Cutting the Gordian Knot on Collective Action

What role does collective action play in reaching globally sustainable, inclusive and stable growth? Not too long ago the answer to this question was that there was no need for collective action and therefore no need for global institutions that govern the world economy.

In fact, the age of globalization — or, as it was also called among economists, the age of the great moderation — suggested that, through the internationalization of both trade and finance, growth was finally spreading all over the world.

After all, developing countries were able in the last few decades to raise a lot of their population out of poverty. There were also other benign factors (or benign characteristics) of this age of the great moderation: the spread of democracy and the end of a big ideological divide in the world between East and West and between different economic systems. There was less volatility, and there were fewer crises.

One of the upshots of this was that international institutions, such as the International Monetary Fund, were seen as less relevant. There was even a view that they were no longer needed, or that they would find it difficult to deploy their financial resources. The world was seen as becoming increasingly level, rich and stable.

We now know that this was an illusion. The collapse of Lehman Brothers in September 2008 taught us at least two lessons. The first is that the world economy, rather than being robust, is extremely vulnerable to shocks. The financial crisis that began in the United States instantly spilled over into a financial crisis in Europe. World trade collapsed in matter of days.

The second lesson followed naturally from this experience: A very strong collective response was required.

The initial signs regarding the emergence of the G20 and its crisis management capabilities were encouraging. The macro response, both the monetary and the fiscal management of the crisis, were coordinated and effective.

And there was a recognition that global governance needed to catch up with the globalized nature of finance. But very quickly the will to collaborate and to build truly international institutions with supranational powers started to evaporate.

Today we are seeing a re-emergence of national approaches and of hidden protectionism. Nowhere is this more visible than in the eurozone. The area that arguably had the largest will to integrate is now fracturing along national borders.

Another example of the failure to embrace collective action is global warming. The German Council of Economic Experts, a panel on which I sat for most of past decade, was mandated by the French and German government to come up concrete measures for sustainable growth, of which environmental sustainability was one of the key dimensions.

There were all sorts of measurement and definitional issues involved with that undertaking. But none proved more vexing than this question: Does it make any sense to set national goals things like for CO2, alternative energy production, resource productivity or resource use?

Does it makes sense to be pursue ambitious targets nationally when it might mean that the other nations essentially get a free ride to consume more resources and emit more greenhouse gases?

As an economist, I realize full well that there are no local solutions to global problems. And yet, on the environment, that is exactly what we are trying to do.

In fact, trying to come up with national solutions to problems that are global is very much where climate negotiators left off after the (in)famous Copenhagen meeting in December 2009. One could thus say the approach is now officially sanctioned.

Clearly, the only reasonable approach is to pursue a true globalist, not just multilateral, approach. If we ever want to make progress not only on (lofty) goals, but also with (concrete) institutions and enforcement mechanisms, we have no other choice.

To me, the only way to tackle the big issues of regulating the financial sector and safeguarding the environment — perhaps the two paramount collective-action problems of our time — require a new era of building international institutions.

It has been done before. Just think of the 1950s and 1960s when, learning from the huge disruptions, calamities and crises of the last century, the world (or, rather, key parts of the world) came together and said: We need to build institutions that can be the instruments of collective action and restrain nations from beggaring their neighbors.

Only in such a way can we operate on the basis of globe-spanning rules that move us toward common standards and obligations and, eventually, a level-playing field and true long-term focus.

Today, national perspectives dominate. But the truth is that a fractured world will not only be a poorer world, it will also be a world in which there is less security for everybody.

That is why we need to find the courage once again to present visions that promote collective action to find global solutions to global problems. Unfortunately there is no other way to cut this Gordian knot.

Editor’s note: This essay was adapted from the author’s presentation at the 2012 Salzburg Trilogue. Hosted by the Bertelsmann Stiftung in Germany, the Salzburg Trilogue facilitates international cultural dialogue by bringing together recognized public figures to consider matters of global importance.