The world economy is entering a new phase, in which achieving global cooperation will become increasingly difficult. The US and the EU, now burdened by high debt and low growth — and therefore preoccupied with domestic concerns — are no longer able to set global rules and expect others to fall into line.
Compounding this trend, rising powers such as China and India place great value on national sovereignty and non-interference in domestic affairs. This makes them unwilling to submit to international rules (or to demand that others comply with such rules) — and thus unlikely to invest in multilateral institutions, as the US did in the aftermath of World War II.
As a result, global leadership and cooperation will remain in limited supply, requiring a carefully calibrated response in the world economy’s governance — specifically, a thinner set of rules that recognizes the diversity of national circumstances and demands for policy autonomy. However, discussions in the G20, WTO and other multilateral forums proceed as if the right remedy were more of the same — more rules, more harmonization and more discipline on national policies.
Going back to basics, the principle of “subsidiarity” provides the right way to think about global governance issues. It tells us which kinds of policies should be coordinated or harmonized globally, and which should be left largely to domestic decision-making processes. The principle demarcates areas where we need extensive global governance from those where only a thin layer of global rules suffices.
Economic policies come in roughly four variants. At one extreme are domestic policies that create no (or very few) spillovers across national borders. Education policies, for example, require no international agreement and can be safely left to domestic policymakers.
At the other extreme are policies that implicate the “global commons”: The outcome for each country is determined not by domestic policies, but by (the sum total of) other countries’ policies. Greenhouse gas emissions are the archetypal case. In such policy domains, there is a strong case for establishing binding global rules, since each country, left to its own devices, has an interest in neglecting its share of the upkeep of the global commons. Failure to reach global agreement would condemn all to collective disaster.
Between the extremes are two other types of policies that create spillovers, but that need to be treated differently. First, there are “beggar-thy-neighbor” policies, whereby a country derives an economic benefit at the expense of other countries. For example, its leaders restrict the supply of a natural resource in order to drive up its price on world markets, or pursue mercantilist policies in the form of large trade surpluses, especially in the presence of unemployment and excess capacity.
Because beggar-thy-neighbor policies create benefits by imposing costs on others, they, too, need to be regulated at the international level. This is the strongest argument for subjecting China’s currency policies or large macroeconomic imbalances like Germany’s trade surplus to greater global discipline than currently exists.
Beggar-thy-neighbor policies must be distinguished from what could be called “beggar thyself” policies, whose economic costs are borne primarily at home, though they might affect others as well.