Tuesday, July 7, 2020

Asia will fall with the multilateral system unless it now springs to its defence

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The COVID-19 pandemic is a test for the multilateral system — one that could not have come at a worse time. The multilateral system is vital to keep supply chains open, allow medical supplies to flow freely, resist trade protectionism, deal with the international economic and financial repercussions and coordinate financial assistance to countries in need.

But the multilateral system has never been weaker. Reviving multilateralism to address these challenges will require a new source of strong leadership. Which countries have the greatest incentive to provide that leadership? Which countries benefit the most from the multilateral system? And which would suffer the most from its decline? These are the questions we explored in a recent study.

The 2010s were a bruising decade for the multilateral system. The United States withdrew from the Paris Climate Accord, trade and technology wars weakened the global economy and the World Trade Organization’s (WTO) dispute settlement body was shutdown. The backlash against globalisation intensified sharply. Less than half of survey respondents in the United States, Britain and France believed that the effects of globalisation were positive.

Critical multilateral forums ended the decade facing deep challenges: progress on European integration remains slow and the International Monetary Fund (IMF) remains dangerously under-resourced to deal with economic and financial shocks. The governance structures of many institutions are out of step with global realities and the value of NATO and other long-term military alliances are being called into question.

All countries benefit from the multilateral system but some do more than others. The G20 is a useful case in point. Declared the preeminent forum for international economic cooperation, the G20 has been broadly successful in implementing its commitments. Its commitments provide significant economic benefits and political backbone that led countries to do things they otherwise would not have done.

We can measure how the economic benefits of G20 commitments are distributed between countries. And we can use results from in-depth interviews with leaders, ministers, central bank governors and officials from all G20 countries to guage how the political benefits of G20 commitments are distributed between countries.

The results are stark. Asian countries are overwhelmingly and consistently the largest beneficiaries of the G20’s commitments, both economically and politically. It follows that they have a disproportionately large incentive to show leadership in protecting and promoting the G20 and the multilateral system more broadly.

The modelling shows that the main beneficiaries of coordinated fiscal stimulus are G20 economies in Asia, particularly South Korea, Australia, Indonesia and India. For most, the first-year GDP impacts are more than twice as large thanks to G20 coordination. South Korea is more than four-times better off. India and Indonesia are almost two and a half times better off working together than acting alone.

Structural reform will be necessary for reconstructing the global economy post-pandemic. The modelling shows that, when coordinated, structural reform disproportionately benefits Asian G20 countries. If a country reforms alone, it sees a significant increase in domestic production, some of which spills over into other countries through increased demand for their exports. But with coordinated reform, that country experiences the benefits from its increased domestic production and enjoys positive spill-overs from increased production in other G20 economies through increased demand for exports.

The benefits to G20 economies from coordinated structural reform are large. Calculated as a weighted average, G20 GDP is estimated to be permanently 2.5 per cent larger as a result of coordinated structural reform.

Countries also enjoy important political benefits from G20 commitments. The G20 provides policymakers with the political cover they need to sell important reforms domestically. It also helps build networks and relationships across countries and between policymakers and generates a global dialogue on critical issues to shape consensus on how best to address them. It helps defeat concerns that other countries might be free-riding and boosts the credibility of policies. The G20 plays a critical role in setting higher standards and developing better norms.

These political benefits also disproportionately flow to Asian economies. When asked whether there were domestic…

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