At the top of the agenda at the annual World Economic Forum in Davos this week is global cooperation—to “rethink, redesign, and rebuild” the architecture of international organizations to address economic, social, and security challenges. Reading the summary of the agenda, one gets the feeling that the attendees—the heads of governments, the media, multinational corporations, and international organizations—may be feeling increasingly defensive these days.
Of course, the knives have been out for Davos Man for some time, particularly since the subprime mortgage crisis and global financial crisis. But if last year’s meetings took place as confidence in markets collapsed, this year there is a feeling that trust in the basic institutions of global governance, and in the capacity of forums like Davos to set agendas, has reached a low point.
The program urges global leaders to regain public trust, “not only to establish the legitimacy of their redesign but also to instill confidence in their future success.” Unfortunately, the basic assumption behind these sentiments—that global institutions can and should regain their legitimacy—is flawed.
In the first place, if there were any doubt in the past that the world is becoming increasingly multi-polar and fragmented, and that any global response has become harder to manage, it has certainly been dispelled over the past year.
In the 1990s, coordination of responses to global financial turmoil centered around the United States and the major international institutions in which the United States had a large stake. The global financial turmoil of the 1990s, for example, saw a triumvirate of the U.S. Treasury, the International Monetary Fund, and the World Bank, managing the provision of liquidity to crisis-stricken countries as well as their asset recovery. If a natural disaster had struck a country in the Western Hemisphere in the 1990s, there is no question that the United States would have led relief efforts—as it did when Hurricane Mitch battered Central America in 1998.
Compare this to 2009. The U.S., IMF, and the World Bank have largely taken a back seat in devising global responses to the ongoing financial crisis, ceding agenda-setting power to the G-20 which has, largely in an ad hoc manner, taken on greater responsibility for coordinating regulatory responses to the crisis. In Haiti, meanwhile, France and the U.S. have been squabbling over relief efforts, with a French minister all but accusing the U.S. of military occupation. Meanwhile, other regional powers such as Brazil and Venezuela have played a prominent, and to some extent unprecedented, role in the relief.
Second, and perhaps more important for the Davos participants, it is unclear what kind of cooperation is best suited to this multi-polar world.
It is no secret that the governance of international organizations is at odds with the global distribution of economic power. A casual glance at the IMF’s Executive Board reveals a truly unbalanced group to represent the world: China has only about three-quarters of the vote shares of France, Belgium has 50 percent more vote shares than Brazil, eight out of the 24 Executive Board Directors come from European Union countries, etc.
To a great extent, this fundamental mismatch has eroded the legitimacy of these institutions, perhaps irrevocably. It is highly unlikely that any East Asian politician who remembers the Asian Crisis of the 1990s will seek money from the IMF’s Stand-By Facility or the U.S. Treasury’s Exchange Stabilization Fund during a crisis. In Latin America, too, the history of IMF and U.S. intervention (direct or indirect) contributed to a left-ward turn throughout the continent during the 2000s.
For years, the main threat to Davos Man has been seen in the forces of anti-globalization, nationalism, and the retreat of the world’s economic players behind walls of protectionism and mutual distrust, as Gordon Brown warned against last January. The current crisis—as did the crises in the 1990s—has initially propelled countries to explore options for global monetary cooperation and macroeconomic policy coordination. But given the economic interdependence of certain regions, it has also strengthened proposals for regional cooperation.
Pressures for a new regionalism have been coming from several quarters. Last year, for example, Vladimir Putin called for concerted action to break the stranglehold of the U.S. dollar and create a new global structure of regional powers. In East Asia, the Chiang Mai initiative of the ASEAN + 3 (China, Japan, South Korea) may be a precursor to an Asian Monetary Union. Although much newer, the Union of South American Nations (UNASUR), born from the convergence of Mercosur and the Andean Community, as well as Hugo Chavez’s proposed Banco del Sur, are considered by many in the region to be necessary counterweights to the Bretton Woods institutions, and NAFTA.
These regional efforts stem from several concerns. The first is to reduce the risks of financial contagion, which history shows have common effects among neighbors producing the same products for the same export markets. The second is the perceived need by regional economies for greater cooperation with regional core powers. Other factors include the move by many economies, especially the more developed in the region, to lower their average tariffs; the growing recognition of the value of harmonizing standards and regulations, if these are not to impede trade; and the higher concentration of trade among regional partners.
Following World War II, who would expect historic rivals to build an international organization that would one-day acquire quasi-sovereign status? Today it may seem that sustainable regional commitments in Latin America or East Asia are unlikely.
Rather than trying to redesign and rebuild the mechanisms of global economic coordination, those gathering in the alpine village would do better to spend more time thinking of new ways to deepen regional commitments. The lack in confidence in global institutions should not be cause for pessimism toward international cooperation. On the contrary, regional organizations may be the best-suited mechanisms to govern the global economy in the 21st century.