The Coming Crisis: why global governance doesn’t really work

Tony Payne - Director of SPERI

The World Bank warned in January this year that a ‘perfect storm’ could be building in the global political economy. It was worried by the potential combination of a simultaneous slowing of economic activity across the BRICs and what it euphemistically termed ‘financial market stress’. The International Monetary Fund (IMF) followed the same line. In a speech delivered in Germany in April, its Managing Director, Christine Lagarde, spoke of her fear that the global economy had lost its growth momentum and was stuck in the ‘new mediocre’. ‘We are on alert’, she said, but ‘not alarm’.

The most recent expression of anxiety came just a couple of weeks ago from the Organisation for Economic Cooperation and Development (OECD), the Paris-based body which is becoming ever more important in shaping and delivering global economic governance. Its chief economist, Catherine Mann, introduced the publication of the OECD’s latest economic outlook by identifying the emergence of ‘a self-fulfilling low-growth trap’ over the past eight years since the crisis broke. The longer this remained the case, she observed, the more difficult it would be to break the ‘negative feedback loops’. The resulting risk was that a ‘negative shock could tip the world back into another deep downturn’.

So they’ve noticed – at least the technocrats of global governance have. The more pertinent question, however, is whether they have actually been able to do anything to head off a second crisis. This takes us to politics and politicians – in this case, the leaders of the countries that belong to the Group of 20(G20), the new overarching ‘steering committee’ of global economic governance set up in a hurry, almost a panic, in autumn 2008 to preside over and direct the global political economy.

The G20 summit for 2016 will not take place until early September when leaders will gather in Hangzhou in China. But two meetings of the G20 Finance Ministers and Central Bank Governors have met under the Chinese Presidency – in Shanghai in February and in Washington DC in April – and have produced two (almost identikit) communiqués of quite astonishing complacency. Sure, the ministers and governors acknowledged the uneven character of the modest growth that is currently being achieved, but, for the rest: well, they were committed to using all available policy tools (monetary, fiscal and structural); were indeed pressing on with structural reforms; had not taken their eye off Basel 111 and financial sector reform; and were still trying to get countries signed up to their Base Erosion and Profit Sharing project designed to foster a fairer international tax system.

The overall message was clear: things aren’t perfect in the global economy, but we know what we are doing, and we are in fact doing a lot to manage the system. There was no hint of the ‘coming crisis’ as explored in these SPERI blogs and scarcely any reference to what, tellingly, Martin Craig has called the ‘other crisis’. On this front the February meeting did no more than ‘welcome’ the Paris Agreement on Climate Change and the April meeting merely asked the G20 Green Finance Study Group to come up with some specific options.

So, what’s going on in global governance? Why can’t it do better? I identify at least three important problems that undermine the capacity of the current regime and create a significant ‘global governance deficit’ in the space in which we presently need imagination, substance and leadership.

The first problem has long been identified within the best academic accounts of the major global economic institutions (see the many invaluable publications of Jeffrey Chwieroth of the LSE). Although there has always been more internal disagreement within the major global economic institutions than some on the left have generally wanted to admit, the fact remains that the vast majority of the staff of the IMF and World Bank especially have been trained in the US economics mainstream. Even when they dissent, as in the recent suggestion by members of the IMF research department that neoliberalism might perhaps have been ‘oversold’, they tend not to stray very far from that mainstream.

What Lagarde, Mann and most global governance technocrats want is for the global economy, broadly as currently constituted, to work better than it is at the moment, to grow again and perhaps be put to the service of rather more people than was the case during the wild, expansionary years preceding the crisis. That is why they have been speaking out in the way they have been lately. But they don’t want or see the need for a different type of global political economy.

The second problem is that the structure of global governance assembled over the years since 1944 (amidst what Stephen Buzdugan and I describe as a ‘long battle’ over the nature and shape of global governance between contending groups of states) is actually very weak. The IMF and the World Bank have very little direct power over countries unless and until a country runs into economic problems and need outside financial help. At this point, ‘conditionalities’ kick in and the powers of the two agencies are booted up.

Most of the time, all the institutions can do is seek to adjust the climate of opinion within which key global political leaders act (by, for example, issuing warnings). It is, in the end, their weakness, rather than their strength, which is their most striking feature.

By contrast, the G20 states do have the power to act. Their economies make up the bulk of the global economy. They can deploy a fuller range of economic powers, stop squeezing life out of their economies and begin to address the interface between renewed economic growth and the climate. It’s just that they don’t! Admittedly, building any global governance institution is a hard task and, as I have argued previously, the G20 as an organisation is deficient in design and has consequently disappointed in performance over the last few summits.

But that’s not really the core explanation of the failure of world leaders to grapple imaginatively with the prospect of a further economic and financial crisis that then becomes entwined with an ecological crisis. The key point is that the G20 is still dominated politically by a wedge of G7 neoliberal states. Other countries with different political positions and traditions remain – for the moment at least – unwilling to tangle with them too openly within the structures of global governance. As a result, the G20 has stalled as a political agency capable of directing the global economic institutions.

Finally, there is a third problem and maybe it’s the biggest problem of all. It’s also never talked about. The truth is that the leaders of the neoliberal states don’t want effective global governance. Why not? Because effective global governance would be public governance, would guide and regulate, would insist on controlling the wilder excesses of finance and capitalism generally, would seek to steer the global economy. It would, in a phrase, be social democratic in character. It could not be otherwise, given what needs to be done. However, the leaders of the countries that still dominate global governance don’t want this type of global governance. They acknowledge the need for there to exist understood ‘rules of the game’ in finance, investment and trade, but they much prefer the privatised, corporate, style of global governance that, for example, the proposed Transatlantic Trade and Investment Partnership offers.

In a nutshell, global governance can only be what the most powerful countries in the world allow it to be – and this may not be enough to avert a further crisis.

The Coming Crisis SPERI blog series: In next week’s blog – published on June 22nd – Genevieve LeBaron on the crisis of indecent work.