A few months ago in late September 2009, the G-20, established in 1999 to bring together the most important industrialized and emerging countries to discuss key issues in the global economy, met in Pittsburgh. The main objective of this meeting was to address the need to reform the current international system, a need made all the more necessary and urgent by the financial and economic crisis and its negative consequences around the world. Issues to be dealt with included: the exit strategy from the crisis, especially in connection with rising unemployment; reform of the International Monetary Fund (IMF); assistance to the poorest countries; the risk of trade barriers; and restrictions on bonuses for professionals in the financial sector. Climate change was also on the agenda, as the international community was gearing up for the Copenhagen summit of December 2009.
Somehow none of these issues were seriously addressed, let alone resolved, on the occasion of the G-20 meeting. At the time, the fact that President Barack Obama and other Western leaders accused Iran of building a secret nuclear plant diverted the attention of the political leaders gathered in Pittsburgh. The opportunity to focus collectively on the financial and economic crisis was wasted. Since then regrettably, not much has happened in this area. Even worse, the actors whose vested interests and actions led to the crisis, particularly in the financial sector in the United States, have been reluctant to change their ways. This is all the more unfortunate considering that some of the gravest problems revealed by the financial and economic crisis are still with us, rendering uncertain the long-term prosperity and stability of international economics and of the international system in general.
In particular, two fundamental issues remain outstanding. One concerns the analysis of economic matters, amounting to what we could call misguided knowledge; the other is related to the limitations of the present mechanisms and institutions of global governance, what we could call a legitimacy deficit.
The Financial and Economic Crisis and Misguided Knowledge
The economic crisis has part of its origins in the speculative drive of the American financial sector, more geared towards its own interests than to that of society as a whole. But it is also the result of misguided knowledge. One cannot understand why the financial and economic crisis happened without referring to the impact of the misleading conception and analysis of economics that prevailed in most of the West in recent decades. Such misguidedness significantly contributed to underestimating the risks entailed in speculative financial practices and overestimating their economic and social added value. In light of the crisis, four intellectual limitations of the prevailing financial and economic models have emerged. There is plenty of sound knowledge in Western modern economics; one should not throw the baby out with the bathwater. Nevertheless, these limitations are so pervasive that, unbridled and overlooked, they could undermine the future of capitalism and its positive aspects.
First, the essentially forensic nature of financial and economic academic knowledge is not very reliable when it comes to understanding the latest evolutions of financial capitalism. The fact that economic knowledge is based on past reality is not specific to economics. To some extent, it is the case for most forms of knowledge. Moreover, this reliance on history can be a source of strength in the sense that it encourages and facilitates reflection on economic dynamics and trends with the benefit of hindsight. However, when not enough attention is given to the most recent developments, economic knowledge runs the risk of being one step behind and ignoring problems that are currently brewing. This is exactly what happened among economists in the United States. Many of them greatly underestimated how Wall Street was using the progress of information technology to create new financial instruments and optimize their profits. In turn, this increased financial and economic interconnectedness, and therefore deepened the risks for the whole international system.
Ironically, the challenges resulting from the forensic nature of economic knowledge are compounded by its tendency to be oblivious to the lessons of the past. Despite the large amount of scholarly work produced over the years on financial and economic crises during and prior to the 20th century, it is as if the accumulated evidence pointing to the risks of crash had been ignored more often than not. It is as if, also, the succession of boom-and-bust cycles became perceived by economic orthodoxy as a fact of life and an integral part of the strategy for growth, to the point where no gain and urgency was seen in attempting to break them. After all, the most lucid economists stressed the fact that in the years prior to the crisis there were plenty of warning signs alerting the world to the perilous course the United States and the world economy were taking. One of the signs was the fact that the misleading accounting system, unregulated derivatives, and financial leverage that brought about the fall of Enron in late 2001—one of the biggest bankruptcies in the history of corporate America—were embraced by Wall Street and almost became a standard practice within top U.S. financial institutions. This situation should have been a source of major worry to whoever had their feet on the ground.
The ideological assumptions upon which economic analysis has come to be conducted in many regions of the West did not help much to disclose and tame these practices. A persistent belief in mainstream economics is that economic actors are rational beings who focus on their own interests, and that these interests end up creating an efficient way of organizing and growing the economy. However, in the lead up to the crisis, nobody seemed level-headed enough to challenge this idea and recognize that greed and a sense of entitlement, rather than reasonable risk-taking, were running the show. When on top of this shaky state of affairs it was considered that the market could never be wrong and that the state, or institutions in general, had to stay out of the way or be a facilitator and endorser of market ideology, we had all the ingredients for a crisis of catastrophic proportions.
A final handicap is the generally poor state of knowledge on matters of global governance. As illustrated dramatically by the financial and economic crisis and its effects, developed and developing countries are more interconnected than ever. Furthermore, as they are less and less self-contained, they cannot sustain themselves and grow on their own. This means that it is imperative that their interdependence be intellectually understood, and practically handled as best as possible. It is what makes global governance crucial. For this to take place, what is needed is a clear picture of circulating capital flows and the resources allocated globally by various actors (states, international and regional organizations, and the private sector in particular) in key areas, such as development and the environment. The impact of these flows and resources and how they interact is also critical to developing a more sophisticated knowledge base. Yet, such clear mapping of the big picture is largely missing. In this context, it is not surprising that the level of policy coordination and resource allocation in support of an international system of management is low. What we have instead is a juxtaposition of national policies and, as an afterthought and footnote to this, international cooperation at the margins.
So when it comes to making sense of international finance and economics, the time of so-called scientific certainties is over. Many areas of modern economics are valid and will continue to be useful. However, we have to start reassessing the ones which are more misleading than anything else. This is to say that we have to be more humble about what we know and what we do not, and, wherever necessary, go back to the drawing board. Take macroeconomics: Its core principles are now more questioned than a few years ago, and there is much work to be done to reevaluate what works and what does not.
The Financial and Economic Crisis and the Renewal of International Legitimacy
Considering that one of the effects of the financial and economic crisis has been to significantly damage the legitimacy or credibility of the international system at the policy, institutional, and political levels, its reform is all the more important. Against this background, the capacity of world leaders to address the problems of legitimacy which emerged during the crisis depends upon the establishment of a more stable and prosperous international order. In this context, China has a key role to play.
At the policy level, it is essential to come up with solutions on three interrelated issues: regulation, systemic risk, and the growth model.
At the moment, there is no real agreement among major international actors on the policies to be adopted and acted upon globally. It is especially the case concerning the question of regulation. While the Europeans, at least in continental Europe, favor international regulations, the U.S. position is one of reluctance. Recently, the Obama administration has insisted on the need for regulation. But in the past year or so it has not moved much in this direction, and we still have to see if its new rhetoric will be followed by action. In particular, we have to see whether or not Wall Street, opposed to any type of regulation that could curtail its interests, will continue to be powerful enough to impose its view. In light of what has happened or not happened since the beginning of 2009, one is tempted to think that in the United States the window of opportunity for significant reform of the banking sector is closing fast, or has already closed.
Such a situation is all the more unfortunate considering that without a regulation effort, the threats generated by the extravagant risks taken by banks deemed "too big to fail" amounts to a systemic risk for the international system as a whole. In this perspective, the bailout initiatives taken since the fall of 2008 have allowed the avoidance of the collapse of the international financial system and of its biggest banks, but they have not removed the structural challenge represented by systemic risk. In order to do this, one would have to keep in mind the following: Unless it is demonstrated that financial and economic practices amounting to a systemic risk generate a systemic service or benefit to society and international order, these practices are unacceptable and unconscionable. Needless to say, in the aftermath of the economic crisis, we know now that short-term speculation and interest, as part of what has been called the financialization of the economy, do not qualify as systemic service producers.
This leads to a third question, equally if not more important, of long-term and sustainable growth and the economic model most likely to secure it. Many Western mainstream economists see consumption as a crucial component of growth. The stimulus packages adopted by governments were supposed to address this issue. The problem is that, at this stage, it is not sure that they will do the trick. In America in particular, will these stimulus packages be enough to curb unemployment and encourage a heavily indebted population to spend money that it does not have? More generally, all this leads to a fundamental question: How do we transition from a polluting economy which produces as much disintegration as integration, to a green economy which would be first and foremost a model of economic and social integration, at the national and global levels?
On the institutional front, the economic crisis has demonstrated the need for better international management. The international mechanisms and institutions in place were neither able to predict and prevent the crisis nor to handle it well once it unfolded. The position of centrality that the G-20 is acquiring is an indication of how world leaders are attempting to rectify this problem. Nevertheless this encompasses its own difficulties.
The members of the G-20 are, in alphabetical order: Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, the Republic of Korea, Turkey, the United Kingdom, and the United States of America. The European Union is the 20th member of the G-20. This small grouping is both a source of strength and of weakness. On the one hand, a few important countries coming together increases the chances of being able to take decisions and having these decisions shape the future of the world. On the other, these nations cannot claim that they represent humanity in its entirety. It is also far from certain that they are going to be responsible enough to take into account the interests of poorer countries and their people as much as they should.
Consequently, at the United Nations, there tends to be unhappiness among developing countries about this institutional development. From their point of view, the G-20 leaves them out of the game. In particular, their fear is that although it creates room for emerging economies, in time these emerging economies will change their allegiances. The fear in developing countries is that, rather than serving as a bridge between developed and developing countries and defending the interest of the latter, emerging economies will identify with and join the camp of the mighty, or exclusively pursue their own agenda.
If this happens, the international system, instead of moving towards greater justice and stability, could face deeper tensions and less overall credibility. Its already fragile and doubtful legitimacy would be further put in question.
At the political level, major crises have an interesting relationship with leadership. On the one hand, they are often the product of a lack of or poor leadership. On the other, good leadership is needed to help overcome crises and put history back on track. Economic crises are no exception to this. This applies especially to the current one. While it took place partly because leading actors did not fulfill their responsibilities, there is now no escape from calling upon them to restore confidence and a sense of possibility. That being said, who can today endorse the role of a legitimate international leader? The answer to this question is anything but obvious.
Take the United States. The financial and economic crisis, with its origins on Wall Street and deficient oversight on the part of Washington, has had a huge reputational cost for America. It has diminished its credibility and, therefore, political ability to lead globally. The discussions that took place in the summer of 2009 between China and the United States in the context of the US-China Strategic and Economic Dialogue have driven this point home. The least we can say is that America was not in a position of strength during the talks.
Does it mean that China is today willing and ready to endorse the mantle of global leadership? The answer is probably No, or Not yet. China feels that it is in a strong position. The idea floating around that a Beijing Consensus could be a future alternative to the presently discredited Washington Consensus, illustrates this possibility. However, as an emerging economy where much economic and social progress has to be made in order to achieve a satisfactory level of development, China will, for quite some time, continue to focus primarily on itself and not divert its resources by taking up global responsibilities. This introduces a question that the Chinese leadership will be less and less able to overlook in the coming years: How long will it be possible for China to have a massive economic impact on the world and pursue its interest without at the same time having to become a fully fledged global political actor with the worldwide responsibilities and constraints that this entails? Although both the West and China are quite nervous about this issue, it will need to be addressed sooner rather than later.
As for the Europeans, and the European Union, they also have a very long way to go. They still have too many internal problems and are too divided to project effectively at the global level. Their inability to influence decisively the negotiations of the climate change summit in Copenhagen in December 2009 is a case in point.
The Way Forward
As we can see, global leadership is up for grabs, but no candidate seems to fit the bill. Against this background, the only thing that we can be more or less sure of is that, considering the scope and depth of the problems at hand, the way forward requires a renewal of ideas, policies, and politics at the international level.
Perhaps one way to address the structural challenges the world is encountering in the fields of international finance, economics, development, and the environment is to explore the feasibility of public policy at the global level. If this were to be realized, it could offer the potential for the demands of justice and efficiency to work together and reinforce each other within and among countries.
In theorizing the possibility of global public policy, it is important to be cognizant of the enormous intellectual work required to demonstrate the possibility and viability of such an idea. Also, we should not be blind to the political and policy dilemmas generated by trying to balance national and international interests. In addition, creating global public policies would require a profound transformation of our ways of thinking about the role of institutions and the interactions among them. In this regard, it would encourage us to think about the extent and limits of moral and political communities and, ultimately, what distinguishes us from others at the international level.
Finally, would it be possible for a global public policy approach to be more successful than the current global governance arrangements in overcoming the entrenched vested interests committed to the status quo? How could this approach manage to capture the attention of decision makers and hold their interest, considering that most of the time their eyes are focused on the narrow and the short-term, resulting in poorly understood national interests?
As the current international system is producing significant social, economic, and political disintegration, we are running out of time. It is urgent that we use this opportunity to revisit and change our modes of thinking and acting.
Jean-Marc Coicaud is director of the United Nations University Office in New York. Jin Zhang is program manager at UNU-ONY. For further discussion of this topic, please visit the UNU Conversation Series on the Economic Crisis.