global deal

8/14/2019 Global Deal

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Transitioning to a New U.S.International Economic Policy

Toward a Global Deal to Revive and Broadenthe Benets o Growth

Richard Samans December 2008


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Transitioning to a New U.S.International Economic PolicyToward a Global Deal to Revive and Broaden

the Benets o Growth

Richard Samans December 2008


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1 Executive summary

6 Introduction

8 Reassessing the pre-crisis paradigm o global economic

integration

10 Toward a new paradigm or global economic integration

13 A Global Deal: Establishing a new consensus amongadvanced and emerging economies to revive and broad

the beneits o growth

17 Transitioning to a new U.S. international economic polic

17 1. Institution building to widen gains from trade

27 2. Institution building to strengthen international financial stability and inve

in the real economy

30 3. Institution building to strengthen systemic coordination and oversight

31 Conclusion

33 Endnotes

34 About the author and acknowledgments

Contents


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Executive summary | www.americanprogress

Executive summary

Tere is a grea deal riding, boh economically and poliically, on he inernaional com-

muniys abiliy o nd he common ground necessary o reverse he curren vicious circle

in he world economy and urn i ino a sronger viruous circle o synergisic advances o

living sandards in rich and poor counries as hey inegrae.

Te recen economic crisis, as well as he combinaion o rising inequaliy in many newly

indusrializing counries and sagnaing real wages in he Unied Saes and oher advanced

indusrialized counries, has sown doubs abou wheher global inegraion can live up o

is billing as a orce or shared progress. As a resul, he social consensus behind ree rade

has rayed noiceably in recen years, paricularly in developed counries.

U.S. inernaional economic policy needs undamenal realignmen o mee hese chal-

lenges. Insead o expending scarce poliical capial on economically marginal ree rade

agreemens, he new adminisraion should ocus on reooling and realigning he ull

specrum o inernaional aid, rade, and moneary policies so ha hey collecively serve

o srenghen aggregae demand worldwide by building a larger, more prosperous global

middle class.

Virually every poliical leader around he world oday perceives a vial naional ineresin he ollowing:

1)Avering he wors-case scenario o a spiraling negaive eedback loop o alling

economic aciviy and deaion around he world.

2) Creaing a sronger posiive eedback loop o more broadly shared paricipaion in

he benes o global economic inegraion among and wihin counrieswha World

Bank Presiden Rober Zoellick calls a more inclusive and susainable globalizaion.

Tis common poliical imperaive has creaed he condiions or an unprecedened exer-

cise in inernaional economic cooperaion aimed a sabilizing he world economy and

placing i on a sronger and more susainable ooing hrough a series o srucural reorms.Tis is precisely he approach he creaors o he New Deal ook o our naional economic

crisis in he 1930s. Te Roosevel adminisraion insiued a series o measures aimed a

sabilizing he economy in he near erm, including scal simulus, public works, and bank

resrucurings. A he same ime i pursued undamenal reorms inended o rebalance


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2 Center for American Progress | Transitioning to a New U.S. International Economic Policy

he counrys underlying economic developmen model, including securiies, banking and

invesmen advisor reorms, he creaion o Social Securiy and unemploymen insurance,

and labor law reorm.

Te Obama adminisraion should rally he inernaional communiy around a shared

sraegy o revive, susain, and broaden he benes o economic growh. Tis Global Deal

should mobilize advanced and emerging economies o ake coordinaed, muually rein-orcing acions in wo respecs: measures o sabilize he world economy; and srucural

reorms ha diversiy he oundaions o global growh and broaden is benes by esab-

lishing a new paradigm o global economic inegraiona Roosevel Consensusha

places parallel and equal emphasis on liberalizaion and insiuion building.

Over he pas generaion, U.S. inernaional, as well as domesic, economic policy has

placed overriding emphasis on op-line growhpromoing economic eciency hrough

deregulaion, privaizaion, rade liberalizaion, and scal balance. In he process, i has

paid comparaively litle atenion o he imporance o economic insiuions o he ulll-

men o he basic objecives o markes (resource allocaion eciency) and economies

(broad-based progress in living sandards).

Insiuions mater o progress in rich and poor economies alike. Tey prooundly, albei

indirecly, inuence he produciviy o privae invesmenis conribuion o susainable

labor produciviy and economic growhby shaping he incenives ha invesors ace.

Jus as consequenially, bu also indirecly, insiuions aec he relaive shares o labor

and capial in naional income. Arguably, he more he sae rereas rom he economy, he

more imporan i is o have an eecive enabling environmen o invesor rules and incen-

ives such as nancial supervision, corporae governance, ransparency, propery righs,

judicial and exchange rae insiuions, as well as oher economic rules and incenives, such

as labor, consumer, environmenal, and social insurance insiuions.

Te undamenal poliical economy choice aced by modern marke economies is no,

as conservaives have been saying or he pas generaion, beween big and small govern-

men. I is beween uncional and negligen governmen wih respec o governmens role

in mainaining an enabling environmen conducive o producive privae invesmen and

broadly shared prosperiy. Afer he morgage and derivaives marke meldowns, oy impor

scares, ood saey disrupions, exchange rae misalignmens, and energy regulaory uncer-

ainies o recen years, his ideological blind spo o American policymakers has become

glaringly obvious o people he world over, almos irrespecive o poliical philosophy.

Te world economy needs shor-erm sabilizaion. Ye i also needs srucural rebalancinghrough insiuional reorms o allocae capial sably and producively as well as ranslae

he growh creaed by inegraion ino he broades possible gains in living sandards. Tis

will require he inernaional communiy o go beyond he roadmap o macro-prudenial

insiuion building ha was he ocus o he G20 leaders recen summi.


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Policymakers in he Unied Saes and elsewhere are acing a growing oupu gap, all-

ing prices, and moneary policy ha is rendered increasingly ineecive by he kind o

liquidiy rap Japan experienced in he 1990s. Tey should hereore be looking o exploi

signican addiional poenial sources o aggregae demand. Helping counries wih high

saving raes or curren accoun surpluses make he srucural ransiion o greaer reliance

on growh in domesic demand represens such an opporuniy.

Te new adminisraion should place G20 leaders on noice ha, afer heir April 2009

summi, i will seek o ocus he group on a comprehensive, well-unded iniiaive o

srenghen and redeploy he Inernaional Labor Organizaion, Developmen Finance

Insiuions, or DFIs, Inernaional Moneary Fund, World rade Organizaion, in paricu-

lar, o help developing counries o build beter labor, social insurance, invesor, consumer,

environmenal, and ani-corrupion insiuions o help hem shif o greaer reliance on

domesic demand and diuse he benes o heir inegraion ino he world economy

among larger shares o heir populaions. A cenral par o his eor should be o provide

he mandae and resources necessary or he ILO and mulilaeral developmen banks, or

MDBs, o scale implemenaion o he Decen Work agenda, and he IMF mus also be

given he mandae and resources necessary or i o be a more eecive bulwark agains

exchange rae misalignmens and massive, persisen curren accoun imbalances.

Tis Global Deal should have a domesic componen ha includes no only a major

addiional simulus package, bu also enacmen o a se o srucural reorms ha expand

labors share o naional income by srenghening our domesic social conrac in our

areas: a universal, second ier pension program similar o ha which exiss in oher coun-

ries; universal healh insurance; major suppor or basic and eriary educaion in less

advanaged communiies; and an upgraded, universal se o adjusmen assisance benes.

As we learned a an earlier sage o our own economic developmen, a sraegy o placeinsiuion building on an equal par wih inegraion and eciency is a sraegy o increase

boh equiy and growh. Far rom being muually exclusive policy objecives, hese can be

muually reinorcing. A Global Deal along hese lines amouns o a populis approach o

globalizaion in he bes sense o he erm, a concree plan o make i work or more people.

By reocusing U.S. inernaional economic policy on he goal o improving he qual-

iy o global economic inegraion and no simply is quaniy, he new adminisraion

could help o aver he wors case scenario o a spiraling global recession and deaion as

well as break he Gordian kno o poliics on rade and globalizaion ha has polarized

Washingon or ar oo long.


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The new administration should place G20 leaders on notice that, ater

agreeing on a set o strong stimulus measures and nancial supervision

reorms at their April 2009 summit, it will seek to ocus the group on a

comprehensive, well-unded initiative to strengthen and redeploy theILO, World Bank, and other development nance institutions, as well as

the IMF and WTO.

This additional structural component o the international communitys

response to the economic crisis should consist o institution building in

three areas o international economic policy: 1) helping developing coun-

tries institute the labor, investor, environmental, and consumer protec-

tions and basic social insurance programs that can help them to diuse

the benets o trade and growth more broadly among their populations;

2) updating international nancial institutions to enhance the stability

and contribution to real economic activity o nancial markets; and 3)

improving the management coherence o the international economic

system as a whole.

A central part o this eort should be to provide the mandate and

resources necessary or the ILO and MDBs to scale implementation o

the Decent Work agenda and or the IMF to be a more eective bulwark

against exchange rate misalignments and massive, persistent current

account imbalances.

1) Widen the gains rom trade and integration.

Strengthen and ocus the ILO on national labor and social insurance

institution building.

Establish system or measuring country progress and institutional

capacity gaps on the main parameters o Decent Work and provide

unding to countries requiring improvement in their labor statistical

services ($50 million).

Greatly expand nancing o institutional capacity-building assist

to countries wishing to strengthen their key labor ministry uncti

including inspection and administration o labor standards ($130

lion), improve their ability to respond to specic problems identiILO Supervisory Body reports ($40 million).

Greatly expand assistance to countries wishing to design and imp

basic pension and unemployment insurance systems ($30 million

Reocus development nance institutions on national economic


Create Social Insurance System Catalytic Revolving Fund to help

developing countries nance the creation or expansion o basic s

insurance systems ($3 billion per year or ve years).

Greatly expand nancial and technical assistance to developing c

tries that wish to create or improve investor, environmental, cons

and anti-bribery legal protections and public agencies responsib

administering them ($800 million).

Restructure trade policy priorities to refect parallel emphasis on


Frame the multilateral institution-building initiative described a

as an equal and related companion to the international commu

top trade liberalization priorities, including the multilateral Doh

Development Round.

Include major weaknesses in law or institutional capacity within

scope o FTA negotiations with developing countries or the purp

developing a mutually agreed and adequately unded plan o de

ment assistance to help reduce them over time.

Global Deal Policy Overview


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Ater a successul conclusion o the Doha Round, seek willing partners

among Europe, Japan, and other industrialized countries to pursue un-

der WTO auspices deeper economic integration through ree trade, basic

consistency o structural, regulatory, and exchange rate policies andinstitutions, and harmonization o FTA and trade preerence programs.

2) Strengthen international fnancial stability and investment in

the real economy.

Provide the IMF greater independent authority to conduct exchange

rate surveillance and acilitate macroeconomic coordination.

Support a signicant increase in the IMFs resources or the purpose o

insuring member countries against the risk o currency crises, thereby

reducing a corresponding incentive in the international monetary sys-

tem or emerging economies to run large current account surpluses.

Encourage greater investment in the real economy o emerging econo-

mies and boost their levels o domestic demand by shiting the ocus

o multilateral development bank operations rom direct lending to

risk mitigation and institution building related to private investment in

the real economy, particularly with respect to inrastructure and clean

energy systems.

3) Strengthen systemic coordination and oversight.

Return the G8 process to its original mission o economic policy

cooperationallowing discussions on oreign policy only on the side

and indicate willingness to expand its membership to all G20 countries

so that it can serve this purpose eectively.

Expand the G8 to the G20 in conjunction with steps by emerging

economies to share responsibility or reviving, sustaining, and br

ing the benets o global growth by shiting progressively to a g

reliance on domestic demand or growth through institution buiand other reorms.

Cultivate a culture o systemic oversight and collective responsib

among G20 leaders by requiring a joint report on the perorman

the world economy each year rom the IMF, World Bank, ILO, and

signed and presented as a standing item on the G20 summit age

the heads o the organizations.

In addition, a Global Deal should include a domestic U.S. compone

structural reorms aimed at supporting growth o median compen

and reversing the trend toward greater inequality. Our domestic so

contract should be adapted to the circumstances o the global eco

in our primary respects by establishing a universal, second tier pe

program similar to that which exists in other countries; universal h

insurance; major support or basic and tertiary education in less ad

taged communities; an upgraded, universal set o adjustment assis

benets; and a rebalancing o collective bargaining rules.


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Introduction

Te inernaional economic challenges acing he new adminisraion are numerous and

dauning. Global economic growh is deceleraing rapidly in he wake o he collapse o

condence in nancial markes around he world. Global sock marke capializaion is

down more han a hird since he summer, and he corresponding adverse wealh eec on

households is only beginning o be el in consumer behavior. U.S. expor growh has cooled,

afer buoying he economy or mos o 2008. Te Unied Saes, European Union, and Japan

have all experienced negaive growh in he pas quarer, and some economiss have begun

predicing no jus a major U.S. recession, bu also an ourigh global recession in 2009.1

As dicul as he macroeconomic environmen may be, prospecs or oher longsanding

U.S. oreign economic policy prioriies are hardly rosier. Te Doha round o mulilaeral

rade negoiaions remains symied afer collapsing in July, and many governmens have all

bu given up on he negoaions. Bilaeral and regional rade liberalizaion eors are aring

no beter. Te Souh Korean and Colombian Free rade Agreemens are salled in he U.S.

Congress. Grand, U.S.-inspired plans or a Free rade Area o he Americas and a compa-

rable arrangemen among Asia-Pacic Economic Cooperaion counries have been quiely

shelved over he pas decade.

As or developmen assisance, he Bush adminisraions promises a he 2005 G8 sum-mi o boos U.S. oreign aid have no been me, and his ask has been made even more

dicul by a skyrockeing U.S. scal deci ha is projeced o approach $1 rillion or

more in he coming year. Las, bu cerainly no leas, he mos undamenal challenge or

inernaional economic policy over he nex generaionhe need o place he world on a

rajecory o sabilize amospheric concenraions o greenhouse gases by mid-cenury

has goten o o a very slow sar despie a arge o December 2009 or an agreemen o

succeed he Kyoo Accord. Indeed, he Chinese governmen recenly appeared o have

raised he sakes o hese negoiaions by publicly calling or developed counries o allo-

cae a leas 1 percen o GDPabou $140 billion or he Unied Saeso help poor

counries cu greenhouse gas emissions.2

Te poliical conex ha he new adminisraions inernaional economic policy eam will

operae in is a leas as challenging as he economic one. Public condence in globaliza-

ion had reached a low ebb even beore he nancial crisis, as i llusraed by he boiserous

public debaes over he Norh American Free rade Agreemen and ousourcing o Asia


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Introduction | www.americanprogress

in recen years, as well as polling daa showing ha Americans suppor or ree rade had

allen o an all-ime low. According o a CNN/Opinion Research Corporaion poll rom

July, 51 percen o Americans view oreign rade as a hrea o he economyhe rs ime

ha a CNN poll has shown a majoriy o Americans holding negaive views on ree rade.

Ta compares wih 35 percen o Americans who believed ha ree rade posed a hrea o

he economy in 2000.3 Oher polls have regisered a similar shif in senimen.4

Americans increased skepicism o he benes o globalizaion is ar rom unique. Many

European counries are embroiled in a leas as heaed a debae abou how o reconcile

greaer inegraion wih emerging economies, heir high sandard o living, and a radiion

o social equiy. And several o he developing counries ha are he bigges benecia-

ries o globalizaion, such as India, Souh Arica, and China, are conending wih relaed

domesic poliical backlashes o heir own as years o rapid bu uneven growh have exac-

erbaed inequaliy and marginalizaion in heir socieies.

In he Unied Saes and elsewhere, he inrinsic win-win naure o global economic inegra-

ionnamely he noion ha a rising ide o economic growh propelled by greaer resource

allocaion eciency will ulimaely lif all boasis being challenged as never beore.

And ha was beore various governmens commited an esimaed $4 rillion o scarce

public resources o backsop and resrucure nancial insiuions caugh up in a world-

wide nancial panic.5 Now, wih he enormous privaizaion o gains and socializaion o

losses represened by hese axpayer bailous, here are rising demands around he world

or major changes o be made in no only inernaional nancial supervision, bu also he

very model o global economic inegraion ha has been pursued over he pas genera-

iona model ha has been closely associaed wih he Unied Saes hrough Republican

and Democraic adminisraions alike.

Te damage caused by he nancial crisis o public nances and he real economy has

given new moral and poliical urgency o he absruse, long-running discussion among

economiss abou wha should succeed he so-called Washingon Consensus o san-

dard economic policy reorms radiionally recommended o developing counries by

he Inernaional Moneary Fund, World Bank, and U.S. reasury, which includes scal

discipline, deregulaion, privaizaion, and lower rade barriers.6 As i he macroeconomic,

macro-prudenial, rade, and aid policy challenges i aces were no dauning enough, he

new adminisraions inernaional economic policy eam will also nd isel under pres-

sure o shape his larger debae in a way ha enables poliical leaders o demonsrae o

heir publics ha hey have drawn he appropriae lessons rom he crisis and have a cred-

ible plan o shif he paradigm o globalizaion accordingly. 7


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Reassessing the pre-crisis paradigmof global economic integration

I he new adminisraion wishes o aver a simplisic, ideological overreacion by he

world o economic inegraion, hen i should be prepared o reec candidly abou he

relaive meris and shorcomings o he policy mix ha has been pursued and patern o

global economic inegraion ha has ensued over he pas generaion.

Globalizaion in he image o he Washingon Consensus has creaed a solid legacy o

economic growh. Te world economy has expanded a a srong pace in recen decades,

growing a an average rae o 3.3 percen per year rom1980 o 2007. World rade has

grown by over 6 percen per year. Srong growh has conribued o rapid povery allevia-

ion, paricularly in Eas and Souh Asia where i was sronges and average annual raes

have been 8.6 percen and 6 percen, respecively.8 More han 60 percen o people in

China lived on less han a dollar day in 1980, bu less han 20 percen do oday. Excluding

China, he povery rae in developing counries has been alling by abou hal a percenage

poin per year.9

Tis model has perormed well in erms o he op-line growh, or GDP per capia, bu

is rack record on a crucial botom-line measuremen o economic perormancemedian

living sandardshas been ar less avorable. Median wages and household incomes have

been sagnan in he Unied Saes or he pas quarer-cenury,10

and oher developed anddeveloping counries have experienced a similar divergence beween op-line and botom-

line perormance. Te Organisaion or Economic Co-operaion and Developmen repors

ha boh income inequaliy and relaive povery have risen signicanly over he pas 20

years in more han hree-quarers o member counries due o a combinaion o acors.11

In he world as a whole, 51 ou o 73 counries or which daa are available have seen

he share o wages as a porion oal naional income decline over he pas wo decades.

Te larges decline in he share o wages in GDP ook place in Lain America and he

Caribbean (-13 poins), ollowed by Asia and he Pacic (-10 poins), and he advanced

economies (-9 poins).12

Te curren model has also promoed a massive misallocaion o nancial resources in woprimary respecs, in addiion o underperorming in he delivery o broad-based progress in

living sandards. Firs, paricularly in he Unied Saes and Unied Kingdom, he nancial

secors share in GDP has risen sharply. In he Unied Saes, i has doubled since he 1970s

and risen by hal since he early 1990s.13 Wih losses in he U.S. nancial sysem projeced


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Reassessing the pre-crisis paradigm of global economic integration | www.americanprogress

o exceed $1 rillion, i is now clear ha his was an unsusainable reallocaion o invesmen

on a colossal scale. Te relaed nancial secor and real esae bubbles have imposed major

coss on sociey. Tese include no only he wealh and jobs currenly being desroyed by he

sharpes downurn in 25 years, bu also he opporuniy cos o higher non-residenial xed

invesmen and susainable employmen in he real economy ha migh have resuled i so

much capial was no divered o he nancial and real esae secors.

Second, he enormous capial accoun surpluses o several major emerging marke coun-

ries since he Asian nancial crisis represen a massive misallocaion o capial in heir

own righ. Since 2000, many developing counries have perversely served as bankers o he

governmens o he riches naions running large domesic savings and curren accoun

surpluses. I he goal o economic policy is o maximize human welare, hen here is

litle jusicaion or poor counries o accumulae garganuan socks o oreign exchange

reserves and lend hem o rich counry governmens a exremely low raes o ineres,

when here should be much more proable and socially useul ways o use ha money in

he real economy a home. Ye his is precisely he patern ha has characerized he iner-

naional moneary sysem or he pas decade, and i has resrained he pace o povery

alleviaion and domesic consumpion in developing counries.

Tese disorions in domesic and inernaional capial allocaion have conribued o

he underperormance o median living sandards. Divering capial rom invesmens in

he real economy o rich and poor counries alike has undermined susainable growh in

global employmen, wage income, consumer purchasing power, and aggregae demand.

Tis is par o he reason why globalizaion has had rouble living up o is poenial o lif

all boas.


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Toward a new paradigm forglobal economic integration

Te conclusion ha emerges rom his sylized assessmen o he Washingon Consensus

model o economic inegraion and developmen is no ha is principal componens

are inrinsically awed, bu ha hey are incomplee and hereore overemphasized.

Underperormance o median living sandards, widening inequaliy, and misallocaion o

capialhe principal shorcomings o globalizaionhave heir roos in policymakers

insucien atenion o insiuional enabling environmens. Tese include legal and regu-

laory rameworks as well as he insiuional capaciies necessary or hem o be adminis-

ered eecively, a boh he naional and global levels.

U.S. inernaional and domesic economic policy has over he pas generaion placed over-

riding emphasis on op-line growhpromoing economic eciency hrough deregula-

ion, privaizaion, rade liberalizaion, and scal balance. I has, in he process, negleced

he imporance o economic insiuions o ullling he basic objecives o markes

(resource allocaion eciency) and economies (broad-based progress in living sandards).

Insiuions mater o progress in rich and poor economies alike. Tey prooundly, albei

indirecly, inuence he produciviy o privae invesmenis conribuion o susain-

able labor produciviy and economic growhby shaping he incenives invesors ace.

Jus as consequenially, bu also indirecly, insiuions aec he relaive shares o laborand capial in naional income. Arguably, he more he sae rereas rom he economy,

he more imporan i is o have an eecive enabling environmen o invesor rules and

incenives such as nancial supervision, corporae governance, ransparency, propery

righs, judicial sysem, and exchange rae insiuions, as well as oher economic rules and

incenives, such as labor, consumer, environmenal, and social insurance insiuions.

Te recen blue-ribbon Commission on Growh and Developmen chaired by Nobel

laureae economis Michael Spence reached a similar conclusion:

In recen decades governmens were advised o sabilize, privaize and liberalize. Tere

is meri in wha lies behind his injunciongovernmens should no ry o do oomuch, replacing markes or closing he economy o rom he res o he world. Bu we

believe his prescripion denes he role o governmen oo narrowly. ... On he con-

rary, as he economy grows and develops, acive, pragmaic governmens have crucial

roles o play ... Maure markes rely on deep insiuional underpinnings, insiuions


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Toward a new paradigm for global economic integration | www.americanprogress.o

ha dene propery righs, enorce conracs, convey prices, and bridge inormaional

gaps beween buyers and sellers. Developing counries ofen lack hese marke and

regulaory insiuions. Indeed, an imporan par o developmen is precisely he cre-

aion o hese insiuionalized capabiliies.14

America learned his lesson during is own indusrial developmen, bu seems o have

orgoten i over he pas generaion in is conduc o boh domesic and inernaional eco-nomic policy. During he rs several decades o he 20h cenury, we implemened several

waves o policy reorms aimed precisely a achieving more balanced and susainable eco-

nomic growh by simulaing broader progress in living sandards and correcing disorions

in invesor behavior. Tis was a response o he glaring inequaliy and economic imbalances

accompanying our own rapid indusrializaion and naional economic inegraion.

We consruced a naional inrasrucure o economic insiuions ha successully broad-

ened he base o our economic growh, rom he landmark environmenal, labor, invesor

and consumer proecions enaced as par o Teodore Roosevels Square Deal; o he

reiremen and addiional labor and invesor proecions o Franklin Roosevels New Deal;

o he healh, labor, consumer, and environmenal proecions o Harry rumans Fair Deal

and Lyndon Johnsons Grea Sociey.15 Tese insiuions deliberaely increased incenives

o inves in indusry as opposed o speculaion in nancial asses, and hey diused he

benes o he counrys rapidly rising naional income more widely among he populaion.

In he middle decades o he 20h cenury, hese progressive reorms played a crucial role in

making he American Dream o a middle-class liesylerising incomes in line wih growh

in labor produciviy, home and small business ownership, reiremen and healh securiy

accessible o millions upon millions o American amilies ha had litle accumulaed wealh

and relied enirely on wage income. In he process, hey helped urn he Unied Saes ino a

middle-class sociey and mass-consumpion locomoive o he world economy.

Te undamenal poliical economy choice aced by modern marke economies is no,

as conservaives have been saying or he pas generaion, beween big and small govern-

men. I is beween uncional and negligen governmen wih respec o governmens role

in mainaining an enabling environmen conducive o producive privae invesmen and

broadly shared prosperiy. Afer he morgage and derivaives marke meldowns, oy impor

scares, ood saey disrupions, exchange rae misalignmens, and energy regulaory uncer-

ainies o recen years, his ideological blind spo o American policymakers has become

glaringly obvious o people he world over, almos irrespecive o poliical philosophy.

Te principal lesson o be drawn rom he recen nancial crisis and broader legacy o glo-balizaion is ha he conservaive American economic modelincluding he Washingon

Consensuswas incomplee and unsable. I placed almos exclusive emphasis on mea-

sures o enhance op-line growh and negleced he need o srenghen invesor and oher

economic insiuions ha help ranslae such op-line perormance ino he botom-line


18/42


measure o a counry s economic success: srong, broad-based gains in living sandards.

Going orward, U.S. inernaional economic policy mus be rebalanced so ha i places

parallel emphasis on measures ha advance eciency and op-line growh, on he one

hand, and measures ha srenghen he insiuional enabling environmen or producive

capial allocaion and broadly shared prosperiy on he oher. Indeed, U.S. policymakers

mus regain heir hisorical appreciaion o how diversiying he oundaions o economic

growh in his ashion can accelerae economic growh urher and make i more resilien.


19/42

A Global Deal | www.americanprogress.o

A Global Deal: Establishing a new consensusamong advanced and emerging economies torevive and broaden the benefits of growth

Te new adminisraions challenge will be o absorb his lesson regarding he imporance

o insiuions in marke economies, and, like is progressive, 20h cenury predecessors,

ranslae i ino an economically eecive and poliically compelling reorm agenda. Te

key dierence oday is ha he challenge is an inernaional, raher han naional, one.

No counry is an island in an inerdependen global economy when i comes o pursuing

srong growh, nancial sabiliy, and progress in median living sandards. For his reason,

he nex Deal mus evoke a global, raher han jus naional, sense o shared economic

desiny. Wha is needed is a Global Deal ha combines advanced and emerging economies

in a coordinaed sraegy o revive economic growh and broaden is benes.

Virually every poliical leader around he world oday perceives a vial naional ineres in

he ollowing:

Avering he wors-case scenario o a spiraling negaive eedback loop o alling eco-

nomic aciviy and deaion around he world.

Creaing a sronger posiive eedback loop o more broadly shared paricipaion in he

benes o global economic inegraion among and wihin counries, or wha World

Bank Presiden Rober Zoellick calls a more inclusive and susainable globalizaion.

Tis common poliical imperaive has creaed he condiions or an unprecedened exer-

cise in inernaional economic cooperaion aimed a sabilizing he world economy and

placing i on a sronger and more susainable ooing hrough a series o srucural reorms.

Tis is precisely he approach he creaors o he New Deal ook o our naional economic

crisis in he 1930s. Te Roosevel adminisraion insiued a series o measures aimed a

sabilizing he economy in he near erm, including scal simulus, public works, and bank

resrucurings, a he same ime ha i pursued undamenal reorms inended o rebalance

he counrys underlying economic developmen model, including securiies, banking and

invesmen advisor reorms, he creaion o Social Securiy and unemploymen insurance,

and labor law reorm.

In heir November 15 communiqu, G20 leaders commited heir governmens o a coor-

dinaed series o moneary and scal simulus measures inended o sabilize he world

economy in he shor erm. Major developed and emerging-marke economies ha have


20/42


he necessary policy space, bu have no ye adjused moneary policy o an accommodaive

sance or insiued a emporary scal simulus equivalen o a leas 1 percen o 2 percen

o GDP, should do so in he coming monhs. 16 As par o his eor, he new adminisraion

and Congress should enac a major second simulus measure in he rs quarer o 2009.

And counries wih large exernal surpluses or adequae scal headroom should ollow

sui wih addiional scal oulays, including China, whose budge is slighly in surplus; oil

exporers; and oher counries, including possibly Souh Korea, Mexico, and aiwan.

As or srucural reorm, G20 leaders also insruced nance minisers o develop iner-

naional nancial archiecure recommendaions by spring 2009 primarily in he area

o nancial supervision. A srong package o reorms mus be adoped as a resul o his

process. Bu i would be a misake i he worlds srucural response o he crisis sopped

here. Now is he ime o underake a broader se o coordinaed insiuional reorms a

he global and naional levels in order o urn a vicious circle ino he susained viruous

one promised by he heory o economic inegraion.

A Global Deal o revive, susain, and broaden he benes o growh would also engage

advanced and emerging economies in a collecive eor o srenghen inernaional and

naional insiuions so ha hey are beter equipped o promoe sable and producive

allocaion o capial wihin he inernaional nancial sysem as well as provide angible

suppor or developing economies wishing o consruc sronger social insurance sysems,

and labor, environmenal, consumer, and invesor proecions.

Domesic economic insiuion building along hese lines has he poenial o help hese

counries diuse he benes o he growh creaed by heir inegraion ino he world

economy more widely wihin heir socieies. Tis would have he added bene o making

an ongoing srucural conribuion o growh in global aggregae demand, which would

complemen he one-o, shor-erm simulus packages ha some governmens havebegun o implemen.

Economiss have warned or years ha huge global economic imbalances were unsusain-

able and ha he world economy would ineviably require rebalancing. emporary scal

simulus packages will help brake he curren all. Bu he hardness o he world economys

landinghe exen o which global aggregae demand holds up during and afer a deep

U.S. recessionwill be srongly inuenced by wheher inernaionally coordinaed seps

are aken o srucurally rebalance i. Te world canno expec o reurn o is radiional

reliance on U.S. consumer spending or growh any ime soon.

Policymakers in he Unied Saes and elsewhere are acing a growing oupu gap, all-ing prices, and moneary policy ha is rendered increasingly ineecive by he kind o

liquidiy rap Japan experienced in he 1990s. Tey should hereore be looking o exploi

signican addiional poenial sources o aggregae demand. Helping counries wih high

saving raes or curren accoun surpluses make he srucural ransiion o greaer reliance

on growh in domesic demand represens such an opporuniy.


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A Global Deal | www.americanprogress.o

High saving raes are no principally a culural phenomenon, and rapidly rising inequaliy

is no an ineviable byproduc o economic developmen. Tese reec acs or omissions

o policy, including underdeveloped insiuional rameworks. Sronger labor, consumer,

invesor, pension, unemploymen, and healh insiuions end o reduce incenives or

households o save, and boos median incomes, which leads o srucural improvemen in

domesic consumpion, oher hings being equal.

As i happens, broadening social paricipaion in he benes o naional income growh is

already a op domesic poliical prioriy in many emerging marke counries. Te govern-

mens o India, Souh Arica, China, and Brazil, among ohers, openly describe hemselves

as being in a race agains poliical ime in his respec and should hereore be recepive o

a win-win exercise in inernaional economic cooperaion o help hem broaden he base

o heir economic growh in his ashion.

A cooperaive eor o srucurally rebalance he world economy along hese lines could

useully be characerized as a new Roosevel Consensus17 on global economic inegraion

and developmen in which advanced and emerging counries recognize ha global and

naional economic insiuion building has o be elevaed o a op prioriy o economic

policy and inegraed deeply ino rade, developmen, and moneary sraegies.

A Global Deal o more ully acivae he world economys viruous circle based on he

progressive (and originally biparisan) Roosevel model o indusrial developmen would

be based on a ew shared principles:

As emerging economies become more sysemically signican hrough heir indusrial-

izaion and inegraion ino global produc and services markes, hey have an obligaion

o assume a commensurae degree o responsibiliy or susaining global growh and

nourishing he world economys viruous circle o rising global living sandards by rebal-ancing dependence on expors and domesic consumpion or growh.

Deeper inegraion beween advanced and emerging economies should be accompanied

by cooperaive eors o srenghen insiuional environmens in emerging economies

o help ensure ha he added growh simulaed by inegraion is ranslaed o he grea-

es exen possible ino broadly shared improvemen in incomes, consumer purchasing

power, and impor demand. Developed counries have an obligaion o srenghen rel-

evan mulilaeral and regional insiuions capaciy o deliver such insiuion building

assisance, and emerging economies have an obligaion o accep i, albei in ways ha

hey deermine sui heir naional and developmenal circumsances.

Developed counries mus do heir par by keeping heir markes open and aking

parallel measures in heir own insiuional-enabling environmens o assure nancial

sabiliy and widen social paricipaion in he benes o growh and inegraion. In he

Unied Saes, his poins paricularly o he need o adap he domesic social conrac

o he global economy by improving Americans access o adequae pensions, healh


22/42


insurance, basic and eriary educaion, and adjusmen assisance, as many progres-

sives have argued, including ormer Represenaive and incoming Whie House Chie o

Sa Rahm Emanuel.18 I also argues or rebalancing collecive bargaining rules in order

o provide workers wih a airer opporuniy o orm unions. Such domesic srucural

reorms would help o reverse he erosion o labors share in U.S. naional income, raise

domesic consumpion, and hereby simulae U.S. and global aggregae demand.

Developed economies mus aord emerging economies a greaer role in decision making

wihin mulilaeral economic insiuions and arrangemens as hose emerging economies

come o share responsibiliy or he vibrancy o he world economy by srenghening

domesic economic insiuions and relying o a greaer exen on domesic demand.

Reducions in rade barriers by developed and emerging economies should dispro-

porionaely bene he leas developed counries, and developmen assisance eors

should be increased o suppor achievemen o he Millennium Developmen Goals.


23/42

Transitioning to a new U.S. international economic policy | www.americanprogress.o

Transitioning to a new U.S.international economic policy

Te essenial lesson o he global economic crisis is ha deeper inernaional economic

inegraion and sronger insiuional-enabling environmens mus be pursued in parallel

and wih equal emphasis. Tis new paradigm o globalizaion will need o be embed-

ded in U.S. rade, aid, and moneary policies, and suppored by a major renovaion and

coordinaed redeploymen o he major mulilaeral insiuions relevan o he ask: he

Inernaional Moneary Fund, he World Bank and regional mulilaeral developmen

banks, he Inernaional Labor Organizaion, and he World rade Organizaion.

Te srucural componen o he inernaional communiys response o he crisis should

consis o insiuion building in hree areas o inernaional economic policy: 1) helping

developing counries insiue he labor, invesor, environmenal, and consumer pro-

ecions and basic social insurance programs ha can help hem diuse he benes o

rade and growh more broadly among heir populaions; 2) srenghening inernaional

moneary and macro-prudenial arrangemens o enhance nancial markes sabiliy

and conribuion o real economic aciviy; and 3) improving he inernaional economic

sysems managemen coherence as a whole.

Te good news is ha poliical circumsances have se he sage or progress on all hree

rons. By virue o he unanimous suppor or he Inernaional Labor OrganizaionsDecen Work agenda, and he inernaional nancial archiecure reorm objecives se by

G20 leaders a heir November 15, 2008 summi, he new adminisraion would be push-

ing on an open door i i chose o lead.

1. Institution building to widen gains from trade

Te new adminisraion need no sar rom scrach in gahering inernaional suppor or

an economic insiuion-building agenda ha will widen social paricipaion in he gains

rom rade and inegraion. Tere already exiss a diplomaic consensus on a major par

o his agenda ha only awais implemenaion: he Inernaional Labor OrganizaionsDecen Work agenda.


24/42


In June 2008, governmen, business, and labor represenaives a he ILO, which has 182

member counries, unanimously approved an ambiious agenda o insiuion building

o widen social paricipaion in he benes o globalizaion hrough he Decen Work

agenda. Te sraegic objecives o his eor are:

Promoing employmen by creaing a susainable insiuional and

economic environmen.

Developing and enhancing measures o social proecionsocial securiy and labor

proecionha are susainable and adaped o naional circumsances.

Promoing social dialogue and riparie collaboraion beween workers, employers, and

governmens as he mos appropriae mehod or, iner alia, making labor law and insiu-

ions eecive. Tis includes promoing good indusrial relaions and building eecive

labor inspecion sysems while respecing and recognizing he employmen relaionship.

Respecing, promoing, and realizing he undamenal principles and righs a work. 19

Tis ILO Declaraion on Social Jusice or a Fair Globalizaion can be read as a mulila-

eral commimen o apply he Roosevel model o economic developmen o he process

o globalizaion. Tis enails helping counries build labor, invesor, and social insurance

insiuions as hey indusrialize and inegrae ino he world economy. Bu wha his

Declaraion lacks in comparison o he Square and New Deals is a concree implemena-

ion agenda, and ha is where leadership by he new U.S. adminisraion could make a

crucial dierence.

Te nex adminisraion should build on he universal poliical suppor or he Decen

Work agenda by mobilizing he inernaional communiy o implemen i hrough a se oconcree seps o: 20

1. Srenghen he ILO in order o provide grealy enhanced suppor o developing coun-

ries ha wish o build:

Eecive labor minisries o suppor improvemen in wages and working condiions in

line wih labor produciviy growh.

Basic pension and unemploymen insurance sysems.

2. Reocus mulilaeral developmen banks and bilaeral developmen assisance minisries

on providing grealy enhanced suppor o developing counries ha wish o build:

Social securiy sysems o suppor he living sandards o he poor, elderly, and inrm,

hereby reducing he incenive or households o orego consumpion and save large

proporions o heir income.


25/42


26/42


Te proles would be available on he web and hereore also ac as a poral o connec

o sources o daa and inormaion on employmen and enerprise developmen, social

proecion, social dialogue, labor law, sandards, and oher relevan economic, social, and

legal maters. Te proles would provide key inormaion or he ILOs consiuens and

allow he organizaion as a whole o ideniy insiuional gaps and improve he design o

programs o remedy weaknesses, including hrough counry-specic sudies.

Tere are wo pressing prioriies or implemening a sysem o improve he ransparency

and benchmarking o counry progress on key aspecs o Decen Work. Te rs is o

esablish a sysem in he ILO o generae counry proles a he rae o 30 per year over he

nex six years in order o have ull coverage by 2015. Te second is o srenghen he ech-

nical assisance o build in-counry capaciy or he collecion, compilaion, and analysis

o he labor saisics ha will be included in such proles. Leas-developed counries in

paricular, bu also several mid-income developing counries, are no currenly able o pull

ogeher all he labor marke inormaion hey need or good policymaking and evaluaion.

Te core o such services is a reasonably requen labor orce survey. Te ILO is currenly

oering advice in his eld, bu is able o mee only a small number o he many requess

received. Te esimaed annual cos o hese reorms would be $10 million o esablish a

comprehensive se o counry Decen Work proles wihin he ILO and $40 million in

direc assisance o counry labor minisries o improve heir saisical services.

Providing institutional capacity building assistance to labor ministries

Over he las 10 years, good governance has become a wachword in many areas o public

lie. A he hear o good governance is he issue o regulaory compliance and how o

implemen good pracice. In he labor eld, his is ocused on implemening inernaional

labor sandards, in paricular he ve core labor sandards: reedom o associaion, righ

o collecive bargaining, eliminaion o all orms o orced or compulsory labor, eecive

aboliion o child labor, and equaliy o opporuniy and reamen. Naional labor admin-israion and labor inspecions services hold he primary responsibiliy or implemening

inernaional labor sandards aken ino naional laws. Te new ILO Declaraion on Social

Jusice specically menions he need or eecive labor inspecion.

Privae enerprises and non-governmenal organizaions are increasingly aking on hese

responsibiliies in developing counries because o he lack o capaciy in such labor

inspecoraes. However welcome such privae iniiaives may be, hey are no subsiue or

good laws ha are broadly applied and hereore inuence he behavior o all employers

and no jus hose which espouse corporae social responsibiliy.

Advisory and capaciy-building services in he wo closely relaed elds o labor admin-israion and labor inspecion have been par o he ILOs work since is oundaion. Ye

here is an urgen need o inegrae and grealy expand he limied and scatered resources

in he ILO ino a more eecive service. Similar o he approach recommended above or

measuring counry progress on Decen Work, he ILO should help counries srenghen

labor adminisraion and inspecion in a wo-rack approach o developing counry


27/42


capaciy-building plans based on idenied gaps and providing direc suppor o heir

labor minisries o remedy hem. Te esimaed annual cos o hese reorms is $10 mil-

lion o work wih counries o assess gaps and develop plans, and $120 million in direc

assisance o counry labor minisries o srenghen he adminisraion and inspecion o

heir labor sandards.

Helping countries address ILO supervisory body findingsEach year he ILO underakes an exensive examinaion o counries acions o imple-

men inernaional labor sandards. Tis leads o ofen-deailed recommendaions on how

counries could adap heir laws or he way hey are enorced. In mos cases counries

are ready o cooperae wih he ILO o make he necessary reorms and srenghen heir

enorcemen mechanisms. A ew are no, and his can lead he ILO o escalae pressure

on hem o respec he sandards. Atenion needs o be ocused no jus on he ew cases

where here is a ailure o cooperae, bu also on he ILOs capaciy o sysemaically help

hose who sae ha hey are willing o ollow up on he recommendaions o he ILOs

supervisory bodies.

Te ILO Commitee o Expers on he Applicaion o Convenions and Recommendaions

has called or an increase in he ILOs echnical assisance o counries in order o help hem

mee heir obligaions under raied convenions. In is 2008 repor, he commitee ideni-

ed 39 counries ha i was concerned enough abou o invie hem o use ILO echnical

assisance o remedy weaknesses in heir law and pracice. Several counries each year call

or such assisance, bu he ILO is no a presen able o mee all he requess.

A reinorced ILO program o ollow up on he ndings o is supervisory bodies would

cover a variey o siuaions. In some cases, his involves echnical redrafing o laws; in

ohers, i requires more in-deph dialogue and analysis o ways in which inernaional

principles can be inegraed ino naional sysems or labor marke governance. Tey rangerom he small-scale echnical assisance, advisory, and raining services o public auhori-

ies, rade unions, and employer associaions, o large-scale echnical cooperaion projecs

aimed a creaing new public insiuions and assising volunary associaions o employers

and workers. Rapid reacion capaciy is needed o address paricularly roubling and seri-

ous cases o non-observance o labor sandards. Te esimaed cos o boosing he ILOs

own capaciy o sysemaically ollow up on he ndings o is supervisory bodies is $10

million per year wih a urher $30 million per year or echnical assisance o counries

implemening he measures required o come ino conormiy wih heir obligaions under

inernaional labor sandards.

Providing institutional capacity-building assistance for the design and administration of basicsocial insurance systems

Experience in OECD counries over many years has shown ha social proecion is a

powerul insrumen o gh povery and inequaliy. Posiive and encouraging examples

in Arica, Lain America, and Asia have also shown how basic social securiy o a modes

scale can be implemened successully. For example, in Boswana, Souh Arica, Namibia,


28/42


and Mauriius, a universal basic pension has had posiive eecs on povery reducion.

Counries such as Brazil, Mexico, and some pars o India have gained subsanial experi-

ence in using social ransers in ghing povery. A package o basic guaranees is he

launching plaorm or a urher social securiy developmen process ha provides more

securiy when governmens scal space increases as economies coninue o develop.

Developmen planners assumed or a long ime ha poor counries could no aord socialsecuriy. Bu ILO calculaions show ha a basic package or imporan pars hereo are

aordable in sub-Saharan Arica and Asia.22 A small universal a rae pension bene

combined wih a universal child benepossibly condiional on school atendance

has he poenial o lower he number o people living in povery by 40 percen in some

developing counries. Te cos or hese benes would amoun o no more han 3 o 4

percen o GDP. Expendiure o his size can be manageableespecially i basic schemes

are phased in gradually over he course o a decade and perhaps caalyzed wih iniial

nancing by he donor communiy.

A necessary condiion or he successul inroducion o social securiy schemes is he

availabiliy o sucienly rained expers ha are able o plan, organize, nance, and

adminiser he ranser paymens. Tis requires considerable echnical capabiliy, which

can only be buil up hrough subsanial invesmens in he echnical raining o naional

managers and planners.

Te ILO mainains a small eam o expers who provide advice and raining o counries

wishing o esablish or expand heir social insurance programs. Wha is needed is a major

expansion o capaciy-building aciviies o help developing counries design and esimae

he coss o naional social securiy developmen plans. Tis could be done by esablishing

regional compeence ceners saed by lawyers, public policy specialiss, raining special-

iss, public nance economiss, and acuaries who have he capaciy o provide susainedechnical inpu ino naional riparie dialogue and planning processes, saring rom he

iniial diagnosis o he social and scal siuaion and exending o help wih he develop-

men o naional social budges, acuarial projecions, and naional laws. Abou ve such

ceners would be appropriaewo in Arica, wo in Asia, and one in Lain America.

Te ILO should also sponsor a sysem o ellowships or naional sa o atend social

proecion and governance masers programs in a nework o universiies in Europe

and he Unied Saes such as he Universiies o Maasrich, Lausanne, Sussex, and he

Kennedy School. Te regional ceners o compeence could grow over ime ino Schools

o Governance in heir own righ wih he help o his inernaional nework. For example,

he Maasrich School o Governance grew ou o a course iniially sponsored by he ILO.

Te budge would be abou $15 million or ve ceners o excellence, saed by 10 o 15

proessionals underaking aciviies in abou 30 o 40 counries and adminisering 100

ellowships or uure social securiy planners per year. Addiional suppor or he regional


29/42


schools o governance would bring he annual cos o abou $20 million. Afer a period

o ve years, here could be uncioning naional basic social securiy sysems in abou

20 counries and a global nework o abou 8 o 10 Schools o Governance ha would

rain social securiy managers and planners. Naional and regional co-nancing would be

needed o help keep he nework alive hereafer.

Focusing development finance institutions on national economic

institution building

Developmen nance insiuions, or DFIs, such as mulilaeral developmen banks and

bilaeral aid minisries currenly pay scan atenion and devoe ew resources o helping

counries implemen basic saey nes and adequae invesor, anibribery, consumer, and

environmenal proecions. Te oreign aid communiy acknowledges ha hese insiu-

ions are imporan o broad-based economic progress, bu i has ye o ranslae his

recogniion ino serious acion. Aid saisics indicae ha less han 6 percen o ocial

developmen assisance is devoed o social saey nes (2.91 percen) and capaciy build-

ing (2.80 percen).23

Even hese modes numbers are an oversaemen o he aid communiys emphasis on

economic insiuion building, and social insurance sysems in paricular. For example,

World Bank lending or pension sysems averaged only $400 million per year beween

2002 and 2007, and much o hese unds were devoed o helping counries resrucure

or raionalize heir sysems in line wih demographic challenges, raher han creaing or

expanding coverage. wo-hirds wen o upper-middle income counries.24

In addiion, mos insiuional capaciy-building assisance provided by DFIs akes he

orm o echnical assisance pilo projecs ha end o recommend legal rameworksand ouline bes pracice raher han nance he acual insiuional capaciy necessary o

scale implemenaion o such rameworks and pracices. Ye nancing public adminisra-

ive capaciy o close he gap beween law and pracice is precisely wha DFIs need o do

o help counries achieve a more inclusive patern o economic growh hrough robus

privae secor invesmen and ormal job creaion on he one hand, and basic saey nes

o suppor a minimum sandard o living or he poor on he oher. Tis shif in ocus will

be necessary or DFIs o remain relevan in middle-income developing counries ha no

longer rely on heir loans or qualiy or heir concessional assisance, ye coninue o expe-

rience subsanial povery and inequaliy.

Financing basic social insurance systemsTe ILO has conduced a number o sudies indicaing ha developing counries can

susain a comprehensive basic social securiy package saring wih benes such as uni-

versal pensions or social assisance a a cos o 1 o 2 percen o GDP, or 5 o 10 percen

o naional budges.25 Implemening his level o benes would represen a major sep


30/42


oward atacking chronic povery in hese counries. For example, an ILO simulaion exer-

cise suggess ha even a very modes universal pension, cosing abou 1 percen o GDP,

would reduce he povery gap in Senegal and he Unied Republic o anzania by more

han 20 percen.26

As or middle-income counries, a sudy o ve Asian counries suggess ha, wih reason-

able scal reorm, all should be able o carry a basic benes package hrough he allocaiono 20 percen o governmen revenues.27 A uller benes package could be nanced in wo

ou o he ve counries, and he ohers would be capable o closing heir domesic nance

gap over hree decades hrough he phased inroducion o benes, budge suppor rom

inernaional donors, or an increase in he resource base o he naional social budge.

Te case can even be made ha he ne cos o early invesmens in a basic se o social secu-

riy benes will be zero or negaive when secondary produciviy growh eecs are aken

ino accoun. For example, i has been documened ha Mexicos basic condiional cash

ranser program, Oporunidades, reduces adul sick days on he job by abou 19 percen.

Te cash-or-educaion program in Bangladesh increased he lieime earnings o bene-

ciaries by 25 percen.28 I GDP increased by 10 percen due o produciviy improvemens

linked o basic social securiy schemes, hen modes schemes would pay or hemselves over

ime. Wih complemenary invesmen in ax collecion mechanisms, ax revenues could

be expeced o increase in line wih growh, creaing he addiional necessary scal space.

Tere are naurally counries in which he scal space or social ransers canno be easily

ound in he near erm. Each counry would require is own easibiliy analysis.

Te ILO is bes equipped o help counries design reiremen and unemploymen securiy

sysems and rain he public adminisraors necessary o implemen hem, per he recom-

mendaion above. Bu DFIs should be given he mandae and resources needed o provide

subsanial iniial co-nancing o counries wishing o underake scal reorms o esablishor expand coverage o hese and oher basic social insurance sysems, such as hose or

healh and child povery.

Te necessary caalyic nancing should be provided hrough a join, revolving loan acil-

iy in which counries receive medium- o long-erm loans, including loans on conces-

sional erms or low- and low-middle-income counries. Te ILO should be par o he

governance o his aciliy o ensure ha nancing decisions on basic pension and unem-

ploymen sysems are coordinaed wih he echnical assisance provided by he ILO. Tis

Social Insurance Sysem Caalyic Fund migh even be consiued as a separae nancing

vehicle, similar o he Global Environmen Faciliy, in which he World Bank serves as

rusee, bu oher relevan agencies paricipae ully in disbursemen decisions. Given hepowerul, direc role o social insurance sysems in reducing povery, he unds provided

by donors o his aciliy would be considered a cenral par o heir ocial developmen

assisance commimens o achieving Millennium Developmen Goal 1. Te esimaed

annual cos o hese reorms is abou $3 billion per year or ve years o capialize he

revolving loan aciliy.


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Financing implementation of investor, consumer, environmental, and anticorruption protections

Financing social insurance sysems requires ar more money han esablishing uncioning

naional insiuions o adminiser invesor, consumer, environmen, and anibribery laws.

However, a similar parnership approach is needed wih developing counries in which

DFIs agree o co-nance he hiring and raining o public adminisraors or an exended,

iniial period.

Te ILO is he naural parner o counries wishing o build more eecive labor minis-

ries, whereas DFIs are he naural parners o counries wishing o build more eecive

banking, securiies, judicial, audiing, consumer, environmenal, and anicorrupion agen-

cies. Tis will require DFIs o recas heir role and reengineer heir capabiliies. In all bu

he leas-developed counries, heir cenral added value lies increasingly in helping coun-

ries creae he insiuional-enabling environmen needed or susained privae inves-

men and broader social inclusion in naional prosperiy. In hese setings, hey should be

principally insiuion builders raher han bankersenablers o privae secor invesmen

raher han alernaives o i. Tis will require a major shif in DFIs skill se and operaing

syle, including he developmen o exensive parnerships wih pools o experise exis-

ing in governmenal agencies and he privae secor. Te esimaed annual cos o hese

reorms is roughly $800 million across he ve major mulilaeral developmen banks.

Restructuring trade policy priorities

A new approach ha places parallel emphasis on insiuion building and rade liberaliza-

ion in order o srenghen he payo o broad living sandards rom inegraion would

imply imporan changes in rade policy prioriies.29

Te new adminisraion should rs presen his muliaceed agenda o economic insiu-ion building assisance or developing counries as an equal and relaed companion o

he inernaional communiys op rade liberalizaion prioriies, including he mulilaeral

Doha Developmen Round.

Second, beore he new adminisraion eners ino a ree rade agreemen negoiaion

wih a counry or region, i should conduc an ineragency assessmen o he exen o

which improvemens should be sough in labor, environmenal, consumer, or invesor

laws and insiuions in order o srenghen he payo o broad living sandards rom such

an agreemen. Major weaknesses in law or insiuional capaciy idenied by his analysis

should be included wihin he scope o he FA negoiaions or he purpose o develop-

ing a muually agreed and adequaely unded plan o developmen assisance o help hecounry reduce he weaknesses over ime. Te scale, design, and imeline o he agreed

economic insiuion building should be adaped o a counrys level o economic develop-

men as well as is naional circumsances.


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2. Institution building to strengthen international financial stabilityand investment in the real economy

Cross-border capial ows and nancial innovaion have been allowed o oupace global

insiuional arrangemens wih respec o boh nancial supervision and he inerna-

ional moneary sysem. Tere is now a general consensus o srenghen he relevan

insiuions, as evidenced by he reorm objecives agreed o a he recen G20 summi inWashingon.30 Bu here may be a endency or policymakers in he hea o he crisis o

reach agreemen on a se o supervisory reorms and gloss over deep-seaed problems in

he inernaional moneary sysem ha conribued o he crisis. Tis would represen a

major missed opporuniy o srenghen he world economys viruous circle.

Persisen misalignmens and major ucuaions in exchange raes have plagued he

inernaional moneary sysem over he pas generaion. Tese have someimes subjeced

American workers livelihoods o exraordinary volailiy and dislocaion or reasons hav-

ing litle o do wih he underlying compeiiveness o he indusries in which hey work.

Reorms are needed o reduce he incenive or emerging marke counries o undervalue

heir exchange raes and accumulae large oreign exchange reserves as a hedge agains a

uure nancial crises and runs on heir currencies. And beter mechanisms need o be

developed ha sysemaically encourage all governmens o hink harder abou he iner-

naional implicaions o heir domesic scal and moneary policy choices. Tese objec-

ives can bes be achieved by srenghening he IMFs mandae and resources.31

I is neiher easible nor desirable o reurn o a sysem o xed exchange raes, bu here

are less revoluionary seps ha could be aken o lessen he likelihood o prolonged mis-

alignmens and dramaic swings o currency pariies wihin he curren exible exchange

rae sysem.

Firs, we should srenghen he IMFs mandae and capaciy o publicly and privaely

assess he appropriaeness o exchange rae pariies, as well as aciliae macroeconomic

policy coordinaion o preven or redress persisen misalignmens.32 Te und ook an

imporan sep in his direcion in 2006 when is board approved a process o mulilaeral

surveillancea series o consulaions wih key governmens o examine he sysemic

implicaions o exchange rae relaionships and policies. However, his process has been

slow o develop, and i suers rom a lack o ransparency, independence, and candor in

implemenaion, including individual counries abiliy o veo publicaion o und analy-

ses o heir policies.33

Tese problems have arisen, in par, because counry surveillance aciviies are ulimaelyhe responsibiliy o he unds execuive board o shareholder governmens raher han

is proessional sa. As such, he und rarely saes direcly ha counries are pursuing

policies ha seriously impede he adjusmen o economic imbalances or undermine

global economic sabiliy, even hough ha has clearly been he case in recen years wih


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respec o China and a number o oher counries. Nor does he und invoke is auhoriy

o require special consulaions when member counries ail o respec heir longsanding

obligaion under he unds aricles o agreemen o avoid manipulaing exchange raes. In

ac, his auhoriy has only been exercised wice since is creaion in 1979.

Te nex adminisraion should work wih oher members o he unds board o

srenghen he insiuions independence in he execuion o is surveillance and macro-economic coordinaion uncions. Te new adminisraion should no only coninue o

auhorize he public disclosure o is own bilaeral and mulilaeral surveillance discussions

wih he und; i should also invie he unds sa o give greaer prominence o is inde-

penden esimaes o he U.S. dollars equilibrium range agains oher imporan currencies

in order o mobilize addiional marke and poliical pressure on problem cases.

Second, he new adminisraion should declare isel open o a signican increase in he

unds resources or he purpose o insuring member counries agains he risk o currency

crises and reducing he corresponding incenive in he inernaional moneary sysem or

emerging economies o run large curren accoun surpluses. U.S. adminisraions have,

over he years, been relucan o agree o increases in IMF resources in par because hese

require approval by a radiionally skepical Congress, which hey eared would exrac a

high price in he orm o changes o oher aspecs o U.S. inernaional economic policy.

However, his skepicism has been based largely on a percepion by many Democras and

Republicans ha he und akes an unnecessarily conracionary approach o macroeco-

nomic adjusmen in developing counries. Since his reorm would help o reverse an

imporan bias agains global growh in he inernaional moneary sysem, and i would

orm par o a broader sraegy involving rade, aid, and oher policies o improve global-

izaions conribuion o progress in living sandards, Congress would be likely o view his

iniiaive in a dieren ligh.

Finally, he new adminisraion has an opporuniy o encourage greaer invesmen in

he real economy o emerging economies and boos heir levels o domesic demand by

shifing he ocus o mulilaeral developmen bank operaions rom direc lending o risk

miigaion and insiuion building relaed o privae invesmen in he real economy, par-

icularly inrasrucure. Tere are enormous unme inrasrucure needs in hese counries,

growing pools o domesic capial, and pleny o oreign invesors wih poenial ineres in

invesing in such projecs i no or heir regulaory, currency, conracual, and oher r isks.

Te DFIs could help o miigae hese risks on a much larger scale han hey now do, bu

hey by and large reain a direc lending and gran-making culure ha remains relevan o

he leas-developed counries, bu is less so or he much larger group o middle-income

counries. As a resul, as o 2007 hey had unused capial represening abou $200 billiono poenial commimens.34

Massive inrasrucure invesmen is a grea boon or domesic demand and could con-

ribue grealy o helping counries shif over ime rom expor-oriened o more balanced

growh wih posiive spillover benes or heir middle classes and ours. For example,


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3. Institution building to strengthen systemic coordination and oversight

One o he greaes insiuional weaknesses o global economic inegraion is he absence

o inegraed oversigh o he various inernaional economic miniserial processes and

mulilaeral organizaions. Te original mission o he G6 when i was creaed in 1975

was inernaional economic cooperaion. 37 Bu he G7 and G8 have never aken his job

seriously, and hey no longer have he righ composiion even i hey were so inclined. Asa resul, G8 summi agendas coninue o be dominaed by a wide range o non-economic

issues. And naional nance, developmen, rade, labor, and oher minisries, as well as he

corresponding mulilaeral organizaions, coninue o exhibi a high degree o silo hinking

and uncoordinaed acion.

Te nex adminisraion should build on he Bush adminisraions recen convening

o G20 leaders by reurning he G8 process o is original mission o economic policy

cooperaionallowing discussions on oreign policy only on he sideand expanding

is membership o include all G20 counries so ha i can serve his purpose eecively.

By limiing he ormal scope o discussions o economic and relaed aspecs o global

governance, here would be a clearer logic o insiuionalizing he paricipaion o major

emerging marke economies, including hose whose paricipaion is conroversial in he

conex o a general oreign policy summi because hey are no democracies.

Indeed, he new adminisraion should hold ou he prospec o a ormal expansion o

he group as an inegral par o is proposed Global Deal o galvanize closer coopera-

ion beween advanced and emerging marke economies o revive, susain, and broaden

he benes o global growh. I emerging economies demonsrae a willingness o share

responsibiliy or he sewardship o he world economy by delivering on heir par o he

bargain,38 hen hey cerainly deserve o be permanen members o his leader-level pro-

cess o oversee he progress o he world economy and is primary mulilaeral insiuions.

o culivae a culure o sysemic oversigh and collecive responsibiliy wihin he group,

G20 leaders should require he IMF, World Bank, ILO, and WO o prepare a join repor

on he perormance o he world economy. Tis repor should be signed by he heads o

he organizaions and presened by hem each year as a sanding iem on he G20 sum-

mi agenda. I should analyze rends in growh in economic aciviy, rade, capial ows,

employmen, and living sandards, and documen how he our mulilaeral insiuions

are working ogeher o improve hese rends. Srenghening he join accounabiliy o

hese insiuions o heads o governmen should improve cooperaion among hem and

help ensure ha all relevan inernaional economic policy ools are being applied in an

inegraed ashion o he challenge o maximizing he conribuion o global growh andbroad living sandards o global economic inegraion.


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Conclusion | www.americanprogress.o

Conclusion

Tere is a grea deal riding, boh economically and poliically, on he inernaional com-

muniys abiliy o nd he common ground necessary o reverse he curren vicious circle

in he world economy and urn i ino a sronger viruous circle o synergisic advances o

living sandards in rich and poor counries as hey inegrae.

Te recen economic crisis, as well as he combinaion o rising inequaliy in many newly

indusrializing counries and sagnaing real wages in he Unied Saes and oher advanced

indusrialized counries, have sown doubs abou wheher global inegraion can live up o

is billing as a orce or shared progress. As a resul, he social consensus behind ree rade

has rayed noiceably in recen years, paricularly in developed counries.

U.S. inernaional economic policy needs undamenal realignmen o mee hese chal-

lenges. Insead o expending scarce poliical capial on economically marginal ree rade

agreemens, he new adminisraion should ocus on reooling and realigning he ull

specrum o inernaional aid, rade, and moneary policies so ha hey collecively serve

o srenghen aggregae demand worldwide by building a larger, more prosperous global

middle class.

o his end, he Obama adminisraion should rally he inernaional communiy around ashared sraegy o revive, susain, and broaden he benes o economic growh. Tis Global

Deal should mobilize advanced and emerging economies o ake coordinaed, muually

reinorcing acions in wo respecs: measures o sabilize he world economy; and srucural

reorms ha diversiy he oundaions o global growh and broaden is benes by esab-

lishing a new paradigm o global economic inegraiona Roosevel Consensusha

places parallel and equal emphasis on liberalizaion and insiuion building.

Te world economy needs shor-erm sabilizaion, bu i also needs insiuional deep-

ening o allocae capial sably and producively, as well as ranslae he growh creaed

by inegraion ino he broades possible gains in living sandards. Economic insiuion

building along precisely hese lines was crucial o Americas success in creaing broad-basedprosperiy and sronger, more sable growh as is economy inegraed naionally in he 20h

cenury. I also holds he key o humanizing globalizaion and making i more susainable.


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Bu his insiuion building will require he inernaional communiy o go beyond he

roadmap o macroprudenial insiuion building ha was he ocus o he G20 leaders

recen summi. Te new adminisraion should place G20 leaders on noice ha, afer

heir April 2009 summi, i will seek o ocus he group on a comprehensive, well-unded

iniiaive o srenghen and redeploy he ILO, DFIs, IMF, and W O o help developing

counries build beter labor, social insurance, invesor, consumer, environmenal, and

anicorrupion insiuions as necessary o diversiy he oundaions o heir economicgrowh and diuse he benes o heir inegraion ino he world economy among larger

shares o heir populaions. A cenral par o his eor should be o provide he mandae

and resources necessary or he ILO and MDBs o scale implemenaion o he Decen

Work agenda, and he IMF mus also be given he mandae and resources necessary or i

o be a more eecive bulwark agains exchange rae misalignmens and massive, persisen

curren accoun imbalances.

Te Global Deal should also have a domesic componen ha includes no only a major

addiional simulus package, bu also enacmen o a se o srucural reorms ha expand

labors share o naional income by srenghening our domesic social conrac in our areas:

a universal, second-ier pension program similar o ha which exiss in oher counries; uni-

versal healh insurance; major suppor or basic and eriary educaion in less-advanaged

communiies; and an upgraded, universal se o adjusmen assisance benes.39

As we learned a an earlier sage o our own economic developmen, a sraegy o place

insiuion building on an equal par wih inegraion and eciency is a sraegy o increase

boh equiy and growh. Far rom being muually exclusive policy objecives, hese can be

muually reinorcing. A Global Deal along hese lines amouns o a populis approach o

globalizaion in he bes sense o he erma concree plan o make i work or more people.

By reocusing U.S. inernaional economic policy on he goal o improving he qual-iy o global economic inegraion and no simply is quaniy, he new adminisraion

could help o aver he wors case scenario o a spiralling global recession and deaion

as well as break he Gordian kno o poliics on rade and globalizaion ha has polarized

Washingon or ar oo long.


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Endnotes | www.americanprogress.o

Endnotes

1 See in particular JP Morgan Chase Global Economic Research at http://www.jpmorgan.com/pages/jpmorgan/investbk/research/global_economic_research.

2 Gao Guangsheng, Head o Climate Change Ofce, National Reorm and Devel-opment Commission, PRC, China Puts Climate Talks Squeeze on West, FinancialTimes, October 29, 2008, p. 6.

3 CNNPolitics.com, Poll: Majority against ree trade, July 1, 2008, available athttp://edition.cnn.com/2008/POLITICS/07/01/cnn.poll/index.html.

4 See ndings o Pew Research Center/Princeton Survey Research Associates andCBS News/New York Times at Americans and the World Digest, ComprehensiveAnalysis o Polling on International Topics, available at http://www.americans-world.org/PDF/intltrade_data_update-8_2008.pd.

5 Kim Yeon Hee, Crisis Keeps Governments Tied to Banks, International HeraldTribune, November 6, 2008.

6 John Williamson, What Washington Means by Policy Reorm. In John William-son ed., Latin American Adjustment: How Much has Happened? (Washington:Institute or International Economics, 1990).

7 See or example The Global Unions, Washington Declaration, Trade UnionStatement to the G20 Crisis Summit, ITUC CSI IGB, TUAC, Global Unions,November 2008.

8 World Bank, Global Economic Prospects 2007 (2007), p. 3.

9 World Bank, World Development Indicators 2005 (2005), p. 3.

10 See or example Frank Levy and Peter Temin, Inequality and Institutions in 20thCentury America, MIT Department o Economics Working Paper 0717 (SSRN-984330) (2007), in particular p. 3: In the quarter century between 1980 and2005, US business sector productivity increased by 71 percent. Over the samequarter century, median weekly earnings o ull-time workers rose rom $613to $705, a gain o only 14 percent (gures in 2000 dollars). Median weekly com-pensation - earnings plus estimated ringe benets - rose rom $736 to $876, again o 19 percent. Detailed analysis o this period shows that college-educatedwomen are the only large labor orce group or whom median compensation

grew in line with labor productivity.

11 Organisation or Economic Co-Operation and Development, GrowingUnequal?Income Distribution and Poverty in OECD Countries (OECD, 2008).

12 International Labor Organization, World o Work Report 2008 (2008).

13 Thomas Philippon, Why Has the Financial Sector Grown So Much: The Role oCorporate Finance (NYU, NBER and CEPR, July 2008).

14 Commission on Growth and Development, The Growth Report: Strategies orSustained Growth and Inclusive Development (2008), pp. 4-5.

15 For a more detailed overview o these reorms, see Richard Samans andJonathan Jacoby, Virtuous Circle: Strengthening Broad-Based Global Progress InLiving Standards (Washington: Center or American Progress, 2007), p. 5.

16 See C. Fred Bergsten, Stopping a Global Meltdown, The Washington Post,November 13, 2008.

17 Samans and Jacoby, Virtuous Circle.

18 Rahm Eman uel, A New Deal or the New Economy, The Wall Street Journal,

March 19, 2008.

19 ILO Declaration on Social Justice or a Fair Globalization, June 2008

20 Samans and Jacoby, Virtuous Circle.

21 This section draws extensively rom inormation and materials provided to theauthor by the ILO in response to research inquiries.

22 These results can be ound in a series o discussion papers that the Social Secu-rity Department has published since 2005. The results are summarized in SocialSecurity Department, International Labour Ofce, Can low income countriesaord basic social security? Social Security Policy Briengs, Paper No. 3 (Geneva,2008).

23 Figures taken rom OECD Development Database on Aid rom DAC Members,available at http://www.oecd.org/document/33/0,2340,en_2649_34447_36661793_1_1_1_1,00.html.

24 World Bank, Social Protection and Labor at the World Bank 2000-2008 (2008),pp. 82-87.

25 Social Security Department, International Labour Ofce, Can low incomecountries aord basic social security?.

26 F. Gassmann and C. Behrendt, Cash benets in low-income countries: Simulat-

ing the eects on poverty reduction or Tanzania and Senegal, ILO SocialSecurity Department Discussion Paper No. 15 (Geneva, 2006).

27 S. Mizunoya; C. Behrendt; K. Pal, and F.Leger, Costing o basic social protectionbenets or selected Asian countries: First results o a modeling exercise,International Labour Ofce Discussion Paper No. 17 (Geneva, 2006).

28 UK Department or International Development, Social Transers and ChronicPoverty: Emerging Evidence and the Challenge Ahead, DID Practice Paper(London, October 2005), available at http://www.dd.gov.uk/pubs/les/social-transers.pd, pp. 14 and 17.

29 For a more extended discussion o new priorities or trade policy, see Ira Shapiroand Richard S amans, Ofce o the US Trade Representative: Responding to theChanging Global Challenge. In Mark Green and Michelle Jolin, eds., Change orAmerica: A Progressive Blueprint or America (Basic Books, Forthcoming, 2009).

30 White House Ofce o the Press Secretary Declaration o the Summit on Finan-cial Markets and the World Economy, November 15, 2008, available at http://www.whitehouse.gov/news/releases/2008/11/20081115-1.html.

31 See or example, the nal section o Richard Samans, Marc Uzan, and Augusto

Lopez-Claros, eds., The International Monetary System, the IMF, and the G-20: AGreat Transormation in the Making? (Palgrave Macmillan, 2007).

32 See various proposals o John Williamson, Edwin M. Truman, and Morris Goldstein,Senior Fellows, Peterson Institute o International Economics, Washington, DC.

33 Samans and Jacoby, Virtuous Circle, pp. 26-28.

34 World Economic Forum, Building on the Monterrey Consensus: The UntappedPotential o Development Finance Institutions to Catalyze Private Investment(2006), p. 8.

35 Marianne Fay and Mary Morrison, Infrastructure in Latin America and theCaribbean: Recent Developments and Key Challenges (World Bank, 2005).

36 World Economic Forum and World Business Council or Sustainable Develop-ment, CEO Climate Policy Recommendations to G8 Leaders (July 2008), Annex 1Document 2, available at http://www.weorum.org/pd/climate/Document2.pd.

37 Canada was not invited to the initial summit in Rambouillet, France.

38 For a related discussion with specic reerence to

global deal

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