Global Economic Governance: New Challenges and China’s Approaches

China International Studies (English) - - Contents - Chen Dongxiao & Ye Yu

Global economic governance is facing a complex and grim situation where the old dynamics are being replaced by new ones and competition is becoming more intense. China has established a new direction to participate in and lead global governance, and it is strengthening coordination and intellectual support for global governance.

Global economic governance is the core of global governance network and the main area for China’s participation in global governance at present. Since the onset of the global financial crisis in 2008, the world’s economic development has been experiencing a series of new problems and challenges, and global economic governance is facing an unprecedented complex and grim situation. During this period, China’s willingness and ability to participate in global economic governance has been increasing, as well as the expectations of the international community with regard to China’s role. The G20 Summit held in Hangzhou in September 2016 witnessed a new blueprint to lift the world economy out of doldrums and embrace inclusive and sustainable development. The summit also charted a new direction for China to participate in and lead global economic governance. But given the global economy at present and the complex pattern of global economic governance, China can only break through the various constraints and play a more important and constructive part in global economic governance by following the current trends and promoting greater coordination.

Difficulties in Global Economy and Challenges of Governance

The state of the world economy is usually measured by four indicators: economic growth and efficiency, security and stability of economic system, fairness of

Chen Dongxiao is President of Shanghai Institutes for International Studies (SIIS); Ye Yu is Associate Research Fellow at the Institute for World Economy Studies, SIIS.

wealth distribution, and environmental sustainability. At present, the global economy is troubled by a situation where it does not perform well in any of the four indicators and problems are interrelated and mutually superimposed.

First, the overall economic growth is weak. Since the financial crisis in 2008, the global economic recovery has remained sluggish, and the overall annual growth rate lingers around 3%. The scale of global investment and trade, whether in terms of absolute value or relative value to GDP, is declining notably. Gone are the dynamics of global trade that grew several times more than GDP growth as was the case before the crisis. The weak economic recovery comes from the combined effects of supply and demand. On the demand side, due to a serious imbalance in income distribution, the declining global population growth and the aging population structure, among others, the global effective demand is far from strong. On the supply side, there is a lack of breakthroughs in technological innovation, and the global financial resources are going from real economy to virtual economy, holding back the public infrastructure investment and the vitality of small and medium-sized enterprises. Both developed and developing countries are faced with structural reform bottlenecks of varying degrees, restricting the promotion of total factor productivity.1

Second, the economic system is fragile and unstable. Economic liberalization, globalization, networking and informatization have entered a new development phase, and interdependence between countries continues to intensify. Scientific and technological innovation has brought more wealth, knowledge and opportunities than ever before. But it has also exacerbated the fragility of the economic system. First, the liberalization process of global financial market is developing with volatility, but the financial regulatory measures are still largely regarding post-crisis management.2 Although the overall strength of the United States has declined, the dollar still has absolute dominance and the US formulates its monetary policies based

on its own interests, which have spillover effects on the global economy. Second, the expansion of the global middle class and the popularity of social media have helped promote the general awareness of individual rights, but the extreme thoughts on social media which lack orderly regulation may lead to polarization of public opinion, intensify social conflicts and even cause unrest.3 Third, the international geopolitics and the rising risk of conflicts, natural disasters and the spreading of infectious diseases and religious extremism mean traditional and non-traditional security threats are intertwined, exacerbating the instability of the world’s political security situation, and further increasing uncertainty in the global economic system.

Third, the issue of unfair social distribution is becoming salient. In the Outlook on the Global Agenda 2015 report by the World Economic Forum, income inequality was cited as a prioritized issue.4 In 2013, the global Gini

coefficient reached 0.625.5 In recent decades, developing countries such as China, India and other countries have narrowed their income gaps with developed countries through economic growth, but the inequality within developing countries has worsened.6 A series of studies have shown that capital-led economic growth and globalization will expand inequality, and the lack of coordination between countries and the corresponding policy support within a country will inevitably lead to further marginalization of vulnerable groups in the process of capital expansion. If the problem of the serious imbalance in economic growth is not effectively resolved, it will not only restrict the effective demand of the world economy, but also exacerbate the spread of domestic protectionism and nationalism, and even lead to a wider range of political and social conflicts.7

Fourth, the sustainability of ecological environment is worrisome. Climate change is a recognized prioritized global issue, which not only poses a major risk to the sustainable development of global economy, but is also listed by countries as a frontier security issue. Especially for many developing countries, air, water and soil pollution and other environmental challenges not only pose a direct threat to the lives and health of their citizens, but also undermine the basis of sustainable socio-economic development. The Paris Climate Change Conference at the end of 2015 reminded us that the threat of climate change is imminent and that the international community must take immediate and effective actions to mitigate the effects.

The coexistence of the above four problems is closely related to the failure to transform global governance and the inadequacy of supply. Global economic governance is faced with four challenges:

First, the power of leadership is divided and in a period of transition. The rise of emerging economies has added significantly to the number of stakeholders, effecting changes to the original economic governance system.

However, the slowdown of economic growth in emerging economies and the enlarging trend of internal division among them in recent years have made the prospects unclear. The future pattern of leading global economic governance will depend on the outcome of the competition between established and emerging forces. As the competition is still underway, it is still too early to conclude whether the new pattern is a replacement, supplementary or in parallel with the old one.8 In this uncertain context, the problem of insufficient supply of public goods in global economic governance will become more prominent than ever.

Second, the concept of governance and the values it upholds are becoming more diversified and the competition for discourse power in global governance has intensified. The dominance and orthodoxy of neoliberalism in global governance is constantly being challenged and shaken.9 The diversified development path represented by emerging economies is increasingly noticed, understood and affirmed by the international community, but it is far from the mainstream, as can be seen from the global debate over China’s development model. The diversification of global economic governance philosophy and values has led to increasingly intense competition for discourse power in making, interpreting and exercising rules. Enhancing the abilities of countries to learn from each other and creating harmony among diversified global economic governance values will consolidate a new consensus for global economic governance and avoid the opposition or even cultural conflicts of values.10

Third, the governance mechanism is fragmented, revealing its lack

of effectiveness and representativeness. Regional, sub-regional, and transregional governance, as well as bilateral trade and investment agreements and negotiations are replacing the global multilateral economic and trade system with the World Trade Organization (WTO) as the main channel, and are constantly fragmenting the entirety of the world market. It is a crucial step for the international community to overcome the failure of market mechanism by strengthening communication and coordination of interests and forming an efficient and complete economic governance mechanism.

Fourth, domestic governance is being internationalized. In a highly interdependent global economy, the spillover and spillback effects are being felt strongly and the task of managing and coordinating these effects is urgent. Correspondingly, how the economies, through their own reforms and transformation, strengthen their influence on the world economy and reinforce the toughness of their own governance mechanism has become a major indicator to gauge the effectiveness of domestic governance. In the context of today’s de-globalization trend and rising economic nationalism, populism and protectionism, it is an urgent task for governments to coordinate the relationship between domestic and global governance.

New Opportunities and Impetus to Participation

At present, in the United States, Europe and other Western developed economies, economic populism and nationalism are gaining ground strongly, and the traditional driving force for globalization has turned into resistance. Moreover, while emerging economies have lifted their status in the global economic governance, they are pressured by domestic structural problems, weakening momentum and internal division. Despite the decline in the traditional trade which represents the globalization of the 20th century, the speed and breadth of global expansion of information, ideas, data, and innovation are accelerating. In March 2016, the Mckinsey Global Institute released its report Digital Globalization: The New Era of Global Flows in which it noted that, “The world is more connected than ever, but the nature

of its connections has changed in a fundamental way.”11 Therefore, the low tide and adjustments of globalization is not the end of globalization. Rather, globalization is in a new era of transformation, in need of establishing a new direction and gathering new impetus. At present, China is launching a new round of comprehensive reform and opening up, the process of which is inseparable from the support of the global system. Coinciding with the transformation of globalization, China needs to establish new directions, seek for new historical opportunities, and gain new development momentum on the global economic arena.

New aspirations and ground for consensus

In the new period, China has been conducting major-country diplomacy with Chinese characteristics and engaging itself more actively in global economic governance, producing more global public goods than before. In 2016, China hosted the G20 Summit, and actively participated in setting the agenda for global economic governance, pushing the process to a new height.

From the strategic point of view, global governance has been placed at the forefront and center of China’s major-country diplomatic strategy. “It is a solemn commitment of the CPC and the Chinese people to the world that we make greater contributions to mankind.”12 President Xi Jinping proposed insisting on “global governance as a prerequisite for peaceful development” and put “commitment to peaceful development, actively participating in and pushing forward the transformation of the international order and the global governance process” at the forefront of major-country diplomacy with Chinese characteristics.13 Compared with the diplomatic philosophy at the beginning of the 21st century in which China considered multilateralism as

the stage to play a role, the new thinking indicates that full participation in global governance has become one of the cornerstones and core elements of current Chinese diplomatic strategy.

China has attached great importance to the synergy between domestic reforms and global governance, considering it as a central diplomatic task. The Chinese government regards opening up as an important path toward peaceful development and proposes building a new open economic system. From the establishment of the Shanghai Pilot Free Trade Zone, the speeding up of constructing pilot free trade zones across the nation, to putting forward the Belt and Road Initiative, and vigorously promoting negotiations on trans-regional and multilateral trade and investment agreements, all these efforts reflect China’s willingness to continue to strengthen ties with the outside world, and deepen the interdependence of interests. At the same time, China’s medium and long-term development plan seeks to synergize with the United Nation’s 2030 Agenda for Sustainable Development. China has also ratified the Paris Agreement. These efforts made by the Chinese government are intended to promote the global development consensus as mainstream in China, which will then entail domestic reforms.14

New mechanisms and platforms

If China’s accession to the WTO in 2001, becoming deeply integrated into the process of globalization and rising to the world’s largest trading nation, destination for the largest amount of foreign capital, and second largest foreign investor, are deemed as founding reasons for China to participate in global economic governance, the more inclusive global economic governance mechanisms represented by the G20 can serve as the incentive for China to make more constructive contributions and provide more global public goods. From suspicion and alienation from the G8/G7 summits at the end of the 20th century to being a guest at the G8 Summit in 2003, to becoming a member of the G20 Summit in 2008, up to hosting and

leading the G20 Summit in 2016, China’s role in global economic governance has transformed from an observer to a participant, and it has had a new identity and mindset accordingly. After the financial crisis in 2008, it is under the G20’s promotion that China became the third largest stakeholder of the International Monetary Fund and the World Bank, and more Chinese experts have joined the high ranks of international economic organizations, enabling China to play a greater role than ever before in global economic governance.

More importantly, China has initiated and supported the establishment of the Asian Infrastructure Investment Bank (AIIB) and the BRICS New Development Bank (NDB) in the context of slow reform of global financial institutions and sluggish response to global development needs. These are new platforms for China to play a more crucial role in global economic governance. The voting power of China, the United States and Japan in the World Bank and the Asian Development Bank are 5.3%, 14.1% and 10.0% respectively, where China clearly lags behind. But if the voting power of AIIB is included in the calculation of total voting power, the shares of the three countries become 9.6%, 11.2% and 7.9% respectively, where China surpasses Japan to be in second place, and the gap with the US narrows sharply.15 The reform of old mechanisms and the establishment of new institutions have, to a certain extent, alleviated the legitimacy deficit of global economic governance and provided a great incentive and guarantee for China to actively contribute more global public goods.

New resource and intellectual supports

China has become an increasingly important variable in the world economic system. Its own smooth transition and sustainable development is a great contribution to the stable development of global economy and an indispensable engine for the sustainable evolution of globalization. China is

striving to become an important contributor to global governance in terms of resources, concepts and proposals, among others. In recent years, China’s contribution to international institutions such as the United Nations, the World Bank and the Asian Development Bank has witnessed substantial increase. Since the 18th CPC National Congress, the Chinese government has proposed an inclusive vision of building a community of shared future for mankind, enriching the concept of a new type of international relations featuring win-win cooperation, and it has upheld the principle of wide consultation, joint contribution and shared benefits. China is pushing forward international cooperation by providing public goods created by the implementation of the Belt and Road Initiative.

With the theme of “Building an Innovative, Invigorated, Interconnected and Inclusive World Economy,” the G20 Hangzhou Summit reached a communiqué and 28 outcome documents on issues such as innovating growth patterns, improving global economic and financial governance, promoting international trade and investment, and enhancing inclusive and interconnected development. It has actively shaped an agenda for the world economy’s sustainable development by coordinating with its domestic transformation and has pushed forward the G20’s transition from a crisis response mechanism to one that aims to support long-term global governance. “China has for the first time elucidated its concept of global economic governance, regarded innovation as a core outcome, placed the issue of development in a prominent position in global macroeconomic policy coordination, formulated a rules framework of global multilateral investment, released a Presidency Statement on Climate Change at the G20, and for the first time integrated green finance into the G20 agenda.”16

As China’s economy enters the new normal, it encounters multiple challenges like change of pace in economic growth, the difficulties associated with structural adjustments, and the transformation of the drivers of

growth.17 China’s economy has been closely integrated into the global trade system, but the military power to provide protection for its trade is insufficient. Although the total volume of its trade tops the world, China’s monetary and financial sectors are still comparatively weak. China is the hub of global manufacturing, but its innovation ability is far from strong. China is confronted with dual challenges from developing countries with low-cost advantages and from developed countries which control core elements.18 The coexistence of the advantage of total volume and the structural disadvantages means that when participating in global economic governance, China needs to keep a balance between its ability and strategic willingness, shoulder its due international responsibilities while upholding domestic development, and avoid overestimating its ability and overdrawing strategic resources.

Focuses and Approaches to Constructive Participation

As a major developing country, China needs to base its participation in global economic governance on the dual interests of realizing domestic development and promoting global economic cooperation, so as to achieve win-win on both domestic and international fronts.19 This requires China to design its participation strategy in global economic governance based on the priority areas and pace of its own development and transformation, and promote a more inclusive and effective global economic governance system by simultaneously advancing the G20 and regional mechanisms.

Promoting interaction between global and state governance

Domestic governance lays foundation and momentum for international governance. The two are interrelated, influencing, transforming and

promoting each other. One notable phenomenon of the current global economic governance process is that for a leading country in global governance, the more innovative and effective outcomes its domestic reforms can yield, the more likely it will apply the principles, ideas and even solutions to addressing the global agenda. The reason why China was able to provide a large number of solutions at the G20 Hangzhou Summit lies in the similarity of China’s reform drive to the G20 agenda. This gave China the confidence and assurance to promote the relevant discussions and policy coordination.20 In the analysis of China’s strategic considerations of participating in global governance, Chinese scholars have put forward the concept of “holistic governance”, that is, global governance and state governance should complement each other and achieve inherent unity. China as a major country should use global governance to deepen state governance, and promote global governance by relying on state governance.21 China’s practice in participating in and even leading global governance has also proved that China needs to further deepen domestic reforms in order to consolidate its ability and influence in setting the global agenda. This is an important source of China’s ability and confidence to become a global leader in governance.

To this end, China should continue to promote the Chinese concept of sustainable development in the international multilateral agenda, so as to foster a new consensus point. Moreover, China should theorize its practice of domestic reform and transformation, find common meaning in special cases, provide theoretical support for the significance of Chinese practice in the world, and enhance the influence of the Chinese practice in global economic governance. In this regard, China has in recent years stepped up its efforts in major multilateral economic organizations to make effective use of its data analysis and research capabilities to translate China’s practices more effectively into the global agenda. China’s cooperation with

major international economic organizations during its G20 presidency has been a highlight. For example, China invited the World Bank, the African Development Bank and another ten multilateral development banks to jointly publish a declaration on supporting infrastructure investment; China initiated the creation of a global infrastructure interconnectivity alliance and designated the World Bank as the Secretariat, which enhanced the legitimacy of the relevant initiatives and indirectly supported the Belt and Road Initiative, and let the G20 officially recognize the positive significance of two new multilateral institutions. In the future, China should continue to strengthen cooperation with these important international economic organizations and borrow their strong research capabilities to promote some major issues, such as promoting the formulation of a uniform standard, indicator system and implementation program for the Global Investment Guidelines and Agenda on Deepening Structure Reform ratified during the

G20 Hangzhou Summit.

In addition, China also needs to carry out comprehensive planning on the important agendas and important mechanisms of global economic governance and give full play to their synergy, complementarity and mutual reinforcement. For example, the implementation of the 2030 Agenda for Sustainable Development is one of the central issues of global governance now, and China should work out a comprehensive plan to increase its contribution to implementing the Agenda by integrating outcomes from the G20 Hangzhou Summit, the BRICS mechanism, the China-africa Cooperation Forum Johannesburg Summit, CHINA-ASEAN cooperation, China-central and Eastern Europe cooperation, China-latin America cooperation, and so on. This concept of interconnectivity and comprehensive planning will give the fullest play to the synergy and extending effects of global initiatives and regional and international cooperation, and create opportunities for China to innovate South-south cooperation and contribute more effective public goods to global governance.

Establishing a more effective regional mechanism

The global economic governance system is meant to govern global economic issues, but the system has a pyramid structure and is comprised of participants on national, sub-regional, regional and global levels. It is noteworthy that the system should follow the so-called “principle of subsidiary,” that is, only when the lower mechanism cannot effectively provide some kind of public goods, does the higher mechanism intervene.22 In this sense, the global governance mechanisms should “sink” as much as possible. Mechanisms such as the G20 should focus on strategic and overall issues of global economic development while specific governance issues should be carried out by mechanisms on national, sub-regional and regional levels.

Therefore, we don’t have to regard booming regionalization as a

scourge. What is important is that regionalization should be truly solid and effective and be consistent with the general direction of globalization. The history of the development of the international trade system also proves the possibility of regionalization promoting globalization. In the context of multi-polarization in the international community, the game between old and new major countries and the development of the global supply chain have brought about a new round of regional reorganization and prosperity, which should be regarded as a new opportunity for the development of globalization. As the world’s second largest economy, China should be an important driving force in this process, and better coordinate with the traditional powers to ensure healthy competition and effective complementarity between old and new systems. First, it should do a good job in implementing the Belt and Road Initiative, ensure successful operation of the AIIB and NDB and promote development in Asia. The AIIB is committed to “fostering sustainable economic development, creating wealth and improving infrastructure connectivity in Asia,” and “promoting regional cooperation and partnership.”23 Its establishment marks the complete shift of focus to the Asia-pacific and to a new phase where issues such as trade, finance and development are interconnected. Its open structure makes it able to interact with and supplement the existing institutions. Before its launch, the AIIB had been widely recognized by the international community. It is China’s paragon for promoting global economic governance through regionalization. Second, it should promote the effectiveness of regional mechanisms in the monetary field and contribute to the global system. For example, the Chiang Mai Initiative Multilateralization (CMIM) and the Contingency Reserve Arrangement (CRA) of BRICS are important complements to the global emergency financing system centered on the International Monetary Fund. China should play a more important role in promoting and enhancing the effectiveness of these mechanisms. During the G20 Hangzhou Summit, China’s promotion of cooperation between

the IMF and CMIM was a useful practice.24 Third, China should promote the construction of a regional trade system. The uncertain fate of the Transpacific Partnership (TPP) offers new opportunities for China to promote trade integration in the Asia-pacific region. Even if it is difficult to push forward the Regional Comprehensive Economic Partnership (RCEP) or the Asia-pacific FTA (FTAAP), China can follow the CMIM experience to promote multilateralization of trade rules system under the framework of ASEAN plus China, Japan and South Korea (10+3). If this can be done, it would be an important contribution to the trade system of East Asia and even of the world.

Strengthening G20 effectiveness and macro policy coordination

The G20 is the premier platform for international economic cooperation and global economic governance. It plays an increasingly important role in addressing some systematic and holistic issues such as preventing risks, improving efficiency, and promoting fairness. The role is even more obvious in strengthening strategic communication and building trust between the leaders of major economies. As a representative of emerging economies in the G20, China has an important influence on international monetary finance, trade and investment, development and other fields. It is also one of the most important variables in the future international system and has attracted the attention of the international community. The G20 Hangzhou Summit provided a new focus and medium to long-term plans for the major countries to jointly promote global economic governance. However, the structural problems of the world economy and other “chronic diseases” need to be tackled from both the symptoms and the root causes, and it shouldn’t be expected that the problems can be solved swiftly once and for all. In the post-hangzhou Summit era, China should continue to use its position in the G20 and its influence as the world’s second largest economy to promote the implementation of relevant outcomes to ensure the effectiveness of the G20

mechanism.

The key to materializing the outcomes of the Hangzhou Summit and designing the future development of the mechanism is to enhance the ability to convert consensus to action. As the mechanism is not binding, outcomes achieved at the Hangzhou Summit, such as the blueprint for innovative growth, the agenda for deepening structural reform, the roadmap to implement the UN 2030 Agenda for Sustainable Development, and guiding principles and action plans regarding global investment, green finance, energy efficiency and renewable energy, are mostly suggestions and initiatives at the moment. Behind the consensus are huge conflicts of interest. More talks and negotiations will be needed to implement them. To this end, we need to further promote the working mechanisms of relevant issues. For example, during the Hangzhou Summit, innovation and growth issues were led by the Ministry of Science and Technology, Ministry of Industry and Information Technology, and the Cyberspace Administration of China, etc., and assisted by international organizations such as the Organization for Economic Cooperation and Development (OECD), but a special working group is yet to follow up. Article 11 of the G20 Leaders’ Communiqué Hangzhou Summit stipulates that “a G20 Task Force supported by the OECD and other relevant international organizations to take forward the G20 agenda on innovation, new industrial revolution and digital economy,” and the discussions should be “subject to the priorities of the respective future G20 presidencies.”25 In this regard, China should strengthen coordination with the G20 members, including future presidency countries to jointly promote the relevant provisions and ensure follow-up implementation.

How much influence and coordinating ability China can have in the G20 and other global economic governance mechanisms are fundamentally reliant on its ability to develop itself and to manifest leadership. Therefore, China should effectively promote structural reforms and the transformation of its development pattern, vigorously develop its finance sector and high-

end manufacturing, improve its position in the global value chain, gain new international competitive advantages, and achieve sustainable development. These are the fundamental forces to strengthen China’s role in setting international agenda and rules. At the same time, China needs to further open up its service market and lower the threshold for foreign investment. China should increase its financial and intellectual contributions to global pubic goods and apply both its hard and soft powers to facilitate the resolution of systematic and global issues on trade, investment, finance, climate change, energy and so on. For example, China can use its fast development of e-commerce to grasp the important right to make trade rules for global e-commerce. In the final analysis, China can rely on its own industries and innovation advantages to actively push forward relevant discussions and the formation of international rules, in order to promote institutionalizing the common practices of China’s advantageous industries.

Conclusion

Global economic governance is facing a complex and grim situation where the old dynamics are being replaced by new ones and competition is becoming more intense. The situation requires forging new common ground and stimulating new cooperation impetus. China’s continued development relies on an open and inclusive global governance system and that in turn will provide new opportunities and impetus for the development of globalization. Marked by the G20 Hangzhou Summit, China is fully participating in global economic governance. Its next moves should be to promote the interaction of state and global governance and to build a more solid and effective regional mechanism for economic governance. The effectiveness of the G20 should also be strengthened to realize a governance system that is more inclusive and effective than before.

Leaders of G20 members taking family photo at the Hangzhou Summit in September 2016. The key to materializing the outcomes of the Hangzhou Summit is to enhance the ability to convert consensus into action.

Chinese President Xi Jinping, in his keynote speech at the 2017 annual meeting of the World Economic Forum in Davos, Switzerland, laid out his plan to lead global efforts in charting the course of economic globalization.

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