China – Regionalism and Multilateralism

The history of international economic cooperation teaches us one important lesson: every form of cooperation will die – essentially if not formally – if it does not adapt to new conditions for its member states to cooperate and compete with each other. Now that China has risen to global power status, have these institutions adapted to the new conditions – or are they also on the verge of losing their relevance, perhaps even die, as their incumbent powers are reluctant to change?

The past twenty years have witnessed huge shifts not only in what issues that international economic cooperation should address, but also in the conditions for effective cooperation. Most international economic institutions carry a transatlantic identity. They were part of the post World War II arrangement.

Importantly, the Cold War, with its ideological conflict between two different ideas of economic and societal order, provided the glue that kept many of these organisations together after their initial post-war purpose had been achieved. The United States had strategic reasons to provide leadership for the global economy – and Europe conformed, sometimes reluctantly, to that leadership. They aimed to spread the principles of market economy and the role of free trade to generate peace and prosperity. Generally, under this era, warts and all, global economic institutions helped to give the world one of its mot successful period ever in poverty reduction and creation of wealth.

But that era is now over. The question now is rather one of finding mechanisms for old, new and future global powers to collaborate. So what should the progress report say on that development?

My answer is: It is not going well. Catastrophes have been avoided but on current trend, the world’s economic institutions are slipping into obscurity.

The good news is that key global powers managed to come together in 2008 and 2009 to avoid the global economy to slip into a new Great Depression. Even if the crisis response was far from optimal, countries did what was absolutely necessary – and they halted the crisis from spreading from the West to the East.

The not-so-good news is that there is no new formula for leadership in global institutions like the World Bank, the World Trade Organisation or the International Monetary Fund. All global powers share a responsibility for making these institutions effective, but in the past years there have been a neglect of that responsibility by most countries.

European governments have had great troubles accepting that shared responsibility for global economic institutions inevitably means diminishing power and influence for Europe – in fact, that European countries, not the United States, are the main losers of power in global institutions, if they are to reflect the real economic power balance in the world. Their role in the World Bank and the IMF will only decline farther as “shares and chairs” in these institutions reflect the shares that European countries have in the global economy.

The United States is crippled by ever increasing political conflicts domestically – and the country has had great difficulties getting accepting the fact that the end of the Cold War did not bring it the desired “dividend” of greater economic and financial support form other countries in underwriting these institutions. Now with China at the table of global economic leaders, the strategic imperative to provide financial support through global economic institutions have diminished as U.S. governments are hesitant about China’s future role in the global system.

Emerging markets and powers like China have not responded ideally either. They take part in global economic governance and some, like China, act as responsible stakeholders. But they shun the role of a responsible leader. In recent years it has rather been popular for many emerging powers to fashion new institutions alongside global economic institutions.

None of these new cooperative efforts are created to be alternatives to multilateral institutions. Most them like the Asia Infrastructure Bank can help to push economic development. There is a need for improved conditions for real investment in many developing and emerging countries. Likewise, institutions like the World Bank needs competition. Like in other parts of the world, regional cooperation in Asia is a necessary component to make national policies in Asia more effective. Increasing economic ties in the region entails that countries must become more effective in addressing common problems. Whether we like it or not, regional cooperation is yet the best form of cooperation the world has on offer to fix global problems.

However, some of these initiatives are soaked in a rhetoric that is hostile to global economic governance as an idea – or the practice of these institutions in their current form. The New Development Bank, or the Brics Bank, is a collaboration between countries that have greater differences than they have similarities. They are not naturally aligned in other ways than that they have reason to signal disappointment to Western leaders about the current mix of economic leadership.

Moreover, it has been sold as an institution that could rival Western leadership for development – and that would work to the benefit of the member countries rather than the diffused membership of global economic institutions. Fine. But that purpose is bound to be constrained by the internal differences of the members. As some of the founder countries also viewed the creation of the Bank as an expedient part of exporting domestic economic capacities, these internal differences are likely to exacerbate over time.

China has a great role to play in global economic governance. It should be invited by other countries to assume a leadership position, but China also needs to articulate an idea what it wants to use its leadership for. As a global economic power, China is increasingly facing the same problems as other countries in its position have done before. With vast interests abroad, and with an ever growing number of companies and citizens operating abroad, it does not have the luxury to look the other way when its interests are challenged. To manage its own interests and policies, it will need cooperative institutions that extend beyond its own neighbourhood and that offer simple and transparent rules that countries should follow. Smaller collaborative efforts can do good – but their real effectiveness only comes if they are aligned with a larger policy strategy for the world.