The
retreat of the advanced economies from the global economy – and, in the
case of the UK, from regional trading arrangements – has received a lot
of attention lately. At a time when the global economy’s underlying
structures are under strain, this could have far-reaching consequences.
Whether by choice or necessity, the vast majority of the world’s
economies are part of a multilateral system that gives their
counterparts in the advanced world – especially the US and Europe – enormous privileges. Three stand out.
First, because they issue the world’s main reserve currencies, the
advanced economies get to exchange bits of paper that they printed for
goods and services produced by others. Second, for most global
investors, these economies’ bonds are a quasi-automatic component of
portfolio allocations, so their governments’ budget deficits are
financed in part by other countries’ savings.
The advanced economies’ final key advantage is voting power and
representation. They command either veto power or a blocking minority in
the Bretton Woods institutions (the International Monetary Fund and the
World Bank), which gives them a disproportionate influence on the rules
and practices that govern the international economic and monetary
system. And, given their historical dominance of these organisations,
their nationals are de facto assured the top positions.
These privileges don’t come for free – at least they shouldn’t. In
exchange, the advanced economies are supposed to fulfil certain
responsibilities that help ensure the system’s functioning and
stability. But recent developments have cast doubts on whether the
advanced economies are able to hold up their end of this bargain.
Perhaps the most obvious example is the 2008 global financial crisis.
The result of excessive risk-taking and lax regulation in the advanced
economies, the financial system’s near-meltdown disrupted global trade,
threw millions into unemployment, and almost tipped the world into a
multi-year depression.
But there have been other lapses, too. For example, political
obstacles to comprehensive economic policymaking in many advanced
economies have undermined the implementation of structural reforms and
responsive fiscal policies in recent years, holding back business
investment, undermining productivity growth, worsening inequality, and
threatening future potential growth.
Such economic lapses have contributed to the emergence of
anti-establishment political movements that are looking to change – or
are already changing – long-established cross-border trade relations,
including those within the European Union and the North American Free Trade Agreement (Nafta).
Meanwhile, a prolonged and excessive reliance on monetary policy,
including direct central-bank involvement in market activities, has
distorted asset prices and contributed to resource misallocation. And
the advanced economies – particularly Europe – have shown little
appetite for reforming outdated elements of governance and
representation at the international financial institutions, despite
major changes in the global economy.
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