Beyond the collective action problem
Addressing the global economic governance deficit is imperative to promote world growth
Editor's notes: The world has undergone many changes and shocks in recent years. Enhanced dialogue between scholars from China and overseas is needed to build mutual understanding on many problems the world faces. For this purpose, China Watch Institute of China Daily and the National Institute for Global Strategy, Chinese Academy of Social Sciences, jointly present this special column: The Global Strategy Dialogue, in which experts from China and abroad will offer insightful views, analysis and fresh perspectives on long-term strategic issues of global importance.
Global governance is aimed at solving global problems — issues with worldwide influence that can only be solved with the joint efforts from all countries. The most critical and fundamental global economic governance issue is to maintain strong, sustainable, inclusive and balanced global growth. Global economic governance here refers to how countries reach a consensus on the rules and arrangements that can help sustain and promote global growth.
The increase in labor productivity, the rise in marginal product of labor, is the sole driver of economic growth. There are, generally speaking, two ways to improve productivity: technical progress, including innovation and the diffusion of technology; and gains from trade, based on the division of labor and flow of production factors. It is not difficult to understand that technical progress leads to greater productivity. In the absence of technical progress, countries can increase their total output by taking part in the division of labor and the specialization of production on the basis of comparative advantage. The two drivers of growth are profoundly intertwined and integrated in reality, but discussing them separately in theoretical analysis may help us obtain a better understanding over what drives economic growth and thus come up with more targeted policies and institutions.
What we are discussing here is the ways to maximize the trade benefits from the division of labor and exchanges between countries on a global scale, so as to facilitate strong, sustainable, inclusive and balanced global growth. The issue of maximizing gains from trade can be roughly seen as an issue of global economic governance. To be more specific, the main participants of global economic governance are countries or groups of countries, whose goal is to maximize their own interests. With the absence of a world government, global economic governance is manifested in a form in which various countries establish a set of self-binding rules or mechanisms through negotiation.
Global economic governance encompasses international trade, investment and finance. It controls the exchange of cross-border goods and services and affects cross-border flows of capital and other production factors. Global economic governance also includes the supply chains, the demand and supply of bulk commodities, climate change and the low-carbon economy, and policy coordination among major countries. It is obviously in the interests of all countries if these issues are effectively managed. However, generally speaking, there is an evident governance deficit in handling global economic problems. It has become a pressing global issue to reduce and eventually eliminate this global economic governance deficit.
Common interests are often not sufficient to lead to collective actions, which is one of the fundamental reasons why things that we all know would improve the well-being of mankind as a whole are always difficult to be achieved. That is because good things usually come at a high cost, but the benefits from them are easily shared with free riders. For global governance, the fundamental question to be answered is how to share the costs and benefits. The collective action problem is that some in a group would like to take a free ride, while trying to prevent others from doing so, because of the non-excludability of the collect actions or public goods. As a result, the same governance can result in distinct outcomes for different countries, with some reaping benefits while others suffer losses. As a consequence of this, the provision of public goods becomes insufficient, and global economic governance, represented in the form of international institutions, is often non-neutral.
If we take into account the geopolitical and economic competition between major countries, even mutual benefit and free trade that could usher in Pareto improvements — a key economic concept describing a situation that makes someone better off without making anyone else worse off — will become unacceptable. In 2004, Paul Samuelson, a renowned economist, asserted in an article for the Journal of Economic Perspectives that the Ricardo-Mill Model that advocates free trade is only valid when technical improvements are not considered. Once technical improvements are included in the analysis, this model can go wrong. It is the free trade that spontaneously kills off all trade. Samuelson, taking the US and China as examples, argued that if China's technical progress in its export sector made the two countries' relative productivity between two sectors the same, then the comparative advantage between the US and China would be removed. At this time, China's per capita income will be boosted by technical progress, while the US will suffer permanent measurable loss in per capita real income.
One possible solution to the problem of collective actions in global economic governance is the institutional design of effective governance, on the premise of ignoring the geopolitical rivalry among major powers.
Global economic governance is a matter of concern for every country, and thus it requires consultation among all the parties on an equal footing. Multilateral rules that are acceptable to each member of the international community should be formed after fully balancing the costs borne by each member and the benefits to be shared. During the process of mechanism design, the key is to reduce or eliminate moral hazards and adverse selections by providing compatible incentives, and to reduce or eliminate free riding by creating selective incentives. With limited governance resources, different countries can rank global economic issues based on their urgency, severity and feasibility, and put in place policies on a step-by-step basis in accordance with their orders of priorities. If consensuses cannot be reached, it is also an option to divide the host of issues into different modules so they can be dealt with in more manageable packages.
It is a profound and cruel revelation that the mutual benefits and win-win outcomes brought about by free trade may not satisfy all beneficiary countries. The basis of its internal logic comes from a change in the objective function of countries, which is a transformation from the single objective of maximizing benefits, originally expressed as the absolute improvement of welfare, into dual objectives that also include the considerations of maintaining and expanding the gaps in national power. In an environment with intensified competition between major countries, the dominant strategy of hegemonic powers will shift to containing the rise of their opponents even at the cost of their own interests. As a result, the global system will become divided, or see the emergence of two or more parallel systems that are isolated, or partially isolated, from each other. It will ultimately lead to the fracturing of a unified global market, and so reduced benefits from global trade.
There can be multi-pronged measures to prevent or lessen this result, which could lead to a decline in the level of global welfare. First, it is important to restore or build up trust among countries in order to practice true multilateralism. Second, the benefits for countries to have converging interests in areas beyond trade and economic areas should be emphasized to highlight or elevate the costs of decoupling. Third, it is important to maximize the trade benefits that now remain unrestricted.
The author is a member of the Chinese Academy of Social Sciences and a chief expert of the National Institute for Global Strategy at the CASS. The author contributed this article to China Watch, a think tank powered by China Daily.
The views do not necessarily reflect those of China Daily.
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