Around the turn of the century, critics of trade and capital-market liberalization had good reason to worry that emerging and developing economies would fall further behind the developing world. But the opposite happened, and now the world must worry about the trajectory of advanced economies and the fraying of multilateral arrangements.
LONDON – Few academic books have had more political influence than Joseph E. Stiglitz’sGlobalization and its Discontents. First published in 2002, it became an instant international sensation and propelled its author, already a Nobel laureate economist, to rock-star status. That has been especially true in the emerging and developing world, where he now addresses sold-out arenas. After Discontents, globalization became a byword for all of the harm that has been visited upon emerging and developing economies by global trade and international financial institutions.
Last year, Stiglitz published a sequel in which he reassesses his previous arguments. In Globalization and Its Discontents Revisited, he gives us two books for the price of one: the original text appears in its entirety, followed by reflections on the original insights in light of all that has happened since.
It is hard to fathom just how much the world has changed over the past 16 years. Suffice it to say that the discontents – and their attendant threats to the international order – have now shifted from developing to developed countries. Together with other contributors to the globalization debate, Stiglitz helps us understand why things have turned out differently than expected, and how globalization will likely play out over the next decade, particularly from the perspective of emerging and developing economies.
The original Discontents was written in the aftermath of a series of emerging-market meltdowns in Asia and deep transitional recessions in the former Soviet Union. At the time, policy debates were colored by the late-1990s anti-globalization movement, which had culminated in the violent street protests surrounding the World Trade Organization’s Ministerial Conference in Seattle in 1999.
Since then, the world has been fundamentally altered by the terrorist attacks of September 11, 2001, and the global financial crisis that began ten years ago with the collapse of Lehman Brothers. While Asian emerging markets have grown spectacularly, developed countries have experienced stagnation, rising inequality, and widespread social and political upheaval.
Owing to these developments, the anti-globalization coalition itself has changed. In the late 1990s, it brought together those who were worried about growing inequities and the impact of trade agreements on jobs and those who were shining a spotlight on environmental degradation. The anti-globalization bandwagon in the age of Donald Trump is also focused on jobs, trade, and unfairness. But the US is now much more in the losing position vis-à-vis the rest of the world, particularly China, and the environment has been demoted to a second-order problem.
Inequality and the New Discontents
Back in 2002, Stiglitz was mainly concerned with globalization’s effect on the distribution of income and wealth in emerging and developing economies. It turns out that he was an early exponent of two fundamental changes in the field of economics over the past two decades. First, economists have come to pay much more attention to the distributional impact of economic policies. It is now widely acknowledged that inequality can profoundly affect politics, and that mechanisms for compensating the “losers” of economic outcomes after the fact rarely work in practice.
Both inequality of outcome and of opportunity matter. But inequality of opportunity has more far-reaching and direct economic costs, because it means that valuable human capital is being wasted. This points to the second change in economics: economists have come to focus much more on process, recognizing that people can live with unequal outcomes as long as the mechanisms for determining those outcomes are considered fair.
Stiglitz now acknowledges that developing economies – with some exceptions, mainly in Africa – are doing much better than he would have expected in 2002. HIV/AIDS is under control, life expectancy is increasing, and ozone-layer depletion has been reversed. The citizens of emerging and developing economies have reaped significant benefits since opening up their markets to trade and investment. Stiglitz rebukes himself for not having emphasized these positive elements of globalization. But in 2018, his main concern has shifted from disparities between developed and emerging/developing economies to the rising inequality within countries – a trend that is undermining public support for national and multilateral institutions around the world.
Two excellent books can help us better understand inequalities both between and within countries: The Globalization of Inequality by François Bourguignon, a former chief economist at the World Bank, and Global Inequality by Branko Milanovic of the City University of New York. Each delves painstakingly into the available economic data to show how the two dimensions of global inequality can both reinforce and mitigate each other.
For his part, Bourguignon recounts that between 1820 and 1990, global inequality (weighted by population) increased dramatically, reaching levels above that of any single country. But since 1990, and particularly in the new millennium, global inequality has decreased. The net result is that the share of the world population living in extreme poverty has fallen to just 20%, from 70% a century ago.
This decline in inequality at the global level has been driven mainly by rapid economic convergence. That process has been reinforced by what Milanovic calls “Kuznets waves” within countries – a phenomenon in which inequality rises steeply alongside technologically driven growth, but then eventually peaks and declines (hence the wave metaphor).
As of 2018, convergence is still going strong, not just in China, but in much of East Asia as well. And as the Kuznets wave recedes, inequality within these countries will continue to fall. At the same time, Milanovic’s analysis suggest that global inequality will increasingly describe the gap between emerging and developing economies themselves, rather than between the developed and the emerging/developing world. In particular, successful Asian economies will continue to outpace much of Africa.
Meanwhile, as the French economist Thomas Piketty has shown, inequality within developed economies has continued to increase, as the top 0.1-1% of households amass more wealth. Owing to labor-replacing technologies and the growing influence of big business, middle-class wages are being depressed. And that, in turn, is fueling a political backlash against globalization. Between the United Kingdom’s Brexit referendum and the election of Trump, these “New Discontents,” as Stiglitz calls them, have already had a far greater impact on global politics than the “Old Discontents” of the developing world ever did.
The Great Race
Though global inequality has declined as a result of convergence, few middle-income countries since 2000 have managed to attain high-income status. As a result,policymakers in many emerging/developing economies have come to fear the so-called middle-income trap. In reality, the idea that countries tend to get stuck at some particular income level is not supported by the data. Nevertheless, governments in middle-income countries are right to assume that catching up to the developed world will require far-reaching reforms to political and economic institutions. The question is whether achieving such a transformation has become easier or harder since Discontents first appeared.
There is good reason to think that the task of catching up to high-income developed economies has become more difficult. Emerging and developing economies must now converge faster than in the past, owing to demographic and political pressures and amore rapidly changing technological frontier. Moreover, governments are subject to more environmental and social constraints than they once were. Many of these are spelled out in the United Nations’ Agenda 2030, which includes 17 Sustainable Development Goals and 169 specific targets to be met on the way to achieving them. No one has actually sat down and determined Agenda 2030’s costs or its impact on growth. But the world community must come together to ensure that the necessary investment does not impede convergence or lead to unsustainable debt levels in many emerging and developing countries.
That said, catching up to the developed world may have become easier in one important respect. In The Great Convergence, Richard Baldwin of the Graduate Institute, Geneva, shows how the global production system has moved from trade in goods and services to trade in information, with multinational corporations obsessively trying to prevent intellectual-property leaks to competitors.
Baldwin’s analysis has important implications for both the governance of global trade and domestic policymaking. For emerging and developing economies, the good news is that the fragmentation of value chains has reduced or eliminated traditional barriers to entry. A country no longer has to produce an entire car to be part of the global automobile industry; it is enough to become an efficient producer of a single item, such as windshield wipers or gearboxes.
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Subscribe now to gain greater access to Project Syndicate – including every commentary and our entire On Point suite of subscriber-exclusive content – starting at just $49.99
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Despite multinationals’ best efforts to protect their technologies and the information generated at various stages of the production process, spillovers are inevitable, and emerging and developing countries are understandably trying to benefit from them. No country has been more successful than China at exploiting these opportunities in a systematic fashion; but virtually all emerging economies have integrated IP-procurement methods into their industrial policies.
Interestingly, recent work on patenting by the economic geographer Riccardo Crescenzi suggests that leading multinationals are much better at preventing IP leakage than are the companies following in their footsteps. For emerging and developing economies, then, there is much to be gained from attracting these second-tier firms.
Another broad trend since 2002 is the geographic changes in production and institutional patterns. The global financial architecture and the trade in goods and services have become more regionalized, such that South Asian countries now trade more with China than with the US and Europe. Regional development institutions have also grown at the expense of the World Bank; regional safety nets such as the Chiang Mai Initiative in Asia and the post-crisis framework in the eurozone have largely taken over from the International Monetary Fund; and national development institutions such as the China Development Bank and the Brazilian Development Bank have become far more important outside their home countries.
Managing It All
How might we improve our management of globalization? On that question, Harvard economist Dani Rodrik’sThe Globalization Paradox remain perhaps the most thought-provoking of the books under review. Rodrik provides a useful conceptual framework for examining the current state of globalization. At the center of his thinking is what he calls the “Globalization Trilemma,” which captures the impossibility of combining national sovereignty, market integration, and genuine democracy. Countries can have any two, but never all three. A country that is more open to market integration inevitably must cede some degree of democratic self-determination to comply with international trade rules and institutions. And countries that wish to join democratic multilateral bodies must give up some sovereignty.
Prior to the current age of globalization, most policymaking decisions were made by presumably representative national bodies that were accountable to a domestic constituency. But with globalization came the establishment of supranational structures, starting with the Bretton Woods institutions after World War II. In terms of Rodrik’s trilemma, Bretton Woods embraced market integration, but kept decision-making firmly in the hands of national governments. Since then, multilateral institutions have attained more discretion, even though they are not democratically governed. They are controlled by elected governments; but the US has always enjoyed de facto veto rights, and the allocation of power among the other members largely reflects their respective standing after the war.
In the original Discontents, Stiglitz was critical of multilateral institutions such as the World Bank and the IMF for what he saw as their role in undermining emerging and developing economies through “structural adjustment” programs. But his critique was not a broadside against the very concept of multilateralism, as one hears so often today. In fact, Stiglitz still expressed great hope in these institutions.
Soon after Stiglitz’s book appeared, Kemal Derviş, a former Turkish economy minister and World Bank official, published Better Globalization, which offers a deeply informative and wide-ranging analysis that reflects its author’s diverse professional experience. Among other proposals, Derviş called for the creation of a UN Economic and Social Security Council, and showed how internal voting arrangements could be improved to lend more legitimacy to multilateral institutions.
Unfortunately, not much progress has been made on the global-governance agenda since then. Voting rights have been adjusted somewhat at the World Bank, but the US still has the power to veto all decisions, as well as the privilege of appointing the president every five years. Meanwhile, governance reform at the IMF has been even slower,prompting emerging economies to form their own institutions, such as the AsianInfrastructure Investment Bank (AIIB) and the New Development Bank.
In its own low-key way, the AIIB is now creating waves in the realm of multilateral governance. Its shareholders, chief among them China, have decided to abolish the resident board of executive directors, thus conferring more decision-making power on the bank’s management while promoting more direct contacts with shareholding governments. Through the AIIB,the emerging world has proven that it is perfectly capable of launching its own state-of-the-art multilateral institutions.
Shifting the Balance
Still, more work is needed to strengthen emerging and developing economies’ influence over issues that directly affect them. One crucial issue is capital flows, which typically emanate from the developed world and wreak havoc in emerging and developing economies. Investors in search of higher yields pour into emerging and developing economies, inflating asset prices, only to flee en masse, precipitating the collapse of markets.
Many countries have developed tools for managing these flows, only to be met with criticism from the OECD (representing mostly rich countries) and the IMF. To be sure, the IMF has softened its attitude toward capital controls over time. But as Raghuram Rajan, the former Governor of the Bank of India, has argued, new procedures are needed to ensure that the concerns of emerging and developing economies’ governments are taken into account.
New institutional arrangements might also be needed to address inequality. Milanovic points out that there are currently no international institutions focused on this issue. TheWorld Bank is tasked with eliminating poverty and creating prosperity in low-and middle-income countries, but that remit does not explicitly include inequality. Throughout the age of globalization, growth and poverty reduction have been the top development priorities. But recent events in developed economies have given new urgency to the issue of inequality within countries, such that “inclusive growth” is now a leading catchphrase in development circles.
One major institutional change that has already occurred is the expansion of the G20’s role after the global financial crisis. During the rush to muster a global response to the crisis, the economic and development agendas were re-assigned to this previously inactive body, reflecting tectonic movements in the relative weight of certain emerging and developing economies.
Over the past decade, the G20’s capacity to manage its expanded portfolio has been the subject of much debate. The pivot to the G20 has certainly given emerging and developing economies a place at the table. But those countries’ influence over decision-making has been limited by their capacity to provide evidence-based input. Whereas advanced countries come to G20 meetings with an entourage of hundreds, emerging countries often show up with a handful. Granting these countries a bigger role in decisions that affect them will prompt a stronger interest in building this capacity.
Despite all of the institutional innovations since 2002, the Trump administration’s attacks on the international order that the US once did so much to support mean that emerging and developing economies must worry about the sustainability of the multilateral system itself. While most countries would prefer a rules-based system of global governance, the nature of those rules and how they are written obviously matters. Unlike in the post-war era, the US can no longer set the rules unilaterally, and it may opt for a world where raw power is all that matters.
The Bottom Line
At the end of the day, there is little doubt that emerging and developing economies are better off today than when Stiglitz wrote the original Discontents. And yet, while globalization has contributed to the decrease in inequality of outcomes at the global level, the jury is still out on whether it is now harder for emerging and developing countries to catch up with developed economies. The role of globalization in the increase in inequality of both outcomes and opportunities within developed economies is disputed, but the widening gaps are now undermining trust in both national and international institutions – and ultimately in globalization itself.
Clearly, confidence in the international community’s ability to reach comprehensive multilateral agreements is in decline. The days of Bretton Woods or the Plaza Agreement, when world leaders could sit down and hash out collective solutions to common problems, seem far away. In his freewheeling and entertaining Grave New World, Stephen D. King, a senior economic adviser at HSBC, points to some areas where cooperation may still be possible, but, overall, his conclusions are pessimistic.
Still, there are points of light. The Paris climate agreement, for example, is a remarkable and innovative feat of collective action. Rather than attempting to impose emissions limits by law, it enforces nationally determined targets through peer monitoring and massive pressure from civil society and the international community. This is a promising approach to mobilizing global action. That said, it remains to be seen if the same model would work for other areas.
The reinforcement of the G20 as a global-governance body has given emerging and developing economies a greater role in global decision-making. But reforms to the decision-making process have not kept pace with emerging economies’ growing economic heft. In an increasingly decentralized global order, countries such as China have more influence than ever, particularly in their own regions. But within truly global institutions, the process of accommodating new powers has been slower.
A hopeful sign is the G20 Eminent Persons Group of Global Financial Governance appointed last year during the German G20 presidency to examine the international financial institutions as a system. Advanced and emerging economies have an equal number of members and the chair, Tharman Shanmugaratnam, Singapore’s deputy prime minister, comes from the emerging world. The group will report at the IMF/World Bank AnnualMeetings in October.
Looking ahead, it is clear that reforms to global-governance structures must be combined with efforts to boost emerging and developing economies’ ability to shape their own future. Those countries’ governments are right to worry that unilateral action taken by wayward superpowers will destroy the multilateral system upon which globalization rests. If the world is heading toward a new reality based on hard power, emerging and developing countries will be the big losers. They now have an urgent interest in helping to build a more inclusive and multipolar multilateralism – and they have the heft to do so.
Globalization, which was supposed to benefit developed and developing countries alike, is now reviled almost everywhere, as the political backlash in Europe and the US has shown. The challenge is to minimize the risk that the backlash will intensify, and that starts by understanding – and avoiding – past mistakes.
critiques three responses to the political backlash against economic openness now sweeping advanced economies.
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explains how technology firms abuse patent law to establish and preserve monopolies, criticizes the US Supreme Court’s approach to market power, sheds light on the relationship between innovation and inequality, and more.
How to design effective industrial policies has suddenly become a hot – and divisive – topic among economists and policymakers. Even those who agree that governments should intervene in the economy to bolster productivity, increase competitiveness, and tackle social and environmental challenges differ sharply on the details.
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LONDON – Few academic books have had more political influence than Joseph E. Stiglitz’s Globalization and its Discontents. First published in 2002, it became an instant international sensation and propelled its author, already a Nobel laureate economist, to rock-star status. That has been especially true in the emerging and developing world, where he now addresses sold-out arenas. After Discontents, globalization became a byword for all of the harm that has been visited upon emerging and developing economies by global trade and international financial institutions.
Last year, Stiglitz published a sequel in which he reassesses his previous arguments. In Globalization and Its Discontents Revisited, he gives us two books for the price of one: the original text appears in its entirety, followed by reflections on the original insights in light of all that has happened since.
It is hard to fathom just how much the world has changed over the past 16 years. Suffice it to say that the discontents – and their attendant threats to the international order – have now shifted from developing to developed countries. Together with other contributors to the globalization debate, Stiglitz helps us understand why things have turned out differently than expected, and how globalization will likely play out over the next decade, particularly from the perspective of emerging and developing economies.
The original Discontents was written in the aftermath of a series of emerging-market meltdowns in Asia and deep transitional recessions in the former Soviet Union. At the time, policy debates were colored by the late-1990s anti-globalization movement, which had culminated in the violent street protests surrounding the World Trade Organization’s Ministerial Conference in Seattle in 1999.
Since then, the world has been fundamentally altered by the terrorist attacks of September 11, 2001, and the global financial crisis that began ten years ago with the collapse of Lehman Brothers. While Asian emerging markets have grown spectacularly, developed countries have experienced stagnation, rising inequality, and widespread social and political upheaval.
Owing to these developments, the anti-globalization coalition itself has changed. In the late 1990s, it brought together those who were worried about growing inequities and the impact of trade agreements on jobs and those who were shining a spotlight on environmental degradation. The anti-globalization bandwagon in the age of Donald Trump is also focused on jobs, trade, and unfairness. But the US is now much more in the losing position vis-à-vis the rest of the world, particularly China, and the environment has been demoted to a second-order problem.
Inequality and the New Discontents
Back in 2002, Stiglitz was mainly concerned with globalization’s effect on the distribution of income and wealth in emerging and developing economies. It turns out that he was an early exponent of two fundamental changes in the field of economics over the past two decades. First, economists have come to pay much more attention to the distributional impact of economic policies. It is now widely acknowledged that inequality can profoundly affect politics, and that mechanisms for compensating the “losers” of economic outcomes after the fact rarely work in practice.
Both inequality of outcome and of opportunity matter. But inequality of opportunity has more far-reaching and direct economic costs, because it means that valuable human capital is being wasted. This points to the second change in economics: economists have come to focus much more on process, recognizing that people can live with unequal outcomes as long as the mechanisms for determining those outcomes are considered fair.
Stiglitz now acknowledges that developing economies – with some exceptions, mainly in Africa – are doing much better than he would have expected in 2002. HIV/AIDS is under control, life expectancy is increasing, and ozone-layer depletion has been reversed. The citizens of emerging and developing economies have reaped significant benefits since opening up their markets to trade and investment. Stiglitz rebukes himself for not having emphasized these positive elements of globalization. But in 2018, his main concern has shifted from disparities between developed and emerging/developing economies to the rising inequality within countries – a trend that is undermining public support for national and multilateral institutions around the world.
Two excellent books can help us better understand inequalities both between and within countries: The Globalization of Inequality by François Bourguignon, a former chief economist at the World Bank, and Global Inequality by Branko Milanovic of the City University of New York. Each delves painstakingly into the available economic data to show how the two dimensions of global inequality can both reinforce and mitigate each other.
For his part, Bourguignon recounts that between 1820 and 1990, global inequality (weighted by population) increased dramatically, reaching levels above that of any single country. But since 1990, and particularly in the new millennium, global inequality has decreased. The net result is that the share of the world population living in extreme poverty has fallen to just 20%, from 70% a century ago.
This decline in inequality at the global level has been driven mainly by rapid economic convergence. That process has been reinforced by what Milanovic calls “Kuznets waves” within countries – a phenomenon in which inequality rises steeply alongside technologically driven growth, but then eventually peaks and declines (hence the wave metaphor).
As of 2018, convergence is still going strong, not just in China, but in much of East Asia as well. And as the Kuznets wave recedes, inequality within these countries will continue to fall. At the same time, Milanovic’s analysis suggest that global inequality will increasingly describe the gap between emerging and developing economies themselves, rather than between the developed and the emerging/developing world. In particular, successful Asian economies will continue to outpace much of Africa.
Meanwhile, as the French economist Thomas Piketty has shown, inequality within developed economies has continued to increase, as the top 0.1-1% of households amass more wealth. Owing to labor-replacing technologies and the growing influence of big business, middle-class wages are being depressed. And that, in turn, is fueling a political backlash against globalization. Between the United Kingdom’s Brexit referendum and the election of Trump, these “New Discontents,” as Stiglitz calls them, have already had a far greater impact on global politics than the “Old Discontents” of the developing world ever did.
The Great Race
Though global inequality has declined as a result of convergence, few middle-income countries since 2000 have managed to attain high-income status. As a result,policymakers in many emerging/developing economies have come to fear the so-called middle-income trap. In reality, the idea that countries tend to get stuck at some particular income level is not supported by the data. Nevertheless, governments in middle-income countries are right to assume that catching up to the developed world will require far-reaching reforms to political and economic institutions. The question is whether achieving such a transformation has become easier or harder since Discontents first appeared.
There is good reason to think that the task of catching up to high-income developed economies has become more difficult. Emerging and developing economies must now converge faster than in the past, owing to demographic and political pressures and amore rapidly changing technological frontier. Moreover, governments are subject to more environmental and social constraints than they once were. Many of these are spelled out in the United Nations’ Agenda 2030, which includes 17 Sustainable Development Goals and 169 specific targets to be met on the way to achieving them. No one has actually sat down and determined Agenda 2030’s costs or its impact on growth. But the world community must come together to ensure that the necessary investment does not impede convergence or lead to unsustainable debt levels in many emerging and developing countries.
That said, catching up to the developed world may have become easier in one important respect. In The Great Convergence, Richard Baldwin of the Graduate Institute, Geneva, shows how the global production system has moved from trade in goods and services to trade in information, with multinational corporations obsessively trying to prevent intellectual-property leaks to competitors.
Baldwin’s analysis has important implications for both the governance of global trade and domestic policymaking. For emerging and developing economies, the good news is that the fragmentation of value chains has reduced or eliminated traditional barriers to entry. A country no longer has to produce an entire car to be part of the global automobile industry; it is enough to become an efficient producer of a single item, such as windshield wipers or gearboxes.
SUMMER SALE: Save 40% on all new Digital or Digital Plus subscriptions
Subscribe now to gain greater access to Project Syndicate – including every commentary and our entire On Point suite of subscriber-exclusive content – starting at just $49.99
Subscribe Now
Despite multinationals’ best efforts to protect their technologies and the information generated at various stages of the production process, spillovers are inevitable, and emerging and developing countries are understandably trying to benefit from them. No country has been more successful than China at exploiting these opportunities in a systematic fashion; but virtually all emerging economies have integrated IP-procurement methods into their industrial policies.
Interestingly, recent work on patenting by the economic geographer Riccardo Crescenzi suggests that leading multinationals are much better at preventing IP leakage than are the companies following in their footsteps. For emerging and developing economies, then, there is much to be gained from attracting these second-tier firms.
Another broad trend since 2002 is the geographic changes in production and institutional patterns. The global financial architecture and the trade in goods and services have become more regionalized, such that South Asian countries now trade more with China than with the US and Europe. Regional development institutions have also grown at the expense of the World Bank; regional safety nets such as the Chiang Mai Initiative in Asia and the post-crisis framework in the eurozone have largely taken over from the International Monetary Fund; and national development institutions such as the China Development Bank and the Brazilian Development Bank have become far more important outside their home countries.
Managing It All
How might we improve our management of globalization? On that question, Harvard economist Dani Rodrik’s The Globalization Paradox remain perhaps the most thought-provoking of the books under review. Rodrik provides a useful conceptual framework for examining the current state of globalization. At the center of his thinking is what he calls the “Globalization Trilemma,” which captures the impossibility of combining national sovereignty, market integration, and genuine democracy. Countries can have any two, but never all three. A country that is more open to market integration inevitably must cede some degree of democratic self-determination to comply with international trade rules and institutions. And countries that wish to join democratic multilateral bodies must give up some sovereignty.
Prior to the current age of globalization, most policymaking decisions were made by presumably representative national bodies that were accountable to a domestic constituency. But with globalization came the establishment of supranational structures, starting with the Bretton Woods institutions after World War II. In terms of Rodrik’s trilemma, Bretton Woods embraced market integration, but kept decision-making firmly in the hands of national governments. Since then, multilateral institutions have attained more discretion, even though they are not democratically governed. They are controlled by elected governments; but the US has always enjoyed de facto veto rights, and the allocation of power among the other members largely reflects their respective standing after the war.
In the original Discontents, Stiglitz was critical of multilateral institutions such as the World Bank and the IMF for what he saw as their role in undermining emerging and developing economies through “structural adjustment” programs. But his critique was not a broadside against the very concept of multilateralism, as one hears so often today. In fact, Stiglitz still expressed great hope in these institutions.
Soon after Stiglitz’s book appeared, Kemal Derviş, a former Turkish economy minister and World Bank official, published Better Globalization, which offers a deeply informative and wide-ranging analysis that reflects its author’s diverse professional experience. Among other proposals, Derviş called for the creation of a UN Economic and Social Security Council, and showed how internal voting arrangements could be improved to lend more legitimacy to multilateral institutions.
Unfortunately, not much progress has been made on the global-governance agenda since then. Voting rights have been adjusted somewhat at the World Bank, but the US still has the power to veto all decisions, as well as the privilege of appointing the president every five years. Meanwhile, governance reform at the IMF has been even slower,prompting emerging economies to form their own institutions, such as the AsianInfrastructure Investment Bank (AIIB) and the New Development Bank.
In its own low-key way, the AIIB is now creating waves in the realm of multilateral governance. Its shareholders, chief among them China, have decided to abolish the resident board of executive directors, thus conferring more decision-making power on the bank’s management while promoting more direct contacts with shareholding governments. Through the AIIB,the emerging world has proven that it is perfectly capable of launching its own state-of-the-art multilateral institutions.
Shifting the Balance
Still, more work is needed to strengthen emerging and developing economies’ influence over issues that directly affect them. One crucial issue is capital flows, which typically emanate from the developed world and wreak havoc in emerging and developing economies. Investors in search of higher yields pour into emerging and developing economies, inflating asset prices, only to flee en masse, precipitating the collapse of markets.
Many countries have developed tools for managing these flows, only to be met with criticism from the OECD (representing mostly rich countries) and the IMF. To be sure, the IMF has softened its attitude toward capital controls over time. But as Raghuram Rajan, the former Governor of the Bank of India, has argued, new procedures are needed to ensure that the concerns of emerging and developing economies’ governments are taken into account.
New institutional arrangements might also be needed to address inequality. Milanovic points out that there are currently no international institutions focused on this issue. TheWorld Bank is tasked with eliminating poverty and creating prosperity in low-and middle-income countries, but that remit does not explicitly include inequality. Throughout the age of globalization, growth and poverty reduction have been the top development priorities. But recent events in developed economies have given new urgency to the issue of inequality within countries, such that “inclusive growth” is now a leading catchphrase in development circles.
One major institutional change that has already occurred is the expansion of the G20’s role after the global financial crisis. During the rush to muster a global response to the crisis, the economic and development agendas were re-assigned to this previously inactive body, reflecting tectonic movements in the relative weight of certain emerging and developing economies.
Over the past decade, the G20’s capacity to manage its expanded portfolio has been the subject of much debate. The pivot to the G20 has certainly given emerging and developing economies a place at the table. But those countries’ influence over decision-making has been limited by their capacity to provide evidence-based input. Whereas advanced countries come to G20 meetings with an entourage of hundreds, emerging countries often show up with a handful. Granting these countries a bigger role in decisions that affect them will prompt a stronger interest in building this capacity.
Despite all of the institutional innovations since 2002, the Trump administration’s attacks on the international order that the US once did so much to support mean that emerging and developing economies must worry about the sustainability of the multilateral system itself. While most countries would prefer a rules-based system of global governance, the nature of those rules and how they are written obviously matters. Unlike in the post-war era, the US can no longer set the rules unilaterally, and it may opt for a world where raw power is all that matters.
The Bottom Line
At the end of the day, there is little doubt that emerging and developing economies are better off today than when Stiglitz wrote the original Discontents. And yet, while globalization has contributed to the decrease in inequality of outcomes at the global level, the jury is still out on whether it is now harder for emerging and developing countries to catch up with developed economies. The role of globalization in the increase in inequality of both outcomes and opportunities within developed economies is disputed, but the widening gaps are now undermining trust in both national and international institutions – and ultimately in globalization itself.
Clearly, confidence in the international community’s ability to reach comprehensive multilateral agreements is in decline. The days of Bretton Woods or the Plaza Agreement, when world leaders could sit down and hash out collective solutions to common problems, seem far away. In his freewheeling and entertaining Grave New World, Stephen D. King, a senior economic adviser at HSBC, points to some areas where cooperation may still be possible, but, overall, his conclusions are pessimistic.
Still, there are points of light. The Paris climate agreement, for example, is a remarkable and innovative feat of collective action. Rather than attempting to impose emissions limits by law, it enforces nationally determined targets through peer monitoring and massive pressure from civil society and the international community. This is a promising approach to mobilizing global action. That said, it remains to be seen if the same model would work for other areas.
The reinforcement of the G20 as a global-governance body has given emerging and developing economies a greater role in global decision-making. But reforms to the decision-making process have not kept pace with emerging economies’ growing economic heft. In an increasingly decentralized global order, countries such as China have more influence than ever, particularly in their own regions. But within truly global institutions, the process of accommodating new powers has been slower.
A hopeful sign is the G20 Eminent Persons Group of Global Financial Governance appointed last year during the German G20 presidency to examine the international financial institutions as a system. Advanced and emerging economies have an equal number of members and the chair, Tharman Shanmugaratnam, Singapore’s deputy prime minister, comes from the emerging world. The group will report at the IMF/World Bank AnnualMeetings in October.
Looking ahead, it is clear that reforms to global-governance structures must be combined with efforts to boost emerging and developing economies’ ability to shape their own future. Those countries’ governments are right to worry that unilateral action taken by wayward superpowers will destroy the multilateral system upon which globalization rests. If the world is heading toward a new reality based on hard power, emerging and developing countries will be the big losers. They now have an urgent interest in helping to build a more inclusive and multipolar multilateralism – and they have the heft to do so.