Global Governance: New Players, New Rules
| Author | James M. Boughton/Colin I. Bradford, Jr. |
| Position | IMF Historian and Assistant Director of the Policy Development and Review Department/Nonresident Senior Fellow for Global Economy and Development at the Brookings Institution |
| Pages | 10-14 |
Page 10
Why the 20th-century model needs a makeover
In the summer of 2007, millions of homeowners in the United States discovered that the terms on their mortgage loans had worsened at the same time that the market values of their homes were declining. The squeeze quickly led to a sharp rise in foreclosures, and many families lost their homes. Within weeks, the turmoil spread to other advanced economies with complex financial systems, where businesses and individuals found that loans were harder to obtain and were unexpectedly expensive. Suddenly, the solvency of major banks and other financial institutions was being questioned.
What is surprising about this episode is that most people seem to have thought that advanced financial systems were sophisticated enough to absorb risks and to spread them widely enough to prevent a sudden drying up of liquidity. Bank runs happened in the 1930s. They were not supposed to happen in the 21st century. What is not so surprising is that once the problem began, it spread around the world before any one country could resolve the matter or protect itself from contagion. What began as a banking crisis spilled over into equity markets, destabilizing stock markets in industrial countries and raising fears that emerging markets could also be at risk.
The financial turbulence of 2007 illustrates-not for the first time-both the benefits and the risks of financial globalization. The global pooling of money has made it possible for companies in Tanzania, for farmers in Vietnam, for entrepreneurial women in villages in Bangladesh, and for young families in American cities to realize dreams that were beyond the reach of earlier generations. But it also has made them vulnerable to shifts in invisible forces that they cannot be expected to understand, much less influence or control. In this instance, quick responses by major central banks may have isolated the shock before it spread too widely. The episode thus illustrates another important point: in a world of globalized financial markets in which a systemic weakness in one country can affect many other markets, oversight and regulation should be acknowledged as a global responsibility.
Of course, the international community needs to grapple with much more than financial governance issues. The removal of barriers to international trade creates new employment opportunities, but it also raises thorny questions about labor standards and other social concerns. The destruction of old-growth hardwood forests to meet a growing world demand imposes environmentalPage 11 costs around the globe. Most frighteningly, contagious health risks respect no borders, whether the risks derive from AIDS, tuberculosis, or influenza. In each case, hard decisions must be made about whose welfare, which rights, and what goals matter most. This makes global governance-whether it pertains to finance, trade, the environment, or health-one of the most vital and difficult challenges of the modern world.
The ideal of global governance is a process of cooperative leadership that brings together national governments, multilateral public agencies, and civil society to achieve commonly accepted goals. It provides strategic direction and then marshals collective energies to address global challenges. To be effective, it must be inclusive, dynamic, and able to span national and sectoral boundaries and interests. It should operate through soft rather than hard power. It should be more democratic than authoritarian, more openly political than bureaucratic, and more integrated than specialized. neither the concept nor the difficulty of global governance is new. After the First World War ended, the leaders of the victorious allies gathered in Paris in 1919 for six months of talks aimed at redrawing many of the world's national borders and establishing a permanent forum-the League of nations-to deal with future issues and problems. More than 30 countries sent delegations to the Paris peace conference, but the four great powers of the winning side-France, Italy, the United Kingdom, and the United States-dominated and controlled the proceedings.
A quarter of a century later, as the Second World War drew to a close, allied delegations gathered again to set up new institutions to replace the failed League and to prevent the economic disasters that had characterized much of the interwar period. From those storied discussions, most of which were held in and overwhelmingly influenced by the United States-at Bretton Woods, new Hampshire; at the Dumbarton Oaks mansion in Washington, D.C.; and in San Francisco, California-emerged the multilateral agencies that would mold economic and political relations for the next six decades: the United nations, with its Security Council and its specialized agencies; the Bretton Woods institutions-the World Bank and the IMF; and the General Agreement on Tariffs and Trade (GATT). This model of global governance, in which the few countries that sat at the apex of the world economic pyramid invited others to participate without ceding much control, became the prevailing paradigm for the postwar era.
This dominance model of global governance was a reasonable and practical model for much of the 20th century. When the century...
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