Restoring Multilaterism

The “rules-based order” is more a confessional community of ardent believers in the benign global influence of American economic and political power than an accurate description of global governance. This is not widely understood. The more common story is that—per, to take a recent example, Paul Krugman—after the Second World War, Pax Americana “chose not to rig the system in its favor,” and instead cultivated a new model of hegemonic governance based on decency, benevolence, and restraint.           

Donald Trump’s ascendancy to the White House through the murkier worlds of mega real estate deals and reality television means he has never had much time for such values—nor for the internationalist trappings typical of more vaunted members of “the order.” That unique personal history is beginning to hit home.

A flurry of Presidential decrees since January 17 has taken direct aim at key institutions of international cooperation, both domestic and multilateral. More are expected. There is certainly malice in these actions, and perhaps a little madness. But they embody an underlying belief in the restorative power and technological acumen of American business to make the country great again—and a determination to ensure that it is not obstructed by countervailing forces at home or abroad. 

Trump’s aggressive use of tariff measures, announced on April 2 with no sense of irony as “Liberation Day,” has been taken as a more direct assault on the prevailing structures of global governance. Economists were quick to ridicule the arithmetic and logic behind the idea that his “reciprocal tariffs” can bring manufacturing jobs back to America, mapping their likely damage to markets, businesses, and households. Much of this is commonsense but the technocratic allure of the response might miss the forest for the trees. What is at stake is not a well-conceived policy mix to tilt the gains from trade, but a political project to reshape American power.

In the Financial Times, Gillian Tett noted, via Albert Hirschman, that trade policy through the ages has always been linked to economic coercion and national power. If there is one thing President Trump understands, it is the potential of bullying to achieve his desired outcome. 

Trump’s invective has been directed at everyone who has ostensibly “ripped-off” the country—from erstwhile allies in Western Europe to some of the world’s poorest countries to the penguins of the Heard and McDonald Islands—and also his predecessors in the Oval Office who allowed this to happen. Still, by now there is little doubt that China is the principal target of his assault on the international trading system or in his willingness to use the threat of further tariffs to corral countries into joining an anti-Sino alliance. Whether forced or strategic, the ninety-day tariff pause, excluding China, announced just a week after Liberation Day, points to further disruption ahead.

The unruly coalition of business interests behind the administration may well struggle to survive the turmoil and uncertainty that has been unleashed, let alone deliver on its promises to working families. That China will be cowed into economic submission seems even more unlikely. What is certain, however, is that the global economic environment will become more challenging, particularly for countries in the developing world. Highly indebted poor countries will suffer sooner rather than later even with the possible offsetting influence of a weaker dollar.

But the emergence of a more hostile international economic environment pre-dates Trump, beginning with the global financial crisis, if not before. Moreover, a willingness to weaponize its dominant economic position has been a defining feature of the United States’ hegemonic position for longer still, albeit with uneven and perhaps diminishing effect in a world of competing poles of influence. 

A corrosive combination of economic coercion and asymmetric transactional relations has been undermining trust in multilateral arrangements and weakening international cooperation for years, most recently under cover of free trade agreements and economic partnerships between countries in the global North and South.

Normalcy?

What is worrying then, is the call by assorted defenders of the existing international order for a “return to normalcy” and, in particular, for business leaders to help turn back the Trumpian assault on “rules-based capitalism.” To date, that call has fallen on deaf ears. But the response is itself a measure of just how far “the order” has drifted from the principles that launched the post-war multilateral system.

For those gathered at Bretton Woods in 1944, the financial instability, economic contagion, and political violence of the interwar years had left them deeply suspicious of the unchecked ambitions of private capital and the self-correcting power of market competition. Instead, active public policy, a strong regulatory hand, enhanced cooperation, and a rejection of “economic bullying” would play a foundational role in building a prosperous and peaceful world. Dedicated multilateral institutions were fashioned accordingly. As Jamie Martin has described it, a new interventionist model of organized capitalism based on the New Deal was to be “scaled up to the entire world.” And, as Eric Helleiner has shown, this project was conceived with (now largely forgotten) foundational support from countries of the global South. 

The eponymous world-making era that unfolded from the Bretton Woods Agreement never lived up to its original ideals. Through its institutions, hegemonic power was used both unilaterally in support of American interests and, when necessary, to bully recalcitrant players into compliance. With the rejection by the US Congress of the Havana Charter for an International Trade Organization, developing country concerns over the biases and asymmetries they faced in the postwar international division of labor were largely ignored. However, it did deliver a degree of economic stability and sufficient policy space to allow more advanced countries to recover from wartime dislocations and achieve unprecedented rates of economic growth, sustained levels of employment, and tangible welfare gains. 

From the late 1960s, this era faced growing macroeconomic and distributional tensions from a combination of fiscal pressures, trade imbalances, and shop floor discontent. In response, President Nixon’s unilateral decision in 1971 to delink the dollar from the system of fixed exchange rates began a process of unravelling that saw international banks thrive and expand by recycling “petro-dollars” and culminated in a “controlled disintegration” of the postwar regime. This process continued as the decade came to a close under the watchful eye of the Federal Reserve—hiking interest rates and allowing the dollar to strengthen—and with strong political backing from President Reagan. 

Much like the current moment, the Fed’s decision provoked considerable market turmoil and business discontent; through the end of 1982, the economy was in and out of recession. Still, the combined assault on organized labor and developing country solidarity helped to extinguish any lingering inflationary pressures, restore profitability, and pave the way for newly liberated firms and financiers seeking investment opportunities across the globe. 

By the end of the 1980s, the result had more clearly taken shape. The international economic regime, fully tuned to the demands and wishes of footloose capital, and backed by a policy toolkit of austerity measures, was intensely relaxed about the sharp rise in inequality, insecurity, and indebtedness that followed. Multilateral institutions duly lent their support to what the IMF’s Managing Director at the time called “an open and liberal system of capital movements” and, through their adoption of policy-based lending programmes, aimed squarely at opening up the Eastern bloc and the global South to private capital flows.

Although the Fund’s bid to rewrite its Articles of Agreement, which enshrined capital controls, failed in the face of the Asian Financial Crisis, in the following decade the United States was still able to hardwire such requirements into trade and investment treaties.

Setting private capital free has not, however, delivered on the promise of a strong and inclusive era of productive investment and financial stability. On the contrary, beginning as early as the savings and loans crisis in the mid-1980s, and spreading through Mexico, East Asia, and Russia to the Covid shock and its aftermath, financial turbulence has been a permanent feature of this hyperglobalized world.      

Crises and reform

The bursting of the US housing bubble in 2008 and its global aftershocks prompted calls to rebuild buffers against unruly capital flows and to strengthen international cooperation. French President Nicolas Sarkozy and British prime minister Gordon Brown talked of a “new Bretton Woods,” looking to a revamped G20 to deliver on the promise. It didn’t happen. Instead, once the banks at the center of the crisis were saved, business as usual returned, and a new collection of financial movers and shakers—hedge funds, private equity, and asset management—capitalized on a world of easy money.

With their fiscal space squeezed by austerity and beguiled by the ever-expanding portfolios of these new financial players, governments in rich and poor countries alike signed partnership deals for the delivery of public goods and services. Even more ambitiously, at the 2021 COP26 in Glasgow, a financial alliance led by Michael Bloomberg and Mark Carney hinted that these “public private partnerships” could unlock over $130 trillion to secure the health of the planet. The headline figure marked the peak of a new consensus over how to deliver on sustainable development goals.

“Pitiful” is the word that the World Bank’s chief economist used to describe this decade-long embrace of private capital mobilization. Neither the resources mobilized nor their value for money has meant transformative change. More of the same will do little to counter Trump’s agenda or deliver the investments needed to keep global temperatures within a zone safe for healthy living, let alone address the suffocating burden of debt facing a growing number of developing countries. Indeed, as Daniela Gabor has suggested, there is every likelihood that an even more damaging strain of such partnerships will emerge from the new administration in Washington.

What can stand in the way? Calls to defend the architecture of international liberal governance against right-wing populist assault miss on two grounds. They fail to account for how their own programs over the past three decades nurtured the growth of nativist forces, and they ignore their own incapacity to respond to the multiple crises we now face with timely, effective, and coordinated resources and policy action. 

Multilateralism renewed

To reach decarbonization targets and make tangible improvements in the lives of the global majority, the required reform agenda will, like the challenge itself, have to be multi-dimensional and yet anchored in a strong public foundation of finance, investment, services and policies. Much like the aftermath of the global financial crisis, the reform impetus from the Covid shock has lost momentum—and in America, at least, has shifted into reverse. Still, some positive movement is discernible. In 2024 the G20, under the Brazilian Presidency, identified the network of development finance institutions (DFIs) as key to spearheading the fight against poverty and climate change. It advocates for the potential of DFIs to boost public investment, strengthen transitional planning, and better coordinate country efforts to meet climate and development goals. Though receiving less attention, an independent report of the G20 TF-Clima Group of Experts on A Green and Just Planet outlined a whole government approach to green industrialization with the public sector, at the national and international levels. In essence, these moves call for a return to the foundational principles of multilateralism. 

As part of this agenda, the multilateral financial institutions should focus on establishing closer partnerships with other public finance institutions that are clearly aligned with development and climate priorities. A decade of blended finance talk must give way to a new program of institutional collaboration—“blending from the ground up” to raise the prospects of a big public investment push for development and climate. This approach is better placed to mobilize private capital that is both patient and innovative, and reflects a willingness to share the risks and rewards of investments in an enabling but accountable policy environment.

The DFIs have upwards of $23 trillion in assets. Adding central banks, sovereign wealth funds, and public pension schemes casts the public finance net even wider. But so far there is no effective institutional framework for cooperation among these public bodies to leverage their assets. Particularly important is the possibility of strengthening collaboration between multilateral development banks (MDBs) and national development banks (NDBs). Above all, reducing the cost of capital is crucial if developing country borrowers are to undertake the investment needed to transform their economies in a sustainable manner. 

The favorable terms on which NDBs can obtain financing from MDBs, which can assist in hedging the risks that NDBs can’t manage on their own,—especially currency risk—is essential for building genuine “public-public partnerships.” Moreover, their chances of affecting the required transformation in key areas, such as the energy transition, would be strengthened by their close alignment with government priorities and backing from a policy environment predisposed to fostering innovation and successful projects.

More than fifty years after developing countries sought a New International Economic Order through the United Nations process, and seventy years after the Bandung Conference launched the non-aligned movement, there is a coterie of Southern-led institutions positioned to take another leap forward. The New (BRICS) Development Bank is already built on a model of partnering with national development banks for green projects. And the BRICS will convene all their national development banks later this year. The Islamic Development Bank and the Inter-American Development Bank have piloted similar efforts, as has the European Investment Bank, suggesting that a more innovative spirit can still be found in the global North.  

These efforts are, of course, only part of a larger agenda to rebuild multilateralism on strong public foundations. The required reset will not succeed through backroom diplomacy and grand summitry. As was the case in the 1930s and 1940s, new political coalitions are needed at the global, regional, and national levels, to backstop more systemic reform and to mobilize against the powerful interests that have woven strong political alliances around support for footloose capital, rent-seeking corporations, and a carbonized economy. That, unlike the 1940s, these new coalitions must deal with the overtly hostile agenda of a rogue hegemon is the political challenge of the moment.