Service on WTO and Trade Issues (Apr19/26)
A new multilateralism for a global green new deal
Geneva, 26 Apr (Kanaga Raja) - A renewed multilateralism is required to provide the global public goods needed to deliver shared prosperity and a healthy planet, to cooperate and coordinate policy initiatives demanding collective action, mitigate common risks, and ensure that no nation's pursuit of these broader goals infringes on the ability of other nations to pursue them.
This is the main conclusion highlighted in a recent report, "A New Multilateralism for Shared Prosperity: Geneva Principles for a Global Green New Deal," by the Global Development Policy Center at Boston University and the UN Conference on Trade and Development (UNCTAD).
The report was authored by Kevin P. Gallagher, professor of global development policy and Director of the Global Development Policy Center at Boston University, and Richard Kozul-Wright, Director of the UNCTAD Division on Globalisation and Development Strategies.
In the report, the authors outline a set of "Geneva Principles for a Global Green New Deal." These, they say, advances an urgent research and policy agenda for a New Multilateralism that rebuilds the rules of the global economy toward goals of coordinated stability, shared prosperity and environmental sustainability, while deliberately respecting the space for national policy sovereignty (see below).
"We once had a version of multilateralism that permitted nations to regulate international markets and to pursue strategies for equitable prosperity and development. This system reflected the fact that leaders who believed in managed capitalism and full employment were put in charge after WWII," said Prof. Gallagher and Mr Kozul-Wright.
With their experience of the Great Depression and defeating fascism, they aimed for a value-driven and rules- based global economy.
"The system was far from perfect, yet its core principles did provide a rough template for a more balanced form of prosperity in a globally interdependent world," said the authors.
That system began to break down in the late 1970s, when giant global banks, corporations, and their allies in government regained the reins of power that they had temporarily lost in the Great Depression and the War.
"Once power was recaptured, these actors rewrote the rules of the global system. The system later became an instrument for the diffusion of a neo-liberal order that has triggered crises of financial instability, inequality, and climate change," the two leading economists said.
CRITIQUE OF THE CURRENT MULTILATERAL SYSTEM
According to Prof. Gallagher and Mr Kozul-Wright, multilateralism once promised a value-driven and rules- based international economic order, tasked with promoting coordinated actions to deliver shared prosperity and mitigate common risks.
The initial goals of the Bretton Woods institutions created after World War II were to promote full employment, regulate capital and prevent the imported deflation and austerity. The system was intended to prevent beggar-thy- neighbour policies that could upset the stability of the global economy.
It provided institutional and ideological support for governments to raise living standards of their populations, leaving policy space for sovereign states, at all levels of development, to pursue their particular national priorities.
"In practice, multilateralism in the three decades after Bretton Woods never lived up to this ideal," said the authors.
Managed capitalism co-existed with a persistent and widening technological divide between North and South, wasteful military spending under a tense East-West divide with proxy wars crippling economic prospects in many developing regions, colonialism and lingering racial prejudice, unequal trade relations that inhibited productive diversification in many countries, and carbon-heavy growth that was heedless of the environmental cost.
Yet its core principles did provide a rough template for a more balanced form of economic development in an interdependent world.
The goal, as stated by Henry Morgenthau, the US Treasury Secretary at the time of Bretton Woods in 1944, was a "New Deal in international economics" based on the fundamental principle that "prosperity, like peace, is indivisible."
The pursuit of multilateral principles was possible because of a particular political alignment. At the geopolitical level, there were contending systems in East and West which, each sought to demonstrate superior results for citizens. In the West, most governments of the era recognized and remembered that the earlier laissez-faire policies privileging capital above all else had led to instability, inequity, depression, mass unemployment, and, ultimately violent conflict.
A new generation of political leaders from the South endeavoured to break the bondages of colonialism and create new economic opportunities for their rapidly growing populations.
They were also willing to challenge the rules of the multilateral game when they stymied those efforts. But, following the dislocations of the 1970s, private capital and financial elites reclaimed political power, and set about using the multilateral system to re-enthrone and universalize laissez-faire.
These elites, in both national governments and in the financial and corporate sectors, have pursued the expansion of global markets and cross-border financial flows as ends in themselves.
Under the umbrella of the World Trade Organization (WTO), with the active engagement of the IMF and World Bank, and through a plethora of trade and investment treaties, they have put in place a set of enabling norms and rules that allows footloose finance and firms to move freely within and across borders and into ever expanding spaces for profit-making through privatization of previously (and properly) public functions.
Concomitantly, these norms and rules restrict national policies that might limit the opportunities for capital to generate larger rents. They outlaw many bona fide regulatory actions that governments could take to steer trade and investment toward broader goals and to mitigate divergence between private returns and societal costs.
What is more, these norms and rules are actively enforced by a combination of market disciplines, privatized regulatory systems, and "investor-state dispute resolution systems" (ISDS) where the interests of foreign investors carry undue weight.
"Today we live in a more interconnected world, where trade and foreign direct investment have grown by orders of magnitude," the authors argued.
Most striking, however, is the "hyper" growth of global finance and, behind this, financial actors, institutions, markets and motives. But while financialization has reigned supreme over the global economy, the big promise that this would generate a dynamic investment climate has not materialized.
There has been a surge in financialization over the past three decades but a reduction in real investment in productive capital formation, they said, adding that economic growth was both stronger and more stable in the era of multilateral managed capitalism.
Moreover, as footloose private capital has moved production and investment around the globe, the bargaining power of capital has increased greatly compared to that of labour.
This has allowed corporations to repress wages and working conditions in both developed and developing countries, except in those few cases where governments have actively intervened on behalf of workers.
Extremes of inequality both within and between many countries have hit grotesque heights. Investment in public goods, at the global as well as the national level, has stagnated. Growth has become dependent on punishing levels of debt and a pace of resource extraction and energy consumption that is threatening the survival of the planet itself.
These policies produced the global financial crisis, a moment of deep distress that should have discredited hyperglobalization, just as the Crash of 1929 and the ensuing Depression disgraced the sponsors of that era's laissez-faire.
"But such was the political power of global elites that no fundamental reform ensued. Under the auspices of the WTO, the influence of financial markets and the cajoling by major multinational corporations, pressure has increased - demanding even more intensive uses of global rules to privilege banks and corporate interests, in the financial, digital, pharmaceutical industries, and beyond," said Prof. Gallagher and Mr Kozul-Wright.
While policy-makers readily ignored neo-liberal strictures against public debt and spending by pumping trillions of dollars into their financial systems, they otherwise left its operations largely intact. After years of proclaiming the impotence of public policy, the hypocrisy of this response has added to a growing popular frustration and sense of distrust of political and technocratic elite.
"This comes at a moment when economic, social, political and environmental breakdowns demand urgent, ambitious and coordinated political action across borders. Such action requires new global norms and rules to restore a place for diverse policies that allow national autonomy while converging toward the goals of economic stability, widely shared prosperity, development, and de-carbonization."
Achieving such a new approach will require confronting and contesting the furies of hyperglobalization: the beneficiaries in financialized sectors, monopolists, footloose firms and their apologists in the academic and policy realms, said the authors.
The authors argued that the current state of global anxiety has been a long time in the making. As the system began to erode, nations in payments difficulties and debt distress were obliged to prioritize the demands of private creditors, open up their capital accounts, and pursue austerity and other pro-cyclical policies as a condition of IMF support.
Unleashing private entrepreneurship, embracing the discipline of international competition, allowing markets and businesses to regulate themselves were deemed the only way to regain stability, revive growth and guarantee widely shared prosperity. The gross flaws of this model were quickly exposed in Latin America's lost decade of the 1980s and the devastating debt overhang, lasting well into the 1990s, in much of sub-Saharan Africa.
In East Asia, following the collapse of the Thai baht in 1997, speculative collapses spread to much of the region. In each case, austerity was the prescribed policy response, "there is no alternative" the accompanying political mantra.
Despite significant improvements in research and rhetoric, the IMF promoted virtually the identical austerity formula for adjustment in the case of Greece after 2010, producing similarly catastrophic results.
Over the course of these four decades, financial markets have acquired unprecedented global reach. As obstacles to the free movement of capital have been dismantled, its economic power has been strengthened through new rules (on financial services provision, investment, and intellectual property rights) in trade and investment treaties.
In reality, unrestrained finance has aimed less at boosting investment, productivity and jobs, and more at extracting rents through a whole new range of pyramid schemes, toxic products and the buying and selling of existing assets for quick returns.
Financial globalization has been closely associated with "surges" of capital flows when times are good, and sharp reversals or "sudden stops" during difficult times, resulting in financial crises. These surges and slumps have translated to highly uneven patterns of development.
The economic glue keeping all this together has been the creation of and access to debt, both public and private. The pace of credit creation over the last three decades has been truly astounding with both developed and developing countries going with the flow.
While a handful of powerful actors have assumed ever greater control of markets and supply chains, they have been far less inclined to use the resulting profits to create decent jobs, deepen the skill base, and invest in the local communities where they reside. And the bigger these players have become, the more adept they have become at hiding how and where they make their money.
According to the authors, digital technologies, "which hold out a promise of ending the drudgery of work and enhancing our creativity, are, in practice, reinforcing the drive to monopolization and corporate subterfuge, adding further to polarization pressures."
As robots threaten job security across a widening swath of sectors, as fintech expands the predatory reach of speculative finance, and as platform monopolies gain ever tighter control of our data, "winner takes most" has become the distributional ethos of the "superstar" firms dominating the hyperglobalized world order - looking very much like a crocodile with corporate profits devouring the labour share of income, they argued.
Beginning in the mid-1980s, with the launch of the Uruguay Round, "trade-related" negotiations pretended that normal and defensible forms of national regulation were violations of private property rights and liberal trade norms. The new provisions since that round have extended the neo-liberal agenda and locked it in with hard rules.
Established instruments of national development policy, including subsidies, government investment and procurement, and diverse forms of national regulation such as the regulation of private capital flows and environmental safeguards, were redefined as violations of "free trade" and restricted or banned outright.
The current state of uncertainty and insecurity is the result of inherent financial instability, rising inequality, and climate breakdown.
Rising inequality and heightened instability are hard-wired into the rules of hyperglobalization, in both good and bad times. The global debt splurge has transformed the business cycle around recurrent (and often intense) episodes of financial boom and bust, best described by economist Hyman Minsky's stages of fragility.
Even during times of relative stability when growth has picked up, the middle class has felt increasingly squeezed in advanced economies; while poverty remains a blight on the lives of most families in the developing world despite the remarkable achievements of China in reducing levels of extreme poverty.
Households and governments have taken on more and more debt to meet their spending needs, providing fertile grounds for a rampant financial services sector to extend predatory lending practices and further entrench the debt-driven growth model.
Informality and insecurity have become the lot of working people everywhere, even as select skilled workers and professionals, in both the North and South, have achieved more privileged positions on the technological frontier of hyperglobalization.
Growth spurts in the developing world have produced a welcome assault on extreme poverty since the start of the millennium, while the Global South has gained a bigger manufacturing footprint through participation in global supply chains.
But, in truth, this story is mostly confined to China and parts of East Asia. And even in China, incremental increases in the designated poverty threshold as well as sharply rising inequality highlight the ongoing policy challenges even for the most successful countries.
Moreover, given the ability of multinational corporations to shift production, the spread of industry is far less stable or reliable than it seems. Too little industry is locally owned and controlled. The offshoring of activities through the spread of global value chains has contributed to deindustrialization and the hollowing out of communities in many parts of the developed world, with concerns growing about the "vanishing middle class.
Meanwhile, in many developing countries the adverse consequences of "premature" de-industrialization have been only partially hidden by commodity price hikes and easier access to international debt markets.
According to Prof. Gallagher and Mr Kozul-Wright, the problem is that while trade and investment flows have mushroomed under hyperglobalization, the package of accompanying policies, including special processing zones and massive subsidies to attract multinationals, offered by developing countries to encourage processing trade and by local communities in advanced countries desperate to attract jobs, has brought limited benefits.
China's exceptional status, in this regard, has rested on targeted industrial and other policies as well as tailored financing mechanisms, aimed at raising domestic value added in manufacturing exports. These are now being presented as a threat by developed countries to their own business interests with efforts underway to curtail their use.
The authors also pointed out that with global temperatures set to exceed the desired 1.5 degree increase by 2030, keeping that increase well below 2 degrees is now the urgent challenge and a core organizing principle for the world economy.
The threat of rising temperatures from high levels of atmospheric carbon levels is in large part due to emissions from the richest 10 percent of people in the world.
But the environmental breakdown is multi-dimensional; species loss, land degradation, extreme weather events, acidification of oceans, etc., are concurrent and compounding.
"That the situation will worsen is not in doubt; the only question is by how much, and whether we will take the threat seriously enough," they said.
A NEW MULTILATERALISM AND THE GENEVA PRINCIPLES
According to Prof. Gallagher and Mr Kozul-Wright, the rules and practices of the multilateral trade, investment and monetary regime are in need of urgent reform.
These rules are currently skewed in favour of global financial and corporate interests, and powerful countries, leaving national governments, local communities, households, and future generations to bear the costs of economic insecurity, rising inequality, financial instability, and climate change.
The rules of the global trade and investment regime have been instrumental in delivering this unbalanced outcome.
These limitations are now widely recognized and a number of efforts are underway, particularly in the developing world, to establish policies for reform. The most effective efforts will be those that recognize the systemic nature of the challenge, rather than piecemeal policy tinkering.
"A renewed multilateralism is required to provide the global public goods needed to deliver shared prosperity and a healthy planet, to cooperate and coordinate on policy initiatives that demand collective action, to mitigate common risks, and to ensure that no nation's pursuit of these broader goals infringes on the ability of other nations to pursue them."
The original New Deal, launched in the United States in the 1930s and replicated in distinct ways elsewhere in the industrialized world, particularly after the end of the Second World War, established a new social contract and accompanying development path that focused on four broad components: recovery from Depression, extensive public investment, regulation of finance, and redistribution of income.
While these broad features were consistent with specific policy goals tailored to particular economic and political circumstances, they made job creation, the expansion of productive investment and faster productivity growth common features of successful post-war economies.
"In building a global new deal today, we can learn from those core principles. As before, states require the space to tailor proactive fiscal and public policies to boost investment and raise living standards, supported by regulatory and redistributive strategies that tackle the triple challenges of large inequalities, demographic pressures and environmental problems," said the authors.
However, the original New Deal was neither directed at development of the Global South, nor at global climate change. The specific challenges of inequality and insecurity in the 21st century will require innovative and global approaches.
The "Geneva Principles for a Global Green New Deal" articulates a set of cohesive principles for the design of a reformed multilateral trade and investment regime.
According to the authors, five broad strategic goals should frame any such deal:
1. A productive global economy built around full and decent employment at livable wages, for all countries.
2. A just society that targets closing socio-economic gaps, within and across generations, nations, households, race and gender.
3. A caring community that protects vulnerable populations and promotes economic rights.
4. A participatory politics that defeats policy capture by narrow interest groups and extends the democratic principle to economic decision making.
5. A sustainable future based on the mobilization of resources and policies to decarbonize growth and recover environmental health in all its dimensions.
Specific policy programs and measures will necessarily reflect local circumstances, but there will be a series of initiatives that will likely surface across countries regardless of their level of development.
In this context, the authors called on governments everywhere to end austerity and boost demand in support of sustainable and inclusive economies; make significant public investment in clean transport and energy systems and transform food production, supported by a green industrial policy; raising wages in line with productivity; regulating private financial flows; and curtailing restrictive business and predatory financial practices.
At the global level, a new multilateralism is urgently needed to pursue these in a way that maximizes the effectiveness of national development strategies without creating negative global spillovers to partner nations.
A new multilateralism will require the following design principles:
1. Global rules should be calibrated toward the overarching goals of social and economic stability, shared prosperity, and environmental sustainability and be protected against capture by the most powerful players.
2. States share common but differentiated responsibilities in a multilateral system built to advance global public goods and protect the global commons.
3. The right of states to policy space to pursue national development strategies should be enshrined in global rules.
4. Global regulations should be designed both to strengthen a dynamic international division of labour and to prevent destructive unilateral economic actions that prevent other nations from realizing common goals.
5. Global public institutions must be accountable to their full membership, open to a diversity of viewpoints, cognizant of new voices, and have balanced dispute resolution systems.
Only through extensive reforms can the financial and trading systems support a more stable global economy, help deliver prosperity for all, and backstop the public investment drive needed to move, at the required speed, to carbon-free and inclusive growth paths.
"As things stand, current arrangements fall far short of providing countries with the resources and predictability needed to support a global green new deal," said Prof. Gallagher and Mr. Kozul-Wright.
The crisis of the multilateral trading system is also an opportunity to redirect it toward the goal of sustainable development.
Reforms to trade and investment rules are perhaps the highest priority given the laws and regulations in the trade and investment regime now stretch across the global financial, trading, investment system - as well as deep into national policy-making.
Trade and investment rule reform must ensure the maximum space to undertake financial regulations and debt workouts, innovation and industrial policy, and policies for social welfare that are in line with the demands of a global green new deal, including the effective use of subsidies to support structural transformation and the development of alternative energies and to re-engineer the production process of carbon-intensive industries.
Rolling back the numerous free trade agreements and bilateral investment treaties, which have been particularly destructive of policy space, is a priority.
New efforts for reform at the WTO are an opportunity to put these Geneva principles into forward looking action, said the two leading economists.