Global Economic Governance in Transition: A political economic analysis and questions for Japan

Yves TIBERGHIEN

We are in a time when the whole world is changing. The global economy and system of global governance are changing, so I believe now is a good time to have big picture talks. The objective of this talk is to present such a big picture and a political-economy analysis of global governance, including frameworks such as the G-20.

First, allow me to talk about why I am bringing up the question of global governance today. Currently the G-20 is presided over by France and aims to implement big, institutional reforms. At the same time, we are in the midst of President Hu Jintao's visit to the United States during a period of intense US-China tensions, and President Hu has made statements recently questioning the global monetary system and the role of the US dollar. Elsewhere, climate negotiations are now also going through an intense period. On the trade side, the Doha Round has not seen any breakthroughs, but progress on the Trans-Pacific Partnership (TPP) in this region is moving forward. I would like to talk about global governance today, because we are living in a time of change, in which such governance is becoming increasingly important.

The main topics I will speak on are the questions of "What explains the current stalemate of global governance at a critical juncture?" "Does the G-20 process matter and does it have the ability to change the behavior of major states and induce them into durable cooperation?" "What area China's preferences and why?" and "What are Japan's preferences and role?" I will also delve into how economic policy in Japan has been reconciled with issues which cut across the jurisdiction of several ministries and for which political leadership is also critical.

The arguments I want to forward in this talk are as follows: 1) The world is at a critical juncture, in which the future institutions of the global economy are being debated; 2) Global governance issues are now interrelated; 3) Today the G-20 is dominated by the triad of the United States, China and Europe; and 4) Japan has the power and interest to play a major role if it can coordinate its policy better between all the relevant actors.

In making these arguments, I will first look at the G-20. In the period leading up to the last G-20 meeting there was this very interesting ballet of diplomacy in which China courted Europe as it did when President Hu met French President Nicolas Sarkozy, and the United States warmed up to India, Indonesia, Japan and South Korea. It seemed that there was a "New Great Game" going on within the G-20, with the sense that this game was part of a process to decide the future rules of the globe.

The G-20 itself is a framework of three levels. On one level, the G-20 is intended to carry out risk management and conduct economic problem solving. On another level, it is an organization for global governance and institution building. On its third level, the group is making efforts to manage the uneven gains and power transition from OECD countries to emerging powers. The G-20 does not just deal with problems of global transaction costs or coordination issues in the wake of a global crisis—it also deals with changes in global power. We are currently seeing what some would call a "hegemonic transition." This transition makes both the need for global governance more important, but it also makes it more difficult.

This is the fundamental issue for global governance. We need rules and monitoring to facilitate well functioning markets in order to solve collective action dilemmas and reduce transaction costs. The problem is that markets have globalized, but rule making remains fragmented. We need global rules, but they are difficult to create.

This is where global governance comes in. Global governance is a collection of international rules, treaties, and institutions that help states coordinate actions at a global level in the context of fragmented sovereignty and the absence of world government. It is a broad package of national rules, bilateral agreements, multilateral treaties and international institutions.

Now, if we agree that this is the definition of global governance, then we are immediately faced with the paradox of global governance. On the one hand, we need more global governance because we need to manage more complex and uneven global markets and the more complex issues that are arising with the changes occurring in the world. However, on the other hand, the great rebalancing we are seeing makes it difficult for actors to agree on anything. The more we have the rebalancing of power, the more we need coordination, but at the same time, the more difficult that coordination becomes.

For example, China is worried that accepting rules now will slow its future progress. It is in China's interest to have just enough rules to keep the system going, but not too many so as to tie its hands in the future. For the United States and Japan, it is the reverse—these two countries want to tie the hands of China, and also India and Brazil, right now. Even though everyone has a stake in the stability of the global system, there is a division of interest between rising powers and declining powers.

Are we able to solve this problem? There are several dilemmas which are blocking progress.

First is a classic collective action dilemma. This dilemma is occurring on a huge scale. Finding ways to avoid cheating, enforce monitoring and reduce transaction costs are very difficult. This dilemma manifests itself the most in the issue of climate change.

Second, following the crisis there have been uneven gains in the fields of trade and finance, creating a distribution dilemma.

Third, we are in a stage where all of the major countries are suffering from unstable political leadership. In such a situation, no country is in a good position to make a credible commitment to its partners, and every country knows this. Everyone knows that 2012 is going to be a year of transition for many governments. Even China is having a hard time making commitments today because of internal power struggles leading up to next year.

Finally, there is a global democratic accountability dilemma, in which many countries are showing unwillingness to commit to institutions which seem to have low democratic responsiveness—something that the G-20 has been accused of.

Hegemonic transition is the key force underlying all of these dilemmas. It is well known that global power is shifting away from the United States, mainly to China, but also to India and Brazil. And yet at the same time, the entire global liberal order is based on having the United States at the center. The ability of the United States to organize this order is not as effective anymore, and has been adversely affected by the 2008 financial crisis. This problem is only going to get worse. Economists are predicting that by 2050, China will be ahead in terms of GDP, the United States will be second and India third. Goldman Sachs expects Chinese GDP to be double that of the United States by 2050. We are shifting toward a new paradigm.

That said, allow me to give a brief overview of where things stand in terms of each issue being dealt with by the international community today. This overview will look at the questions of "What are the tools of global economic governance today?" "What are the loci of power?" and "What degree of stability do these loci operate within?"

It depends on the issue being looked at. We know that the whole economic order is dependent upon global security, which has as its locus of power US hegemony with regional powers around it. This area is more stable than economic order. Even if China catches up to the US economy by 2020, it will take ten or 15 years after that for the country to catch up militarily.

On trade, governance has been the WTO, G-8 and G-20. Within these initiatives, initially, the key power was found in the United States, EU, Japan and Canada quad. That system is not working anymore, and this is at the root of why the Doha Round is not moving forward. The system will not break down, but it will have a hard time moving forward.

The global currency system used to be dominated by the United States, but today, the United States, China, Japan as well as the EU all hold power. It is common to forget that Japan holds 20% of the foreign debt of the United States. It is not using it as leverage. If China and Japan coordinated, they could almost rewrite the future currency system.

In finance, in terms of governance, the IMF, US-UK, G-7 and G-20 have been the main actors. The locus of power is the United States, the United Kingdom, Japan, and China. This system is in flux, and China is rising.

For FDI, there was never a global regime, but bilateral FTAs were the main form of governance. This area has a divided locus of power and is fragmented.

For climate issues, we have had a UN umbrella with the Kyoto Protocol. The US is the locus of power, but behind it is also China, the EU, and the BASIC group—Brazil, South Africa, India and China. Despite the hopeful tone of Cancun, the reality is that the field is in a state of paralysis.

On GMO/Biosafety, the UN Biosafety Protocol and the WTO are in conflict with each other. Here there is a battle between the United States and EU with China and India as balancers. This too is a fragmented and disputed field.

The sum of all this is that we have very distinct patterns of global governance in all areas, and the loci of power are in a state of flux. It is no longer possible to coordinate all global issues through just one framework such as the G-7 or WTO.

I would like to delve into to areas with a little more detail and pose some questions to Japan.

The first area is that of global trade governance, a regime which has been built over a long period of time, using a club process and the notion of reciprocity, which has encouraged credible commitments. The system is stable, but it also seems unable to move forward past the Doha Round. I would like to know what Japan's views on the links between FTAs and regionalization and the global trade regime? What are the links between global trade and the global monetary system, and how is Japan dealing with that link?

On global climate governance, Copenhagen last year was a major stalemate due to the actions of the United States and China. The proposal by Prime Minister Hatoyama interested many people. At Cancun, Japan did something which surprised a lot of people as well by saying that it did not want more commitment on Kyoto without the United States and China. There is a big difference between Japan's actions at Cancun and Copenhagen, which suggests a major shift within Japan. I believe that action at Copenhagen was more politically driven while action at Cancun reflected the opinion of the Ministry of Economy, Trade and Industry (METI). I would like to know what Japan's preferences are in terms of a global climate regime, and how those preferences are coordinated between all the relevant actors in the Japanese Government. Kyoto ratifiers represent only 25.7% of global emissions, so it is true that it makes no sense to continue without the United States and China.

Moving on, having discussed the current state of progress on each of the global issues, what implications does all of this have for the G-20? Can the G-20 provide a system of global governance?

Looking at the current state of the G-20, I see three simultaneous games being played.

The first game is one of technical coordination in order to escape the global crisis. This was an effective game and is nearly finished.

The second game is one of global governance/institution building in which actors are talking of a new "Bretton Woods" system to redress the balance between global markets and regulation.

The third game is one of power transition and uneven gains in which we see a rising China, India and Brazil. Countries are adjusting to the new influence this group has. It is beginning to be recognized that it is no longer acceptable to give China 2% voting rights in the IMF when countries like Belgium have 2.2%.

Throughout these three games, I see the G-20 as being dominated by the triad of the United States, EU and China. Other actors, including Japan, have not been very powerful within the G-20 yet. On any international issue, the United States needs to coordinate more and more with China, but the latter country will only participate if it is within a larger forum like the G-20. This makes the G-20 even more important.

Each member of the G-20 triad brings with it a different perspective. The EU defines one end of the spectrum, being focused on more regulation. The United States is on the other end—it is not willing to go along with heavy regulation which might mark the end of its hegemony. So far it seems that Japan has backed up the United States, but frankly, it might not be a bad idea economically for Japan to agree to greater regulation. China is in the middle on all of this. The EU or the United States will need to win over China in order to move forward. This is why China is currently being courted so intensely.

Over the last two years, the major issues that have come before the G-20 are the trading system, anti-protectionism, the global currency regime, macroeconomic imbalances, financial regulation, and transaction taxes, among others. Looking at the way different countries have reacted to each issue, it is interesting to note that Japan seems to have always sided with the United States so far. In doing so, it has stabilized the system, but it has also disappeared as an actor.

The implications of the current state of the G-20 are that there has been a tenuous buy-in from the United States, and an intermediate buy-in from China. We will be at a critical in-pass for the next two to three summits, and we face a dilemma of seeing slow institutionalization in light of urgent large issues which are too big for the G-20 to handle effectively at its current stage.

I will talk briefly about China and global governance. I have been tracking China's position for several years and have found that the country has a diverse range of positions with respect to global governance. On the one hand, it tries to slow down initiatives that it does not believe are in its interest. On the other hand, it is very pragmatic on certain issues, such as the FDI regime, foreign reserves, TRIPS, and others. Then again, for certain issues, one might say it has played a balancing role—it has joined many UN-based coalitions on global regimes, often against US interests. Finally, it has also from time to time forwarded certain innovative initiatives, such as sovereign wealth funds. Based on my data, my argument is that essentially China's response to global issues is the result of domain-specific fragmented governance primarily driven by two domestic variables: 1) the domestic balance of power between different coalitions within China; 2) the degree of public openness and public deliberation involved. How China acts seems to be determined more by these two factors than anything else.

Lastly, what is Japan's role in all of this? Japan is a major global player and the second largest holder of US debt. However, so far, Japan's voice in global governance debates has been limited. It does not seem to be playing coalition games except with the United States and South Korea. I would suggest that more intense coordination between South Korea and Japan could be very interesting.

The world is in the midst of a major attempt to rebuild the global regulatory infrastructure that is necessary for global markets to function. The G-20 is at the center of this. In the future, we are likely to see moves that will involve grand bargains between different issue areas. At the core of the G-20 lies the US-China-EU triad, but the United States and China are really the key actors as their buy-ins are more tenuous. Getting a US buy-in requires a Chinese buy-in, which makes Chinese participation the lynchpin in the G-20. Japan can play a key mediating role in this game.

Q: China has become a huge economy, but continues to promote state-run capitalism. If China does not change, how can there be the establishment of global governance?

Yves TIBERGHIEN
The world has, in the past, accommodated to different regional variations of capitalism just fine. The hope is that a strong enough system can force member economies to play by the rules.

As far as state-owned enterprises (SOEs) are concerned, until the early 1990s there were a variety of actors on the international scene, but since the crisis in 2008, it does seem that SOEs are becoming more important. Many SOEs seem to be becoming more competitive. With the Chinese system being different, it requires monitoring.

Q: The G-20 was effective immediately after the financial crisis, but it quickly fell into a stalemate situation. With the United States and China for the time being continuing to go their separate ways, I am unsure of how a new global governance system will be constructed. Could the answer lie within action on the part of mid-income countries? Could Japan cooperate with such countries?

Yves TIBERGHIEN
I think you are right on the mark. Historically, when two great powers have been locked into a power struggle, we see that cooperative initiatives among other countries have brought about progress. This can be seen with ASEAN and the way it has brought together Japan and China in Asia. In the past, Canada used to play a role like this. Japan did this in Nagoya and brought about a biodiversity agreement. The key partners for such an initiative would be Japan, Canada, Australia and South Korea—those countries with the ability to mediate between China and the United States and probably Europe. However, this takes leadership which has a bit of slack. Leadership in Japan does not currently have enough freedom to do something like this. Nevertheless, it is the best hope right now.

Q: I would like to ask about demography. It is being said that the aging phenomena will be focused in Asia. How do you think demographic shifts will affect global governance?

Yves TIBERGHIEN
Aging is a relatively new problem. It has been going on in Japan for ten years, but not elsewhere. We do not have a good understanding yet of what it means. I have not seen a good model on it. Similarly, in political science, all we can say is that older people vote more and have preferences for old-age care issues. On everything else, they do not vote differently from the rest of the population. However, this is a new trend which seems like it will be a major force. We know that labor will not grow as much, but we also know that in places like China there is still such a pool of labor that the country will stay vibrant.

Q: What are your thoughts about the influence of technology on global governance?

Yves TIBERGHIEN
We have models to measure the impact of technology in normal times, but not for times when technology causes a paradigm shift. The United States, Japan and China have a comparative advantage in this. It is true that sometimes there is such a major technological shift that it affects the standing of economies—the internet is a good example.

Q: The military power of China has been increasing, and the economic power of the United States and other OECD countries has fallen due to the 2008 financial crisis, which in turn has affected those countries' military budgets. Why did you exclude this issue from your talk? Also, what is your opinion on why Japan has been unable to take the initiative on currency issues?

Yves TIBERGHIEN
It is true that economic rebalancing has had military consequences, and that this can affect governance and the economy. I left this point out because it is too complicated to explain in the time that we had today, and because once you get into security issues, there are many actors to consider. In addition, it is not the first mover. Military power follows economic power. The United States remains overwhelming in terms of military power, and will for some years to come.

As for the question on currency, my hunch is that in principle Japan has an interest in currency rebalancing, but on the political side, there is a lack of knowledge about global finance. That knowledge remains within the Ministry of Finance, which itself does not have the political leadership to put forward its ideas. The ideal would be to have an outsider group asking big questions with the experts in the Ministry of Finance looking into them. However, no incentive has been put in place for anyone to exercise such leadership.