Does a multipolar world support multilateralism?
After the Chinese New Year holiday, I visited Rio de Janiero for a conference to discuss the state of the global economy. I last visited Brazil in 1986, when the whole of Latin America was suffering terribly from its debt crisis. Today, Brazil is the "B" in the BRIC economies. It has a population of over 190 million, the fifth largest in the world, with nominal GDP of US$2.5 trillion, the seventh largest in the world. There is quiet confidence in the air, especially since Brazil's largest neighbour, Argentina, has once again gone back to recession due to mismanagement.In fact, other than Asia, which has benefited from the rise of China, India and Southeast Asia (particularly Indonesia), Latin America is the most important emerging region. Within Latin America, the Pacific countries such as Chile, Colombia and Peru are emerging as growth leaders, moving to 5 per cent annual growth because of their openness to trade and ability to increase domestic investments.
What is most remarkable is the growth in international trade between the leading Latin American countries with China. In 2000, China moved from 36th place and 35th place in trade with Colombia and Venezuela respectively to second-largest trading partner with both countries. Today, China is the largest export market for Brazil, Chile and Peru, so there is no doubt how keen Brazilians are to learn about China.
As a member of the G20, Brazil has been an important supporter of multilateralism and free trade. But there are subtle changes in the view on capital flows. Large inflows of short-term capital have driven the Brazilian real upwards, and whilst commodity exports have benefited from a strong real, manufacturing exports are affected. Brazil is watching closely whether a global currency war will emerge, particularly if there are major moves in the yen and East Asian currencies.
An important question is whether the growing trend towards a multi-polar world promotes multilateralism or not?
In 2011, the World Bank produced an interesting study on multipolarity under then chief economist Dr Justin Lin Yifu. Global rebalancing with the rise of the emerging markets in the last 30 years has created what Nobel laureate Michael Spence called the "Next Convergence". There are "two parallel and interacting revolutions: the continuation of the Industrial Revolution in the advanced countries, and the sudden and dramatic pattern of growth in the developing world. One could call the second revolution the 'Inclusiveness Revolution'. After two centuries of high-speed divergence, a pattern of convergence has taken over".
As the World Bank report pointed out: emerging markets' share of global trade rose from 26 per cent in 1995 to 42 per cent in 2010 and is still expanding. Specifically, by 2025, the Bank estimates that six major economies - Brazil, Russia, India, China (BRIC) plus Indonesia and South Korea - will account for more than half of global growth.
What does this multipolarity mean? The World Bank thinks that for the emerging markets to arrive at rebalancing, they will have to improve their technological innovation (their "Total Factor Productivity") and shift demand away from exports towards domestic engines of growth. The second trend is that emerging-market multinational companies will become a potent force in shaping global industrialisation. The third trend is that the current US-dollar-dominated financial world will become more multipolar, with a larger role for the euro and, in the long term, for the yuan.
The World Bank also concludes that a "more multipolar global economy will, on balance, be positive for developing countries as a whole - although not necessarily for each of them individually".
This conclusion seems non-controversial. But the reality is that the continuing European debt crisis and slow growth in the US has created a situation in which the multilateral trade and investment regime that has brought prosperity to the world is now stalling. The current multilateral regime is a system of multiple countries agreeing to work on common rules in security, trade and finance. The international agencies such as the United Nations, World Bank, International Monetary Fund and World Trade Organisation are all institutions that support multilateralism.
Multilateralism in trade has been one of the foundations of global prosperity, allowing emerging countries to access global markets as tariff barriers have come down and supply chains have become global in nature. The reality, however, is that the Doha round of trade negotiations has stalled and there are more and more bilateral trading agreements, such as the Trans-Pacific Partnerships (TPP), which are supposed to get bilateral agreements first because it is perceived to be too difficult to get multilateral agreements. But I do not see how small companies in emerging markets can hope to deal with complex rules and regulations that each bilateral agreement will bring in the form of new costs to trade.
Why is there difficulty in getting multilateralism to move forward, when the world is becoming more multipolar?
One plausible answer is that the advanced country multinationals fear that a multilateral system may promote greater competition from emerging-market multinationals that are often state-owned or state-backed, and that the new game may not be as level as before. Hence, there is greater support for bilateral arrangements whereby bilateral concessions on market opening can be achieved with more perceived commercial results than getting bogged down in complex multilateral negotiations.
It is in the area of finance that multilateralism has truly stalled. If the emerging markets increase their share of global wealth and finance, one would have thought that their representative voice and voting power in the Bretton Woods institutions of the World Bank and IMF would increase. But this is a long and protracted reform, because the largest incumbent shareholders, the Europeans and the Americans, are deeply preoccupied in their own economic problems and are reluctant to concede power to the emerging markets in the running of the Bretton Woods institutions.
National interests have therefore triumphed over global common interests. The current impasse on multilateralism is due to the complex debate on how to share the costs and responsibilities of global system maintenance. If the emerging markets want more power, they must be willing to share the costs of providing more global public goods.
It is hard to see who has that vision of global public responsibility.
Andrew Sheng is president of the Fung Global Institute.