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REVITALIZING THE SPIRIT OF BRETTON WOODS 50 PERSPECTIVES ON THE FUTURE OF THE GLOBAL ECONOMIC SYSTEM The Bretton Woods Committee Conference delegates register at the Mt. Washington Hotel on July 2, 1944 Source: Bettman/Getty Images MULTILATERAL COOPERATION AND SYSTEMS CHANGE REVITALIZING THE SPIRIT OF BRETTON WOODS | 47 TRANS-SOVEREIGN NETWORKS China’s Role in the New Global Order KEYU JIN Associate Professor of Economics, London School of Economics and Political Science The world is increasingly characterized Competition and substitution, by networks: technologies, firms, banks, emphasized in traditional economic global supply chains, even the English thinking, are gradually giving way to language. It is impossible to under- notions of complementarity, connec- stand the workings of the modern-day tivity, and cooperation. With greater economy without grappling with the interdependence comes the need for a intricacies of how shocks propagate rethinking of the international politico- through networks, how firms conduct economic architecture that takes into business via networks, how infrastruc- account networks of a transnational ture connects countries into networks, nature. There is also a series of questions and how productivity gains are accrued to ponder: Will networks supersede from networks. The world as a whole sovereign relations? Will they render also works as a network. Whether it is the concept of hegemons obsolete, or the Red Cross, an agreement to tackle at least less relevant? Will networks of global climate change, or international the transnational sort need fostering, or financial systems and global supply will they just emerge without design? chains, these efforts are of a transnational If they do need shepherding, who will nature. Even looming challenges such as play that leadership role? technology displacing jobs or AI out- This century and the subsequent smarting humans are issues not between ones are likely to be centuries of states but across them. expanding networks, but the current 92 | REVITALIZING THE SPIRIT OF BRETTON WOODS era is also one in which China will rise China has defied conventional wisdom and assert itself as a global leader. What on its path to prosperity; it has achieved will be the defining characteristics of economic growth not by sheer forces its leadership? This will likely be a key of the market but instead with signifi- question of our time. Seventy-five years cant state intervention. It is on its way ago, China was one of the 44 allied to becoming the largest economy in nations to have participated in the the world, yet it is still a developing founding of the Bretton Woods system. country, marked by backward financial Ever since, it has transformed itself development and ailed by a myriad of from an economic backwater to one deep-seated economic distortions. It of the most connected components in has cutting-edge technological capacity the global economy. China has experi- despite its low income levels. It’s seen an enced seismic changes, in the same way income growth of more than 15 times that the global economy has radically since 1990, and this was all achieved transformed itself by weaving a web without being a Western-style democ- of interconnected, interrelated com- racy and arguably even without a proper ponents. But what hasn’t changed at a set of incentives-enabling institutions. similar pace is the design and thinking But there seems to be a “silver bullet” on international economic and finan- absent from the conventional set of cial architecture. explanations for China’s success. Yes— The main argument of this essay is factor accumulation has been important, that in a world of global economic net- and reforms that have removed distor- works, new economic relationships and tions have so far led to efficiency gains. linkages warrant a new type of economic But China’s ability to transform itself leadership, one that supplants traditional rapidly from an economic backwa- notions of power and hegemony. China, ter to one of the world’s most vibrant by living through its own experience economies in a matter of three decades of building networks that succeeded seems to hinge on something else. Forty in jump-starting development, is poised years ago, China was a centrally planned to become a global network leader. In economy, absent a properly functioning that role, the most central and connected marketplace. The state set production nation enables and propels the networks; targets and prices, with virtually all it does not seek to dominate the system daily necessities and many other con- but instead strives to ensure the smooth sumer goods rationed. But over a short functioning of the networks, as well as period of time, the government was their safety and sustainability. able to coordinate the various elements China, the second-largest economy in the nation and set development in today, doesn’t easily fit into a category motion. The country leveraged its ability of historical and nascent superpowers. to accumulate resources and mobilize REVITALIZING THE SPIRIT OF BRETTON WOODS | 93 them—rapidly building infrastructure machines, a trained workforce, techni- that connected its various regions, cal expertise, security, business licenses, people, and complementary inputs. It transportation networks, electricity, worked as a network, with firms and and so on. Problems with any input can industries enabling other firms and other substantially reduce the overall output. industries, and productivity gains were What China has managed to achieve is maximized as the networks were built to build up the business and transpor- and expanded. tation networks that have connected The idea of building linkages to these inputs fairly rapidly—further foster economic development goes back increasing the value of the inputs and, to Hirschman.29 By building forward in turn, the incentive to produce them. and backward linkages, development Whereas it took the West a hundred can be self-reinforcing, propelling a vir- years to create and link markets, China tuous cycle. A straightforward example did it in a matter of two decades. illustrates that this mechanism extends beyond simple scale economies: if, for example, the transportation sector is NETWORK EFFECTS ON inadequate, then output in many other A GLOBAL SCALE activities, including truck manufac- The same idea of network effects and turing and highway construction, will self-reinforcing linkages carries over to be hampered, in turn further reducing the global economy. There is substantial output in the transportation sector and evidence, first, that inputs across coun- in the rest of the economy. This vicious tries have become complementary. For cycle engenders a multiplicative effect. example, Japanese earthquakes in 2011 The same goes for a virtuous cycle, in are shown to have caused substantial dis- the opposite direction. ruptions for parts of the US economy.30 If intermediate goods are comple- Moreover, switching costs in global sup- mentary in nature, then forging and ply chains tend to be high.31 In the world strengthening these linkages is ever of financial networks, interdependen- more important. For instance, tex- cies among governments, central banks, tile producers require raw materials, investment banks, and firms, through 29 Albert Hirschman, The Strategy of Economic Development (New Haven, CT: Yale University Press, 1958). 30 Christoph Boehm, Aaron Flaaen, and Nitya Pandalai Nayar, “Input Linkages and the Transmission of Shocks: Firm-Level Evidence from the 2011 Tōhoku Earthquake” (Unpublished working paper, University of Michigan, Department of Economics, Ann Arbor, MI, 2014); Vasco M. Carvalho, Makoto Nirei, and Yukiko Saito, “Supply Chain Disruptions: Evidence from the Great East Japan Earthquake” (RIETI Discussion Paper Series No. 14035, Research Institute of Economy, Trade and Industry, Tokyo, 2014). 31 Jean-Noël Barrot and Julien Sauvagnat, “Input Specificity and the Propagation of Idiosyncratic Shocks in Production Networks,” Quarterly Journal of Economics 131, no. 3 (2014): 1543–92. 94 | REVITALIZING THE SPIRIT OF BRETTON WOODS cross-border exposures in bonds, equi- arrangements—but that is where the ties, housing, and capital flows, can lead current international economic policies to cascading defaults and failures. and thinking lie. Technology has precipitated more Brexit is a major disruption in intense specializations around the networks. The calculable cost is still world. Examples abound in which spe- unknown. And the UK’s rupture with cific countries’ resources and inputs can the EU is mainly regulatory rather than realize their full value only in a world physical. The chaos we have already with linkages: cheap labor in devel- witnessed at the border points between oping countries became an important the UK and France indicates that in the asset when technology advanced and present-day world, the networking in trade costs fell; oil from Middle Eastern terms of policy, regulation, and other countries was useless 150 years ago but nonphysical issues is no less crucial than is a critical input to the world’s output the tangible and visible connectivity. today; rhodium and lithium are now Whether it is a hard Brexit, a soft Brexit, valuable only because the world needs or a blind Brexit, Britain’s tendon, deep batteries to produce electric cars. The under the skin, is snapped, and all of networks and linkages make country- the unprepared-for consequences are all specific inputs and products more of a sudden apparent to the naked eye. valuable, which in turn makes the net- Already, the English Channel looks like works and linkages more valuable, and an artery clogged up by cholesterol. It so on and so forth. is reported that trucks now back up This cycle makes the importance of for miles outside the tunnel’s entrance connectivity, both physical and digi- and passengers have to wait for board- tal, ever more crucial in this modern ing Eurostar trains. Slow and longer day and age. Ideas feature economies processes in clearing trucks, cars, and of scale.

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