably still growing. One fifth of the world lives in countries, mainly in Africa and Latin America, where living standards actually fell in the 1980s. Several indicators of aggregate poverty--1.5 billion lack access to safe water and 2 billion lack safe sanitation; more than 1 billion are illiterate, including half of all rural women--are no less chilling than a quarter-century ago. The conditions of this 20 per cent of humanity--and of millions of others close to this perilous state--should be a matter of overriding priority.

The challenge of global development has changed in several respects since it was analysed by, among others, the Pearson and Brandt Commissions. First, the old division between industrial and developing, North and South, is becoming blurred, though there are still some striking imbalances; rich countries account for more than 80 per cent of world trade, 85 per cent of direct foreign investment in the 1980s, and 95 per cent of all research and development. There are different Souths and different Norths, reflecting varied experiences of development and growth, internal disparities of income and opportunity, and different country sizes and economic structures. Although it is a caricature to talk of the Asian development miracle and the African development disaster, for example, these areas have had very different experiences.

Second, there is the fall-out from the ending of the cold war. Russia and other former Communist countries of Central and Eastern Europe have embarked on one of the most ambitious and difficult economic transformations in history. If the process is successful, it will provide a major stimulus to the growth of the world economy. If it fails, the consequences could be catastrophic: a collapse of orderly government in these countries, several of whom still have stockpiles of nuclear weapons.

The challenge posed to global economic governance by this transformation is considerable: the need to incorporate some thirty new countries into global and regional institutions and trading rules; the demand for large amounts of additional official capital to support adjustment and to facilitate private capital flows under conditions where the problems are enormous and largely unprecedented; the dismantling of vast and technically sophisticated arms industries while safeguarding the livelihoods of millions employed in them. It is clear that enormous hardship is being endured by some. But from Eastern Europe and to a lesser degree Russia there are encouraging signs that private-sector growth is beginning to replace a contracting state sector.

One of several wider implications is the end to the 'cold war' of ideas. Instead of polarized and unproductive conflict between opposed ideological systems, there is a much greater degree of consensus on economic policy questions. Some continuing disagreement about the appropriate roles of the public and private sectors is inevitable. But many countries are finding wide agreement on the need to draw in a balanced way on the energies of a profitable private sector, global markets, and competition as well as the need to use the powers of the state to provide security, a regulatory framework for competition, a good environment, and a sense of equity and social cohesion. The painful experience of getting this balance badly wrong earlier should now facilitate development.

A further change is taking place in industrial countries. They are collectively slowing down, and not just because of the current recession. Various factors are at work, including the ageing of the population and the problems of adjusting to a service-based, post-industrial society. These trends have good and bad implications for developing countries. Positively, there should be less competition for scarce resources, notably capital for investment. But by the same token, low-growth conditions in rich countries mean a weaker demand for goods that developing countries export.

The crisis of unemployment and the associated evils of growing poverty and social deprivation in many industrial countries may also create a political environment where there is less willingness to adjust quickly to new sources of competition. 'Cheap' imports and migrant labour are often made the scapegoat for unemployment.

One of the greatest ironies of the current scene (and, potentially, one of the greatest future dangers) is that just when developing and former Communist countries discover the benefits of liberalization and greater openness, rich countries may turn in on themselves. A central challenge for global governance will be to prevent this dangerous situation from creating new fissures between and within countries.

Unused Human Potential

A major failure of past development in rich and poor countries alike is that very large numbers of people have been unable to realize their potential. Unemployment, discrimination against women or minorities, poor facilities for education or health, slum conditions in crowded cities, and other similar phenomena are found to varying degrees throughout the world. They not only affect the security and well-being of people, they are themselves obstacles to development. Economic policy, however well conceived, does not itself ensure the social progress and better standards of life in larger freedom held out in the UN Charter.

The failure to integrate social policy, in the widest sense, into the economic policy framework has led countries down economically wasteful paths. Western Europe, for example, is losing what a tenth or more of its labour force could produce as it idles in unemployment, with devastating effects on individuals, families, and communities. While the root causes of joblessness persist, support for the unemployed makes ever larger demands on national budgets, creating deficits that compound economic problems. Large numbers of people are pushed out of the work-force to languish on the margins of society.

In Africa, Latin America, and Eastern Europe, underfinanced structural adjustment programmes have often neglected the social implications of austerity measures. Though macroeconomic stability and market liberalization are clearly necessary objectives, the failure to anticipate and counter the severe stresses on society and the cutbacks in long-term investment in human development have set back the long-term prospects for economic progress and weakened political support for continued adjustment.

The most pervasive denial of human potential is found in the discrimination that women suffer world-wide. Society benefits hugely from the economic contribution of women, although this is seldom recognized. Thus, half the world continues to be systematically--though in varying degrees--denied their full rights as human beings, with stultifying consequences for them and at great cost to society, which is denied the many additional contributions they can make. Awareness of these issues was greatly sharpened by the International Conference on Population and Development in Cairo and will be again at the World Conference on Women in Beijing in 1995. There is now wide awareness that gender sensitivity must be introduced into the conceptual, decision-making, and operational stages of all multilateral and government agencies, and in Chapter Five we recommend some ways to achieve these objectives.

Social policy is a matter not only for national but also for global governance. Different societies have different preferences for--among other things--income distribution, welfare provision, cultural diversity, worker protection, and structures of education. None the less, societies increasingly interact and cannot function in isolation. Failures of social development resulting, for example, in involuntary mass migration cannot be confined within national borders. The World Summit for Social Development in 1995 will define more concretely what the priority areas for common action are in the social policy field.

The Human Development Report of the UN Development Programme (UNDP) and UNICEF's 'Adjustment with a Human Face' campaign have helped considerably in bringing social concerns into economic policy. And although the recent Group of Seven (G7) Jobs Summit in Detroit in 1994 had no concrete results, it helped direct attention not just to the plight of the long-term unemployed in G7 countries but to the 800 million or more workers world-wide who live in poverty because of unemployment or underemployment.

The Environment

One of the truly momentous changes of recent years--and a change that could not even have been envisaged by those who designed the post-war global economic system--is the growing awareness of the importance of the physical environment and the extent of the threats now posed to vulnerable ecosystems. This has forced governments to face up to the extent of the interdependence of their countries. The UN system deserves credit for having helped to create this awareness, with the 1972 Stockholm Conference being a seminal event. The 1992 Earth Summit in Rio left an agenda of great political weight.

Growing awareness of global environmental threats has nudged governments into devising co-operative (albeit weak) forms of governance to address the overfishing of oceans, the extinction of certain species, the threat to Antarctica from commercial development, the depletion of the ozone layer, and the risks of climate change caused by the build-up of greenhouse gases in the atmosphere.

Environmental stresses arise from an imbalance between what people consume and what natural systems can provide. Human impact on the biosphere is essentially what people use and waste. Some 80 per cent of that consumption is what is thought of as prosperity--wealth creation and enjoyment by some 20 per cent of the world's people. Those disparities become important when environmental sustainability requires restraint on consumption at a global level, including greater efficiency in the use of resources, as is the case for carbon emissions.

There is also a strong relationship between environmental stress and poverty. So far the impacts have been localized, such as microclimatic change and flooding resulting from deforestation caused by subsistence agriculture. But there are already examples of large-scale environmental refugee movements--in the Horn of Africa and from Haiti--that have wider implications.

Economic growth and the multiplication of population will eventually create a world economy many times larger than today's. The concept of 'sustainable development' defined by the World Commission on Environment and Development (the Brundtland Commission) provides a framework of policy within which strong growth, necessary to overcome poverty, can be achieved while adapting economic policies to take full account of environmental considerations. Major changes in economic practices will have to occur.

Even then, there will be considerable pressure on some fragile ecosystems, and some scarce environmental resources--such as fish stocks, tropical forests, and watersheds--are currently being used at an unsustainable rate. These will have to be shared and managed equitably to prevent overuse. The high consumption levels of these resources need to be reduced without any slackening of poverty alleviation. The failure to establish a common approach can have disastrous consequences.

Global Decision-Making

At a global level, what model of decision-making should an emerging system of economic governance adopt? It will have to draw on lessons from regional and national levels and from business organizations where inflexible, centralized command-and-control structures have been shown to be unsustainable. Multilayered decision-making systems are emerging that depend on consultation, consensus, and flexible 'rules of the game'. Intergovernmental organizations, however, still face basic questions as to who should set the rules and according to what principles.

One particular challenge is the growing number of countries. Some fifty countries were involved in founding the UN and the Bretton Woods institutions--the IMF and the World Bank. The end of colonialism and, more recently, the breakup of the Soviet empire added many new nations, with the total participating countries now approaching 200. They want not just statehood but a voice in international economic decision-making. Global economic integration and interdependence have to accommodate, and be accommodated in, a post-imperial world of formal political independence.

There is an inevitable tension between the democratic ideal of universal participation and the need for speedy, efficient decision-making, as well as between the respective claims of statehood, population, and wealth. The tension has increased as the number of states has grown while global economic decision-making, far from reflecting a polycentric world, has become concentrated in the hands of the United States, Europe, and Japan--with just over 10 per cent of the world's population.

This concentration of decision-making is reflected in the voting arrangements of the Bretton Woods institutions. Even more important, it is also a factor in the exclusivity of such groups as the G7. And major powers dominate the negotiating processes of GATT, where all parties are nominally equal but actually very unequal. The countries that benefit from these inequalities would never accept such undemocratic arrangements in their own societies, and, in part at least, their economic strength derives from that rejection.

Whatever the democratic legitimacy of current intergovernmental arrangements for global economic governance, a fresh approach to the question is required by the shifting centre of gravity of the world economy. Taken as a whole, developing economies have been growing more rapidly than Western industrial ones during the last three decades, with Asian developing countries growing much more rapidly. The share of output accounted for by members of the Organisation for Economic Co-operation and Development (OECD) has shrunk to barely half, once we take account of the underlying purchasing power of economies measured at comparable prices. The world's ten biggest economies on a purchasing power parity basis include China, India, Brazil, and Russia, with Mexico, Indonesia, and the Republic of Korea not far behind.

Yet none of these participate in the Group of Seven, all are under-represented in terms of votes in relation to their population and economic weight in the Bretton Woods institutions, and China and Russia are not yet members of GATT. It is a matter of common interest that the major players in the global economy be fully involved in decision-making on common problems.

But in focusing on intergovernmental relations, it is necessary to bear in mind that the traditional role of nation-states is evolving. There are powerful forces making for greater decentralization of decision-making. Nationally centralized, top-down systems, exemplified by the former Soviet Union, have collapsed. Large states are under growing pressure to decentralize to provinces and local government just as companies are having to devolve management responsibility. In areas such as Western Europe where stronger regional institutions are being created, there is a vigorous debate about 'subsidiarity'--the allocation of responsibilities to the lowest level appropriate among global, regional, national, and local authorities. Global economic governance has to recognize this diffusion of decision-making, while acknowledging that there is still a compelling need for an overall framework of rules and order.

The Case for Multilateralism

The time is now ripe--indeed, overdue--to create a global forum that can provide leadership in economic, social, and environmental fields.

Historically, global governance has occurred without global institutions. The nineteenth century was a time of deepening integration and unprecedented expansion of trade, investment flows, and migration of people. Some world-wide governance was partly provided by the exercise of dominion through empires, especially Britain's. It was politically stable, but it lacked consent and was ultimately unsustainable. It also depended heavily on self-regulated markets that were prone to crisis, drawing states into more active management of their economies. This in turn contributed to destructive economic nationalism and indirectly to the major twentieth-century conflicts.

There is no case and no call for a return to a system like that of the nineteenth century. Without strong international rules, however, the most powerful countries will act unilaterally, or try to control the system, which makes rules-based processes all the more crucial. Migration, for instance, is one area where policy is overwhelmingly unilateral. No desirable system of governance can be based on the capacity of strong nations to coerce weaker ones, which is the inevitable consequence of the unilateral projection of power in economics as much as it is in the military sector.

The rules and sense of order that must underpin any stable and prosperous system can be described as international 'public goods'. It is in their nature not to be provided by markets or by individual governments acting in isolation.

Most governments accept responsibility for the provision of public goods such as policing and justice, financial stability, or environmental protection; to do otherwise would be to abandon essential functions of a state. The same responsibility applies--but is less readily acknowledged--at an international level. Among the basic international public goods that global economic governance should provide are:

• systemic financial stability: a stable monetary system, a capacity to deal with major systemic slumps and shocks, and prudential regulation of international financial markets;• the rule of law: for an open system for trade, technology transfer, and investment, with mutually acceptable dispute settlement machinery;

• infrastructure and institutions: common standards for weights and measures, time, and many technical specifications, and agreed systems to manage and maintain freedom of the seas and commonly used networks for aviation and telecommunications;

• environment: through protection of the global commons and the required framework of policy to promote sustainable development; and

• equity and social cohesion: through economic co-operation in its widest sense, including international development assistance and disaster relief.

The growing interdependence of the global economy and environment increases both the benefits of providing these international public goods and the penalties for neglecting them. None the less, some governments are reluctant to accept the sharing of national sovereignty that must occur for strong multilateral rules and institutions to function. The struggle to place GATT rules above unilateral trade policy, the marginalization of the IMF from the management of the international monetary system, the continuing struggle to maintain and increase flows of concessional resources through international institutions, and the virtual exclusion of the UN from a central role in the field of global economic governance: all these attest to this reluctance.

Regionalism and Informal Multi-lateralism

A workable system of international economic governance is not solely based on global arrangements. Many tasks can be carried out between neighbours. So far, only the European Union has created both a durable system of regional trade liberalization and a strong commitment to political co-operation, but others may well follow. Regional integration is currently receiving much attention elsewhere, especially in the Americas and South-east Asia, though it has made little progress in Africa and South Asia.

Some issues are best dealt with regionally rather than globally (localized spillovers of pollution, for example). Regional economic groups can also contribute to burying historic enmities through developing closer economic and political linkages, realizing economies of scale, developing common infrastructure, and pioneering new methods for deepening integration in advance of progress at the global level. As noted, the concept of subsidiarity being vigorously debated in Europe provides a framework for allocating responsibilities between institutions of global, regional, national, and local governance in an efficient way.

For regional institutions to form building blocks for global economic governance rather than exclusive 'blocs', they should also be open--both in offering membership on the same terms as existing members and in regard to market access. There is a fine line between the degree of exclusivity needed to create a regional identity and that which creates division. The European Union has many features of openness, especially now that it is being enlarged; but some other features, such as the Common Agricultural Policy, are protectionist and divert trade. The advocates of 'fortress' Europe are a minority, but they are not insignificant. Although regional arrangements can strengthen global economic governance, the wrong kind of regionalism can weaken it.

Much governance can and does informally take place through groups of countries such as the G7, the OECD, or the Commonwealth. The G7 is a significant development and its role is discussed further later. The OECD has played a major role in developing principles to govern the behaviour of international investment, environmental management, and export credit. And it is now reaching out to a wider number of countries through enlargement and dialogue.

Several functional, specialist institutions should also be mentioned, such as the International Telecommunications Union (ITU), the International Maritime Organisation, the Bank for International Settlements (BIS), and the Paris Club. ITU has responsibility--now shared with GATT--for creating a regime of global governance for the rapidly expanding, interconnected network of telecommunication, multimedia, and information technology systems. BIS provides the world's financial system with an underpinning of co-operative supervision. In these quiet, unspectacular ways, a system of global governance is being put in place, albeit on a piecemeal basis.

Global governance is not, however, only a public sector activity. Multinational companies account for a substantial and growing slice of economic activity. Some centrally important industries--notably the complex of activities variously described as telecommunications, information, or multimedia; automobile production; banking and other financial services--are being developed largely through private companies that operate on a multinational basis. Their concerns are necessarily with the totality of their business operations rather than with any one country. We discuss later in this chapter the checks and balances that have to be established to ensure that business operates, at a global level, within a wider framework of social responsibility.

Finally, there is what might loosely be called international civil society including non-governmental organizations (NGOs), international humanitarian agencies such as the Red Cross and Red Crescent, voluntary rule-making bodies such as the International Standards Organisation, and groups of scientific professionals such as the International Council of Scientific Unions.

These structures often have the great merits of flexibility, responsiveness, and enthusiasm. They will rightly play a growing role in governance. They can, however, become self-electing and exclusive. Fewer than 15 per cent of NGOs registered with the UN Economic and Social Council (ECOSOC) are from developing countries. Although NGOs are of inestimable value in establishing governance in the widest sense, they cannot be expected to substitute for effective intergovernmental structures.