Globalization and the international rules-based order that underpins it are under siege. Bunkering down and hoping the flames of populism burn out as economic growth picks up is not a winning strategy. The crisis of confidence in the benefits of globalization and multilateralism likely will persist as long as rates of social and economic inequality remain stubbornly high.
The best defense of multilateralism and the rules-based order is a good offense. Addressing inequality and updating the rules of the global economy to reflect the needs of the 21st century must guide the agenda for this week’s International Monetary Fund (IMF) and World Bank spring meetings.
The finance ministers and central bank governors gathered for the spring meetings should focus on new approaches to reduce inequality and increase resilience, not just on new language for press releases and other official statements.
A number of steps to restore faith in the system should be considered, including improving the rules shaping international trade, developing a shared vision for effective regulation of technology, and ensuring the IMF and multilateral development banks (MDBs) are prepared to help prevent and respond to crisis.
The post-second world war period has produced the greatest economic expansion in world history, including a dramatic reduction in extreme poverty. Yet the institutions, norms and rules that form the backbone of the economic order have proven remarkably slow to change.
The most prominent example was the inability of global financial regulation to keep pace with the innovation and evolution of the financial system, contributing to the most severe global recession since the Great Depression. The rise of a global populist strand that seeks to draw economies apart rather than bring them together also represents an existential threat to multilateralism and the rules-based order.
All credible ideas should be on the table, including potential penalties for countries with persistently large current account surpluses, particularly those that intervene in the foreign exchange market. While global supply chains may reduce the impact exchange rates have on trade, it is still critical we find new ways to address the unfair advantage some derive from manipulating their currency.
The IMF can and should do more to hold countries accountable. A multilateral approach to addressing imbalances will be far more effective and less draconian than any unilateral or regional solution. And additional reforms to the international trading system are needed, including faster resolution of disputes between countries, increased transparency, and improved technical assistance to developing countries.
Advances in technology are radically transforming the global economy. The lack of global policy coordination to address technologies that often live outside the borders of any one jurisdiction is already having a negative impact on innovation and regulation.
While issues related to taxation have dominated the discussion at previous spring meetings, there are several other subjects deserving of attention. Reducing data localization – the requirement that data is stored, managed and handled within a country’s borders – especially as it pertains to financial data, needs to be addressed.
Maintaining information in unnecessary jurisdictions creates a barrier to entry for many smaller firms and slows innovation by way of machine learning with the ability to transform fields like financial inclusion which are central to reducing inequality. A major hurdle to reducing data localization is formulating a global framework for managing data privacy issues. The EU–US Privacy Shield is already providing a structure for the United States and Europe, but officials need to focus on building a framework that includes far more of the global economy.
As the memory of the global financial crisis fades, it is critical that the lessons we learned from facing the abyss continue to impact our policy choices. While post-crisis reforms have made the global financial system more resilient, in many ways governments have fewer tools today to protect the system from another crisis.
This is one of many reasons it is essential the MDBs and IMF are well resourced. The World Bank’s ability to lend during the Great recession helped ensure it did not become a depression.
Those leading the justified efforts to optimize MDB balance sheets should carefully consider how resources can be stretched while maintaining the ability to lend during a crisis. The IMF lending toolkit should not be overly constrained by inflexible requirements that limit its ability to prevent and respond to a crisis. Fears that all but the most rigid standards will put taxpayer money at risk are significantly exaggerated. The IMF has never lost a dollar of taxpayer money, and should maintain the flexibility needed to protect the global economy.
After nearly a decade responding to the financial crisis and its economic aftershocks, officials must now devote the same level of creativity and ambition to addressing the crisis of confidence in the international economic order.
Protectionism and a retreat from international cooperation is clearly not the answer, but policy makers minimize the underlying mistrust of globalization and multilateralism at their peril. In order to promote sustainable and inclusive growth, policymakers must focus on tangible changes that are responsive to the challenges we face.
Wally Adeyemo is a senior adviser at the Center for Strategic and International Studies and previously served as deputy national security adviser for international economics during the Obama administration. This article was first published in the Guardian.