From Centralised to Decentralising Global Economic Architecture

The relatively centralised global economic governance architecture created after the historic Bretton Woods conference of 1944, comprising the International Monetary Fund, the World Bank and the General Agreement on Tariffs and Trade (GATT), is decentralising. One of the manifestations of the decentralisation process is the rise of regional economic institutions that operate alongside their “senior” global counterparts. Regional financial arrangements, regional development banks and reciprocal trade agreements have become increasingly important in global economic governance. The conventional view of the relationship between regional and global economic institutions, or that between regionalism and multilateralism more generally, has been coloured by the “contested multilateralism” theoretical paradigm which predicts conflictual, competitive, and fragmenting dynamics between regional and global economic governance bodies. We reject such views and adopt a “benefit-risk” analysis method to examine whether the move from a centralised to decentralising global economic architecture entails net gains or net losses for global financial, monetary, trade and development governance. It is argued that complementarity and division of labour between regional and global institutions can be cultivated to advance global economic governance. Towards the end of the chapter, the main arguments and findings of the other chapters of the edited volume are summarised and highlighted. The role of Asia is identified.

During the past decades, the Group of Seven (G7) leading industrial democracies and the Group of Twenty (G20) comprising the G7 countries and systematically important emerging economies have established themselves as the twin global steering committees overseeing the functioning of the global economic governance architecture. The G7 process began in 1973 with a group of finance ministers from the United States, the United Kingdom, France, and West Germany meeting privately at the White House library to coordinate monetary policies following the Nixon Shock. It was upgraded to summit-level meetings in 1975 and incorporated additional members of Japan, Italy and Canada, making it the G7. For the period of 1998–2014 when the grouping was referred to as the G8, Russia was a member. A major enlargement of the grouping occurred in 1999 in the aftermath of the Asian Financial Crisis. Financial and central bank technocrats from developing and emerging economies started to meet with their counterparts from the established G7 powers, paving the way for the establishment of the G20. The G20 became a leaders’ forum in 2008 at the height of the Global Financial Crisis and gradually expanded its agenda from the pre-established set of economic and financial issues to other aspects of global governance. This chapter traces the historical evolution of the global oversight institutions from the quadripartite Library Group to the G20 through the G7/8. The G7/8 and G20 as self-select elite governance groups suffer from varying degrees of substantive, input and output legitimacy—components of what can be referred to as “whole-process legitimacy”. Proposals are advanced to enhance the effectiveness-legitimacy nexus for the two institutions. The chapter concludes by arguing that the two G-groupings should refocus and reposition themselves as global oversight bodies and come up with a division of labour to promote functional complementarity between the two, and between them and a wide range of functional international governance institutions.

The rise of new regional institutions has led to the decentralisation and multi-layering of the global financial architecture (GFA) comprising the international monetary architecture (or the global financial safety net) and the economic development architecture, posing a risk of fragmentation. In this chapter, we argue that the present approach of ad hoc complementarity between the ASEAN+3 regional financial safety net (ASEAN+3 RFSN) and the IMF, when effective, may be sufficient to manage a moderate financial crisis in a single country. Managing a more serious crisis with contagion to neighbouring countries will require a more structured form of cooperation between the ASEAN+3 RFSN and the IMF, similar to the arrangement that was set up in Europe to manage the eurozone crisis. Then taking the case of East Asia in general and China in particular, we posit that the ASEAN+3 RFSN, the CMIM and AMRO, and the China-led non-traditional development banks such as the AIIB and NDB have functional complementarities with their global counterparts (namely the IMF and the World Bank, respectively). There is also a degree of “healthy” competition between regional and global institutions which is beneficial to financial governance. We do not find evidence of “unhealthy” competition which increases the risk of fragmentation of the global financial architecture. The benefits of decentralisation and creation of regional institutions appear to have outweighed the risks. Our findings suggest, therefore, that the rise of regional institutions and the decentralisation of the global financial architecture have not led to fragmentation, so far. But we caution that there are limits to this argument due to the history of the establishment of regional institutions, the gap between rhetoric and reality, and the evolving geopolitical forces including the US veto power over the IMF and the ongoing US-China trade war.

As the international development finance architecture decentralises, a plethora of regional multilateral development banks (MDBs) have emerged. The institutional landscape in Asia is transforming with the establishment of the Asian Infrastructure Investment Bank (AIIB). This chapter aims to shed light on the horizontal relationship between the traditional development finance actor, the Asian Development Bank (ADB) and the nascent AIIB. Based on the collaborative experiences of the European Investment Bank (EIB) and the European Bank for Reconstruction and Development (EBRD), this chapter recommends that ADB and the AIIB should form tri-partite coordination mechanism along with global institutions to promote cooperation, develop complementary portfolios in terms of sectoral exposure and geographical coverage and co-fund projects to catalyse greater inter-agency cooperation. The resulting synergies will have potential to stitch the two seemingly parallel institutions into an interdependent and coherent development finance structure in Asia and beyond.

This chapter argues that the present global reserve system (GRS) based on the “fiduciary” or “fiat” US dollar faces several fundamental problems that have been heightened by the Global Financial Crisis of 2008–2009. These include the asymmetric adjustment problem, inequity bias, and the Triffin Dilemma. Policymakers and academics have put forward several proposals to reform the GRS. These are moving to a multi-currency reserve system, strengthening the special drawing rights (SDR)-based GRS managed by the International Monetary Fund (IMF), strengthening the decentralising/multi-layered global financial safety with the IMF and regional financial safety nets, and establishing a new institution to issue a global currency in a fair and equitable manner. While the multi-currency system provides an opportunity for diversification and risk reduction, it does not address the fundamental problems associated with the present GRS. Also establishing a new institution is not politically feasible at the moment as the IMF still exists. The chapter argues that the feasible options in reforming the GRS are, therefore, to pursue incremental reforms in the way that SDRs are, among others, issued and allocated by the IMF and to strengthen the decentralising/multi-layered global financial safety net. These approaches will take time to bear fruit which means that the hegemony of the US dollar will continue for some time.

Will the US dollar be replaced as the predominant global reserve asset? What are the international monetary system’s structural vulnerabilities, inherent flaws, and challenges? In this chapter, we discuss the past, present, and future of the international monetary system. Revisiting the history of the Bretton Woods system, including its origins, features, readjustment attempts, and eventual collapse, we explain why the current monetary order that flows from it is not sustainable. Since Nixon ended the convertibility of the US dollar to gold in 1971 leading to the end of the gold-standard era, the international monetary system has undergone tremendous changes and became a system without a hard anchor. In the process, the US dollar’s hegemony has been increasingly consolidated. Under the US dollar’s hegemony, the international monetary system has systemic imbalances between the United States and other countries, relies on the symbiotic relationship between China and the United States, and faces various threats ranging from expansionary US domestic fiscal policies to China’s economic transition and to geopolitical conflicts. Looking forward, digital currencies provide a convenient and efficient technical solution to guide reform of the international monetary system. Yet, any attempt to reform the current international monetary architecture cannot be successful without prudent thinking, reasonable adjustment methods, and mutual trust between China and the United States in international monetary cooperation.

Global economic governance is in flux. The centralised international trade architecture of the post-Bretton Woods era is decentralising as new regional institutions are being established for various reasons. Decentralisation per se is neither good nor bad. It depends on whether there is “healthy” competition and functional complementarity or “unhealthy” competition between global and regional institutions. Against that backdrop, this chapter has three objectives, to: (i) review the decentralisation of the international trade architecture; (ii) identify the benefits and the risks of the decentralisation process and its implications for the centrality of World Trade Organisation (WTO) and (iii) recommend policies for the WTO to manage the process. This chapter argues that, so far, the benefits of new regional institutions and trade decentralisation appear to have outweighed the risks, and as a result global economic governance may have improved. Looking ahead, this chapter recommends a number of policy actions that the WTO should take to manage trade decentralisation. This chapter argues that Asian countries, especially those that are members of the Group of 20, should play a greater role in lobbying and driving the needed reforms of the WTO. They should also seek to expedite implementation of the Regional Comprehensive Economic Partnership (RCEP) and eventually institutionalise the complementarity between RCEP, the Comprehensive and Progressive Agreement for Trans-Pacific Partnership and the Belt and Road Initiative.

The process of building the International Financial Regulation Architecture (IFRA) started later than the other three pillars of the Global Economic Architecture (GEA), namely the monetary, trade and development pillars. The reason for this was that it was not until the 1970s that countries started to deregulate their capital markets and cross-border capital flows and financial globalisation took off. From the 1970s to the mid-1990s, a number of international Standard Setting Bodies (SSBs) were established beginning with the Basel Committee on Banking Supervision (BCBS) which is the premier standard setter for the international banking industry. Following the Asian Financial Crisis of 1997–1998, the G7 established the Financial Stability Forum (FSF) to coordinate SSB activities. Subsequently, after the Global Financial Crisis, a root cause of which was regulatory failure in the United States, the G20 upgraded the FSF to the Financial Stability Board (FSB) mainly by increasing its membership to all G20 members. The power and authority of the FSB were, however, not increased. The IFRA, therefore, remains a loose network of members and jurisdictions without any legal backing. Nevertheless, the IFRA differs from the other GEA pillars in several important ways. In particular, the IFRA is not decentralising because the non-G7 members of the G20 are not dissatisfied with its governance of the FSB and SSBs as they are enjoying the “club benefits” of membership. They are not trying to establish regional institutions. Further governance reforms of the FSB and SSBs are, however, still required. This chapter then assesses how the IFRA might evolve in the future: Will it become a rules-based pillar comprising institutions like the proposed World Finance Organisation (WFO) with power to sanction like the other GEA pillars or will it continue to be a loose network-based pillar? Presently, because of rising nationalism and populism in many parts of the world, it will not be possible to garner support for a rules-based IFRA. Hence, IFRA will likely continue as a loose network of institutions. Besides, the feasibility of the proposed WFO is also questionable for a number of reasons. First, in contrast with international trade, there is a notable lack of consensus on the benefits of financial globalisation and hence on setting up a rules-based WFO. Second, despite the interconnected nature of global finance, the costs borne to respond to financial crisis remain concentrated at the national level. Nation states are, therefore, unlikely to give up control to a supranational body.