The rising intensity and frequency of financial/economic crises as well as the mounting pile of global economic challenges such as climate change have led the international community to explore the venues for transforming the current construct of the world economy. Some pundits see the key answer in the digital transformation and the boost in productivity, while others view the “green economy” as a key reserve to a more sustainable growth paradigm. And while a lot of these transformational tracks are promising and critical for our future, their implementation will hinge crucially on yet another track that relates more to the construct of the world economy’s governance. In our view the critical transformation that would deliver greater sustainability and inclusivity in global economic development is the creation of a new regional layer of global governance based on streamlined horizontal coordination between regional economic arrangements (MERCOSUR, EU, ASEAN, etc. and their development institutions (EIB, FOCEM, EBRD, ADB etc) as well as between such regional platforms and global international organizations.
An important integrating factor in such a re-configuration of the world economy is what we earlier referred to as “syndicated regionalism”[1] – the co-integration of regional development institutions and regional arrangements within common platforms that allow for greater horizontal coordination and the pooling of resources to address/finance priority projects. What the “syndicated regionalism” paradigm delivers to the global economy is greater scope for co-financing large-scale projects by regional development banks; higher effectiveness in coordinating regional stimuli and stabilization efforts across the global economy via the respective regional financing arrangements (RFAs); wider possibilities for regional and trans-regional trade liberalization via the trade accords among the regional trade arrangements (RTAs).
Within a re-configured world economy with a regional layer of global governance the horizontal coordination between the regional arrangements (regional trade arrangements (RTAs), regional development banks (RDBs), regional financing arrangements (RFAs)) will need to be complemented by improved cooperation/coordination with multilateral international organizations (WTO, World Bank, IMF). In particular, the IMF will increasingly cooperate with the Regional Financing Arrangements (RFAs) – this track already been launched more than 7 years ago with regular consultations held by the Fund with RFAs with the participation of G20 representatives. The World Bank will increasingly work within a common platform with regional development banks – something that was made possible after the launching of such a global platform in 2023[2]. And finally, the WTO will work together with regional trading arrangements (RTAs) in exploring the potential for new trade rounds and “region-to-region” (R2R) initiatives in lowering trade restrictions[3].
A regional transformation of the global economy will involve a greater focus being placed on the broadening of the regional layer of global governance, with relatively less importance accorded to the lower level of national economies and the upper level of global international institutions. At this stage, there is no horizontal platform for regional integration arrangements and hence no full-fledged layer of regional governance in the world economy. The lack of a regional layer of global governance accentuates the notable asymmetries across regions in the scale and depth of regional integration, particularly between the Global North and the Global South. The sizeable North-South gap between the scale and the quality of regional integration contributes to more outflows from the Global South (partly accounting for the Lucas paradox) and low intra-regional trade in the developing world. In the longer term, the evolution of the regional layer of global governance should strive towards building resilient economic frameworks in all of the main regions of the world economy that would be endowed with a critical array of regional institutions and arrangements such as regional development banks, regional financing arrangements, regional trade arrangements.
In the longer term, the transformation of the global economy along the lines of closer cooperation among regional arrangements, will likely be accompanied by changes in the operation of multilateral institutions such as the UN and the Bretton Woods organizations. The latter may involve a greater role for regional arrangements in global forums such as the G20 (membership of the AU and the EU could be just a start of this trend), greater scope for regionalism being a key factor in the allocation of quotas and votes in organizations such as the IMF/World Bank and more regional criteria being applied to governance within the United Nations framework. The effect will then be to lower asymmetries and tensions across the main constituencies in global organizations.
Contrary to many other calls for transforming the world economy, the introduction of a new layer of global governance represented by regional arrangements is not predicated on Schumpeterian “creative destruction” (or any destruction for that matter), but rather seeks to complement and support existing institutions with the resources and capabilities offered (and far from being fully exploited thus far) by the regional realm. Furthermore, the creation of the new layer of global governance for the regional arrangements will not involve significant increases in financing or “red tape” – rather this governance layer may be constructed as a network (similar to G20 or BRICS) that brings together the already existing regional platforms and arrangements. With the Global South economies in Africa and Latam still in need of significant catch-up in regional integration compared to other parts of the world economy, there are cases of successful regional integration presented by the EU and ASEAN that may be selectively taken on board by the developing world in building a framework of regional economic cooperation.
In the end, the benefits of a global economy endowed with a dynamic and open layer of inter-connected regional arrangements will enable the international community to effectively address such supra-national challenges as climate change; it will attenuate the excesses of nationalism and Realipolitik that are so exacting currently at the geopolitical level; it will open up tremendous reserves for international diplomacy via new “region-to-region (R2R), RTA-to-RTA” communication lines. It will also increase the qualitative and the quantitative capabilities of a G20-style global economic stimulus that involves the regional arrangements – in quantitative terms it is the expansion in the scale of resources available for stimuli via employing the sizeable reserves of regional development institutions; in qualitative terms the involvement of regional arrangements will improve the capability of the world economy to ex-ante pre-empt crisis episodes and to ex-post attenuate the magnitude of output fluctuations in the world economy. The path towards a multipolar and revitalized global economy lies through the regional realm and the strengthening of the pillars of regional integration.
[1] https://brics-plus-analytics.org/syndicated-regionalism-the-missing-link-in-global-governance/
[2] https://brics-plus-analytics.org/imf-world-bank-annual-meetings-the-emergence-of-a-platform-for-mdbs/
[3] There is as yet no full-fledged mechanism of coordination among the RTAs as a platform and the WTO.
Yaroslav Lissovolik, Founder, BRICS+ Analytics
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