Gordon Brown: A ‘Third Way’ strategy must be found soon

Globalisation and free trade have beggared millions, but nationalism is inadequate in our interdependent world. Something else is urgently required, says Gordon Brown

PROTECTIONIST and ‘bring-back-control’ movements will flourish so long as globalisation remains leaderless, lacks a human face, and advances like a runaway train.

Sadly, there are good reasons why globalisation has become a dirty word for millions of people. The pillars of the 30-year-old Washington Consensus have been collapsing. Most now agree that free trade without fair trade creates millions of losers, and some winners. Unregulated capital flows, especially short-term speculative flows, can destabilise economies. Rising social inequalities can be bad for growth.

These realisations are punching holes in the free-market fundamentalism — focused on liberalisation, deregulation, privatisation, tax-cutting, and the shrinking of the state — that has prevailed in policymaking over the last few decades. Ten years after the global financial crisis, we can now accept that individuals and corporations acting solely in their own self-interest do not serve that of the public.

And yet a new economic paradigm for the global age has not emerged. In the resulting vacuum, protectionism, anti-trade populism, and illiberal — often xenophobic — nationalism have gained ground, fueled by anxieties about stagnant wages, technological unemployment, and rising insecurity. Make no mistake: those left out, and left behind, by globalisation are searching for something, and someone, to articulate their discontent and to shelter them from change.

But neither nationalism — whether that espoused by US president, Donald Trump, or its other manifestations — nor overly formulaic or elaborate systems of global governance will meet people’s needs and desires for prosperity, security, equity, and self-determination. The former fails to confront the realities of a world in which our independence is limited by our interdependence; the latter runs counter to a strong current in public opinion favouring more local control.

If we are to tame globalisation and respect national identities, we must strike the right balance between the national autonomy most citizens desire and the international agreements most countries so patently need.

Trump’s ‘America First’ nationalism proposes to cut imports, restrict immigration, and withdraw the US from the Paris climate agreement, international organisations, like UNESCO, and free-trade deals. For a country that benefits hugely from its leading role in global supply chains, this is a self-defeating strategy.

Trump doesn’t know — or perhaps doesn’t want to know — that cutting imports threatens to cut exports, because billions of dollars in US exports rely on imported components. He forgets that the profitability of many US corporations depends more on Asian workers using American technology than on more expensive American workers using the same production techniques. These companies will fight any attempts to limit their access to global supply chains.

The progressive alternative that is usually advanced — ‘responsible nationalism’ — is essentially a programme to compensate the squeezed middle classes through retraining and wage subsidies. But even professedly generous European welfare systems lift no more than one-third of the poor out of poverty.

In the US, inequalities are now so glaring that the federal, earned income-tax credit provides only 2.5% of what would be needed to restore the distribution of income between the bottom 80% and top 20% to 1980s levels. Former US secretary of the treasury, Lawrence H Summers, has calculated that the top 1% would be required to pay $1trn extra in tax ($700,000 each) per year to close the gap.

Addressing high levels of inequality will require international cooperation to repatriate billions from tax havens. And even then, we would still have to deal with Asian and African countries out-competing the West on price, because of a race to the bottom in labour standards — a root cause of Western wage-stagnation.

The battle against environmental degradation poses the same problem: sustainable progress against pollution cannot be made if nation-states fail to take seriously their responsibilities to reduce carbon-dioxide emissions and switch to renewable energy. Yet, without concerted international action to force free-riders into line, pollution will cross borders, and environmental damage will spread and multiply.

So, there is a limit to national-level solutions. While it is sensible to oppose the wrong kind of global cooperation, the right kind is vital to national prosperity in this hyper-connected era. With market power still expanding at the expense of governments, policies focused exclusively on pulling the levers of the nation-state will fail to deal not just with pollution and inequality, but also with macroeconomic imbalances, beggar-thy-neighbor trade policies and their spillover effects, cyber-attacks, and pandemics — each of which now poses a transnational problem that requires an international response.

Striking the right balance between autonomy and cooperation comes down to being clear about the distinction between nineteenth- and twenty-first-century concepts of state sovereignty. In the former, power is centralised, held by a single state that is seen as indivisible; the latter is focused on popular self-government, with citizens making their own democratic choices about whether power resides locally, nationally, or internationally.

In some areas, citizens will choose their national government as sole decision-maker. In others, they may choose to share decision-making power in regional blocs, like the European Union, or in international organizations, such as the United Nations and NATO, that agree to share responsibilities, resources, and risks.

Getting the balance right is the unstated issue at the heart of the argument, not just about the limits and extent of global cooperation, but also, and more immediately, about the future of the UK’s relationship with the EU. Reflexive reactions, like Brexit, ‘America First’-style strategies, and overly intricate frameworks of supranational governance are all inadequate to satisfy the modern world’s imperatives to cooperate across borders and to uphold the pride people have in their distinctive national identities.

The balance between national independence and cross-national cooperation will more likely be achieved on an issue-by-issue basis, and the boundaries will shift as the world economy and popular opinion change.

Harvard University economist, Dani Rodrik, whose writings expose the weaknesses of neoliberal globalisation, suggests that, in some areas, we should be expanding or consolidating the nation-state’s power. Such an approach would recognise, for example, domestic preferences when it comes to food- and product-safety standards, or the need to moderate so-called investor-state dispute settlement processes, which are frequently criticised for undercutting domestic laws.

National governments must also recognise the value of self-imposed restrictions on excessive deficits and surpluses, and resist currency manipulation. But macroeconomic imbalances may be best reduced by reciprocal, cooperative agreements.

Of course, nation-states will want to make their own tax decisions to suit local cultures and circumstances. But a failure to cooperate to tackle unfair tax competition and to close down offshore tax havens will irrevocably damage every country’s revenue base and its domestic plans for spending on education, health-care, and security.

In 2018 and beyond, we should establish realistic plans for responding to the backlash against globalisation by managing globalisation better. No-one has a complete roadmap for balancing national autonomy and international cooperation. But the best way to begin is to focus international, cooperative efforts on areas where the benefits are greatest, or the costs of non-cooperation are the highest. But we will also have to deal directly, and forthrightly, with distributional questions, whether in trade, climate change, investment, or the development and deployment of technologies.

First, it is time to create a worldwide early-warning system for financial markets that is based on globally applicable standards for capital adequacy, liquidity, transparency, and accountability, and which includes agreed trigger points for action when risks multiply. For example, New York University economist, Roman Frydman, has proposed a mechanism to impose a ceiling on new debt-creation when asset prices escalate too quickly.

More broadly, we need to expand the scope of post-crisis financial-restructuring efforts to cover all global financial centres. Otherwise, when the next crisis hits, we will still not know what is owned or owed by whom, where, and on what basis. Critics will be right in asking why we failed to learn from the 2008 financial crisis.

Second, we need to reform global supply and value chains. Of course, we should have fair intellectual-property, tariff, and non-tariff rules. But we must also address the fundamental injustices that are at the heart of global supply chains, fueling today’s anti-globalisation protests. Intelligent reform of global supply chains should stamp out environmental free-riders; reverse the current race to the bottom in labour markets; curtail trafficking and money-laundering; eliminate transfer-pricing and tax-avoidance schemes that allow for goods to be taxed — at a lower rate — in countries they never enter; and shut down the tax havens that now hold trillions of dollars.

Third, we need to improve macroeconomic cooperation. For the past decade, growth in global output and trade has been much lower than it should and could have been. Proposals such as the G20 Mutual Assessment Process (MAP) and the International Monetary Fund’s ‘imbalances’ initiative have made only token progress.

In 2009, I proposed a nominal growth target for the world economy, to secure a faster recovery from the post-crisis recession.

Then, in 2010, the G20 reached an agreement, under which major exporting countries, such as China, would limit their current-account surpluses to 4%, and major importing countries, such as the US, would cap their deficits.

Robert Skidelsky, of Warwick University, recently updated this Keynesian idea, with a detailed proposal, requiring both creditors and debtors to make adjustments wherever imbalances arise. And Nobel laureate economist, Joseph E Stiglitz, has called for an IMF scheme to insure emerging countries against risk, thereby freeing them from having to hold excessive reserves, which are unproductive in normal times.

Reducing macroeconomic imbalances and boosting growth will require a stronger G20. The premier forum for economic cooperation should have an executive capacity, and a broader and more representative membership.

When I was prime minister of the United Kingdom, the British government fought hard for a world trade deal, while India and America remained at loggerheads over curbing agriculture imports to protect Indian farmers’ livelihoods.

Today, without America’s help, Pacific-rim countries are discussing their own multilateral trade deals, which suggests that we should be planning for a time, post-Trump, when a new world trade deal might be possible once again.

In the meantime, as Nobel laureate economist, Michael Spence, has eloquently argued, the IMF should be intensifying its focus on global surveillance, in order to identify and remove structural weaknesses in a fast-changing world economy.

It would also help if plans for financing the UN Sustainable Development Goals for 2030 included recapitalising the World Bank to give it more borrowing power.

The bank’s resources could be increased substantially by merging its low-income-country fund, the International Development Association, with its middle-income-country fund, the International Bank for Reconstruction and Development, and by encouraging more cooperation between it and other regional development banks.

As participants discussed at the pioneering Billions to Trillions Forum in Addis Ababa, Ethiopia, three years ago, development targets for the environment, health, gender equality, and employment call for innovative delivery plans to make the best use of the world’s $160bn aid budget. The International Commission on Financing Global Education Opportunity, which I chaired, has proposed a private-public financing facility that could complement existing institutions and raise an additional $10bn annually for education worldwide.

More to the point, we must develop mechanisms that go beyond simply holding out a begging bowl. Only through innovation can we adequately provide for the world’s 20m refugees and 60m displaced people, who have suffered untold atrocities, and whom the UN, under Secretary-General, António Guterres, is working so hard to help.

It is right for the international community to set ambitious development goals. But our failure to deliver on those goals will invite charges of betrayal. Nationalists will continue to argue that mainstream leaders cannot be trusted, and extremists of all stripes will insist that coexistence among countries, cultures, and religions is impossible.

With America in retreat and Brexit threatening to isolate Britain, 2018 will almost certainly have setbacks. But waiting in the wings is a new agenda that can ensure prosperity for all countries, not just through national actions, but also through enhanced international cooperation, starting in the areas with the most promise, and then spreading across the board.

Gordon Brown, former UK prime minister and chancellor of the exchequer, is United Nations special envoy for global education and chair of the International Commission on Financing Global Education Opportunity. He chairs the advisory board of the Catalyst Foundation.