2013-2014 PAPER SERIES

NO. 6
WHITHER GLOBAL ECONOMIC COOPERATION?
Bartlomiej E. Nowak, Joachim Herz Stiftung Fellow
2014 Transatlantic Academy. All rights reserved.
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Whither Global Economic Cooperation?
Transatlantic Academy Paper Series
July 2014
Bartlomiej E. Nowak
1
1
Dr. Bartlomiej E. Nowak is a Joachim Herz Stiftung Fellow at the Transatlantic Academy. He is a political scientist with
a Ph.D. in economics from Warsaw School of Economics. Nowak is an assistant professor at the Vistula University in
Warsaw, where he teaches courses on global governance and international political economy. He has served as executive
director at the Center for International Relations (Warsaw, 2010-13) and has worked in the European Parliament (Brussels-
Strasbourg, 2004-09) as the head of the cabinet of Vice-President Janusz Onyszkiewicz.
Introduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
Interdependence and Cooperation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Governing Globally . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
The Legitimacy Problem of a Diffusing World Order . . . . . . . . . . . . . . . . . . . . . 9
Variable Geometries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Conclusions and Policy Recommendations . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Whither Global Economic Cooperation? 1
Introduction
1
We are witnessing
the emergence
of a new, more
fragmented and
decentralized
world economic
order, in which
global multilateral
institutions play
only a limited
role alongside
regional orders
and national
strategies.
T
he financial crisis of 2008 and beyond
proved just how interdependent the world
now is and the need for strong global
cooperation. However, in key areas of global
economic governance, such as finance, world
trade, and development aid, regionalization is
the overwhelming trend. This can lead us to No
Ones World, in the words of Charles Kupchan,
1

characterized by stronger competition between
regions and/or nations and growing global
ungovernability. The world clearly faces an adaptive
challenge in order to continue the delivery of
essential global public goods in the future.
Non-Western regions and states are increasingly
attempting to bypass the institutions of global
economic governance. They address economic
problems increasingly through new channels, where
the dominant position of the West is diffused.
2

As a result, we are witnessing the emergence of a
new, more fragmented and decentralized world
economic order, in which global multilateral
institutions such as the International Monetary
Fund (IMF), the World Bank, and the World Trade
Organization (WTO) play only a limited role
alongside regional orders and national strategies.
This poses a great challenge for the future of
international cooperation. This paper seeks to
examine the key features of a diffusing world order
and how it will influence global public policies in a
wider context.
The thesis on global multilateral gridlock has a
solid base in recent literature. Thomas Hale, David
1
C.A. Kupchan, No Ones World: The West, the Rising Rest, and
the Coming Global Turn (New York: Oxford University Press,
2012).
2
B.E. Nowak, Economic Governance for a Diffusing Global
Order, in T. Flockhart, C.A. Kupchan, C. Lin, B.E. Nowak, P.W.
Quirk, and L. Xiang, Liberal Order in a Post-Western World,
Transatlantic Academy (May 2014), pp. 13-24, http://www.
transatlanticacademy.org/publications/liberal-order-in-a-post-
western-world.
Held, and Kevin Young explain that the existing
institutions solve some problems they were initially
designed to address, but also fail to address
problems which have emerged from the very global
economic system they have enabled.
3

There is a popular tendency to announce the
end of multilateralism and the unpleasant
consequences that arise from this danger.
Influential commentators describe the future as
every nation for itself
4
or a zero-sum world.
5

Indeed, in many ways, current global cooperation
resembles the classical club model of multilateral
cooperation,
6
or as the 2013 Transatlantic Academy
collaborative report argued, may be reminiscent
of minilateralism,
7
where there are different
groups consisting of certain states but the lack
of involvement of functional outsiders is a key
political efficacy. Does that mean that the diffusing
global order will be much more anarchic?
Although this paper does not deny that
international cooperation is at a crossroads, it
also stresses that we should be careful not to
draw far-reaching conclusions. It argues that the
3
T. Hale, D. Held and K. Young, Gridlock. Why Global
Cooperation is Failing When We Need It Most (Cambridge:
Polity Press, 2013). p.10.
4
I. Bremmer, Every Nation for Itself. What Happens When No
One Leads the World (New York: Portfolio/Penguin, 2013).
5
G. Rachman, Zero-Sum World. Politics, Power and Prosperity
After the Crash (London and New York: Atlantic Books, 2011).
6
See R.O. Keohane and J.S. Nye Jr., Between Centralization and
Fragmentation: the Club Model of Multilateral Cooperation
and Problems of Democratic Legitimacy, John F. Kennedy
School of Government, Harvard University, Faculty Research
Working Papers Series (February 2001).
7
S. Benhabib, D. Cameron, A. Dolidze, G. Halmai, G.
Hellmann, K. Pishchikova, and R. Youngs, The Democratic
Disconnect. Citizenship and Accountability in the Transatlantic
Community, Transatlantic Academy (May 2013), http://www.
transatlanticacademy.org/publications/us-european-countries-
taken-task-democratic-polarization-backsliding. See also
M. Naim, Minilateralism. The Magic Number to Get Real
International Action, Foreign Policy (June 22, 2009).
Transatlantic Academy 2
More than ever,
the national
interests of states
are bound to
global politics.
Unfortunately,
successful
international
cooperation is
still an exception
rather than a rule.
popular juxtaposition of regionalism vs. global
multilateralism is not a useful framework to
look at world affairs. The need for international
cooperation is after all aimed at the delivery of
public goods. These can be for example securing
trade routes or global supply-chains, providing
a stable monetary regime, providing collective
security, containing the spread of infectious
diseases, or mitigating the negative consequences of
climate change.
Global public goods (GPGs) are those goods
considered important to the entire international
community but that cannot be delivered by
unilateral action. Examples include global public
health and climate change mitigation. These goods
are best addressed through joint multilateral
undertakings.
8
The benefits of GPGs are non-
excludable and non-rivalrous, meaning every
nation should have access to them and be capable
of benefiting from them. The theory of global
public goods has its roots in rational methods of
welfare economics where the supply should follow
greater demand. From this perspective, the rational
logic of globalization implies that it is in the interest
of all countries that global problems are solved.
The key obstacle to harnessing this logic is state
sovereignty. Taking into account the absence of
world government, GPGs can only be delivered
voluntarily. There is no authority that could
effectively enforce a sufficient supply of GPGs.
Therefore modern scholars of GPGs tend to tailor
the needed solutions on a case-by-case basis to
every single policy area. This assumption has many
advantages as cooperation focused on detailed areas
is more likely to work.
8
International Task Force on Global Public Goods, Meeting
Global Challenges: International Cooperation in the National
Interest. Towards an Action Plan for Increasing the Provision
and Impact of Global Public Goods, Working Paper prepared
by the Secretariat (November 2, 2004).
But today, the interrelatedness of problems makes
them also more and more difficult to manage via
separate approaches. Furthermore, the provision
of GPGs is at risk due to evident stalemate in all
institutions of global economic governance.
This paper argues for a more comprehensive
approach that avoids the pitfalls of both the thesis
of multilateral gridlock and a singular treatment
of every area of international politics. Sovereignty
should not be treated as the only major explanatory
factor of the existing gap between the supply and
demand for GPGs. The problem is much larger and
needs to take into account a vast array of factors
explaining the state of the world order today. The
below arguments give new incentives for a more
comprehensive GPGs treatment that looks at the
supply problem from a top-down global governance
perspective. But it should be done in a way that
can combine the bottom-up economic approach
to GPGs and the top-down approach, which could
trigger the incentives for greater GPGs supply
in the future. The cross-cutting nature of todays
problems compels us to rethink the sovereignty
thesis, bound in the realities of previous centuries,
as being too narrow to explain the gap between
GPGs demand and supply.
There are several reasons for this. First, the nature
of the current interdependence is such that there
are many national problems that can only be
solved globally, but the keys to solving global
problems are on the domestic level. Second, states
have an increasing need for global solutions. If
global problems are not solved, they will directly
affect national economies and in some cases even
threaten countries existence (like the problem of
climate change for islands and low-lying coastal
countries). More than ever, the national interests of
states are bound to global politics. Unfortunately,
successful international cooperation is still an
exception rather than a rule. Third, the popular
academic framework that juxtaposes regionalism
Whither Global Economic Cooperation? 3
with global multilateralism is becoming useless and
misleading. We should rather think how to manage
the network of variable geometries. The debate
needs reframing. Fourth, one of the key causes for
the regionalization of economic governance is the
diminished legitimacy of the global organizations
in the view of emerging countries. If this is not
fixed, the future of global cooperation looks rather
bleak.
Transatlantic Academy 4
The war on
pollution that
was declared by
Chinese Prime
Minister Li
Keqiang is another
example how
global solutions
are made in
practice on the
domestic level.
Interdependence and Cooperation
2
T
he 2010 collaborative report of the U.S.
National Intelligence Council (NIC) and the
EU Institute for Security Studies (ISS), Global
Governance 2025: At a Critical Juncture, argued
that there is a growing demand for effective global
governance, which arises from the increasingly
deeper interdependence and interconnectedness
of problems and the ever-deepening links between
domestic and international politics.
9
It is a popular
thesis, which implies that tackling global challenges
should be in the profound national interest of all
countries, while free-riding should be less of an
option.
One of the key characteristics of 21
st
-
globalization is in the very nature of
interdependence: the straightforward link between
national and global actions. There are many
national problems that can only be solved globally,
but the keys to solving global problems are on the
domestic level. In a recent example, the post-Bali
WTO agenda assumes a very domestically driven
policy process where the external actors have
limited influence (i.e. the reduction of supply-
chain barriers, cutting red tape, or the regulation
of services). The war on pollution that was
declared by Chinese Prime Minister Li Keqiang is
another example how global solutions are made in
practice on the domestic level. The Chinese prime
minister said that environmental pollution has
become a major problem, which is natures red-
light warning against the model of inefficient and
blind development
10
and it should be fought with
the same determination as the war on poverty. The
Chinese government long resisted international
cooperation on climate change, but today Chinas
economy is directly affected by the problem.
9
National Intelligence Council/European Union Institute for
Security Studies, Global Governance 2025: At a Critical Juncture,
Washington, DC/Paris (September 2010), p. 4.
10
Financial Times, China declares war on pollution (March 5,
2014)
This kind of international provision, which
is strongly dependent on domestic actions,
asserts that there is a political determination on
the national level and that effective domestic
institutions exist and are capable of implementing
these reforms, despite potential veto points
embedded in the domestic political process. If
states do not deliver national solutions and reforms,
the global agenda will fail. This condition changes
the logic of solving global problems and requires
much more innovative thinking about global
governance.
In this context, the global agenda clearly needs an
update. There are many more problems that can
only be solved globally, but they are not tackled by
the organizations that govern the world system. For
example, without global cooperation, the problem
of currency manipulation cannot be controlled.
Regionalism cannot give a sufficient response.
Countries that are victims of beggar-thy-neighbor
policies should be deeply interested in global
regulations. One year ago, the finance ministers
of the G20 agreed not to use their exchange rate
to boost their countries competitiveness. Today,
instead of strengthened cooperation, we have a
currency Cold War at best.
11
The G20 evidently
does not play its role. Here is the space for the G20,
the IMF, and the WTO to act. They must rethink
their objectives and functions for the 21
st
century.
It is also ironic that the long-known problem
of world macroeconomic imbalances, which
John Maynard Keynes warned about decades
ago, remains without a workable solution today
and so greatly contributed to the crisis of 2008
onwards. In 2006-07, before the crisis occurred,
the IMF tried to address this problem through
mutually advantageous adjustments in policies. It
gathered the most important players (the United
11
Financial Times, Currency Cold War is starting to heat up
(May 16, 2014).
century
Whither Global Economic Cooperation? 5
States, eurozone countries, China, and Japan), for
multilateral consultation that produced no results.
The states of the world would clearly be better off if
they found global solutions.
The immensely rapid mobility of capital and
tax evasion are other global challenges directly
affecting states. Some European countries wanted
to tackle this problem regionally with a financial
transaction tax, but the EU failed to find unanimity
and the agreement of only 11
12
countries cannot
resolve the issue and will rather undermine their
own competitiveness. For this tax to be effective,
it would have to be addressed by the full EU at a
minimum, or better yet, through a transatlantic
bargain. But there are too many countries that see
it as too costly. These states that did not sign up for
closer tax cooperation think that they can benefit
with additional capital inflow at the expense of
neighbors. This is a perfect example not just of the
problem of basic solidarity, but of all the paradoxes
entailed with international cooperation.
Such challenges always appear when there are no
immediate existential threats to states. There are
12
In January 2013, the group of 11 countries (France, Germany,
Spain, Portugal, Italy, Belgium, Austria, Slovakia, Slovenia,
Greece, and Estonia) decided to use enhanced cooperation,
an infrequently used EU procedure whereby a minimum
of nine member states establish advanced integration or
cooperation within EU structures without all member states
being involved, to tax 0.1 percent of the value of any trade
in shares or bonds and 0.01 percent of any financial derivate
contract.
additional obstacles for efficient international
coordination: countries are affected by different
global problems to a very different extent,
their responses will have domestic economic
consequences that political leaderships must face,
and collective action is always prone to free-riding.
Jonathan Ostry and Atish Ghosh explain that
the coordination gap is caused by three factors:
1) policymakers rarely think in terms of trade-
offs across their objectives; 2) there is a lack of
shared perceptions about the economic situation,
the desirable model, and the cross-borders
transmission effects of policies; and 3) there are
big asymmetries in country size.
13
In this context,
Barry Eichengreen lists four conditions for
international cooperation to take place: 1) when it
centers on technical issues; 2) is institutionalized;
3) is concerned with preserving a policy regime
instead of changing it; and 4) it is appropriately
timed to avoid tensions between nations.
14

13
J.D. Ostry and A.R. Ghosh, Obstacles to International
policy Coordination, and How to Overcome Them, IMF Staff
Discussion Note SDN/13/11 (Washington DC, December
2013).
14
B. Eichengreen, International Policy Coordination: The
Long View, Research Paper, University of California-Berkeley
(September 2011).
Countries are
affected by
different global
problems to a very
different extent,
their responses
will have domestic
economic
consequences
that political
leaderships
must face, and
collective action
is always prone
to free-riding.
Transatlantic Academy 6
The anticipated
change in [Fed]
policy caused
enormous volatility
in emerging
markets such
as Brazil, India,
Indonesia, Turkey,
and South Africa,
weakening their
currencies and
causing an
outflow of funds.
Governing Globally
3
I
n hindsight, the system of global governance
today looks quite favorable. It is true that the
2008 economic crisis has proven both the
resiliency of the current system and the strong need
for more advanced international cooperation.
15

In the assessment of the Bank of International
Settlements, decisive action by central banks
was probably crucial in preventing a repeat of
the experiences of the Great Depression.
16
The
Western central banks for the first time coordinated
their management of interest rates and liquidity
allocation through the reactivated swap network,
which attempts to manage currency mismatch in
the balance sheets of big international banks and
financial institutions.
17

However, it is also true that as the feeling of
crisis waned, effective international cooperation
decreased as well. When the acute 2008 economic
crisis demanded an urgent response, the G20
superseded the less representative G8 and its
leaders achieved the consensus that no other
systematically important financial institution
should be allowed to fail and that they should avoid
protectionism in their policy responses. The G20
started to delegate tasks and resources to existing
multilateral institutions. It even crowned itself the
premier forum for [] international economic
cooperation.
18

Indeed, the G20 became an effective preventer
of deeper financial crisis, not just a responder.
But soon after, the G20 failed in its role as the
coordinator for a global agenda. The main reason
15
D.W. Drezner, The System Worked: How the World Stopped
Another Great Depression (New York: Oxford University Press,
2014).
16
Bank of International Settlements, 82
nd
Annual Report
(February 24, 2012), pp. 41.
17
E.M. Truman, Enhancing the global safety net through
central-bank cooperation, VoxEU.org (September 10, 2013).
18
Final declaration of the G20 Summit in Pittsburgh (September
25, 2009).
is because it is simply a loose form of international
cooperation and its decisions are non-binding.
Similarly, the Financial Stability Board (FSB),
established after the 2009 G20 London summit, is
also a very specific institution that does not have
a legal mandate, coercive power, or any formal
process that would include all countries.
Though the G20 and FSB pretend to be key
institutions of global economic cooperation,
there was no real coordination of fiscal stimulus
and monetary and fiscal adjustment on the
international level. There was also no international
cooperation and solidarity when the U.S. Federal
Reserve suggested in May 2013 that it would
significantly reduce its post-financial crisis bond-
buying program of quantitative easing, thus
raising yields on longer-maturity U.S. bonds.
19

The anticipated change in policy caused enormous
volatility in emerging markets
20
such as Brazil,
India, Indonesia, Turkey, and South Africa,
weakening their currencies and causing an outflow
of funds. Nevertheless, Fed Chairwomen Janet
Yellen, during her testimony to the U.S. Congress
in February 2014, stated openly: We have been
watching closely the recent volatility in global
financial markets. Our sense is that at this stage
these developments do not pose a substantial risk
to the U.S. economic outlook.
21
At a minimum,
the Fed should at least openly communicate its
intentions, in order to give some time to other
economies to prepare for such circumstances. The
desirable step, however, would be that the central
19
B. Steil, Taper Trouble: The International Consequences of
Fed Policy, Foreign Affairs (July/August 2014).
20
D. Lombardi, P. Silklos, and S. St. Amand, A Failure to
Cooperate? Raising the Risks and Challenges of Exiting
Unconventional Monetary Policies, Policy Brief no. 35 (March
2014), Centre for International Governance Innovation.
21
J. Yellen, Semiannual Monetary Policy Report to the Congress,
Fed Chairwoman testimony to the Committee on Financial
Services, U.S. House of Representatives (Washington, February
11, 2014).
Whither Global Economic Cooperation? 7
banks of the biggest international players take a
much broader view into account when it comes to
possible repercussions of their actions, rather than
simply a purely national view.
Harold James observed that the crisis and the
new roles that central banks had to undertake
22

have made them paradoxically more nationally
focused.
23
Central banks should extend their
domestic mandates in order to bear greater
responsibility for the global situation. The G20
should encourage this effort. Raghuram Rajan
argues that the most important central banks
should be held accountable for spillovers in order
to avoid adverse effects on other economies.
24
But
the latest financial crisis did not change the basic
attitude: national interest always prevails over more
abstract international cooperation. The fact that
the net domestic benefits from unilateral action are
rather small while the losses arising from spillover
effects to other economies are much bigger does
not matter much to decision-makers.
The G20, which was touted as a rising star
of international system by the advocates of
global governance, has demonstrated its limits
as the coordinator of collective actions. Some
optimistically argue that G20 membership is based
on systemic significance, and its countries have
both connectivity and capability in global economic
governance. Therefore it could become the primary
forum of global cooperation.
25
But with hindsight,
it has only ensured an effective ad hoc crisis
response. Under the circumstances of a crisis that
22
Most importantly: preemptive role and financial supervision.
In the past, the central banks were dealing with monetary and
price stability, exchange rates, and financial stability.
23
H. James, International Cooperation and Central Banks,
VoxEU.org (October 8, 2013).
24
R. Rajan, Containing Competitive Monetary Easing, Project
Syndicate (April 28, 2014).
25
J. Kirton, G20 Governance for a Globalized World (Farnham-
Burlington: Ashgate, 2013).
is not acute but rather creeping, without a sense of
urgency, collective action is much more difficult.
The fact that the G20 is much more representative
than the former G8 its countries represent today
85 percent of global economic output, 80 percent
of global trade, and 66 percent of global population
cannot be overestimated. It is still a loose form of
international cooperation, which invites members
to its club on the base of unwritten and rather
controversial criteria. In the long term, the G20
cannot be sustainable without developing common
norms, institutional experience, and resources.
Though the latter can be achieved over time, it
is very unlikely that this setting will produce the
needed robustness without common underlying
values.
The rational argument, based on economic logic,
would rather suggest that the future of global
cooperation is bright. There is no doubt that states
are today in greater need of such cooperation.
They are negatively affected by globalization in
the sense that they have lost national control over
policy outcomes. Therefore they should seek to
regain collectively what they have lost individually.
IMF Managing Director Christine Lagarde
underlines that the countries of the world should
be thankful to multilateral global cooperation
and its instruments for preventing a global Great
Depression and a wave of protectionism. From
her point of view, the world does not have a choice
and a new multilateralism is non-negotiable.
26
In
reality, however, it is far from obvious. When the
circumstances of crisis are missing, the incentives
to cooperate internationally are smaller.
The key question had not changed over time: how
to ensure the successful management of medium-
term problems that are looming on the horizon.
26
C. Lagarde, A New Multilateralism for the 21
st
Century, The
2014 Richard Dimbleby Lecture, International Monetary Fund
(2014).
The G20, which
was touted as
a rising star of
international
system by the
advocates of
global governance,
has demonstrated
its limits as the
coordinator of
collective actions.
Transatlantic Academy 8
International policy coordination can be compared
to the Loch Ness monster: much discussed but
rarely seen.
27
It usually appears in response to an
acute crisis, but otherwise it is elusive. The cost of
collaborative action may simply become too high
over the long term, making periods of extended
cooperation unsustainable. But probably the biggest
challenge facing the world today is the impaired
legitimacy of global governance.
27
O. Blanchard, J.D. Ostry,and A.R. Ghosh, International
Policy Coordination: The Loch Ness Monster, IMFdirect
(December 15, 2013).
Whither Global Economic Cooperation? 9
When the IMF was
created in 1945,
the United States
was worlds largest
creditor; today
it is the largest
debtor, along with
European Union
member states.
T
he Western countries have benefited from
the post-war global economic order, as it
reflected their own preferences in distribution
of benefits. They openly pursued a policy of
exceptionalism when the rules infringed too much
on their own interests. In such circumstances, they
could simply threaten an exit from the system and
withhold the delivery of GPGs, which implied a
much worse situation for the rest of the world. For
the West, this situation was natural and reflected
the division of power of the time. In order to
compensate the weaker states, the West used
to make side payments in the form of finance,
development aid, or trade.
28
However, the rest saw
this as arrogance.
Today there is an enormous level of resentment
against the Western-led liberal international
order. Dominique Moisi calls it the geopolitics of
emotion.
29
It is not simply caused by the unjust
rules of the world system. The emerging powers
are fully aware that they have been beneficiaries
of the post-war world order and its anchoring
institutions. With hindsight, they are the winners
of the globalization process. They also realize
that they cannot replace the Wests leadership in
providing GPGs. Nor they are willing to contribute
more to the governance of the globe. The problem
is different.
When the IMF was created in 1945, the United
States was worlds largest creditor; today it is
the largest debtor, along with European Union
member states. The rise of the BRICS
30
and Next
28
R. W. Stone, Controlling Institutions: International
Organizations and the Global Economy (Cambridge:
Cambridge University Press, 2011).
29
D. Moisi, The Geopolitics of Emotion: How Cultures of Fear,
Humiliation and Hope are Reshaping the World (New York:
Anchor Books 2009).
30
Brazil, Russia, India, China, and more recently South Africa.
11,
31
despite the lack of common values between
these countries or even economic commonalities
(except the size of the market), is changing the
worlds geography of economic power. According
to estimates by Arvind Subramanian and Martin
Kessler, China is the first mega-trader since
Imperial Britain, even bigger than the United
States, Japan, and Germany at the peak of their
power.
32
By some measures, China will even very
soon overtake the United States as the largest
economy in the world.
33
Today middle-income
countries share of world GDP measured by
income level is almost equal to that of high-
income states. Furthermore, the advanced Western
economies were damaged the most by the global
economic crisis that began in 2008. As a high-level
Indonesian official amonishes, Look at you: the
Western-led international economic institutions
advised Asia very poorly during the economic
crisis of 1997. For us it was formative experience.
Then the crisis of 2008 was caused by the Wests
ill-designed economic governance and models. The
West doesnt really have the strongest cards today.
34
The problem is that the change of economic power
in the world is not followed by the change of power
within the institutions governing the world system.
As one observer noted, the irony is that solvent
31
According to Goldman Sachs: Bangladesh, Egypt, Indonesia,
Iran, South Korea, Mexico, Nigeria, Pakistan, Philippines,
Turkey, and Vietnam.
32
A. Subramanian and M. Kessler, The Hyperglobalization of
Trade and Its Future, Working Paper 13-6, Peterson Institute
for International Economics (July 2013), p. 9.
33
International Comparison Program, Purchasing Power Parities
and Real Expenditures of World Economies: Summary of Results
and Findings of the 2011 International Comparison Program
(Washington, DC, International Bank for Reconstruction and
Development/The World Bank, 2014).
34
Author interview in Jakarta (March 25, 2014).
The Legitimacy Problem of
a Diffusing World Order
4
Transatlantic Academy 10
From the point of
view of emerging
economies, the
financial crisis
of 2008 was a
major blow to
the West and the
IMF. It appeared
that the IMF had
almost become a
fund for European
economies
that had been
managed
irresponsibly.
Asians still dont have the power and the near-
insolvent West still rules.
35

The emerging countries have continuously
called for democratization of international
governance and greater equality. These calls could
be left unanswered by the West without serious
consequences for decades. It is because the non-
Western economies were beneficiaries of the system
as well, since the West was ensuring a relatively
stable anchor through its dominant economic
and political position. Today, when the West is in
relative decline while the rest is on the rise, the
reform of global international organizations is
getting even harder. For example, the United States
is the only country that holds the veto for any major
decision in the IMF. Though under a proposed
reform this situation did not change,
36
the reform is
still blocked by the U.S. Congress due to unrelated
and purely domestic issues. As a result, Russia,
China, Brazil, and India more or less openly called
for the IMF to move ahead without U.S. resources.
Even the G20 issued an ultimatum to the United
States, warning rather unambiguously that it risks
being left aside: If the 2010 reforms are not ratified
by year-end, we will call on the IMF to build on its
existing work and develop options for next steps.
37

From the point of view of emerging economies,
the financial crisis of 2008 was a major blow to the
West and the IMF. It appeared that the IMF had
almost become a fund for European economies that
35
A. Subramanian, Asia, Europe, and the IMF, Business
Standard (May 26, 2010).
36
The U.S. share would only drop marginally from 17.7 percent
to 17.4 percent while the Europes share would drop from 60
percent to 57 percent. Under this arrangement, 6 percent of
total quotas would be shifted to emerging economies, and
from among 24 IMF directorships an additional two would
go from European to developing countries. The IMFs equity
capital would double to $720 billion.
37
Meeting of G20 Finance Ministers and Central Bank
Governors, Communiqu (Washington, DC, April 10-11,
2014).
had been managed irresponsibly. The emerging
countries became very reluctant to extend their
credit lines, which constitute the biggest source
of IMF financing. The level of mistrust has
skyrocketed. Furthermore, the emerging economies
were not interested in the IMFs advice on financial
sector reforms and made it clear that they are
not willing submit again to the IMFs adjustment
programs.
38
In order to avoid reliance on the
Western-led Bretton Woods institutions, in 2009
the ASEAN+3 (a forum of the ten member states
of the Association of Southeast Asian Nations plus
China, Japan, and South Korea), developed the
Chiang Mai Initiative Multilateralization (CMIM),
worth $240 billion, and two years later established
the ASEAN+3 Macroeconomic Research Office
(AMRO).
39
An initiative by the BRICS aims at
creating a foreign exchange contingency reserve
instrument worth $100 billion that would be an
alternative financial source to the IMF during a
financial crisis. While global finance had already
been decentralized, in a short period of time it
became even less manageable. At the same time,
new problems appeared on the agenda that need to
be tackled internationally, preferably on the global
level. The enormous activity of sovereign wealth
funds is completely blurring the borders between
what is state and what is private. Nations need a
serious dispute settlement mechanism in global
finance. The IMF should rethink not only its shares
of quotas and financial capacity, but also its agenda
and functions within the evidently changing world
economic order.
38
M. S. Khan, Asia: Stepping Up from Regional Influence to a
Global Role, East Asia Forum Quarterly (October 2011).
39
The CMIM replaced the Chiang Mai Initiative (CMI), which
was created in 2000 after the financial crisis in East Asia. The
aims of the CMI included cooperation in four major areas:
monitoring capital flows, regional surveillance, swap networks,
and training personnel.
Whither Global Economic Cooperation? 11
The WTO became
the victim of its
own success, i.e.
the continuing
liberalization of
world trade. It
approached the
point where trade-
related issues
were too difficult
to resolve globally.
The World Bank is not in any better shape. It is
today a competitor to other regional banks and
wealthy countries that dispense aid. The emerging
economies directed the biggest post-crisis capital
infusions to regional institutions, i.e. the African
Development Bank or the Asian Development
Bank. Since 2008, regional banks have played a
crucial role in securing emerging economies in the
face of financial crisis contagion. The newly created
BRICS Development Bank is intended to make
funding for infrastructure in developing countries
more accessible with much less conditionality
attached. Today Brazils development bank BNDES
has a bigger balance sheet than the World Bank.
Clearly, the World Bank is on shaky ground with
middle-income countries. They can borrow money
not only from other institutions or states, but also
quite cheaply on international capital markets. The
original assumption that the developed countries
give financial assistance to developing ones has
gone into reverse. Under new president, Jim
Kim, reforms are reshaping the World Bank as a
solution bank that offers a kind of a global toolkit
for development policy. This breaks the previous
structure of management based on regional
divisions. But it is questionable whether this new
approach will allow the World Bank to bounce back
to its previous level of influence.
The WTO is also struggling for relevance. There
is no chance to complete the so-called Doha
Development Round, which has become outdated
since its launch in 2001 as the nature of world trade
has transformed enormously. Today more than 70
percent of total service imports and more than 50
percent of manufactured imports are intermediate
services or goods. At least 35 contractors from
different parts of the world usually contribute to
a one typical manufacturing company. The key to
understanding trade today is in investigating the
world and regional supply chains of production,
40

the flow of foreign direct investments (FDI) and
the impediments to international flow of services.
Previously, regional trade concerned made-here-
sold-there goods, while today it concerns made-
everywhere-sold-there goods as Richard Baldwin
describes it.
41
In the past, the rules of regional trade
were mostly about discrimination. Today they are
about enhancement of international production
networks. The contemporary supply chain is a
matrix of international flows of goods, services,
capital, people, and ideas, where trade itself is not a
number one issue. Bernard Hoekman estimates that
reductions in supply chain barriers would bring six
times more benefits in terms of global GDP growth
than the removal of all import tariffs.
42

In fact, the WTO became the victim of its
own success, i.e. the continuing liberalization
of world trade. It approached the point where
trade-related issues were too difficult to resolve
globally. Today the WTO applauds as a great
success a modest package agreed at the Ninth
Ministerial Conference in Bali in December
2013, aimed at trade facilitation. For those who
see world trade traditionally, the deal may look
like Doha Lite and Decaffeinated.
43
But maybe
it is a time for pause and the change of approach
to the WTO. For critics, it is easy to imply that it
suffered because of too much democratization and
40
R. Baldwin, M.Kawai, and G. Wignaraja (eds.), The Future
of the World Trading System: Asian Perspectives, Centre for
Economic Policy Research, Asian Development Bank Institute,
London (2013).
41
R. Baldwin, Multilateralising 21
st
Century Regionalism (Paris:
Organization for Economic Cooperation and Development,
2014).
42
B. Hoekman, Enabling Trade: Valuing Growth Opportunities,
World Economic Forum, Davos (2013), p. 13.
43
Financial Times, Up in the air: A failure to reach an
agreement in Bali would threaten the future of multilateral
trade (December 3, 2013).
Transatlantic Academy 12
The decomposition
of the previously
Western-led
order takes us to
governance that
is much more
network-based
than hierarchical.
handover of power from the West to the rest.
44

As a matter of fact, the recent success of the Bali
meeting though small would probably not
have happened if the WTO chairmanship had not
been handed over to emerging powers. It is also
too easily forgotten that that the WTOs biggest
barriers are the EU Common Agricultural Policy
and an equally protectionist U.S. agricultural
policy. The transatlantic partners should finally
look at themselves and stop blaming others for the
stalemate.
The WTO, like other institutions of global
governance, should really rethink its agenda. It
is setting the global standard for trade in goods
and services. It should deal with basic rules for
investment as well. The WTO should focus on
its deliberative and dispute-settlement functions
and on effectively managing the liberalization
of world trade via regional blocs, in order to
consolidate them into a global framework at some
later point of time. While it appears impossible
to reach agreement on further rounds of global
liberalization, 21
st
century trade is a success story
thanks to regionalism. This does not have to be
considered a contradiction to global multilateral
solutions. In the last decade, almost 40 percent
of preferential trade agreements (PTAs) included
provisions on WTO+ issues
45
(competition policy,
intellectual property rights, investment, and
movement of capital).
46

World trade is also very different than a decade
ago because of the increasing role of E-to-E trade
(emerging markets to emerging markets). China
and India trade less with advanced economies than
44
A. Subramanian, Too Much Legitimacy Can Hurt Global
Trade, Financial Times (January 13, 2013).
45
These are commitments which are already within WTO
agreements, but go beyond the WTO disciplines.
46
The WTO and Reciprocal Preferential Trading Agreements
(Geneva: World Trade Organization, 2011).
with emerging markets. Even on international
capital markets, we notice an unprecedented
situation with a fast growing trade in bonds and
equities that were issued by emerging countries
and denominated in their own currencies. The
2013 UNDP Human Development Report has
proclaimed The Rise of the South as one of the
most important processes in the global economy.
47

The diffusion of economic power in the world has
enormous consequences for the global governance
system. The decomposition of the previously
Western-led order takes us to governance that is
much more network-based than hierarchical. The
hierarchic system for the delivery of GPGs was
based not only on the hegemonic power of the
major supplier but also on the legitimacy of the
system in the view of dependent states. In other
words, its fundamental assumption is that the
weaker states would like to follow a leader and that
they trust the strategic choices of the leader. Today
this is not the case. Theoretically, the delivery of
GPGs should take place on the most efficient level,
suggesting an increasing role for global solutions.
But this presumption is taken from economic
models of governance that are based on economies
of scale in the production of GPGs, spillovers, and
externalities. As Kahler and Lake rightly argue, we
should instead use a more political model that takes
into consideration the preferences of actors and
institutions.
48
From this perspective, the provision
of GPGs is more questionable.
The legitimacy of the global system is waning as
increasingly powerful actors retain a limited say.
If their voice is rarely successfully heard, the exit
47
Human Development Report 2013, The Rise of the South:
Human Progress in a Diverse World (New York: United Nations
Development Program, 2013).
48
M. Kahler, D.A. Lake, Economic Integration and Global
Governance: Why So Little Supranationalism?, in: W. Mattli and
N. Woods (eds.), The Politics of Global Regulation (Princeton
and Oxford: Princeton University Press 2009), p. 250.
Whither Global Economic Cooperation? 13
The potential
challenger of
todays global
currency order,
China, is very
cautious about
making the
renminbi a
global currency,
as privilege
and power are
followed by greater
obligations and
responsibility.
option is still unfavorable to them, so they have
chosen to weaken their loyalty to the existing
system.
49
It is one of the reasons why the emerging
economies are not necessarily willing to contribute
to the global system. It obviously decreases the
chances for successful GPGs delivery.
It is sometimes argued that with the growing
interdependence and interrelatedness of problems,
the cost of extending the current multilateral
regimes could prove to be lower than the cost of
creating new ones.
50
However, the latter already
happens.
It is worth stressing that the emerging powers
do not have any common position on the most
important world affairs. They do not offer an
alternative vision of the world or want to contribute
more strongly than they do today. The potential
challenger of todays global currency order, China,
is very cautious about making the renminbi a
global currency, as privilege and power are followed
by greater obligations and responsibility. Beijing
has carefully studied the price paid by the U.S.
dollar and the euro.
51
The BRICS countries are not
brought together by real similarities. They did not
even have any united position toward the most
important issue for which they most obviously
should form an alliance: leadership in organizations
of global economic governance. It recently seemed
that for the first time there was a real chance for
the overthrow of the Wests leadership in Bretton
Woods institutions. The pressure was enormous
and the non-Western candidates for office were
better qualified than their Western counterparts.
49
On the links between exit, voice and loyalty, see: A.O.
Hirschman, Exit, Voice, and Loyalty: Responses to Decline in
Firms, Organizations, and States (Cambridge and London:
Harvard University Press, 1970).
50
W. Molle, Governing the World Economy (London and New
York: Routledge, 2014), pp. 33.
51
For example, the loss of control over exchange rate policy.
But in the cases of both the World Bank and the
IMF, the West played the emerging powers against
each other through a divide and conquer strategy.
Ultimately, the national self-interests of challengers
prevailed. As Armijo and Roberts argue, China
is likely to treat the BRICS formula as an outside
option that would allow for exerting greater
pressure on current global economic governance
settings.
52
However, by emphasizing their ambiguity
toward the current global governance system,
the BRICS was able to achieve a certain level of
institutionalization. The other countries have also
supported China during the discussion on global
imbalances and currency manipulation, labeling
the West (the U.S. Federal Reserve, the European
Central Bank, and the Bank of England) as an
offender of international currency management
standards.
To sum up, there is a growing consensus that the
unipolar moment is over. The latest collaborative
report of the Transatlantic Academy argued: the
long run of the Wests material and ideological
hegemony appears to be coming to an end
The Western model no longer has a monopoly
on the aspirations and plans of nations seeking
to better their economic and political futures.
53

The institutions of world economic governance
have to adjust to this new reality. Without reforms
to enhance legitimacy, the world system will
increasingly be more chaotic and less capable of
managing international issues. The leadership of
the Bretton Woods institutions should be based
on merit, not on Euroatlantic origin. The U.S.-
52
L.E. Armijo and C. Roberts, The Emerging Powers and
Global Governance: Why the BRICS Matter, in R. Looney
(ed.), Handbook of Emerging Economies (New York: Routledge,
2014), forthcoming.
53
T. Flockhart, C.A. Kupchan, C. Lin, B.E. Nowak, P.W.
Quirk, and L. Xiang, Liberal Order in a Post-Western
World, Transatlantic Academy (May 2014), http://www.
transatlanticacademy.org/publications/liberal-order-in-a-post-
western-world.
Transatlantic Academy 14
EU informal deal on the IMF and World Banks
leadership, which is prohibitive for the most
qualified candidates from the rest of the world,
must finally come to an end. These institutions
should follow the example of the WTO, now run by
Brazilian diplomat Roberto Azevdo.
In the not too distant future, the United States
should give up its veto power in the IMF, while
the EU should seriously take into consideration
having a single seat in institutions like the IMF or
the UN Security Council. That may point the way
to an interesting alternative where regions are more
involved and represented in the institutions of
global governance. It would give powerful leverage
for starting a far-reaching reform of the whole
system to make it more adjusted to the realities of
the 21
st
century.
Whither Global Economic Cooperation? 15
The popular
academic
framework that
juxtaposes
regionalism
vs. global
multilateralism
is useless and
misleading. The
key question is
rather which rules
and disciplines
of international
economic
governance should
be harmonized
on the global
level, and which
on the regional?
Variable Geometries
5
T
hough this paper agrees that in many
ways, the emerging new forms of global
economic cooperation resemble the classical
club model of multilateral cooperation or
minilateralism, it argues that it is frequently
wrongly interpreted by experts. The popular
academic framework that juxtaposes regionalism
vs. global multilateralism is useless and misleading.
The key question is rather which rules and
disciplines of international economic governance
should be harmonized on the global level, and
which on the regional?
Regionalism is unavoidable and observable in all
areas of global economic governance, and this is
not necessarily a bad thing. Regional agreements
are generally based on more similar assumptions
between the countries and, frequently, more similar
governance structures and a higher level of trust
among the members of the group. It has clear
advantages in todays reality. For example, global
value chain networks are mostly regional, so the
governance responses to supranational problems
must also be exercised on regional level. Most
externalities occur on the regional level rather
than the global so the incentives toward regional
cooperation are rather natural.
But regional frameworks can prove economic
self-sufficiency only to a limited extent. We must
take into account that there are many problems,
like currency manipulation, macroeconomic
imbalances, food shortages, the rapid flow of
capital, and tax evasion, that can only be tackled
globally. Neither regional orders nor loose forms of
cooperation like the G20 can effectively solve them.
Global multilateral institutions can deliver public
goods in a way that is not attainable in other
frameworks of cooperation. Their advantage is
that they are open and based on rules. Therefore
regionalism cannot be an alternative to global
solutions. The two must complement each other.
Regionalism can be effective only if it coexists with
a robust multilateral global framework. Instead of
a threat to global multilateralism, regionalism can
be treated as a second-best option. As Kenneth
Heydon and Stephen Woolcock argue, the notion
of regionalism in itself is today much less relevant
and useful. Thus Jagdish Bhagwatis famous
spaghetti bowl concept describing the problem
of tangled trade agreements is becoming outdated
as a reference point.
54
In trade, for example, the
core entities of preferential trade agreements are
compatible with global solutions.
55
Therefore the
links between different orders, global and regional
organizations, and the interactions governing them
are of absolute importance.
This paper argues that the debate should be
framed within the network of variable geometries.
This term had originally emerged as a mode of
governance in the EU,
56
but it was also practically
developed during the GATT/WTOs subsequent
rounds of negotiation. It aims at accommodating
differences between nations, or different regional
or global settings in a flexible and manageable
way. The concept has some similarities with
Richard Baldwin and Philip Thortons multi-
tier multilateralisation,
57
the idea of open
clubs
58
advocated by Jagdish Bhagwati, or
Robert Lawrences proposal of club of club
54
K. Heydon and S. Woolcock, The Rise of Bilateralism.
Comparing American, European and Asian Approaches to
Preferential Trade Agreements (Tokyo/New York/Paris: United
Nations University Press, 2009), p. 5.
55
Ibid, p. 4.
56
Under this approach, the EU uses different terms: variable
geometry, two-speed Europe, Europe la carte, closer
cooperation, enhanced cooperation.
57
R. Baldwin and P. Thorton, Multilateralising Regionalism,
CEPR Policy Report (2008).
58
J. Bhagwati, The World Trading System at Risk (Princeton:
Princeton University Press 1991), p. 45.
Transatlantic Academy 16
Regionalism can
be a building
block or a
stepping stone
for global order
only if at some
point of time it is
consolidated into
global framework.
approach,
59
which argue that some international
clubs should be functional and devoted to single
or intertwined issues. Supplementing the global
economic governance setup with a network of
variable geometries would help to push the further
integration of the global economy and build beyond
global governance gridlock while avoid the gloomy
prophecy of deglobalization.
The basic requirement for variable geometries
is that each such undertaking must be inclusive,
i.e. all non-members who fulfill the criteria and
are willing to join should be allowed. It poses the
biggest risk for the agreements that are of universal
coverage and that cover cross-issue areas. In order
to avoid this, nations should accept the second
principle, which requires that common minimum
rules for regional orders are introduced by the
global institutions and that they are binding on all.
Global organizations should provide an anchor
for increasingly differentiated regional orders.
They should have not only a robust surveillance
mechanism, but also play the role of assessor and
judge for settlement of disputes. In other words,
their primacy in the international system must be
recognized and cultivated.
59
R.Z. Lawrence, Rule Making amidst growing diversity: A club
of club approach to WTO Reform and new issue selection, paper
prepared for the World Trade Forum 2004 (June 2004).
Regionalism can be a building block or a
stepping stone for global order only if at some
point of time it is consolidated into global
framework. For example, trade competitive
liberalization as Robert Zoellick defined it
can be a way to bypass the current multilateral
gridlock. It assumes further liberalization of trade
in a way that regional blocks would create new
standards or golden rules for cutting-edge areas.
In other words, the regional agreements should
be built and thought of as WTO+. From this
perspective, global, regional and bilateral trade
agreements will complement and reinforce each
other.
60
Then, at some point, the WTO should
try to forge global consensus and consolidate the
regional deals into a single agreement. The biggest
challenge is obviously to avoid building blocks
becoming stumbling blocks. Thus normative
consensus on the primacy of global institutions
is of the utmost importance. To accomplish that,
international organizations must truly be reformed.
60
R. Zoellick, Free Trade and Hemispheric Hope, remarks before
the Council of Americas (Washington D.C., May 7, 2001).
Whither Global Economic Cooperation? 17
The benefits of
global good are
not a convincing
argument
for domestic
audiences. For
politicians, it
can be easier to
explain how the
lack of global
action can directly
harm their
constituencies.
Conclusions and Policy
Recommendations
6
T
his paper argues that we clearly need a more
holistic approach to the changing global
governance order. This approach must take
into account all aforementioned factors. Therefore
in the quest for appropriate responses, we should
start with following questions: what is the nature of
a new interdependence and what are the minimum
requirements for effective international cooperation
toward better delivery of global public goods? How
can we combine global and regional multilateralism
into a single framework in a way that makes the
diffusing global order more manageable? How can
we build a more inclusive and legitimate global
economic order for the better delivery of global
public goods, which would encourage emerging
powers to contribute more extensively to solving
global problems. The paper clearly states that
despite growing interdependence and the side-
effects of unresolved global problems that today
affect many countries, strengthening international
cooperation toward greater global public goods
delivery is not easier than in the past. Here are
some of the potential responses to the existing
pitfall.
On the level of discourse, an appeal is
needed to both general global good or
common destiny of all nations and their
self-interest. Former WTO chief Pascal Lamy
calls for a declaration of global rights and
responsibilities.
61
This is a positive step but not
sufficient. The benefits of global good are not
a convincing argument for domestic audiences.
For politicians, it can be easier to explain how
the lack of global action can directly harm their
constituencies. They can use the logic of a two-
level game, in which international negotiations
between states take place simultaneously on
both the domestic and international levels as
61
P. Lamy, Global governance requires localizing global issues,
speech at the Oxford Martin School (March 8, 2012).
formulated by Robert Putnam,
62
much more
persuasively than in the past.
Strong national institutions are essential
for tackling global challenges, and this
understanding should be much more
deeply embedded in the functioning of
global institutions. Most importantly,
national institutions are responsible for the
implementation of every single globally agreed
policy. The deep understanding of national
political logics and the truth that one size
does not fit all is essential. For example, the
IMF has already evolved and is concerned
now with the level and roots of inequality on
the national level. It thoroughly examines the
political economy of reform and its societal
impact, a significant difference from its behavior
in the 1990s. During the eurozone crisis, it
was surprising to see that the EU institutions
(the European Central Bank and the European
Commission) were more radical in their
demands toward the indebted countries than the
IMF.
The problem of missing incentives for
countries to provide GPGs can only be
overcome by strong international institutions.
Unreformed organizations will not be capable
of delivering these incentives. In an age of
multipolarity, it would be unrealistic to expect
more pooling of sovereignty from states toward
supranational actors. It is quite likely that
delivery of global public goods in the future will
be developed through customary law rather than
by treaties or other big agreements. However,
it is realistic to expect that global organizations
can refocus, regain, and strengthen their
legitimacy. They must be reformed both in
62
R. Putnam, Diplomacy and Domestic Politics: The Logic of
Two-Level Games, International Organization 42: 427460
(1998).
Transatlantic Academy 18
The world
desperately
requires the
system of global
governance to
be profoundly
readjusted to a
new reality. While
there is a growing
intellectual
consensus on
what should be
done, there is
less willingness
to follow through
with appropriate
actions.
terms of the problems that they are dealing with
and in terms of the share of power between the
West and the rest, so that they finally reflect
the world of 21
st
century.
More than ever, there is a need for holistic
approaches. Too easily the network of variable
geometries may devolve into anarchy. Holistic
thinking does not have to be in contradiction
to multipolarity. While there is a growing
normative diversity in the world, countries
should at least recognize the principles that
should govern their behavior in global, regional
and national politics. It can be based on two
points. First, regional orders are not equivalent
to global solutions and cannot replace them.
Regionalism can only be stronger when it exists
within the resilient global system. Therefore
keeping the links between national, regional, and
global tiers is essential. Second, global solutions
are driven by the principles of subsidiarity and
proportionality. Policies should be exercised
at the lowest possible level of governance,
from the local to the global, and international
actions should only be complementary for the
effective achievement of aims. This practice of
supranational governance is derived from the
European Union and can be applied elsewhere.
We live in a world that has converged enormously
since the collapse of the bipolar system of the Cold
War. Interdependence is much more advanced than
ever before. However, convergence goes hand-in-
hand with multipolarity. If serious reform of the
system usually takes place after a breakdown, the
incentives for change are even less, as the global
governance system has worked rather well during
the recent crisis. But the world desperately requires
the system of global governance to be profoundly
readjusted to a new reality. While there is a growing
intellectual consensus on what should be done,
there is less willingness to follow through with
appropriate actions. If this situation continues, a
plunge into chaos may become unavoidable.
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