ECONOMICS

MICHAEL SPENCE

Michael Spence, a Nobel laureate in economics, is Professor of Economics at NYUs

Stern School of Business, Distinguished Visiting Fellow at the Council on Foreign
Relations, Senior Fellow at the Hoover Institution at Stanford University, Academic
Board Chairman of the Asia Global Institute in Hong Kong, and Chair of the World
Economic Forum Global Agenda Council on New Growth Models. He was the chairman of the
independent Commission on Growth and Development, an international body that from 2006-2010
analyzed opportunities for global economic growth, and is the author of The Next Convergence The
Future of Economic Growth in a Multispeed World.

NOV 29, 2016

HONG KONG Since the end of World War II, the hierarchy of economic priorities has
been relatively clear. At the top was creating an open, innovative, and dynamic market-
driven global economy, in which all countries can (in principal) thrive and grow.
Coming in second one might even say a distant second was generating vigorous,
sustainable, and inclusive national growth patterns. No more.

In fact, a reversal seems to be underway. Achieving strong inclusive national-level

growth to revive a declining middle class, kick-start stagnant incomes, and curtail high
youth unemployment is now taking precedence. Mutually beneicial international
arrangements governing lows of goods, capital, technology, and people (the four key
lows in the global economy) are appropriate only when they reinforce or, at least,
dont undermine progress on meeting the highest priority.

This reversal became apparent in June, when Britons including those who beneit
signiicantly from the existing open economic and inancial system voted to leave the
European Union, based on what might be called the sovereignty principle. EU
institutions were perceived to be undermining Britains capacity to boost its own
economy, regulate immigration, and control its destiny.

A similar view has been animating nationalist and populist political movements across
Europe, many of which believe that supra-national arrangements should come second
to domestic prosperity. The EU which actually does, in its current coniguration, leave
its member governments short of policy tools to meet their citizens evolving needs is
an easy target.

But even without such institutional arrangements, there is a sense that emphasizing
international markets and linkages can hamper a countrys capacity to advance its own
interests. Donald Trumps victory in the United States presidential election made that
abundantly clear.

In keeping with Trumps main campaign slogan, Make America Great Again, it was his
America irst comments that were most revealing. While Trump might pursue
mutually beneicial bilateral agreements, one can expect that they will be subordinated
to domestic priorities, especially distributional aims, and supported only insofar as
they are consistent with these priorities.

Developed-country voters frustration with the old market-driven global economic

architecture is not unfounded. That order did allow powerful forces, at times beyond
the control of elected oficials and policymakers, to shape national economies. It may be
true that some of that orders elites chose to ignore the adverse distributional and
employment-related consequences of the old order, while reaping the beneits. But it is
also true that the old order, taken as sacrosanct, hampered elites capacity to address
such problems, even if they tried.

This was not always the case. In the wake of WWII, the US, motivated partly by the Cold
War, helped to create the old order by facilitating economic recovery in the West and,
over time, creating growth opportunities for developing countries. For 30 years or so,
the distributional aspects of the global growth patterns that these efforts underpinned
were positive, both for individual countries and for the world as a whole. Compared
with anything that came before, the post-war order was a boon for inclusiveness.

But nothing lasts forever. As inequality across countries has declined, inequality within
countries has surged to the point that the reversal of priorities was probably
inevitable. Now that the reversal has arrived, so have the consequences. While it is
dificult to say precisely what those will be, some seem fairly clear.
For starters, the US will be more reluctant to absorb a disproportionate share of the
cost of providing global public goods. While other countries will eventually pick up the
slack, there will be a transition period of unknown duration, during which the supply of
such goods may decline, potentially undermining stability. For example, the terms of
engagement in NATO are likely to be renegotiated.

Multilateralism long enabled by the same sort of asymmetric contribution, though

typically proportionate to countries income and wealth will also lose steam, as the
trend toward bilateral and regional trade and investment agreements accelerates.
Trump is likely to be a leading proponent of this tack; in fact, even regional trade deals
may be ruled out, as his opposition to ratifying the 12-country Trans-Paciic
Partnership suggests.

This creates an opportunity for China to lead the establishment of a trade pact for Asia
an opportunity that Chinese leaders are already set to seize. In conjunction with its
one belt, one road strategy and its creation of the Asian Infrastructure Investment
Bank, Chinas inluence in the region will expand signiicantly as a result.

Meanwhile, for developing countries that lack Chinas economic might, the trend away
from multilateralism could hurt. Whereas poor and less-developed countries found
opportunities to grow and prosper under the old order, they will struggle to negotiate
effectively on a bilateral basis. The hope is that the world will recognize its collective
interest in keeping development pathways open for poorer countries, both for these
countries beneit and for the sake of international peace and security.

Beyond trade, technology is another powerful global force that is likely to be treated
differently in the new order, becoming subject to more national-level regulations. Cyber
threats will all but require some regulations and will demand evolving policy
interventions. But other threats for example, the fake news that has proliferated in the
West (and, in particular, in the US during the presidential campaign) may also call for
a more hands-on approach. And the adoption of work-displacing digital technologies
may need to be paced, so that the economys structural adjustment can keep up.

The new emphasis on national interests clearly has costs and risks. But it may also
bring important beneits. A global economic order sitting atop a crumbling foundation
in terms of democratic support and national political and social cohesion is not stable.
As long as peoples identities are mainly organized, as they are now, around citizenship
in nation-states, a country-irst approach may be the most effective. Like it or not, we
are about to ind out.
http://prosyn.org/MOaIJ6n

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