Paper II

(Section A)

8. Evolution of the International Economic System : From Brettonwoods to WTO ; Socialist

economies and the CMEA (Council for Mutual Economic Assistance); Third World demand for new
international economic order; Globalisation of the world economy.

Section B

4. India and the Global South : Relations with Africa and Latin America; Leadership role in the
demand for NIEO and WTO negotiations.

HISTORY OF GLOBAL ECONOMY

Birth of Capitalism

Over the centuries as commerce grew, albeit slowly, the power of the vassals of the feudal system
declined being replaced by merchants and incipient capitalists. Innovations in sailing led to long
distance trading. The opportunities and challenges of sending a vessel abroad for years a time
brought about the institutions which facilitated the growth of the modern capitalist system.

Institutions which spurred the growth of capitalism

Principle of Private Property Joint Stock Companies
Deposit Banking Insurance
Formal Contracts International Financial Markets
Craft Guilds Government Support of Opening Markets
Merchant Associations

At the same time burgeoning industrialization and urbanization further weakened the feudal
economy changing both the political as well as the economic structure of Europe.

The question remains why in the “west”?

Some of the factors contributing to these changes were:

 1. The Protestant Reformation - note that industrialization began
in northern Europe. Protestant work ethic - fostered hard
work, frugality, sobriety and efficiency, virtues which facilitated
capitalism.
2. Rise of strong nation states - 16th through 19th century. The rise of strong nation-states
created conditions conducive to capitalism. It provided domestic markets free of barriers to
trade, a uniform monetary system, contract and property
laws, police and militia protection, as well as, basic
transportation and communications infrastructure. Initially
absolute monarchs wrested power from feudal lords and
town authorities and consolidated territory into nation
states. Eventually, as the power of capitalists and the
middle class or bourgeoisie rose, the monarchs ceded
power to a more representative structure.
3. The Enlightenment - during the 17th and 18th century there were great scientific and social
advances. Discoveries of oxygen, electricity, calculus, among many other findings led to
practical applications in agriculture and industry. This period laid the scientific foundation for
the industrial revolution. Social thought as expounded
by David Hume, Adam Smith and Thomas Jefferson
stressed the rights and responsibilities of the individual.
This weakened the power of institutions such as the
church and state, which had patronizing relationships
with the masses. This liberal philosophy emphasizing
freedom from arbitrary authority further led to the rise
of the middle class and the overthrow of the landed gentry. It eventually led to political
revolutions in not only in the United States, but also in England, Holland, and France.

The profits earned by capitalist from international trade, and the flow of gold and silver from the
Americas, financed the accumulation of capital that furthered reinforced industrialization and
capitalism.

Capitalism and Colonization

Capitalism as an economic system spread beyond

Europe, mainly to North America and Australia. One
may ask why capitalism and new technologies did
not spread elsewhere. One possible answer is that
the indigenous peoples of North America and
Australia were not particularly numerous as
compared to other regions. As the descendants of
the English and French colonists grew in number
and with new immigrant waves, primarily from
Europe, the European population overwhelmed the
indigenous peoples who were (at best) pushed
aside. The European immigrants using their skills
and by acquiring technologies from their home countries embarked on creating new industries.
However, in Africa, the Indian Subcontinent, East Asia, and in Latin America the indigenous peoples
were relatively numerous. Being greatly outnumbered, the colonist created an administrative
structure, which encouraged or more likely coerced, the indigenous peoples to produce primary
products for export to the home countries. These primary products were then transformed in the
production process into manufactured goods, some of which were re-exported back to the colonies.
Under these conditions there was little incentive to create new industries in these colonies.

Japan

Japan proved to be an exception. Until the Meiji Restoration (1868) Japan was basically a closed
society. Feudal structures and a strong caste system were
the main characteristics of this island nation. Being isolated
and having an insular culture, which mistrusted foreigners,
the Japanese were caught unaware of the economic and
military power of the Western nations when Admiral Perry
sailed into Yokohama harbor. The Japanese, understanding
their great disadvantage, began a frantic and zealous
campaign to industrialize in the latter part of the 19th century. Borrowing western technologies, the
Japanese managed to build steel industries, create a modern navy and in1906 defeat the Russians in
a naval battle in the Sea of Japan.

Britain’s Decline

The world economy during the 19th century was

centred on Britain's early start in the industrial
revolution. Current account surpluses led to the English
Pound becoming the world’s major currency and the
gold standard was established creating a system of fixed
exchange rates. By the end of the century British
foreign direct investment and the diffusion of
technology spread industrial development to the
European continent and North America leading to
greater international competition. However, towards the end of the 19th Century Britain did not
respond to new technological and managerial realities. Their dominance began to diminish. The
advent of steel and chemical industries, which enjoy economies of scale, led to the creation of large
corporations. The British maintained the status quo with small to medium size family manufacturing
industries. The US with its large and growing internal market was better placed to exploit these new
industries.

Twentieth Century

At the beginning of the 20th century the global

economy was in turmoil. Financial crises were common.
Policies to protect domestic industries such as tariff
measures stifled trade. Political alliances in Europe
divided the continent into two camps. The assassination
of Archduke Ferdinand in the Balkans sparked the
century’s first World War. The advent of technology in
warfare had devastating effects. The machine gun,
armored tanks, and the use of poisonous gas brought
warfare to a new level of barbarity, shocking the world.
In its aftermath, President Woodrow Wilson advocated a new-world order centered on the League
of Nations. While grand in concept the political realities of the day made it ineffective. The cost of
WWI to Britain resulted in the abandonment of the gold standard, a system of exchange rates
backed by gold. The post WWI era was marked by a resurgence of economic prosperity, particularly
in the United States. However, Germany saddled with reparations, payments to Allied powers
(France in particular) for damages caused during the war faced devastating hardship. The Germany
currency suffered a hyperinflation making it near worthless. At the end of the 1920s Germany began
to get back up on its economic feet.

The US stock market crashed in 1929. Inappropriate policy responses led to the Great Depression. Its
repercussions spread to Europe as competitive policies of trade protection and currency
devaluations were implemented in vain attempts to protect domestic economies. The US Congress
passed the Tariff Act of 1930, better known as the Smoot Hawley Tariff Act. These measures raised
tariffs on imports to an average of 50%. This "beggar thy neighbour" policy led to a vicious cycle of
reciprocal tariffs and other restraints to trade. International trade came to a halt in the mid-1930s
deepening and lengthening the Great Depression both here at home and abroad.

Germany, resurfacing after a decade of deprivation, now faced a new economic challenge. Political
turmoil ensued and the 1933 Germany elections saw the rise of the National Socialist Party headed
by Adolf Hitler. Embarking on a re-industrialization policy, the Nazis expanded their military capacity,
built the famous Germany highway system, the Autobahn, and encouraged production of the
peoples car, Volkswagen. Flexing their new found military might Germany under the Nazis, invaded
Czechoslovakia in 1937 and latter precipitated World War II with the invasion of Poland in 1939.

Post-World War II

In 1944 it became clear that the war was coming to an end, and the western Allied powers decided
to again to attempt building a new world order. Meeting at the Mount Washington Hotel in Bretton
Woods, New Hampshire, the US and English representatives, H.D. White and J.M. Keynes
respectively, (yes, Keynes of the Keynesian Macromodel!) set out to create institutions so to prevent
the reoccurrence of the conditions which led to WWII.

They proposed the creation of three organizations, with each organization playing a role in the
smooth functioning of global economy. These were:

1. The International Bank for Reconstruction and Development (IBRD

or more commonly the World Bank) whose original mandate was
to rebuild the war torn economies of Europe and Asia. It has
evolved into the world’s most influential lender of foreign aid to
developing nations.
2. The International Monetary Fund (IMF ) whose primary purpose was to maintain a fixed
exchange rate system known as the Bretton Woods System. After
the dissolution of the Bretton Woods System in the early 1970s the
IMF has become the world’s overseer of the international financial
system, recently playing a highly visible and controversial role in
the aftermath of the East Asian financial crisis.
 3. The International Trade Organization (ITO),
which was not ratified by the US Congress
and consequently did not become a reality.
However, it’s primary function of liberalizing
world trade was given to the General
Agreement on Tariffs and Trade (GATT). Several GATT trade negotiations are of note. The
Kennedy Round (early 1960s) originated due to US concerns with respect to the newly
formed European Common Market. It resulted in a reduction in world tariffs by
approximately 30%. The Tokyo Round (1970s) further reduced tariffs and addressed issues
of non-tariff barriers, such as quotas. Most recently is the Uruguay Round, which concluded
in 1994. Its major accomplishments included reduced barriers to trade in services,
protection of intellectual property and liberalization in agriculture. One consequence of the
Uruguay round was the transformation of GATT into the World Trade Organization (WTO), a
new institution with the same primary objective of trade liberalization.

The post World War II era is marked by two major geopolitical events, the Cold War and the period
of decolonization. Some political scientists viewed the world as being divided into three groups of
nations. The first-world consisted of the western democratic industrial nations. The second-world
was made up of the communist nations and the third-world, a term still in use today refers to the
developing nations. The Cold War was an ideological battle between the first and second worlds.
Each believed the other wished to spread its influence and dominate the world. The actual hostilities
that took place were in the third world. The Korean War, Vietnam War, and numerous other
conflicts were at their core battles between the first and second worlds for the allegiance of third
world nations. The end of the Cold War occurred in the beginning of the 1990s with the fall of the
Soviet Union.

De-colonization

This period also saw the birth of many new nations as

the European powers decolonized. Shortly after
World War II, Great Britain de-colonized South Asia
leading to the partition of British India into India and
Pakistan. France, as a result of the Algerian Civil war,
decolonized later in late 1950s and early 1960s.
Portugal, the last of the European colonizer granted
independence to the last of its colonies in the middle 1970s. This means that many developing
countries are relatively young, especially those in Africa, the Middle East and South Asia.

These newly liberated countries had to choose which economic structure to adopt to achieve their
developmental objectives. Many of these countries adopted Socialist policies giving government a
very large role in their economies. Their choices, by and large, were a function of distancing
themselves from their former colonial masters. Furthermore, Keynesian policy, whose central tenet
was that government should play an active role in the economy to combat recessions and
unemployment, was being practiced in the United States and other stalwarts of market economics. A
third reason was the example of Stalinist Russia which in relatively quick time transformed the Soviet
Union from an agrarian to industrial society.
Import Substitution

These new nations adopted government controlled economies that relied on import substitution
industrialization strategies to achieve industrialization. Import substitution meant that these
countries fostered the growth of industries that produced goods that were being imported, usually
from the former colonialist. The basic premise for this policy was that their former colonial economic
relationship was one in which the colonialist exploit its colony by importing its raw materials and
then exporting high-valued manufactured goods back to it. This cycle of exploitation could be broken
if the colony used its raw materials itself to manufacture its own goods. While the notion might
appear to be compelling, it is a movement away from efficient resource allocation. Newly formed
manufacturing industries in the young nations were relatively inefficient and required fairly high
levels of protection from imports, mainly from the industrialized countries. Behind protectionist
barriers these industries did not have the incentive to become efficient. While import substitution
policies did initially succeed in producing some economic growth, they were not sustainable. Many
nations in Africa, South Asia and Latin America saw their economies stagnate after an initial growth
spurt. Several Southeast Asian nations, after initially implementing import substitution policies,
adopted export promotion strategies. Here they would focus their industrial efforts on producing
goods that were competitive in global markets. They created industries whose products had high
world demand, required labour-intensive production, and had economies of scale. What was not
consumed at home could be exported.

Oil Price Shocks

The oil price shocks of the1970s forced many Americans for

the first time to realize that the US economy was not
independent from the rest of the world. The recessions
following the oil crises of 1973 and in 1979 led to both
recession and inflation simultaneously. The oil price shocks
set into motion events that are still present in today’s
global economy.

Many oil exporting countries, especially in the Persian Gulf

area, saw their export earnings rise faster than they could
spend them. The surplus earnings, which were
denominated in US dollars, found their way into the global
financial system. In other words, these petro-dollars were deposited in the major banks of the US
and Europe. These banks now flush with new deposits had to find new borrowers in order to remain
solvent. Many oil-importing developing countries had a great need for these resources in order to
finance the now higher cost of oil. Some oil-exporting developing countries enacted development
programs that outspent their oil earnings. The size of many developing countries debt ballooned.

International Debt Crisis

Two events in the US precipitated an international debt crisis. Mr. Paul Volker, then the Chairman of
the Federal Reserve System, instituted a very tight monetary policy to fight the double-digit inflation
in the US. Reducing the money supply resulted in an increase in interest rates. This increase in
interest rates increased the interest payments that developing countries had to pay in order to
service their huge debt. Secondly, President Ronald Reagan instituted a supply-side economic policy
plunging the US economy into the worst recession since the Great Depression. With the economy in
the US in a severe downturn the demand for developing countries products fell. Developing
countries were now between a rock and a hard place. On the one hand their debt service payments
were rising while at the same time their ability to earn the income to pay their debt obligations was
falling. Mexico, Argentina, Brazil and many other developing countries either defaulted on their debt
or underwent IMF restructuring programs requiring stringent austerity measures. On group of
countries, however, weathered the storm. Export promoters allowed price adjustments to shift their
production away from energy intensive production. Countries who followed import-substituting
policies stagnated. The 1980s is often referred to as the “lost decade” in Latin America. Using the
Asian Tigers of Korea, Hong Kong, Taiwan and Singapore as a model, many import substituting
countries changed their policies. They became more market friendly, opening up their economies to
the global economy. One major example is Mexico, who joined the US and Canada in the North
American Free Trade Agreement in 1994.

Most developing nations saw the benefits of becoming linked to the global economy. Industrial
nations no longer were viewed as neo-colonial exploiters, but as markets for developing countries=
goods. Further integration of capital markets led to the emerging market phenomena. Investors in
industrial countries could now purchase equities from a variety of newly formed stock markets in
Argentina, Chile, Thailand, Malaysia, and so on. This inflow of financial capital allowed developing
countries to invest in building new factories and infrastructure speeding up their economic
development.

Also at this time the Soviet Union disintegrated after its Eastern European allies overthrew their
communist governments. The example of a well-organized government controlled economy turned
out to be a myth. The global movement towards more market friendly economic systems is the
major outcome of the end of the Cold War. Countries embracing markets, both internally and
externally, have created a world of growing interdependence. The events across the globe are
transmitted everywhere through the global economy.

The Future of the Liberal World Order

Internationalism After America

By G. John Ikenberry (courtesy Foreign affairs)

There is no longer any question: wealth and power are moving from the North and the West to the
East and the South, and the old order dominated by the United States and Europe is giving way to
one increasingly shared with non-Western rising states. But if the great wheel of power is turning,
what kind of global political order will emerge in the aftermath?

Some anxious observers argue that the world will not just look less American -- it will also look less
liberal. Not only is the United States' pre-eminence passing away, they say, but so, too, is the open
and rule-based international order that the country has championed since the 1940s. In this view,
newly powerful states are beginning to advance their own ideas and agendas for global order, and a
weakened United States will find it harder to defend the old system. The hallmarks of liberal
internationalism -- openness and rule-based relations enshrined in institutions such as the United
Nations and norms such as multilateralism -- could give way to a more contested and fragmented
system of blocs, spheres of influence, mercantilist networks, and regional rivalries.

The fact that today's rising states are mostly large non-Western developing countries gives force to
this narrative. The old liberal international order was designed and built in the West. Brazil, China,
India, and other fast-emerging states have a different set of cultural, political, and economic
experiences, and they see the world through their anti-imperial and anticolonial pasts. Still grappling
with basic problems of development, they do not share the concerns of the advanced capitalist
societies. The recent global economic slowdown has also bolstered this narrative of liberal
international decline. Beginning in the United States, the crisis has tarnished the American model of
liberal capitalism and raised new doubts about the ability of the United States to act as the global
economic leader.

For all these reasons, many observers have concluded that world politics is experiencing not just a
changing of the guard but also a transition in the ideas and principles that underlie the global order.
The journalist Gideon Rachman, for example, says that a cluster of liberal internationalist ideas --
such as faith in democratization, confidence in free markets, and the acceptability of U.S. military
power -- are all being called into question. According to this worldview, the future of international
order will be shaped above all by China, which will use its growing power and wealth to push world
politics in an illiberal direction. Pointing out that China and other non-Western states have
weathered the recent financial crisis better than their Western counterparts, pessimists argue that
an authoritarian capitalist alternative to Western neoliberal ideas has already emerged. According to
the scholar Stefan Halper, emerging-market states "are learning to combine market economics with
traditional autocratic or semi autocratic politics in a process that signals an intellectual rejection of
the Western economic model."

But this panicked narrative misses a deeper reality: although the United States' position in the global
system is changing, the liberal international order is alive and well. The struggle over international
order today is not about fundamental principles. China and other emerging great powers do not
want to contest the basic rules and principles of the liberal international order; they wish to gain
more authority and leadership within it. Indeed, today's power transition represents not the defeat
of the liberal order but its ultimate ascendance. Brazil, China, and India have all become more
prosperous and capable by operating inside the existing international order -- benefiting from its
rules, practices, and institutions, including the World Trade Organization (WTO) and the newly
organized G-20. Their economic success and growing influence are tied to the liberal internationalist
organization of world politics, and they have deep interests in preserving that system.

In the meantime, alternatives to an open and rule-based order have yet to crystallize. Even though
the last decade has brought remarkable upheavals in the global system -- the emergence of new
powers, bitter disputes among Western allies over the United States' unipolar ambitions, and a
global financial crisis and recession -- the liberal international order has no competitors. On the
contrary, the rise of non-Western powers and the growth of economic and security interdependence
are creating new constituencies for it.

To be sure, as wealth and power become less concentrated in the United States' hands, the country
will be less able to shape world politics. But the underlying foundations of the liberal international
order will survive and thrive. Indeed, now may be the best time for the United States and its
democratic partners to update the liberal order for a new era, ensuring that it continues to provide
the benefits of security and prosperity that it has provided since the middle of the twentieth
century.

THE LIBERAL ASCENDANCY

China and the other emerging powers do not face simply an American-led order or a Western
system. They face a broader international order that is the product of centuries of struggle and
innovation. It is highly developed, expansive, integrated, institutionalized, and deeply rooted in the
societies and economies of both advanced capitalist states and developing states. And over the last
half century, this order has been unusually capable of assimilating rising powers and reconciling
political and cultural diversity.

Today's international order is the product of two order-building projects that began centuries ago.
One is the creation and expansion of the modern state system, a project dating back to the Peace of
Westphalia in 1648. In the years since then, the project has promulgated rules and principles
associated with state sovereignty and norms of great-power conduct. The other project is the
construction of the liberal order, which over the last two centuries was led by the United Kingdom
and the United States and which in the twentieth century was aided by the rise of liberal democratic
states. The two projects have worked together. The Westphalian project has focused on solving the
"realist" problems of creating stable and cooperative interstate relations under conditions of
anarchy, and the liberal-order-building project has been possible only when relations between the
great powers have been stabilized. The "problems of Hobbes," that is, anarchy and power
insecurities, have had to be solved in order to take advantage of the "opportunities of Locke," that
is, the construction of open and rule-based relations.

At the heart of the Westphalian project is the notion of state sovereignty and great-power relations.
The original principles of the Westphalian system -- sovereignty, territorial integrity, and non
intervention -- reflected an emerging consensus that states were the rightful political units for the
establishment of legitimate rule. Founded in western Europe, the Westphalian system has expanded
outward to encompass the entire globe. New norms and principles -- such as self-determination and
mutual recognition among sovereign states -- have evolved within it, further reinforcing the primacy
of states and state authority. Under the banners of sovereignty and self-determination, political
movements for decolonization and independence were set in motion in the non-Western developing
world, coming to fruition in the decades after World War II. Westphalian norms have been violated
and ignored, but they have, nonetheless, been the most salient and agreed-on parts of the
international order.

A succession of post war settlements -- Vienna in 1815, Versailles in 1919, Yalta and Potsdam in
1945, and the U.S., Soviet, and European negotiations that ended the Cold War and reunified
Germany in the early 1990s -- allowed the great powers to update the principles and practices of
their relations. Through war and settlement, the great powers learned how to operate within a
multipolar balance-of-power system. Over time, the order has remained a decentralized system in
which major states compete and balance against one another. But it has also evolved. The great
powers have developed principles and practices of restraint and accommodation that have served
their interests. The Congress of Vienna in 1815, where post-Napoleonic France was returned to the
great-power club and a congress system was established to manage conflicts, and the UN Security
Council today, which has provided a site for great-power consultations, are emblematic of these
efforts to create rules and mechanisms that reinforce restraint and accommodation.

The project of constructing a liberal order built on this evolving system of Westphalian relations. In
the nineteenth century, liberal internationalism was manifest in the United Kingdom's championing
of free trade and the freedom of the seas, but it was limited and coexisted with imperialism and
colonialism. In the twentieth century, the United States advanced the liberal order in several phases.
After World War I, President Woodrow Wilson and other liberals pushed for an international order
organized around a global collective-security body, the League of Nations, in which states would act
together to uphold a system of territorial peace. Open trade, national self-determination, and a
belief in progressive global change also undergirded the Wilsonian worldview -- a "one world" vision
of nation-states that would trade and interact in a multilateral system of laws. But in the interwar
period of closed economic systems and imperial blocs, this experiment in liberal order collapsed.

After World War II, President Franklin Roosevelt's administration tried to construct a liberal order
again, embracing a vision of an open trading system and a global organization in which the great
powers would cooperate to keep the peace -- the United Nations. Drawing lessons from Wilson's
failure and incorporating ideas from the New Deal, American architects of the post war order also
advanced more ambitious ideas about economic and political cooperation, which were embodied in
the Bretton Woods institutions. This vision was originally global in spirit and scope, but it evolved
into a more American-led and Western-centred system as a result of the weakness of post war
Europe and rising tensions with the Soviet Union. As the Cold War unfolded, the United States took
command of the system, adopting new commitments and functional roles in both security and
economics. Its own economic and political system became, in effect, the central component of the
larger liberal hegemonic order.

Another development of liberal internationalism was quietly launched after World War II, although it
took root more slowly and competed with aspects of the Westphalian system. This was the
elaboration of the universal rights of man, enshrined in the UN and its Universal Declaration of
Human Rights. A steady stream of conventions and treaties followed that together constitute an
extraordinary vision of rights, individuals, sovereignty, and global order. In the decades since the end
of the Cold War, notions of "the responsibility to protect" have given the international community
legal rights and obligations to intervene in the affairs of sovereign states.

Seen in this light, the modern international order is not really American or Western -- even if, for
historical reasons, it initially appeared that way. It is something much wider. In the decades after
World War II, the United States stepped forward as the hegemonic leader, taking on the privileges
and responsibilities of organizing and running the system. It presided over a far-flung international
order organized around multilateral institutions, alliances, special relationships, and client states -- a
hierarchical order with liberal characteristics.

But now, as this hegemonic organization of the liberal international order starts to change, the
hierarchical aspects are fading while the liberal aspects persist. So even as China and other rising
states try to contest U.S. leadership -- and there is indeed a struggle over the rights, privileges, and
responsibilities of the leading states within the system -- the deeper international order remains
intact. Rising powers are finding incentives and opportunities to engage and integrate into this
order, doing so to advance their own interests. For these states, the road to modernity runs through
-- not away from -- the existing international order.

JOINING THE CLUB

The liberal international order is not just a collection of liberal democratic states but an international
mutual-aid society -- a sort of global political club that provides members with tools for economic
and political advancement. Participants in the order gain trading opportunities, dispute-resolution
mechanisms, frameworks for collective action, regulatory agreements, allied security guarantees,
and resources in times of crisis. And just as there are a variety of reasons why rising states will
embrace the liberal international order, there are powerful obstacles to opponents who would seek
to overturn it.

To begin with, rising states have deep interests in an open and rule-based system. Openness gives
them access to other societies -- for trade, investment, and knowledge sharing. Without the
unrestricted investment from the United States and Europe of the past several decades, for instance,
China and the other rising states would be on a much slower developmental path. As these countries
grow, they will encounter protectionist and discriminatory reactions from slower-growing countries
threatened with the loss of jobs and markets. As a result, the rising states will find the rules and
institutions that uphold non-discrimination and equal access to be critical. The World Trade
Organization -- the most formal and developed institution of the liberal international order --
enshrines these rules and norms, and rising states have been eager to join the WTO and gain the
rights and protections it affords. China is already deeply enmeshed in the global trading system, with
a remarkable 40 percent of its GNP composed of exports -- 25 percent of which go to the United
States.

China could be drawn further into the liberal order through its desire to have the yuan become an
international currency rivalling the U.S. dollar. Aside from conferring prestige, this feat could also
stabilize China's exchange rate and grant Chinese leaders autonomy in setting macroeconomic
policy. But if China wants to make the yuan a global currency, it will need to loosen its currency
controls and strengthen its domestic financial rules and institutions. As Barry Eichen green and other
economic historians have noted, the U.S. dollar assumed its international role after World War II not
only because the U.S. economy was large but also because the United States had highly developed
financial markets and domestic institutions -- economic and political -- that were stable, open, and
grounded in the rule of law. China will feel pressures to establish these same institutional
preconditions if it wants the benefits of a global currency.

Internationalist-oriented elites in Brazil, China, India, and elsewhere are growing in influence within
their societies, creating an expanding global constituency for an open and rule-based international
order. These elites were not party to the grand bargains that lay behind the founding of the liberal
order in the early post war decades, and they are seeking to renegotiate their countries' positions
within the system. But they are nonetheless embracing the rules and institutions of the old order.
They want the protections and rights that come from the international order's Westphalian defense
of sovereignty. They care about great-power authority. They want the protections and rights relating
to trade and investment. And they want to use the rules and institutions of liberal internationalism
as platforms to project their influence and acquire legitimacy at home and abroad. The UN Security
Council, the G-20, the governing bodies of the Bretton Woods institutions -- these are all stages on
which rising non-Western states can acquire great-power authority and exercise global leadership.

NO OTHER ORDER

Meanwhile, there is no competing global organizing logic to liberal internationalism. An alternative,

illiberal order -- a "Beijing model" -- would presumably be organized around exclusive blocs, spheres
of influence, and mercantilist networks. It would be less open and rule-based, and it would be
dominated by an array of state-to-state ties. But on a global scale, such a system would not advance
the interests of any of the major states, including China. The Beijing model only works when one or a
few states opportunistically exploit an open system of markets. But if everyone does, it is no longer
an open system but a fragmented, mercantilist, and protectionist complex -- and everyone suffers.

It is possible that China could nonetheless move in this direction. This is a future in which China is
not a full-blown illiberal hegemon that reorganizes the global rules and institutions. It is simply a
spoiler. It attempts to operate both inside and outside the liberal international order. In this case,
China would be successful enough with its authoritarian model of development to resist the
pressures to liberalize and democratize. But if the rest of the world does not gravitate toward this
model, China will find itself subjected to pressure to play by the rules. This dynamic was on display in
February 2011, when Brazilian President Dilma Rousseff joined U.S. Treasury Secretary Timothy
Geithner in expressing concern over China's currency policy. China can free-ride on the liberal
international order, but it will pay the costs of doing so -- and it will still not be able to impose its
illiberal vision on the world.

In the background, meanwhile, democracy and the rule of law are still the hallmarks of modernity
and the global standard for legitimate governance. Although it is true that the spread of democracy
has stalled in recent years and that authoritarian China has performed well in the recent economic
crisis, there is little evidence that authoritarian states can become truly advanced societies without
moving in a liberal democratic direction. The legitimacy of one-party rule within China rests more on
the state's ability to deliver economic growth and full employment than on authoritarian -- let alone
communist -- political principles. Kishore Mahbubani, a Singaporean intellectual who has
championed China's rise, admits that "China cannot succeed in its goal of becoming a modern
developed society until it can take the leap and allow the Chinese people to choose their own
rulers." No one knows how far or fast democratic reforms will unfold in China, but a growing middle
class, business elites, and human rights groups will exert pressure for them. The Chinese government
certainly appears to worry about the long-term preservation of one-party rule, and in the wake of
the ongoing revolts against Arab authoritarian regimes, it has tried harder to prevent student
gatherings and control foreign journalists.

Outside China, democracy has become a near-universal ideal. As the economist Amartya Sen has
noted, "While democracy is not yet universally practiced, nor indeed universally accepted, in the
general climate of world opinion democratic governance has achieved the status of being taken to
be generally right." All the leading institutions of the global system enshrine democracy as the
proper and just form of governance -- and no competing political ideals even lurk on the sidelines.

The recent global economic downturn was the first great postwar economic upheaval that emerged
from the United States, raising doubts about an American-led world economy and Washington's
particular brand of economics. The doctrines of neoliberalism and market fundamentalism have
been discredited, particularly among the emerging economies. But liberal internationalism is not the
same as neoliberalism or market fundamentalism. The liberal internationalism that the United States
articulated in the 1940s entailed a more holistic set of ideas about markets, openness, and social
stability. It was an attempt to construct an open world economy and reconcile it with social welfare
and employment stability. Sustained domestic support for openness, postwar leaders knew, would
be possible only if countries also established social protections and regulations that safeguarded
economic stability.

Indeed, the notions of national security and economic security emerged together in the 1940s,
reflecting New Deal and World War II thinking about how liberal democracies would be rendered
safe and stable. The Atlantic Charter, announced by Roosevelt and Winston Churchill in 1941, and
the Bretton Woods agreements of 1944 were early efforts to articulate a vision of economic
openness and social stability. The United States would do well to try to reach back and rearticulate
this view. The world is not rejecting openness and markets; it is asking for a more expansive notion
of stability and economic security.

REASON FOR REASSURANCE

Rising powers will discover another reason to embrace the existing global rules and institutions:
doing so will reassure their neighbours as they grow more powerful. A stronger China will make
neighboring states potentially less secure, especially if it acts aggressively and exhibits revisionist
ambitions. Since this will trigger a balancing backlash, Beijing has incentives to signal restraint. It will
find ways to do so by participating in various regional and global institutions. If China hopes to
convince its neighbours that it has embarked on a "peaceful rise," it will need to become more
integrated into the international order.

China has already experienced a taste of such a backlash. Last year, its military made a series of
provocative moves -- including naval exercises -- in the South China Sea, actions taken to support the
government's claims to sovereign rights over contested islands and waters. Many of the countries
disputing China's claims joined with the United States at the Regional Forum of the Association of
Southeast Asian Nations (ASEAN) in July to reject Chinese bullying and reaffirm open access to Asia's
waters and respect for international law. In September, a Chinese fishing trawler operating near
islands administered by Japan in the East China Sea rammed into two Japanese coast guard ships.
After Japanese authorities detained the trawler's crew, China responded with what one Japanese
journalist described as a "diplomatic 'shock and awe' campaign," suspending ministerial-level
contacts, demanding an apology, detaining several Japanese workers in China, and instituting a de
facto ban on exports of rare-earth minerals to Japan. These actions -- seen as manifestations of a
more bellicose and aggressive foreign policy -- pushed ASEAN, Japan, and South Korea perceptibly
closer to the United States.

As China's economic and military power grow, its neighbours will only become more worried about
Chinese aggressiveness, and so Beijing will have reason to allay their fears. Of course, it might be
that some elites in China are not interested in practicing restraint. But to the extent that China is
interested in doing so, it will find itself needing to signal peaceful intentions -- redoubling its
participation in existing institutions, such as the ASEAN Regional Forum and the East Asia Summit, or
working with the other great powers in the region to build new ones. This is, of course, precisely
what the United States did in the decades after World War II. The country operated within layers of
regional and global economic, political, and security institutions and constructed new ones --
thereby making itself more predictable and approachable and reducing the incentives for other
states to undermine it by building countervailing coalitions.

More generally, given the emerging problems of the twenty-first century, there will be growing
incentives among all the great powers to embrace an open, rule-based international system. In a
world of rising economic and security interdependence, the costs of not following multilateral rules
and not forging cooperative ties go up. As the global economic system becomes more
interdependent, all states -- even large, powerful ones -- will find it harder to ensure prosperity on
their own.

Growing interdependence in the realm of security is also creating a demand for multilateral rules
and institutions. Both the established and the rising great powers are threatened less by mass
armies marching across borders than by transnational dangers, such as terrorism, climate change,
and pandemic disease. What goes on in one country -- radicalism, carbon emissions, or public health
failures -- can increasingly harm another country.

Intensifying economic and security interdependence are giving the United States and other powerful
countries reason to seek new and more extensive forms of multilateral cooperation. Even now, as
the United States engages China and other rising states, the agenda includes expanded cooperation
in areas such as clean energy, environmental protection, non-proliferation, and global economic
governance. The old and rising powers may disagree on how exactly this cooperation should
proceed, but they all have reasons to avoid a breakdown in the multilateral order itself. So they will
increasingly experiment with new and more extensive forms of liberal internationalism.
TIME FOR RENEWAL

Pronouncements of American decline miss the real transformation under way today. What is
occurring is not American decline but a dynamic process in which other states are catching up and
growing more connected. In an open and rule-based international order, this is what happens. If the
architects of the post war liberal order were alive to see today's system, they would think that their
vision had succeeded beyond their wildest dreams. Markets and democracy have spread. Societies
outside the West are trading and growing. The United States has more alliance partners today than
it did during the Cold War. Rival hegemonic states with revisionist and illiberal agendas have been
pushed off the global stage. It is difficult to read these world-historical developments as a story of
American decline and liberal unraveling.

In a way, however, the liberal international order has sown the seeds of its own discontent, since,
paradoxically, the challenges facing it now -- the rise of non-Western states and new transnational
threats -- are artifacts of its success. But the solutions to these problems -- integrating rising powers
and tackling problems cooperatively -- will lead the order's old guardians and new stakeholders to an
agenda of renewal. The coming divide in world politics will not be between the United States (and
the West) and the non-Western rising states. Rather, the struggle will be between those who want
to renew and expand today's system of multilateral governance arrangements and those who want
to move to a less cooperative order built on spheres of influence. These fault lines do not map onto
geography, nor do they split the West and the non-West. There are passionate champions of the UN,
the WTO, and a rule-based international order in Asia, and there are isolationist, protectionist, and
anti-internationalist factions in the West.

The liberal international order has succeeded over the decades because its rules and institutions
have not just enshrined open trade and free markets but also provided tools for governments to
manage economic and security interdependence. The agenda for the renewal of the liberal
international order should be driven by this same imperative: to reinforce the capacities of national
governments to govern and achieve their economic and security goals.

As the hegemonic organization of the liberal international order slowly gives way, more states will
have authority and status. But this will still be a world that the United States wants to inhabit. A
wider array of states will share the burdens of global economic and political governance, and with its
worldwide system of alliances, the United States will remain at the center of the global system.
Rising states do not just grow more powerful on the global stage; they grow more powerful within
their regions, and this creates its own set of worries and insecurities -- which is why states will
continue to look to Washington for security and partnership. In this new age of international order,
the United States will not be able to rule. But it can still lead.

United Nation
World Economic Situation And Prospects

Global economic recovery remains precarious – the projected rebound of 4.7 per cent will barely
offset 2020 losses

Global economic outlook

The World Economic Situation and Prospects (WESP) 2021 warns that the COVID-19 pandemic,
which has delivered a heavy blow to economic activities worldwide, may exert devastating long-run
socio-economic effects, unless global policy responses can ensure a robust and sustainable recovery.
Those actions should comprise smart investments in economic, societal and climate resilience,
revitalization of global trade, avoidance of premature austerity policies and addressing widening
inequalities.

In 2020, world output shrank by 4.3 per cent, over three times more than during the global financial
crisis of 2009. The modest recovery of 4.7 per cent, which is expected in 2021, would barely offset
the losses sustained in 2020. The pandemic hit the developed economies the hardest, with an
estimated output decline of 5.6 per cent in 2020, due to the strict and prolonged lockdown
measures that were imposed in many European countries and some parts of the United States
during the outbreak. The contraction was comparatively milder in the developing countries, with
output shrinking by 2.5 per cent in 2020. The aggregate figure masks, however, significant regional
variation (figure 1). East Asia registered positive, albeit low GDP growth in 2020, performing much
better than all other developing regions. In contrast, Latin America and the Caribbean and South
Asia experienced the sharpest declines in output. The least developed countries (LDCs) saw their
GDP contract by 1.3 per cent in 2020.

The pandemic unleashed a severe employment crisis worldwide. By April 2020, full or partial
lockdown measures had affected almost 2.7 billion workers, representing about 81 per cent of the
global workforce. Despite some improvement later in the year, unemployment rates in most
countries still remain well above pre-crisis levels (figure 2). Job and income losses have pushed an
estimated 131 million additional people into poverty in 2020, many of them women, children and
people from marginalized communities. Women have been hit particularly hard by the pandemic, as
they make up more than 50 per cent of the workforce in labour-intensive service sectors, such as
retail trade, hospitality and tourism, where working remotely is often not an option. In the United
States, the national poverty rate, for example, jumped from 9.3 per cent in June to 11.7 per cent in
November 2020, while the total wealth of 644 United States billionaires increased by 31.6 per from
$2.95 trillion to $3.88 trillion. The growing income and wealth inequalities - not only in the United
States but also in most regions of the world - will breed further discontent, fray social cohesion and
potentially undermine recovery efforts. Reining in inequality will remain critical for steering a
resilient post-crisis recovery.

The long-term consequences of the crisis will be equally severe. The pace of digitalization,
automation and robotization is set to accelerate, further depressing labour demand in the medium
term. While productivity will experience some growth in economic sectors embracing automation,
average productivity growth will likely falter. Declining investments in fixed capital, low average
productivity growth and lower labour-force participation rates are expected to weigh on potential
output going forward.

Massive and timely stimulus measures, amounting to US$12.7 trillion, prevented a total collapse of
the world economy and averted another Great Depression. However, stark disparities in the size of
the stimulus packages (figure 3) between developed and developing countries will put them on
different trajectories of recovery. The stimulus spending per capita by the developed countries has
been nearly 580 times higher than that of the least developed countries (LDCs), whereas the average
per capita income of the developed countries is only 30 times higher than that of the LDCs. Financing
these stimulus packages entailed the largest peacetime borrowing in history, increasing public debt
globally by 15 per cent. This massive rise in debt will unduly burden future generations unless a
significant part is channelled into productive and sustainable investment that stimulates economic
growth.

The fiscal measures have been complemented by unprecedented monetary responses. Since March
2020, 92 central banks have cut policy rates a total of 241 times. Many central banks implemented
additional monetary and prudential measures to boost liquidity and ensure financial stability. A
number of monetary authorities also announced changes in their monetary policy frameworks to
enhance policy flexibility and improve monetary transmission. As many as 30 central banks
worldwide are now engaged in direct asset purchases. The US Federal Reserve announced the
unlimited purchase of government-backed debt and also started to buy corporate bonds for the first
time, and so did the Bank of Japan. The European Central Bank is engaged in a €1.85 trillion
emergency bond-buying programme. As a result, balance sheets of the leading central banks in
developed countries swelled. Meanwhile, several developing country central banks have also started
their own asset purchase programmes. However, rather than stimulating productive investment, the
surge in global liquidity has contributed to the under-pricing of risk in financial markets, posing a
threat to longer-term financial stability.

The crisis has exposed and exacerbated the weaknesses that persist because of the lack of progress
in the implementation of the 2030 Agenda for Sustainable Development. A sustained recovery from
the pandemic will depend not only on the size of the stimulus measures, and the quick rollout of
vaccines, but also on the quality and efficacy of these measures to build resilience against future
shocks. The economic recovery from the crisis must go well beyond restoring GDP growth and
embrace improved living standards and prosperity and greater equality, including gender equality,
and the improved environmental and social sustainability of economic activities.

The path to recovery and progress on SDGs will critically hinge on the ability and political
commitment of countries to make sure that the crisis response builds resilience against future
economic, social and climatic shocks. There is no sustainable development without resilience and
there is no resilience without sustainable development. The imperatives of strengthening public
finance and debt sustainability, expanding social protection and building climate resilience must
inform policy choices to put the world firmly on the trajectory of sustainable development.

Emerging challenges facing global trade

The COVID-19 crisis has delivered a significant shock to trade, restricting cross-border travel,
disrupting international production networks and depressing demand worldwide. Global trade in
goods and services shrank by an estimated 7.6 per cent in 2020, a slightly smaller contraction than
during the global financial crisis. While international travel remains at a fraction of its pre-pandemic
level, global merchandise trade has been recovering since mid-2020 on the back of strong demand
for electric and electronic equipment, pharmaceuticals and, especially, personal protective
equipment. The recovery in merchandise trade has been led by China and other East Asian
economies, which were relatively successful in containing the spread of the virus and experienced a
faster-than-expected rebound in economic activities.

Beyond these short-term dynamics, the pandemic is likely to accelerate several structural shifts,
which are shaping the future of the global trade landscape. These include the rise of digital
technologies, the increasing significance of global trade in services, and the move towards more
resilient and flexible global value chains (GVCs). By redefining comparative advantages, the changing
international trade environment will have a profound impact on countries’ growth prospects and
their progress towards sustainable development. How global trade patterns and trade policies
evolve over the coming decade will be an important determinant of progress towards achievement
of all of the goals within the SDG framework.

The COVID-19 pandemic has exposed some of the critical challenges faced by the multilateral trading
system as countries around the world initially resorted to unilateral trade measures to protect
domestic interests. But the crisis can also serve as a catalyst for restoring confidence in the
multilateral trading system and generate positive momentum for WTO reform, as the pandemic has
underscored that in times of crisis, keeping trade flowing and limiting protectionist and nationalist
measures are vital to ensuring the safety of lives and livelihoods.

Developed Economies

Northern America: despite rebound in economic activities, continued fiscal support is needed In the
United States, the economy came to a standstill in mid-March owing to lockdown measures taken to
combat the COVID-19 pandemic; and the unemployment rate jumped to 14.7 per cent in April from
3.5 per cent in February. The Government, supported by the Federal Reserve, promptly responded
with unprecedented stimulus packages, whose cumulative size totalled 12 per cent of GDP by the
end of October, expanding income transfers to households and providing emergency loans to
businesses. During the third quarter of 2020, the economy rebounded as lockdown measures were
relaxed, with the consumption of goods and residential investments exceeded the pre-crisis level,
and unemployment subsiding. However, the mid-year rebound fell short of the pre-crisis levels of
both consumption of services and corporate investments. The fragile recovery could easily be
reversed if fiscal support measures, including income transfers and loan guarantees, remain
inadequate. Following a 3.9 per cent contraction in 2020, the United States economy is forecast to
grow by 3.4 per cent in 2021 and 2.7 per cent in 2022.

In Canada, the economy is estimated to have contracted by 5.6 per cent in 2020 and is forecast to
grow by 3.8 per cent in 2021. To alleviate the economic impact of the COVID-19 outbreak, an
unprecedented fiscal stimulus package amounting to 16 per cent of GDP (included income support,
loan guarantees and liquidity assistance) was implemented.

Europe: fallout from the pandemic is compressing economic activities

Europe has been experiencing an economic crisis of historic proportions as a consequence of the
pandemic. A large number of countries implemented widespread and rigorous lockdown measures
in 2020 in order to contain the spread of the pandemic. This led to a virtual standstill in large parts of
the economy. Businesses—especially small businesses with fewer financial reserves—were thrown
into a liquidity crisis. After a respite during the summer and signs of economic revival, many
countries, including France, Germany, Italy and the United Kingdom, reintroduced various lockdown
measures in the fourth quarter In response to the crisis, the countries enacted significant fiscal
policy measures, including, among others, wage support schemes, liquidity assistance and tax
deferrals, with the size of those measures depending on the individual country’s fiscal position.

In addition, the European Union has activated the escape clause of the Stability and Growth Pact
(SGP), which normally limits national fiscal deficits and public debt, loosened State-aid rules, and
agreed for the first time on joint debt issuance to finance a €750 billion recovery plan. In March
2020, the European Central Bank (ECB) initiated a pandemic emergency purchase programme (PEPP)
that subsequently reached a total volume of 1,850 billion euros. Following an estimated economic
contraction of 7.8 per cent in 2020 (for EU-27), Europe is projected to return to positive growth of
5.2 per cent in 2021 and 2.6 per cent in 2022.

Developed Asia: linkage with developing East Asia holds the key to post-crisis recovery

Developed Asia (Japan, Australia and New Zealand) experienced an unprecedented plunge in the
level of its economic activities in 2020, especially in the second quarter. In Japan, despite the roll-out
of an unprecedented stimulus package, including income transfers and employment subsidies, real
GDP collapsed in the second quarter. The third-quarter rebound was weak as households remained
cautious; and residential and corporate investments stayed subdued despite easing financing
conditions. The unemployment rate gradually rose to 3.0 per cent in September from 2.4 per cent in
January. The fragile employment situation reflects weak prospects for corporate profits and wage
growth; and domestic demand growth is projected to be mild. While the countries of developed Asia
could afford the unprecedented fiscal stimulus packages, it is the revival of their external demand —
particularly from developing East Asia and notably from China — that will make recovery solid and
sustainable. East Asia is integrated in global supply chains with Japan; is Australia’s largest
commodity export destination, and an important market for New Zealand’s tourism sector. Among
the developed Asia countries, Japan’s GDP is estimated to have contracted by 5.4 per cent in 2020
and is forecast to grow by 3.0 per cent in 2021.

Economies in transition

Commonwealth of Independent States (CIS) and Georgia: lower commodity prices compound the
challenges. The outbreak of the COVID-19 pandemic has unleashed multiple shocks in the
Commonwealth of Independent States (CIS) and Georgia. The disruptive effect of the lockdowns and
quarantine measures was further compounded by lower commodity prices, including for important
non-oil commodities exported by the CIS countries, and disruptions in labour migration and
remittances.

The magnitude of those declines has depended on a country’s economic structure and its capacity to
adopt offsetting measures, which was larger for energy-exporting countries, some of which tapped
their sovereign wealth funds. Kazakhstan, in particular, implemented a stimulus package equivalent
to around 9 per cent of its GDP. In the Russian Federation, by contrast, the fiscal response was more
modest and funded by domestic borrowing. The economic outlook for the region is uncertain, with
downside risks predominating. A possible deterioration of asset quality and high levels of
dollarization in the banking sector in many countries would constrain lending and increase risks.
Geopolitical and social tensions in the region have mounted. The aggregate GDP of CIS and Georgia
is estimated to have shrunk by 3.4 per cent in 2020. Only a modest recovery is expected, with
growth of 3.4 per cent in 2021 and 3 per cent in 2022.

South-Eastern Europe: higher unemployment and negative fallout from trade linkages

In South-Eastern Europe, the crisis has led to an increase in unemployment from already high levels.
The fallout of the pandemic in the European Union, the main destination for the region’s exports
and a source of investments and remittances, has depressed external demand and reduced incomes,
while supply chain disruptions have dampened manufacturing production. The effects have varied
across the region, depending on policy space and the level of dependency on tourism. The aggregate
GDP of South-Eastern Europe, is expected to have declined by 3.8 per cent in 2020. The region is
projected to see a moderate recovery with growth of 4 per cent in 2021 and 3.1 per cent in 2022.

Developing economies

Africa: economic downturn is undermining development prospects

Africa has experienced an unprecedented economic downturn with major adverse impacts on the
region’s long-term development prospects. Domestic lockdowns required to control the pandemic,
lower external demand, the collapse of tourism and lower remittances have caused severe economic
disruptions. Although many Governments in Africa have taken quick action to counter the spread of
the pandemic, most are severely hampered by a lack of the resources needed to support health
systems, protect vulnerable population groups and support the recovery. Given its magnitude and
unequal effects across population groups, the current crisis is causing a rise in unemployment,
poverty and inequality, which threatens to wipe out the development gains of recent decades. In
addition, more difficult financing conditions and rising public debt are exposing many African
countries to debt distress. The continent is forecast to see a modest recovery in 2021, but this
depends on the relaxation of lockdown constraints and an improvement in international trade and
commodity markets. After a contraction of 3.4 per cent in 2020 — the first in 27 years and the
largest on record — Africa is projected to achieve a modest recovery, with regional GDP expanding
by 3.4 per cent in 2021 and 3.6 per cent in 2022.

East Asia: rebound in growth expected, following weakest expansion in more than two decades

East Asia saw a sharp deceleration in economic growth in 2020, with the region recording the
weakest expansion since the Asian financial crisis. Measures designed to contain domestic
outbreaks, including widespread restrictions on mobility and enforced business closures,
significantly curtailed household spending and investment activities. Early lockdown measures
managed to quickly contain the spread of COVID-19 in China, which paved the way for a relatively
quick economic recovery starting from the second quarter of 2020 — China is only major economy in
the world that registered positive growth in 2020. The region’s investment prospects have been
further dampened by heightened uncertainties and risk aversion. Large policy stimulus measures,
including infrastructure investment in China, helped to offset some of these negative effects by
providing support to domestic demand. However, considerable negative fallout also came from the
external front, with export volumes contracting owing to supply chain disruptions and weakened
global economic activities. In many parts of the region, the pandemic has caused significant setbacks
to social and economic development, with a disproportionate impact on the vulnerable segments of
society. The region will see a recovery in 2021, but this will be from a low base and with great
uncertainty stemming from the potential for renewed lockdown measures. After growing by an,
estimated 1 per cent in 2020, East Asia’s GDP is projected to expand by 6.4 per cent in 2021 and 5.2
per cent in 2022.

South Asia: progress on many SDGs has been reversed

The pandemic and the global economic crisis have left deep marks on South Asia, turning this former
growth champion into the worst performing region in 2020. All economies in the region have been
hit by the crisis, whose impact has been amplified and accelerated by existing vulnerabilities. These
vulnerabilities were aggravated by the already weak progress on achieving the SDGs and, notably, by
the weakness of the region’s public health infrastructure, with low levels of public health
expenditure and few physicians, nurses, midwives and hospital beds per capita. At the same time,
poorly organized labour markets and the absence of a reliable social safety net have prevented
Governments from implementing the effective restrictions needed to contain the spread of the
pandemic, while fiscal constraints and limited economic diversification restricted Governments’
manoeuvring space. As a result, the crisis has devastated livelihoods across the region, reversing
many years of progress on achieving the SDGs. GDP per capita fell by nearly 10 per cent in 2020,
while poverty is rising sharply, and existing inequalities are widening. Women, children, slum
dwellers, migrant workers and the elderly have been hit hardest by the crisis. South Asia’s aggregate
GDP is estimated to have contracted by 8.6 per cent in 2020; growth in the region is forecast to
rebound to 6.9 per cent in 2021, before moderating to 5.3 per cent in 2022.

Western Asia: confronting the challenges of subdued energy prices and low tourism revenues

In Western Asia, the pandemic and the subsequent mitigation measures weighed heavily on
economic activities across the region. The pandemic’s impact was felt most acutely in the region’s
high-performing tourism sector, negatively affecting accommodation, transport, and wholesale and
retail trade services. At the same time, weak energy market conditions stifled revenues for
commodity exporters, putting additional constraints on fiscal policy options. Economic recovery in
the region will depend on global energy demand, international tourism and the extent of the
recovery of domestic demand on the back of fiscal support measures. On average, Western Asia’s
GDP is estimated to have contracted by 4.8 per cent in 2020. A slow recovery with growth of 3.8 per
cent is expected in 2021, followed by 3.4 per cent growth in 2022.

Latin America and the Caribbean: facing a fragile and uneven recovery from a deep recession

The COVID-19 pandemic has ravaged countries in Latin America and the Caribbean, exacting a heavy
human toll and causing an economic contraction of historic proportions. Prolonged national
lockdowns, weaker merchandise exports and a collapse in tourism undermined economic activities
at a time when many countries were already struggling with severe economic, social and political
difficulties. Massive job and income losses have pushed millions of people into poverty, wiping out
all progress made over the past 15 years. The crisis has caused further setbacks to the achievement
of the SDGs by exacerbating deep-rooted structural inequalities, for example, between formal and
informal workers, and between women and men. Monetary and fiscal support measures have
provided a lifeline to households and businesses. Although many countries entered the pandemic
with sizeable fiscal deficits and high public debt levels, Governments have deployed considerable
resources to combat the health and economic crisis. Continued fiscal support remains critical to
buttress economic recovery and reduce the long-term damage from the crisis. However, the region’s
recovery will likely remain uneven and fragile, with significant political risks and the possibility of a
debt crisis looming in several countries. After an 8 per cent contraction in 2020, regional GDP is
forecast to grow by 3.8 per cent in 2021 and 2.6 per cent in 2022.

The Future Of Globalization

The spread and acceptance of globalization has been an unrelenting force, but its march forward has
lost some steam in recent years—is this the beginning of a new trend towards an outright
contraction in globalization or merely a temporary deceleration?

It can be said that the broader trends of globalization remain in place and will continue to move
forward as the benefits are widespread and far-reaching.

The Rise Of Hyper-Globalization

Globalization gained acceptance and became more prominent following the 1970s. The economic
landscape quickly shifted towards free and liberalized international markets for goods, labor and
financial capital.

A more global economy became a logical way for businesses to grow and establish additional
economies of scale while tapping into new labor markets and eventually a new customer base.

Countries were swift in adopting new trading partners while lowering trade barriers and liberalizing
their domestic markets. Supply chains became increasingly complex as first-world multinationals
began to shift their manufacturing bases overseas. Several Asian countries became leaders among
their peers and exported their way to "tiger economy" status while global financial hubs developed
across the United States, Europe and Asia.

Global trade volumes steadily marched upwards before hitting

a peak and flatlining after the 2008 crisis (Figure 1).

One nation’s meteoric rise in power was fuelled by global trade:

China. The world’s most populous nation opened its labor market
to Western multinationals in the 1980s and eventually joined the
World Trade Organization in 2001. China became the fastest-
growing economy of the early millennium and its share of global
exports overtook many advanced economies (Figure 2).

The United States and many other developed nations benefited from globalization on numerous
fronts, but none was more obvious than the ability to leverage lower labor costs. Large, investment
grade multinationals quickly saw their labor costs fall while their profit margins increase thus
boosting equity valuations and enterprise value. Falling labor costs also heavily contributed to
secular disinflation across the West, which persists to this day and is a positive for consumers’
disposable income.

The Fall Of Hyper-Globalization

The financial crisis of 2008 (a globally systemic crisis) exacerbated by the intricate links between not
only financial sectors but also countries, took some of the wind out of globalization’s sails. Perhaps
globalization took a backseat as the world experienced a contraction in growth, consumers
deleveraging and an environment where fiscal austerity became a focus—shining a light on the
widening inequality within the advanced economies.

Globalization then faced a stronger pushback from both the left and right sides of the political aisle
within the United States as some global trading partners could be perceived as a competitive threat.
This perhaps culminated in President Trump’s "America first" policy—which notably took aim at the
emergence of China. Across the Atlantic, the UK’s "Brexit" vote affirmed similar sentiment.

We’re Shifting Toward Widespread ‘Regionalization’, Not ‘Isolationism’

The end of hyper-globalization does not imply a retreat into global isolationism. Instead we believe a
more likely scenario is that the world will cluster more strongly into regions around so-called
‘spheres of influence’ based upon economic and geopolitical ties.

The European Union is perhaps the largest example of a

multilateral regional bloc, with Germany and France at its
forefront. Future regional clustering is likely to occur
around the United States and its emerging geopolitical
and economic rival, China. Many countries are aligning
with one, or the other, while others attempt to play a
careful balancing act (Figure 3).

For example, the United States has (through the USMCA trade pact) strengthened its economic ties
to Mexico and Canada. The USMCA includes requirements for localized production and also grants
the United States with the ability to veto any free trade agreements between either Mexico or
Canada with China.

China, meanwhile, has been busy with its "Belt and Road" initiative, a large-scale infrastructure plan
designed to open up and establish improved trade routes across Asia, Eastern Europe, Africa and
Latin America. There is, however, one initiative, the Trans-Pacific Partnership, that is a counter-
attempt by certain (largely Asian) nations to form a cohesive economic bloc outside of China’s
influence.

Multi-national corporations are underway in shifting towards more localized production and some
are shifting production out of China to its neighboring nations. This will likely unfold in a staggered
process with some industries taking longer than others to effect the transition. China’s current status
as "workshop of the world" is a result of decades of investment and government support aimed
towards building huge industrial parks, training workforces and strengthening connections between
massive ports and modern logistical networks that would likely take many years to replicate
elsewhere.

Corporations operating in the United States may find that re-localizing production may not be
straightforward. Government assistance may be needed to subsidize the increased cost of domestic
production. This could come in multiple forms, some being direct tax credits or tax incentives, and
preferential treatment for domestic producers to help gain a competitive advantage.

Consider The Winners And Losers

Globally, we believe South Korea, Poland and Malaysia are likely the winners should the effort to
diversify away from China persist. Mexico and India would also stand to gain from this shift on a
longer-term basis.

In the United States and other more advanced economies, the winners should be the sectors that
directly compete with Chinese exports; the sectors that have inelastic enough demand to pass thru
higher labor costs to its consumers. However, the areas or sectors of the economy where the
demand for goods are more elastic to price changes are less likely to have the ability to pass the
increased cost on to consumers and thus will face margin compression.

Localizing production within a developed nation should mean upward pressure on prices given rising
input costs, which has the ultimate effect of eroding disposable income. This effect could be partly
offset with higher domestic wages given the expected increase in demand for domestic workers.
How these forces ultimately play out will likely vary by location and sector.

Some sectors of the economy may be able to dampen the effect of higher labor costs through
increases in productivity such as automation. This could be a boon for business investment and
productivity growth but will likely vary by sector.

The World Economy since the end of Cold War

Three global transformations were well under way as we entered the 1990s.

First, the reforms in the Soviet Union and Eastern Europe

• Second, the salience of security issues decline sharply; economics move much closer to the
top of the global agenda
• Third, the world economy complete its evolution from the American-dominated regime of
the first postwar generation to a state of U.S.-European-Japanese "tripolarity."

International relations will look very different by 2000 as a result of these transformations. The
hierarchy of nations will shift considerably. The Big Three of economics will supplant the Big Two of
nuclear competition as the powers that will shape much of the 21st century.

The United States is the only superpower in both military and economic terms. It alone will remain in
the top rank as the nature of world affairs changes. Indeed America may soon be the only military
superpower. Such status, however, will be of decreased utility as global military tensions are
substantially reduced and international competition becomes largely economic.

Moreover the United States is in relative economic decline, caught in a scissors movement between
increasing dependence on external economic forces and a shrinking capacity to influence those
forces. The United States has become the world's largest debtor country and will continue to rely on
capital inflows of over $100 billion per year to finance its external deficits for the foreseeable future.

By contrast the American share of world output has been declined. A central question for the world
of the is whether the new international framework will produce conflict over economic issues or a
healthy combination of competition and cooperation. History suggests that there is considerable risk
of conflict, which may even spill over from the economic sphere to create or intensify political
rivalries. Such a pattern contributed to the breakdown of global order prior to 1914 and again in the
interwar period.
The world must adjust to this fundamental shift in economic relationships among its major countries
as security arrangements change. Ironically, the end of the Cold War could sharply heighten the
prospect of a trade war.

This risk of economic conflict is already acute. Japanese politician Shintaro Ishihara has predicted
that "the 21st century will be a century of economic warfare." Such conflict has already surface
between the United States and China and taking the form of geopolitical rivalry.

Finally, America's confidence in its international economic position has been shaken. Trade "hawks"
have argued, with some success, that the reduction in the security imperative now opens the way
for unilateral actions to promote U.S. trade interests. And it is true that the United States can now
afford to be less solicitous of its allies-American leverage is enhanced, to an extent, by the declining
need to place overriding priority on political cohesion and thus to mute its economic demands.

The World Trade Organization

Overview
The World Trade Organization (WTO) was established on January 1, 1995, following the ratification
of the Uruguay Round Agreements, and today includes 164 members. It succeeded the 1947 General
Agreement on Tariffs and Trade (GATT), created as part of the post-WWII effort to build a stable,
open international trading system.

The WTO has three basic functions:

(1) administering existing agreements;
(2) serving as a negotiating forum for new trade liberalization and rules; and
(3) providing a mechanism to settle disputes.

The multiple WTO agreements cover trade in goods, services, and agriculture; remove tariff and
nontariff barriers; and establish rules on government practices that directly relate to trade—for
example, trade remedies, technical barriers to trade (TBT), intellectual property rights (IPR), and
government procurement.

The agreements are based on the principles of:

1. Non-discrimination among countries—most favoured nation (MFN) treatment,
2. national treatment,
3. fair competition,
4. and transparency of trade rules and regulations.

Some exceptions, such as preferential treatment for developing countries and regional and
bilateral trade agreements outside the WTO, are allowed.

The GATT/WTO system over time has led to a significant reduction of trade barriers, supported
trade expansion and economic growth, and helped manage trade frictions.
At the same time, the WTO faces serious challenges. One fundamental concern is that the WTO
could lose relevance due to its inability to adapt to the modern global economy by its members’
failure to negotiate a successful round of major trade liberalization since 1994. Several members
have proposed reforms to the institution in attempts to safeguard and improve it.
The Doha Round The Doha Development Agenda, the latest “round” of multilateral trade
negotiations, was launched in 2001 but ended in stalemate, with no clear path forward. The
WTO’s large and diverse membership and the “single undertaking” approach made consensus on
the broad Doha mandate difficult.

The negotiations were characterized by persistent differences among the United States, European
Union (EU), and developing countries on major issues, such as agriculture, industrial tariffs and
nontariff barriers, services, and trade remedies.
Developing countries sought the reduction of agriculture tariffs and subsidies by developed
countries, nonreciprocal market access for manufacturing sectors, and protection for services
industries.
In contrast, developed countries sought reciprocal trade liberalization, especially commercially
meaningful access to advanced developing countries’ industrial and services sectors, while
retaining some protection for their own agricultural sectors. Agriculture, where multilateral
solutions arguably remain ideal, remains among the thorniest issues on the agenda left over from
Doha.
In 2015, members agreed to limited deals, including on phasing out export subsidies, minimizing
impacts of food aid on local markets, and several measures for least developed countries. The
lasting legacy of Doha may be the successful negotiation of the Trade Facilitation Agreement
(TFA), which entered into force in early 2017 and aims to remove customs obstacles and
inefficiencies at the border
In 2015, WTO members failed to reaffirm Doha’s mandates and many observers considered the
round to be effectively over. At the most recent WTO Ministerial Conference in 2017, no major
deliverables were announced, leaving the stakes high for the next meeting. In 2020, members were
forced to postpone the 12th Ministerial (MC12) to 2021 due to the Coronavirus Disease 2019
(COVID-19) pandemic.
MC12 was widely anticipated as an action-forcing event for the WTO. Members have committed
to make significant progress on ongoing talks, including on fisheries subsidies, and advancing e-
commerce and other areas.

Plurilateral Initiatives While multilateral efforts have progressed slowly, several plurilateral talks are
underway within and around the WTO.

• Government Procurement Agreement (GPA). The GPA provides market access for various
nondefense government projects to its signatories. In force since April 2014, the revised GPA
expanded market access and covered entities, and currently has 48 members.

• Information Technology Agreement (ITA). A subset of members agreed in 2015 to expand product
coverage for tariff-free treatment in the 1996 ITA. The expansion is to eliminate tariffs over seven
years on 201 additional goods, applied on a MFN basis to all WTO members

Other plurilateral are currently stalled, related to services and environmental goods. Some raise
concerns that plurilateral approaches, while useful, could potentially marginalize non-participating
countries or allow for free riders who benefit from others’ commitments.
Ongoing Challenges
Since the Doha Round, intractable issues and active debate have characterized the WTO.
Many members and observers concur that the WTO must adopt reforms to remain an effective
institution, in terms of its negotiating, monitoring, and dispute settlement (DS) functions. Some
members have also called on the WTO to address the trade policy challenges that emerged from
COVID-19.

In addition, since 1995, new trade barriers, technology advances, and other issues have emerged.
Developed countries have sought to incorporate issues on the agenda, such as digital trade and
state-owned enterprises that pose challenges to the trading system.

Some, including the United States, point to plurilateral as the way forward to address new issues.
More broadly, U.S. trade officials contend that WTO rules were not designed to effectively handle
the challenges of emerging markets like China that are not fully-fledged market economies. To this
end, U.S.-EU-Japan discussions aim to strengthen rules on subsidies and issues raised by non-
market economies where the state plays a major role.

COVID-19 AND COVID

WTO members face challenges in responding to the global trade and economic slowdown from
COVID19. The pandemic has tested cooperation and coordination in global trade policies, disrupted
global supply chains, and resulted in trade protectionism. The WTO has committed to work to
minimize disruptions to trade, and encouraged WTO members to notify new trade measures. At the
same time, many countries have reaffirmed the trading system, lifted temporary restrictions, and
view the WTO as playing an important role in tackling trade policy challenges that have emerged.
Some members have advocated for a plurilateral agreement on medical goods. Delay in production
and distribution of COVID-19 vaccines has led to calls by some developing countries to waive IPR
on vaccines or to seek to issue compulsory licenses for them.

WTO REFORMS

The US indicated interest in reform of the WTO, including in:

(1) addressing “unanticipated challenges of non-market economies”;

(2) ensuring respect in DS rulings for members’ “sovereign policy choices”;

(3) compelling members to adhere to WTO notification obligations; and

(4) reassessing “developing country status” that grants some members flexibilities in WTO
commitments.

Dispute Settlement. To supporters, the DS system is considered a WTO success. The United States
has been an active user of the system. The Trump Administration voiced major concerns with DS,
including what it considers “judicial overreach” in panel decisions, To spur reform, the
Administration blocked appointment of new jurists to the seven-member Appellate Body (AB), which
reviews appeals of dispute cases. As a result, the AB ceased to function in December 2019.

While the EU and others have proposed reforms to address U.S. concerns, thus far, they have been
rejected by the United States. A key question is the impact of the AB’s absence on the effective
enforcement of WTO rules moving forward. Unilateral Enforcement Actions. Many observers are
also concerned that recent U.S. tariffs and counter-tariffs by other countries, as well as escalating
trade disputes are further straining the WTO. Several related WTO disputes are pending DS
decisions. In one involving U.S. tariffs on China, a panel ruled against the United States. Observers
express concern that unilateral tariffs, some pursued in the name of national or economic security,
may undermine the credibility of the WTO and its key rules and principles, and lead to new trade
restrictions. While WTO agreements offer ample flexibility for temporary measures justified by
national security or health crises, the spread of export restrictions following COVID-19 amplified
such concerns.

What’s Next for the WTO?

In the wake of highly protectionist environment since corona crisis, and with major negotiations
stalled, the future of global trade rules is in doubt.

The Trump administration harshly criticized the WTO, claiming it failed to curb China’s alleged unfair
trade practices. President Biden says he will renew the U.S. commitment to the body.

As major WTO negotiations have stalled in recent years, many countries have turned to bilateral or
plurilateral trade agreements.

The World Trade Organization (WTO) is the principal forum for setting the rules of international
trade. In its two and a half decades, it has helped reduce barriers to trade of both goods and services
and created a dispute resolution system that supporters say reduced the threat of trade wars.

However, the institution is under considerable pressure. Negotiations on a comprehensive

development agenda have foundered due to disagreements over agricultural subsidies and
intellectual property rights, while members have increasingly turned to separate bilateral and
regional free trade agreements to advance their trade interests. More recently, the COVID-19
pandemic has caused a sharp decline in international trade and created uncertainty about the future
of global supply chains.

Former U.S. President Donald J. Trump criticized the WTO for what he saw as its weakness in
confronting China’s trade abuses and constraints on U.S. sovereignty. His administration
intentionally crippled the organization’s appeals body. President Joe Biden has signaled that he will
take a less combative approach to reforming the WTO, though there are concerns about the trade
body on both sides of the aisle.

The WTO is responsible for overseeing the rules of international trade. It facilitates trade
negotiations among its 164 members, up from 123 in 1994. The organization also monitors the
implementation of trade agreements, produces research on global trade and economic policy, and
serves as a forum for settling trade disputes between countries.

Established in 1995 and based in Geneva, Switzerland, the WTO is the successor to the General
Agreement on Tariffs and Trade (GATT), a group founded in 1948 whose rules created the modern
multilateral trading system. WTO decision-making happens at the Ministerial Conference, generally
held every two years. There have been eleven such meetings since the inaugural conference in
Singapore in 1996; the twelfth was scheduled to take place in June 2020 in Kazakhstan, but has been
postponed due to the pandemic. With a few exceptions, agreements reached at these conferences
are made by consensus, meaning that all members must agree, and decisions are binding. WTO rules
are enforced by individual members, who can impose retaliatory trade sanctions on states that
break them.

While the specifics of the WTO’s trade rules are hashed out in negotiations, the organization is based
on several founding principles. The most basic is a commitment to openness, meaning reducing
tariffs as well as limiting quotas, subsidies, and other barriers to trade. Another central plank is non-
discrimination, in which WTO members must treat trade with all other members equally. The WTO
also seeks transparency and predictability in trade-related regulations and promotes international
standards to give citizens, companies, and investors stability. Additionally, the organization is
committed, in principle, to giving less-developed countries greater flexibility and accommodations to
help them adjust to new rules.

The WTO director general is the organization’s administrative head, overseeing the WTO secretariat
and its roughly seven hundred staff. While the director general helps set the tone and direction of
the organization, the office “traditionally has wielded little power over matters of policy” because of
the WTO’s consensus process, writes CFR’s Jennifer Hillman.

In February 2021, WTO members confirmed Ngozi Okonjo-Iweala of Nigeria as director general
following a protracted selection process. She is the first woman and first African to lead the
organization. While the majority of WTO members backed Okonjo-Iweala, the Trump administration
threw its support behind South Korean candidate Yoo Myung-hee, blocking a consensus pick. After
Trump left office, Yoo withdrew from the race for director general, and the Biden administration
announced its support for Okonjo-Iweala.

How does the WTO deal with conflicts?

The WTO’s trade dispute mechanism has been used extensively over the past two decades, helping
to avoid unilateral responses to disputes and potential trade wars. Since 1995, members have filed
more than five hundred disputes with the WTO. Most of these are settled in consultations or by
agreement before advancing to litigation.

Upon joining, all members agree to a dispute settlement mechanism, in which WTO-appointed trade
experts can render binding judgments. When one member files a complaint against another, the
countries must first attempt to resolve the issue through consultation, and only if that fails is a panel
chosen by the WTO’s Dispute Settlement Body to hear the case. A panel’s recommendations, if not
overturned on appeal, must be implemented by the offending country. If the country fails to
respond, the plaintiff can then take targeted retaliatory measures, such as blocking imports or
raising tariffs.

President Trump denounced China’s trade practices, and his administration’s 2018 report on trade
with China maintained that the WTO is incapable of dealing with the problem. So, Trump
sidestepped the WTO system. He applied tariffs targeting overproduction of steel and aluminum by
China and other countries based on a little-used national security law, and took further measures to
retaliate against China, imposing tariffs on hundreds of billions of dollars worth of Chinese goods.
Edward Alden called Trump’s willingness to bypass the WTO the death of the institution.

The appeals system is now at a breaking point after years of U.S. pressure. The Obama
administration drew criticism from many members for a May 2016 decision to block the
reappointment of a South Korean judge to the WTO’s Appellate Body, the first time any country
blocked the appointment of another country’s judge. Trump continued to block new appointments,
and on December 10, 2019, the Appellate Body became unable to hear appeals since the terms of
two more judges expired and the number of active judges fell to one. Seven judges normally serve
on the body and a minimum of three is required to review new appeals. The Biden administration
has so far maintained the block on new appointments, citing the presidential transition.

The United States had long expressed dissatisfaction with the functioning of Appellate Body.
Lighthizer wrote in Foreign Affairs. For Trump, the hope was that by crippling the body, Washington
would be able to directly challenge Beijing and others allegedly engaged in unfair trade practices.

What is the Doha Development Agenda?

At the 2001 ministerial conference in Doha, Qatar, WTO members agreed to a new round of
negotiations that promised to put developing countries at the center. This became known as the
Doha Development Agenda, or the Doha Round.

Liberalizing global agricultural trade was the linchpin of the agenda. Many of the world’s poorest
nations depend on exporting basic agricultural products but struggle to compete against richer
nations that support their farmers with subsidies. The Organization for Economic Cooperation and
Development (OECD) estimates that these subsidies total nearly $300 billion annually. Analysts say
that agricultural lobbies in the United States, Europe, and Japan have consistently exercised their
considerable political clout to convince lawmakers to maintain such subsidies.

Liberalizing global agricultural trade was the linchpin of the Doha development agenda.

The Doha agenda also sought to further reduce barriers to trade in services, such as business and
finance, and nonagricultural goods. However, by 2008, negotiations collapsed due to disagreement
over agricultural subsidies and a proposed “special safeguard mechanism,” which would allow
developing countries to temporarily raise tariffs to protect their farmers.

What is the status of the Doha Round?

Negotiations continued after the 2008 global financial crisis with low expectations. But the 2013
ministerial in Bali, Indonesia, delivered a significant achievement: the first multilateral agreement
since the creation of the WTO. This was the Trade Facilitation Agreement (TFA), which aims to speed
up customs procedures and make trade easier, faster, and cheaper. The WTO estimated in 2015
[PDF] that this could increase global trade by some $1 trillion. The talks also reached an interim
agreement on “public stockholding,” continuing exceptions that allow developing countries to
stockpile agricultural products to protect against food shortages.

The TFA was only a small slice of the larger Doha agenda, but the successful deal was a cause for
optimism: former Director General Roberto Azevedo proclaimed that the WTO was “back in
business.” In Nairobi in 2015, members made progress on a number of issues, including the phasing
out of agriculture export subsidies and an agreement among some members to cut tariffs on
information technology (IT) products.

However, for many observers, Nairobi signaled the end of the Doha talks, a sentiment that
intensified after the 2016 election of Trump. At the 2017 ministerial in Buenos Aires, members failed
to find any agreement, with India blocking an attempt to reduce fishing subsidies. With members
unable to agree even on a final statement, EU Trade Commissioner Cecilia Malmstrom labeled the
meeting a failure, while Lighthizer called for a “fresh start.”
What are the criticisms of the WTO?

Criticisms of the organization vary. Farmers and labor groups accuse the WTO of focusing too
narrowly on corporate interests, environmentalists worry about deregulation, and U.S. policymakers
allege that the institution has failed to handle Chinese abuses. The primary concerns include:

Intellectual property. The WTO’s intellectual property agreement, Trade-Related Aspects of

Intellectual Property Rights (TRIPS), draws criticism from experts who have argued that WTO rules
on drug patents have limited access to medicines in poorer countries. The WTO says that enforcing
patent protections is central to expanding global trade. A group of emerging economies, led by India
and South Africa, have proposed TRIPS waivers for COVID-19 vaccines and treatments, but the move
is opposed by some wealthier countries, including the United States.

Sovereignty and regulation. Other critics say WTO rules overrule national sovereignty, and in doing
so erode environmental and labor protections. Environmental groups have criticized WTO decisions
on genetically modified foods, as well as recent rulings against what the WTO considers
discriminatory environmental labeling, as in the case of U.S. dolphin-safe labeling. Labor unions in
the United States argue that the WTO is inadequate for protecting U.S. wages from being undercut
by unfair labor practices abroad, alleging, for instance, that China violates basic workers’ rights to
lower the cost of its exports. Developing countries counter that attempts to address labor standards
at the WTO are a form of protectionism in disguise.

Trump was a vociferous critic of Chinese state-led development policy.

Import competition. Some economists argue that by promoting imports and encouraging firms to
move their operations abroad, WTO-led tariff reductions hurt U.S. jobs and wages. The Economic
Policy Institute’s Robert E. Scott and Will Kimball estimated in 2014 that China’s entrance into the
WTO in 2001 led to the loss of more than three million U.S. jobs, as U.S. firms were forced to
compete with China’s much cheaper imports. Other estimates find [PDF] a smaller but still
substantial loss of around two million jobs, though some experts contend that technological
changes, not China, were responsible for those losses. Trade proponents including Dartmouth
College economist Douglas Irwin say that increased trade with China benefited the U.S. economy by
lowering prices, increasing productivity, and expanding exports. Some analysts claim that most of
the consumer benefits that came with China’s accession went to poor and middle-class Americans.

Response to China. Trump was a vociferous critic of Chinese state-led development policy, arguing
that while the United States has adhered to global trade rules, other countries—primarily China—
have gained an advantage by ignoring them. CFR’s Alden says that Washington and its allies “did too
little for too long,” failing to confront China’s abuses at the WTO. Biden has also called for an
“aggressive” response to Chinese trade practices, but has also pledged to take a more multilateral
approach by working with traditional U.S. allies including the European Union and Japan.

What are the alternatives to the WTO system?

Even with Doha stalled, WTO talks have continued through what are known as plurilateral
negotiations, or agreements among subsets of WTO members. Plurilateral deals are easier to
negotiate, as they are narrower in focus and not all members are bound by their terms.

At the 2015 Nairobi talks, for instance, fifty-three WTO members concluded an expansion of the
Information Technology Agreement, or ITA, which reduces trade tariffs on a raft of IT products. The
agreement means that more than 97 percent of all global IT trade is now covered by WTO rules. A
major plurilateral agreement in progress is the Trade in Services Agreement (TiSA), under
negotiation since 2013 [PDF] among twenty-three members, including the United States and
European Union (EU) but excluding China. TiSA’s backers hope to use the talks to further the WTO’s
liberalization of the global services trade, the rules for which haven’t been updated since 1995.

In 2012, nineteen members agreed to update the Government Procurement Agreement (GPA),
which seeks to further open government procurement markets. And in 2014, fourteen members,
including the United States, China, the EU, and Japan, opened negotiations on a proposed
Environmental Goods Agreement (EGA), which would liberalize trade in environmental products,
such as wind turbines and solar panels. In 2019, a group of more than seventy countries, including
those in the EGA negotiations, launched talks for an agreement on e-commerce, an increasingly
important trade issue.

Many countries have also turned to bilateral free trade agreements (FTAs) or larger regional ones.
The Obama administration pushed for so-called megaregional deals, such as the Trans-Pacific
Partnership (TPP) and the U.S.-EU Transatlantic Trade and Investment Partnership (TTIP). But Trump
voiced deep skepticism about multilateralism, preferring to deal with trading partners on a bilateral
basis. He withdrew from the TPP immediately upon taking office, and the remaining members
completed the deal without the United States. As U.S. allies advanced FTAs without him, Trump
pursued unilateral measures to confront China and other countries on trade, raising serious doubts
about the future of the WTO.

One of the immediate tasks facing Biden is salvaging a WTO that is in crisis, beginning with its
Appellate Body impasse.

India and the WTO

India has been a member of the WTO since its inception in 1995. WTO is sometimes referred to as
the ‘free trade’ institution seeking to promote multilateralism and a rule based system in the
conduct of global trade amongst countries.

India’s stance on trade facilitation, agriculture, e-commerce etc.

India along with a few other developing countries has and continues to have objections on issues like
agriculture especially subsidies in the context of food security etc. and trade facilitation.

The Agricultural ‘conundrum’ at the WTO and India’s position

India has been pushing agricultural issues at the WTO. Public stock holding (which includes
purchasing, stockpiling and distributing food by Governments in times of necessity) is very important
for India’s food security. While stockpiling and distributing are as per WTO guidelines, the
purchasing of food by governments at a price higher than the market price is considered by the WTO
as a trade distorting subsidy. The 11th Ministerial Conference held at Buenos Aires in 2017 did not
result in any permanent solution to the issue of public stock holding. India has been a votary of a
permanent solution to the issue of stock holding. The sticking point in this issue, as far as India is
concerned, has been the way in which the Minimum Support Price (MSP) (MSP is the guaranteed
price fixed by the Government of India and paid to the farmers for their produce. It is essentially a
support mechanism extended by the Government to the farmers so as to ensure that the farmers
get a minimum profit for their produce especially when prices in the open market are less than the
costs incurred)is fixed.

According to the WTO’s Agreement on Agriculture, the Minimum Support Price (MSP) would have to
be calculated on the basis of price of food grains in 1986-88 and the total subsidy would have to be
below 10 per cent of the total value of production. India has strongly disputed this formula because
the current prices are much higher and hence the total MSP given as subsidy would also be higher.
Countries like India and China have opposed the huge production related price distorting subsidies
given by the developed countries like the US and the EU to their farmers. The US alone gives around
USD 150 billion in direct subsidies to farmers.

Investment/Trade Facilitation

Regarding investment/trade facilitation, India has its own model investment code which does not
allow multinational companies to take the government to international courts before it has sought
recourse through the domestic dispute settlement bodies for a period of at least five years. This is
because, in the past, the Government of India has been taken to international arbitration courts on
multiple occasions.

Freeing e-commerce:

One of the areas identified for further discussion at the 11th Ministerial Conference of the WTO held
in Buenos Aires was e-commerce. India has objected to freeing of e-commerce as it feels that the
country’s digital penetration is not yet adequate. India also feels that Micro, Small and Medium
Enterprises (MSMEs) will not be able to compete with countries with deeper internet penetration
who can gain better access to international markets. As far as talks on framing of rules and
regulations to govern e-commerce is concerned, India wants the 1998 agenda to be the basis of any
conversation about this subject.

India and the WTO: Present Position, Suggested Reforms and the way ahead:

India has objected to the WTO Secretariat’s participation in the recent report ‘Reinvigorating Trade
and Inclusive Growth’ brought out by the World Bank and IMF casting doubts on the efficacy of
trade talks involving ALL nations. The report’s suggestion of having plurilateral instead of multilateral
trade talks has not found favour with countries such as India. India’s contention has been that
institutional reforms of the WTO are best left to the members rather than the WTO Secretariat. India
has further highlighted the increasing trade frictions and the dwindled size of the Appellate tribunal,
which among other things, is affecting dispute resolution.

What does India want?

India has been pitching for a reformed WTO. India has maintained that it is committed to work along
with other countries to reform the World Trade Organisation (WTO) in order to ensure that it
continues to be an engine for global trade. India also believes that while an institution like the WTO
is required and should remain intact, it needs to change. However New Delhi is against changing the
consensus-driven character of the multilateral trade body.

India’s recent initiative for reforming the WTO

India recently drew up a proposal aimed at reforming the dispute settlement mechanism, rule-
making and transparency requirements. India’s move assumes significance in the backdrop of
growing protectionism.

India recently co-sponsored a proposal with the European Union and other members on reform of
the dispute settlement mechanism. The proposal addresses issues of timelines, the appointment
process of the appellate body members, their tenure and other conditions, so that the body and the
mechanism work more efficiently.
On the issue of notifications and transparency, India is opposed to the idea of linking notification
requirements with punitive action. India and 40 other members had opposed the US proposal in
November 2018 seeking to prohibit defaulters from presiding over WTO bodies and allowing other
countries to not answer questions posed by them.

India’s position on US proposals to reform the WTO

The United States recently proposed a reform of the World Trade Organization that would slash the
number of countries that are eligible for “special and differential treatment” (S&D), a plan likely to
be resisted by China, India and other countries. S&D entitles developing countries to longer time
periods for implementing agreed commitments, measures to increase trading opportunities, and
twice the amount of agricultural subsidies available to developed countries. India, insists that a
promise to reform the trade rules to boost developing nations, made by WTO ministers in Doha in
2001, must be kept before the WTO can move on to negotiate new rules in other areas.

The International Monetary Fund

The International Monetary Fund (IMF, the Fund), which was founded in 1945, is an international
organization that works to ensure the stability of the international monetary system.

The IMF: Key Facts and Figures Membership: 190 Countries. Headquarters: Washington, DC.
Executive Board: 24 Directors; the United States, China, Japan, Germany, France, and the United
Kingdom each have their own representatives; others are formed into constituencies. Total
Resources: $661 billion in quota; $693 billion of additional pledged or committed resources. Largest
Borrowers: Argentina, Ukraine, Greece, and Egypt. The IMF has reinvented itself several times since
its creation.

From 1946 to 1971, during the so-called Bretton Woods era, the IMF oversaw a system of fixed
exchange rates pegged to the U.S. dollar, which was itself convertible into gold. When non-U.S.
currencies suffered payments imbalances arising from their normal trading and financial
relationships, the IMF provided short-term financing to cover temporary hard currency shortfalls.

After the collapse of the Bretton Woods system of fixed exchange rates in 1971, IMF members
enacted a comprehensive reform of the organization and its operations in 1975. The IMF
transformed itself from being an organization focused exclusively on issues of foreign exchange
convertibility and stability to one having a broader mandate: lending for a range of financial crises,
including debt, currency, and banking crises, and engaging on a wide range of issues including capital
flows, financial regulation, and surveillance of the global economy.

Key Functions Since the 1970s, the IMF’s mandate of promoting international monetary stability has
translated into three main functions:

• Surveillance. The IMF regularly monitors the economic and financial policies of its member
countries. Through surveillance at the global level and in individual countries, the IMF highlights
possible risks to domestic and external stability and advises on needed policy adjustments. The
implementation of IMF recommendations is enforced through pressure exercised by other IMF
members and the global financial sector, which has access to most IMF analysis of global
economic risks.
• Loans. The IMF makes loans to countries experiencing balance-of-payments difficulties, which
generally means they are facing problems paying for necessary imports or servicing their debt
 payments. The temporary financial assistance enables countries to stabilize their economies
while implementing economic reforms. The IMF disburses its loans in phases (“tranches”) after
verifying that specified economic conditions and reforms have been met (“conditionality”).
• Capacity Development. The IMF provides technical assistance and training to help member
countries strengthen their capacity to design and implement effective policies. The IMF provides
technical assistance in monetary and financial policies; fiscal policy and management; statistical
data complication; and economic and financial legislation.

Organization and Structure The IMF’s governing document, the Articles of Agreement, provides for a
three-tiered governance structure with a board of governors, an executive board, and a managing
director.

The board of governors is the highest policymaking authority of the IMF. All member countries are
represented on the board of governors, usually at the finance minister or central bank governor
level. Day-to-day authority over operational policy, lending, and other matters is vested in the board
of executive directors, a 24-member body that meets three or more times a week to oversee and
supervise the activities of the IMF. The executive board or board of governors of the IMF can
approve loans, policy decisions, and many other matters by a simple majority vote; however, a
supermajority vote is required to approve major IMF decisions. The supermajority may require a
70% or 85% vote, depending on the issue.

At 16.52% of total voting power, the United States has unique veto power over major policy
decisions. The primary source of IMF lending resources is the financial contributions or quota
subscriptions of its member nations. A country’s proportion of quota, or quota share, broadly
reflects its weight in the global economy; larger economies have larger quotas. A member’s quota
also impacts the country’s voting power at the IMF. Countries with larger quotas, and thus larger
financial commitments to the institution, have a greater say in how the IMF is run.

The United States contributes $117 billion to the IMF quota (17.46%). In addition, the United States
has contributed $44 billion to funds at the IMF that supplement quota resources.

IMF’s Response to the COVID-19 Pandemic

COVID-19 has spread to virtually all countries around the world and combatting the pandemic has
required shutting down large portions of the economy. The pandemic has roiled stock markets,
created mass unemployment, resulted in shortages of food and medical supplies, and threatened
the solvency of businesses and governments around the world. In April 2020, the International
Monetary Fund (IMF) cautioned that COVID-19 will likely be the worst recession since the Great
Depression, and far worse than the recession following the global financial crisis of 2008-2009. Over
100 countries have sought financial support from the Fund. The IMF has several emergency
financing mechanism options for deploying resources in response to the COVID19 pandemic. The
Fund has temporarily doubled access to its emergency facilities—the Rapid Credit Facility (RCF) and
Rapid Financing Instrument (RFI). These facilities allow the Fund to provide emergency assistance
without the need to have a full-fledged program in place, which is a time-consuming process.

The IMF has also extended debt service relief to 29 of its poorest and most vulnerable member
countries on their IMF obligations, covering these countries’ eligible debt falling due to the IMF for
the period between April 2020 and April 2021, through its Catastrophe Containment and Relief Trust
(CCRT).
The IMF is seeking to increase their debt relief resources by $1.4 billion to provide additional debt
service relief. The IMF is also looking to triple the size of its Poverty Reduction and Growth Trust
Fund (PRGT) to $17 billion.

Size of the IMF

IMF members agreed in December 2010 to a wide-ranging set of reforms that also doubled the IMF’s
quota (meaning its member contributions). In addition to increasing the size of IMF resources
available to fight financial crises, the reforms also increased the financial contributions (and voting
power) of emerging economies relative to advanced economies. China, for example, increased its
quota share at the IMF by 2.4%.

The IMF reviews quotas every five years. The most recent review took place in February 2020. At the
time, IMF members decided not to seek an increase in IMF quotas but moved forward the time-table
for the next review to December 15, 2023.

IMF Lending The most controversial of the IMF’s activities is its lending program, and its role in
financial crises. Countries have accused IMF ,for using adversities to compel them to adopt specific
reforms. It is considered as dilution of sovereignty.

Scholars like joseph Stiglitz have consistently emphasized on the need for bringing transparency in
institutions of global governance.

The World Bank

The World Bank, the oldest and largest multilateral development bank, provides financial assistance
to developing countries to promote economic development. Established in 1945, the Bank initially
focused on providing financing for large infrastructure projects. During the past 75 years, its role has
broadened to include poverty reduction efforts through social projects (such as education and
health) and policy-based loans. The World Bank is currently focused on helping developing countries
respond to the health and economic consequences of the COVID-19 pandemic.

Structure and Governance

The World Bank has two major lending “windows” or “facilities.”

The International Bank for Reconstruction and Development (IBRD), created in 1945, provides loans,
guarantees, risk management products, and advisory services to middle-income countries and some
creditworthy low-income countries. The IBRD currently has 189 member countries.

In 1960, at the suggestion of the United States, the International Development Association (IDA) was
created to make concessional loans (with low interest rates and long repayment periods) to the
poorest countries. IDA also now provides grants to these countries. IDA currently has 173 member
countries. The IBRD and IDA operate according to procedures established by their Articles of
Agreement, documents that outline the conditions of membership and general principles of
organization, management, and operations.

The World Bank’s highest decision making authority is the Board of Governors, which meets
annually. Each member country is represented on the Board of Governors, usually by the finance
minister or central bank governor.

The Board of Governors has delegated day-to-day authority over operational policy, lending, and
other matters to the Board of Directors. There are 25 executive directors.
The five largest Bank shareholders(China, France, Germany, the United Kingdom, and the United
States) appoint their own executive director. Other member countries are represented by elected
executive directors..

Board decisions are reached through voting. Each member country’s voting share is weighted on the
basis of its financial contributions to the World Bank. U.S. voting power at the IBRD is 15.98% and at
IDA is 10.20%.

The president of the World Bank is selected by the Board of Directors for a five-year, renewable
term. Traditionally, the Bank president has always been nominated by the United States.

Headquartered in Washington, DC, the World Bank has more than 120 offices and 10,000 employees
worldwide

Projects and Financing

The IBRD and IDA fund development projects around the world and in a variety of sectors. In terms
of the World Bank’s active portfolio by region, Africa, South Asia, and East Asia and the Pacific are
the top recipients. By sector, the World Bank has projects focused on transportation, energy, and
water and sanitation, among others. In April 2020, World Bank committed $160 billion over the next
15 months to support developing country responses to COVID-19, more than double the amount
committed by the World Bank overall in FY2019.. The World Bank is able to extend financial
assistance to developing countries due to the financial commitments of its more prosperous
member countries. The countries. The IBRD is able to borrow from international capital markets
because it is The World Bank is backed by the guarantees of member governments.

The IBRD’s total capital is $280 billion. Most of the capital ($263 billion) are IBRD borrows money
from international capital markets and then relends the money to developing guarantees from
donor countries (“callable” capital) and a small portion ($17 billion, about 6%) has been paid to the
IBRD by donor countries (“paid in” capital). The United States has the largest financial commitment
to the IBRD, accounting for 16.57% of total IBRD resources.

The IBRD earns income on its equity investments and the interest it charges on loans, which it uses
to pay for World Bank operating expenses. The IBRD also annually transfers a portion of its net
income to IDA. IDA is able to provide low-cost loans and grants based on direct contributions by
donor countries, in addition to the annual transfer from IBRD. IDA also started issuing its own bonds
in 2018 as a new way to raise resources. As IDA extends concessional loans and grants to low-
income countries, the window’s resources become depleted. Donor countries meet every three
years, to replenish resources.

The World Bank was created to address shortages of capital for post-WWII Europe and developing
countries, but in subsequent decades international capital markets developed and donor countries
created new multilateral aid organizations. Today, the World Bank is a relatively small source of
capital to developing countries. Select Capital Flows to Developing Countries policymaker concerns
about China’s handling of its early COVID-19 outbreak . China is taking a greater leadership role at
the World Bank, even while it continues to borrow from the World Bank.

World bank is also subjected to similar criticisms as IMF, for example:

• Intrusion in sovereignty.
• Lack of representativeness and transparency.
• Dominated by western countries.