The second direction is that, given their shared problems, small states may increasingly feel the need to gather together to discuss topics where there is a specific small-state angle and to share expertise on solutions. Some examples of this are fiscal policy in the eurozone, the role of research and development in industrial policy, and the nexus between multinationals and nation-states. The evolution of the Hanseatic League 2.0 in the eurozone is a very good illustration of this. This league is grouped around the finance ministers of nine small eurozone states—Ireland, the Netherlands, the Nordic states (except Iceland), and the Baltic states—who have come together to express their views on the importance of fiscal independence for small states in the eurozone. The group is now a powerful political presence within the broader group of European finance ministers and may grow to express views on other policy strands.
In this light, the “notion of a voice for small states” increasingly makes sense to governments and policy makers in some of the countries mentioned above, though many of them express a preference for less formal discussions lest such conversations trouble existing relationships (either with big-country neighbors or with bodies like the European Union).12
However, if a new reality of distinct political channels between the large poles emerges, then it will increasingly make sense for small, developed countries to come together in a more formal group. A more global small-country grouping could be called the “g20” (with a lowercase g) as opposed to the G20. A g20 is perhaps more likely to be on the cutting edge of the economic pulse and policy innovation than the larger countries and on the whole is likely to be more impartial on many issues, such as environmental damage, corruption, and military intervention.
In this respect, such a g20 group would have three common factors that are not found across all the world’s larger countries. First, small states are very globalized: eight of the top ten most globalized states are small (population up to ten million), whereas China ranks 132nd in globalization out of 174 countries, India comes in 137th, and the United States is in 57th place. With globalization changing, small states’ experiences will be instructive for all other countries. Second, small states are a model to follow in terms of the quality of their institutions. Third, most of them have well-established, healthy democracies.
So it is not inconceivable that in a world fixated on classifications—such as “emerging economies” or “frontier markets”—a new geopolitical grouping will emerge in the form of a select group of small, developed countries whose defining characteristics are that they are open economies and open societies.
One might ask what contribution a ragtag group of small countries—whose collective population is lower than that of Russia or Indonesia—can make to international relations in a world dominated by large poles. There are several. One is that, among the accolades won by the likes of Sweden and Singapore, is the recognition that they are neutral and impartial and leaders in the area of transparency and fighting corruption. Thus, one contribution from the small, developed countries may be to draft a practical code of transparency and corruption, which would set a higher bar compared to similar codes from the United Nations and the OECD. Another innovation is that small, developed countries are leaders in the area of technologies that can be deployed to bolster transparency, such as cybersecurity, payment systems, and accounting and finance systems.
Consider the impact of a two-pronged approach whereby procurement and payments by state, regional, and local authorities are made in a secure tabulated electronic form, with the same being done for political party funding and political expenses. Such an approach is in operation in some small countries, and a common standard among them, with common technologies and systems approaches, could form a gold standard on transparency and corruption, a standard that other countries could adopt voluntarily.
The Future of International Institutions
The rise of new alliances and the potential division of the world order into, say, a biosphere built around large poles, ambitious and anxious midsized nations, and a coalition of democratic, developed small states may prefigure the way international relations develop in other ways. In many parts of the world, the role and influence of international institutions such as the World Bank, the IMF, and the WTO is fading quickly. The OECD has at least managed to reposition itself as the brains trust of the G20. Growing wealth in Asia means that the World Bank is now concentrating on Africa, the eurozone crisis has diminished the IMF, and trade disputes (such as tariffs on steel) have exposed the WTO’s lack of clout.
The economies of the Middle East are another example. Much of the development in the Middle East has been financed locally, led by key families and entrepreneurs, with some American expertise. In the past, the United Nations had a physical and moral presence in the region, but the aftermath of the Arab Spring and the UN’s nearly total failure in the Syrian refugee crisis contribute to the view that it is a twentieth-century rather than a twenty-first-century institution. The lesson here is that for many regions of the world, and potentially for the large poles, twentieth-century institutions like the UN, the World Bank, and the WTO are defunct. The large poles may well prefer to settle disputes among themselves rather than, for instance, having recourse to what will be an increasingly divided UN Security Council.
As a multipolar world materializes to replace today’s more US-centric one, the collection of institutions that have served the evolution of the world order in the twentieth century may well be rendered obsolete. The fact that many of those institutions (the World Bank is a leading example) are bureaucratic, founded on consensus building, and, according to many accounts, resistant to change is a recipe for their being superseded. Indeed, before he joined the World Bank, former president Dr. Jim Yong Kim contributed to the book Dying for Growth, in which he scathingly attacked the Bank.13
Several emerging trends may contribute to the obsolescence of bodies like the World Bank and the United Nations. The most obvious is that many of the problems they were established to tackle—such as poverty, development-project funding, and economic development—have improved to a degree that they are much more localized, and in many cases individual governments are more focused on them. The second is that, in a multipolar world, the poles may be more prone to resolve matters among themselves—trade is one such area; another is geopolitical conflict, where, for example, issues like the diplomatic strategy toward North Korea are more likely to be resolved between two poles, the United States and China.
Relatedly, the failure of the United Nations in the midst of the horror and complexity of the conflict across Syria in the post–Arab Spring era has not enhanced its credibility. A further issue in geopolitics is the emergence of unconventional warfare, where perpetrators are harder to identify and where rules of engagement are not yet well developed; cyberwarfare and cybercrime are examples of unconventional warfare, and so is the ambiguous tactical approach of the Russian military in Ukraine and parts of Serbia. In addition, new constellations of nations may emerge—such as the Shanghai Cooperation Organization (SCO)—that may defy the United Nations, or simply paralyze its voting structure.
To borrow the earlier analogy between political parties and companies, if the United Nations, World Bank, IMF, and WTO were companies, they may well have failed, been taken over, or been broken up at this stage. We should not extend this analogy too far because these institutions have been valuable international public goods and in many instances have contributed a great deal to world affairs. However, they are a poor fit to today’s changed world and need to be reordered and reshaped to better serve it.
The World Bank should be drastically reduced in size and relocated to Africa, which is the one part of the world that still needs an institution like it. Being closer to the economies and societies it is supposed to serve, rather than being cosseted in Washington, will make the work of the World Bank more impactful. Having helped microfinance grow, it should support the emergence of impact investing (where i
nvestments have a social as well as a financial objective) across developed and emerging countries.
The WTO should also cease to exist, given its poor performance, near irrelevance in the face of emerging trade wars, and the tendency of large poles to hammer out agreements among themselves. Ironically, and with a little imagination, London may replace many of these international institutions as a place of dispute resolution and as a legal base.
Similarly, the IMF needs to be overhauled, both in its structure and in its expertise. Many of its functions, such as research, economic surveillance, and capital raising, are better performed by the private sector and, increasingly, by central banks. The eurozone crisis has seen the IMF contort itself in terms of the policies it considers appropriate for different types of indebted countries.14 To an extent, much of its role as a lender has been superseded by large central banks, development institutions, and private capital. Furthermore, the potential advent of an EU Treasury may further negate the need for the European Union to partner with the IMF on financial rescues. The next potential global financial accident spot, China, will probably not call on the IMF to resolve its debt overhang in a conventional manner; rather, it is likely to deal with a financial accident in its own way.
Bring Back Bancor
There may be scope for the IMF to maintain its relevance as a specialized debt-oversight institution. In that area, at least, one aspect of the IMF’s policy arsenal might still be useful. At the time of the initial Bretton Woods Conference in 1944 at the very charming Mount Washington Hotel in Bretton Woods, New Hampshire, the economist John Maynard Keynes suggested the creation of a supranational currency to be called “Bancor.” His idea was that Bancor would, especially in times of recession, create a world reference currency that would help regulate imbalances in trade among nations and would therefore stimulate commerce. In the end, the Bretton Woods Conference opted to reference, or peg, currency values to the value of gold, though this effectively laid the grounds for the emergence of the dollar as the first among currency equals.
Bancor might have a use today as an idea that could permit the IMF’s Special Drawing Rights (SDR) facility—effectively a supranational currency (ironically, in today’s terms it is like a cryptocoin, with a coordinating institution)—to allow both developed and less developed countries to issue what one might call IMF or SDR bonds.15 They would do so in the immediate aftermath of a financial crisis, which would hasten their financial and economic recovery. These bonds would be issued as the supranational currency of Bancor, they could potentially have preferential terms and conditions, and, importantly, they would be overseen by the IMF as a form of rating agency, or approval body, for these bonds. An important innovation could be added providing that, in the aftermath of an economic crisis, this type of bond could be issued with coupon payments tied to GDP and inflation levels, so that the holders of the bonds as well as the issuing countries would have an interest in its recovery.
Existing world institutions could be recast in two more ambitious ways. First, given that one of the aims of the levelling is to focus policy more on people (e.g., on health and education), there is a greater need for a more robust and coherent international policy on human development or intangible infrastructure. This policy effort would involve codifying a framework on intangible infrastructure, undertaking deeper research on the topic, and developing more-detailed global standards and measurements. Most importantly, it implies the development of practical means and policies by which countries in different parts of the world, with different standards of development, can improve human development and intangible infrastructure. To make such an organization work, parts of the United Nations—such as the UN Development Program (UNDP), some element of the WHO, departments of the World Bank, and the OECD—should be brought together in a new body, in a new location, and perhaps in a country that exemplifies this policy approach. Denmark is an example of such a country: it scores well in terms of such intangible infrastructure variables as social cohesion, education, wealth equality, and quality of institutions.
Another complication for the IMF and WTO as they lose credibility is that the nature of conflict between nations is becoming more focused on finance. In particular, central banks may encroach more into geopolitics. I have already argued (chapter 7) that central banks are too powerful and that far too much policy lifting has been left to them. Their overlordly roles in markets and economies should be pared back. Yet this is not a given, and in a multipolar world some players may have a different view. One dimension that may complicate the need for less central bank intervention and diminish their independence is the quest by the large poles for financial dominance over each other. Central banks could become a vital instrument in such pursuits. Echoing Carl von Clausewitz’s view that “war is the continuation of politics by other means,” in a multipolar world central banks could become the monetary battleships of the large regions, with currency wars shadowing trade wars.16 Indeed, the epidemic of countries sanctioning each other in 2018 (Saudi Arabia sanctioning Canada and the United States sanctioning Turkey, Russia, and China, for instance) suggests that finance is a key part of the geopolitical arsenal.
Against this backdrop, governments may be tempted to allow central banks to take on a more strategic or geostrategic role than the “mere” economic function they play today. For the United States and Europe, this compulsion may well grow. Financial globalization is the only area of globalization where the United States is truly dominant, and using financial architecture to entrench its dominance is a compelling strategy. In one scenario, the government might urge the Fed and the US Treasury to do several things.
The first is to deepen market and institutional ties to countries that use the dollar or that fall within the US orbit: most of Latin America, Saudi Arabia, and the Gulf states. As it stands, these countries are already, in economist speak, “price-takers” of the moves in Fed policy and US financial assets. That is, these countries must accept US interest-rate and dollar moves as given and try to maneuver around them and, if they are clever, ensure that their economies are not vulnerable to sharp moves in the dollar. In time the Treasury and the Fed may look to help dollar-relevant countries deepen their markets, build policy frameworks that make them less vulnerable to moves in US policy, and potentially bring large banks in regions such as Latin America more closely into the Fed system. Second, especially if China has a debt-induced recession in the next few years, the US financial authorities may look for ways to limit the broadening of China’s financial markets so that its cost of funding is higher than it might be in a very open global financial system.
Internationally, the ECB is in second place to the Federal Reserve but is still a colossus compared to other central banks. In Europe, it has the unique distinction of being a successful, powerful European institution. The first step for the ECB is to drive banking and financial market uniformity across Europe. The easiest way to do this is to support the creation of several regional champion banks through a wave of consolidation and bank closures. The harmonization of regulation in areas like the recognition of bad debts and nonperforming loans would be a helpful start here.
In the case of the Fed and the ECB, tensions between poles may mean that they are drawn into situations of geopolitical tension. In the same way that cyberwars are now being fought silently and invisibly, the two large central banks may be called upon as sources of nondeadly but nonetheless consequential power. For instance, might a cyber- or even military incursion by Russia on Estonia be met with the selling of, say, the ruble, or the selling of Russian government and company bonds by the ECB? This is a somewhat extreme suggestion but not altogether out of the realm of possibility.
Climate Urgency
Many twentieth-century institutions (e.g., the United Nations, the World Bank) were set up to solve at least two problems: the coordination of policy and views across countries and the development of technical expertise. One field that needs more rather than less coordination a
nd expertise is climate policy. Climate change and the increasingly obvious damage being done to the planet is something I would have liked to feature more in this book. When people ask me to state what the biggest risk to the world is (they usually use the phrase “black swan”), I usually reply that it is climate change. The slow buildup of evidence for global warming, the risks it poses to the world, the denial, and the lack of real policy change remind me all too much of the lead-up to the global financial crisis. Consistent with this template, I do not expect drastic action by the larger industrialized countries to address damage to the earth’s atmosphere until the human cost of climate change becomes stark. However, I have not devoted more space to climate change because I feel that I lack the specialized knowledge to speak with any authority on this subject, at least from the point of view of the science of climate change.
Yet tackling climate change is more about politics, the way policy makers make decisions, and collective action than it is about pure science. This is somewhat depressing in the light of the disintegration of the international order and the divisive trade dispute that marked 2018. The economic toll of the trade dispute is relatively small in the grand scheme of things, but the cost of climate change can be enormous. It can potentially, for the first time in centuries, render whole cities uninhabitable (if sea levels rise), destroy vast tracts of agricultural land (as is already happening across Africa and the United States), alter the wealth of nations permanently, and exacerbate diseases (such as cancer and malnutrition) within countries.
The approach to climate change lies in the same process as that behind world trade negotiations and, potentially, as that described in chapter 7 for international debt restructuring. Individual nations will have to recognize the toll that climate change will take on their economies and societies and militate for broader political pressure. Sadly, in the case of climate change, it seems that people only become attuned to it once they witness its effects and fear of its implications becomes intense. In the United States, despite rigorous research by a dozen federal bodies to the effect that this period is now the warmest in the history of modern civilization owing principally to greenhouse gases, many Americans are skeptical that climate change is man-made.17 For instance, only 30 percent of Republican voters believe that climate change is driven by human activity, yet academic research has shown that among Republican voters, there is a significant degree of difference of opinion on climate change.18 For example, Republicans living in coastal areas—in California and Florida, for instance, two states where climate change is increasingly evident—have a much higher than average (compared to other Republicans) sense that climate change is ongoing. Having noted this, it still doesn’t make sense to wait until the earth is entirely parched to convince people of the need for action on climate change. From a political and institutional point of view, there are a number of options.
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