The System Worked_How the World Stopped Another Great Depression Page 3
The second source of pessimism is the view that power itself has been diffusing so rapidly that no actor or concert of actors can credibly wield authority anymore. Even before the crisis, Richard Haass and Niall Ferguson had warned about the ebbing of power from governments to more-amorphous, networked actors.70 In a world of WikiLeaks, anonymous transnational Occupy movements, and mass protests that can sprout up anywhere in the world, it does seem as though governments have lost their ability to shape events. Moisés Naím argues, “Today’s panoply of international threats and crises … come as the hierarchy of nations is in flux and the very exercise of state power is no longer what it used to be.” French foreign minister Laurent Fabius asserts that “today we live in a zero-polar, or a-polar world. No one power or group of powers can solve all the problems.” Bruce Jentleson believes we are now in a “Copernican world” characterized by “power diffused and diluted more than realists portray, post–World War II norms and institutions more contested than liberal internationalists acknowledge.” Randall Schweller goes even further, concluding that we are now living in “age of entropy” in which “world politics is being subsumed by the forces of randomness and enervation, wearing away its order, variety, and dynamism.”71 In such chaos, global governance efforts seem foolhardy.
To sum up: global governance had a bad reputation at the start of the twenty-first century, and it has only gotten worse since. The prevailing sentiment is that international institutions failed to prevent the Great Recession and might have abetted the crisis. Global economic governance has failed to repair the damage since 2008, and its structures are too sclerotic to repair themselves.
THE ARGUMENT
This book argues that almost every assertion in the previous section is wrong. I contend that a closer look at the global response to the financial crisis leads to a more optimistic assessment. Despite initial shocks that were more severe than those of the 1929 financial crisis, global economic governance responded in a nimble and robust fashion in 2008. Whether one looks at economic outcomes, policy outputs, or institutional operations, it is clear that global governance structures either reinforced or improved upon the pre-crisis status quo. The global economy bounced back from the 2008 crisis with relative alacrity. Compared to crises of this magnitude in the past, the world economy did not suffer as big an economic hit, and growth resumed more quickly than was expected. This is in no small part because global economic governance supplied the necessary public goods to prevent worst-case scenarios from being realized. In the key areas in which international institutions can help ameliorate a global economic crisis—keeping markets open to trade, supplying sufficient liquidity, coordinating macroeconomic policies, rewriting the most flawed rules of the game—both global governance and great power governments did their job. At the same time, many of the key global governance structures revamped their rules and memberships to better reflect the rise of the advanced developing countries in the international system. The Great Recession provided a severe “stress test” for global economic governance—and these structures passed.
To be sure, there remain areas in which governance has either faltered or failed. One can point to policy arenas, such as climate change, cybersecurity, and macroeconomic policy coordination, in which cooperation has been either illusory or ephemeral. The case that the system worked would be easier to make if the entire Doha Round had been completed, or if the G20 always spoke as one on macroeconomic policy. If one judges the success of global governance during this crisis by whether the optimal policies were enacted, then the system did fail, and fail spectacularly. But this is an absurd standard to apply. Looking for perfection in global governance is the enemy of finding the good in global governance.72 The question is not whether global governance has been flawless but whether it has been good enough at supplying the necessary policies and public goods. And if the policy outcomes have been suboptimal, they have not been subpar. International institutions and frameworks performed better than expected. Simply put, the system worked.
Why, then, is the expert consensus just the opposite? One explanation has to do with where the pundits “live.” Since 2008, there has been a disjuncture between where most of the people who write about the global economy are located and where many of the global economy’s growth locomotives are found. The bulk of the actual economic growth has taken place in emerging markets—but emerging-market analysts have yet to affect the tenor of discourse on the global political economy. The bulk of intellectual output emanates from the countries of the developed world, places that have not exactly thrived since the start of the Great Recession. It is therefore natural that some analysts extrapolate from their downbeat local circumstances a downbeat assessment of global circumstances.
Analysts may also conflate the failings of national and regional governance with failures at the global level. Given the extent of political gridlock across the developed world, it is not surprising that analysts translate domestic policy deadlocks to global policy deadlocks. In an era of economic globalization, it is natural to conclude that the sources of significant policy solutions should also reside at the global level. Economist Dani Rodrik posits that the world has hit a governance “trilemma” in which it is increasingly difficult to reconcile the effects of global economic integration with democratic mass politics and national governance.73 However, globalization has not upended the laws of politics. It remains the case that the most salient forms of governance for citizens are at the local and national levels. The best global governance structures in the world cannot compensate for dysfunctional national governments.
Nostalgia for past eras when the distribution of power seemed more certain also influences the view that today’s global governance did not work. When analysts complain that global economic governance is fraying, they inevitably make comparisons with the Bretton Woods structures the United States crafted in the decade following the Second World War. But as we shall see, such nostalgia exaggerates the effectiveness of past global governance. In truth, the performance gap between the Bretton Woods structures at their acme and the post-2008-era global governance structures is not large. Furthermore, this nostalgia misses the key difference between the Great Recession and other post-war crises. The 2008 financial crisis hit the core global economies hardest. Yet, global economic governance structures have never imposed significant strictures on the great powers. The difference between the 2008 financial crisis and previous global crises isn’t the relative strength of international institutions—it is that in 2008 the core economies faced the burden of adjustment.
It is easy to show that global economic governance has worked better than most people realize. It is easier still to dissect why misperceptions about global governance have taken such firm root. It is explaining why global economic governance has performed well that is hard.
The most commonly provided reason is that the shared sense of crisis in 2008 spurred the major economies to joint action. This is not a compelling argument, however, for two reasons. First, a crisis mentality did not necessarily lead to sustained cooperation in the past. Other significant twentieth-century economic crises, such as the Depression, collapse of Bretton Woods, the oil shocks of the 1970s, and the failure of the European Exchange Rate Mechanism in the early 1990s, also failed to spur meaningful cooperation among the great powers. It was far from obvious that powerful actors would think of the 2008 crisis as a “shared” one.
Second, the “crisis” argument assumes that cooperation ended as soon as the crisis abated. Eurasia Group founder Ian Bremmer, for example, argues that as the sense of collective crisis lifted, so did the impetus for policy coordination.74 This assertion distorts what actually happened after Lehman Brothers collapsed. It is certainly true that macroeconomic policy coordination eroded after the G20 Toronto summit in May 2010. What had been a consensus about government spending making up the shortfall for private sector investment broke down over disagreements about the virtues of fiscal austerity. Beyond that i
ssue area, however, international economic cooperation persisted. As this book will show, progress in negotiating and implementing new banking regulations continued unabated. Trade protectionism remained restrained, and free-trade agreements and bilateral investment treaties continued to be negotiated. Cooperation on antipiracy measures increased. Global governance reform efforts continued. What actually transpired is at odds with the narrative that there was only a brief burst of cooperation during the acute phase of the crisis.
Another argument is that global governance worked better in 2008 than in previous crises because policymakers had learned from past mistakes and created stronger multilateral institutions.75 To be sure, the international institutional environment has never been thicker than it is today, and these institutions have learned from past mistakes. There are flaws in the argument, however. First, it does not explain why elites imbibed some lessons better than others. Policymakers avoided the mistakes of protectionism that plagued the Depression era; but, as we shall see, they also managed to repeat many of the macroeconomic policy errors of the 1930s. Second, to say that global economic governance worked because of strong institutions borders on tautology. In essence, one is arguing that the system worked because the system worked.76Institutionalists could counter that past institutional strength is what really matters, but there is no way to measure strength ex ante that would match up with the performance of the different institutions of global governance. The WTO, for example, is a formal, treaty-based organization with significant monitoring and enforcement capabilities. The G20, on the other hand, has no legal standing, no independent secretariat, and no real resources. Yet, despite these differences, one can persuasively argue that the latter was at least as significant as the former in affecting post-crisis global economic governance.
To understand why global economic governance performed the way it did, we need to look at the building blocks of international relations theory: interest, power, and ideas. As we shall see, commentators were not only wrong in assessing the state of international institutions, they also erred in assessing the shifts in the distribution of interest, power, and ideas. With respect to interest, the disaggregation of production has created powerful interests with a vested stake in maintaining openness. But this only tells part of the story. It also turns out that the crisis freed up international regimes to act with more policy autonomy than an argument solely grounded in sectoral interests would predict.
The conventional wisdom about post-crisis power and ideas is also due for a reassessment. Among the great powers, the United States retained far greater capabilities than is commonly appreciated. Across a range of issues, the United States was able to exercise leadership—or, at least, to maintain a status quo bias toward openness—in key arenas of global economic governance. It is true that, in recent decades, the BRIC economies have grown more rapidly than the economies of the developed world. Observers have been too quick, however, to project the future of the BRICs based on those past growth trajectories—and then to convert those extrapolations into inflated estimates of their current capabilities. The BRIC economies lack agenda-setting or convening power in the global economy. A dispassionate look at the distribution of capabilities reveals that the United States, the European Union, and China are the great powers in the post-crisis global economy. If they agree on what is to be done, then it is done. The 2008 financial crisis and Great Recession have led to a minor shift in the global distribution of power—but the key word is “minor.”
Neither did the crisis seriously challenge the privileged set of economic ideas. Despite a lot of loose talk about its demise, the Washington Consensus has endured. There are a variety of reasons for its resilience, but the two biggest are the deep intellectual roots of market-friendly policy ideas and the failure of challengers to articulate a compelling alternative. China could have been full-throated in its support of a Beijing Consensus. Instead, China acted like a supporter of the status quo far more frequently than it acted like a spoiler of the system. In 2005, US deputy secretary of state Robert Zoellick challenged China to act like a “responsible stakeholder” in the international system, by which he meant that China needed to “recognize that the international system sustains their peaceful prosperity, so they work to sustain that system.”77 In their post-crisis actions, China has acted like a fully responsible stakeholder of global economic governance.
WHAT DOES IT MEAN FOR THE SYSTEM TO WORK?
“The system” refers to the global economy and the rules of the game that govern it. It is theoretically possible for the global economy to function well without clear rules of the game. Usually, however, the global economy works when global economic governance works.
Empirical assessments about whether global governance “works” or is “effective” do not suffer from an abundance of analytical clarity.78 To a great extent, the problem is normative. Normatively, any definition of global economic governance that shows it to be “working” is freighted with peril. Definitions of what “works” will automatically include—either implicitly or explicitly—preferences about what the rules for the global economy should look like. For example, suppose global economic governance were to effectively manage a regime based on the principle that all international trade should be executed through state trading companies and be in perfect bilateral balance. Ostensibly, such a system could work given its operating rules; but it would be based on principles most economists would categorize as horribly suboptimal. So, should global governance aim for a laissez faire system of unregulated cross-border exchange, for the “embedded liberalism” of the Bretton Woods era, or for the state-controlled aspirations of the New International Economic Order?79 It is impossible to disentangle evaluations of the system from our preconceptions of what the system should do.
To be clear at the outset: my normative preferences for global economic governance rest on two underlying principles. First, a global economy more open to the exchange of goods, services, capital, people, and ideas generates the greatest expansion of welfare possible.80 A global economy with high barriers to cross-border exchange will grow more sluggishly and suffer from more prolonged downturns than a global economy that is open to trade. Global governance should therefore focus on reducing cross-border barriers to exchange. This is particularly true for the largest markets. China’s defection from the rules of the game has more impact on the global economic order than, say, Gabon’s.
Second, paradoxically, global governance also must be prepared to cope with the vicissitudes of an open world economy. Charles Kindleberger called financial crises the “hardy perennials” of the global economy; the subsequent literature suggests that over the past century such crises have been more common than great-power wars.81 Capitalist systems are inherently prone to crisis, which means that open global economies are inherently prone to global crises. In theory, the best forms of global economic governance forestall such crises. In practice, no global economic order to date permits the comprehensive management of key policy variables.82 Pragmatically, global economic governance helps to contain and repair the damage as quickly as possible after such crises. These repairs can include reforming the rules of cross-border exchange, ameliorating macroeconomic downturns, and establishing guidelines for national regulations.
My set of first principles is different from those of some other observers. Advocates of laissez faire policies will decry my approval of the revisions to the Basel Committee on Banking Supervision’s standards, seeing them as an example of excessive intervention into the marketplace. Harsher critics of globalized finance will decry my approval of those standards because they failed to adequately address the “too big to fail” problem in global finance. These criticisms are valid from their points of view—I would simply note that my preferences on how global governance should regulate the global economy reflect public attitudes on these questions.83
WHAT THIS BOOK IS AND WHAT IT IS NOT
This is not a standard work of political science. I
do not rigorously test competing hypotheses, nor do I develop a formal theory of governance. Instead, I make an empirical assertion that is heavily contested in the public sphere. It would therefore be problematic to simply assert that global economic governance worked after 2008 and proceed from there. I thus seek to demonstrate that fact and explain why the conventional wisdom on this topic has been so wrong. To use the language of social science, the first half of the book is far more about descriptive inference than causal inference.84
Furthermore, I am not creating a generalizable theory about global governance in a crisis. Rather, the purpose of this book is to explain what happened to the global political economy and global governance after the Lehman Brothers collapse. My primary concern is thus explaining this case rather than apportioning causal weights to different theories. To be sure, this is a Big Important Case and therefore merits scrutiny. Nevertheless, it remains a single case study. There are vigorous methodological debates within political science about the salience of big cases, but I choose not to engage those debates here. The causal inferences that I discuss in the second part of the book are not necessarily generalizable. As political scientists will observe, I eschew a strictly paradigmatic approach for a more analytically eclectic treatment—with all the epistemological trade-offs that entails.85