This week, when finance ministers and central bank governors from around the world gather in Washington for the annual meetings of the International Monetary Fund and the World Bank, they will confront a global economic order under increasing strain.
Having failed to deliver the inclusive economic prosperity of which it is capable, that order is subject to growing doubts and mounting challenges. Barring a course correction, the risks that today’s order will yield to a world economic non-order will only intensify.
The current international economic order, spearheaded by the United States and its allies in the wake of World War II, is underpinned by multilateral institutions, including the IMF and the World Bank. These institutions were designed to crystallize member countries’ obligations, and they embodied a set of economic-policy practices that evolved into what became known as the “Washington Consensus.”
That consensus was rooted in an economic paradigm that aimed to promote win-win interactions among countries, emphasizing trade liberalization, relatively unrestricted cross-border capital flows, free-market pricing, and domestic deregulation.
For several decades, the Western-led international order functioned well. Then it was shaken by a series of financial shocks that culminated in the 2008 global financial crisis, which triggered cascading economic failures that pushed the world to the edge of a devastating multi-year depression. It was the most severe economic breakdown since the Great Depression of the 1930s.
But the crisis did not appear out of nowhere to challenge a healthy economic order. On the contrary, the evolution of the global order had long been outpaced by structural economic changes on the ground, with multilateral governance institutions taking too long to recognize fully the significance of financial-sector developments and their impact on the real economy, or to make adequate room for emerging economies.
For example, governance structures, including voting power, correspond better to the economic realities of yesterday than to those of today and tomorrow. And nationality, rather than merit, still is the dominant guide for the appointment of these institutions’ leaders, with top positions still reserved for European and US citizens.
Several countries, particularly among the advanced economies, have also failed to transform their domestic policies to account for changes to economic relationships resulting from globalization, liberalization, and deregulation.
As a result of all of this, the balance of winners and losers has become increasingly extreme and more difficult to manage, not just economically, but also politically and socially. With too many people feeling marginalized, forgotten, and dispossessed, domestic policy pressure has intensified, causing countries to turn inward. America’s inward turn, already underway for several years, has been particularly consequential.
Year after year, top government officials at the IMF/World Bank annual meetings fail to address the problems. This year is likely to be no different. Instead of discussing concrete steps to slow and reverse the march toward a global economic non-order, officials will probably welcome the cyclical uptick in global growth and urge member countries to do more to remove structural impediments to faster, more durable, and more inclusive growth.
While understandable, that isn’t good enough. The meetings in Washington offer a critical opportunity to start a serious discussion of how to arrest the lose-lose dynamics that have been gaining traction in the global economy.
Mohamed A. El-Erian, Chief Economic Adviser at Allianz, was Chairman of US President Barack Obama’s Global Development Council. Copyright: Project Syndicate, 2017. www.project-syndicate.org. Shanghai Daily condensed the article.