A new world order

Krzysztof Rybinski
31 March 2009

What is and should be the future of global governance? Who should make the key decisions and in what institutional frameworks? The answers to these questions may be approached via a retrospective glance at an epochal moment when they might have seemed far clearer than they do today: the "diamond jubilee" of 1897 which marked Queen Victoria's sixty years on the British throne. Fareed Zakaria brilliantly evokes the scene on 22 June 1897 which conjoined London and much of the globe:

"(About) 400 million people around the world, one-fourth of humanity, got the day off. (The jubilee) stretched over five days on land and sea, but its high point was the parade and thanksgiving service on this midsummer day. The eleven premiers of Britain's self-governing colonies were in attendance, along with princes, dukes, ambassadors and envoys from the rest of the world...
Krzysztof Rybinski is a partner in Ernst & Young and assistant professor at the Warsaw School of Economics.

This article is (with minor editorial changes) the text of a talk delivered on 25 November 2008 at a seminar on "Reforming International Organisations" in Warsaw, co-organised by the British embassy and the Unia & Polska Foundation

"The jubilee was marked with great fanfare in every corner of the empire. In Hyderabad every tenth convict was sent free. There was a grand ball at Rangoon, a dinner at Sultan's palace in Zanzibar, a salute of gunboats in Table Bay, a monster Sunday-school treat at Freetown, a performance of the Hallelujah Chorus in Happy Valley at Hong Kong....

"In today's world it is difficult to imagine the magnitude of the British empire. At its height, it covered about a quarter of the earth's land surface and included a quarter of its population. London's network of colonies, territories, bases, and ports spanned the entire globe, and the empire was protected by the Royal Navy, the greatest seafaring force in history...

"Over the preceding quarter century the empire had been linked by 170,000 nautical miles of ocean cables and 662,000 miles of aerial and buried cables, and British ships has facilitated the development of the first global communication network via the telegraph. Railways and canals (the Suez canal, most importantly) deepened the connectivity of the system. Through all of this, the British empire created the first truly global market. Moreover, 2% of the world population produced more than 30% of global GDP, its energy consumption was five times that of United States and Prussia, and it accounted for two-fifths of the world manufacturing trade" (see "The Future of American Power: How America Can Survive the Rise of the Rest", Foreign Affairs, May-June 2008).

But hubris was being shadowed by nemesis. The bitter wars against the Afrikaaners ("Boers") of South Africa in 1899-1902 - waged in the teeth of opposition from France, Germany and United States - were an early signal. The beginning of an end of the 19th-century superpower - already anticipated by Rudyard Kipling at the time of the 1897 jubilee - was in sight.

writers analyse the search for new forms of global governance amid financial turmoil:                   Kerry Brown, "China goes global" (2 August 2007)

Robert Wade, " The financial crisis: burst bubble, frayed model" (1 October 2007)

Andras Ortega, " The power of the few" (4 October 2007)

Ivan Krastev & Mark Leonard, " The world's choice: super, soft, or herbivorous power?" (26 October 2007)

David Hayes, " A world in contraflow" (3 January 2008)

David Held, " Global challenges: accountability and effectiveness" (17 January 2008)

Ann Pettifor, " The week that changed everything" (22 September 2008)

Fred Halliday, "The revenge of ideas: Karl Polanyi and Susan Strange" (24 September 2008)

Rein Müllerson, "The world after the Russia-Georgia war" (5 September 2008)

Godfrey Hodgson, "The week that democracy won" (29 September 2008)

Tony Curzon Price, "Unprincipled madness" (1 October 2008)

Grahame Thompson, "Deglobalising the crisis" (3 October 2008)

Will Hutton, "Wanted: a fairer capitalism" (6 October 2008)

Avinash Persaud, "Europe's financial crisis: the integration lesson" (7 October 2008)

Paul Rogers, "A world in flux: crisis to agency" (16 October 2008)The title of Fareed Zakaria's essay from which the above extracts come - and the fact that in turn they are drawn from a book called The Post-American World - is an indication that these questions have found a fresh relevance today. Now, however, they refer not to the coming of a United States-dominated world but to its ending - and in particular, to the rise of China (or "Chindia"). Will a country of 300 million stand the competition of a charging dragon (albeit a troubled one) and racing elephant (albeit a wounded one) with 2.5 billion inhabitants; will this relatively small country be able to remain the global superpower?

A rebalancing

My answer to these questions is simple. While the United States is very likely to retain a big part of its political influence over the next decades, its economic and financial influence will rapidly diminish. The US's continued political influence will be related to its massive defence budget, one that dwarfs all other countries' put together. But in economic terms the restoration of the world order that prevailed until the early 19th century is likely. In 1820, Chindia accounted for 50% of the world's GDP, but both countries missed the industrial revolution and Chindia's share of the world's GDP dropped to less than 10% in mid-20th century. Since then it recovered to 20% and (according to IMF estimates) China had the highest contribution to the world GDP growth in 2007 and in the same year accounted for 25% of global growth on a purchasing-power parity (PPP). The "BRIC" countries, meanwhile - Brazil, Russia, India, China - accounted for almost half of global growth.

In the early 20th century, the United States replaced Britain as the world's only superpower. With the US's economic and financial power fading in relative, and recently also in absolute terms, the world faces two options:

* Design the new world order, the new vision

* Let the market and non-coordinated political processes determine the new world order.

A rising tide

The second option may be very costly. This claim can be illustrated with a few examples:

* Oil prices have topped $140 per barrel in 2008, then receded to $50 amid cyclical factors; but according to an International Energy Agency (IEA) forecast published in November 2008, the price of oil will soon exceed $100 again. The emerging markets' - and China's in particular - appetite for energy will continue to rise at a very fast rate, much faster than the pace of innovation allowing to reduce energy consumption and to use the new, non-fossil fuels based sources of energy.

The IEA predicts that in 2030 energy demand will be higher by 45% than in 2007, with Chindia responsible for 51% of that increase. Without globally coordinated massive policy intervention, fossil-fuels will retain its dominant share in energy generation accounting for 80% of world energy production cannot be ruled out. With a high risk of excess demand for energy, there may be massive and frequent blackouts around the globe in the future. The current recession may make matters worse, because the credit-crunch reduces investments in the energy sector. Energy may become a very powerful political weapon, helping to shift global power from energy-deficit countries to energy-surplus countries. This is of particular importance in Europe, which heavily relies on gas imports from Russia.

Climate disasters have become much more frequent in the past two decades, jeopardising the life and well-being of millions of people on all continents. Yet despite strong evidence that human industrial activity is contributing to this trend, the world's biggest countries cannot agree on the set of measures that will prevent humanity destroying itself. Europe's lonely fight against climate change is meaningless without US and China coming on board. Even if the European Union cuts emissions as planned by 20% by 2020, the cumulative reduction over fifteen years will be smaller than a single year greenhouse-gasses emissions by China in 2020.

China has amassed more than $2 trillion of foreign-exchange reserves. An estimated $1.5 trillion has been invested by the Chinese in US assets, mostly US government debt or US government guaranteed debt. Nowadays Chinese leaders can crash the dollar and send the US economy into a tailspin recession with just one comment - namely that China will stop buying dollars. At the same time the leading 20th-century economic powers refuse to recognise the key role that China plays in the world of politics, economics and finance. The best example of that is the fact that Belgium and Netherlands together have more votes on the boards of the IMF and the World Bank than China.

The global push to a switch from fossil-based fuels to biofuels has contributed to a global rise of food prices - so-called agflation. In 2007-08, the food-import bill of the poorest countries has risen by 75%, which combined with rising climate-related disasters may bring famine to many developing countries, killing millions. There is no coordinated action to face this problem, and countries respond by prohibiting food exports, which only makes the global food situation even worse. The Food & Agriculture Organisation (FAO) summit in Rome on 3-5 June 2008 was a formidable event. While zipping Brunello di Montalcino and chewing Bistecca Fiorentina, participants agreed to chip in some money and pretended the problem is over.

If you google "world vision" or "global vision", 2.4 million and 1.1 million entries respectively will be returned. It means that this phrase is very popular and used frequently. One could argue that the United Nations' Millennium Development Goals (MDGs) constitute such a world vision. The world has agreed to improve the living conditions in poor countries between 1990 and 2015, and the United Nations set a series of indicators to measure this progress. Details of MDGs are presented in Table 1:

Millennium Development Goals (MDG) and selected numerical targets, and the progress achieved so far (east Asia, west Asia and sub-Saharan Africa)

MDG Target (1990-2015)east Asia (1990-2005)west Asia (1990-2005)sub-Saharan Africa (1990-2005) Halve the proportion of people living under $1 a day, % 33/9.9 1.6/3.8 46.8/41.1 Halve the proportion of people who suffer from hunger, % 19/7 11/7 53/46 Ensure universal primary school enrolment, % 99/95 81/86 54/70 Eliminate gender disparity, female employment, % of total 38/4 16/21 28/32 Reduce by two-thirds child mortality, mortality rate per 1000 births 126/82 68/55 185/166 Reduce by three-quarters the maternal mortality ratio, proportion of deliveries attended by skilled personnel, % 51/83 60/66 42/45 Combat HIV, malaria and other diseases, number of tuberculosis cases per 100,000 319/204 92/56 331/490 Ensure environmental sustainability, CO2 emissions, billions of metric tones 2.9/5.6 0.7/1.2 0.5/0.7 Develop a global partnership for development, number of internet users per 100 population (2002/2005) 7/12 6/11 1/3

Source: United Nations (2007)

Table 1 reveals a telling pattern. With very few exceptions (the poorest people in western Asia, tuberculosis in Africa) steady progress can be observed. However, there was a very little progress in sub-Saharan Africa, where huge developed world aid is deployed, while there was a massive improvement in east Asia, mostly China, as a result of an almost 10% annual GDP growth on average in the past two decades. It is evident that the most powerful weapon in fighting poverty is economic growth. However, fast growth has its price. East Asia doubled the amount of CO2 emissions and China exceeded the United States on the list of biggest polluters. This shows enormous policy inconsistency on the global level: achieving progress in one dimension (moving away from poverty) leads to a massive deterioration in another dimension (environmental sustainability).

A global mandate

The vast majority of world innovations are created in developed countries. But in the last few years the world has learned in a very painful way that developing countries can master innovation as well. The al-Qaida terrorist attacks on the World Trade Centre towers in New York (2001) and on trains in Madrid (2004) were examples of organisational innovation that bypassed all security measures and reached beyond the imagination of secret services in developed countries.

Table 2

World ranking of countries, 20 largest by GDP-PPP and population (European Union as one area)

Country Rank

1. China 15.4
2. European Union 14.7
3. United States 12.8
4. India 10.8
5. Japan 4.3
6. Brazil 2.8
7. Russia 2.6
8. Indonesia 2.4
9. Mexico 1.9
10. Pakistan 1.6
11. Bangladesh 1.3
12. Korea, South 1.3
13. Nigeria 1.2
14. Canada 1.2
15. Iran 1.1
16. Turkey 1.0
17. Egypt 0.9
18. Philippines 0.9
19. Thailand 0.9
20. Vietnam 0.8

Source: CIA World Factbook, author's calculations based on weights: 50% GDP (PPP) and 50% population

Or think about the present financial crisis driven by financial innovation, greed and policy failure that has jeopardised the existence of many large world financial institutions that were forced to seek capital injections by investors based in Asia and in oil-exporting countries, and then were bail out by governments. How was it possible, that a country whose universities occupy 54% to 68% of the top 100 universities list (depending on the ranking), and whose citizens were awarded 270 Nobel prizes, was not able to act pre-emptively and reduce the amount of "zombie finance" that was building around the US real-estate bubble and around the credit-derivatives market? This is a $10-trillion question.

The Bank of England estimated that until October 2008 governments' interventions around the globe to save financial institutions and secure deposits totalled $7 trillion; on top of that central banks expanded their balance-sheet by $2 trillion, lending to banks against dodgy collateral. These estimates are not good in November, with US government bailout of Citibank totalling $330 billion, with the European Union's and president-elect Barack Obama's recovery package underway, and with China's $650 billion-equivalent fiscal stimulus.

Ireland launched a beggar-thy-neighbour action when its government announced full deposit insurance, and Irish banks started to market their services to British customers as safe as opposed to "risky" and not guaranteed financial services of British banks. This happened soon after a "memorandum of understanding" on the crisis was signed by twenty-seven EU finance ministers. The United Kingdom has announced VAT cuts to 15% without discussing these matters with other EU members; French President Nicolas Sarkozy called this ridiculous, arguing that it makes no sense to reduce prices further in an already deflationary situation.

There are plenty of examples of unilateral actions by countries that produce negative global externalities. In other words the first option, a creation of the new world vision and the new world order is clearly a superior scenario, we should not leave it to uncoordinated political and market forces. Unfortunately, today there is no shared vision of the world, be it in 2020 or in 2050. There is no globally accepted strategy to deal with the issues that could cost millions if not billions of human lives in the coming decades. There is a widespread tendency to think about one's own yard, and forget about the bigger picture.

Many international organisations engage in a range of activities that are often contradictory and lead to a tremendous waste of resources. Some global policies pursued in the last few decades proved to be the best example of "destructive creation", at least judging by their outcomes. The global governance is collapsing and there are no signs of a process which could lead to the creation of a new world order. The United Nations and the Bretton Woods institutions (the World Bank and the International Monetary Fund) have recently been helpless in solving the most pressing global problems.

The existing groups of leading countries, G7, G8 or G20 patchwork are not representative and are rapidly losing any meaning and importance. The G20 meeting in Washington on 15 November 2008 concluded that the IMF role's should be expanded, but people tend to forget that the IMF policy advice and track-record is horrible. Even before the mission comes to a country X in crisis, what it will recommend is horrible: raise interest rates, reduce fiscal deficit and implement structural reforms. The IMF is perceived in many countries as a partisan institution pursuing United States objectives, no wonder Saudi Arabia refused to extend a loan of $100 billion to the fund.

Table 3

World ranking of countries, 20 largest by GDP-PPP and population. European countries shares estimated separately

Country Rank

1. China 15.4
2. United States 12.8
3. India 10.8
4. Japan 4.3
5. Brazil 2.8
6. Germany 2.8
7. Russia 2.6
8. Indonesia 2.4
9. United Kingdom 2.1
10. France 2.1
11. Mexico 1.9
12. Italy 1.8
13. Pakistan 1.6
14. Spain 1.3
15. Bangladesh 1.3
16. Korea, South 1.3
17. Nigeria 1.2
18. Canada 1.2
19. Iran 1.1
20. Turkey 1.0

Source: CIA World Factbook, author's calculations based on weights: 50% GDP (PPP) and 50% population

It is hard to understand why the world has arrived at this juncture. There are more great scientists and great ideas than ever before, technological progress is advancing at an exponential rate, and for the first time ever, thanks to ICT deepening, the internet has created a global information and knowledge pool. We live in a flat world indeed. Hence the global knowledge economy and society should be able to come up with a range of solutions to cope with 21st-century global problems.

But somehow they fail, and every passing year shows that we have done very little to deal with such issues as resources constraints, climate disasters, the rapid ageing of many societies, the rise of China or the hegemony of financial markets. Annual meetings held at the United Nations, the World Bank and the International Monetary Fund are not always as fruitful as desired. Often, speeches by a given country's delegations are attended by its own delegates, while the rest of the hall is empty. This raises serious concerns about the effectiveness of institutions that are supposed to act according to a global mandate. Politicians who try to think globally are in a deep minority.

A world vision

No leadership; no shared global vision; no shared values; bad incentives which favour short-termism, red-tape, and corruption - all have impeded global strategic thinking since the 1980s. To end this chaos, I postulate that old Bretton Woods institutions and the G7-G8 that existed under the Pax Americana should be replaced by a Global Strategic Council, formed by the new leaders. There are four reasons for this.

First, we need a shared world vision for the 21st century. Vision is about the future, not about the past. Therefore it should be formed by future global leaders, not by yesterday's leaders. Italy, Canada, and soon France and the United Kingdom will fall into the yesterday's-leaders category.

Second, you cannot have twenty, thirty, or forty countries to form the leadership. Think about a company board-meeting that needs to reach consensus among the thirty board members. Either there will be a true single leader, or a strong group of a few leaders that will be followed by the rest of the board. In the absence of such leader(s) the decision-making process at board level becomes a nightmare. To avoid this risk a new group of leading countries of a limited size, based on very simple rules, should be formed. The recent process of changing the vote and quota at the IMF/World Bank - seen inside Bretton Woods institutions as a great success - in my view was an example of a long, inefficient, complicated and partisan process that did not respond at all to the challenges of the 21st century.

Third, the old powers of the 20th century should give up boxing above their weight; France's Nicolas Sarkozy is the best example, especially as he is pushing hard a French, not a European, view of the world. Old parities should not apply anymore: "we get the Bank, you get the Fund" rule has become ridiculous. Partisanship, parities, and short-termism should be replaced by discussions about the new world vision. It is impossible under the old global-governance rules amid very strong political dependence. New structures and new rules should be created from scratch.

Fourth, if we do not create new global institutions, new regional ones will likely be created. My book Three Faces of Globalisation: offshoring, global imbalances, monetary policy (published in Polish, in 2007) explains that recent initiatives in Asia may lead to the creation of an Asian Monetary Fund in charge of maintaining financial stability in the region. It is possible that by the 2020s or 2030s an Asian common currency will be created for the Asean+3 group of countries, with a regional central bank that will be much more powerful than the US Federal Reserve or European Central Bank are today.

The Global Strategic Council that I propose should be formed by leaders of the eight-to-ten biggest countries. The metric used to rank countries should be very simple and intuitive: it should be a country's GDP according to purchasing-power parity (PPP) divided by global GDP, and the country population divided by the global population - each with 50% weight. Those eight-to-ten countries with the highest scores should form the new group of G8 or G10 and should establish the Global Strategic Council (see Table 2 and Table 3).

The vision and strategy agreed by the council should be shared and implemented by the biggest countries, while others will follow on a voluntary basis. There should be incentives to ensure that no country will chose to opt-out (possibly with the rare exceptions of countries such as North Korea, Burma, Cuba or Belarus). An innovative proposal for how such incentives should be designed, that adopts strategic-asset allocation (SAT) methodology from the world of finance, is presented in the book Gordian Knots of the 21st Century (by Rybinski, Opala & Holda [2008]).

The Global Strategic Council would seem an outside-the-box idea to many politicians, especially those whose mindset was shaped by the 20th century and who failed to notice how fast the world has changed. I have documented in this article how far the failures of global governance and the lack of global vision have produced many global Gordian knots. Traditional methods will fail to untie them - and we do need Alexandrian solutions.

Every four years the National Intelligence Council - which oversees America's baroque collection of intelligence agencies - releases a global trends report, which is given to the new president. The latest report, published on 20 November 2008, stated that "the most dramatic difference" between the new report and the one issued in 2004 is that it now foresees a world in which the United States plays a prominent role in global events, but the US is seen as "one among many global actors". The report issued four years ago had projected "continuing US dominance". The heart of the US security establishment has acknowledged that the global landscape has changed. It is time indeed to reflect this change in a transformed global-governance setup. The new world order should be established without delay.

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