Why multilateralism is at a standstill
Andrew Sheng says in a multipolar world, multilateralism remains checked by national interests
After the Lunar New Year holiday, I visited Rio de Janeiro for a conference on the state of the global economy. I last visited Brazil in 1986, when the whole of Latin America was in the grip of a debt crisis. Today, Brazil is the "B" in the BRIC economies, with nominal gross domestic product of US$2.5 trillion, the seventh largest in the world. There is a quiet confidence in the air.
In fact, Latin America is becoming an important emerging region. The Pacific countries, such as Chile, Colombia and Peru, are leading the growth, moving to 5 per cent annual growth because of their openness to trade and ability to increase domestic investments.
What is most remarkable is the growth in trade between the leading Latin American countries and China. China moved from 36th place and 35th place in 2000, in trade with Colombia and Venezuela respectively, to being the second-largest trading partner with both countries today.
China is now the largest export market for Brazil, Chile and Peru, so there's no doubt how keen Brazilians are to learn about China.
As a member of the G20, Brazil has been an important supporter of multilateralism, since free trade has been seen as beneficial. But there are subtle changes in its views on capital flows. Large inflows of short-term capital have driven the Brazilian real upwards, and while commodity exports have benefited from a strong real, manufacturing exports are affected. Brazil is watching closely whether a global currency war will emerge.
A key question is whether the growing trend towards a multipolar world promotes multilateralism or not.
In 2011, the World Bank produced an interesting study on multipolarity. It pointed out that emerging markets' share of global trade rose from 26 per cent in 1995 to 42 per cent in 2010 and is still expanding. Specifically, by 2025, the bank estimates that the BRIC economies plus Indonesia and Korea will account for more than half of global growth.
What does this multipolarity mean? The bank thinks that for the emerging markets to arrive at global rebalancing, they would have to improve their technological innovation and shift demand from exports towards domestic growth. Second, their multinational companies would become a potent force in shaping global industrialisation. The third trend is that the current US-dollar-dominated financial world will become more multipolar.
The report also concludes that a "more multipolar global economy will, on balance, be positive for developing countries as a whole - though not necessarily for each of them individually".
This conclusion seems non-controversial. But the reality is that the continuing European debt crisis and slow growth in the US have created a situation in which the multilateral trade and investment regime that has brought prosperity to the world is now stalling. The current multilateral regime is a system of multiple countries agreeing to work on common rules in security, trade and finance. International agencies such as the UN, World Bank, International Monetary Fund and World Trade Organisation all support multilateralism.
In trade, multilateralism has been a foundation of global prosperity, allowing emerging markets to access global markets as tariff barriers come down and supply chains go global. The reality, however, is that the Doha round of trade negotiations has stalled, and there are more and more bilateral agreements because it is perceived to be too difficult to get multilateral agreements. I do not see how small companies in emerging markets can hope to deal with complex rules that each bilateral agreement will bring.
Why is there difficulty in getting multilateralism to move forward, when the world is becoming more multipolar? One plausible answer is that the multinationals in advanced economies fear that a multilateral system may promote greater competition from their counterparts in emerging markets, which are often state-owned or state-backed.
But it is in the area of finance that multilateralism has truly stalled. Given the increase in their share of global wealth and finance, one would have thought that emerging markets' voice and voting power in the Bretton Woods institutions of the World Bank and IMF would increase. But this is a long and protracted reform, because the largest incumbent shareholders, the Europeans and the Americans, are deeply preoccupied with their own economic problems, and would be reluctant to concede power to the emerging markets in the running of the Bretton Woods institutions.
National interests have therefore triumphed over global common interests. The current impasse on multilateralism is due to the complex debate on how to share the costs and responsibilities of global system maintenance. If the emerging markets want more power, they must be willing to share the costs of providing more global public goods. It is hard to see who has that vision of global public responsibility.
Andrew Sheng is president of the Fung Global Institute