What role for global governance?

Kemal Derviş  

Kemal Derviş is vice president and directorof Global Economy and Development, Brookings. Formerly head of the UnitedNations Development Programme and Minister of Economic Affairs of Turkey, hefocuses on global economics, emerging markets, European issues, development andinternational institutions.

Can global governance solve most of oureconomic problems? Or does it too often promise more than it can deliver, anddivert attention from more practical reforms that national governments shouldimplement? In a recent commentary, Harvard University economist Dani Rodrikthoughtfully argues the latter. Is he right?

To be sure, national policy has a moredirect effect – good or bad – on a country’s citizens. But we cannot ignore theglobal effects of bad national policies, the most obvious examples noted byRodrik being greenhouse-gas emissions and infectious diseases. People in the“country of origin” may pay a price, but so will the rest of us.

“Globalization” has been a catchword fordecades, and the need for global governance has admittedly been exaggerated inrecent years, especially by those on the center left. This has led to calls for new alternatives, such as “responsible nationalism” or “inter-governmental” – asopposed to supranational – decision-making in the European Union.

Such proposals make for a healthy debate.For example, we should reevaluate the current system for deciding tradeagreements, which have become more about regulatory and investment issues thanabout eliminating import tariffs or other import barriers. It is no surprisethat even some free-trade supporters object to agreements that allow tradegroups to insert language granting multinational corporations undue marketpower at the expense of consumer protection.

Still, the push for stronger globalgovernance in recent years has not happened in a vacuum. Countries haveundoubtedly become more economically and socially interdependent, owing totrade, travel, and telecommunications, not to mention multinational corporatestructures and international financial flows. Global intercourse is broader,faster, and more ubiquitous than ever before.

Globalization may occasionally hit speedbumps, such as the current slowdown in world trade; but the underlyingtechnological changes driving interconnectivity will only continue to bringpeople and countries closer together.

Ultimately, this is for the best, becausethe major challenges we face today are global in nature. Efforts to mitigatethe effects of climate change will require consistent global coordination. Evenlocal initiatives, which are increasingly important for addressing the problem,must fit into a framework of converging global policies and obligations.Otherwise, people will not feel as though they are making a difference orcontributing to a shared goal, and others will not feel pressure to do anythingat all.

Another global challenge is taxation, whichrequires international coordination to stanch rampant avoidance and evasion. The problem is not justindividual “tax havens”; there is also a need to capture corporate profits thatcompanies’ move internationally with complex devices such as “transfer pricing”and “tax-base shifting” to minimize their tax bill.

Disparate tax rules among differentcountries have resulted in close to a zero-sum game for national governments,which are forced to pursue beggar-thy-neighbor policies to secure a biggerslice of a shrinking pie. Under the current system, countries have strongincentives to offer ever-greater tax advantages to companies operating withintheir borders, even though they stand just as strong a chance of being undercutby another country as companies shift their declared profits from one jurisdictionto another.

In most cases, companies are not doinganything illegal by taking advantage of this fragmented system. But ifcountries are serious about reducing inequality and funding pensions and healthcare for their citizens, they will have to cooperate in global-governanceefforts to prioritize fair taxation.

Climate change and taxation are just twoissues requiring global coordination, but the list goes on. The monetarypolicies of large reserve-currency central banks such as the United StatesFederal Reserve can have far-reaching spillover effects, as can self-destructiveexchange-rate policies or regulations on cross-border financial flows. In mostof these cases, the damage runs downstream from large countries to smallercountries; however, if enough small countries are affected, the aggregatedamage can flow back to the larger economies themselves, as we’ve seen in the Europeandebt crisis.

Given the scale of these challenges, wehave no choice but to cooperate internationally and strengthen global andregional institutions and frameworks such as the International Monetary Fund,the EU, and the G20, which will meet in Hangzhou, China, next month. But globalgovernance is not an either/or proposition. When national or local policies aresufficient to address a problem, then they should be pursued.

Indeed, the principle of subsidiarity –whereby decision-making should occur at the most local level possible – iscrucial to flexible, functioning global governance. The presence ofglobal-governance frameworks should never become an excuse for national orlocal inaction. Public policy is a multi-level and multi-channel effort with local,national, regional, and global dimensions. Ideally, policy debates shouldacknowledge this reality.

We also must acknowledge the urgency ofshoring up faith in global governance from another perspective. Across the US,Asia, Europe, and the Middle East, a resurgence of identity politics andxenophobic nationalism threatens to reprise the great tragedies of thetwentieth century. Against this backdrop, stressing the existence and needs ofa global community is necessary not only for economic reasons, but also to helpensure a peaceful world.