POLICYBRIEF ISSUE 5 | SEPTEMBER 2019 COLLECTIVE ACTION IN A FRAGMENTED WORLD

Jean Pisani-Ferry INTERNATIONAL COLLECTIVE ACTION: CONCENTRATION INDICES IN SELECTED AREAS Senior Fellow, Bruegel, 0.25 EU/euro-area countries acting individually Professor, European 0.2 EU/euro-area countries acting jointly University Institute, Benchmark (EU/euro-area countries individualised) Visiting Fellow, Peterson 0.15 Institute 0.1 0.05

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Source: Bruegel. Note: the figure indicates in which areas of international cooperation collective action might be more effective, on the basis that collective action tends to be easier when significant players are only a few. The figure adapts the Herfindahl index of market concentration, which varies between zero (perfect -ato misation) and one (complete concentration). The concentration scores are much higher for competition policy and banking regulation than for trade and This Policy Brief is based on regulation. The index is also influenced by whether EU countries act individually or jointly. See https://bruegel.org/2019/08/how-long-is-the-head-table/. undertaken jointly with George Papaconstantinou at the European University THE ISSUE Institute, a summary of There is a greater need than ever for international collective action. From climate which can be found in preservation to financial stability and internet security, heightened interdependence calls Papaconstantinou, G. and J. for common responses to global threats. Obstacles to global collective action are no less Pisani-Ferry (eds) (2019) Global Governance: Demise or formidable. Beyond President Trump’s stance and worldwide concerns over sovereignty, Transformation? EUI e-book, the China-US rivalry and the of a multipolar world are impediments of available at https://tgg.eui. a structural nature. The legal and institutional architecture of the rules-based global eu/wp-content/uploads/ sites/39/2019/08/eBook_ governance system looks increasingly incomplete and obsolete. A process of fragmentation Global.Governance.Demise.or_. has started to affect its core tenets. None of the main players is providing leadership. The Transformation.pdf. US is increasingly questioning its post-war role; China is reluctant to invest in a system This Policy Brief also builds designed by others; remains too weak and fragmented to offer sufficient leadership. on remarks given on 22 March 2019 at the European Central Bank colloquium ‘Challenges for supervisors POLICY CHALLENGE and central bankers’, International collective action is in search of a new paradigm. It cannot rely anymore on organised to mark the end of global binding rules supported by universal . New forms of cooperation have the tenure of Ignazio Angeloni as a member of the ECB emerged in a number of fields. These are soft pledge-and-review mechanisms, cooperation Supervisory Board. Thanks to between independent agencies, regional groupings, coalitions of the willing and open Adrien Bradley, Pascal Lamy, partnerships involving non-state participants and knowledge networks. To maximise the Manuel Lafont-Rapnouil, George Papaconstantinou, effectiveness of such arrangements, they should rely on a limited set of universal principles Francesco Papadia, André and be served by nimble and legitimate institutions. Existing international institutions Sapir, Reinhilde Veugelers, should be regarded as globalisation’s . There are problems that will not be Nicolas Véron, Guntram Wolff and Georg Zachmann solved without having recourse to strong participation and enforcement mechanisms such for comments on earlier as sanctions or pecuniary incentives. Europe should equip itself to be an effective player in versions. this new global game. This calls for internal governance reforms. 2 POLICY BRIEF COLLECTIVE ACTION IN A FRAGMENTED WORLD

1 STATE OF PLAY For the Bretton Woods institutions, There is a greater need for interna- the Asian crisis of the late 1990s tional collective action than ever was a turning point. Intrusive and before. The threats of catastrophic cli- economically misguided International mate change and biodiversity collapse Monetary Fund programmes were demonstrate the increased importance considered proof that these institutions of global commons and the urgency of were at the service of the Western coordinating responses at global level. powers. A decade later, the multilateral But the need for collective action also response to the euro crisis was regarded arises from risks to financial stability, as further evidence of this built-in bias. threats to internet security, tax avoid- The global financial crisis did ance by multinational firms and mass not result in a permanent upgrade migration, to name only some of the to global governance. The response most prominent challenges. to the financial meltdown and the The 1990s represented the ensuing recession was swift and high water mark of the collective forceful, and the elevation of the G20 action model characteristic of the to leaders’ level adjusted the political post-second world war system. leadership body to the new reality of This system relied on universal, the global economy. But nevertheless treaty-based institutions tasked with changes to the rules and institutions the organisation of international of global governance fell short of the cooperation and the enforcement of leaders’ 2009 promise that “a global legally binding rules in major fields crisis requires a global solution”1. of interdependence. At the time, the Financial regulation was upgraded, template became truly universal as but international macroeconomic membership of the Bretton Woods coordination was short-lived and institutions was extended to Russia hopes that the crisis would provide an and the former Soviet bloc, while opportunity to reform the international preparations were made for Chinese monetary system were frustrated. and Russian membership of the World The urgency of climate change Trade Organisation. However, efforts to mitigation has not resulted in a replicate this template in fields such as revival of the post-war template. At investment, competition and climate Kyoto in 1997 and Copenhagen in 2009, action have been frustrated. attempts to create a legally binding, Once regarded as a milestone enforceable system of negotiated on the way to completing the emission reduction commitments institutional architecture of failed. The Paris Agreement of 2015 globalisation, the creation of the WTO was based on an entirely different did not achieve its aims. Since the paradigm: national ‘contributions’ that mid-1990s, multilateral are unilaterally determined and non- have stalled, trade governance binding. The expected effectiveness has fragmented into a myriad of of the collective endeavour to contain preferential agreements, and China’s the rise in temperature relies on soft membership of the WTO has failed to mechanisms: review procedures, peer trigger the convergence of its economic pressure and the involvement of non- system (let alone its political system) state participants. with the Western model. The essential The governance of the internet principles of the General Agreement epitomises the obsolescence of the on Tariffs and Trade (GATT) and post-war model. The emergence the dispute settlement mechanism of the first truly global, borderless 1. G20 London Summit – instituted with the creation of the WTO infrastructure has essentially been Leaders’ Statement, 2 April were nevertheless upheld, until the based on uncoordinated state and 2009, available at https:// Trump administration’s deliberate private initiatives based on broad www.imf.org/external/ np/sec/pr/2009/pdf/ sabotage undermined the core tenets of principles and a series of g20_040209.pdf. the post-war order. exchange protocols. Its governance 3 POLICY BRIEF COLLECTIVE ACTION IN A FRAGMENTED WORLD

structures have remained weak and concerns over national sovereignty are informal, and all attempts to give on the rise nearly everywhere. them a more formal structure have The stance of the Trump ended in deadlock. Since the start of administration is currently the single the decade divergent preferences on most significant obstacle to global and the limits of free speech, collective action. Its worldview does and more fundamentally state control not build on the premise that a series over national citizens, have given rise of issues require global cooperation to a process of balkanisation. The unity and that well-structured joint action of the internet is a thing of the past and can yield benefits for all participants. the question now is what geometry will It favours a transactional approach emerge from its fragmentation. to international relations and regards The historic core of the global most international issues as zero-sum regime – trade and finance games. arrangements – is undergoing a However, US grievances against, process of fragmentation. Global and doubts about global rules rules and institutions are still there, and institutions did not start with but their authority is fast diminishing. Trump. Already in the 1940s, the Existing multilateral arrangements US Congress rejected membership lost muscle already in the 2000s and of the US-designed International the early 2010s, and the process is Trade Organisation. President accelerating. A new geography made Clinton objected to the creation of up of partially overlapping blocs has the International Criminal Court. started to emerge: trade rules are giving President George W. Bush refused to way to a new US-initiated bilateralism ratify the Kyoto Protocol. The Obama and the one success the WTO could administration expressed serious claim, its conflict resolution system, is concerns about the functioning of the on its way to paralysis; development WTO. finance is undergoing a process of Changes in the international geographically-centred fragmentation, stance of the US reveal America’s most notably as a consequence of deep and widely-shared doubts the Chinese Belt and Road Initiative about the benefits of continued and its adverse consequences for international leadership in the multilateral debt relief procedures; in current context. In the post-war international finance, several layers of period up to the 2000s, the US mostly unilateral, bilateral and regional safety played by the international rules and nets have piled up, not least because furthermore acted as a guarantor and of the need to tackle the euro crisis, an insurer of the global system. This while the centrality of the IMF is being stance rested on the leverage that the questioned; further disruption may system provided to the global hegemon, well arise in the medium term with but also on the hypothesis that it was the emergence of a multi-currency in its best interests to promote, uphold monetary system. and guarantee a global rules-based regime. Yet the declining relative 2 GEOPOLITICAL OBSTACLES economic weight of the US is prompting The post-2016 political context cer- a reassessment of the benefits that the tainly complicates global governance. ‘indispensable nation’ derives from International rules and institutions em- trading-off exorbitant duties for an body all that populist nationalists love exorbitant privilege. to hate: a non-national definition of China’s assertiveness questions the common good, equality of nations, the stability of the global system. supranational bureaucracies, limits Seen from Beijing, the rules-based to discretionary power, rules-based system embodies the preferences and decision-making and the influence of privileges of the incumbent powers. experts in policy design. More broadly, Whereas China values an open global 4 POLICY BRIEF COLLECTIVE ACTION IN A FRAGMENTED WORLD

trading regime, it has no ownership of The heterogeneity of preferences a system that was designed by Western is an obstacle to collective action. As powers and whose rules embody participants in global interaction have their preferences. The significance become economically, systemically of the Belt and Road Inititiative for and culturally more diverse, it has global governance remains unclear, become harder to agree on rules and but it might be sowing the seeds of a governance mechanisms. From the different kind of system of international Bretton Woods conference in 1944 to economic relations. Chinese accession to the WTO in 2001, The US is reassessing its decades- the broadening of global governance long strategy towards China. From proceeded by gradually co-opting Richard Nixon to Barack Obama, new members into clubs whose all US presidents followed the same basic rules had been written by their inclusive approach. It was assumed creators. The failure of the Doha round that China’s disruptive power could symbolically signalled that this process best be tamed by shaping the direction of homogenisation had come to an end. of its development by making it a full Developing countries, big and small, member of the rules-based global rightly claim that they cannot be simply economic community. But if this asked to sign up to rules that were strategy has helped China to develop shaped by the preferences of advanced and catch up technologically, it has countries. But while they have often not led to system convergence and it been effective veto players, their has not contained geopolitical rivalry. positive contributions have been rare. Consequently, the US increasingly Notwithstanding the BRICS, developing regards China as a strategic threat. and emerging countries lack unity and Europe remains the staunchest leadership. advocate of the multilateral system The formal architecture of global but it lacks strength and coherence. economic and financial governance As a rules-based construct, the is increasingly at odds with the shape European Union feels at home in a and intensity of interdependence. rules-based system and regards itself as The WTO’s mandate was predicated a laboratory of global governance. But on an economic interdependence it is not ready to stand in for the US as model that has been superseded by an anchor of the system and its hesitant the rise of global value chains and response to the euro crisis contributed foreign investment, and that is being to its weakening. overburdened by attempts to adjudicate trade-related matters increasingly 3 ECONOMIC CHALLENGES removed from trade. The lack of a Beyond China, the emergence of a competition arm is increasingly a multipolar world economy is a sys- concern in the context of globally rising temic challenge to the operation of market power. The mandates of the the global policy regime. Together Bretton Woods institutions relied on a with rules that apply to all countries, the financial interdependence model that post-war regime rested on the assump- has been superseded by unfettered tion that the US was responsible for ex- capital flows, international banking ercising leadership and for undertaking and cross-border balance sheet discretionary action in times of crisis. It interdependence. Moreover, major was implicitly agreed that the US would new interlinkages have developed remain the issuer of the main interna- that do not belong to the remit of tional currency and that it would act as any significant . This is liquidity provider of last resort, importer evidently the case for environmental of last resort and crisis manager of last , flows and migration, resort. In an economically more bal- to name only the most important. anced global system, it is not clear how The growing asymmetry of the these roles could be distributed. global economic system weakens 5 POLICY BRIEF COLLECTIVE ACTION IN A FRAGMENTED WORLD

multilateral rules and institutions. require compulsion, hard international Network-based interdependence in rules or delegation of decision-making fields including finance, international powers to international organisations. currency, global value chains and data The prisoners’ dilemma model is flows, confers exorbitant power and less universally applicable than responsibility on whoever controls the often believed and many obstacles nodes of the system. The assumption to coordination can be tackled by that all countries are equal has never ensuring transparency, creating trust matched reality. But interdependence and monitoring actual behaviour. once seemed to be an equalising force. In banking regulation, for example, This is less the case today than ten or significant results have been achieved twenty years ago. through the of non- Conflicting representations of the mandatory global standards and same reality are a serious obstacle the thorough monitoring of their to collective action. This is evidently implementation. Such examples should the case for climate change denial, of course not be overinterpreted: not but also for less extreme forms of all problems can be tackled by soft disagreement, as recently illustrated mechanisms. And the price to pay for by European disputes over the solution the involvement of private players is to the euro crisis. Battles of ideas are often that they gain influence over the often harder to win than disputes policy process. But for a whole range arising from divergent interests. This of problems, information exchange, problem is bound to be significantly indicative standards or pledge-and- greater in a more diverse world. review mechanisms can deliver Investment in the building of common results – on the condition that national knowledge through the development behaviour is monitored effectively and of epistemic communities remains the transparently. most effective, though limited way to Cooperation between independent overcome such obstacles2. national agencies endowed with similar mandates can also achieve 4 THE TOOLKIT FOR COLLECTIVE significant results. Historically, central ACTION banks have provided a template for Ambitious global agreements on new, international collective action by legally binding rules supported by new, being able to cooperate effectively universal institutions are highly im- on the basis of domestically-oriented probable. The political and geopolitical monetary policy mandates. The same conditions for such agreements are un- applies to sectoral regulatory policies. likely to be fulfilled anytime soon. In this The record of such cooperation is context the strategy for rekindling inter- uneven: it has often been disappointing national collective action can neither be in the field of financial oversight, to simply and uncritically defend a now but significant results have been 2. Epistemic communities inadequate twentieth-century system, achieved in the competition policy are networks of knowledge nor to make plans for unrealistic reforms. field, where national authorities professionals (scien- The response must be to make the most exercise extraterritorial powers in a tists and policy experts) of the web of existing rules and institu- cooperative manner. Independent whose consensus and/or tions inherited from the previous decades regulators generally work on the basis framing of issues helps to shape public policies. The and to combine them with softer, much of common knowledge and common Intergovernmental Panel more ad-hoc forms of governance of in- beliefs, which provide a platform for on Climate Change (IPCC) terdependence and global public-goods coordinated action. They cannot by and the network of experts . themselves internalise externalities, but and institutions around Soft mechanisms that do not they can and do prevent disputes, share it provides a well-known example of such commu- curtail national sovereignty can information and organise coordination. nities. Another example is effectively tackle a whole category of ‘Clubs’ or groupings of countries monetary experts linked to collective-action problems. Solutions can effectively address hard central banks. to such problems do not necessarily collective-action problems, but they 6 POLICY BRIEF COLLECTIVE ACTION IN A FRAGMENTED WORLD

involve the risk of fragmentation. out in international competition by Soft forms of cooperation are hardly failing to keep up with clean technology applicable to a collection of 200+ developments. The effectiveness countries. They are more effective of such a mechanism does not rest when the number of significant players on universal participation but on remains limited – as in the cases of the participation of a critical mass central banking, competition and of committed states and on the banking regulation. Coalitions of expectation that access to their markets the willing have developed in many will depend on the adoption of clean fields, starting with international technologies. trade, sectoral regulation and the Political leadership plays a environment, where the Montreal decisive role by setting priorities and Protocol on the elimination of overcoming the curse of unanimity. substances harming the ozone layer Whereas the G20 has not lived up to provided an early template. The the hopes that it would give rise to a forming on a voluntary basis of sectoral, permanent economic coordination regional or development level-based apparatus, it has been much more coalitions can be an effective conduit to effective as an orchestrator and collective action, though at the cost that agenda-setter. It has occasionally been the policy choices embedded in flexible an arm-twister too. An important international agreements can be biased example is taxation: whereas agreement towards the preferences of their initial on eliminating bank proved members, thereby restricting their size impossible to reach within the and limiting the gains they deliver. Organisation for Economic Cooperation The adoption of a dynamic and Development, or within the EU, the perspective can strengthen otherwise combination of US unilateral action, weak incentives for joint action. Some G20 pressure and OECD expertise made global problems bring about strong it possible to overcome opposition. A incentives to free-ride on common similar game might have started in the disciplines, either by failing to commit field of corporate taxation. or by failing to implement. Common- pool problems are of this sort and 5 THE POLICY AGENDA addressing them requires stronger Effective collective action for the cooperation incentives than those twenty-first century should make provided by trust-building devices careful use of the limited political and the monitoring of delivery against capital available for multilateral existing commitments. But these endeavours. It can rely neither on an obstacles can be reduced (though not outdated and disputed global govern- eliminated) by involving private-sector ance model nor on non-committal players, which can buttress otherwise intentions and the involvement of a feeble cooperation agreements. multitude of stakeholders. The range For example, the Paris Agreement of solutions available without recourse on containing climate change does to hard international law is however not involve any compulsion and significant. What is needed is to make even lacks mechanisms to enforce best use of necessarily limited legal, compliance with the commitments institutional and financial resources. made. It is therefore vulnerable to the Collective action can rest on a series free-rider curse. But together with of principles that command universal regulatory intiatives in key markets, support, such as national treatment for it has been effective enough for part trade or the no-beggar-thy-neighbour of the manufacturing industries’ principle in international finance. Such research and development efforts to principles should be buttressed by a set be redirected towards zero-emission of nimble institutions able to provide technologies. Their incentive to act is support to international cooperation, based on the perceived cost of losing and their implementation should be 7 POLICY BRIEF COLLECTIVE ACTION IN A FRAGMENTED WORLD

based on precise matching procedures for international collective action is to that assign adequate resources, in- make the most of this social capital. stitutions and mechanisms to clearly This implies tasking institutions with identified problems. responsibilities for ex-ante assessment, A way to control the risk of ex-post monitoring, evaluation and fragmentation involved in the support for negotiation in fields that reliance on clubs or groupings of extend beyond their usual remits. countries would be to require them For universal institutions to be be rooted in common universal effective, it is essential to preserve principles (‘minilateralism’). This their legitimacy. As far as rules are is actually the case with regional concerned, this requires distinguishing or sectoral trade agreements: they essential principles that command are subject to WTO scrutiny, must general recognition from more specific respect fundamental principles such provisions that reflect the preferences as national treatment and unless they of advanced economies, or a subset meet certain conditions, they should of them. The re-examination of the uphold the most-favoured nation IMF doctrine on financial account principle. Compliance with such liberalisation was a case in point, as principles has ensured some coherence the institution departed from its initial in the evolution of the international stance to take on board the concerns trading system. Similar issues arise in of emerging countries facing repeated a series of fields, from investment to sudden stops. As far as governance regulation to climate to financial safety is concerned, legitimacy necessarily nets. requires adjusting representation and Existing institutions – which can voting rights to the new realities of be regarded as globalisation’s social demographic, economic and political capital – should be requested to serve development on a global scale. collective action beyond the confines Institutions whose policy doctrines or of their sectoral remits. Global modus operandi are perceived as being institutions were once regarded as the excessively dominated by incumbent masters of sectoral fiefdoms within the powers are bound to lose legitimacy multilateral system. But nowadays the and to be partially substituted by fiefdoms hardly cover globalisation’s alternative sectoral or regional territory. With the principles, groupings. Europe in this respect procedures and governance they are should wake-up to the trade-off it faces: equipped with, institutions should either to preserve its power in existing rather be regarded as wells of social and multilateral institutions, with the risk informational capital that international of accelerating their obsolescence, or collective action can draw from. The to concede a reduction of its role and evolution of the Bank for International direct influence, with the risk of not Settlements (from the collector of gaining much in exchange. German war reparations to the architect The involvement of knowledge of global banking regulation), the IMF networks, civil society and (from the coordinator of a financially subnational autarkic world to that of a financially (‘polylateralism’) can add to the integrated one), the World Bank (from effectiveness of otherwise feeble an infrastructure bank for Europe to, mechanisms. Shared knowledge among other things, the promoter girls’ is essential to identify issues and education in Africa) and especially overcome obstacles to cooperation the OECD (from the administrator arising from divergent representations of the European payments union to, of the same problem. This is why the among other things, the assessor of creation of the Intergovernmental worldwide education systems) shows Panel on Climate Change was a major that institutions – some of them at step towards a shared awareness of least – can be nimble. A key priority problems and solutions (and the 8 POLICY BRIEF COLLECTIVE ACTION IN A FRAGMENTED WORLD

absence of a shared knowledge base Democratic legitimacy is harder is also a reason why international to ensure in a world of ad-hoc agreement is so difficult in the field of arrangements. Whereas it is a concern migration). In domains that speak to in a rules-based order, at least rules public opinion like the preservation must be ratified and institutions can of the environment, public health or be subject to parliamentary oversight. the fight against tax evasion, pressure A world that relies on a proliferation from below might also help counter the of clubs, institutions that operate incentives to free-ride that governments beyond their mandates, private-sector are subject to, and could help overcome participation and soft arrangements obstacles to collective action. But is superficially less constraining, but polylateralism risks being too weak to substantially more alien to democratic overcome obstacles to collective action principles. At the very least, it in critical fields such as climate change. requires close scrutiny by civil-society In the absence of compulsory organisations. universal agreements, some Europe should equip itself to be an collective-action problems can effective player in this new game. It only be tackled by having recourse cannot rely anymore on a global regime to sanctions, pecuniary levies and and on the US willingness to uphold international transfers. Whereas it is it. External influence and leadership wrong to assume that all international are European public goods that should collective-action problems can be be given priority and be buttressed by represented by a prisoners’ dilemma adequate internal governance. game, it is equally incorrect to assume that all can be solved without mechanisms that contain free-riding. Without universally enforceable rules, such mechanisms can be provided by strict rules agreed to by countries entering into a club arrangement. This is most evident in the climate field: should a group of countries decide to implement significant carbon taxes while their trade partners abstain from introducing them, a border tax would serve both as a way to limit the risks of endogenous breakdown of the climate coalition, and as a way to ensure its members do not lose out in international trade. The critical question © Bruegel 2019. All rights in the years to come will be whether the reserved. Short sections, not US joins the climate club (in which case to exceed two paragraphs, it will most certainly introduce border may be quoted in the origi- taxes) or whether the EU and other nal language without explicit climate-conscious players introduce permission provided that the source is acknowledged. border taxes in an effort to discipline Opinions expressed in this the US and other free-riders. publication are those of the author(s) alone.

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