The System Worked_How the World Stopped Another Great Depression
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Furthermore, what’s surprising is how little China’s rise affected either the outputs or outcomes of global economic governance. To be sure, in some areas, such as currency manipulation, China’s concessions have been grudging. Beijing also engaged in a hedging strategy at the regional level.16 Nevertheless, across a host of issue areas, China acted much more like a responsible stakeholder than as a spoiler. This is particularly true when one compares China’s approach to the global economy to its approach to security issues in the Pacific Rim. At a minimum, the findings in this book offer a strong data point to support John Ikenberry’s contention that the liberal international order can survive China’s rise, and a data point against John Mearsheimer’s contention that a conflict between China and the United States is inevitable.17 Indeed, the performance of post-2008 global governance suggests the resiliency, rather than the fragility, of the liberal international order.
Another conclusion to draw is that there are hard limits to what open economy politics can explain during times of crisis and uncertainty.18 It is not a coincidence that the rise of open economy politics occurred at a time when the distribution of power and ideas in the global political economy seemed stable. So long as systemic factors can be held constant, an open economy politics approach can explain significant amounts of variation in the global political economy. When the global financial order is stable, observers can take as given the established rules of thumb, without overtly acknowledging the underlying processes of social construction and power that reproduce that stability on a daily basis. With a crisis, however, the underpinnings of the system become visible, questioned, and potentially up for grabs. This does not mean that the system will necessarily change—merely that what had been invisible becomes visible.
The post-crisis global political economy also revealed the deep structural roots of American power.19 The relative influence of the United States declined on some dimensions after 2008, but what is striking are the areas in which US power was resilient. If one looks at financial metrics, one sees that the United States retains considerable capabilities. Washington controls the global reserve currency, and there is no short-term alternative to it. Its capital markets are the largest, most liquid, and most networked in the world. The United States retains a commanding position in terms of asset ownership. Washington still controls the world’s largest military. US reservoirs of soft power are still formidable, especially when compared to China’s.20 In other words, five years after precipitating the biggest economic crisis in seventy years, the United States still has the most guns and the most butter, and of all the great powers, is the most liked. Contrary to the predictions of some,21 the crisis barely dented American power, especially when compared to the other OECD economies. China is a rising power in terms of material capabilities but not in the realm of ideas.
The Future of Global Economic Governance
This book has painted a relatively rosy picture of global economic governance for the past five years. Nevertheless, there are valid reasons to be concerned about the future. For one thing, considerable amounts of fragility remain in the global economy. The eurozone has still not found a viable way to fix the internal imbalances between Germany and Southern Europe.22 A renewed slump would increase the probability of a global recession. As central banks in the developed economies try to navigate exits from quantitative easing, and as the BRIC economies try to contain their own emergent asset bubbles, a double-dip Great Recession is possible. In the summer of 2013 the Federal Reserve tried to map out an end to its quantitative easing program at the same time that China clamped down on credit. The uncoordinated actions roiled global markets.23
Another issue is the state of economic ideas going forward. As chapter 6 demonstrated, neoliberalism has persisted since 2008. In the case of keeping borders open to international trade and investment, this is all for the better. On macroeconomic policy, however, the neoliberal consensus has preached the importance of low inflation and fiscal austerity über alles. During boom times, these policy prescriptions made sense. They were wildly misplaced, however, during the depths of the biggest economic downturn in seventy years. Despite the lessons of the Great Depression, and despite the ephemeral victory of Keynesianism in 2008 and 2009, neoliberal ideas remained privileged after the 2008 financial crisis. One can plausibly argue that in the developed world, the economic damage wreaked by austerity policies negated much of the economic benefit derived from global economic openness.
Misperceptions about power and governance continue to fester as well. Perceptions in the global political economy can generate self-fulfilling prophecies. If countries are viewed as powerful, they will be treated as if they are powerful. This can exacerbate conflict in world politics.24 Misperceptions are particularly problematic if they lead to mutual misunderstandings about the responsibilities governments have to preserve the open global economy.25 There is a similar problem with misperceptions about global economic governance. Despite an abundance of evidence that the system worked, economics columnists, such as Clive Crook, continue to write that the Great Recession “tested the world’s economic policy institutions and found them wanting.” Similarly, George Soros concluded that “the absence of global governance may continue indefinitely.”26 If elites continue to insist that the system did not work, they will devote time and effort to figuring out how to fix something that was not necessarily broken. This is scarce political capital that can best be devoted to more pressing policy problems. An even worse possibility is that policies that actually worked will, after the fact, still be framed as political failures—like TARP.
A paradoxical problem is that the successful reforms of global economic governance structures will increase the likelihood of policy sclerosis. The case of the WTO is instructive here. It was the earliest multilateral economic institution to recognize shifts in the global distribution of power. When the Doha Round was initiated in 2001, the old negotiation “Quad” of the United States, the European Union, Canada, and Japan that had traditionally hammered out trade concessions was no more. India, Brazil, and eventually China joined the “green room” as well. Even the smaller West African countries had an influential voice on cotton subsidies. The result has been the longest and most fruitless negotiating round in the history of GATT/WTO. Arvind Subramanian argues that the WTO has acquired too much legitimacy at the expense of negotiating efficiency, and therefore needs to be “de-democratized.”27
The WTO could be merely the harbinger of changes in other global governance structures. As noted in chapter 2, every significant club governance structure increased its membership, creating a greater potential for disagreement among members and policy stalemates.28 Given that the status quo bias in many of these institutions favors economic openness, this might not be an altogether bad outcome. Nevertheless, stalemates allow bad equilibria to persist as well. As noted above, the consensus about austerity seems likely to continue. This has brought economic growth in the European Union to a screeching halt. If Europe’s troubles infect the rest of the global economy, then the failure of global economic governance on this issue might tarnish the reputation of the entire system.
Rising security tensions could also transform global governance. China has acted like a responsible stakeholder in the economic dimension, but matters are more muddled in the security realm. If China and the United States were to decide that their security rivalry trumped the economic benefits of the open global economy, then both great powers would carry that security rivalry into the economic sphere. As expectations of future conflict rise, states become far more willing to disrupt economic relationships as a tool of coercion.29 This would echo the economic statecraft being practiced in the run-up to the First World War, when cooperation on the gold standard broke down a few years before Archduke Ferdinand was assassinated.30 A century after the start of the Great War, historians started drawing parallels to 1914 in their prognostications.31
Either policy stalemates or geopolitical rivalries could l
ead to the fragmentation of global governance. When preeminent international institutions fail to take necessary actions, great powers can choose to create alternative structures to implement their preferred policies. On the trade front, for example, the United States is currently negotiating a Trans-Pacific Partnership with Pacific Rim allies, and a Transatlantic Trade and Investment Partnership with the European Union. China, in turn, has engaged in its own hedging strategy. Beijing negotiated a network of preferential trade agreements with ASEAN and other regional actors such as Taiwan and New Zealand.32 In 2013, China launched talks on a trilateral free-trade agreement with Japan and South Korea. Beijing was also been a leading proponent of the East Asia Summit, Chiang Mai Initiative, and Asian Bond Markets Initiative. None of these structures necessarily conflict with global economic governance, but they have the capacity to do so.33
In a truly multipolar world, institutional proliferation can shift global governance from a world of binding rules to a world of forum-shopping. Institutional proliferation could erode the legitimacy of the Bretton Woods institutions.34 Jagdish Bhagwati has complained about the “spaghetti bowl” of overlapping trade agreements weakening the coherence of the WTO.35 Even if these challenges are currently at nascent levels, over time forum-shopping has the capacity to erode the cohesion of global economic governance. As more and more institutions are created, each will find its legitimacy devalued when forum-shopping occurs. With each state willing to walk away from global governance structures that fail to advance its interests, all these structures will experience a decline in both legitimacy and effectiveness. In the long run, it appears that an institutionally thick world bears more than a passing resemblance to the Hobbesian world of anarchy. Paradoxically, the proliferation of governance structures could lead to a tragedy of the global institutional commons.
There is one last pessimistic note: it is possible that the global economic challenges of the twenth-first century might be so different from any experienced in the past that existing institutions will simply be incapable of addressing them. Climate change is one example. This will be a growing concern moving forward, but international cooperation on this issue has been woeful to date; none of the traditional institutions have established a sustainable governance structure. Another, more unorthodox possibility would be a toxic combination of rising inequality and slower growth. Economic inequality has skyrocketed in almost every major economy. Globalization has generated an economics of super-stars, which in turn has produced an explosion of plutocrats.36 If the distribution of benefits from the global economy skews more toward the superrich, a disturbing feedback of rent-seeking behavior perpetuating further inequality could ensue. At the same time, some economists predict a future of slower economic growth.37 Rising inequality combined with slower growth translates to a world economy in which the losers massively outnumber the winners. Neither national governments nor global institutions will necessarily be well equipped to cope with the policy externalities and political resentments of that future.
The More Things Change …
So it is clear that there are a lot of ways in which things could go wrong. But, given what has happened since 2008, it is safer to conclude that they won’t. Based on the performance of global economic governance—and the causes of that performance—there are reasons to be optimistic going forward. First, it would appear that post-crisis, the resilience of the system actually increased. As noted in chapter 2, the current character of cross-border financial exchange rests on more-durable flows such as FDI and remittances. This suggests that another negative shock would have less of an impact on these markets. Furthermore, more recent financial scares have not had the same contagion effects. The 2013 Cyprus crisis, for example, led to significant financial repression in that country. Despite those repressive actions, it failed to trigger the same continentwide financial panic as happened in prior eurozone episodes. Paradoxically, the very centrality of American finance to the global economy increases overall stability. The only way a shock could have the same contagion effects as occurred in 2008 would be if the crisis started in the United States.38 The improved health of the US financial sector suggests that this scenario is highly unlikely for the foreseeable future.
There are also reasons to believe that oft-predicted Sino-American security tensions will not escalate. The distribution of power is unlikely to change as radically as many predicted in 2008. In 2011, Michael Beckley compared China to the United States across a wide range of comprehensive power measures and concluded that “the trends favor continued US dominance.” Robert Kagan has reached a similar conclusion: “The American system, for all its often stultifying qualities, has also shown a greater capacity to adapt and recover from difficulties than many other nations, including its geopolitical competitors.”39 Even previous skeptics of US power have begun to acknowledge this fact. Arvind Subramanian’s book Eclipse: Living in the Shadow of China’s Economic Dominance came out in 2011. Just two years later, Subramanian wrote that “reports of the decline in American economic power appear to have been exaggerated.”40
The enduring strengths of the United States—healthy demographics; geographic security; a syncretic, dynamic popular culture; and excellence in higher education and innovation—remain unchanged. As in previous eras of stagnation, a combination of private-sector and public-sector adjustments have triggered a revival in American capabilities. In areas such as manufacturing and energy production, the trend lines point to a renaissance in US capabilities. In a sharp contrast to pre-crisis projections, the International Energy Agency predicts that the United States will become the world’s leading oil producer sometime before 2020. Lower energy costs in the United States will ease energy bottlenecks everywhere while increasing the competitiveness of the US economy.41 America’s political economy is far from perfect, but the United States responded to the shock of the 2008 financial crisis more adroitly than its rivals. Meanwhile, China’s leaders are taking steps to reform the country’s development model so that its domestic economy more closely resembles that of the United States.
Institutional fragmentation is possible, but continued open regionalism seems more likely. The desire of each major economy to deepen economic ties with strategic partners has spurred other great powers to sign integration agreements with the same countries. The US endorsement of the Trans-Pacific Partnership, for example, has caused China to accelerate its strategy of signing regional free-trade agreements.42 The United States has joined the East Asia Summit, and China has joined the Inter-American Development Bank. The result is a world of deeper integration, rather than fragmentation. The international investment regime demonstrates the ability of bilateral and regional agreements to sustain an international regime without fragmenting.43
Just as open regionalism appears to be sustainable, so do current multilateral economic institutions. The legitimacy of global economic governance can have a path-dependent quality. If existing structures establish a reputation for reasonably effective governance, the gains from coordination increase while the costs decline.44 National policy-makers have an incentive to correct misperceptions and bolster existing regimes’ reputations for competency. If successful, they can use these international regimes to bypass domestic political roadblocks. In other words, the more that people realize the system worked after 2008, the more likely they are to believe the system will continue to work in the future—which, in turn, increases the actual probability of the system continuing to work.
LAST WORDS …
In the world of international affairs punditry, pessimism sells. Professionally, it is less risky to predict doom and gloom than to predict that things will work out fine. Warning about a disaster that never happens carries less cost to one’s credibility than asserting that all is well just before a calamity. History has stigmatized optimistic prognosticators who turned out to be wrong. Beginning with Norman Angell’s errant prediction a century ago that war would soon become obsolete, to Francis Fukuyama’s proclamati
on that history has ended, errant optimists have been derided for their naiveté. Policymakers prematurely declaring “mission accomplished” have suffered even more embarrassment.
In saying that the system has worked reasonably well since 2008, I risk joining that ignominious list—but it is a risk worth taking. Despite considerable economic turmoil, global economic governance reinforced preexisting norms of economic openness. The intersection of material interests, enduring American power, European and Chinese support, and adherence to market-friendly ideas allowed the system to function better than expected. If past financial crises are any guide, the global economy should be primed for more-robust economic growth for quite some time.45 There has been excessive pessimism about the state of global economic governance over the past few years, and this pessimism has spread just as widely as financial contagion did in 2008. It is wrong and needs to be corrected. After looking at the evidence, it is clear that the distribution of material interests, state power, and economic ideas combined to make the system work. Going forward, a healthy dollop of optimism is in order.