Reforming Global Finance

Do We Need New Global Institutions?

What is the world to do when national governments retreat from global commitments?

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Takeaways


  • Global politics is gridlocked. There can be no doubt that the system needs radical reform.
  • The question is whether this will be in time — or whether real reform only emerges from a devastating crisis.
  • The suffering that lies ahead may well be on a scale that exceeds the loss of human life which scarred the last century.
  • Politicians, when faced by the prospect of falling over an abyss, do make brave decisions.
  • We do not need a greater number of global institutions. We need radical reform of those that exist.

The omens are not good. If past decades provide a guide, new problems will be thrown at old institutions that were created for other purposes. The UN, IMF, World Bank and others are overloaded and cannot deliver on their mushrooming mandates.

The G7 — a small, informal directorate for managing the global economy that emerged in the 1970s — covers all of these issues. But its membership — a powerhouse 30 years ago — is now out of date.

The G20 exercises far more legitimacy globally when compared to the G7. However, these and other inter-government networks, such as the G24 or G77 groups of developing countries, have neither the authority nor the capacity or legitimacy to deliver on the enormous expectations placed on them.

Global action is important. Some core principles are required to guide as to when, where, and how global action is required.

Ngaire Woods, the Dean of the Blavatnik School of Government at Oxford, and I have devised the following set of five principles:

  Not all issues require global collective action.

A principle of subsidiarity must apply. Many problems are resolvable at the national, regional or bilateral level. In addition, non-government actors such as the private sector or civil organizations can also bring about solutions to concrete problems.

Those advocating a greater role for civil society or professional networks are right, up to a point. Governments have to step in when a failure on their part to act collectively and in a timely way would have dramatic and irreversible consequences.

Climate change is an obvious example. Even assuming rapid global action, the IPPC projects a temperature rise of 2-3%, which would be catastrophic to many millions of people.

Global collective action is clearly required to protect the common good. That said, as long as overall national targets are met, the principle of subsidiarity means that nation states and even communities should be able to determine how global rules are adapted to local priorities.

  Selective inclusion is required.

The rule of thumb is this: Key actors must be engaged and these must include not only countries with the most power to effect solutions, but also countries most affected by the problem.

In other words, not all actors need to be involved in every global negotiation, but those that are most significant must be.

In the case of climate change, this means it is essential that the twenty countries accounting for over 80% of the emissions are included.

Equally, however, countries most affected (such as Bangladesh, in the case of climate change) need to be included in the planning and shaping of global action.

Only this will ensure a definition of the problem and design of actions that will be effective and legitimate.

Top-down decision making, as reflected in IMF conditionality, the invasion of Iraq or handouts by donors, is not sustainable.

It also means that some existing institutions fail this test. Crucial actors such as China are not members of what is now the G8 (changing from the G7 in 1997 when Russia was added), the International Energy Agency or the International Organization for Migration.

As long as such countries are absent these institutions cannot resolve the global questions they face.

  The principle of variable geometry must be applied.

The process of global management must be an efficient one. Nostalgia for efficiency already hangs heavily over the G8. Eight leaders sitting around a lunch table is manageable, 192 members of the UN is not.

What this means in practice is that the process of global management needs to accommodate the minimum number of countries required at each stage of managing a problem.

In negotiations on climate change, Tuvalu and the Alliance of Small Island States need not be represented in discussions over how emissions should be reduced. But their input is crucial to discussions on what actions are necessary to deal with irreversible changes.

Effective global management will thus require variable geometry, or different countries engaging on different issues, and at different stages of global action.

  Global management requires legitimacy.

This principle is regularly articulated, but seldom defined. Put simply, the rules of engagement in global action have to be understandable and acceptable by most countries.

The test of the most basic form of legitimacy is a simple one: Does a government that finds itself disadvantaged by the application of a rule nevertheless continue to accept the rules as a whole?

Presented with a ‘red card’, will they obey the rules or continue to participate regardless? And what authority can be exercised to force them to follow the rules of the game?

  For global action to be effective, there must be enforceability.

Governments must do what they promise. This is not easy in a world which no longer has any single power center. Inter-governmental reviews and pressure among governments is one route towards enforcement.

Equally vital is public pressure which emerges when inactions or failure are brought to light by the media, by the campaigning of NGOs or by other public institutions.

This requires widespread information about what governments agree among themselves and about their compliance with the rules. The enforceability of global action therefore requires a high degree of transparency.

These five principles suggest a clear route through the crowded terrain of global governance.

The world’s top policy makers should confine global management to those actions that can meet the basic standards of necessity, legitimacy and enforceability.

At the same time, all of us need to beware of calls for actions that fail to meet these principles. Whenever that happens, the likelihood is that leaders are simply passing along problems, not solving them collectively.

We do not need a greater number of global institutions. We need radical reform of those that exist, including their streamlining. This may well involve the closure of some and the redefinition and transformation of others.

If this does not happen, I see a growing frustration among citizens with the slow progress and erosion of legitimacy and effectiveness of global governance.

That is especially worrisome for a simple reason. Given the retreat of many national governments from global commitments, we cannot afford for global institutions to be ineffective under any circumstances.

Global politics is gridlocked. There can be no doubt that the system needs radical reform. The establishment of a shared system of rules to promote inclusive and sustainable globalization is urgently needed.

The question is whether this will be in time to proactively address systemic global crises — or whether reform must emerge from the ashes of a devastating crisis, as has been the historical norm.

The urgency of global governance lies in the hope that the collective management of our global commons can prevent immense human tragedy and suffering.

While we may not yet perceive it that way, that suffering may well be on a scale that exceeds the loss of human life associated with the First and Second World Wars, Spanish influenza and the Great Depression which scarred the last century.

The only useful guidepost we have, although not exactly a comforting one at this stage, is that politicians, when faced by the prospect of falling over an abyss, do tend to make brave decisions.

Let us hope that this principle still applies.

Editor’s note: This article is adapted from Divided Nations: Why Global Governance Is Failing and What We Can Do about It (Oxford University Press) by Ian Goldin. Published by arrangement with the author. Copyright © 2013 by Ian Goldin.

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About Ian Goldin

Ian Goldin is the director of the Oxford Martin School and professor of globalization and development at the University of Oxford.

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