Reflections on global economic governance at the “start of a new era”
With the adoption of “The 2030 agenda for sustainable development” and negotiations on a new climate regime, what’s changed for governance of the global economy in the last two decades, and what have we learned? This article maps the shifting context for trade, investment, and sustainable development.
Governments around the world adopted a new global development agenda for the next 15 years including 17 Sustainable Development Goals (SDGs) during a summit held last month at UN headquarters in New York. The new roster of international priorities has been billed as an effort to integrate economic, environmental, and social aspects of development for the next 15 years in a way that is universally applicable while taking into account different realities and capacities, as well as respecting national policies and priorities. The new global development agenda outcome document – dubbed “Transforming our world: The 2030 agenda for sustainable development” –also includes a declaration by world leaders on shared principles and commitments for multilateral cooperation in today’s context, a section on means of implementation, and another on follow-up and review processes at national, regional, and global levels.
In less than two months, UN members will come together in Paris, France again in a bid to secure a new, universal climate regime for the post-2020 period. Countries have agreed that the planned deal will be made up of self-defined individual national pledges for cutting greenhouse gas (GHG) emissions, although critics have warned that current submissions will not add up to enough to keep the world below an internationally agreed limit of two degree Celsius average warming above pre-industrial levels, and that arrangements for verification and a continuous upscaling of efforts over time will be needed.
Following hot on the heels of the Paris meet, WTO members will gather in Nairobi, Kenya, for the global trade body’s 10th Ministerial Conference. The possibilities of effective outcomes for that occasion remain unclear, in the face of continued difficulties around wrapping up the Doha Round, and promising, more ambitious parallel mega-regional efforts to ink deep 21st century economic integration deals. Luckily for Nairobi, negotiators from select WTO members have secured an expansion of WTO’s plurilateral Information Technology Agreement (ITA) slashing tariffs on an additional 200 or so high-tech products valued at US$1 trillion in annual trade. Efforts are also underway to deliver a plurilateral tariff liberalising Environmental Goods Agreement. The latter, in particular, might be a potential meaningful contribution to the grand objectives of New York and Paris.
This coincidence of global governance decision-making resembles the “summitry” that characterised 1990s and early 2000s including among others the 1992 UN Conference on Environment and Development (UNCED) dubbed the “Earth Summit,” the 1994 conclusion of the Uruguay Round under the General Agreement on Tariffs and Trade (GATT) that led to the establishment of the WTO a year later, as well as international conferences on social development, least developed countries (LDCs), human rights, women, food, financing for development, and the information society. A year hailed by UN Secretary General Ban Ki Moon as “a new era” for global governance is a good time to ask pertinent questions. [Ref 1] How has the global governance context changed over the past two decades? What have we learned? And what role should the trade and investment regimes play in the years ahead to continue to move sustainable development from an agenda on paper to a concrete reality?
Where have we come from?
It is critical to put global governance efforts into the right historical context. In 1992 the world was emerging from a period of economic fragmentation organised by at least three separate development models, namely centrally-planned economies, closed economies by and large in the global South characterised by import substitution coupled with controls, and the transatlantic and transpacific spaces driven by a pungent US post-war economy into an amalgamated liberal economy. Motion was set towards a new world, one that could turn into a globalised economy – as it gradually did – with the integration of national economies into international markets through an aligned set of economic policies, and the frameworks to enable that integration. It was a critical moment of seeds sewn for a better future, unleashing vast forces of change, and with them respective tensions. Wealth was created in unprecedented forms and millions were lifted out of poverty. A triumph of sorts, at a significant cost, to a great extent due to the lesser attention paid to questions of equity and social inclusion, and an underestimation of persistent and deep-rooted asymmetries in capabilities among countries at different levels of development. As a result, today we face perilous levels of inequality among and within most countries around the world.
A high price has also been paid as a result of insufficient consideration for the natural environment and the now-coined concept of planetary boundaries. In hindsight, the Earth Summit held in Rio de Janeiro, Brazil was the first opportunity for the international community to think comprehensively about the intricacies of acting on a platform of shared values around a number of vital issues, and on the terms of engagement in this new world. Moreover, with good cause, Rio was also labelled as an opportunity to re-examine the relationship between environment and development.
Twenty years on from the 1972 UN Conference on the Human Environment held in Stockholm, Sweden, it had become clear that siloing environment and development priorities would always play against the environment. The Rio Declaration with its 27 principles and Agenda 21 was a forward-thinking proposal for transforming global governance, requiring a re-think of fundamentals of economic management and economic governance. It was an extremely ambitious attempt at reconciling environmental protection and economic growth, and setting a broad common direction for policy. But it was also a vision developed at the turbulent moment mentioned above. Concerns abounded on global inequality, the terms of trade, anxiety from developing economies about their role in a new globalised world, the predatory behaviour of unbridled multi-national corporations in global markets, and rules of the game inadequate for a globalised market. This all gave rise to an anti-globalisation movement to which the intergovernmental machinery of the UN and the development community partly responded with the Millennium Development Goals (MDGs). Yet, albeit their critical coverage, the MDGs were notable for their lack of focus on environmental issues and did not seem to have been affected by UNCED, prompting disarray between governments on the concept of sustainable development and backlash from the environmental community.
Rio did succeed in having an effect on global economic governance, while world economies moved swiftly in the direction of integration. At the time of the Earth Summit, the multilateral trade system was in interregnum, transforming itself from the limited 1947 GATT into the quasi-universal World Trade Organization, practically doubling its membership and expanding itself way beyond borders into issues such as services, investment, and intellectual property. Trade and trade rules up until that time were the purview of a smaller club of countries, geared towards regulating transatlantic and transpacific commerce, with the few developing countries participating in the system not bound by the same level of commitments. Transformation into the WTO was partly a manifestation of the changes in policies happening at that time. The new WTO design embraced the Rio principles by inserting these into its new constitution – the first paragraph of the Marrakesh Agreement referring to sustainable development, standards of living, and environmental protection – and making environment concerns operational through a number of other institutional mechanisms such as a Committee on Trade and the Environment (CTE).
Convergence and divergence
The three global governance endeavours this year are each, in their own context, trying to balance the benefits of convergence behind a universal agenda with the realities of natural divergences in national situations and development pathways. What have we learned in this area since Rio?
The first important change from Rio is substantive and has to do with the international community’s understanding of the complex relationships between economics and the environment. The prevailing view at Rio in 1992 was one based on the Kuznets curve, which suggests that in early stages of economic growth environmental degradation increases, and then declines beyond some level of income per capita. This seemed to give license to those that were under-developed to continue to pollute and mistreat natural resources. We are wiser now 20 years later, in some respects, and there has been an incredible amount of work done to boost our knowledge base in this area. The introduction of sustainability in the global trade architecture, and subsequently in other instruments of trade governance, proved wise. Although many tensions have surfaced since Rio, most have been handled by the appellate level of dispute settlement at the WTO, referring to non-trade treaties or applying principles of sustainability. It’s not all rosy, some key environmental issues continue to challenge the systems of economic integration, not least steering the world away from climate change and fatal pollution and destruction of habitats and oceans.
The second important change is the real and practical impact of the principle of subsidiarity, which began to gain traction around the time of Rio. It was a period when civil society first really started to engage in UN processes, culminating in over 17,000 people and 2,400 non-governmental organisation representatives attending an NGO Forum held on the side-lines of UNCED, and the establishment of the Major Groups in recognition that achieving sustainable development required comprehensive engagement from all sectors of society. At the same time the EU was also going through the negotiation of the Treaty of Maastricht which, among other changes, formally enshrined the principle of subsidiarity into the bloc’s law-making. These projects were all connected to and feeding global conversations. Global and regional governance set common direction, but increasingly was based on input from those on the ground, and implemented through institutions closer to this level.
Finally, two decades ago the WTO was envisaged as a universal, top-down structure. At its dawn, it emerged as a pyramid-like architecture for trade policy, with GATT principles, norms, and institutions at the top, prevailing over all other regional trade agreements, regional, bilateral or otherwise, and domestic policy settings. However, in the last few years, this centrality of the WTO has been forcibly altered as the locus of trade policy decision-making has moved in a variety of different directions. In a quest for deeper or lesser integration, many countries have selectively positioned themselves in new arrangements, opting for different speeds of interaction with global markets. Opportunities driven by changes in information and communication technologies and transportation, and seizing the opening of markets, resulted in new forms of organising production in international networks. As a result a complex regime for trade and investment with coverage beyond the WTO has emerged for the governance of economic interdependence.
Today the post-2015 development agenda, and accompanying outcome from the Third International Conference on Financing for Development held in July, arguably appear to be calling for a single compass for national policies and economic policies without being too prescriptive. General guidance is provided but room is left to accommodate different paths for moving forward. Among the complex challenges of implementing the new sustainable development agenda will be differentiating between aspects intended as references for national policies and those that pertain to the new terms of engagement for international cooperation. The former include, for instance, whether a country will meet these targets and then adjust policies where it does not. The latter has to do with the international obligations and roles played to ensure that every nation, collectively and individually, reaches those targets while also addressing global issues.
The UN Framework Convention on Climate Change (UNFCCC) regime – one of the three conventions born out of the Rio summit – has particularly evolved in structure. It was unclear in 1992 exactly what would happen on climate and the science was still not well understood. The articulation at the first conference of the parties to the UNFCCC in Berlin in 1995 of the principle of common but differentiated responsibility through the artificial division of the world into Annex I and Annex II, influenced by Kuznets curve reasoning, held back cooperation on climate matters for years. Now that the science is firmer, and more widely accepted, it is much clearer that broad participation in tackling climate change is necessary, and new forms of managing the differentiated historical responsibility for the accumulation of greenhouse gasses needs to be found. The dynamics of Chinese growth and significant emissions from other developing nations mean that a Kyoto Protocol-type divide between the developed and developing world is no longer possible.
More importantly, the challenge is to find ways in which a blend of command and control policies, market mechanisms and behavioural change, deliver the transformation to a low or zero carbon economy. A very difficult aim and one that will need a supportive global economic architecture. For the moment, we are now moving towards a new post-2020 regime to be defined in Paris that will likely be composed primarily of bottom-up, voluntarily outlined, national climate action pledges. The real question is whether this bottom-up process driven by subsidiarity will be enough to achieve our common goal.
Securing future progress
A key part of dealing with the tension between convergence and divergence, or between universality and subsidiarity, is establishing good monitoring, follow-up, and review systems at all levels. Getting the metrics right, those that are able to cope with complexity and disaggregate to the global level, will be important, and can help to enable governance based on shared principles but articulated by disciplines, agreements, and cooperation between countries applied in a very subsidiary manner. The monitoring and review of commitments is the only real tool to ensure delivery on international pledges and the newly agreed terms of engagement.
The 2030 agenda for sustainable development will require good indicators to track progress and help governments deal with the complexity of implementing a framework that weaves together the three dimensions of sustainable development across multiple policy areas. Fortunately, theory and academic work on development measurement has changed the way countries think about measuring human wellbeing, in the context of social priorities and the natural environment. The last few decades have seen increased efforts to look beyond gross domestic product per capita as a singular measure of development. The Human Development Report, published annually since 1990 by the UN Development Programme (UNDP), introduced the Human Development Index (HDI) synthesising a dashboard of indicators for countries’ development such as unweighted averages of education, income, and life expectancy. The original HDI did not, however, take into account measures of environmental sustainability reflecting scepticism of its founding economist. This has now evolved under new leadership and a host of other multi-dimensional measurement efforts have joined the fray, including the OECD’s wellbeing index, Jeffrey Sachs-led World Happiness Report, the Genuine Progress Indicator (GPI), the Bertelsmann Stiftung’s Sustainable Governance Indicators (SGI), and Yale’s Environmental Performance Index.
At the WTO, arguments have been made that special and differential treatment (S&DT) must be approached, and measured, from a sustainable development perspective. Simply granting developing countries a few extra years for policy implementation or preferential market access might not take into account the multi-faceted challenges facing a particular economy, trade impacts on domestic natural resources, or the trade effects of diverse environment policies. [Ref 2] Implementing the 2030 agenda for sustainable development will ultimately require trade rules to be organised around sustainable development outcomes. Here again it will be useful to provide indicators on the extent to which rules are oriented in the right direction or not using some sort of composite of indices. Establishing such a system is, however, very challenging.
The beauty of the new climate regime is that measurements and indicators exist for much of what countries are proposing to do. The international community has fairly sophisticated ways of understanding where and when GHG emissions are generated as well as how they contribute to hikes in global temperatures, ocean acidity, and so on. Countries will individually pledge certain cuts by specific dates for the post-2020 period, in most cases with varying baselines, but nonetheless capacity broadly exists to understand how these efforts add up.
It is extremely likely, however, that the current national climate pledges will not add up to enough mitigation action to keep the world within the two degree warming ceiling. Countries may also not stick to their pledges. And what happens if a situation dramatically changes in a major emitter? A significant economic crash, for example, could trigger a re-think of climate policies. Safeguards need to be put in place to help countries deal with changes in circumstances. Alongside a close monitoring of what policies countries are pursuing to implement their pledges, some sort of “coaching” should occur, to help individual economies understand and manage the low carbon transition. Many stakeholders often attribute the “success” of the trade system to its contractual nature, the mechanics of the dispute settlement understanding, and regular trade policy monitoring. But another, powerful dynamic is also at play. The trade system works and is enforceable because it is firmly anchored in the self-interest of players. If the logic is applied in the climate arena, efforts need to be made to ensure that policymakers understand the win-win outcomes of continuing to implement climate commitments, even if other circumstances change.
Getting the systems right
Global governance will continue to be a matter of striking the balance between global direction-setting, monitoring the ongoing leadership role of government policy, and supporting the subsidiary implementation of commitments at ground level. Aligning national policies will require absorbing the transaction costs of negotiating broad international agreements. In an interconnected economy, implementation of those agreements will also depend at least in part on business, technology, and harnessing the power of well-regulated global markets. Moreover, ensuring trade and investment systems work for sustainable development will take more time, but arguably stands to achieve far more than funding discrete projects.
The trade and investment systems could play two important roles in the years ahead. Trade and investment rules can be the biggest catalyst for transformation due to their ability to change the way economies work and the way millions of people live their lives. We will need to continually ensure that trade rules, whether established at global or regional levels, are clearly in favour of sustainable development outcomes. Solid metrics and indicators will be required, with a sustainable development lens, to monitor the impact of those rules not just on economic activity but on the environment and society.
Moving from words to action on the UN financing for development outcome, the 2030 agenda for sustainable development, and climate regime will require continued efforts to get the trade and investment systems right, and to support a well-functioning economy that delivers social, environmental, and economic goods. Ultimately it is the policies that serve to drive the necessary systemic shifts in the global economy, rather than funding in its own right, that will play a crucial role in supporting sustainable, inclusive growth in the coming decades. The road so far has made it clear; it’s not money, but policies, their frameworks and the institutions needed to implement them, that constitute the most powerful lever for change.
Author: Ricardo Meléndez-Ortiz, Chief Executive, International Centre for Trade and Sustainable Development (ICTSD).
[Ref 1] UN Secretary-General Ban Ki-moon’s remarks at General Assembly Plenary Meeting to adopt the draft resolution to transmit the Agenda 2030 Outcome Document
New York, 1 September 2015. Available at http://www.un.org/sg/statements/index.asp?nid=8944
[Ref 2] Meléndez-Ortiz, Ricardo, and Ali Dehlavi. "Sustainable Development and Environmental Policy Objectives: A Case for Updating Special and Differential Treatment in the WTO." Trade, Environment and Sustainable Development: Views from Sub-Saharan Africa and Latin America. A Reader, ICTSD, Geneva (1998).