After the Fall: The Future of Global Cooperation Geneva Reports on the World Economy 14 The world economy faces its most serious test since the 1930s. The financial crisis that began in 2007 has yet to run its course, and the immediate future of global economic activity is not promising. The longer-term future of the international economic order is also in doubt, with broad concern about everything from financial fragility and recurring macroeconomic imbalances to stalled trade negotiations and the prospect of currency wars. The 14th Geneva Report on the World Economy asks: What are likely to be After the Fall: the principal issues facing the international economy over the next decade? 978-1-907142-55-0 ISBN: What could a realistic analysis hope for in the way of progress in confronting the problems of the future? What are the constraints imposed by the realities of international and domestic politics? What forms of international The Future of economic cooperation are most important to pursue, and most likely to be achieved? Geneva Reports on the World Economy 14 Global Cooperation Jeffry Frieden, Michael Pettis, Dani Rodrik and Ernesto Zedillo ICMB INTERNAT AND BANK FOR MONETARY I O NAL CENTER I N G STUD I E S ISBN 978-1-907142-55-0 Centre for Economic Policy Research ICMB INTERNATIONAL CENTER 3rd Floor • 77 Bastwick Street • LONDON EC1V 3PZ • UK FOR MONETARY TEL: +44 (0)20 7183 8801 • FAX: +44 (0)20 7183 8820 • EMAIL: [email protected] AND BANKING STUDIES www.CEPr.Org 9 781907 142550 After the Fall: The Future of Global Cooperation Geneva Reports on the World Economy 14 International Center for Monetary and Banking Studies (ICMB) International Center for Monetary and Banking Studies 11A Avenue de la Paix 1202 Geneva Switzerland Tel: (41 22) 734 9548 Fax: (41 22) 733 3853 Web: www.icmb.ch © July 2012 International Center for Monetary and Banking Studies Centre for Economic Policy Research Centre for Economic Policy Research 3rd Floor 77 Bastwick Street London EC1V 3PZ UK Tel: +44 (20) 7183 8801 Fax: +44 (20) 7183 8820 Email: [email protected] Web: www.cepr.org ISBN: 978-1-907142-55-0 After the Fall: The Future of Global Cooperation Geneva Reports on the World Economy 14 Jeffry Frieden Harvard University Michael Pettis Peking University Dani Rodrik Harvard University Ernesto Zedillo Yale University ICMB INTERNATIONAL CENTER FOR MONETARY AND BANKING STUDIES CIMB CENTRE INTERNATIONAL D’ETUDES MONETAIRES ET BANCAIRES International Center for Monetary and Banking Studies (ICMB) The International Centre for Monetary and Banking Studies was created in 1973 as an independent, non-profit foundation. It is associated with Geneva’s Graduate Institute of International Studies. Its aim is to foster exchanges of views between the financial sector, central banks and academics on issues of common interest. It is financed through grants from banks, financial institutions and central banks. The Center sponsors international conferences, public lectures, original research and publications. It has earned a solid reputation in the Swiss and international banking community where it is known for its contribution to bridging the gap between theory and practice in the field of international banking and finance. In association with CEPR, the Center launched a new series of Geneva Reports on the World Economy in 1999. The eleven subsequent volumes have attracted considerable interest among practitioners, policy-makers and scholars working on the reform of international financial architecture. The ICMB is non-partisan and does not take any view on policy. Its publications, including the present report, reflect the opinions of the authors, not of ICM or any of its sponsoring institutions. President of the Foundation Board Thomas Jordan Director Charles Wyplosz Centre for Economic Policy Research (CEPR) The Centre for Economic Policy Research is a network of over 700 Research Fellows and Affiliates, based primarily in European universities. The Centre coordinates the research of its Fellow and Affiliates and communicates the results to the public and private sectors. CEPR is an entrepreneur, developing research initiatives with the producers, consumers and sponsors of research. Established in 1983, CEPR is a European economics research organization with uniquely wide-raning scope and activities. The Centre is pluralist and non-partisan, bringing economic research to bear on the analysis of medium- and long-term policy questions. CEPR research may include views on policy, but the Executive Committee of the Centre does not give prior review to its publications, and the Centre takes no institutional policy positions. The opinions expressed in this report are those of the authors not those of the Centre for Economic Policy Research. CEPR is a registered charity (No. 287287) and a company limited by guarantee and registered in England (No. 1727026). Chair of the Board Guillermo de la Dehesa President Richard Portes Chief Executive Officer Stephen Yeo Research Director Lucrezia Reichlin Policy DIrector Richard Baldwin About the Authors Jeffry Frieden is Stanfield Professor of International Peace in Harvard University’s Department of Government. He specialises in the politics of international monetary and financial relations. Frieden is the author (with Menzie Chinn) of Lost Decades: The Making of America’s Debt Crisis and the Long Recovery (2011). Frieden is also the author of Global Capitalism: Its Fall and Rise in the Twentieth Century (2006), of Banking on the World: The Politics of American International Finance (1987), of Debt, Development, and Democracy: Modern Political Economy and Latin America, 1965‑1985 (1991), and is the editor or co-editor of over a dozen other books on related topics. His articles on the politics of international economic issues have appeared in a wide variety of scholarly and general-interest publications. Michael Pettis is a professor at Peking University’s Guanghua School of Management, where he specializes in Chinese financial markets. He has also taught, from 2002 to 2004, at Tsinghua University’s School of Economics and Management and, from 1992 to 2001, at Columbia University’s Graduate School of Business. Pettis has worked on Wall Street in trading, capital markets, and corporate finance since 1987, when he joined the Sovereign Debt trading team at Manufacturers Hanover (now JP Morgan). Most recently, from 1996 to 2001, Pettis worked at Bear Stearns, where he was Managing Director-Principal heading the Latin American Capital Markets and the Liability Management groups. Dani Rodrik is Rafiq Hariri Professor of International Political Economy at Harvard’s John F. Kennedy School of Government. He has published widely in the areas of economic development, international economics, and political economy. His most recent book is The Globalization Paradox: Democracy and the Future of the World Economy (2011). His current research focuses on designing growth strategies for developing economies. In 2007 he was awarded the inaugural Albert O. Hirschman Prize of the Social Sciences Research Council. He is also the recipient of the Leontief Award for Advancing the Frontiers of Economic Thought. His work has been supported by research grants from the Carnegie Corporation, Ford Foundation, and Rockefeller Foundation. He teaches courses on economic development and globalization. v vi After the Fall: The Future of Global Cooperation Ernesto Zedillo is the Frederick Iseman ’74 Director of the Yale Center for the Study of Globalization; Professor in the Field of International Economics and Politics; Professor of International and Area Studies; and Professor Adjunct of Forestry and Environmental Studies at Yale University. He teaches undergraduate courses at Yale on debating globalisation, trade, and the economic evolution and challenges of the Latin American and Caribbean countries. In Mexico, he was with the Central Bank of Mexico from 1978-1987 then served the National Government as Undersecretary of the Budget, Secretary of the Budget and Economic Planning, Secretary of Education, and President (1994-2000). He holds a PhD in Economics from Yale University. In 2011 he was elected as an international member of the American Philosophical Society. Among his edited books are included The Future of Globalization: Explorations in Light of Recent Turbulence, Global Warming: Looking Beyond Kyoto and Rethinking the “War on Drugs” through the US‑Mexico Prism. Contents List of Conference Participants x Acknowledgements xvi Foreword xvii 1 Introduction: Past Imperfect, Present Tense, Future Conditional 1 2 The Ghost of Globalisation Past: Lessons for Globalisation Present 5 2.1 Globalisation past 5 2.2 Globalisation collapsed 6 2.3 Lessons from the past 6 3 The Current Situation 9 3.1 Introduction 9 3.2 A world out of balance 9 3.3 The politics of adjustment 11 3.4 Europe on edge 12 3.5 The China syndrome 15 3.6 Japan struggles back 17 3.7 Recovery, and then what? 18 4 Global Economic Coordination: On Track or Doomed to Fail? 19 4.1 Globalisation and governance 19 4.2 G20 rising 20 4.3 Momentum unsustained 20 4.4 Problems proliferate 21 4.5 Warnings issued 22 4.6 Warnings heeded? 23 4.7 Warnings forgotten 24 4.8 Trade failing 25 4.9 IFI reform on the agenda 26 4.10 Multilateral surveillance frustrated 28 4.11 Promises, promises… 29 4.12 Failure explained, but not excused 30 5 The Domestic Political Economy of International Economic Cooperation 33 5.1 The United States 34 5.2 The European Union 37 5.3 China 40 5.4 Brazil 45 5.5 Inconvenient truths 46