The Global Policy Institute is currently studying how the liberal order can accommodate an increasing multipolar world in which major state actors and regional blocs increasingly pursue their own interests – political, economic and cultural. Increasing levels of competition, tensions and potential for conflicts present major difficulties of management and adjudication by the multilateral institutions which were set up after World War 2 and which overall are commonly referred to as the Liberal International Order.
Retreat from the Liberal International Order
The Liberal International Order (LIO) provided an architecture that harmonised reasonably well a country’s domestic economy and politics with the international system into which it was plugged. The founding of the United Nations created international law for member nation-states and a declaration of fundamental human rights – a new settlement with claims to universality. Bretton Woods allowed for currency movements without destabilizing or deflationary consequences and minimised speculative capital flows across national borders. President Truman and Chairman Stalin simplified geopolitics into an ideological Cold War, which rendered lesser nation-states into camp followers. Apart from arms expenditure, the system ran according to rules and their adjudication, and entropy was minimised.
The United States designed the architecture of this system, with Great Britain reduced to playing a minor part. International leadership – economic, political and cultural – passed to the United States. It had the bulk of the world’s gold reserves, and the post war recovery of Europe, Japan and elsewhere was funded by US dollars. The system was underwritten by the US which gave it an effective hegemonic position within the international order. Two questions arise. 1) Why would the US, even President Trump’s America, dismantle the system that had served its interests so well? 2) What will replace it – if indeed it is completely dismantled?
The first step in its dismantling is well known. In 1971 dollars could no longer be exchanged for gold and the era of floating currency rates arrived, creating major problems for domestic economic management. Attempts to fashion international currency agreement around pegged exchange values failed. Thereafter, it was gradually accepted that currencies and capital could flow unrestricted across borders. In domestic economies, the attempt to reconcile fiscal expenditure and taxation in line with floating exchange rates was abandoned in favour of monetary policy alone. Along with the growing financialization of economies, these alterations to the LIO generated structural changes in domestic economies and accompanying social tensions.
This first step was triggered by US war expenditure in Southeast Asia and the US Treasury’s refusal to exchange foreign holders of US dollars for gold. A second step was the collapse of the Soviet Union and the communist bloc in 1989. US foreign policy was directed by neoconservatives who pushed for global supremacy, a push headed up by US corporations and banks and ideologically by various thinktanks. The tolerances built into the liberal order was replaced by the more prescriptive neoliberalism – the imperative to de-regulate – and this was embraced by the European Union under the catchphrase ‘the Washington Consensus’. President Clinton’s repeal of the Glass-Steagall Act and his invitation to the Chinese to join the World Trade Organization extended the new world of global flows: of capital, currency, people, trade, goods, and value chains. The ending of the Cold War was accompanied by an intensification of neoliberal ideology that markets, and not state actors, knew best how to make correct decisions, completed the package of globalisation mark 1. This was an excited world of high entropy. The motility of the citizen counted for more than citizen security. The corollary of an unrestricted market system was a loss of domestic policy autonomy and national sovereignty.
The financialization of economies, including the state sector, served US interests well. As Stephen Haseler argued, the arrangements of ‘chimerica’ meant that American wars and foreign policy were financed by Chinese savers. However, only minor wars were successful and the previous diplomatic and internationalist roots of Pax Americana were squandered in an overt bid for US global hegemony. The Mesopotamian wars, financed by borrowing, seemingly have no time limit and have resulted in the destabilization of whole regions and the import, or blowback, of terrorism into those nations pursuing ‘liberal intervention’. These wars, in the UK and the US, also carried domestic consequences and were not without political cost (inward-facing nationalism) and economic opportunity cost. Regional powers – Russia, China, India, Brazil – asserted their own interests separately to the Washington consensus. This is termed multipolarity, a term which rather disguises that US power is not in decline but only that other states and regional blocs are growing in power: economic, cultural and geopolitical. The ability of the US to impose its will on the global system is becoming increasingly constrained. Uni- bi- and multipolar patterns are all in play.
The continuing financialization of economies, led by US and UK banks and financial institutions, was halted by the Great Financial Crash (GFC) of 2007-8. The economic recovery has been extremely costly in terms of debt level, lost growth and increased inequality. It has not been accompanied by enough of the reform of regulation and practice that was deemed so necessary in the immediate wake of the GFC. For many, including the IMF and the BIS, all the preconditions are in place for GFC2, while the levels of debt and interest rates leave governments and central banks with nothing like the fire power they had in 2008. It is doubtful whether the basis for unified action negotiated by the G20 during 2008 still exists and whether the political will of the USA to direct the Federal Reserve to provide critical support for key economies, not least the EU, would be forthcoming.
The consequences of the Great Financial Crash of 2008 have still to play out. Those central banks that stepped in rapidly and massively to stabilize the financial system suffered the least economic harm, i.e. the USA and China, with only China pursuing greatly expanded fiscal expenditure, so stabilizing the world economy. Central bank portfolios are now so greatly expanded that the ecology of debt has been transformed with uncertain outcomes. Corporations and citizens operate on unchecked credit. The economists who contributed to this crisis have, to date, not come up with any solutions. GPI, which has already published its own analysis in Federal Central Banks, is developing an analysis of ‘debt wars’ as both state holders of debt and commercial holders of debt seek to maximize their advantage. In terms of blocs there in no unifying economic model. ‘The market’ remains totemic but it has not functioned in a proper capitalist manner for over a decade and holders of capital are rewarded for rentier not entrepreneurial activities. China pursues a state-capitalism model. Europe holds to regulated capitalism though lacks the motors of economic renewal. GPI is currently investigating economics at the ‘meso’ level as the coming global trend.
The most significant aspect of the financial crisis is the deflationary consequences, which have included coercive austerity measures. Globalisation mark 1 was a win win situation: citizens became richer as the world was more closely integrated. Entrepreneurial capitalism flourished but is now replaced by moribund rentier capitalism and the installation of new wealth inequalities. The profound economic injustice of the financial rescue measures has driven populism, neo-nationalism, plebiscitary leaders and intolerance of immigrants. Borderless borders are now ‘bordered’. Policy injustice has triggered arbitrary injustice of selective citizen disenfranchisement. Victimization has cascaded down the social ladder.
Thus, in the context of a politically and economically unstable global situation, we are seeing the break-up of what might be described as the West’s greatest achievement, the establishment of a rule-based international order, based on the liberal doctrine of trading within a legal framework of rules. The United States as the ‘order giver’ is retreating from its own creation, turning its back on multilateralism in favour of ‘America First’ – which, for it, is not a new doctrine.
We now have to contend with two levels of disorder: that of state actors and the domestic policies and reactions of the citizens of nation-states. Given the complex and multi-layered relationships between states, not least in the production sphere, globalism, in the sense of the secular trend to interconnectedness, which emerged in the nineteenth century, will continue. However, we see the future in terms of more selective liberalisation and regional forms of development. With communication media, and now social media which offer a reflexive mirror to the citizen placed in a global world, fostering a global consciousness. The interests of state actors and citizens divide on the use and control of social media. A new phase of increased entropy beckons, but how should we choose to analyse this disorganised situation?
Where does this leave the Liberal International Order? The 1944 to 1971 settlement was a structured architecture: citizen democracy in nation-states flourished within a framework of international rules and the legitimacy of those rules. It had intersectional functionality of its various parts. This was a western and American led solution. Globalisation mark 1 extended the model but reformulated as neoliberalism. Its high point was the inclusion of China into the WTO, though China’s understanding of the LIO was ‘westaphalian’: agreement to international rules with domestic policy being sovereign to the nation-state. Again, the China example is significant for its determined attempt to retain control as a state actor, whereas in the West state actors remain suborned to dysfunctional financial markets.
Neoconservatism wishes to further disrupt this order. The USA blocked the partial reform of the IMF 2013-16, implemented domestic monetary policies with little regard for the impact on the rest of the global system, while continuing to reap advantage from the global role of its currency and the depth and liquidity in its financial markets. The situation has worsened under President Trump with his erratic pronouncements and policy shifts, the alienation of many long-term allies, not least in Asia, blocking of appointments to the WTO¸ and a general move away from multilateralism in favour of bilateral arrangements in the name of ‘America First’. These actions will not be without cost to the USA and could well erode its structural advantages, for example the international place of the dollar. It is difficult to envisage a conservative international order, though one aspect of it is the rise of domestic social conservatism and reducing the rights of women.
GPI has been tracking for some time the emergence of regional blocs, and now we suggest a basis for their coordination. If the LIO is no longer considered viable, new alternative arrangements may have to take its place, though what may happen is still highly dependent on neoconservative forces in America and whether President Obama’s tentative reset towards an acceptance of multilateralism is re-visited.
What are regional blocs? The European Union is an example of a fully formed bloc. It is an integrated trading area operating as a customs union. It has its own currency, central bank, supreme law court and federal institutions (a parliament, a civil service and two federal councils). It is currently constituted on confederal lines and its juridical validity rests on accumulated treaties, a legal form of blockchain.
While the EU is by far the most advanced regional grouping, rapid progress is being made by Association of Southeast Nations (ASEAN), which has to be seen in the context of very much broader and increasingly China-centered integration of Asia-Pacific and Eurasia. In addition, bloc formation progresses in South America and on 30 May 2019 the African Continental Free Trade Agreement (AfCFTA) came into force involving 52 African countries.
The forces driving coalescence into blocs are primarily trade. US protectionism and the growing dysfunctionality of the WTO encourage the formation of regional customs union, monetary and financial coordination, and the free movement of goods, capital, and people, as in the EU.
‘America First’ policies have turned trade and currency interests into offensive weapons. ‘National security interests’ are being used by the US to block importation of, for example, European cars or Chinese telecomms. The Trump administration’s decision to ally with Saudi Arabia and Israel and against Iran and to operate sanctions for those who otherwise legitimately (according to WTO rules) trade with Iran. This has made blocs aware of the dependence on US controlled banking and payment systems and currency exchange arrangements, driving the creation of regionally specific institutions, such as the Asian Infrastructure Investment Bank (AIIB) and Chiang Mai Initiative Multilateralisation and more broadly the BRICS and the New Development Bank. While we are seeing increasing moves away from the use of the US$ in cross-border settlements and the development of alternatives to the SWIFT payment system, notably by China, and ASEAN; also, in the context of US sanctions on the EU, with the Iran Special Purpose Vehicle.
These developments can be considered as the taking in-house of the mark 1 globalisation model. Regional blocs want to retain the advantages of extended division of labour and the exploitation of centre-periphery unequal development, but now within their own regional arena. This does not render the LIO null and void, for interregional trade will continue. However, the terms of power between US and other blocs will change. The outcome is hard to assess since much still depends on geo-political alliances. Europe has a legacy issue with its trade, diplomatic, and defence Atlanticism. Japan has to face both ways, to America and to China. Australia resolutely holds on to the Anglosphere whose highpoint dates back to the Reagan-Thatcher years. And it remains to be seen how transformative the Belt and Road initiative will be (one of the GPI study areas). Much depends on America’s treatment of longstanding allies, and China’s winning of new friends and trade partners.
Federalism and pragmatic universals
Under current circumstances it is hard to predict what comes next. Policy solutions are required at the global level but there is not a coherent or consensually acceptable global order. GPI will argue that a new framework for analysis is required.
It proposes two lines of thought: pragmatic universals (following the work of the globalism theorist, Martin Albrow), and federalism as a viable long-term solution. The International Liberal Order was based on rules that were assumed to be universally applicable. But even in inception – both in 1944 as well as in the 1919 model of national self-determination – the rule setters excluded major civilizational powers like India and China. With global power shifts towards South and East Asia globally inclusive solutions have to be worked out. Western notions of culture, individualism, and way of life are not universal. Quite profound civilizational differences will not be levelled, rather the opposite: they will be promoted. Issues in common such as trade, currencies, transport, communication and their associated standards require solutions that will be arrived at through pragmatic negotiation. Current bilateral modes of negotiation are an example, even if they are imperfect. At some point those agreements will have to be interlinked if the urgent problems of resource use and modes of consumption are to be confronted. ‘We have become our own environment, humankind has become global.’ Here federalism offers an overarching methodology and this is dealt with in a separate paper by GPI’s Michael Lloyd.
GPI welcomes contributions to this debate at both the overarching level and at case study level.