Trend of Economic Transformation & Reform of Global Economic Governance

  Time:2015-06-27   Hits:0

Trend of Economic Transformation & Reform of Global Economic Governance

Chi Fulin

China Institute for Reform and Development

27 June 2015

 

In the face of the global economic transformation and profound changes in the global economic landscape, reform of the global economic governance system is now at a historical point. On one hand, there is an urgent need to advance global economic transformation and upgrading, while on the other there is also a more urgent need to transform the global economic governance structure. Success in passing over this historical point can enable global governance to better fit global economic transformation and to better handle new challenges in economic globalization so as to unleash new drivers for sustainable growth of the world economy in the next 20 years or so.

I. Is inadaptability of global economic governance to economic transformation a big problem with sustainable growth of the global economy?

Since the eruption of the international financial crisis in 2008, complex and profound changes have taken place in the world economy. With new contradictions, new risks and new challenges continuously arising, the problem of inadaptability of the global economic governance to the trends of economic transformation has been getting more and more acute.

1. Emerging economies have become an important engine for sustainable development of the world economy. The proportion of the 11 emerging economies (E11) in the world economy increased from 22% in 2008 to 29% in 2013, a 7 percentage point increase in 5 years. Meanwhile, that of G7 dropped from 53% to 46% in the same period. In the 4 years between 2010 and 2013, the annual average contribution of E11 to global economic growth was as large as 59%, which shows that E11 have become a major driver of the global economic growth.

2. The global economic governance system does not fit economic transformation and upgrading of emerging economies. In recent years, economic growth in emerging economies has been confronted with severe challenges. This can be attributed to many causes, including the double extrusion of “reindustrialization” in developed countries and more and more serious homogeneous competition among emerging economies themselves. At the same time, this is also directly related to the lag-behind of the transformation of the global economic governance system. First, under the current global governance, developed countries can transfer crises by a variety of means while emerging economies have to suffer from risks such as turbulent international capital flow, exchange rate volatility, deterioration of trade environment, and so on and so forth. Secondly, emerging economies have not yet got the voice that matches their economic positions. In 2010, International Monetary Fund passed a reform program to markedly increase the share of emerging economies’ voting rights. Unfortunately, the program has not yet been fully implemented. Thirdly, the infrastructure investment demand of emerging economies is huge but there is no mechanism specially established within the global economic governance system to take care of this demand.

3. Reform of the global economic governance should aim at advancing economic transformation. To realize the goal of sustainable development of the world, it is very important to promote economic transformation and upgrading of emerging economies. This requires not only that emerging economies pass the strategic pass of economic transformation through internal reforms but also that the global economic governance system be further reformed, including the reform of the governance structure of IMF and World Bank, as well as reform of international aid mechanisms.

II. How should the economic-transformation-friendly reform of the global economic governance be advanced?

Economic growth in the whole world is now facing hitherto unknown environment. As economic transformation is becoming a major driver for global economic growth, reform of the global economic governance should aim at meeting the requirement of global economic transformation.

1. Expanding the network of FTAs. Speeding up FTA processes will not only help economic transformation of emerging economies and developing countries, but also can advance global investment and trade liberalization. The problem is that it is difficult for emerging economies to participate in building a network of FTAs, because, objectively speaking, they cannot adopt the same standards as developed countries. Although gradually upgrading free trade standards is a mega-trend in the process of economic globalization, the threshold should not be raised too high in a short period. This will lead up to new investment and trade barriers and exclude emerging economies from economic globalization in the future. 

An important purpose of one belt one road proposed by China is to build up a network of FTAs with reasonable standards and with a large coverage. So, I would like to propose that one belt one road and TPP be organically combined to enable the China-US Bilateral Investment Treaty and China-EU Investment Treaty to be signed as soon as possible, and the joint studies of the feasibility of China-US FTA and China-EU FTA to be launched as early as possible.

2. Expanding Trade in Services. Major emerging economies have entered into the late middle period of industrialization and show an obvious trend of becoming service-dominated economies. Therefore, trade in services has become an important driving force for their economic growth. Take China for an example. It is anticipated that, by 2020, the annual output of China’s service sector will be as large as 48 trillion RMB Yuan to 53 trillion RMB Yuan, taking up 55% of its total GDP. And the annual output of the producer service sector will take up 30%-40% of its total GDP. “China Service” will form a huge a market space and is becoming a huge boost for sustainable growth of the world economy.

Nevertheless, there are two big challenges for expanding trade in services of emerging economies. First, their service market is not open enough. Secondly, developed countries still exercise too much tight export control in areas such as environmental protection, energy and science/technology. So, speeding up the opening of service market of emerging economies and loosening service export control are two major tasks for reforming the global economic governance system.

3. Improving infrastructure interconnectivity. In the whole world in general and among emerging economies in particular, infrastructure interconnectivity is low. This, together with inadequate investment, has been a serious constraint on economic transformation. The Asia Infrastructure Investment Bank initiated by China, not only can help overcome the bottleneck in infrastructure investment in Asia but also can become another important platform for global economic governance with close cooperation with other existing multilateral development organizations. That is to say, enabling all the multilateral and regional economic organizations to play their due roles is an important measure for consummating global economic governance.

III. Is it an urgent need to reform the global governance system with enabling G20 to play a full role as a top priority?

To advance the reform of the global governance system requires not only optimizing traditional governance mechanisms but also enabling new governance mechanisms to play due roles.

1. Advancing G20’s institutionalization. Although G20 summit is a result of international joint efforts to combat the international financial crisis, it is also a reflection of a trend of reforming global governance against the backdrop of profound changes in the global economic landscape. This trend shows that reform of the global governance has entered a new era. At present, there is an urgent need to discuss how to enable G20 to become a solid global governance mechanism, such as to establish a secretariat, an executive board for implementing G20 summits’ initiatives and a coordinating mechanism for G20 to more closely cooperate with IMF and other international organizations.

2. Reforming global economic governance should aim at making the system more open and more inclusive. The process of forming a new global economic governance system would be full of conflicts and risks. Thereforeinclusiveness, respect of diversity and encouragement to explore multiplayer global governance mechanisms is very important. For this purpose, any attempt to prioritize national interests over global interests as well as exclusiveness and small coterie should be prevented.

3. Pragmatically Building up New Type Big Power Relations. The difficulty in reforming the global governance system does not lie in program design but in how to build up new type big power relations. It is particularly worth noting that, China and US’ joint efforts to properly control their differences, and avoid their strategic miscalculations and misperceptions, have already become a new driving force for advancing reforms of the global economic governance.

 

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