The Evolution of the Global Economic Architecture

Introduction

The global economic architecture evolved out the historic 1944 Bretton Woods Conference comprised various international economic institutions (IEIs): International Monetary Fund (IMF), the General Agreement on Tariff and Trade (GATT) > World Trade Organization (WTO), and World Bank. G 7/G 8 was established in the mid-1970 s to oversee the IEIs. The Financial Stability Forum (FSF) was established in 1999 in response to the Asian Financial Crisis to promote financial stability and develop best practices for financial regulation and supervision.

The economic architecture that was created before and worked well for a few decades has now come under severe strain. First, the governance system of the old architecture does not reflect the move from a uni-polar to multi-polar world. This was accelerated after the global financial crisis (GFC) of 2008-2009, which increased the economic power of Asia, especially China and India.

Second, the policies of IEIs (e.g. charters, quotas, voting rights) were designed in the interest of the like-minded members in 1944 and are strongly protected by original members.

At the height of the GFC, a number of academics and politicians called for a “New Bretton Woods” (NBW) - meaning comprehensive reform of the old architecture. This led to the Group of Twenty (G 20) Finance Ministers and the G 20 Summit of Leaders, as well as an evolution of the FSF into the Financial Stability Board (FSB).

However, those hoping for a NBW were likely disappointed because the rebound from the GFC was faster than expected. Instead of a Global Depression there was a Great Recession.

Likely in the future, there will not be a NBW. Instead the global architecture will move incrementally towards a more decentralized system where national, bilateral and regional institutions work closely with a “senior” global institution.

The Rise of the G 20

The global financial crisis of 2008-2009 led to the rise of the G 20 as a new forum for international economic cooperation. At the height of the crisis, the G 20 brought together finance ministers and central bank governors from both advanced and emerging economies to coordinate a global response. This was a break from the past, when crisis response was led primarily by the G 7 countries.

The G 20 has had some important successes, including agreeing to refrain from protectionist measures, implementing substantial fiscal stimulus plans, reforming the IMF, and regulating financial institutions. At the Seoul summit in 2010, leaders agreed on a blueprint for shared growth and to reform the IMF governance structure to increase representation for emerging markets.

However, the G 20 continues to suffer from problems of “output legitimacy” and “input legitimacy.” In terms of output, the G 20’s early successes have given way to less ambitious agreements and acrimonious summits. There is a perception that the G 20 has failed to make progress on issues like reforming agricultural subsidies, concluding the Doha trade round, and addressing global imbalances.

On input legitimacy, the G 20 has been criticized for its exclusive nature and lack of representation. Some see it as usurping the UN’s role and lacking inclusiveness, since it represents only 19 countries plus the EU. Efforts have been made to improve engagement with non-members, but further reform is likely needed for the G 20 to be seen as fully legitimate. Overall, the G 20 faces challenges if it wants to be the premier forum for international economic cooperation over the long term.

Global Financial Safety Nets and Regional Safety Nets

The International Monetary Fund (IMF) plays a central role in the global financial safety net through its lending facilities and surveillance activities. However, the IMF’s resources are limited, and it cannot effectively monitor every country.

Regional safety nets like the Chiang Mai Initiative Multilateralization (CMIM) help supplement IMF resources and surveillance. The CMIM is a multilateral currency swap arrangement among ASEAN+3 countries (ASEAN members, China, Japan, South Korea) with a fund of US$240 billion.

The CMIM provides short-term liquidity support to members facing balance of payment problems. It allows members to tap funds quickly without having to agree to IMF austerity conditions. The CMIM also established the ASEAN+3 Macroeconomic Research Office (AMRO) for regional surveillance.

While the CMIM is a step towards greater regional self-sufficiency during crises, it faces challenges. The size of the fund remains small compared to IMF resources and the European Stability Mechanism. There are also questions around CMIM’s linkage to IMF programs, the need for conditionality, and AMRO’s capacity to act independently from the IMF.

Overall, the CMIM exemplifies the move towards greater regional collaboration, but continued efforts are needed to increase its size and enhance regional surveillance. The CMIM can supplement but not yet supplant the important role of the IMF in global crisis response.

Regional Financial Architecture

Regional financial integration has progressed significantly in recent decades, especially in Europe and Asia. Regional cooperation has become increasingly important to bridge the gap between global financial regulations and national systems.

Financial Integration in Europe

Europe has achieved a high degree of financial integration supported by supranational institutions like the European Central Bank and the three European Supervisory Authorities for micro-prudential regulation. The EU also has the European Systemic Risk Board for macro-prudential oversight. However, Europe still lacks a region-wide framework for cross-border bank resolution. National insolvency laws also remain unharmonized.

Key regional financial institutions in Europe include:

• European Central Bank (ECB) - responsible for monetary policy and banking supervision in the euro area
• European Banking Authority (EBA) - works to ensure effective and consistent micro-prudential regulation and supervision across the European banking sector
• European Securities and Markets Authority (ESMA) - promotes the stability of Europe’s financial system by enhancing the protection of investors and reinforcing stable and well-functioning financial markets
• European Insurance and Occupational Pensions Authority (EIOPA) - oversees insurance regulation, works to maintain financial stability, and strengthens customer protection

Financial Integration in Asia

Asia has weaker regional financial institutions compared to Europe. The Association of Southeast Asian Nations (ASEAN) and the ASEAN+3 (with China, Japan and South Korea) have taken steps to strengthen regional financial stability and integration.

Key regional financial initiatives in Asia include:

• Chiang Mai Initiative Multilateralization (CMIM) - a multilateral currency swap arrangement among ASEAN+3 countries to address balance of payments problems
• ASEAN Economic Community - promotes regional economic integration in ASEAN through a single market and production base
• Asian Bond Markets Initiative - aims to develop local currency bond markets in Asia to allow better utilization of Asian savings for Asian investments
• ASEAN+3 Macroeconomic Research Office (AMRO) - conducts regional economic surveillance and supports implementation of the CMIM

Financial integration in Asia still has a long way to go compared to Europe. However, the region has laid the foundations through entities like AMRO and CMIM. There is potential for an Asian monetary fund and stronger regional financial regulation in the future.

Trade Architecture: WTO and Regionalism

Earlier, trade liberalization efforts had focused on unilateral and various multilateral agreements achieved by the WTO. However, with the failure to complete the Doha Round, attention has shifted to bilateral or plurilateral free trade agreements (FTAs).

This shift has been criticized as potentially trade diversionary, and the debate since then has focused on the issue of whether such agreements are ‘building blocks’ or ‘stumbling block’ to a new multilateral round.

Although Asia was a latecomer in developing FTAs, it has now emerged at the forefront of global FTA activity:

• FTA increased from 3 in 2001 become 76 in 2013
• FTAs pose a number of challenges:
  • First challenge is the limited coverage of agricultural goods and services trade in Asia FTAs. WTO-plus provisions (competition policy, investment provisions, trade facilitation and government procurement) must be considered in future FTA.
  • Second, limited services trade liberalization in Asian FTAs.
  • Third, insufficient coverage of Asian FTAs of new issues which go beyond the WTO framework.
  • Fourth challenges is how to improve the utilization of FTAs. In addition to the information gap, the provisions of FTAs were complex and could not be fully understood by small and medium-sized enterprises (SMEs).
  • The fifth challenges is tackling the “Noodle Bowl” effect. The noodle bowl effect is the multiplication of free trade agreements, supplanting multilateral World Trade Organization negotiations as an alternative path toward globalization. Examples, overlapping rules of origin (ROOs) in FTAs which increased transaction cost for firms. With the rapid spread of FTAs throughout Asia, multiple ROOs in overlapping FTAs posed a serious burden on SMEs in particular.

These challenges require responses at the national, regional, and global levels:

• National level: policy makers need to increase efforts to address the above-mentioned challenges.
• Regional level: two competing tracks that could lead to an Asian-region-wide FTA > RCEP and TPP.
• Global level: important initiatives in areas such as global supply chains may be of greater use than plurilateral agreements (which focus of rule making and liberalization on a single trade issue) within the WTO framework.

WTO and Regionalism

Earlier, trade liberalization efforts had focused on unilateral and various multilateral agreements achieved through the World Trade Organization (WTO). However, with the failure to complete the Doha Round, attention has shifted to bilateral or plurilateral free trade agreements (FTAs).

The Doha Round, launched in 2001, is the latest round of trade negotiations among the WTO membership. Its aim was to achieve major reform of the international trading system through lowering trade barriers and revising trade rules. The work program covered about 20 areas of trade. The Round is also known as the Doha Development Agenda since a key goal was improving the trading prospects of developing countries. However, the negotiations have stalled due to disagreements between developed and developing countries on issues like agriculture subsidies.

The shift towards bilateral and regional FTAs has been criticized as potentially trade diverting. The debate has focused on whether such agreements are ‘building blocks’ or ‘stumbling blocks’ for future multilateral negotiations and trade liberalization.

Although Asia was initially slow to pursue FTAs, it has now emerged as a leader in FTA activity. The number of FTAs involving Asian countries increased from just 3 in 2000 to 76 by 2013. However, Asian FTAs face several key challenges:

• Limited coverage of agricultural and services trade
• Insufficient new issues beyond WTO framework
• Low utilization rates due to complexity and lack of awareness
• “Noodle bowl” effect from overlapping rules of origin

With the Doha deadlock, some argue regionalism is the only way forward. Regional FTAs could serve as “building blocks” by:

• Enhancing negotiating power of smaller economies
• Pushing member states towards greater efficiency and competitiveness
• Preparing economies for future multilateral agreements

However, others contend the noodle bowl of FTAs and inconsistent rules are more of a “stumbling block” towards multilateral liberalization. Responses are needed at the national, regional, and global levels to fully address the challenges.

World Bank

The World Bank faces several challenges in its evolving role and relationship with regional development banks.

First, the rapid economic growth of Asian countries means many have transitioned from low-income to middle-income status. As a result, they require less financial assistance from the World Bank.

Second is the issue of governance reform, which is more critical for the World Bank compared to regional banks. The World Bank’s governance structure reflects the post-WWII power dynamics and does not adequately represent the economic influence of emerging economies.

Third is the relationship between the World Bank and regional banks like the Asian Development Bank (ADB) in advising client countries. There is a need to promote coordination between the two institutions to reduce operational costs and burdens on recipient nations. Where the World Bank and ADB have cooperated on initiatives like carving out “areas of primacy,” the results have been positive. But friction remains between the two organizations.

Overall, the World Bank faces pressures to reform its governance, business model, and relationship with regional institutions. It must adapt to maintain its influence and effectiveness in a changing world. Closer coordination with regional banks can help achieve development goals efficiently. The World Bank’s future relevance depends on undertaking necessary reforms.

Regional Development Banks

The proliferation of regional development banks (RDBs) such as the Asian Development Bank (ADB), African Development Bank (AfDB), and the Inter-American Development Bank (IDB) calls for increased coordination between these institutions and the World Bank.

The RDBs play an important role in promoting sustainable growth and integration in their respective regions. For example, the IDB has successfully driven development in Latin America by balancing financial assistance, capacity building, and support for regional infrastructure.

In Asia, the rise of middle-income countries means the ADB faces declining demand for its financing. Along with governance reform pressures, the World Bank and ADB must improve coordination on operations, policies and strategies. Where they have cooperated to divide areas of focus, it has boosted efficiency and reduced client burdens.

Looking ahead, the World Bank and RDBs should enhance collaboration to capitalize on relative institutional strengths. The World Bank offers global expertise and standards, while RDBs provide in-depth regional knowledge and localized lending services. With joint efforts on analytics, project design and implementation, they can maximize development impact.

Overall, the decentralized global architecture requires strong links between the World Bank and regional institutions. As RDBs expand their influence, coordination with the World Bank will be essential to optimize aid effectiveness, reduce duplication and inconsistencies, and advance shared development goals.

Reforms and Decentralization

The global economic architecture faces challenges of legitimacy and effectiveness. The governance system of the old Bretton Woods institutions does not reflect the economic rise of emerging markets, leading to perceptions of lacking inclusiveness and legitimacy. Additionally, the context of increasing financial globalization requires policy responses at national, regional, and global levels.

This suggests a need for governance reforms to make the system more inclusive of emerging powers. Voice and vote ratios at the IMF and World Bank do not correspond to the economic weight of rapidly growing emerging economies. Governance reforms to give greater voice and quota shares to dynamic emerging markets are necessary to maintain legitimacy.

At the same time, there is a trend towards a more decentralized, multi-layered architecture. The global financial crisis demonstrated the need for regional and national institutions to complement global responses. Regional development banks already play an important role alongside the World Bank. Regional financing arrangements like the Chiang Mai Initiative Multilateralization also complement the IMF.

Rather than a “big bang” New Bretton Woods, incremental reforms towards a decentralized system with national, regional, and global institutions closely cooperating are more likely. This evolving, multifaceted architecture plays to the strengths of institutions working at different levels. Meaningful governance reforms remain vital for inclusiveness and legitimacy.

Conclusion

The global economic architecture has undergone significant changes since the Bretton Woods conference in 1944 established key international economic institutions like the IMF, World Bank, and GATT. While these institutions served the world well for decades, they have come under strain in recent years as the global economy has become more multi-polar.

The rise of emerging economies like China, India, and Brazil has challenged the dominance of the US and Europe in global economic governance. In response, the G 20 rose to prominence after the 2008 financial crisis as the premier forum for international economic cooperation. However, the G 20 continues to face critiques over its legitimacy and effectiveness.

At the same time, there has been a proliferation of regional institutions and agreements. Regional financial safety nets like the Chiang Mai Initiative provide an alternative to the IMF. Plurilateral trade agreements have surged as an alternative path to trade liberalization with the WTO Doha Round deadlocked. And regional development banks like the ADB and IDB play an important role alongside the World Bank.

This points to a likely future of a more decentralized global economic architecture, with national, bilateral, and regional institutions working in concert with global bodies like the IMF and WTO. While a radical “Bretton Woods 2” is unlikely, the system will likely continue to evolve incrementally. Asia in particular can help shape the new architecture by building robust regional institutions.

Overall, the global economic architecture is transitioning to a more multi-polar, decentralized system. While challenges remain, this provides opportunities for emerging economies to gain influence. With continued cooperation and reform, the system can be strengthened to promote stability and equitable growth.