Can the world order catch up with the world?
17 Jan 2020|

The world turned a corner in 2019. The problem is that the world order didn’t turn with it. This disconnect could have disastrous consequences.

The biggest global power change has been the start of the ‘Asian century’. Today, Asia is home to three of the world’s top four economic powers (in purchasing power parity terms): China, India and Japan. The region’s combined GDP exceeds that of the United States and of the European Union.

The US is no longer even the most globalised power; that title now goes to China. Already a larger trading partner to more countries than the US, China is signing on to more free-trade agreements as well, including potentially the largest in history, the Regional Comprehensive Economic Partnership. By contrast, the US has abandoned FTAs such as the Trans-Pacific Partnership, and America’s share of global trade continues to shrink.

The world order hasn’t kept pace with these shifting economic dynamics. On the contrary, the US dollar remains the predominant currency for settling international trade. The US and Europe retain control of the two leading global economic organisations: the International Monetary Fund and the World Bank. And the United Nations Security Council—the only body that can issue binding decisions for the UN’s 193 member states—is dominated by just a few, largely declining powers.

In theory, the easiest of these incongruities to address should be the inadequate influence of emerging powers like China in the IMF and the World Bank. After all, the US and Europe have already acknowledged—including in the 2006 and 2007 G20 communiqués—that ‘the selection of senior management of the IMF and World Bank should be based on merit’, ensuring ‘broad representation of all member countries’.

Yet the anachronistic ‘gentlemen’s agreement’ that has kept an American at the head of the World Bank and a European leading the IMF has proved stubbornly resilient. In 2007, Dominique Strauss-Kahn became IMF managing director, succeeded by another French citizen, Christine Lagarde, in 2011.

Six years later, Lagarde declared that the IMF could be based in Beijing by 2027, if growth trends continue and are reflected in the fund’s voting structure. After all, she noted, the IMF’s bylaws call for the institution’s head office to be located in the largest member economy.

Yet, when Lagarde resigned from her post to become president of the European Central Bank last November, it was yet another European who took her place: the Bulgarian economist Kristalina Georgieva. Likewise, the World Bank presidency passed from Robert Zoellick to Jim Yong Kim in 2012, and then to David Malpass in 2019. Future historians will marvel at the imprudence of the old powers’ shameless refusal to share control of global institutions.

And yet the US and the EU are not the only ones working to safeguard their clout. In the UN Security Council, the five permanent members (P5)—China, France, Russia, the UK and the US—also pay lip service to the need for reform, but consistently obstruct progress. Complicating matters further, additional countries attempting to get a permanent seat on the council are facing resistance from their neighbours: Pakistan is blocking India’s bid, Argentina is blocking Brazil, and Nigeria is blocking South Africa. Given these dynamics, the Security Council will be even more difficult to reform than the IMF or World Bank.

But, again, failure could be disastrous. If the composition of the council isn’t updated, it could lose its credibility and moral authority. If the African Union or India (each with over a billion people) refused to abide by the Security Council’s decisions—essentially the decisions of the P5—the international community’s most important body wouldn’t have much recourse.

To avert such an outcome, the Security Council should adopt a 7-7-7 formula. The first seven would be permanent members—Brazil, China, the European Union (represented by France and Germany), India, Nigeria, Russia and the US—each of which represents a different region. The second seven would be semi-permanent members, a rotating selection of 28 countries, based on population and GNP. The remaining 160 countries would rotate into the remaining seven seats.

The most difficult incongruity to resolve will be that between America’s declining leadership and its currency’s role as the leading international reserve currency. Today, more than 40% of cross-border payments and 90% of foreign-exchange trades are settled in US dollars. This reflects decades of trust: the US had deep markets and strong institutions—including efficient courts and an independent central bank—and it didn’t use the dollar as a tool to advance its own interests.

But, since 2017, US President Donald Trump has been aggressively undermining the international community’s trust in the dollar. He has pressured the US Federal Reserve to lower interest rates in order to deliver short-term economic growth as he campaigns for re-election. And he has weaponised the dollar, labelling China a ‘currency manipulator’ and instructing the US Treasury to put more countries—including close Asian and European allies—under surveillance.

Trump’s behaviour has raised the hackles not only of adversaries (Russia leads a new de-dollarisation trend), but also of key allies. In 2018, European Commission president Jean-Claude Juncker pledged that the euro would become an ‘active instrument’ of EU sovereignty. It was also significant that France, Germany and the UK—in collaboration with China and Russia—created INSTEX (Instrument in Support of Trade Exchanges) to bypass US sanctions on Iran.

But, in a sense, Trump has done the world a favour by making undeniable what was already obvious. If world leaders don’t start addressing the contradictions plaguing the world order soon, the likely result is crisis—and even more dangerous contradictions.