Globalization Coverage

Globalization
History of the UN
The United Nations is an international organization founded in 1945 after the Second World
War by 51 countries committed to maintaining international peace and security, developing
friendly relations among nations and promoting social progress, better living standards and
human rights.
Due to its unique international character, and the powers vested in its founding Charter, the
Organization can take action on a wide range of issues, and provide a forum for its 193 Member
States to express their views, through the General Assembly, the Security Council, the Economic
and Social Council and other bodies and committees.
The work of the United Nations reaches every corner of the globe. Although best known for
peacekeeping, peacebuilding, conflict prevention and humanitarian assistance, there are many
other ways the United Nations and its System (specialized agencies, funds and programmes)
affect our lives and make the world a better place. The Organization works on a broad range of
fundamental issues, from sustainable development, environment and refugees protection, disaster
relief, counter terrorism, disarmament and non-proliferation, to promoting democracy, human
rights, gender equality and the advancement of women, governance, economic and social
development and international health, clearing landmines, expanding food production, and more,
in order to achieve its goals and coordinate efforts for a safer world for this and future
generations.
The UN has 4 main purposes
 To keep peace throughout the world;

 To develop friendly relations among nations;
 To help nations work together to improve the lives of poor people, to conquer hunger,
disease and illiteracy, and to encourage respect for each other’s rights and freedoms;
 To be a centre for harmonizing the actions of nations to achieve these goals
Globalization: A Brief Overview

By IMF Staff
A perennial challenge facing all of the world's countries, regardless of their level of economic
development, is achieving financial stability, economic growth, and higher living standards.
There are many different paths that can be taken to achieve these objectives, and every country's
path will be different given the distinctive nature of national economies and political systems.
The ingredients contributing to China's high growth rate over the past two decades have, for
example, been very different from those that have contributed to high growth in countries as
varied as Malaysia and Malta.
Yet, based on experiences throughout the world, several basic principles seem to underpin
greater prosperity. These include investment (particularly foreign direct investment), the spread
of technology, strong institutions, sound macroeconomic policies, an educated workforce, and
the existence of a market economy. Furthermore, a common denominator which appears to link
nearly all high-growth countries together is their participation in, and integration with, the global
economy.
There is substantial evidence, from countries of different sizes and different regions, that as
countries "globalize" their citizens benefit, in the form of access to a wider variety of goods and
services, lower prices, more and better-paying jobs, improved health, and higher overall living
standards. It is probably no mere coincidence that over the past 20 years, as a number of
countries have become more open to global economic forces, the percentage of the developing
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Globalization/IMF/EstebanSabar
world living in extreme poverty—defined as living on less than $1 per day—has been cut in
half.
As much as has been achieved in connection with globalization, there is much more to be done.
Regional disparities persist: while poverty fell in East and South Asia, it actually rose in sub-
Saharan Africa. The UN's Human Development Report notes there are still around 1 billion
people surviving on less than $1 per day—with 2.6 billion living on less than $2 per day.
Proponents of globalization argue that this is not because of too much globalization, but rather
too little. And the biggest threat to continuing to raise living standards throughout the world is
not that globalization will succeed but that it will fail. It is the people of developing economies
who have the greatest need for globalization, as it provides them with the opportunities that
come with being part of the world economy.
These opportunities are not without risks—such as those arising from volatile capital
movements. The International Monetary Fund works to help economies manage or reduce these
risks, through economic analysis and policy advice and through technical assistance in areas
such as macroeconomic policy, financial sector sustainability, and the exchange-rate system.
The risks are not a reason to reverse direction, but for all concerned—in developing and
advanced countries, among both investors and recipients—to embrace policy changes to build
strong economies and a stronger world financial system that will produce more rapid growth and
ensure that poverty is reduced.
The following is a brief overview to help guide anyone interested in gaining a better
understanding of the many issues associated with globalization.
What is Globalization?
Economic "globalization" is a historical process, the result of human innovation and
technological progress. It refers to the increasing integration of economies around the world,
particularly through the movement of goods, services, and capital across borders. The term
sometimes also refers to the movement of people (labor) and knowledge (technology) across
international borders. There are also broader cultural, political, and environmental dimensions of
globalization.
The term "globalization" began to be used more commonly in the 1980s, reflecting
technological advances that made it easier and quicker to complete international transactions—
both trade and financial flows. It refers to an extension beyond national borders of the same
market forces that have operated for centuries at all levels of human economic activity—village
markets, urban industries, or financial centers.
There are countless indicators that illustrate how goods, capital, and people, have become more
globalized.
 The value of trade (goods and services) as a percentage of world GDP increased from 42.1
percent in 1980 to 62.1 percent in 2007.
 Foreign direct investment increased from 6.5 percent of world GDP in 1980 to 31.8
percent in 2006.
 The stock of international claims (primarily bank loans), as a percentage of world GDP,
increased from roughly 10 percent in 1980 to 48 percent in 2006.1
 The number of minutes spent on cross-border telephone calls, on a per-capita basis,

increased from 7.3 in 1991 to 28.8 in 2006.2
 The number of foreign workers has increased from 78 million people (2.4 percent of the
world population) in 1965 to 191 million people (3.0 percent of the world population) in
2005.
The growth in global markets has helped to promote efficiency through competition and the
division of labor—the specialization that allows people and economies to focus on what they do
best. Global markets also offer greater opportunity for people to tap into more diversified and
larger markets around the world. It means that they can have access to more capital, technology,
cheaper imports, and larger export markets. But markets do not necessarily ensure that the
benefits of increased efficiency are shared by all. Countries must be prepared to embrace the
policies needed, and, in the case of the poorest countries, may need the support of the
international community as they do so.
The broad reach of globalization easily extends to daily choices of personal, economic, and
political life. For example, greater access to modern technologies, in the world of health care,
2
could make the difference between life and death. In the world of communications, it would
facilitate commerce and education, and allow access to independent media. Globalization can
also create a framework for cooperation among nations on a range of non-economic issues that
have cross-border implications, such as immigration, the environment, and legal issues. At the
same time, the influx of foreign goods, services, and capital into a country can create incentives
and demands for strengthening the education system, as a country's citizens recognize the
competitive challenge before them.
Perhaps more importantly, globalization implies that information and knowledge get dispersed
and shared. Innovators—be they in business or government—can draw on ideas that have been
successfully implemented in one jurisdiction and tailor them to suit their own jurisdiction. Just
as important, they can avoid the ideas that have a clear track record of failure. Joseph Stiglitz, a
Nobel laureate and frequent critic of globalization, has nonetheless observed that globalization
"has reduced the sense of isolation felt in much of the developing world and has given many
people in the developing world access to knowledge well beyond the reach of even the
wealthiest in any country a century ago."3
International Trade
A core element of globalization is the expansion of world trade through the elimination or
reduction of trade barriers, such as import tariffs. Greater imports offer consumers a wider
variety of goods at lower prices, while providing strong incentives for domestic industries to
remain competitive. Exports, often a source of economic growth for developing nations,
stimulate job creation as industries sell beyond their borders. More generally, trade enhances
national competitiveness by driving workers to focus on those vocations where they, and their
country, have a competitive advantage. Trade promotes economic resilience and flexibility, as
higher imports help to offset adverse domestic supply shocks. Greater openness can also
stimulate foreign investment, which would be a source of employment for the local workforce
and could bring along new technologies—thus promoting higher productivity.
Restricting international trade—that is, engaging in protectionism—generates adverse

consequences for a country that undertakes such a policy. For example, tariffs raise the prices of
imported goods, harming consumers, many of which may be poor. Protectionism also tends to
reward concentrated, well-organized and politically-connected groups, at the expense of those
whose interests may be more diffuse (such as consumers). It also reduces the variety of goods
available and generates inefficiency by reducing competition and encouraging resources to flow
into protected sectors.
Developing countries can benefit from an expansion in international trade. Ernesto Zedillo, the
former president of Mexico, has observed that, "In every case where a poor nation has
significantly overcome its poverty, this has been achieved while engaging in production for
export markets and opening itself to the influx of foreign goods, investment, and
technology."4 And the trend is clear. In the late 1980s, many developing countries began to
dismantle their barriers to international trade, as a result of poor economic performance under
protectionist polices and various economic crises. In the 1990s, many former Eastern bloc
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countries integrated into the global trading system and developing Asia—one of the most closed
regions to trade in 1980—progressively dismantled barriers to trade. Overall, while the average
tariff rate applied by developing countries is higher than that applied by advanced countries, it
has declined significantly over the last several decades.
The implications of globalized financial markets
The world's financial markets have experienced a dramatic increase in globalization in recent
years. Global capital flows fluctuated between 2 and 6 percent of world GDP during the period
1980-95, but since then they have risen to 14.8 percent of GDP, and in 2006 they totaled $7.2
trillion, more than tripling since 1995. The most rapid increase has been experienced by
advanced economies, but emerging markets and developing countries have also become more
financially integrated. As countries have strengthened their capital markets they have attracted
more investment capital, which can enable a broader entrepreneurial class to develop, facilitate a
more efficient allocation of capital, encourage international risk sharing, and foster economic
growth.
Cross-Border Assets and Liabilities (Percent GDP)
1
Data series bein in 1995 for central and eastern Europe and the Commonweatlth of Independent
States.
Yet there is an energetic debate underway, among leading academics and policy experts, on the
precise impact of financial globalization. Some see it as a catalyst for economic growth and
stability. Others see it as injecting dangerous—and often costly—volatility into the economies
of growing middle-income countries.
A recent paper by the IMF's Research Department takes stock of what is known about the
effects of financial globalization.5 The analysis of the past 30 years of data reveals two main
lessons for countries to consider.
First, the findings support the view that countries must carefully weigh the risks and benefits of
unfettered capital flows. The evidence points to largely unambiguous gains from financial
integration for advanced economies. In emerging and developing countries, certain factors are
likely to influence the effect of financial globalization on economic volatility and growth:
countries with well-developed financial sectors, strong institutions, sounds macroeconomic
4
policies, and substantial trade openness are more likely to gain from financial liberalization and
less likely to risk increased macroeconomic volatility and to experience financial crises. For
example, well-developed financial markets help moderate boom-bust cycles that can be
triggered by surges and sudden stops in international capital flows, while strong domestic
institutions and sound macroeconomic policies help attract "good" capital, such as portfolio
equity flows and FDI.
The second lesson to be drawn from the study is that there are also costs associated with being
overly cautious about opening to capital flows. These costs include lower international trade,
higher investment costs for firms, poorer economic incentives, and additional
administrative/monitoring costs. Opening up to foreign investment may encourage changes in
the domestic economy that eliminate these distortions and help foster growth.
Looking forward, the main policy lesson that can be drawn from these results is that capital
account liberalization should be pursued as part of a broader reform package encompassing a
country's macroeconomic policy framework, domestic financial system, and prudential
regulation. Moreover, long-term, non-debt-creating flows, such as FDI, should be liberalized
before short-term, debt-creating inflows. Countries should still weigh the possible risks involved
in opening up to capital flows against the efficiency costs associated with controls, but under
certain conditions (such as good institutions, sound domestic and foreign policies, and
developed financial markets) the benefits from financial globalization are likely to outweigh the
risks.
Globalization, income inequality, and poverty
As some countries have embraced globalization, and experienced significant income increases,
other countries that have rejected globalization, or embraced it only tepidly, have fallen behind.
A similar phenomenon is at work within countries—some people have, inevitably, been bigger
beneficiaries of globalization than others.
Over the past two decades, income inequality has risen in most regions and countries. At the
same time, per capita incomes have risen across virtually all regions for even the poorest
segments of population, indicating that the poor are better off in an absolute sense during this
phase of globalization, although incomes for the relatively well off have increased at a faster
pace. Consumption data from groups of developing countries reveal the striking inequality that
exists between the richest and the poorest in populations across different regions.
As discussed in the October 2007 issue of the World Economic Outlook, one must keep in mind
that there are many sources of inequality. Contrary to popular belief, increased trade
globalization is associated with a decline in inequality. The spread of technological advances
and increased financial globalization—and foreign direct investment in particular—have instead
contributed more to the recent rise in inequality by raising the demand for skilled labor and
increasing the returns to skills in both developed and developing countries. Hence, while
everyone benefits, those with skills benefit more.
It is important to ensure that the gains from globalization are more broadly shared across the
population. To this effect, reforms to strengthen education and training would help ensure that
workers have the appropriate skills for the evolving global economy. Policies that broaden the
access of finance to the poor would also help, as would further trade liberalization that boosts
agricultural exports from developing countries. Additional programs may include providing
adequate income support to cushion, but not obstruct, the process of change, and also making
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health care less dependent on continued employment and increasing the portability of pension
benefits in some countries.
Equally important, globalization should not be rejected because its impact has left some people
unemployed. The dislocation may be a function of forces that have little to do with globalization
and more to do with inevitable technological progress. And, the number of people who "lose"
under globalization is likely to be outweighed by the number of people who "win."
Martin Wolf, the Financial Times columnist, highlights one of the fundamental contradictions
inherent in those who bemoan inequality, pointing out that this charge amounts to arguing "that
it would be better for everybody to be equally poor than for some to become significantly better
off, even if, in the long run, this will almost certainly lead to advances for everybody."6
Indeed, globalization has helped to deliver extraordinary progress for people living in
developing nations. One of the most authoritative studies of the subject has been carried out by
World Bank economists David Dollar and Aart Kraay.7 They concluded that since 1980,
globalization has contributed to a reduction in poverty as well as a reduction in global income
inequality. They found that in "globalizing" countries in the developing world, income per
person grew three-and-a-half times faster than in "non-globalizing" countries, during the 1990s.
In general, they noted, "higher growth rates in globalizing developing countries have translated
into higher incomes for the poor." Dollar and Kraay also found that in virtually all events in
which a country experienced growth at a rate of two percent or more, the income of the poor
rose.
Critics point to those parts of the world that have achieved few gains during this period and
highlight it as a failure of globalization. But that is to misdiagnose the problem. While serving
as Secretary-General of the United Nations, Kofi Annan pointed out that "the main losers in
today's very unequal world are not those who are too much exposed to globalization. They are
those who have been left out."8 A recent BBC World Service poll found that on average 64
percent of those polled—in 27 out of 34 countries—held the view that the benefits and burdens
of "the economic developments of the last few years" have not been shared fairly. In developed
countries, those who have this view of unfairness are more likely to say that globalization is
growing too quickly. In contrast, in some developing countries, those who perceive such
unfairness are more likely to say globalization is proceeding too slowly.
As individuals and institutions work to raise living standards throughout the world, it will be
critically important to create a climate that enables these countries to realize maximum benefits
from globalization. That means focusing on macroeconomic stability, transparency in
government, a sound legal system, modern infrastructure, quality education, and a deregulated
economy.
Myths about globalization
No discussion of globalization would be complete without dispelling some of the myths that
have been built up around it.
Downward pressure on wages: Globalization is rarely the primary factor that fosters wage
moderation in low-skilled work conducted in developed countries. As discussed in a recent issue
of the World Economic Outlook, a more significant factor is technology. As more work can be
mechanized, and as fewer people are needed to do a given job than in the past, the demand for
that labor will fall, and as a result the prevailing wages for that labor will be affected as well.
The "race to the bottom": Globalization has not caused the world's multinational corporations to
simply scour the globe in search of the lowest-paid laborers. There are numerous factors that
enter into corporate decisions on where to source products, including the supply of skilled labor,
economic and political stability, the local infrastructure, the quality of institutions, and the
overall business climate. In an open global market, while jurisdictions do compete with each
other to attract investment, this competition incorporates factors well beyond just the hourly
wage rate. According to the UN Information Service, the developed world hosts two-thirds of
the world's inward foreign direct investment. The 49 least developed countries—the poorest of
the developing countries—account for around 2 per cent of the total inward FDI stock of
developing countries.
Nor is it true that multinational corporations make a consistent practice of operating sweatshops
in low-wage countries, with poor working conditions and substandard wages. While isolated
examples of this can surely be uncovered, it is well established that multinationals, on average,
pay higher wages than what is standard in developing nations, and offer higher labor standards. 9
Globalization is irreversible: In the long run, globalization is likely to be an unrelenting
phenomenon. But for significant periods of time, its momentum can be hindered by a variety of
factors, ranging from political will to availability of infrastructure. Indeed, the world was
thought to be on an irreversible path toward peace and prosperity early in the early 20th century,
6
until the outbreak of Word War I. That war, coupled with the Great Depression, and then World
War II, dramatically set back global economic integration. And in many ways, we are still trying
to recover the momentum we lost over the past 90 years or so.
That fragility of nearly a century ago still exists today—as we saw in the aftermath of
September 11th, when U.S. air travel came to a halt, financial markets shut down, and the
economy weakened. The current turmoil in financial markets also poses great difficulty for the
stability and reliability of those markets, as well as for the global economy. Credit market strains
have intensified and spread across asset classes and banks, precipitating a financial shock that
many have characterized as the most serious since the 1930s. These episodes are reminders that
a breakdown in globalization—meaning a slowdown in the global flows of goods, services,
capital, and people—can have extremely adverse consequences.
Openness to globalization will, on its own, deliver economic growth: Integrating with the global
economy is, as economists like to say, a necessary, but not sufficient, condition for economic
growth. For globalization to be able to work, a country cannot be saddled with problems
endemic to many developing countries, from a corrupt political class, to poor infrastructure, and
macroeconomic instability.
The shrinking state: Technologies that facilitate communication and commerce have curbed the
power of some despots throughout the world, but in a globalized world governments take on
new importance in one critical respect, namely, setting, and enforcing, rules with respect to
contracts and property rights. The potential of globalization can never be realized unless there
are rules and regulations in place, and individuals to enforce them. This gives economic actors
confidence to engage in business transactions.
Further undermining the idea of globalization shrinking states is that states are not, in fact,
shrinking. Public expenditures are, on average, as high or higher today as they have been at any
point in recent memory. And among OECD countries, government tax revenue as a percentage
of GDP increased from 25.5 percent in 1965 to 36.6 percent in 2006.
The future of globalization
Like a snowball rolling down a steep mountain, globalization seems to be gathering more and
more momentum. And the question frequently asked about globalization is not whether it will
continue, but at what pace.
A disparate set of factors will dictate the future direction of globalization, but one important
entity—sovereign governments—should not be overlooked. They still have the power to erect
significant obstacles to globalization, ranging from tariffs to immigration restrictions to military
hostilities. Nearly a century ago, the global economy operated in a very open environment, with
goods, services, and people able to move across borders with little if any difficulty. That
openness began to wither away with the onset of World War I in 1914, and recovering what was
lost is a process that is still underway. Along the process, governments recognized the
importance of international cooperation and coordination, which led to the emergence of
numerous international organizations and financial institutions (among which the IMF and the
World Bank, in 1944).
Indeed, the lessons included avoiding fragmentation and the breakdown of cooperation among
nations. The world is still made up of nation states and a global marketplace. We need to get the
right rules in place so the global system is more resilient, more beneficial, and more legitimate.
International institutions have a difficult but indispensable role in helping to bring more of
globalization's benefits to more people throughout the world. By helping to break down
barriers—ranging from the regulatory to the cultural—more countries can be integrated into the
global economy, and more people can seize more of the benefits of globalization.
1
BIS Quarterly Review, Bank for International Settlements (December 2006), p. 29.
2
IMF and International Telecommunications Union data.
3
Joseph Stiglitz (2003), Globalization and Its Discontents (New York: W.W. Norton &
Company), p. 4.
4
Remarks by former President of Mexico Ernesto Zedillo at the plenary session of the World
Economic Forum, Davos, Switzerland, January 28, 2000.
5
Reaping the Benefits of Financial Globalization, IMF Discussion Paper,
(http://www.imf.org/external/np/res/docs/2007/0607.htm).
6
Martin Wolf (2005), Why Globalization Works (New Haven and London: Yale University
Press), p. 157.
7
"Growth is Good for the Poor," Journal of Economic Growth (2002), and "Trade, Growth, and
Poverty," The Economic Journal (2004).
7
8
From remarks at an UNCTAD conference in February 2000, in Johan Norberg (2003), In
Defense of Global Capitalism (Washington: Cato Institute), p. 155.
9
Linda Lim (2001) The Globalization Debate: Issues and Challenges (Geneva: International
Labor Organization).
Globalization: A Framework for IMF Involvement

By IMF Staff 1
March 2002
Contents
I. Introduction
II. The Role of the Bretton Woods Institutions
III. Safeguarding the International Financial System
IV. Providing Help for Self-Help
V. Conclusion
The critical debate on globalization, though temporarily subdued by the events of

September 11, 2001, continues to raise issues that are at the core of national and
international policy agendas. This note offers a conceptual framework for the IMF's
involvement in the global economy. It describes what is being done by the Fund, within the
framework of its mandate, to (1) safeguard the international financial system and (2)
enable more countries to reap the benefits, while minimizing the risks, of globalization. At
the same time, it recognizes that the IMF is part of a wider network of international
institutions that each has an important role to play in making globalization work better.
I. Introduction
Globalization—the process through which an increasingly free flow of ideas, people,

goods, services, and capital leads to the integration of economies and societies—is often
viewed as an irreversible force, which is being imposed upon the world by some countries
and institutions such as the IMF and the World Bank. However, that is not so: globalization
represents a political choice in favor of international economic integration, which for the
most part has gone hand-in-hand with the consolidation of democracy. Precisely because it
is a choice, it may be challenged, and even reversed-but only at great cost to humanity. The
IMF believes that globalization has great potential to contribute to the growth that is
essential to achieve a sustained reduction of global poverty.
Globalization, or internationalization, is not a new phenomenon. The period through the

end of the 19th century was also characterized by unprecedented economic growth and
global integration. But globalization was interrupted in the first half of the 20th century by a
wave of protectionism and aggressive nationalism, which led to depression and world war.
International economic and political integration was reversed, with severe consequences.
Since 1945, democracy and capitalism have been embraced by an increasing number of
countries—including, since 1989, by most of the previously communist world. As a result,
the past 50 years have been a period of growing economic and political freedom and rising
prosperity. Global per capita income has more than tripled, and most of the world has
experienced a major improvement in life expectancy.
Many developing countries have already taken advantage of the opportunities of the global
economy. More rapidly globalizing countries, such as Brazil, China, Costa Rica, the
Philippines, and Mexico on average doubled their share in world trade and raised per capita
8
incomes by two thirds from 1980 to 1997. Their experience demonstrates that integration
into the global economy can bring major advantages for developing countries.
However, other countries have not done so well. A large part of the world's population—
especially in sub-Saharan Africa—has been left behind by economic progress. As a result,
the disparities between the world's richest and poorest countries are now wider than ever,
with increasing incidences of poverty within countries. Poverty is not only unacceptable on
moral grounds, it also forms the breeding ground for war and terrorism. It is, therefore, the
greatest challenge to peace and stability in the 21st century.
Reversing the process of globalization would not solve the problem of poverty—that was
amply demonstrated by the events of the 20th century. The world needs instead a new
approach to globalization that exploits its enormous potential for improving human welfare.
In order to carry the process forward, and build support for a better globalization, a
common political understanding of how to maximize the benefits, while minimizing the
risks, must be developed.
II. The Role of the Bretton Woods Institutions
The Bretton Woods Institutions—the IMF and World Bank—have an important role to play
in making globalization work better. They were created in 1944 to help restore and sustain
the benefits of global integration, by promoting international economic cooperation. Today,
they pursue, within their respective mandates, the common objective of broadly-shared
prosperity. The World Bank concentrates on long-term investment projects, institution-
building, and on social, environmental, and poverty issues. The IMF focuses on the
functioning of the international monetary system, and on promoting sound macroeconomic
policies as a precondition for sustained economic growth.
The greatest asset that the Bretton Woods Institutions have in fulfilling these objectives is
their culture of consensus-building, which is based on trust and mutual respect among the
more than 180 countries—and their governments—that make up their membership.
However, both institutions also recognize the need for change and internal reform. The IMF
has implemented many reforms in recent years, designed to strengthen its cooperative
nature and improve its ability to serve its membership. To mention a few:
 The IMF has increasingly become an open and transparent organization, as

demonstrated by the overwhelming amount of information now available on its internet
website. It is also encouraging transparency among its membership.
 It is taking action to strengthen economic governance. For instance, it is promoting the
use of standards and codes as vehicles for sound economic and financial management
and corporate governance.
 It is working to safeguard the stability and integrity of the international financial
system as a global public good. In particular, the joint IMF-World Bank Financial Sector
Assessment Program (FSAP) is at the core of efforts to strengthen financial sectors and
combat money laundering in member countries.
 It is encouraging true national ownership of reforms by streamlining the conditions
attached to IMF-supported programs. While conditionality remains essential, countries
must themselves take responsibility for implementing the necessary reforms.
 Lastly, the IMF is an institution ready to listen and learn, and not just from its member
governments. It recognizes and values the role of civil society organizations in
articulating the moral foundations for collective action and building grass roots support.
III. Safeguarding the International Financial System
The IMF seeks to mitigate the negative effects of globalization on the world economy in
two ways: by ensuring the stability of the international financial system, and by helping
individual countries take advantage of the investment opportunities offered by international
capital markets, while reducing their vulnerability to adverse shocks or changes in investor
sentiment.
Private capital flows have become the most important source of financing for economic
growth, job creation, and productivity. But they can also be a source of volatility and crisis.
9
To address some of these problems, the IMF is encouraging its members to increase the
transparency of their financial and corporate sectors as a means to reduce financial abuse,
such as money laundering and fraud, and ensure a level playing field for all investors. It is
also stepping up its surveillance of international capital markets, and is improving its ability
to predict and preempt crises.
While improved supervision and effective analytical tools are important, the IMF
recognizes that more fundamental reform of the international financial architecture may be
needed. It has therefore devoted considerable resources over the past few years to ensuring
greater involvement of the private sector in crisis resolution, but without deterring much
needed investment in developing countries. As part of this work, it recently suggested the
establishment of a sovereign debt restructuring mechanism (SDRM). If adopted by the
international community, such a mechanism could help countries avoid costly and
protracted defaults.
IV. Providing Help for Self-Help
Many countries are still in the earliest stages of integrating with the global economy. Even
so, they must still shoulder the main responsibility for making globalization work to their
advantage. A country opening up to the global economy should have the institutional
capacity to implement necessary structural reforms (such as trade and capital account
liberalization) and should adhere, as a general rule, to a flexible exchange rate regime.
But many poor countries simply do not possess the resources to start the process of fuller
participation in the global economy. They need additional assistance from the international
community. As a universal institution, the IMF is committed to maintaining its engagement
with the world's poorest countries. As a guidepost for reducing world poverty, it has joined
countries and other international institutions in supporting the 2015 Millennium
Development Goals.
The fight against world poverty should be centered on the principle of "help for self-help".
Poor countries must strive to establish peace, the rule of law, and good governance, as well
as implement economic policies that encourage private initiative and integration into the
global economy. Meanwhile, rich countries should be offering stronger financial support in
the form of investment, official development assistance, and debt relief. Even more
important, they should open up their markets in products where poor countries have a
comparative advantage.
To further the process of help for self-help, the IMF and World Bank established in 1999 a
new approach to their lending programs that gives a central role to a country-led process for
reducing poverty. A key component is the country-owned Poverty Reduction Strategy
Paper (PRSP). This approach has now been accepted as a promising way to design poverty
reduction strategies that can command broad support, both within a country and among its
development partners. However, there is clearly room for further improvement, not least,
through deeper analysis of the root causes of poverty, and increased technical assistance
from the IMF and the donor community to build institutional capacity.
To bring about a decisive reduction in world poverty, the efforts of poor countries must be
matched by more comprehensive support from the international community. That is why
the IMF and World Bank are spearheading an effort under the enhanced HIPC Initiative
that has already provided $40 billion of debt relief to 25 poor countries. But debt relief is no
panacea. Indeed, the resources available from further debt relief or outright cancellation are
relatively small when compared with the potential for action by the rich countries in the key
areas of trade and aid.
Trade liberalization is the best form of help for self-help, both because it offers an escape
from aid dependency and because it is a win-win game; all countries stand to benefit from
freer trade. The true test of the credibility of rich countries' efforts to combat poverty lies in
their willingness to open up their markets and phase out trade-distorting subsidies in areas
where developing countries have a comparative advantage—as in agriculture, processed
10
foods, textiles and clothing, and light manufactures. The United States, the European
Union, and Japan spent almost $270 billion in 2000 on agricultural subsidies alone.
The achievement of the UN target of 0.7 percent of GNP for official development
assistance (ODA) should be viewed as a concrete expression of solidarity between rich and
poor countries. Yet, today, the average level of ODA in the OECD countries is only
0.22 percent of GNP—an unacceptably low figure that translates into a shortfall of over
$100 billion a year in aid flows. A successful effort to enact legislation in rich countries to
meet the UN target within the next decade would, in the first year alone, generate enough
new resources to meet the estimated $10 billion annual requirement for a new global effort
at HIV/AIDS prevention and treatment.
Achieving these goals will require difficult political decisions on the part of both poor and
rich countries. But if the international community decided to implement the necessary
reforms, world poverty would be significantly reduced, and the 2015 Millennium
Development Goals would come within reach.
V. Conclusion
The IMF believes that economic growth is the only way to improve living standards in
developing countries, and that this is best achieved through globalization. It is doing its
utmost, within the mandate given to it by its members, to safeguard the international
financial system, and help its members take advantage of the opportunities offered by
integration into the world economy, while minimizing the associated risks. However, it also
recognizes that, while much progress has been made in making globalization work better,
much work still lies ahead.
1
This Issues Brief is based on a speech, "Working for a Better Globalization", given by the
Managing Director of the IMF at the United States Conference of Catholic Bishops in
Washington D.C. on January 28, 2002. The speech is available
at http://www.imf.org/external/np/speeches/2002/012802.htm
Globalization: Threat or Opportunity? Français

By IMF Staff Deutsch
Russian
April 12, 2000 (Corrected January 2002) Español
I Introduction
II What is Globalization?
III Unparalleled Growth, Increased Inequality: 20th Century

Income Trends
IV Developing Countries: How Deeply Integrated?
V Does Globalization Increase Poverty and Inequality?
VI How Can the Poorest Countries Catch Up More Quickly?
VII An Advanced Country Perspective: Does Globalization Harm

Workers’ Interests?
VIII Are Periodic Crises an Inevitable Consequence of

Globalization?
IX The Role of Institutions and Organizations
11
X Conclusion
12
I. Introduction
The term "globalization" has acquired considerable emotive force. Some view it as a
process that is beneficial—a key to future world economic development—and also
inevitable and irreversible. Others regard it with hostility, even fear, believing that it
increases inequality within and between nations, threatens employment and living standards
and thwarts social progress. This brief offers an overview of some aspects of globalization
and aims to identify ways in which countries can tap the gains of this process, while
remaining realistic about its potential and its risks.
Globalization offers extensive opportunities for truly worldwide development but it is not
progressing evenly. Some countries are becoming integrated into the global economy more
quickly than others. Countries that have been able to integrate are seeing faster growth and
reduced poverty. Outward-oriented policies brought dynamism and greater prosperity to
much of East Asia, transforming it from one of the poorest areas of the world 40 years ago.
And as living standards rose, it became possible to make progress on democracy and
economic issues such as the environment and work standards.
By contrast, in the 1970s and 1980s when many countries in Latin America and Africa
pursued inward-oriented policies, their economies stagnated or declined, poverty increased
and high inflation became the norm. In many cases, especially Africa, adverse external
developments made the problems worse. As these regions changed their policies, their
incomes have begun to rise. An important transformation is underway. Encouraging this
trend, not reversing it, is the best course for promoting growth, development and poverty
reduction.
The crises in the emerging markets in the 1990s have made it quite evident that the
opportunities of globalization do not come without risks—risks arising from volatile capital
movements and the risks of social, economic, and environmental degradation created by
poverty. This is not a reason to reverse direction, but for all concerned—in developing
countries, in the advanced countries, and of course investors—to embrace policy changes to
build strong economies and a stronger world financial system that will produce more rapid
growth and ensure that poverty is reduced.
How can the developing countries, especially the poorest, be helped to catch up? Does
globalization exacerbate inequality or can it help to reduce poverty? And are countries that
integrate with the global economy inevitably vulnerable to instability? These are some of
the questions covered in the following sections.
II. What is Globalization?
Economic "globalization" is a historical process, the result of human innovation and

technological progress. It refers to the increasing integration of economies around the
world, particularly through trade and financial flows. The term sometimes also refers to the
movement of people (labor) and knowledge (technology) across international borders.
There are also broader cultural, political and environmental dimensions of globalization
that are not covered here.
At its most basic, there is nothing mysterious about globalization. The term has come into
common usage since the 1980s, reflecting technological advances that have made it easier
and quicker to complete international transactions—both trade and financial flows. It refers
to an extension beyond national borders of the same market forces that have operated for
centuries at all levels of human economic activity—village markets, urban industries, or
financial centers.
Markets promote efficiency through competition and the division of labor—the

specialization that allows people and economies to focus on what they do best. Global
markets offer greater opportunity for people to tap into more and larger markets around the
world. It means that they can have access to more capital flows, technology, cheaper
imports, and larger export markets. But markets do not necessarily ensure that the benefits
of increased efficiency are shared by all. Countries must be prepared to embrace the
13
policies needed, and in the case of the poorest countries may need the support of the
international community as they do so.
III. Unparalleled Growth, Increased Inequality:

20th Century Income Trends
Globalization is not just a recent phenomenon. Some analysts have argued that the world
economy was just as globalized 100 years ago as it is today. But today commerce and
financial services are far more developed and deeply integrated than they were at that time.
The most striking aspect of this has been the integration of financial markets made possible
by modern electronic communication.
The 20th century saw unparalleled economic growth, with global per capita GDP increasing
almost five-fold. But this growth was not steady—the strongest expansion came during the
second half of the century, a period of rapid trade expansion accompanied by trade—and
typically somewhat later, financial—liberalization. Figure 1a breaks the century into four
periods.1 In the inter-war era, the world turned its back on internationalism—or
globalization as we now call it—and countries retreated into closed economies,
protectionism and pervasive capital controls. This was a major factor in the devastation of
this period, when per capita income growth fell to less than 1 percent during 1913-1950.
For the rest of the century, even though population grew at an unprecedented pace, per
capita income growth was over 2 percent, the fastest pace of all coming during the post-
World War boom in the industrial countries.
The story of the 20th century was of remarkable average income growth, but it is also quite
obvious that the progress was not evenly dispersed. The gaps between rich and poor
countries, and rich and poor people within countries, have grown. The richest quarter of the
world’s population saw its per capita GDP increase nearly six-fold during the century,
while the poorest quarter experienced less than a three-fold increase (Chart 1b). Income
inequality has clearly increased. But, as noted below, per capita GDP does not tell the
whole story (see section IV).
IV. Developing countries: How deeply integrated?
Globalization means that world trade and financial markets are becoming more integrated.
But just how far have developing countries been involved in this integration? Their
experience in catching up with the advanced economies has been mixed. Chart 2a shows
that in some countries, especially in Asia, per capita incomes have been moving quickly
toward levels in the industrial countries since 1970. A larger number of developing
countries have made only slow progress or have lost ground. In particular, per capita
incomes in Africa have declined relative to the industrial countries and in some countries
have declined in absolute terms. Chart 2b illustrates part of the explanation: the countries
catching up are those where trade has grown strongly.
Consider four aspects of globalization:
 Trade: Developing countries as a whole have increased their share of world trade–from
19 percent in 1971 to 29 percent in 1999. But Chart 2b shows great variation among the
major regions. For instance, the newly industrialized economies (NIEs) of Asia have
done well, while Africa as a whole has fared poorly. The composition of what countries
export is also important. The strongest rise by far has been in the export of manufactured
goods. The share of primary commodities in world exports—such as food and raw
materials—that are often produced by the poorest countries, has declined.
 Capital movements: Chart 3 depicts what many people associate with globalization,
sharply increased private capital flows to developing countries during much of the 1990s.
It also shows that (a) the increase followed a particularly "dry" period in the 1980s; (b)
net official flows of "aid" or development assistance have fallen significantly since the
early 1980s; and (c) the composition of private flows has changed dramatically. Direct
14
foreign investment has become the most important category. Both portfolio investment
and bank credit rose but they have been more volatile, falling sharply in the wake of the
financial crises of the late 1990s.
 Movement of people: Workers move from one country to another partly to find better
employment opportunities. The numbers involved are still quite small, but in the period
1965-90, the proportion of labor forces round the world that was foreign born increased
by about one-half. Most migration occurs between developing countries. But the flow of
migrants to advanced economies is likely to provide a means through which global
wages converge. There is also the potential for skills to be transferred back to the
developing countries and for wages in those countries to rise.
 Spread of knowledge (and technology): Information exchange is an integral, often

overlooked, aspect of globalization. For instance, direct foreign investment brings not
only an expansion of the physical capital stock, but also technical innovation. More
generally, knowledge about production methods, management techniques, export
markets and economic policies is available at very low cost, and it represents a highly
valuable resource for the developing countries.
The special case of the economies in transition from planned to market economies—they
too are becoming more integrated with the global economy—is not explored in much depth
here. In fact, the term "transition economy" is losing its usefulness. Some countries (e.g.
Poland, Hungary) are converging quite rapidly toward the structure and performance of
advanced economies. Others (such as most countries of the former Soviet Union) face long-
term structural and institutional issues similar to those faced by developing countries.
15
16
Source: IMF World Economic Outlook Databases: (May 2000), Direction of Trade
1/ Excludes oil exporting countries.
2/ Consists largely of bank lending.
V. Does Globalization Increase Poverty and Inequality?
During the 20th century, global average per capita income rose strongly, but with
considerable variation among countries. It is clear that the income gap between rich and
poor countries has been widening for many decades. The most recent World Economic
Outlook studies 42 countries (representing almost 90 percent of world population) for
which data are available for the entire 20th century. It reaches the conclusion that output per
capita has risen appreciably but that the distribution of income among countries has become
more unequal than at the beginning of the century.
But incomes do not tell the whole story; broader measures of welfare that take account of
social conditions show that poorer countries have made considerable progress. For instance,
some low-income countries, e.g. Sri Lanka, have quite impressive social indicators. One
recent paper2 finds that if countries are compared using the UN’s Human Development
17
Indicators (HDI), which take education and life expectancy into account, then the picture
that emerges is quite different from that suggested by the income data alone.
Indeed the gaps may have narrowed. A striking inference from the study is a contrast
between what may be termed an "income gap" and an "HDI gap". The (inflation-adjusted)
income levels of today’s poor countries are still well below those of the leading countries in
1870. And the gap in incomes has increased. But judged by their HDIs, today’s poor
countries are well ahead of where the leading countries were in 1870. This is largely
because medical advances and improved living standards have brought strong increases in
life expectancy.
But even if the HDI gap has narrowed in the long-term, far too many people are losing
ground. Life expectancy may have increased but the quality of life for many has not
improved, with many still in abject poverty. And the spread of AIDS through Africa in the
past decade is reducing life expectancy in many countries.
This has brought new urgency to policies specifically designed to alleviate poverty.
Countries with a strong growth record, pursuing the right policies, can expect to see a
sustained reduction in poverty, since recent evidence suggests that there exists at least a
one-to-one correspondence between growth and poverty reduction. And if strongly pro-
poor policies—for instance in well-targeted social expenditure—are pursued then there is a
better chance that growth will be amplified into more rapid poverty reduction. This is one
compelling reason for all economic policy makers, including the IMF, to pay heed more
explicitly to the objective of poverty reduction.
VI. How Can the Poorest Countries Catch Up More Quickly?
Growth in living standards springs from the accumulation of physical capital (investment)
and human capital (labor), and through advances in technology (what economists call total
factor productivity).3 Many factors can help or hinder these processes. The experience of
the countries that have increased output most rapidly shows the importance of creating
conditions that are conducive to long-run per capita income growth. Economic stability,
institution building, and structural reform are at least as important for long-term
development as financial transfers, important as they are. What matters is the whole
package of policies, financial and technical assistance, and debt relief if necessary.
Components of such a package might include:
 Macroeconomic stability to create the right conditions for investment and saving;
 Outward oriented policies to promote efficiency through increased trade and investment;
 Structural reform to encourage domestic competition;
 Strong institutions and an effective government to foster good governance;
 Education, training, and research and development to promote productivity;
 External debt management to ensure adequate resources for sustainable development.
All these policies should be focussed on country-owned strategies to reduce poverty by

promoting pro-poor policies that are properly budgeted—including health, education, and
strong social safety nets. A participatory approach, including consultation with civil
society, will add greatly to their chances of success.
Advanced economies can make a vital contribution to the low-income countries’ efforts to
integrate into the global economy:
 By promoting trade. One proposal on the table is to provide unrestricted market access
for all exports from the poorest countries. This should help them move beyond
specialization on primary commodities to producing processed goods for export.
 By encouraging flows of private capital to the lower-income countries, particularly

foreign direct investment, with its twin benefits of steady financial flows and technology
transfer.
18
 By supplementing more rapid debt relief with an increased level of new financial
support. Official development assistance (ODA) has fallen to 0.24 percent of GDP
(1998) in advanced countries (compared with a UN target of 0.7 percent). As Michel
Camdessus, the former Managing Director of the IMF put it: "The excuse of aid fatigue
is not credible—indeed it approaches the level of downright cynicism—at a time when,
for the last decade, the advanced countries have had the opportunity to enjoy the benefits
of the peace dividend."
The IMF supports reform in the poorest countries through its new Poverty Reduction and
Growth Facility. It is contributing to debt relief through the initiative for the heavily
indebted poor countries.4
VII. An Advanced Country Perspective:

Does Globalization Harm Workers’ Interests?
Anxiety about globalization also exists in advanced economies. How real is the perceived
threat that competition from "low-wage economies" displaces workers from high-wage jobs
and decreases the demand for less skilled workers? Are the changes taking place in these
economies and societies a direct result of globalization?
Economies are continually evolving and globalization is one among several other
continuing trends. One such trend is that as industrial economies mature, they are becoming
more service-oriented to meet the changing demands of their population. Another trend is
the shift toward more highly skilled jobs. But all the evidence is that these changes would
be taking place—not necessarily at the same pace—with or without globalization. In fact,
globalization is actually making this process easier and less costly to the economy as a
whole by bringing the benefits of capital flows, technological innovations, and lower
import prices. Economic growth, employment and living standards are all higher than they
would be in a closed economy.
But the gains are typically distributed unevenly among groups within countries, and some
groups may lose out. For instance, workers in declining older industries may not be able to
make an easy transition to new industries.
What is the appropriate policy response? Should governments try to protect particular
groups, like low-paid workers or old industries, by restricting trade or capital flows? Such
an approach might help some in the short-term, but ultimately it is at the expense of the
living standards of the population at large. Rather, governments should pursue policies that
encourage integration into the global economy while putting in place measures to help
those adversely affected by the changes. The economy as a whole will prosper more from
policies that embrace globalization by promoting an open economy, and, at the same time,
squarely address the need to ensure the benefits are widely shared. Government policy
should focus on two important areas:
 education and vocational training, to make sure that workers have the opportunity to
acquire the right skills in dynamic changing economies; and
 well-targeted social safety nets to assist people who are displaced.
VIII. Are Periodic Crises an Inevitable Consequence of Globalization?
The succession of crises in the 1990s—Mexico, Thailand, Indonesia, Korea, Russia, and
Brazil—suggested to some that financial crises are a direct and inevitable result of
globalization. Indeed one question that arises in both advanced and emerging market
economies is whether globalization makes economic management more difficult (Box 1).
Box 1. Does globalization reduce national sovereignty in economic policy-making?
Does increased integration, particularly in the financial sphere make it more difficult for
governments to manage economic activity, for instance by limiting governments’ choices
of tax rates and tax systems, or their freedom of action on monetary or exchange rate
policies? If it is assumed that countries aim to achieve sustainable growth, low inflation
19
and social progress, then the evidence of the past 50 years is that globalization
contributes to these objectives in the long term.
In the short-term, as we have seen in the past few years, volatile short-term capital flows
can threaten macroeconomic stability. Thus in a world of integrated financial markets,
countries will find it increasingly risky to follow policies that do not promote financial
stability. This discipline also applies to the private sector, which will find it more
difficult to implement wage increases and price markups that would make the country
concerned become uncompetitive.
But there is another kind of risk. Sometimes investors—particularly short-term

investors—take too sanguine a view of a country’s prospects and capital inflows may
continue even when economic policies have become too relaxed. This exposes the
country to the risk that when perceptions change, there may be a sudden brutal
withdrawal of capital from the country.
In short, globalization does not reduce national sovereignty. It does create a strong
incentive for governments to pursue sound economic policies. It should create incentives
for the private sector to undertake careful analysis of risk. However, short-term
investment flows may be excessively volatile.
Efforts to increase the stability of international capital flows are central to the ongoing
work on strengthening the international financial architecture. In this regard, some are
concerned that globalization leads to the abolition of rules or constraints on business
activities. To the contrary—one of the key goals of the work on the international
financial architecture is to develop standards and codes that are based on internationally
accepted principles that can be implemented in many different national settings.
Clearly the crises would not have developed as they did without exposure to global capital
markets. But nor could these countries have achieved their impressive growth records
without those financial flows.
These were complex crises, resulting from an interaction of shortcomings in national policy
and the international financial system. Individual governments and the international
community as a whole are taking steps to reduce the risk of such crises in future.
At the national level, even though several of the countries had impressive records of
economic performance, they were not fully prepared to withstand the potential shocks that
could come through the international markets. Macroeconomic stability, financial
soundness, open economies, transparency, and good governance are all essential for
countries participating in the global markets. Each of the countries came up short in one or
more respects.
At the international level, several important lines of defense against crisis were breached.
Investors did not appraise risks adequately. Regulators and supervisors in the major
financial centers did not monitor developments sufficiently closely. And not enough
information was available about some international investors, notably offshore financial
institutions. The result was that markets were prone to "herd behavior"— sudden shifts of
investor sentiment and the rapid movement of capital, especially short-term finance, into
and out of countries.
The international community is responding to the global dimensions of the crisis through a
continuing effort to strengthen the architecture of the international monetary and financial
system. The broad aim is for markets to operate with more transparency, equity, and
efficiency. The IMF has a central role in this process, which is explored further in separate
fact sheets.5
20
IX. The Role of Institutions and Organizations
National and international institutions, inevitably influenced by differences in culture, play

an important role in the process of globalization. It may be best to leave an outside
commentator to reflect on the role of institutions:
"...That the advent of highly integrated commodity and financial markets has been
accompanied by trade tensions and problems of financial instability should not come as a
surprise, ...... The surprise is that these problems are not even more severe today, given that
the extent of commodity and financial market integration is so much greater.
" One possibility in accounting (for this surprise) is the stabilizing role of the institutions
built in the interim. At the national level this means social and financial safety nets. At the
international level it means the WTO, the IMF, the Basle Committee of Banking
Supervisors. These institutions may be far from perfect, but they are better than nothing,
judging from the historical correlation between the level of integration on one hand and the
level of trade conflict and financial instability on the other."6 (parentheses added)
X. Conclusion
As globalization has progressed, living conditions (particularly when measured by broader

indicators of well being) have improved significantly in virtually all countries. However,
the strongest gains have been made by the advanced countries and only some of the
developing countries.
That the income gap between high-income and low-income countries has grown wider is a
matter for concern. And the number of the world’s citizens in abject poverty is deeply
disturbing. But it is wrong to jump to the conclusion that globalization has caused the
divergence, or that nothing can be done to improve the situation. To the contrary: low-
income countries have not been able to integrate with the global economy as quickly as
others, partly because of their chosen policies and partly because of factors outside their
control. No country, least of all the poorest, can afford to remain isolated from the world
economy. Every country should seek to reduce poverty. The international community
should endeavor—by strengthening the international financial system, through trade, and
through aid—to help the poorest countries integrate into the world economy, grow more
rapidly, and reduce poverty. That is the way to ensure all people in all countries have access
to the benefits of globalization.
1
The discussion in this section is elaborated in the World Economic Outlook, International
Monetary Fund, Washington D.C., May 2000.
2
Nicholas Crafts, Globalization and Growth in the Twentieth Century, IMF Working
Paper, WP/00/44, Washington DC, April 2000.
3
These issues are explored in greater depth in IMF, World Economic Outlook, May 2000,
Chapter IV.
4
These are described in the factsheets "The Poverty Reduction and Growth Facility (PRGF)
- Operational Issues", and "Overview: Transforming the Enhanced Structural Adjustment
Facility (ESAF) and the Debt Initiative for the Heavily Indebted Poor Countries (HIPCs),"
which may be viewed at www.imf.org.
5
See "Progress in Strengthening the Architecture of the International Monetary
System": http://wwww.imf.org/external/np/exr/facts/arcguide.ht m and Guide to Progress in
Strengthening of the International Financial
System: http://www.imf.org/external/np/exr/facts/arcguide.htm.
6
Bordo, Michael D., Barry Eichengreen, and Douglas A. Irwin, Is Globalization Today
Really Different than Globalization a Hundred Years Ago? Working Paper 7195, National
Bureau of Economic Research, Cambridge, MA, June 1999.
21
International Monetary Fund (IMF)
Understanding the International Monetary Fund (IMF)
The International Monetary Fund (IMF) is based in Washington, D.C. The organization is
currently composed of 190 member countries, each of which has representation on the IMF's
executive board in proportion to its financial importance. Quotas are a key determinant of the
voting power in IMF decisions. Votes comprise one vote per SDR100,000 of quota plus basic
votes (same for all members).23
The IMF's website describes its mission as "to foster global monetary cooperation, secure
financial stability, facilitate international trade, promote high employment and sustainable
economic growth, and reduce poverty around the world."2
History of the IMF
The IMF was originally created in 1945 as part of the Bretton Woods Agreement, which
attempted to encourage international financial cooperation by introducing a system of
convertible currencies at fixed exchange rates. The dollar was redeemable for gold at $35 per
ounce at the time.1
The IMF also acted as a gatekeeper: Countries were not eligible for membership in the
International Bank for Reconstruction and Development (IBRD)—a World Bank forerunner
that the Bretton Woods agreement created in order to fund the reconstruction of Europe after
World War II—unless they were members of the IMF.45
Since the Bretton Woods system collapsed in the 1970s, the IMF has promoted the system
of floating exchange rates, meaning that market forces determine the value of currencies relative
to one another. This system remains in place today.6
IMF Activities
The IMF's primary methods for achieving these goals are monitoring capacity building and
lending.
The reports the IMF published on its monetary surveillance include the "World Economic
Outlook," the "Global Financial Stability Report," and the Fiscal Monitor.
Surveillance
The IMF collects massive amounts of data on national economies, international trade, and the
global economy in aggregate. The organization also provides regularly updated economic
forecasts at the national and international levels. These forecasts, published in the World
Economic Outlook, are accompanied by lengthy discussions on the effect of fiscal, monetary,
and trade policies on growth prospects and financial stability.
Capacity Building
The IMF provides technical assistance, training, and policy advice to member countries through
its capacity-building programs. These programs include training in data collection and analysis,
which feed into the IMF's project of monitoring national and global economies.7
Lending
The IMF makes loans to countries that are experiencing economic distress to prevent or mitigate
financial crises. Members contribute the funds for this lending to a pool based on a quota
system. In 2019, loan resources in the amount of SDR 11.4 billion (SDR 0.4 billion above
target) were secured to support the IMF’s concessional lending activities into the next decade.8
IMF funds are often conditional on recipients making reforms to increase their growth potential
and financial stability. Structural adjustment programs, as these conditional loans are known,
have attracted criticism for exacerbating poverty and reproducing the colonialist structures.9
22
Where Does the IMF Get Its Money?
The IMF gets its money through quotas and subscriptions from its member countries. These
contributions are based on the size of the country's economy, making the U.S., with the world's
largest economy, the largest contributor.
How Much Are the IMF Grants?
IMF grants are given to charities in Washington D.C. and member countries. The grants are
meant to foster economic independence through education and economic development." The
average grant size is $15,000.10
What Is the Difference Between the International Monetary Fund and the World Bank?
The International Monetary Fund is primarily focused on the stability of the global monetary
system and monitoring the currencies of the world. The aim of the World Bank is to reduce
poverty across the world and strengthen the low- to middle-class populations.
The Bottom Line
The IMF works to help reduce poverty, encourage trade, and promote financial stability and
economic growth around the world. It accomplishes this by monitoring capacity building and
providing loans. While the IMF is currently working on these goals with its 190 member
nations, the organization has still faced criticism for the possible negative impacts of its
structural adjustment programs.
Shaping Globalization
FINANCE & DEVELOPMENT, September 2014, Vol. 51, No. 3
Martin Wolf
PDF version
Wolf on emerging markets
Done wisely, it could lead to unparalleled peace and prosperity; done poorly, to disaster
Globalization is the big story of our era. It is shaping not
just economies, but societies, polities, and international
relations.
Many assume it is also, for good or ill, an unstoppable
force. History, however, suggests this is not so. We can
neither assume globalization will persist, nor that it will be
desirable in all respects. But one thing we must assume: it
is ours collectively to shape.
If globalization is done wisely, this century could prove an
unparalleled era of peace, partnership, and prosperity. If it
is done badly, it might collapse as completely as pre–World
War I globalization between 1914 and 1945.
Globalization is the integration of economic activity across borders. Other forms of
integration—above all, the spread of people and ideas—accompany it. Three interacting
forces—technology, institutions, and policy—shape it.
Over the broad sweep of history, technological and intellectual innovation is the driving
force behind globalization. It has lowered the cost of transportation and communication,
increasing opportunities for profitable economic exchange over greater distances. In the
long run, such opportunities will be exploited.
Even before the industrial revolution, mankind’s ability to navigate the seas in sailing
vessels facilitated the birth of global empires, transoceanic movement of people, and an
expansion in worldwide commerce. But technological change accelerated after the
industrial revolution, creating new opportunities.
Driving the globalization of the late 19th and early 20th centuries were the steam
locomotive, the steamship, and the telegraph. Driving the globalization of the present era
are the container ship, the jet aircraft, the Internet, and the mobile phone.
The integration of communications and computing is the technological revolution of our
era. By 2014, the world had 96 mobile-phone subscriptions and 40 Internet users for every
23
hundred inhabitants. Twenty years earlier neither was significant. Information is
increasingly digital and the world increasingly interconnected. This is a revolutionary
transformation.
Institutions also matter. Historically, empires facilitated long-distance commerce. That was
true before modern times and, still more, with the European maritime empires from the
16th to the 20th centuries. Today, the institutions that facilitate long-distance commerce
are treaties and multilateral organizations: the World Trade Organisation (WTO), the
International Monetary Fund, and regional clubs, such as the European Union.
Semipublic and purely private institutions also matter. Think of the chartered trading
company, notably the British East India Company, and then, since the 19th century, the
limited liability joint-stock company. Also important are organized markets, notably
financial markets, which developed from simple beginnings into the 24-hour, around-the-
globe networks of today.
While technology’s arrow has moved in one direction—toward opportunities for economic
integration—institutions have not. Empires have come and gone. When the European
empires disappeared after World War II, most of the newly independent countries turned
away from international commerce, judging it exploitative.
This brings to mind the third driver—policy. The movement of newly independent
developing countries toward self-sufficiency was a policy reversal. The most important
reversal of all was the worldwide collapse in globalization that followed the two world
wars and the Great Depression. The monetary order then disintegrated, and trade became
increasingly restricted.
After World War II, a limited liberalization, largely of trade and the current account,
spread across the high-income economies, under U.S. auspices. Then, in the late 1970s and
in the 1980s and 1990s, domestic market liberalization, opening of international trade, and
loosening of exchange controls spread across the world.
Crucial steps on this journey were China’s adoption of “reform and opening up” in the late
1970s under the leadership of Deng Xiaoping; the election of Margaret Thatcher as U.K.
prime minister in 1979 and Ronald Reagan as U.S. president in 1980; the launch of the
European Union’s “single market” program in 1985; the Uruguay Round of multilateral
trade negotiations, which began in 1986 and ended eight years later; the collapse of the
Soviet empire between 1989 and 1991; the opening up of India after its foreign exchange
crisis of 1991; the 1992 decision to launch a European monetary union; the creation of the
WTO in 1995; and China’s entry into the WTO in 2001.
Embrace of markets
Underlying these changes was a rejection of central planning and self-sufficiency and an
embrace of markets, competition, and openness. This is not a global empire. For the first
time in history, an integrated world economy connects activities located in a large number
of independent states with the shared goal of prosperity.
It worked, albeit imperfectly. According to the McKinsey Global Institute (2014), flows of
goods, services, and finance rose from 24 percent of global output in 1980 to a peak of 52
percent in 2007, just before the Great Recession. Between 1995 and 2012, the ratio of
trade in goods to world output rose from 16 to 24 percent.
Virtually all economies became more open to trade. The ratio of trade in goods (exports
plus imports) to GDP in China rose from negligible levels in the 1970s to 33 percent in
1996 and 63 percent in 2006, before plunging during the financial crisis. The ratio of
India’s trade to GDP rose from 18 percent in 1996 to 40 percent in 2008 (see Chart 1).
24
An important driver of trade expansion
was the availability of low-cost workers
in emerging economies. Before World
War I, the big opportunity was to
incorporate undeveloped land,
particularly in the Americas, into
production for the global market. This
time, the biggest opportunity is
incorporating billions of previously
isolated people as workers and then
consumers and savers.
Trade involving emerging economies
duly exploded. In 1990, 60 percent of
trade in goods was among the high-
income economies, another 34 percent
was between high-income and
emerging market economies, and just 6 percent was among emerging market economies.
By 2012, these ratios were 31 percent, 45 percent, and 24 percent, respectively.
Global companies are central players. This is shown by, among other things, the growth of
foreign direct investment (FDI), which results in cross-border ownership of businesses. In
1980, FDI was negligible. Today, it is not just a large flow (averaging 3.2 percent of global
output between 2005 and 2012) but a stable one. It has proved triply helpful—as a source
of knowledge transfer, a vehicle for promoting cross-border economic integration, and a
stable form of finance.
Other areas of finance have been far less stable. Total cross-border financial flows peaked
at 21 percent of global output in 2007, before collapsing to 4 percent in 2008 and 3 percent
in 2009. A modest recovery ensued. But cross-border lending, bond issuance, and portfolio
equity flows had not recovered to precrisis levels even by 2012. Cross-border lending,
predominantly from banks, was particularly volatile, as is usual in crise s (see Chart 2).
While trade, finance, and
communication have grown rapidly,
this is not so true of movements of
people. Although, international
travelers and foreign students increased
markedly, migrants grew at virtually the
same rate as the global population—
despite huge gaps in real wages. Trade
and capital flows are, to an extent, a
substitute for movement of people. Yet
great pressure for movement of people
from poor countries to richer ones
persists, particularly across the Rio
Grande and the Mediterranean Sea.
Globalization, then, has meant growing
cross-border economic activity. But the
story is more complex when it comes to
prosperity.
25
The age of globalization has driven
rapid shifts in the location of economic
activity. In 1990, the share of the high-
income economies in global output at
purchasing power parity (or PPP, the
rate at which currencies would be
converted if they were to buy the same
quantity of goods and services in each
country) was 70 percent, with the
European Union contributing 28
percent and the United States
25 percent. By 2019, according to the
IMF, this total will be down to 46
percent.
Over the same period, China’s share is
forecast to rise from 4 percent to 18
percent and India’s from 3 percent to 7
percent. The rapid growth of the most
successful emerging market economies,
which caused this shift, would not have
occurred without the access to trade and know-how provided by globalization (see Chart
3).
A degree of convergence in standards
of living has also occurred (see Chart
4). China’s GDP per capita, relative to
the United States, is forecast to rise
from 2 percent in 1980 to 24 percent in
2019. This is an extraordinary
performance by any standard. China has
become a middle-income country with
a GDP per capita at PPP forecast to be
higher than Brazil’s by 2019. India, too,
has registered convergence, though on a
more modest scale. Indonesia and
Turkey have also done quite well. But
Brazil and Mexico are forecast to be
poorer relative to the United States in
2019 than they were back in 1980.
Seizing the opportunities afforded by
globalization turns out to be hard.
Decline in mass poverty
The age of globalization has brought an extraordinary decline in mass poverty, again
largely due to China. In east Asia and the Pacific, the proportion of the population living
on less than $1.25 a day (at PPP) fell, astonishingly, from 77 percent in 1981 to 14 percent
in 2008 (World Bank, 2014). In south Asia, the proportion in extreme poverty declined
from 61 percent in 1981 to 36 percent in 2008. In sub-Saharan Africa, however, the share
of people in extreme poverty was 51 percent in 1981 and still 49 percent in 2008.
Finally, globalization has been associated with complex shifts in the distribution of
incomes across and within countries. The World Bank’s Branko Milanovic (2012)
suggests that the degree of inequality among individuals across the globe has stayed
roughly constant in the era of globalization, with rising inequality within most economies
offsetting the success of some large emerging economies in raising their average incomes
relative to those in rich countries. He also shows that the top 5 percent of the global
income distribution enjoyed large increases in real income and the top 1 percent very large
increases between 1988 and 2008. Those in the 10th to the 70th percentiles from the
bottom also did quite well.
Two groups, however, did relatively badly—the bottom 10 percent, the world’s poorest,
and those in the 70th to the 95th percentiles from the bottom, who are the middle- to
lower-income groups in high-income countries. Thus, a globally beneficial rise in real
incomes was associated with rising inequality within many high-income countries. The
explanations are complex, but globalization was surely among them.
26
What might lie ahead?
Technology will continue to drive integration. Soon, almost every adult and many children
are likely to own a smart mobile device that offers instant access to all the information
available on the World Wide Web. It will make the transmission of everything that can be
digitized—information, finance, entertainment, and much else—essentially costless. An
explosion of exchange is certain.
While some areas of technology are making leaps, others, such as the cost of transporting
goods and people, are not falling to any significant degree. This suggests that
technological advances will open up far greater opportunities for trade in ideas and
information than in goods or people.
The future of institutions and policy is more doubtful.
Perhaps the most obvious institutional and policy failure has been in liberalized and
globalized finance. There were 147 banking crises between 1970 and 2011 (Laeven and
Valencia, 2012), some of global significance—particularly the Asian crisis of 1997–98 and
the Great Recession of 2008–09—and the subsequent crisis in the euro area. These shocks
have had huge economic and fiscal costs. Despite efforts to make the financial system
more robust and regulation and supervision more effective, success remains uncertain.
Floating currencies
Closely related to the financial disorder is the monetary system. Since 1971, the global
regime has been one of floating currencies, with the U.S. dollar dominant. This has proved
workable. But it has also been quite unstable. Many complain that it has permitted the
United States to adopt policies that cause unpredictable and unmanageable shifts in capital
flows to and from hapless outsiders. Nevertheless, the unloved floating dollar standard is
likely to endure, because no other currency and no other global arrangement have any
hope of commanding the needed consent, at least in the near future.
Trade policy has been relatively robust, with backsliding into protectionism remarkably
well contained in high-income economies. Yet the effort to complete the Doha Round of
multilateral trade negotiations has essentially failed, and the future of ambitious (and
controversial) plans for plurilateral trade agreements is uncertain. The high tide of trade
liberalization may have passed. The growth of world trade in goods may also have slowed
permanently.
Some governments are seeking to control the Internet. But the likelihood is that this effort
will not halt the flow of commercial activity, though it may restrict the ability of citizens to
access politically uncomfortable opinions. Meanwhile, restrictions on movement of people
are likely to increase rather than fall in the years ahead.
While economies have become more interconnected, governments continue to supply
security, implement laws, regulate commerce, and manage money. Where commerce flows
freely, more than one jurisdiction is affected and, by definition, all involved must agree to
the legal and regulatory frameworks within which transactions occur.
This contrast between the economic and political dimensions of our globalizing world is a
source of unpredictability. The more commerce is to flow, the more states must agree to
deep coordination of their institutions and policies, as is evident in the European Union.
Such integration can also cause tension, as the euro area crisis showed. For many countries
today, a comparable degree of integration remains unthinkable.
For these reasons, globalization is sure to remain somewhat limited. People trade more
with fellow citizens than with foreigners. This is in part a result of distance. But it is also a
matter of trust and transparency. Borders matter and will continue to do so.
Ultimately, governments must consent to openness. In doing so, they will take into account
the domestic political realities. In a world of sluggish growth and rising inequality in many
countries, notably high-income ones, the durability of such consent cannot, alas, be
assumed. Human beings remain tribal and states remain rivals.
In 1910, at the apogee of pre–World War I globalization, British politician and journalist
Norman Angell wrote The Great Illusion, which argued that war would be economically
futile. He was right. Intellectually, the leaders of almost all countries now agree: conflict
cannot enhance the prosperity of their nations. Yet, as the events of 1914 proved, the fact
that war is ruinous does not guarantee it will be avoided, though nuclear weapons have
raised the cost of conflict to unimaginable heights.
Even if peace among the great powers is maintained, the cooperation needed to secure an
ever more integrated and prosperous global economy may not be. Foremost among the
challenges ahead is managing the declining power of the West and the rise of China and
other emerging markets. History teaches that neither technology nor economics guarantees
27
globalization’s future in the short to medium term; only political choices do. The onus on
us all is to manage the opportunities offered by globalization wisely.
STRUCTURES OF GLOBALIZATION
 THE GLOBAL ECONOMY - The global economy is innately tied to trade; it allows
countries around the world to obtain any resource they may want, whether or not it is
produced on the home front. This availability of resources is facilitated through trade.
The global economy allows us to eat the foods we want all year round and buy clothing
and gadgets at lower prices. During times of peace, it is beneficial in a global
economy, to see other nations succeed. On the other hand, during times of unrest,
dependence on outside nations, in a global economy, may seem scary. Due to
globalization and other factors, it is impossible for large industrialized nations to exit the
global economy without devastating effects.
The global economy has changed significantly over the past few decades, in the way
that it is organised and governed by collaborating nations. These changes have
repercussions that not only affect the flow of goods and services between countries, but
also the movement of people. As we’ve seen on occasions over the last century, too
great a fluctuation in this international economic system can lead to a global economic
crisis.
So what exactly is the global economy, how does it function, and how does it affect our
lives? Here we take a closer look to help you understand the complexities of the force
that governs the modern world!
What is a global economy?
The global economy refers to the interconnected worldwide economic activities that take
place between multiple countries. These economic activities can have either a positive
or negative impact on the countries involved.
The global economy comprises several characteristics, such as:
 Globalisation: Globalisation describes a process by which national and regional economies,

societies, and cultures have become integrated through the global network of trade,
communication, immigration, and transportation. These developments led to the advent of the
global economy. Due to the global economy and globalisation, domestic economies have
become cohesive, leading to an improvement in their performances.
 International trade: International trade is considered to be an impact of globalisation. It refers
to the exchange of goods and services between different countries, and it has also helped
countries to specialise in products which they have a comparative advantage in. This is an
economic theory that refers to an economy's ability to produce goods and services at a lower
opportunity cost than its trade partners.
 International finance: Money can be transferred at a faster rate between countries compared
to goods, services, and people; making international finance one of the primary features of a
global economy. International finance consists of topics like currency exchange rates and
monetary policy.
 Global investment: This refers to an investment strategy that is not constrained by
geographical boundaries. Global investment mainly takes place via foreign direct investment
(FDI).
Why is the global economy important?
We can understand the importance of the global economy by looking at it in relation to

emerging markets:
 Economic importance at a micro and macro level: The increase in the world’s population
has led to emerging markets growing economically, making them one of the primary engines of
28
world economic growth. The growth and resilience shown by emerging markets is a good sign
for the world economy. Before delving into the next point, you need to understand the concept
of microeconomics. It refers to the study of the behaviour of households, individuals, and firms
with respect to the allocation of resources and decision-making. In simpler terms, this branch of
economics studies how people make decisions, what factors affect their decisions, and how
these decisions affect the price, demand, and supply of goods in the market. Therefore, from
the perspective of microeconomics, some of the largest firms with high market value and a few
of the richest individuals in the world hail from these emerging markets, which has helped in the
higher distribution of income in these countries. However, many of these emerging countries are
still plagued by poverty, and work still needs to be done to work towards eradicating it.
 Long-term world economic outlook: According to financial and economic projections based
on demographic trends and capital productivity models, the GDP in emerging market economies
in 2019 are likely to keep increasing at a positive rate. According to an emerging markets
economic forecast for 2019 conducted by Focus Economics, the economy is set to increase by
7.5% in India, 6.6% in Philippines, 6.3% in China, 5.3% in Indonesia, 5.1% in Egypt, 4.9% in
Malaysia, 3.8% in Peru and 3.7% in Morocco.
Who controls the global economy?
Many people think that the global economy is controlled by governments of the largest
economies in the world, but this a common misconception. Although governments do
hold power over countries’ economies, it is the big banks and large corporations that
control and essentially fund these governments. This means that the global economy is
dominated by large financial institutions. According to world economic news, US banks
participate in many traditional government businesses like power production, oil refining
and distribution, and also the operating of public assets such as airports and train
stations. This was proven when certain members of the US Congress sent a letter to the
Federal Reserve Chairman Ben Bernanke. Here’s an excerpt from the letter:
“Here are a few examples. Morgan Stanley imported 4 million barrels of oil and
petroleum products into the United States in June, 2012. Goldman Sachs stores
aluminium in vast warehouses in Detroit as well as serving as a commodities derivatives
dealer. This “bank” is also expanding into the ownership and operation of airports, toll
roads, and ports. JP Morgan markets electricity in California.
In other words, Goldman Sachs, JP Morgan and Morgan Stanley are no longer just
banks – they have effectively become oil companies, port and airport operators,
commodities dealers, and electric utilities as well.”
How does the global economy work?
The functioning of the global economy can be explained through one word —
transactions. International transactions taking place between top economies in the
world help in the continuance of the global economy. These transactions mainly
comprise trade taking place between different countries. International trade includes the
exchange of a variety of products between countries. It ranges all the way from fruits
and foods, to natural oil and weapons. Such transactions have a number of benefits
including:
 Providing a foundation for worldwide economic growth, with the international economy set to
grow by 4% in 2019 (source: World Trade Organisation);
 Encouraging competitiveness between countries in various markets;
 Raising productivity and efficiency across countries;
 Helping in the development of underdeveloped countries by allowing them to import capital
goods (machinery and industrial raw materials) and export primary goods (natural resources
and raw materials).
What are the effects of global economy?
Nearly every country in the world is in some way affected by things that happen in what
may seem at times, like unrelated countries - due to the influence of the global
economy. A good example of this is the economic impact that the Brexit vote will have
29
other countries, not only in Europe, but across the globe. Brexit was referendum
decision for the United Kingdom to withdraw from the European Union (EU).
The main cause of these effects is economics — based on the production and
exchange of goods and services. Restrictions on the import and export of goods and
services can potentially hamper the economic stability of countries who choose to
impose too many.
The purpose of international trade is similar to that of trading within a country. However,
international trade differs from domestic trade in two aspects:
 The currencies of at least two countries are involved in international trade, so they must be
exchanged before goods and services can be exported or imported;
 Occasionally, countries enforce barriers on the international trade of certain goods or services
which can disrupt the relations between two countries.
Countries usually specialise in those products that they can produce efficiently, which
helps in reducing overall manufacturing costs. Then, countries trade these products with
other countries, whose product specialisation is something else altogether. Having
greater specialisation helps countries take advantage of economies of scale.
Economies of scale refer to the proportionate saving in costs gained by an increased
level of production. Manufacturers in these countries can focus all their efforts on
building factories for specialised production, instead of spending additional money on
the production of various types of goods.
Occasionally countries add barriers to international trade. Some of these barriers

include trade tariffs (taxes on imports) and trade quotas (limitation on the number of
products that can be imported into a country). Trade barriers often affect the economies
of the trading countries, and in the long run, it becomes difficult to keep employing such
barriers.
What are the benefits of global economy?
There are numerous benefits of a global economy, which include:
 Free trade: Free trade is an excellent method for countries to exchange goods and services. It
also allows countries to specialise in the production of those goods in which they have a
comparative advantage.
 Movement of labour: Increased migration of the labour force is advantageous for the recipient
country as well as for the workers. If a country is going through a phase of high unemployment,
workers can look for jobs in other countries. This also helps in reducing geographical inequality.
 Increased economies of scale: The specialisation of goods production in most countries has
led to advantageous economic factors such as lower average costs and lower prices for
customers.
 Increased investment: Due to the presence of global economy, it has become easier for
countries to attract short-term and long-term investment. Investments in developing countries go
a long way in improving their economies.
Factors affecting global economy
According to the latest economic news, here are some of the key factors that influence
and affect how well the global economy works:
 Natural resources;
 Infrastructure;
 Population;
 Labour;
 Human capital;
 Technology;
 Law
30
MARKET INTEGRATION
Market integration: the role of regulation

Speech by Mr Fernando Restoy, Chairman, Financial Stability Institute, Bank for International
Settlements, at the IIF Market fragmentation roundtable, Washington DC, United States, 10
April 2019.
BIS, FSI speech |

15 April 2019
by Fernando Restoy
Introduction1
One of the key features of global financial market integration is that, wherever they happen to be
established, entities are able to offer financial services in other jurisdictions on terms similar to
those enjoyed by domestic market participants. The degree of integration could be measured in
terms of, for instance, the intensity of cross-border financial flows or the market quota of foreign
entities in domestic markets.
Market integration provides a number of social benefits, including broadening the range of
financial services and investment opportunities available to consumers and increasing
competition in the provision of those services. In addition, integrated financial markets act as
private risk-sharing mechanisms that facilitate the smoothing of both economic and financial
cycles in domestic economies. Moreover, market integration enables greater risk diversification,
thereby contributing to more effective risk management and to financial stability.
Regulation certainly plays a highly relevant role in facilitating market integration. In particular,
the homogeneity of financial regulation across jurisdictions and the consistency of the
requirements imposed on internationally active entities may provide powerful incentives for
cross-border financial activities and operations. By the same token, heterogeneous rules or any
type of regulatory discrimination against foreign players in domestic markets tend to inhibit the
internationalisation of financial activity.
Regulation: cause or consequence of fragmentation
Yet market integration is by no means the only, let alone the most relevant, policy objective.
Indeed, fostering international market integration is not the primary goal of financial regulation.
As it is, standard regulatory mandates, such as pursuing financial stability or ensuring consumer
protection in a specific jurisdiction, may occasionally conflict with achieving international
regulatory consistency.
Insofar as domestic economic or market conditions relevant to the achievement of specific policy
goals differ across jurisdictions, regulation may need to be adapted to those conditions, even at
the cost of generating regulatory discrepancies across jurisdictions or additional costs for
internationally active entities.
In other words, regulatory heterogeneity is at times more the consequence than the cause of the
specificities prevailing in different jurisdictions.
As an example, if the failure of a foreign bank's subsidiary generates a systemic impact in the
host jurisdiction - without necessarily affecting the viability of the group as a whole - there is a
rationale for imposing specific requirements on the local subsidiary, unless the parent company
is firmly and credibly committed to supporting its subsidiaries in case of need. This is, of course,
the rationale behind different forms of ring-fencing.
Another example is the tailoring of prudential requirements for non-internationally active banks,
in application of the principle of proportionality. Depending on the complexity of, or the
business model used by, those institutions, some adjustments may be warranted to achieve a
31
proper balance between protecting financial stability and facilitating sufficient competition in
domestic markets.
Yet it is clear that there is always a limit to what could be termed an acceptable degree of
national regulatory specificity. In the case of ring-fencing, the limit should be set at the point
where those domestic requirements started penalising foreign subsidiaries vis-à-vis local players.
In the case of proportionality, one of the limits would be to avoid overprotecting smaller
institutions from legitimate competitive forces, as this would hinder industry efficiency and the
participation of international banks in that market.
The relevant role of international standards
The scope for (warranted) inconsistencies in relation to specific regulatory requirements for
internationally active banking groups is certainly limited. These are players that compete
globally and should be subject to similar rules. International standards are precisely designed to
that very end.
It is often observed that a major source of the regulatory inconsistencies behind market
fragmentation is the incomplete implementation of international standards in relevant
jurisdictions. That may be the consequence of unjustified delays over the agreed deadlines or the
introduction of idiosyncratic adjustments to internationally agreed principles.
Indeed, according to the Basel Committee on Banking Supervision (BCBS (2018)), there is still
insufficient progress in the timely adoption of the Basel III framework. In particular, a significant
number of jurisdictions have not met the agreed timelines for specific standards. Furthermore,
some jurisdictions have reported that their implementation of certain standards has been delayed
because of their concerns over the pace of implementation in other jurisdictions. This is
specifically the case for the Net Stable Funding Ratio, whose implementation deadline was 1
January 2018, and for which most member jurisdictions have not yet approved final rules.
It could also be argued that there is room for improvement in the way both supervisory colleges
and crisis management groups currently function. Improvement in this area would certainly
facilitate further consistency of prudential requirements and the establishment of sensible
internal total loss-absorbing capacity requirements at the legal entity level within international
groups.
What else is needed?
Yet, while a necessary condition, it is not certain that complete timely and consistent
implementation of existing international standards would ensure regulatory consistency across
jurisdictions. In other words, one should accept, at least hypothetically, that effective
harmonisation of relevant regulatory requirements for internationally active entities may require
additional policy work at the international level. This is certainly the case for insurance
regulation, where the scope of international standards is still quite limited. But it is, to a
significant extent, also true in the case of banking regulation, despite the considerable effort
made to develop the prudential and resolution frameworks in the context of the post-crisis
reforms.
Let's take the example of Basel III. This new framework has done a terrific job of broadening the
scope of international standards by establishing common requirements for minimum capital,
liquidity coverage and large exposures. But arguably, it still falls short of ensuring complete
harmonisation of the relevant prudential regulation for internationally active banks.
While Basel III has secured a common definition of capital and harmonised Pillar 1 capital
requirements, the procedures followed to measure regulatory capital still lack homogeneity.
Capital is a residual obtained (roughly) by subtracting assets from liabilities, as reflected in
financial statements. Thus the insufficient convergence of accounting standards across
jurisdictions may imply significant discrepancies in capital measurement.
More importantly, the valuation of assets for prudential purposes does not follow consistent
criteria, given insufficient international guidance on the matter. And, as measuring capital is
32
highly sensitive to asset valuations, that inconsistency diminishes the comparability of solvency
indicators across jurisdictions.
Specific discrepancies affect the measurement of non-performing loans and provisioning

practices. For instance, in a number of jurisdictions, supervisors override the accounting code by
imposing specific provisioning requirements or introduce a variety of prudential backstops for
accounting provisions (Restoy and Zamil (2017)). In addition, criteria for collateral valuations
and interest accruals in non-performing loans vary markedly across jurisdictions (Baudino et al
(2018)).
In the same vein, while Basel III establishes uniform minimum Pillar 1 capital requirements,
these are not the binding constraint for effectively required capital in most jurisdictions. Actual
capital requirements are typically established by Pillar 2 capital add-ons derived from
Supervisory Review and Evaluation Process analysis and/or supervisory stress tests.
As things stand, there is little international guidance on what criteria supervisors should follow to
determine those capital add-ons. In one of our forthcoming publications (Duckwitz et al (2019)),
we find that jurisdictions display a number of important differences in determining capital add-
ons under Pillar 2. First, there is no consensus on what the Pillar 2 capital add-ons should cover
(eg some focus only on risks not covered under Pillar 1, while others also include Pillar 1 risks
that may be underestimated; and still others include a systemic risk charge within their Pillar 2
frameworks). Second, there is no uniform approach to how the Pillar 2 add-ons, if imposed,
should interact with the new buffer requirements introduced under Basel III. Finally, the
approaches followed by supervisors to determine the add-ons also vary, ranging from what we
label "guided discretion" methods (eg methodologies that provide some hard-wired parameters
around the judgments of supervisors) to other authorities' determining Pillar 2 add-ons through a
"holistic assessment" of the institution relying heavily on the informed judgments of supervisory
teams. Collectively, these diverse approaches invariably lead to different Pillar 2 capital
outcomes across jurisdictions.
As for stress tests, another FSI study (Baudino et al (2018)) shows how authorities in selected
jurisdictions design stress tests in different ways across certain key features - covering, among
other things, the existence and level of capital thresholds; the number and severity of stress
scenarios; the inclusion of feedback effects and balance sheet adjustments; and the restrictions
imposed on income components over the stress horizon.
The disparity of the criteria followed to supplement the harmonised Pillar 1 requirements implies
that Basel III cannot, by itself, guarantee a complete harmonisation of actual capital obligations
across jurisdictions.
In sum
Analysing the relationship between regulation and market fragmentation requires a lot of
subtlety. Regulatory heterogeneity is not always the cause - and certainly not the main cause - of
fragmentation; and, it is often the consequence of a lack of market integration stemming from
other factors.
Nevertheless, regulation could contribute to a higher degree of market integration if existing

discrepancies were confined to what is really warranted by the need to accommodate domestic
specificities in order to accomplish policy objectives.
Moreover, while international standards play a crucial role in limiting unwarranted

fragmentation, there is scope for further strengthening their contribution to market integration by
ensuring complete, timely and consistent implementation.
All told, the ambition of ensuring a level playing field for internationally active entities may need
to look beyond adequate implementation of existing standards, namely at additional policy work
aimed at providing international guidance on high-level issues currently covered by widely
disparate approaches.
Such additional policy work will acquire even greater significance against the backdrop of rapid
technological developments with the potential to disrupt the financial industry. In particular, new
33
common standards may be required in the forthcoming feature to ensure a coordinated
adjustment of the regulatory perimeter to (a) accommodate some of the new providers of
financial services and (b) establish consistent rules to deal with financial institutions' increasing
reliance on technology.
References
Basel Committee on Banking Supervision (2018): Basel III Monitoring Report, March.
Baudino, P, R Goetschmann, J Henry, K Taniguchi and W Zhu (2018): "Stress-testing banks - a

comparative analysis", FSI Insights, no 12, November.
Baudino, P, J Orlandi and R Zamil (2018): "The identification and measurement of non-
performing assets: a cross-country comparison", FSI Insights, no 7, April.
Duckwitz, V, S Hohl, K Weissenberg and R Zamil (2019): "Pillar 2, risk-based supervision and
proportionality", FSI Insights, forthcoming.
Restoy, F and R Zamil (2017): "Prudential policy considerations under expected loss
provisioning: lessons from Asia", FSI Insights, no 5, October.
THE GLOBAL INTERSTATE SYSTEM
CONTEMPORARY GLOBAL GOVERNANCE
Global governance brings together diverse actors to coordinate collective action at the
level of the planet. The goal of global governance, roughly defined, is to provide global
public goods, particularly peace and security, justice and mediation systems for conflict,
functioning markets and unified standards for trade and industry. One crucial global
public good is catastrophic risk management – putting appropriate mechanisms in place
to maximally reduce the likelihood and impact of any event that could cause the death
of 10 per cent of humanity across the planet, or damage of equivalent magnitude. See
here for a list of global catastrophic risks.
The leading institution in charge of global governance today is the United Nations. It
was founded in 1945, in the wake of the Second World War, as a way to prevent future
conflicts on that scale. The United Nations does not directly bring together the people of
the world, but sovereign nation states, and currently counts 193 members who make
recommendations through the UN General Assembly. The UN’s main mandate is to
preserve global security, which it does particularly through the Security Council. In
addition the UN can settle international legal issues through the International Court of
Justice, and implements its key decisions through the Secretariat, led by the Secretary
General.
The United Nations has added a range of areas to its core mandate since 1945. It works
through a range of agencies and associated institutions particularly to ensure greater
shared prosperity, as a desirable goal in itself, and as an indirect way to increase global
stability. As a key initiative in that regard, in 2015, the UN articulated the Sustainable
Development Goals, creating common goals for the collective future of the planet.
34
Beyond the UN, other institutions with a global mandate play an important role in global
governance. Of primary importance are the so-called Bretton Woods institutions: the
World Bank and the IMF, whose function is to regulate the global economy and credit
markets. Those institutions are not without their critics for this very reason, being often
blamed for maintaining economic inequality.
Global governance is more generally effected through a range of organisations acting
as intermediary bodies. Those include bodies in charge of regional coordination, such
as the EU or ASEAN, which coordinate the policies of their members in a certain
geographical zone. Those also include strategic or economic initiatives under the
leadership of one country – NATO for the US or China’s Belt and Road Initiative for
instance – or more generally coordinating defense or economic integration, such as
APEC or ANZUS. Finally, global governance relies on looser norm-setting forums, such
as the G20, the G7, the World Economic Forum: those do not set up treaties, but offer
spaces for gathering, discussing ideas, aligning policy and setting norms. This last
category could be extended to multi-stakeholder institutions that aim to align global
standards, for instance the Internet Engineering Taskforce (IETF) and the World Wide
Web Consortium (W3C).
In summary, global governance is essential but fragmented, complex and little
understood. In this context, the key questions raised by the Global Challenges
Foundation are, how to reform institutions, how to develop alternative institutions, and
how to use the new possibilities of technology to improve governance.
GLOBAL GOVERNANCE
The Global Governance perspective seeks to examine gaps in the international system for managing complex
issues and to engage stakeholders on practical steps for collective problem-solving. It pays particular attention to
informing successful multilateral negotiations on creating or reforming global institutions, and to engaging more
effectively new transnational actors from the private sector and civil society.
Making global governance work is a defining challenge of our time, given that too often international leaders fail
to agree on, let alone pursue, concerted action to address pressing transnational problems at the intersection of
peace, security and justice.
The Hague Institute engages governments, international organizations, the business community, and civil society
to create partnerships for policy dialogue and research, capacity-building, and the exchange of knowledge.
By generating innovative, demand-driven solutions derived from evidenced-based research, this program aims to
improve global collective action by strengthening institutions, networks, and ideas across borders and professional
disciplines.
Thematic Focus and Projects

Global Governance Reform
In a rapidly globalizing world, virtually everything is in flow: Information, trade, finances, and people. Good
global governance can serve as a beacon that helps us negotiate these rapids of contemporary human interaction.
The Institute makes policy recommendations to overcome global governance challenges by improving the
efficiency, effectiveness, and legitimacy of collective actions undertaken by relevant stakeholders.
35
Global Business, Labor, and Economic Governance
The core theme Global Justice through Business, Labor, and Economic Governance focus on the role of the private
sector, labor, and multilateral economic institutions (for example, the G20, ASEAN, the EU, the WTO, and the UN
system including the IFIs, ILO, and WIPO) in strengthening the peace-security-justice nexus, including by
advancing and shaping global norms and principles as well as the United Nations’ Sustainable Development
Goals.
Activities are undertaken under this theme aim to improve the global governance of economic factors – including
trade, financial flows, labor, and intellectual property – by fostering innovation as well as by maximizing these
factors to advance global peace, security, and justice (for example, by strengthening the role of international
institutions in the transfer and utilization of climate-friendly technologies in developing countries). The role of
climate change as a threat multiplier that places human security and the global economy at risk is a cross-cutting
element of global governance that will frequently feature in research activities conducted within this pillar. In
addition, this core theme will prioritize migration management, including vis-à-vis the current refugee and
internally displaced persons crisis.
Global Security, Justice, and Governance

The project departs from the insight that no single state or group of states can manage current and emerging global
challenges on their own. Since uncertain governance begets insecurity and insecurity is a gateway to injustice, a
renewed effort to upgrade the global governance architecture so as to manage interdependence effectively, justly,
and with strategic vision is both a moral and a practical imperative. Security, justice, and governance are
inextricably linked.
Global governance: present and future

 Jinseop Jang,
 Jason McSparren &
 Yuliya Rashchupkina
Palgrave Communications volume 2, Article number: 15045 (2016) Cite this article
 108k Accesses
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Abstract
Globalization, the end of the Cold War and increased involvement of non-state actors in global
affairs represent fundamentally shifting relations of power, speeding up national economies’
integration and contributing to the convergence of policies in different issue domains. This
review considers the state of global governance by presenting a variety of global governance
arrangements, key challenges facing governance in an increasingly globalized context and
possibilities for the future governance. Current global governance arrangements favour
flexibility over rigidity, prefer voluntary measures to binding rules and privilege partnerships
over individual actions. This synopsis of the state of global governance examines the evolving
role that sovereignty and the enduring human struggles for power and equity are playing in
shaping international relations and governance. This contribution argues that individual
empowerment, increasing awareness of human security, institutional complexity, international
power shifts and the liberal world political paradigm will define the future of global governance.
This article is published as part of a thematic collection dedicated to global governance.
Introduction
Global governance is a product of neo-liberal paradigm shifts in international political and
economic relations. The privileging of capital and market mechanisms over state authority
created governance gaps that have encouraged actors from private and civil society sectors to
assume authoritative roles previously considered the purview of the State. This reinforces the
divergence of views about how to define the concept of global governance, issues that are of the
utmost importance and priority. Some scholars argue that global governance as it is practiced is
not working (Coen and Pegram, 2015: 417), while others believe that global governance is
constantly adapting by readjusting strategies and approaches to solutions and developing new
tools and measures to deal with issues that impact communities throughout the world (Held and
36
Hale, 2011). Rather than judging current global governance, this contribution seeks to provide an
overview of the current state of global governance by discussing its present state vis à vis the
challenges that it faces and its future.
The perspective employed here presents global governance as a tool to identify solutions to
problems created by neo-liberal globalization (Biermann and Pattberg, 2008: 279). As such, the
concept of global governance relates to the interaction of myriad collective or individual entities
emanating from various societal and professional orientations, which form networks that engage
to address issues that threaten local and global communities. Global governance is concerned
with issues that have become too complex for a single state to address alone. Humanitarian
crises, military conflicts between and within states, climate change and economic volatility pose
serious threats to human security in all societies; therefore, a variety of actors and expertise is
necessary to properly frame threats, devise pertinent policy, implement effectively and evaluate
results accurately to alleviate such threats.
Structure and actors: stakeholders of global

governance
The proliferation of networked global markets, revolution in global communications
technologies, the end of the Cold War and increased involvement of non-state actors in global
affairs all contribute to “globalization”. Increased interconnection among nations has advanced
the exchange of knowledge by bringing peoples, cultures, communities and states closer in an era
in which issues call for increased international collaboration (Bhagwati, 2004; McGrew, 2008).
The scope of modern issues has become “global”, beyond the capacity for state governments
alone to address such issues. The former United Nations (UN) Secretary-General, Kofi Annan
acknowledged that “no State, however powerful, can protect itself on its own” (Annan, 2005: 7)
and that “the threats we face are interconnected” (Annan, 2005: 25). As a result, we witness
broad strands of cooperative and competitive interdependency among sovereign nations,
transnational corporations (TNCs), networks of experts and civil societies.
The current phenomenon of global governance is well captured by Biermann and Pattberg in
their overview of global environmental governance for the Annual Review of Environmental
Resources of 2008. They describe contemporary governance through the following features: (1)
the emergence of new types of agency and of actors in addition to national governments; (2) the
emergence of new mechanisms and institutions of global governance that go beyond traditional
forms of state-led, treaty-based regimes; and (3) increasing segmentation and fragmentation of
the overall governance system across levels and functional spheres (Biermann and Pattberg,
2008: 280).
A multitude of actors define and shape the current structure of global governance. States,
international organizations, non-governmental organizations (NGOs), multinational corporations,
scientific experts, civil society groups, networks, partnerships, private military and security
companies, as well as transnational criminal and drug-trafficking networks provide world politics
with multi-actor perspectives and take part in steering the political system (Dingwerth and
Pattberg, 2006; Biermann and Pattberg, 2012; Karns and Mingst, 2015). Global governance
actors broaden the scope of activities in which they are involved and they also change the
patterns of interaction and cooperation in tackling current issues on a global level. Current global
governance arrangements favour flexibility over rigidity, prefer voluntary measures to binding
rules, choose partnerships over individual actions, and give rise to new initiatives and ideas.
While the modes of global governance vary widely, four general structures can be identified:
International Governmental Organizations (IGOs), Public–Private Partnerships (PPPs), Private
governance and tripartite governance mechanisms. IGOs such as the World Trade Organization
and the UN system are examples of existing state-centered governance mechanisms. IGOs,
however, utilize partnerships with non-state actors that have expertise and resources concentrated
in service sectors and environments that IGOs may lack. Such arrangements maximize
efficiency. Abbott and Snidal (2010) use the term “Transnational New Governance” to recognize
the way IGOs expand capacity and access to resources by including private and non-
37
governmental actors and institutions. This formulates global collaborative networks in which
IGOs shape and support the operations of NGOs and certain private enterprises. Such
governance structures are considered to be PPPs. The UN Sustainable Development Goals
(SDGs) utilize the PPP strategy across all aspects of implementation of the SDGs.
The UN Global Compact is another example of an international PPP. The UN Global Compact is
a forum that encourages TNCs to share case studies that illustrate the ways a firm is
implementing the SDGs in host communities where they operate. The objective is to formulate a
digital record of best practices in Corporate Social Responsibility for public, private and civil
society stakeholders located at all levels of governance—the local, state and transnational—to
engage in discourse and form collaborative efforts for the purpose of accomplishing what the
SDGs identify as expected outcomes. In addition, an increasing trend of private governance
exists that sets sector-specific standards; and, there are alternative forms of governance that are
considered as tripartite arrangements among state, private and civil society actors. Tripartite
arrangements among state, private and civil society actors exemplify alternative, public–private
or private governance arrangements. Tripartite governance such as the Extractive Industries
Transparency Initiative, Publish What You Pay and the African Peer Review Mechanism, while
categorized as PPPs, “are located in the policy space between states and markets” (Carbonnier et
al., 2011: 250). PPP-type arrangements empower civil society actors to not only coordinate with
state and corporate entities, but also to monitor state–corporate activities. Often such
mechanisms are “voluntary, horizontal, multi-actor and participatory, and address global issues”
(Ibid.).
In some areas of business, private governance has supplanted state authority to regulate industry,
showcasing the work of private governance. Examples of private governance include
international accounting standards; the private bond-rating agencies (for example, Moody’s
Investors Service and Standard and Poor’s Rating Groups); International Chamber of Commerce
rules and actions; private industry governance such as the Worldwide Responsible Apparel
Manufacturing Principles and the Forest Stewardship Council (Karns and Mingst, 2015: 34);
Equator Principles (Wright and Rwabizambuga, 2006). Global corporations also actively
develop, promote and implement their own codes of conduct that concern issues of labour,
environment and health. Those voluntary codes are usually adopted as a response to NGO
campaigns, and primarily target developed country consumers, rather than tackle the problems
faced by a diverse set of vulnerable worker groups. However, the processes through which codes
have been developed enables better representation of hitherto excluded groups of workers
(women export workers, homeworkers, casual workers) in social policy and labour regulation
debates (Pearson and Seyfang, 2001).
Multi-actor configurations in global governance broaden the scope of policy solutions that,
combined with current capacities for information sharing and learning, advance policy changes.
Yet this also increases fragmentation and segmentation of different layers and clusters of rule-
making and rule-implementing (Biermann and Pattberg, 2008: 289). The result is increased
competition over resources that may lead to paralysis in cooperative efforts. On the other hand,
this competition may produce innovative solutions. In the subsequent sections, we offer an
overview of the current challenges to global governance concluding with a discussion on the role
that it may play in the future.
Present challenges of global governance

A growing number of emerging global governance actors aim to contribute to the solution of
interdependent issues supplementing, and sometimes clashing, with already established regimes
designed to address certain international problems separately from other issues. Hale et al.
(2013) define the situation when current international institutions fail to provide a coordinated
response to current agendas challenges as “gridlock”. Through the examples of sovereignty, and
by discussing the questions of power and equality we will show how new developments in
international relations affect and reshape collaborative responses to the most pressing issues.
Various global governance actors coalesce around the ideas and norms of human rights and
human security; however, the principle of sovereignty continues to challenge the practical
38
application of those ideas internationally. Huge and severe violations of peoples’ rights and
freedoms during inter- or intra-state wars or conflicts continue to erode human security in
different parts of the world. However, governance actors working for the maintenance of peace,
security, justice and the protection of human rights have limited capacity to improve situations
because of complicated approval procedures of humanitarian intervention or authorization of
peacekeeping operations. For example, political divisions and partisan interests within the
Security Council (particularly the use of veto power by some of its permanent members) blocked
any international response to the mass atrocities committed in Syria, thus strengthening impunity
and encouraging the expansion of war crimes and crimes against humanity (Adams, 2015). A
rise of nationalist sentiments and movements in Russia and some European countries also
continues to erode international cooperation in response to challenges such as the huge influx of
refugees, and the ongoing conflict in Ukraine. All of these threaten the international security, and
order in general, that was created during the post-Cold War period. Yet, even as the principle of
the responsibility to protect has gained political support and international legitimacy since it was
introduced about a decade ago, its contribution to preventing mass atrocities and protection
population remains low. As Luck (2015) points out, policy practitioners and scholars need to
think in a more nuanced way about sovereignty. Both decision-making sovereignty, when
governments choose to independently determine whether a particular course of action for the
cause of human rights protection is in their national interest and erosion of sovereignty open the
door to more atrocities within and across states’ boundaries. This scholar, for instance, argues
that the ineffective exercise of sovereignty by a number of states over their own territory
becomes a significant barrier to exercising protection responsibilities in other places (Luck,
2015: 504).
Power in the current system of global governance has become more diffused. The power shift
accompanying the rise of Brazil, Russia, India, China (the BRICs) and other so-called “rising
powers” pose questions about the possible reordering or shifts in the current state of global
governance. While advocating for better representation in institutions such as the International
Monetary Fund, the World Bank and the UN Security Council, the governments of China, India,
Brazil and other emerging economies have started to develop and maintain alternative
institutions for economic and political collaboration. The Asian Infrastructure Investment Bank
and the New Development Bank are products of these efforts. While rising powers’ behaviours
are shaped by the structural features of global capitalism, “the differing contours of BRICs’
state-society relations provide the foundations for conflicts with Western powers over the most
liberal aspects of global governance” (Stephen, 2014). The Western ideas of privatization,
autonomous markets and open capital accounts are challenged by state-controlled approaches to
development in the countries of so-called Global South. The proliferation of Sovereign Wealth
Funds (SWFs), and national development banks in BRICs challenge an autonomous status of
private capital in current global economic affairs. Those developments have led to the
conclusion, by some scholars, that the most liberal features of global governance order are being
contested by rising powers (Stephen, 2014). In addition, a small group of big and influential
countries such as India and China gain more negotiating power (Barkin, 2013), as their non-
participation in international treaties and policies (for example, climate change) might
substantially diminish the effects of other countries’ efforts to solve these global issues. The
shifting global power configuration challenges each type of multilateral setting whether it
concerns international institutions that have a selective Western-based membership (for example,
OECD, NATO, G7/G8); international institutions that shape the state of international policies but
do not provide rising powers with equal membership and power in their governing bodies (the
International Monetary Fund, the World Bank, the UN Security Council); or multilateral settings
in which rising and established powers interact more or less on an equal footing (the World
Trade Organization, the UN Framework Convention on Climate Change) (Lesage and Van De
Graaf, 2015).
Economic and political inequality have long-lasting implications for governance both within and
between states. Inequality in either form contributes to a rise in extremism and social unrest, and
it also raises the questions of what responsibility the international community should bear for
human development beyond just satisfying basic needs, that is, security, food and shelter. While
the SDGs agenda of 2015 prioritizes the goal to “(e)nd poverty in all its forms everywhere”
(United Nations, 2015), questions still remain about exactly who will fund this eradication of
poverty and which actions are best suited to this fight. Global governance actors, for example,
focus more on intervention measures in poor countries, as they are primarily guided by a
39
“narrow” understanding of security rather than thinking of more long-term development issues,
or the “everyday” insecurities experienced by individuals in different parts of the world. A huge
diversification of financial sources of development aid complicates the task of applying a
common framework, based on individuals’ needs and development interests approach. In
addition, the supply of development resources including official development assistance is also
moving away from the old North towards the BRICs and other new official donors such as South
Korea and Turkey, plus private foundations like the Bill and Melinda Gates Foundation, faith-
based organizations, remittances from diasporas, heterogeneous SWFs and a plethora of
Exchange-Traded Funds as well as novel sources of finance such as taxes on carbon, emissions,
financial transactions and so forth (Shaw, 2015).
Thus, the observed changes in socio-economic and political aspects of the current world pose
new questions and create new challenges for previously active participants of global policy
processes, as well as for new actors of global governance. Global governance actors will need to
critically reflect on the relevance of earlier policy tools to rapidly changing conditions in the
current world.
The future of global governance

Global governance is arguably inevitable for the survival of the human race in present and future
generations. Although global governance sometimes appears fragile and ineffective in response
to current challenges, the trend of globalization and the demand for global governance
approaches have already passed the point of no return. The future of global governance will be
mainly shaped by the following five factors: individual empowerment, increasing awareness of
human security, institutional complexity, international power shift and liberal world political
paradigm. We draw this conclusion by applying the findings and observations from different
field of studies including security studies, international political economy, global governance
field and communications studies.
First, because of information technology and mass/social media, individual citizens—especially

in developed countries—have acquired much more information power than a half century ago.
Individuals can attain higher awareness of situations related to national and international affairs.
Compared with humans in the twentieth century, a majority of those in the twenty-first century
can more easily access international security information, thanks to the Internet and media
exposure. Therefore, individual citizens of the world are more likely to understand the
importance and the impact of international security on their personal lives. Digital media played
a major role in the Arab Spring of 2011 in Egypt and Tunisia: social networks allowed
communities to unite around shared grievances and nurture transportable strategies for
mobilizing against dictators (Howard and Hussain, 2011). Globalization of the new media
illustrates how communities throughout the world can be mobilized for collaborative response as
well signals a new trend in the intersection of new media and conventional media such as
television, radio and mobile phone (Khondker, 2011). The US National Intelligence Council also
identified individual issues and the decreasing influence of the state as one of the main global
trends for the twenty-first century, arguing that the potential political power of individuals has
significantly increased since the end of the Cold War because of the proliferation of information
and transportation technologies (National Intelligence Council, 2012). This trend will strengthen
the convergence between domestic and international politics, constraining state behavior
(Putnam, 1988) and continue to produce many transnational actors. Considering the dramatic
increase of individuals’ capabilities in information gathering, analysis and political projection,
the trend of individual empowerment is logically supposed to pave a wider road towards
cooperative global governance, because peace is generally preferred over war by individual
humans.
Second, as the trend towards “individual empowerment” continues, global society through global
governance architecture will need to pay high attention to human security, which protects
individual humans from fatal threats to physical safety, and human dignity, whether human-made
or of natural origin. Human security is an innovative concept for security in response to
horizontal (such as military, economic and political) and vertical (such as individual, state and
global) threats, which traditional security concepts cannot effectively control (Grayson, 2008).
40
The focal point of state security is too narrow to encompass the myriad threats that challenge
societies today. The threat of sovereign states engaging in large-scale war is less probable today
than at any time in modern history. War has not been eliminated, rather its form has shifted from
sovereign versus sovereign to substate wars between differing identity groups or insurgencies
against the state. Beyond war, the concept of human security is concerned with varieties of
security: economic, food, health, environmental, personal, community and political security
(UNDP 1994). Human security provides an excellent compatible conceptual paradigm to global
governance regimes in the future, which must respond to transnational, multi-dimensional threats
that a single country cannot manage. For example, a number of national security analysts have
already begun to recognize environmental degradation and natural disasters such as epidemics,
floods, earthquakes, poverty and droughts as national security threats similar to military disasters
(King and Murray, 2001–2002).
Third, we must additionally consider “institutional complexity” (Held and Hale, 2011) as another
direction for future global governance development. As the trend of individual empowerment
gains more momentum, the influence of civil society is expected to grow in terms of authority
and resources. Various non-state actors will not only affect their national governments’ behavior
more significantly, but will also engage in networks of transnational relations more actively.
International institutions in global governance will likely keep expanding to “regime complex”, a
concept defined as “an array of partially overlapping and nonhierarchical institutions governing a
particular issue area” (Raustiala and Victor, 2004).
Fourth, global governance in the future will be also be shaped by power shifts in international
relations. Almost all the traditional institutions of global governance were initiated by Western
countries, and their pluralistic political culture and influential civil societies have shaped the
political context of global governance. States of the Global South, especially China, have
improved their relative power in relation to the Global North. As a result, the voice of actors
originating from the Global South is expected to become more prominent in global governance
regimes and institutions traditionally dominated by a small number of the Global North states.
Therefore, an increase in multilateralism will further complicate the face of global governance.
Fifth, the future of global governance is also rooted in liberal paradigms of world politics. States
and non-state or transnational actors tend to be more cooperative with global governance when a
liberal world order is maintained. Global governance regimes to date have evolved with liberal
paradigms such as democracy, bottom-up orientations and human rights promotion. While the
advancement of democratic practices in the states without strong traditions of following liberal
values remain a challenge, democracy has near-universal appeal among people of every ethnic
group, every religion, and every region of the world and democracy is embraced as an
international norm by more states, transnational organizations and international networks
(McFaul, 2004). Liberal approaches challenge the traditional concept of the state as a unified
unitary actor that lacks adverse interpretation of national interest. Accordingly, even in
traditional security areas, there are more spaces for international cooperation. Global security
governance through intergovernmental institutions such as the UN, International Atomic Energy
Agency and International Criminal Court has made considerable progresses and gained more
influence. If the realist paradigm dominates national security, however, the world would have to
overcome deep uncertainty and doubt about the effectiveness of global governance. As a result,
global governance today and in the future will be in the face of such serious threats as US–China
hegemony rivalry, US–Russia military confrontation and Middle East conflicts. Nevertheless, as
long as global society retains liberal paradigms powerful enough to offset the negative effects of
mutually suspicious realist paradigms, global governance will continue to generate into effective
hybrid regimes that hold the potential of creating a future world that is more cooperative,
sustainable and secure.
Defining Global Governance

May 15, 2019
41
Global governance, as its name implies, is the way in which global affairs are managed.
Global governance is understood as “…the way in which global affairs are managed. As there is
no global government, global governance typically involves a range of actors including states, as
well as regional and international organizations. However, a single organization may nominally
be given the lead role on an issue, for example the World Trade Organization in world trade
affairs. Thus global governance is thought to be an international process of consensus-forming
which generates guidelines and agreements that affect national governments and international
corporations. Examples of such consensus would include WHO policies on health issues”
(WHO, 2015).
Global governance, thus, aids in working through the myriad of issues within the international
system.
Thakur & Weiss (2015) further explain that “There is no government for the world. Yet, on any
given day, mail is delivered across borders; people travel from one country to another via a
variety of transport modes; goods and services are freighted across land, air, sea, and cyberspace;
and a whole range of other cross-border activities take place in reasonable expectation of safety
and security for the people, groups, firms, and governments involved. Disruptions and threats are
rare…This immediately raises a puzzle: How is the world governed even in the absence of a
world government in order to produce norms, codes of conduct, and regulatory, surveillance, and
compliance instruments? How are values allocated quasi-authoritatively for the world, and as
accepted as such, without a government to rule the world?
The answer…lies in global governance. It is the sum of laws, norms, policies, and institutions
that define, constitute, and mediate relations between citizens, societies, markets, and states in
the international system–the wielders and objects of the exercise of international public power.”
However, there exist certain lacunae within the system, as identified by the World Health
Organization (2015), such as:
42
 “The jurisdictional gap, between the increasing need for global governance in
many areas – such as health – and the lack of an authority with the power, or
jurisdiction, to take action.
 The incentive gap, between the need for international cooperation and the
motivation to undertake it. The incentive gap is said to be closing as globalization
provides increasing impetus for countries to cooperate. However, there are
concerns that, as Africa lags further behind economically, its influence on global
governance processes will diminish.
 The participation gap, which refers to the fact that international cooperation
remains primarily the affair of governments, leaving civil society groups on the
fringes of policy-making. On the other hand, globalization of communication is
facilitating the development of global civil society movements.”
Global governance, then, is aimed at negotiating responses to problems that affect more than one
state or region. Global governance can be considered the response to issues arising from the
world´s increasing interconnectivity, and the need for and importance of a process to designate
laws, rules, or regulations governing political, economic, social and cultural issues, and which
are to be used on a global scale.
43

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Globalization

The UN has 4 main purposes

 To keep peace throughout the world;

Globalization: A Brief Overview

 The number of minutes spent on cross-border telephone calls, on a per-capita basis,

Restricting international trade—that is, engaging in protectionism—generates adverse

Globalization: A Framework for IMF Involvement

II. The Role of the Bretton Woods Institutions

III. Safeguarding the International Financial System

IV. Providing Help for Self-Help

The critical debate on globalization, though temporarily subdued by the events of

Globalization—the process through which an increasingly free flow of ideas, people,

Globalization, or internationalization, is not a new phenomenon. The period through the

II. The Role of the Bretton Woods Institutions

 The IMF has increasingly become an open and transparent organization, as

III. Safeguarding the International Financial System

IV. Providing Help for Self-Help

Globalization: Threat or Opportunity? Français

III Unparalleled Growth, Increased Inequality: 20th Century

IV Developing Countries: How Deeply Integrated?

V Does Globalization Increase Poverty and Inequality?

VI How Can the Poorest Countries Catch Up More Quickly?

VII An Advanced Country Perspective: Does Globalization Harm

VIII Are Periodic Crises an Inevitable Consequence of

IX The Role of Institutions and Organizations

II. What is Globalization?

Economic "globalization" is a historical process, the result of human innovation and

Markets promote efficiency through competition and the division of labor—the

III. Unparalleled Growth, Increased Inequality:

IV. Developing countries: How deeply integrated?

Consider four aspects of globalization:

 Spread of knowledge (and technology): Information exchange is an integral, often

VI. How Can the Poorest Countries Catch Up More Quickly?

Components of such a package might include:

All these policies should be focussed on country-owned strategies to reduce poverty by

 By encouraging flows of private capital to the lower-income countries, particularly

VII. An Advanced Country Perspective:

VIII. Are Periodic Crises an Inevitable Consequence of Globalization?

Box 1. Does globalization reduce national sovereignty in economic policy-making?

But there is another kind of risk. Sometimes investors—particularly short-term

National and international institutions, inevitably influenced by differences in culture, play

As globalization has progressed, living conditions (particularly when measured by broader

Understanding the International Monetary Fund (IMF)

History of the IMF

How Much Are the IMF Grants?

The Bottom Line

What is a global economy?

The global economy comprises several characteristics, such as:

 Globalisation: Globalisation describes a process by which national and regional economies,

Why is the global economy important?

We can understand the importance of the global economy by looking at it in relation to

Who controls the global economy?

How does the global economy work?

What are the effects of global economy?

Occasionally countries add barriers to international trade. Some of these barriers

What are the benefits of global economy?

There are numerous benefits of a global economy, which include:

Factors affecting global economy

Market integration: the role of regulation

BIS, FSI speech |

Regulation: cause or consequence of fragmentation

The relevant role of international standards

What else is needed?