Collective Action in a Fragmented World

The project that my talk is based on is a research project I launched a year and a half ago at the European University Institute (EUI) about the transformation of global governance. The aim of the project is to discover the needs, obstacles and types of responses that we can end up with.

I think many people hope that the attitude of the U.S. regarding global cooperation will change, but I do not think we should be too obsessed with the current administration. There are fundamental problems behind the stance of the current administration in regards to the role of the U.S. and the implications for collective action. That is the type of analysis and research that I am doing. I am not focusing on the current debates and conflicts, but rather the next issues we should be thinking about and how we should prepare.

The first thing I want to address is whether we really have a need for collective action. There is a slogan for this, "A global crisis requires global solutions." Dani RODRIK, a professor at Harvard, recently had a paper saying that the case for global governance is overstated. He says that there are fewer public goods than generally believed. He also says that the need to limit beggar-thy-neighbor policies is also more limited than generally believed. These are the two main reasons traditionally for having global governance in the first place. First is that global public goods cannot be managed individually by countries or governments. They have to be managed globally. Second is there are policies that are potentially harmful to partners. We need to have rules to limit or eliminate such policies. RODRIK says that these are two perfectly sound rationales for global governance, but the fact is that the case is much more limited and there are few global public goods and beggar-thy-neighbor policies.

The notion of global public goods was invented by World Bank economists in the 1990s. At the time, it had been used in a fairly undisciplined way such as that development was a global public good. Development has positive effects not only on the country that is developing, but also on partners, but does that mean it is a global public good that only needs to be managed at a global level? No, it is fundamentally a national policy. There are spillovers, but the fact is that everything has spillovers. It does not justify moving the governance to a global level. It justifies having a form of cooperation, but it is not a global public good. In contrast, climate is a true global public good because all emissions have exactly the same effects wherever they take place. Climate change is a fundamentally different case because it is not a case in which my policies primarily affect my country and only have marginal spillover effects. Therefore, it is true that the tendency to use the notion of a global public good in a fairly metaphorical way is misleading. We need less global governance. This is also true for beggar-thy-neighbor policies.

If this is true, how many true global public goods do we have, and what type of structure do we need for those policies that do not need to be managed at a global level? The first thing we have to recognize is that there are true global public goods such as climate change, biodiversity, and ocean life, etc. There are also true global public ‘bads’ such as crime and trafficking. Therefore, the case for managing these goods exist, and that case is actually much stronger than it was at any time before, because these global public goods simply did not exist or were completely manageable in the past. In this way, I believe RODRIK is right, but it does not mean that the cases of global governance do not exist.

The second thing I want to address is that the fact that some policies are not true global public goods does not mean that we do not need to have structured forms of cooperation in place. On this regard, I will compare climate change and financial stability. It is sometimes said that financial stability is a global public good. In fact, SHIRAKAWA Masaaki had a paper saying this. The difference is that financial stability policies primarily benefit the country introducing them. If I have lousy regulation, the risk is that my financial stability would collapse, and the first victim of that would be myself. That was the case with Iceland. I need to trust that my partners introduce policies that are conducive to financial stability, because that is in my interest. Therefore, I need an arrangement, but it has to be based on the fact that my policies first and foremost have an effect on my country that are a second order effect on my partner countries. That is essentially the framework that I want to use.

What about the obstacles? For this, I would like to go back to the discussion on the stance of the TRUMP administration, and why we are facing the problems that we have. There, the role of the U.S. is fundamental. Resistance to international commitments has a very long history in the U.S., well before the TRUMP administration. The U.S. is simply against the notion of an order than binds the freedom of their political system. The most famous example of this is probably the rejection of the Havana Charter in 1948 by the U.S. Congress, but there are many other examples such as the International Criminal Court (ICC).

In the U.S., the grievances in regard to the World Trade Organization (WTO) have a bipartisan dimension, and the notion that the Appellate Body has been producing too much jurisprudence and has moved from being a settlement body to being a law-producing body has strong support in the U.S. The Peterson Institute for International Economics (PIIE) recently broadcasted a discussion with the former number two of the United States Trade Representative (USTR), Stephen VAUGHN, in which he spells out the grievances against the Appellate Body in a candid way. He says it has become its own rule-making body that tries to answer questions that members left open during negotiation. The American policy-makers of both parties have been warning the rest of the world that the U.S. never agreed to this sort of process. That is an interesting and important expression of fundamental reluctance that is intellectually respectable.

It is not fantasy. It is not our attitude in the European Union (EU). We are a rule-based entity, so we tend to accept that there are international rules and a judicial dimension. When there is a dispute in the EU, it is settled by the European Court of Justice, and member states always abide by their decisions. The European Court of Justice has been a vector of integration in a way that the U.S. Supreme Court has been a vector of federal integration. We are more ready to accept it at an international level because it is part of our DNA within the EU, but it is not the case of the U.S. VAUGHN says that trade policy should be something similar to tax policy, that Congress decides, and where the majority can reverse a trade policy because it is a political decision. Those doubts are there and they are meeting with stronger demand of politicians in an environment where populist parties, as well as grievances against globalization, are on the rise. Therefore, I think we have to accept that this is a long-lasting feature of the U.S. attitude.

Could the U.S. be more of a discretionary leader and accept the fact that it has an international rule that implies adjustment to its own policy? Charles KINDLEBERGER wrote the book The World in Depression in 1972, where he said that the depression of the 1930s was due to the fact that there was no leader that could internalize the global dimensions of its policies. He said that the British could not and the U.S. would not assume responsibility for three things: maintaining a relatively open market for distressed goods, providing counter-cyclical long-term lending, and discounting in crisis. At the time, it was not possible, and the innovation in the post-war era was the acceptance by the U.S. of this role. Could the U.S. do that without being bound by rules, but simply by its attitude? We have to factor in the rise of China and the fact that the U.S. is less of a dominant economic and geopolitical power. It is more difficult to tradeoff short-term costs for long-term interests. It is much more difficult to have the distribution of this role because the cost is implied and not shared equally. Distributing this role among different powers is almost impossible by nature. We are in a world where this role is much more difficult to fulfill.

What I am saying is that we are facing two fundamental difficulties, one that is political and one that is fundamental. It has to do with the distribution of economic power with the multiple characters of the world economy. Those are the reasons why it is difficult to believe that we are going to return to the pre-existing order after the U.S. administration changes, and it looks extremely pessimistic. The more optimistic side is to look at what we can learn from the way different types of interactions are managed. Can we learn from existing arrangements and the way they work?

I have undertaken a project to assess the different types of governance arrangements, but it cannot be an exhaustive survey, because there are about 2,400 international organizations and 200,000 UN-registered treaties. At the EUI, with my colleague, we took the basic channels of trade, capital flows, and migrations of goods, capital, and people. We took the deep integration issues that have to do with more advanced stages of integration such as competition policy, banking regulation, and tax coordination because they are more challenging by definition. We also took climate change mitigation which epitomizes the management of global public goods, and internet and data governance which is determining the methods of managing new forms of interdependence, and we looked at what we can say about the principles and outcomes.

We took those eight fields and looked at the rationale, type of governance, type of mechanisms, and the state of play. In terms of migration, there are significant reasons to not tackle migration, especially when it takes place in a way that does not determine the country of destination. With refugee flows, governance decisions have major spillover effects; if you decide to refuse to take refugees, they may go to neighboring countries. We have seen that happen on a massive scale recently in Europe. The migration situation is a complete failure in all respects. There is no governance. There was an attempt, but it was just principles and extremely weak. It is completely ineffective. That is an example of a failure of global governance which has significant consequences.

If we take the two main pillars, the trading regime and the IMF-based capital flows regime, we have strong reason for having a system of governance in place which has to do with beggar-thy-neighbor behavior, and also has to do with the case of capital flows with the mutualization of insurance against capital flows. We have strong institutions and a legal system in place, but they are not going very well. Trade is more in the spotlight, but if you look at the way the global financial safety net (GFSN) is organized, there is a process of fragmentation going on. In part, this is natural because it is good to have mutual insurance at a regional level, but it goes beyond that to the weakening of the resources of the International Monetary Fund (IMF) and the risk of fragmentation. The rules-based system in an institution is no guarantee.

Interestingly, the three next fields for deep integration are fields in which things started later. There were failed attempts to create a rules-based order with multilateral agreement and investment with the idea of creating a global competition authority. In the end, we have soft governance arrangements in place. On competition, we have cooperation between competition authorities that is largely informal. These institutions are largely independent with similar mandates. They so far have succeeded in doing something extraordinary which is to accept an allocation of responsibility. For example, depending on the effect of a merger decision on consumers in a jurisdiction, they have been able to take extra-territorial decisions without it resulting in a conflict and there have been many such cases. On banking regulation, it is not the same model, but we have independent regulators that cooperate. They work at a distance from the government and set standards that are not mandatory. The Bank for International Settlements (BIS) standard can be adopted or not, but they can be translated into national law, and there is a monitoring of the degree to which those standards are translated as such. It works, but it is not perfect and there can be a degree of divergence that may be excessive in some cases. On tax coordination, OECD has been able to make progress on at least personal taxation of savings. Discussion on corporate taxation is going on and we do not know what it will result in.

In terms of climate, it is a test case of managing a global public good. I think the binding solution was tried with the Kyoto Protocol, but it failed because it is just impossible to allocate emission rights from an equity standpoint. We do not have a basis for allocating emission rights to different countries. It would require a degree of legitimacy that is simply out of reach. The solution that has been chosen is a bottom-up solution, but it has only delivered a system of wide participation and monitoring so far. The test case comes next year when we see if the 26th Conference of the Parties (COP26) in Glasgow will result in a more ambitious commitment and actual delivery. It is interesting because the focus has been on developing appropriate business and financial systems to support movement instead of focusing on the negative externalities of climate change. In terms of digital networks, it is the only case in which an infrastructure was built globally before it was built nationally. There was an attempt to have a global governance of it and we are in the process of either alignment or fragmentation, depending on if you think of it optimistically or pessimistically.

What can we draw from this analysis? I think the lesson is that the interdependence channels that are involved are not the same. It is different, so in some cases you have relatively soft mechanisms that can deliver results. However, I do not want to say that it is perfect. The situations for climate and migration are worrying. The evaluation we have seen for trade and financial networks is worrying. It is far from being something to be happy about, but they are mechanisms that can deliver more than we would expect.

The lesson is the fact that rule-based systems only cover a small part of international interdependence. It covers trades, exchange rates, and many cases that we have soft law, so the first lesson is that we should not assume that it is a system governed by rules in general. It is a system governed by rules and other types of mechanisms. What you would wish for is a good matching between the nature of the game, the interdependence, and the mechanism in place. We currently have a sort of ad-hoc matching. We may have two strong rules in some fields, for example in trade, and two soft rules on some other aspects like climate, so it is not a perfect matching, but somehow soft arrangements have filled the gap in a fairly unpredictable way creating the web of international arrangements, and with mechanisms that are subject to possible generalization.

I think the notion of independent institutions that work on similar types of mandates and collaborate informally can be extended to several fields. It is not a definition limited to the regulatory field. You could say that the collaboration between central banks is very much based on this notion. Central banks have similar mandates and speak the same language and communicate with each other all the time. This has limited the potential for conflict within development to a large extent. The pledge-and-review mechanisms are a model that tends to develop in these cases. What is behind that model is the fact that you have the epistemic community. You share knowledge, and you are trying to set goals based on that. They can be global goals or more nationally-defined goals, and you do not compel member states to reach their goals, but rather monitor progress towards them. What it triggers is a repetition game that involves private-market participants, citizens, and companies. Therefore, the fact that there is this transparency has some effect, even if the effect is small.

The conclusion I would like to draw is that we have a set of partial solutions, and this set is what we have to work with. Therefore, while there are goals for a new global governance system, I think they are fairly out of reach. We should not spend too much time on cultivating illusions. What I think should be the practical agenda and what I want to discuss is to what extent we can generalize and draw lessons on the basis of the cases of partial success that we have with organization of this governance arrangement. Ideally, we would have principles. They would look for sharing some fundamental principles. On this basis, we would have mechanisms that can be either a soft mechanism or a plurilateral clubs based on general principle. That is the sort of combination I think we should try to draw on.

The last point is that for it to be a workable agenda, I think there needs to be a thorough evaluation of what we can expect from each mechanism, depending on the underlying type of interdependence and game that we are trying to solve. Therefore, it is not to just hope that a solution will be delivered. It is to understand the underlying mechanism and the forces that can be behind success or failure.

Q1: There has already been a very strong economic case for the public goods of trade, but there is also a strong argument that domestic income redistribution among winners and losers has not been well-managed in some countries, leading to very thin support for international trade. How would you improve the domestic political dimension of this in thinking about those international rules or fields?

Jean PISANI-FERRY:
It is true that migration has always been a political benefit everywhere. Trade has become much more political and I think the general attitude towards trade has become much more controversial. Trade openings have not been properly addressed and we are seeing a much stronger geographical concentration of the effect of trade development. As long as it is specific industries and skills that are affected, it is easier to deal with than when it is cities and regions, as it has been with the surge of Chinese exports. By definition, because it is being impacted at a regional level, it creates a political dimension. But the IMF has also been very political in some countries. In terms of intervention, meaning that a problem has been identified, it becomes highly political when you have to go through an IMF program. In some cases, competition can be controversial and issues of banking depend on whether it goes well or not. I do not think it is black and white, but I do agree that it is less political because you can delegate solutions to different independent institutions. Therefore, it is not necessarily permanent, and at some point it can become political again.

Q2: French professor, Thomas PIKETTY, proposed a policy to introduce asset tax globally to improve income and wealth distribution. What do you think of his proposal?

Jean PISANI-FERRY:
I am a great fan of PIKETTY's empirical work and less of a fan of some of his proposals. I think taxation is one of the key reasons why we created parliaments. It is extremely hard to go beyond sovereign borders because there are distributional choices involved. Different societies make different distributional choices. To move that to a supranational level is a high ambition. That is not what is happening in taxation. It is simply addressing harmful tax competition. You have tax havens that essentially capture the tax revenue without implying a move to the economic substance in most cases. It is the tax base that moves, not the economic substance. It is basically a set of small entities that have captured the tax base. Gabriel ZUCMAN, a student of PIKETTY, has worked extensively on this. It has reached a scale for household savings and a scale for corporate taxation that are major problems. Essentially, big countries put pressure on those entities to eliminate the tax competition.

For income taxation, it basically came through a purely unilateral move by the U.S. that was deliberate under the OBAMA administration, where they introduced the Foreign Account Tax Compliance Act (FATCA). It forced any bank operating in the U.S. to disclose information, which meant that the banks would not lose access to the U.S. market. They basically used the size of the market as leverage to force an international agreement. That agreement has become a multilateral agreement, so it has worked in this case.

For corporate taxation, the underlying problem is that it merges with the digital problem which is of a completely different nature. However, it interacts with the question of what is taxable. How do you allocate the profit that it made? In my country, our companies also make profits and locate some of their profits according to the tax interest which is a minimization of the tax burden. Those are things that have to do with the international agreement in which we find ways of allocating profits depending on where you produce, where you do research, where your headquarters is, and where your market is.

Advanced countries have to accept that this is bound to give some of the tax base to developing countries. Those developing countries had no access to our tax base for a very long time. We were keeping that tax base for ourselves. We have to accept that they will also receive a portion. That is what makes the game difficult, but I think it is much more realistic than to move asset taxation to a global level. There is an independent debate within countries, but if you at least limit the competition and profit shifting, you are restoring the capacity to make tax choices at the national level independently.

Q3: You made a reference to global public bads, specifically crime, trafficking, and terrorism. What is your perspective on some of the recent geopolitical developments?

Jean PISANI-FERRY:
We used to have more reciprocation between non-geopolitical order and geopolitical developments. We used to have a system of international economic relations that was more or less protected from geopolitical development. In the past, we had countries that were not part of the economic system. What we see more and more is the interference of geopolitical developments into the economic sphere. That raises difficult questions of how to respond. We have two major players, the U.S. and China, which do not separate the economic field from the geopolitical field in the same way that Japan and the EU do. We are trading and investing in countries, and that is quite separate from our geopolitical alliances. The fact that it interferes means the rise of the China-U.S. rivalry risks contaminating a series of fields, much beyond the traditional limit of the geopolitical rivalry. It may undermine many of the rules and principles we have been working with. We have to see how we can respond to that.