Kemal Derviş: Why we need to restore faith in global governance

Can global governance solve most of our economic problems? Or does it too often promise more than it can deliver, and divert attention from more practical reforms that national governments should implement? In a recent commentary, Harvard University economist Dani Rodrik thoughtfully argues the latter. Is he right?

To be sure, national policy has a more direct effect – good or bad – on a country’s citizens. But we cannot ignore the global effects of bad national policies, the most obvious examples noted by Rodrik being greenhouse-gas emissions and infectious diseases. People in the “country of origin” may pay a price, but so will the rest of us.

“Globalization” has been a catchword for decades, and the need for global governance has admittedly been exaggerated in recent years, especially by those on the center left. This has led to calls for new alternatives, such as “responsible nationalism” or “inter-governmental” – as opposed to supranational – decision-making in the European Union.

Such proposals make for a healthy debate. For example, we should reevaluate the current system for deciding trade agreements, which have become more about regulatory and investment issues than about eliminating import tariffs or other import barriers. It is no surprise that even some free-trade supporters object to agreements that allow trade groups to insert language granting multinational corporations undue market power at the expense of consumer protection.

Still, the push for stronger global governance in recent years has not happened in a vacuum. Countries have undoubtedly become more economically and socially interdependent, owing to trade, travel, and telecommunications, not to mention multinational corporate structures and international financial flows. Global intercourse is broader, faster, and more ubiquitous than ever before.

Globalization may occasionally hit speed bumps, such as the current slowdown in world trade; but the underlying technological changes driving interconnectivity will only continue to bring people and countries closer together.

Ultimately, this is for the best, because the major challenges we face today are global in nature. Efforts to mitigate the effects of climate change will require consistent global coordination. Even local initiatives, which are increasingly important for addressing the problem, must fit into a framework of converging global policies and obligations. Otherwise, people will not feel as though they are making a difference or contributing to a shared goal, and others will not feel pressure to do anything at all.

Another global challenge is taxation, which requires international coordination to stanch rampant avoidance and evasion. The problem is not just individual “tax havens”; there is also a need to capture corporate profits that companies’ move internationally with complex devices such as “transfer pricing” and “tax-base shifting” to minimize their tax bill.

Disparate tax rules among different countries have resulted in close to a zero-sum game for national governments, which are forced to pursue beggar-thy-neighbor policies to secure a bigger slice of a shrinking pie. Under the current system, countries have strong incentives to offer ever-greater tax advantages to companies operating within their borders, even though they stand just as strong a chance of being undercut by another country as companies shift their declared profits from one jurisdiction to another.

In most cases, companies are not doing anything illegal by taking advantage of this fragmented system. But if countries are serious about reducing inequality and funding pensions and health care for their citizens, they will have to cooperate in global-governance efforts to prioritize fair taxation.

Climate change and taxation are just two issues requiring global coordination, but the list goes on. The monetary policies of large reserve-currency central banks such as the United States Federal Reserve can have far-reaching spillover effects, as can self-destructive exchange-rate policies or regulations on cross-border financial flows. In most of these cases, the damage runs downstream from large countries to smaller countries; however, if enough small countries are affected, the aggregate damage can flow back to the larger economies themselves, as we’ve seen in the European debt crisis.

Given the scale of these challenges, we have no choice but to cooperate internationally and strengthen global and regional institutions and frameworks such as the International Monetary Fund, the EU, and the G20, which will meet in Hangzhou, China, next month. But global governance is not an either/or proposition. When national or local policies are sufficient to address a problem, then they should be pursued.

Indeed, the principle of subsidiarity – whereby decision-making should occur at the most local level possible – is crucial to flexible, functioning global governance. The presence of global-governance frameworks should never become an excuse for national or local inaction. Public policy is a multi-level and multi-channel effort with local, national, regional, and global dimensions. Ideally, policy debates should acknowledge this reality.

We also must acknowledge the urgency of shoring up faith in global governance from another perspective. Across the US, Asia, Europe, and the Middle East, a resurgence of identity politics and xenophobic nationalism threatens to reprise the great tragedies of the twentieth century. Against this backdrop, stressing the existence and needs of a global community is necessary not only for economic reasons, but also to help ensure a peaceful world.