Why This Global Economic Crisis Is Different
This is the first time since World War II that there may be no cooperative way out.
Originally published at Foreign Policy
June 21, 2022 2:11 pm (EST)
- Current political and economic issues succinctly explained.
One of the remarkable things about the global economic order since World War II has been the flexibility of governments in responding to serious crises. From stagflation and the collapse of the Bretton Woods currency regime in the 1970s to the Asian financial crisis of the 1990s to the global financial crisis in this century, the world’s major economies have proven surprisingly adept at finding ways to cooperate to address serious challenges.
This time around, that lucky streak may finally break. The current concatenation of problems—the Russia-Ukraine war, inflation, global food and energy shortages, unwinding asset bubbles in the United States, debt crises in developing countries, and the lingering impacts of COVID-19-related shutdowns and supply chain bottlenecks—may be the most serious crisis of them all, not least because central banks can’t print wheat and gasoline. Yet there are few signs of the collective responses that will be needed to meet these challenges. Global cooperation has never been more urgent—and seemed less likely.
Fraying cooperation is, ironically, mostly a consequence of past successes. The world’s past ability to manage crises, transcend disruptions, and restore the trajectory of global growth means that many more countries today have become rich enough to wield influence and demand their interests be considered. Others are pursuing territorial or ideological goals they consider more urgent than immediate economic priorities. As a result, consensus has become almost impossible to find. The upshot is that in this crisis, the world will be condemned to a series of competing and partial responses rather than again finding a way to come together to address the challenge.
The meeting of trade ministers at the World Trade Organization (WTO) in Geneva this week, originally scheduled for 2020 but postponed due to COVID-19, is a case in point. With 164 members and the rule that any agreement requires consensus among all of them, the WTO is handcuffed. Member states are still struggling, for example, to approve a waiver on patent rights for COVID-19 vaccines—already more than a year past the time it might have really helped. Similarly, they have been negotiating for more than two decades over curbing the subsidies that lead to destructive overfishing in the world’s oceans. Where the WTO once broke new ground to set trade rules and resolve disputes, it has played little role in addressing current supply chain challenges. Nor is it likely to respond effectively to the global food crisis as more than two dozen countries have already enacted export restrictions to preserve food supplies threatened by the collapse of Ukrainian and Russian grain exports. This week’s meeting in Geneva could even bring about tariff hikes by inaction: On Wednesday, a 1998 moratorium on tariffs for cross-border e-commerce—such as Apple downloads and Netflix streaming—automatically expires, and India and South Africa are blocking its renewal.
No institution is indispensable, of course, and in the past, governments have found new and creative ways to cooperate when old institutions proved insufficiently adept. That was the case in the 1970s, when the world faced the closest analogy to today’s challenges. A perfect storm of runaway inflation, wars in Vietnam and the Middle East, an oil cartel that drove up global energy prices, the collapse of the gold-backed currency system under Bretton Woods, and the Watergate political scandal in the United States produced a period of global instability and weak growth. At first, governments were unable to cooperate sufficiently to address those challenges. A burgeoning literature emerged at the time on the “legitimation crisis” of Western capitalism.
But the finance ministers of leading Western economies did come together to try to build a new monetary system after then-U.S. President Richard Nixon ended the gold convertibility of the dollar in 1971. These efforts led directly to the first G-6 summit meeting in France in 1975, where leaders of major industrialized nations tasked themselves with finding mutually reinforcing ways to revive their ailing economies. The group, which later became the G-7 (and later G-8 when it added Russia, only to drop it again following its 2014 annexation of Crimea), continues to provide a loose coordinating structure for the leading Western economies of today.
More than two relatively uneventful decades later, the G-20 was born out of a series of destabilizing financial crises, including the 1994-1995 Mexican peso crisis, the 1997-1998 Asian financial crisis, and the 1998 Russian currency collapse. By that time, significant new economic powers had emerged, and the creation of the G-20 recognized that changing reality. The group includes China, India, Brazil, Russia, Mexico, and Indonesia, among others—broadening the rich nations’ club to one that was more representative of the 1990s economy. Like the G-7, the G-20 began as a regular meeting of finance ministers and was upgraded to an annual leaders’ summit during the 2008 global financial crisis. Amid the crisis and its aftermath, the G-20 became the focal point for global efforts to restore economic growth, helped jump-start the global economy through coordinated stimulus measures, worked to strengthen financial regulations, and expanded the lending capacity of the International Monetary Fund.
To be sure, such cooperative efforts have rarely been transformational. Both the G-7 and the G-20 lack decision-making authority, serving more as an effort to nudge countries to undertake mutually supportive policies. The purpose of such organizations is often less about developing grand schemes for recovery and more about keeping matters from getting worse. One of the key accomplishments of the G-20 during the global financial crisis was to get strong pledges from member states to avoid protectionist responses, which would have worsened the global slowdown—pledges that were mostly met. Even such modest accomplishments are vastly better than countries working at cross-purposes or actively undermining one another’s economic interests.
So if the WTO is handcuffed by consensus and if the G-7 and G-20 lack authority, what group or body might ride to the rescue this time? Merely asking the question shows how hard it will be to coordinate a global response to the current set of crises. The United States and its allies are actively working to damage Russia’s economy through the broadest sanctions ever levied, and Russia is responding by blocking shipments of Ukrainian grain through its Black Sea ports. This leaves the G-20 divided and powerless. U.S. Treasury Secretary Janet Yellen has called for Russia’s expulsion from the group and threatened to boycott meetings if Russia attends. Along with finance ministers and central bankers from several countries, she walked out of an April G-20 meeting in Washington when the Russian delegation was speaking. The meeting ended without the usual communique indicating areas of agreement. But removing Russia from the group is unlikely to happen; only Canada and Australia have formally joined the United States’ demand to do so. This year’s summit host, Indonesia, has already invited Russia to the planned November meeting (and issued a one-time invitation to Ukraine, which is not a member). Russia’s participation alone might be enough to neuter the G-20, but other members are also unlikely to get on board any strategy premised on strengthening the global economy while isolating Russia. China, in particular, has refused to break ties with Russia and is focused on greater self-sufficiency to protect its economy from the sort of sanctions levied against Russia by Western economies.
These Western economies, through the G-7 and other fora, are more united than they have been in years, even if there are continued differences over how far to ratchet up sanctions against Russia. This is no small achievement: The G-7 economies still account for nearly half of the global economy and lead in the most sophisticated technologies. The United States and Europe have largely moved past disputes over trade in steel, aluminum, and aircraft that now look trivial in the current environment. But the scale of the current challenges is beyond what the G-7 countries can meet on their own. For example, the G-7 has developed a potentially robust plan, supported by more than 50 nations, for addressing food security issues by expanding financial and technical support in exchange for countries agreeing to forego export bans and other measures that would further distort global food markets. But India, which banned wheat exports last month, has so far blocked the initiative. New Delhi is also resisting other measures to free up food stocks for poorer nations to pursue greater self-sufficiency in agricultural production.
The Biden administration has been creative in trying to find workarounds and build coalitions of like-minded countries. The U.S.-EU Trade and Technology Council has been coordinating responses on issues related to export controls, data sharing, and resilience in critical technologies. During his visit to Tokyo last month, U.S. President Joe Biden launched a new Indo-Pacific Economic Framework, which includes Japan, South Korea, and India. Although details are vague, the new forum is intended to promote cooperation on issues such as digital trade, decarbonization, and tax coordination. At last week’s Summit of the Americas in Los Angeles, the United States unveiled its Americas Partnership for Economic Prosperity with a similar agenda. But the meeting was not attended by Latin America’s second-largest economy after Brazil: Mexican President Andrés Manuel López Obrador boycotted the summit after the Biden administration excluded Cuba, Venezuela, and Nicaragua.
Although admirably creative, none of these initiatives are remotely equal to the urgency of the moment. During previous crises, the world’s leading governments were able to set aside enough of their differences to come up with robust responses. This time around, that is nowhere in sight. This breakdown of cooperation may be the most lasting and worrisome effect of the current series of overlapping crises. So far, the disruptions have not significantly harmed global trade as a whole: Trade values hit record level in 2021, though they are slowing this year, and sectors like food and energy have been significantly disrupted. But the current crises have brought a hard stop to the confidence that, whatever their differences, the world’s leading economies are united on the importance of economic growth and stability and can work together to the greatest extent possible to achieve those goals. This time, there is no one steering the ship.