The New World Economic Order: Are Capitals Ready?

IMGXYZ2372IMGZYXIn the coming years, the economies of developing countries are predicted to surge ahead of their advanced counterparts. The promotion of the G20 may have marked the beginning of a response to this shift, but other institutions, both international and domestic, may be forced to adapt as well. Carnegie sponsored the fifth meeting of the Twenty Roundtable, a bimonthly gathering of senior Washington diplomats, to discuss whether the world’s major economies and the leading international institutions are prepared for the coming change. Angel Gurría, Secretary-General of Organisation for Economic Co-operation and Development (OECD), and Carnegie’s Uri Dadush introduced the topic and participated in the discussion.

2050: A New World Order

The world’s economic balance of power is rapidly shifting and world trade is being transformed. Developing countries in Asia and Latin America will join traditional Western powers as the world’s largest economies, but they will remain less rich, as measured by per capita GDP. Rapid labor force growth, high rates of investment, and the continued absorption of technology in emerging markets will make this growth possible. 

With these changes, however, come significant risks:

• Increased competition from and among developing countries could ignite protectionism in both emerging and advanced economies.


• Financial crises may reoccur, especially if the causes of the recent crisis are not addressed. 


• The shift of economic power away from its traditional centers will create geopolitical friction that could lead to political tension and military conflict.


• Carbon emissions—which will only increase as economies grow—are on a path toward climate catastrophe.

Looking Beyond the Great Recession

In recent months, policy makers have focused on pulling the world economy back from the brink of collapse, and appropriately so. Though the recovery must remain leaders’ first priority, Roundtable participants recognized that international organizations, particularly the G20, need to begin addressing issues required for promoting sustainable, long term growth. The fallout from the crisis—high unemployment, burgeoning government balance sheets, and increased protectionist pressures—threatens to undermine growth potential for years to come.

Additionally, several discussants noted that the crisis in Greece is a serious threat to long term growth prospects in Europe, and argued that the EU should allow the IMF to support Greece. Not only would this ease the crisis, but it would also demonstrate that Europe has confidence in the IMF, making it more effective and credible institution when addressing future crises.

Finally, participants commented that a new balance needs to be struck between market- and government-led growth. Growth was overly dependent on markets before the crisis; now, economies are too reliant on government support. Policymakers must find a new equilibrium before growth can return to its pre-crisis potential.   

Easing the Transition

Assuming the economies of developing countries remain on track for rapid growth, political and economic frictions, both domestic and international, will undoubtedly emerge over the next forty years. Roundtable participants suggested some methods to alleviate those frictions:

• Periods of rapid growth could increase income inequality and create social conflict. The vehicles for dealing with income inequality (e.g., education, progressive taxes) are well understood, and governments should work to promote equitable growth to avoid disrupting social cohesion.


• Some tension among developed and developing countries will be alleviated as developing countries grow. Protecting intellectual property rights, for example, will be more beneficial to countries as they develop and pioneer their own technologies.


• On the other hand, leaders should recognize the existence of hybrid economies that combine features of both developed and developing countries. Despite being economic behemoths, China and India, for example, are home to millions of poor and still face daunting development challenges.

2050: A Shift or a Sea Change?

Several participants argued that it is unclear that the coming changes will represent a fundamental shift in the global economic order. The past half century saw the rise of Germany, Japan, and South Korea as economic powerhouses; the next half century will bear witness to the rise of a new mix of countries.  These participants noted that:

• As long as countries are able to withstand the pain from increased competition and markets remain open, the current economic system will remain fundamentally the same.


• Relationships may change as countries rise and fall from prominence, but these shifts will be incremental. Global governance need only change incrementally as well.


• Markets will address many of the issues that require broad agreement, such as trade. Economic growth is not a zero-sum game: as developing countries grow, they will import more from advanced economies, and all will benefit.

Others disagreed, commenting that the size and speed of the transition are unlike anything seen in history, and that the current polities of the world are unprepared:

• Today’s major developing economies represent a massive population—over 3 billion people. The economic emergence of such a large number of people will have a more profound effect on the world economy than anything that has occurred over the past 50 years.


• For the first time in history, the largest economies will no longer be the richest, in terms of GDP per capita.  International institutions will be forced to adjust their priorities toward issues of development.


• Additionally, advanced economies will remain the primary source of technological innovation. Tensions may build between countries as these advanced economies are surpassed by developing countries, largely because of the latter’s ability to copy technology from the former.


• Neither markets nor current governance structures will be capable of addressing some of the most pressing issues that will confront the world—climate change chief among them.

The Role of Global Governance

Recent attempts to reach international agreements on long term issues have largely failed, the most conspicuous examples being the Doha Round and COP-15 in Copenhagen. As issues such as protectionism and climate change become increasingly important, multilateral accords will become more and more necessary. Participants disagreed on how best to reach a deal, though they broadly agreed that developing countries should become more prominent players in international institutions.

• Several discussants argued that the institutions needed for the coming century are in place, they just need to be appropriately guided.


• Others claimed that the global governance architecture needs to be reformed. The one-to-one relationship between institutions and issues—the WTO and trade, the ILO and labor, etc.—makes global governance less effective.  A new organization should be created that brings the current institutions together, thus giving greater voice and cohesion to international governance.


• Some argued that certain issues should not be addressed in a multilateral forum. Climate change, for example, could be resolved by an accord among 15-20 countries. Where feasible, such agreements should be pursued.

Finally, participants noted that the structure of global governance is important, but only to a certain point. Regardless of institutional architecture, countries sometimes lack the political will to reach an agreement.