The global multilateral economic system has been tested twice in this century. The first time was with the global economic crisis of 2008; the second – with the COVID-19 pandemic.
And the results are not good. As more than six million lives were lost across the world, the deteriorating climate continued to take a greater toll on lives and livelihoods, and 100 million people were pushed back into poverty by the crisis. , a new billionaire has emerged every day from the pandemic.
The system of global economic governance appears increasingly disoriented and paralyzed by the challenges of the 21st century.
Even if, as we all hope, the global pandemic subsides, there is an emerging threat to global economic health from a premature return to austerity in advanced countries, ostensibly to address unforeseen economic distortions induced by the confinements.
In the global North, this will not only put an abrupt end to discussions on national “building back better” – which US President Joe Biden has put at the top of his agenda – but will also trigger a new wave of shocks. economies in countries around the world. developing world, many of which have been hit harder by this crisis than by the previous global financial crisis.
As major shareholders in the global economic regime remain unsympathetic to required changes in rules, norms and policies, and trust in government at all levels continues to deteriorate, today’s global economy Today eerily resembles the early 1930s, when, in the face of unresolved debt problems, growing inequality and political polarization, siren calls from central bankers and economic thinkers helped spark a global depression that led to a world war.
It was only after realizing the dramatic costs of depression and war that world leaders came together at the 1944 United Nations Monetary and Financial Conference in Bretton Woods in the United States to build a set of multilateral institutions responsible for ensuring economic stability, growing prosperity and lasting peace around the world. world.
The system had critical flaws that should not be ignored, but it succeeded in achieving its goals until mounting distributive struggles in the 1970s encouraged American policymakers to save the dollar-based international system through a combination of flexible exchange rate policies, deregulated finance and lower taxes that ultimately led to the unstable and unequal world we live in today.
In the wake of this change, the institutional facade of the international trading and financial system established at Bretton Woods remained in place, but the internal plumbing was torn out.
In the absence of fixed exchange rates and controls on mobile capital, the role of the International Monetary Fund in advancing “monetary assistance” in support of a stable international financial system focused on “mutual uplift standards of living” has become a catalyst for “an open and liberal system of capital movements”.
Price movements and the pursuit of profit were thus entirely responsible for providing the common good, internally and externally.
While much was promised in this makeover, inequality, indebtedness and insufficient productive investment have become the new norm in a hyper-globalized economic landscape.
Worse still, the rules of this game are hampering public efforts to address the common challenges that now threaten the peace and stability of our highly interconnected world.
Urgent need for fundamental reform
The continuing crises of this century prove that the system is in urgent need of fundamental reform. There is a choice: learn from history or let history repeat itself.
Tinkering with existing rules cannot provide a way out of the current interregnum. It is time for another Bretton Woods moment, to revive the international economic architecture and prepare it for the challenges of the 21st century.
Steps in this direction have already been taken. The 2030 Agenda forged by the United Nations offers a “transformative plan of action for people, planet and prosperity” for the 21st century analogous to that drawn up at Bretton Woods in 1944. But the G20 ministers who met last week in Indonesia missed an opportunity to advance a deeper reform agenda.
A renewed multilateral order must prioritize the role of global public goods that are necessary to ensure shared prosperity and a healthy planet, promote cooperation and collective action to bring fairness and balance to market outcomes, coordinate policy initiatives to mitigate common risks and ensure that no one country’s pursuit of these broader goals impinges on the ability of other countries to pursue them.
The G20 should push for a reformed IMF, tasked with reducing speculative financial flows and increasing capital in support of productive low-carbon investments, including through the control and elimination of misguided subsidies and the elimination of illicit financial flows.
Austerity is not a cure
Moreover, when crises occur, the remedy should be expansionary fiscal spending and direct financial transfers to households rather than austerity which further squeezes incomes and causes social unrest.
But for many emerging economies, external debt service pressures prevent them from mobilizing resources for productive investment; and in the event of a disaster, the United Nations Sustainable Development Goals (SDGs) and the commitments set out in the Paris Climate Agreement could evaporate. A multilateral sovereign debt restructuring mechanism is integral to achieving the SDGs.
Development banks around the world, at the national and global levels, should help countries mobilize resources for low-carbon and high-productivity projects by increasing their resources in sustainable infrastructure, promoting green industrial strategies and supporting a just transition for workers and communities attached to carbon-intensive and obsolete economic activity.
The injection of capital needed for these banks could come from new issues of special drawing rights, the international reserve asset created by the IMF, and from recovered illicit financial flows, including a crackdown on tax evasion by transnational corporations and wealthy individuals.
Trade ministers should strive to introduce complementary reforms within the World Trade Organization and myriad treaties to accelerate trade and investment in low-carbon economic activities, eliminate incentives for trade and investment in sectors that need to be phased out and encourage green industry policies of full employment in decent and well-paid work.
And they must do so knowing full well that developing countries face specific challenges that will require differentiated support and policy space. We have a decade to drastically reduce carbon emissions and achieve the broader set of complementary development goals.
The growing number of climate-related disasters, growing social unrest and the resurgence of right-wing populism are harbingers of what will become a new normal if we don’t. Now is the time to act vigorously and positively. Hurry up.
Mr. Gallagher is Director of the Global Development Policy Center at Boston University and Mr. Kozul-Wright is Director of Globalization and Development Strategies at UNCTAD. This comment was first published by Aljazeera.