This week we were in Brazil for the Dilemmas of Humanity conference in San Paulo that discussed the potential for the global economy to find pathways out of the mounting strains and economic crises[1]. The panel discussion in which the head of BRICS+ Analytics was represented among the panelists was dedicated to the building of the new financial architecture of the world economy. Below is a summary of the report presented by BRICS+ Analytics at the conference.
The Dilemmas of Humanity conference is taking place amid renewed shocks experienced by the world economy from an unprecedented escalation in protectionist measures. This latest deterioration in the global economic environment comes on top of a string of crises of the past several decades (2008 crisis, the European sovereign debt crisis, the 2020-2021 downturn during the pandemic). Apart from the rising frequency of economic crises there is also the sheer incapability of the world economy to deal with such global challenges as the pandemics, energy crises, climate change, energy transition and rising debt (the latter being particularly problematic in some of the most advanced economies). In terms of trade, the countries that have preached liberalization are now the sources of rampant protectionism, while in terms of investment, friend-shoring and reshoring strategies were vigorously pursued that all too often veered away from the textbook considerations of economic efficiency.
The global construct
Given the above deficiencies of the global economic system, new solutions need to be explored with the view to strengthening and amplifying some of its already existing elements. Building on the interventions and presentations of other conference participants, the main contention delivered in this presentation is that the key to reforming global economic governance system is via regionalism.
The current global economic governance construct may be characterized by a two-tiered system, in which the lower level of governance is represented by national economies and the upper level is formed by global multilateral institutions such as the IMF and the World Bank. What is missing in this global architecture is an intermediate regional layer of governance composed of regional trade and financial arrangements – at this stage there is no platform for regional trade arrangements (RTAs) and no full-fledged integration into the global construct of such key regional institutions as regional development banks (RDBs) and regional financing arrangements (RFAs). At this stage, in all three key areas of the world economy the resources and the cumulative weight of regional institutions is greater than those of the respective global organizations:
- The sum of regional trade arrangements (RTAs) > WTO
- The sum of the resources of regional financing arrangements (RFAs) > IMF
- The sum of the resources of regional development banks (RDBs) > World Bank
What is important is that some incremental changes towards the integration of regionalism into global economic governance are taking place – the African Union in 2024 became a member of the G20, while in 2023 the World Bank created a platform for multilateral development banks (including RDBs) to co-finance development projects. Thus far, however, these steps do not represent a full-fledged creation of the regional layer of global economic governance and it may be the Global South that could take the lead in the formation of this new governance layer within the global economy.
Implications for the Global South
A lot of the potential ingredients for building the regional layer of governance in the Global South are in place. With respect to the RTAs, some of the leading regional groups of the developing world could include ASEAN, Mercosur, the African Continental Free Trade Area (AfCFTA), and the Eurasian Economic Union. With respect to the RFAs the respective platform could include the Arab Monetary Fund, the CMIM (Chiang Mai Initiative Multilateralization), Fondo Latinoamericano de Reservas (FLAR) and the Eurasian Fund for Stability and Development (EFSD). With respect to the regional development banks the platform may incorporate the Eurasian Development Bank, CAF (the Development Bank of Latin America), and the Islamic Development Bank as well as other such regional institutions.
The platform for regional integration arrangements may target the path of the “integration of integrations”, namely economic cooperation and integration among the regional integration blocs rather than individual economies. This is the track that is already explored by Mercosur in its potential agreement with the EU – there may be scope and the urgency now for Mercosur to pursue similar agreements with the regional blocs from the developing world. The RFA platform could target the support for macroeconomic stabilization of developing economies together with such undertakings as regional integration and the launching of regional currencies. For the RDB platform the priority may be the co-financing of large-scale projects associated with the development of inland regions and economies (inaccessibility corridors).
The development paradigm of this platform of regional arrangements created by the Global South should center on the reversal of cumulative causation (a process of the accumulation of advantages and pre-eminence of regions with ex-ante lead) and the diversification of global economic development via catch-up growth of disadvantaged regions and economies. The main operational goal of the regional platform is the aggregation of the resources available in the Global South to support priority development projects. The benefits of the regional “platform of platforms” of the Global South include lower politicization (less Realpolitik among regional arrangements compared to national economies), greater inclusiveness (ability of small and medium-sized economies to participate in global economic governance) and the accumulation of largely dispersed financial resources to finance development. The best framework for operationalizing all these regional platforms of the Global South may be the BRICS+ format.
(To be continued)
[1] https://thetricontinental.org/pt-pt/brasil/economistas-e-intelectuais-de-todo-o-mundo-se-reunem-para-propor-saidas-a-crise-do-capitalismo/
Yaroslav Lissovolik, Founder, BRICS+ Analytics
Image by FabricioPereira via Pixabay