CHAPTER 9

A Perfect Storm for Global Governance: The Rise of Regionalism and Regional Institutions

Global Agenda Council on Geopolitical Risk

As the financial crisis unfolded in 2008 and 2009, the world lacked an appropriate and effective crisis-response mechanism. To address this vacuum, the Group of Twenty (G20) emerged as a new entity of “global” leadership with a mandate that extended well beyond its prior limited economic agenda, catapulted there by the need for a quasi-legitimate crisis-response forum and the recognition that existing entities were simply not up to the task.

This incapacity of global institutions to handle such a threat was a long time in the making. In the period immediately following the end of the Second World War, global institutions were created that would serve as the bedrock of efforts to address global issues. The United Nations, the World Bank, and the International Monetary Fund, among others, were established, in part to ensure that global conflicts were settled not through the exercise of raw power, but rather through governance structures built on agreed-upon rules, global membership, and decisions taken by votes of its members.

While these organizations retain similar roles, they are meeting current challenges with diminishing returns. These institutions largely remain crystallized in their postwar forms, and their effectiveness is now under severe strain as today’s most pressing issues, primarily economic and financial, threaten to metastasize into full-fledged global crises. Today’s most acute problems are global, systemic, and characterized by complex interlinkages that place increased demands on the very global institutions that have struggled to keep up with developments. Newer institutions have not filled the gap: since its largely successful 2009 efforts at a coordinated response to the global financial crisis, the G20 has been increasingly ineffectual as well.

The dearth of truly effective global institutions is part of a larger geopolitical trend, one in which the global agenda is increasingly driven in a patchwork fashion, influenced as much on a regional level as on a global one. This rise of regionalism is exacerbated by the inability of global institutions to adequately address challenges, but it also arises from an environment where nations acknowledge that there may not be sufficient response capability at an international level. There is general agreement that the unbridled pursuit of individual national interests would produce suboptimal results; in order to provide some leadership that extends beyond the national stage, there is a growing reliance on regionalism as a stopgap to this shortage of effective global decision making. Increased regional efforts to address many issues—from finance, trade, and energy to military security and religious tensions—are expected to continue. Regional institutions and affiliations will take on larger roles. The real challenge is managing the rise of regionalism in a way that it enhances, and does not impede, the pursuit of solutions to systemic and far-reaching global problems—which is by no means assured.

Given strong incumbency effects and inertia, the existing system of global governance has some staying power. These include the UN system, including the Security Council, and the international financial institutions, which have been slow to evolve away from reflecting the interests of the postwar Western powers. Rising powers like China and India effectively hedge their bets, keeping one foot inside the system—just in case it might deliver the results they seek to embrace. But they appear unwilling to go all in and strongly back these institutions, not least because they do not want to share in the blame for possible failures.

In the years to come, it will be imperative to focus on the interplay between two distinct trends that build off one another: first, global institutions’ ability to address current and future international problems is being called into question; second, we see a largely concurrent rise of regionalism that holds the potential to affect the global power balance. This piece will assess the trends and weigh in on the associated risks, opportunities, and impact that they might bring.

ASSESSING THE EFFECTIVENESS OF GLOBAL INSTITUTIONS

After decades of globalization, largely driven by the West, there is now a fundamental questioning and erosion of the postwar system. As the scope and scale of transnational/systemic problems increase, the basic tensions between international principles of global governance and the primacy of sovereignty, national interests, and national decision making become ever more apparent. The resulting stalemates increasingly undermine confidence that existing organizations, systems, and structures of global governance are up to the task of addressing crucial issues and responding adequately to crises.

While demands on global institutions have increased, the ability of existing global institutions to respond effectively and quickly has stagnated and even weakened, for a number of reasons. First, such governance structures lack legitimacy. Many international institutions either fail to adequately represent all countries (for example, the G7, G8, or NATO—none of which claims to be a representative global institution) or, in the case of those that do aspire to a more global mandate, do so in a manner that effectively paralyzes decision making and limits its effectiveness (for example, the G20, IMF, or UN General Assembly). In neither case do existing institutions adequately reflect current and ongoing power dynamics and economic shifts.

In addition, these structures receive insufficient support from today’s great powers—the United States and China. Both nations want to see the existing global order and institutions evolve to meet their particular strategic needs. The United States wants to preserve its existing institutional advantages while managing its relative decline and China wants to leverage its growing size and influence while seeking to defer leadership responsibilities. The European Union remains the strongest defender of multilateral global organizations and governance, but its global leverage has been declining, starting even before the euro zone crisis, which exposed enormous internal faults. As a result, the European Union has lost significant credibility and influence.

Furthermore, global institutions are ineffective: they tend to be inert, inward looking, and process driven, rather than focused on achieving well-defined goals in a timely and effective manner. They are often unable to adapt to a changing global environment and ever-evolving threats.

Lastly, such institutions are prone to reaching “least-common-denominator outcomes.” Given the inherent tensions between international principles of global governance and the continuing primacy of national sovereignty, interests, and decision making, outcomes, if they are achieved at all, tend to be weak compromises at or below the perceived least common denominator. The December 2011 “success” in climate change talks in Durban is seen by many as an example of this phenomenon. While perhaps better than no agreement at all, weak outcomes can hardly be seen as enhancing the effectiveness and credibility of global institutions more broadly.

The G20, the most important recent global entity, is prone to all of the above—and it faces a host of unique factors that further undermine its ability to provide global governance. The G20’s agenda has been continually expanded to include a broadening array of global issues, which effectively limits its ability to focus on and address any individual issue. On top of that, the G20 is not a formal institution; as a result, it lacks legitimacy, resources, coherence, and governance. That is to say, its legitimacy is often questioned, given that its members constitute a small fraction of the world’s countries and its membership selection lacks an overarching and consistent rationale. It has no secretariat, permanent management, or staff—it often calls on other institutions, like the IMF, to undertake efforts to support its “commitments.” And there is no formal voting structure, thus requiring unanimity on every issue, resulting in, at best, least-common-denominator commitments.

Over time, new layers of complexity have been added to already complex global institutions and systems. These often make cumbersome institutions and structures even less able to address problems, manage crises, and make or enforce rules. After over sixty-five years of their existence since the end of World War II, a radical overhaul of the major global institutions and governance systems is appropriate. But, given vested interests and the lack of a postwar/postcrisis dynamic damaging enough to spur agreement, this stands little chance of success. The task is simply too enormous, daunting, and lacking in support. Rising powers like Brazil and India often lament the apparent inability of existing institutions to effectively tackle a range of problems and challenges of global governance, and yet they fail to proffer viable alternatives beyond rhetorical calls for the reform of existing institutions “to take into account changed global realities.”

So how are global realities changing and what should we expect?

THE RISE OF REGIONALISM

A global power vacuum is the most daunting potential consequence of this weakening of global institutions and rules. While regional alliances will likely gain in importance, neither they nor individual countries will completely fill this global vacuum. Many countries now have both national and regional ambitions, yet only a few have global ones. Only the United States and China appear willing and able to spend considerable resources far beyond their borders. Yet, neither can assume overt global leadership and responsibility—nor does either want to. There is a significant difference between the respective levels of this reluctance on the part of China and the United States. Each has a very different political philosophy, with those differences extending well beyond the issue of democracy. China remains primarily focused on its own domestic concerns—chiefly development—and tends to look at global issues through that prism. It is far more committed to addressing its own problems before advancing to a more internationalist agenda. The United States, by contrast, retains incomparably greater diplomatic and military reach and is more outwardly engaged in the world, often requiring it to balance its own domestic and international concerns. The United States remains willing to assume at least some of the functions of international leadership.

Though the decline of the United States should not be overstated, the U.S. economy today limits the country’s ability to exercise unbridled global leadership. China still insists that its “developing country” status absolves it from shouldering too many global responsibilities, though it wants to make sure the world does not unify against it. No other megastate is credibly thinking in global terms. As the world drifts toward what is increasingly seen as potentially a G2 world, with the United States and China at the table, this could possibly lead to a world more prone to competition than a multipolar/multilateral world and it could lead to more state-to-state conflicts. Yet, we might also be more likely to see conflicts within states, as well as the rise of nontraditional threats, including cyberthreats and proxy conflicts, in which countries destabilize others in different ways. Such “new” conflicts could even escalate to a military level, especially if global crisis-management mechanisms are weak.

Rising powers, in particular, have limited trust in global institutions perceived to be underpinned by the “Washington consensus.” One lesson many have learned from the financial crisis is that countries that have accumulated large pools of reserves are safer and more independent than those that lack them. This potentially encourages countries to adopt mercantilist policies, recognizing that the WTO system, even with its enforcement mechanism, is either inapplicable or too weak to meaningfully counter these trends. At its worst, protectionism and populism could rise, thereby undermining prospects for restored global economic growth and development.

The BRICS countries (Brazil, Russia, India, China, and sometimes South Africa) have not emerged as a united global group. While this grouping may have provided an attractive means for investors to gain exposure to a diversified group of large emerging economies, the grouping together of these disparate countries, with different national interests, agendas, and philosophies, has failed to take hold in the international political arena and seems unlikely to do so in the foreseeable future. Any perceived unified front on the part of these developing countries does not usually last beyond headlines and broadly themed UN General Assembly sessions.

The rise of regionalism raises a host of geopolitical concerns that directly affect bilateral relations between states. First, the risk that regional powers could influence the creation of entities and institutions to bolster their own power status is real, and it could lead to an upsurge of “involuntary regionalism”—the dynamic where a strong local power coerces its neighbors into alliances, leading to diminution of their sovereignty. This risk is particularly acute for those countries that are not in a position to “hedge” themselves; that is, they are not able to rely on structural or strategic advantages to opt out. For example, Russia has been known to play the role of regional hegemon, using overt pressure in bilateral dealings with its neighbors. It has demonstrated its willingness to do so by coercing Ukraine into its customs union with Belarus and Kazakhstan.

In regions with a hegemonic power, regional institutions that are based on notions of equality stand limited chance of success. For example, Russia will never truly accept equality with Armenia in a regional forum. In a China-dominated Asia, smaller regional actors may find it difficult to be heard in any future regional entities. The regions that do not have a dominant power, such as Africa and Latin America, have such weak traditions of governance that a rules-based governance model poses enormous challenges.

A second area of concern stems from the potential for regional organizations to evolve such that they can contain the influence of other regional organizations—or the United States. For example, the Shanghai Cooperation Organization was originally designed to build confidence on issues of border security, as well as to be a means to enable the flow of Central Asian energy supplies and to provide a larger market for Chinese goods. But, particularly at the urging of Russia, it has at times been pushed to serve as a quasi-response to NATO. The Gulf Cooperation Council (GCC), a political and economic union of Middle East Arab monarchies that is effectively led by Saudi Arabia, could evolve into a more influential organization with an outsized role in regional politics and beyond. The GCC played an integral part in responding to the Arab Spring, specifically within member states such as Bahrain, and it has expressed the willingness and capacity to potentially fill some of the void left by a United States that is unwinding its commitments in the region and increasingly focusing its attention domestically and on Asia. Down the road, the GCC could chip away at remaining U.S. regional influence or set a course at odds with core U.S. interests more broadly. The organization is willing to evolve and grow—it has recently invited Morocco and Jordan to join its ranks.

As these regional alliances and groupings evolve, fragmentation is a third concern: the form of cooperation and integration will be shaped by a multiplicity of factors, and regional institutions are likely to differ if the primary motivator in the alliance is economic rather than geopolitical in nature. Some have a strong security focus (such as the GCC); some are mainly economic (such as the European Union). In any case, as they evolve, there is a risk that they will result in different flavors of regional integration and alliances that are ultimately irreconcilable. Regional developments that emerge as incompatible and contentious on a global scale pose long-term dangers and should be avoided. Resulting problems could include an inability to manage regional rivalries, the emergence of regional trading blocs, or incompatible technical standards that undermine globalization.

Lastly and perhaps most importantly, regional institutions will surely do precious little when it comes to global issues that global institutions are increasingly incapable of addressing. Global organizations such as the United Nations and the WTO have a built-in mandate to address problems that require international solutions: climate change, weapons proliferation, trade protectionism. Regional organizations tend to be focused on local issues and are often more pragmatic. They are less likely to take up global causes—which could be neglected in the new, regionalized world unless existing global institutions find a way to be more effective. It is important to focus on how regional groupings and institutions can integrate into the existing system of global governance.

REGIONAL INSTITUTIONS AND THEIR GLOBAL IMPACT

So how will these evolving regional groupings be structured?

We could expect to see a few different formations, some of which are already apparent. First of all, there will be coalitions of the willing/capable. These serve as a preferred vehicle, especially for established powers, for more effective decision making and action taking. They are fluid and lack legitimacy because of their selective membership. They often still rely on the UN system or other multilateral organizations to endorse and implement their decisions. NATO’s action against Libya in 2011 offered an obvious example of this construction.

Second, we will see small, functional groupings. Ad hoc initiatives to fight malaria or deforestation are examples. These need a driving force, such as a big country that can provide a budget or the Bill & Melinda Gates Foundation. They rely on voluntary contributions and compliance.

Permanent, more formal subgroupings are a third type: entities like APEC or the Arab League, with membership determined largely by geography, fit the bill. The United States has recently been at the forefront of the creation of a Trans-Pacific Partnership (TPP), a major initiative centered on regional trade and investment among nine Pacific countries. If perceived to be effective, these regional groupings may serve as an example of the increasing importance and centrality of regionalism. However, there is a risk that these more formal groupings can become victims of their own success, with membership and agendas expanding rapidly, thereby diminishing their effectiveness and becoming unwieldy.

With the scale of global economic and financial vulnerabilities increasing, dedicated financial resources at international financial institutions like the IMF are increasingly seen as potentially inadequate. A last type of grouping could be regional financial backstops, for example the Asian Chang Mai Initiative and the Latin American Reserve Fund. These potential providers of emergency liquidity necessarily depend on the willingness of some countries to provide financial support to others in need. In the end, their success or failure will depend on whether they are adequately funded and whether they can provide financial support and liquidity in a timely and effective manner to stave off or spur recovery from a financial crisis. They are also vulnerable to regional correlation risk, where many countries in a regional grouping find themselves all in need of support at the same time.

Global entities and structures are thus likely to be increasingly challenged, or at least augmented, by regional alliances and organizations, some formal and some informal. Many of these formal regional alliances remain nascent and are currently, at best, marginally effective.

The creation of any new regional entity risks the alienation of those countries that balk at even the slightest encroachment on issues of national sovereignty. Thus far, many transnational entities serve mostly as little more than high-level discussion groups, with rudimentary governance structures and skeletal institutions, seemingly unable to tackle the common challenges facing their regions. They are riddled with hang-ups stemming from bilateral differences, including, in particular, questions of financing commitments and support. Despite these shortcomings, however, these regional alliances continue to gain traction. One example is the increasingly assertive role of the Arab League in both Libya and Syria, and another the emphasis being placed on the TPP.

Because the rise of regionalism is still at a relatively early stage of development, there is an opportunity to affirmatively craft these evolving regional alliances, entities, and institutions to optimize their ability to coordinate with one another as well as with existing global institutions. It is far from certain that, left to their own devices, these new institutions will develop along multilateral models similar to existing institutions and to one another.

WHERE TO LOOK: MODELS FOR SUCCESS

As the world stumbles from one economic challenge to another, the failure to adequately respond to or prevent these crises has increasingly exposed the weaknesses of the political and governance systems established to respond to them.

Democracies and institutions built on consensus-driven governance models are often prone to paralysis and seem politically incapable of taking bold crisis-response measures. Their ineffectiveness has made them less attractive to developing and emerging countries striving to balance their governance models between efficiency and legitimacy. Authoritarian/hybrid structures provide an alternative to liberal democratic structures for countries and institutions seemingly incapable of undertaking bold responses in crisis situations. A less open, market-based economic growth model similarly provides an alternative to free-market capitalism that creates cycles of boom and bust. These alternative models, however, come at the expense of long-term resilience, sustainability, and legitimacy. The European model of cooperation and institution building is not the only blueprint for transnational groupings, and the E.U. model itself is losing its attractiveness because of the euro zone crisis and the European Union’s inability to operate as a unified cohesive international player. After all, the European Union is currently focused on shoring up the support of its own members and is not actively seeking to advance its model elsewhere.

Countries like Turkey and Brazil are among the most interesting models in which liberal democratic governance structures and market economies have been both popular and successful in navigating their emergence as responsible and legitimate global stakeholders. Their experience is worth studying and exploring in greater detail.

But whether and how Europe emerges from its current crisis is still of the highest importance to the future of international organizations. To date, Europe has been the only area in the world where countries have successfully pooled sovereignty, on the principle that all countries are (more or less) equal and they should all follow collectively agreed rules and work through supranational institutions.

Even with its influence in decline, the E.U. model of regional cooperation is still the most highly developed in the world, and the evolution of its governance structures, rules, institutions, and power dynamics that emerge from the current crisis will likely be looked upon with great interest by those contemplating regional alliances of their own. While the eventual shape of the European Union is currently more uncertain than it has been for decades, there is already increasing doubt that the European Union will remain as concerned with equality for smaller countries, which may, as a result, find themselves less influential. We have already seen the de facto creation of a smaller steering group for Europe—the Frankfurt Group—which allows stronger and more influential leaders and actors to discuss issues in a less formal setting than the European Union or euro zone treaties prescribe. And even that ad hoc grouping has been somewhat supplanted by the bilateral French-German relationship, where many crucial issues appear to be discussed and agreed upon and then presented to the broader European Union or euro zone, effectively as a fait accompli. While this smaller decision-making dynamic may result in some discomfort for smaller countries, enhancing this more realistic approach to decision making could, in the end, allow the European Union to ultimately emerge stronger and with greater international influence.

In conclusion, a world where regional groupings and organizations address regional and perhaps wider issues is second best to a world of effective global governance. But it nevertheless is preferable to raw nationalism as an alternative outcome, and it reflects the broader diffusion of international power away from a pure “might-makes-right” world. Regionalism may well provide the most effective means of hedging against the potentially hegemonic ambitions of great or regional powers. Examples include the ASEAN position vis-à-vis China on the South China Sea, and Central Asian countries vis-à-vis Russia on diplomatic recognition of Abkhazia and South Ossetia in 2008 via the Dushanbe SCO summit.

The World Economic Forum has demonstrated that globalization is most often a force for good. Hence, it is desirable to draw rising powers and peripheral countries into the global governance system that fosters open trade and the free flow of capital, seeks to address global challenges from climate change to women’s rights, and strives to give all countries a say in shaping the global agenda.

But the global economic and financial crisis has called into question the benefits of globalization and the predominant model of consensus-driven governance. In many developing countries, people are focused now on improving their economic positions and are not necessarily looking to the existing global powers and institutions to provide them with the best model with which to do so. In short, the West and the global institutions it dominates are no longer uncontested models for transition economies and regional alliances.