Big Picture Thinking

We live in extraordinary times. I have been focusing on some major trends on this site that I will continue to explore here. Among others they consist of:

  1. The struggle with accommodating power shifts in international economic governance.
  2. The rise and acceleration of regionalism, spearheaded through international trade and the formation of trading blocs.
  3. The uncertain future trajectory of globalization and the internationalization of production processes (vulnerabilities and opportunities).
  4. The decline of international top-down regulation and the rise of international “informal” law making structures.
  5. The complicated new role of the sovereign nation state as impacted by points 1-4.

I will go into this general situation a bit as several of these are, in my opinion, “root” causes and drivers of many issues and problems in governing both trade and environment/climate.

In a recent speech on changes in trade policy, Pascal Lamy (DG WTO), said:

Just in the last ten years, we have seen the share of developing and emerging economies in global GDP rise from 37 to 49 per cent at purchasing power parity.  From the beginning of this century, then, the developing economies’ share of world economic activity has risen from just over one third to nearly half.  By any standard, this is a rapid transformation. Export volumes have more than quadrupled in the last 30 years.  The value of south-south trade has increased from about one-tenth of total trade to some two-fifths.  The developing country share of global exports has jumped from 33 per cent to 43 per cent over the last decade. China’s exports have been growing at a staggering 20 per cent per annum in value terms. A similar picture of shifting composition arises in respect of foreign direct investment.  While global FDI inflows have stagnated on average over the last decade, the share accounted for by emerging and developing countries has jumped from 19 per cent to 52 per cent.”

These are incredible figures whose acceleration makes it increasingly untenable for the global community to ignore the tensions that are caused by this new order of things.

In another highly pertinent speech Lamy basically made the argument, though with appropriate subtlety, that we also need to rethink what sovereignty really means in a modern world where interdependence is greater than ever.

“With the world becoming ever more interconnected and challenges becoming truly global, governance remains to a large extent local. The discrepancy between the reality of today’s interdependence, the challenges resulting from it, and the capacity of governments to agree politically on how to deal with them is striking.”

In this situation where local politics, not global politics, determine the global governance agenda, problems arise due to it clearly not reflecting the reality of what is actually happening in terms of international interconnectedness. The old paradigm of the Westphalian order of 1648, with national sovereignty as a core, is crumbling. But it is not crumbling quietly or without friction. Indeed, the current problems we have to form a functioning equity system in terms of responsibilities on the climate side and trade (and in many other areas) is directly linked to still having this prevailing model of political national sovereignty while international commercial relations follow very different rules indeed. People see this and term it a “low trust” environment between nations. Which it is. But it is important to not stop there. Trust is built on a bedrock of common values, but what we have today are two highly different value paths experiencing friction in between themselves as they attempt to navigate around each others existence. To solve this problem of the Westphalian order of sovereignty visavi modern interdependence, I do believe like Lamy that leadership is a key issue. But it is not THAT we need leadership that is at issue. It is WHO should be in a leadership position and to what extent that is the tough nut to crack. Fundamentally however, this question of who still feeds in to the traditional paradigm of sovereignty, where culturally coherent nations are still the “units” among which the “great game” is played. In the modern commercial world of deep interdependence however, these units are less self-sufficient than ever before, restricting their operating space and redefining their traditional role as regards the outside world. Put simply, one could make the slightly vulgar argument that nations are basically a group of cultural units that keep their raison d’ etre through clear cultural autonomy. With less of such autonomy available where interdependence is no longer a choice but simply the state of things, the fundamental core that underlies sovereignty is put under considerable pressure.

To fashion “international governance” in such times is difficult.  Most everyone agrees that current attempts at “world governance”, if one can even consider such a thing to exist, do not reflect the reality of power dispersion that the world is in the middle of. Indeed, despair that we will ever be able to conjoin issues harkening back to sovereignty and national political games with the current order of commercial interdependence have lead many to simply believe that there will be no solution to issues that require this synergy. Alan Oxley, an Australian trade advisor, gave a controversial talk at a recent seminar where he posited that the current “leadership” debate is completely misaligned, and that this was proven by having 20 years of climate change work but actually going backwards in progress. Further, that unproductive sidetracks of unilateralism would be the result of continuing along the non-functioning multilateral paths that we currently have. Connecting back to sovereignty again, his fear of unilateralism is ultimately a fear that the sovereignty aspect of national politics would prevail over the global mindset, with further interdependence (including the kind that is truly needed, as is the case with climate change) shunned instead of dealt with head on. Oxley is a controversial figure, but his fear of unilateralism and its greater focus on national priorities is of course not entirely without merit. We probably have not done a very good job of sequencing our multilateral efforts, choosing to ignore fundamentals that would have been better to focus on head on first rather than hoping that a magical future of cooperation will just kind of work things out if we try hard enough. It is not lack of effort that is missing, the problems are deeper.

Is all this unkown? No, but it is clearly more intuited than it is posited outright. In its recently released biannual “Foresight Report”, UNEP laid out the 21 greatest environmental issues facing mankind. Appropriately, aligning governance with sustainable development was number one. And in governance, nothing substantial is likely to happen until we have a functioning system of equity. And the equity debate will not be solved without a clear solution with regards to relative sovereign national power, with this issue being unavoidable due to the main driver of relentless changes undergoing international commercial power and interdependence.

This move towards a period of greater conflicts is a recurring theme in my writing and I do believe that we will have to face a “time of trials” before a new system of international economic governance can emerge that better reflects a new power dispersion. Of course, the WTO will continue to be the “front-lines”, as it is where the products of the low-trust environment ends up (A good example of despair over this low trust environment here).

Now, there is an extremely important point of distinction that I believe is not being made all too often. Commercial interdependence is greater than ever before and sometimes seems to live a life quite of its own without much heed to specific nations. Meanwhile, however, commercial relations as they are governed by the WTO, which is a fundamentally member based organization, only have members that are sovereign nations. Thus ultimately these are the interests that are played out in negotiations. I believe this has profound implications for other trends, such as the move towards greater prevalence of soft law governance in many areas of international law. The reason being that there are interests lacking borders that find little other recourse than to engage in these types of initiatives. Simply put, much power in the international sphere today lack clear international institutional homes, as these tend to be dominated mostly by the compartmentalized interests of sovereign nations. Much of international power and many of the most pressing international issues seem to be becoming less and less dependant on traditional national boundaries, though our traditional paradigms of thinking about these issues linger on.

As a slight digression but along the same vein, it is however encouraging that there are attempts at “catching” some of these changes. The WTO and OECD recently announced that they are changing from measuring gross trade flows to a value-based measuring system. What does this mean? Well, it means that we will get less distorted trade figures by looking at how much value is actually contributed by each country in the production chain, rather than overemphasizing (not to mention double-counting) the final shipping nation data and country of consumption data. This has been talked about for a long time so it’s wonderful to see that this is “going official” now. These statistics will improve our understanding of modern trade flows and production chains.

Going back to the double-bind of sovereignty and commercial interdependence in a landscape of not-so-well-adapted governance structures, I recommend taking a few moments to watch the following videos. The first is a TED talk where a very dramatic Paddy Ashdown discusses related topics (TED is all about presentation after all). The second one is a talk at Chatham House where some truly big picture strokes are drawn on the current state of the world and globalization by Parag Khanna (who if I’m not mistaken is currently at one of the LSE think tanks). You might have to scroll down a bit to find it. If you are interested in these issues that I have been writing about here, I think you will find both of these talks highly enjoyable.

In my next article, I plan to touch briefly upon the intergenerational equity question with regards to climate change and the current debates on the future of economic governance. I alsohope to write a technical piece/discussion soon as I both have some new thinking and find an absolute ton of helpful new material being published. My time is of course the prime limiting factor for how quickly I can get these out here on the site.

PS: A question to readers. Does anyone know if there is a somewhat reliable indicator of world aggregate demand? Absolute trade figures are booming last I checked, but how is aggregate demand globally looking? Are we trading more and more within a landscape of overall shrinking demand or is aggregate demand following suit with the expansion in trade? This has been occupying my mind lately but I haven’t been able to find recent and reliable figures anywhere. Any trade economists out there who knows? Please write a comment or send me a private message if you know some good statistics for this.

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