The rise and fall of the multilateral international order

The broad shape of the international order after World War II (WWII) was a multilateral liberal internationalist system embracing collective security, economic openness and social progress. It had been foreshadowed in the Atlantic Charter agreed by Roosevelt and Churchill in August 1941 to combine the reality of power with moral force in a way that would avoid the ineffectiveness of the League of Nations.

The central tenets of the post WWII multilateral liberal order are now all in doubt.

The reasons are many. The rise of President Trump appears as the culmination of a process already initiated by years of its progressive decline. The proliferation of populism represents only the most superficial manifestation of this upheaval. And the growth of China and the renewed assertiveness of Russia seem to prelude a new phase of the decline of the West's influence on the rest of the world.

The process began with its very success in generating the economic growth that made global development possible, but also reduced American pre-eminence. Globalisation restored the nexus, ceteris paribus (all else being equal), between population size and economic weight that had been severed by the industrial revolution. Globalisation also contributed to the increase in inequalities and the worsening conditions of the middle class.

US hegemony and dollar standard

The post-WWII international order consisted of several layers. At the top, at least from a political and military point of view, there was the willingness of the US to translate its supremacy into hegemony, that is, into the willingness to lead the international community both in times of peace and in times of war.

The UN was created through President Franklin Roosevelt's initiative that culminated at the 1945 San Francisco Conference and the decision to create the World Bank and the IMF was taken at the Bretton Woods Conference in 1944.

The US provided security through various defence alliances, the principal one being the North Atlantic Treaty Organization (NATO). There were also UN-led regional security arrangements, such as the Baghdad Pact (or Central Treaty Organization, CENTO), South East Asia Treaty Organization (SEATO).

The US hegemony also included America's guaranteeing of international monetary stability by maintaining the value of the US dollar at 1/35 of an ounce of gold. This means countries could settle transactions among them with US dollars instead of gold as long as they maintained fixed exchange rates between their currencies and the dollar. With dollar as an international reserve currency, the US enjoys "exorbitant privileges" as Valéry Giscard d'Estaing charged in the 1960s when he was French Finance Minister.

Reserve currency status has two benefits. The first benefit is seigniorage revenue—the effective interest-free loan generated by issuing additional currency to non-residents that hold US notes and coins (according to some estimate $10 billion). The second benefit is that the US can raise capital more cheaply due to large purchases of US Treasury securities by foreign governments and government agencies.

The Zenith

American hegemony perpetuated – despite the great 20^th century "revolt against the West" and decolonisation movements.  The Western centrality in the international system, both in terms of power and in terms of the capacity to spread political, ideological, and juridical models continued. In fact, the spread of what we might call the "civil religion" – the preference for economic and political systems based on the market economy and democracy – accelerated since the breakdown of the Soviet Union in 1991.

Samuel Huntington described this as the "third wave" of democratisation. Francis Fukuyama enthusiastically prophesied "the end of history" with the ascendency of Western-style liberal democracy and market economy.

Multilateralism's tension

From the start, there was little incentive to cooperate. While designers of the post-WWII order at Bretton Woods, Yalta and San Francisco envisaged a rule-based post-colonial multilateral order, it was not long before new arrangements for hegemony, if not outright dominance prevailed.

Without Roosevelt, the WWII Allies were soon engaged in a bipolar 'Cold War' demanding the loyalty of others.

Roosevelt's protracted leadership of the ascendant US and recognition of the urgent need to transcend the limited imperialist multilateralism of the League of Nations were crucial. Despite its limitations, the United Nations system appeared to meet the need for an inclusive post-colonial multilateralism after the Second World War.

Legitimacy crisis

Delegitimisation of the post-WWII international order began with America's involvement in the Vietnam War, which not only strained America's military power, but also drained America economically. Atrocities like the My Lai massacre and indiscriminate bombing on civilians, iconised by terrified children, including 9-year-old Phan Thi Kim Phùc, caused serious dents in America's moral leadership, both at home and abroad.

As the Vietnam War became deeply unpopular, President Johnson announced that he would not fund the War through taxation. This meant funding of the Vietnam War through printing money, which resulted in inflation and thereby undermining the dollar's role as a reserve currency. This saw a significant rise in demand by countries for the redemption of dollar reserves for gold, leading to President Richard Nixon's unilateral abrogation of the commitments in August 1971 to gold convertibility of national currencies at a fixed exchange rate with the US dollar.

President Nixon's decision meant the collapse of the Bretton Woods System – the international monetary and financial system agreed at the Bretton Woods Conference in 1944. Since then what we have is a "non-system"; as a result, more frequent financial crises with increasing depth.

America's paradox with reserve currency

With dollar's status as a leading reserve currency, the US wants to be able to use cheaply raised capital and monetary policy to ensure that domestic industries are competitive in the world market, while not running large trade deficits. "Unfortunately, both of these ideas – cheap sources of capital and positive trade balances – can't really happen at the same time." (Robert Triffin at the Congress' Joint Economic Committee, October 1959).

This is famously known as "Triffin dilemma". The country, whose currency is the global reserve currency, must be willing to supply its currency to meet world demand for it. Other nations obtain reserve currency they wish to hold by running a trade surplus – exporting more to the reserve currency country. The countries running trade surplus, keep their reserve dollars in the US Treasury bonds which pay very nominal interest rates; thus the US gets to borrow cheaply to run its huge budget deficit. That is, the US has to accept budget and trade deficits to enjoy the benefits of being the supplier of a reserve currency - it cannot have its cake and eat it too.

America's trouble with trade

At the Bretton Woods Conference, there was also a proposal for a third multilateral institution, International Trade Organisation (ITO) to encourage and regulate trade and commodity markets. However, this did not materialise in the face of the US opposition because it saw the ITO as more favourable for developing countries.

Picture: Collected

Instead, from 1948 to 1994, the General Agreement on Tariff and Trade (GATT) became the main multilateral framework governing international trade; but it excluded developing countries' concerns. The Uruguay Round from 1986 to 1994 was the last round of multilateral trade negotiations under GATT, where for the first-time developing country issues were negotiated. It ended the post-war trading order governed by GATT, replacing it with a new World Trade Organization (WTO) in 1995.

The WTO is a compromised version of ITO. Nevertheless, WTO is governed by 'one country, one vote' principle, unlike the IMF and the World where the decision making or voting power is determined by the weight of shares member countries hold.

Obviously, the US being the largest shareholder, dominates the BWIs, followed by Western Europe. The US and Western European powers carved out a deal that the President of the WB has to be a US citizen, while the IMF will always be run by a European. No wonder developed countries are undermining WTO with their own free trade agreements, which Professor Jagdish Bhagwati calls "termites" of multi-literalism, and President Trump is ready to dismantle it.

Emerging powers

By the 1960s, many 'emerging countries' sought national political and policy space through 'non-alignment' and the emerging bloc of developing countries, called the Group of 77 (G77), demanded at the UN a "New International Economic Order" (NIEO) to replace the US-led post-World War II economic order, which began collapsing since President Nixon's August 1971 unilateral decision to renege on US's promise of gold convertibility.

The NIEO resolution stipulated "exercise of permanent sovereignty" of developing countries over their natural resources "to take measures for the recovery, exploitation, development, marketing and distribution of natural resources for serving their national interests and promoting collective self-reliance".

Neoliberalism and TNC-led globalisation failed shared prosperity

What emerged, instead, was completely opposite to that envisaged by the NIEO resolution.  By the 1980s, the Thatcher-Reagan-led 'neoliberal' counter-revolution against Keynesian and development economics seized upon Soviet economic stagnation under Brezhnev to strengthen private corporate power, by extending property rights, privatisation, liberalisation and globalisation. Essentially, governments are increasingly expected to leave decisions regarding their policies and institutions to the judgments and interests of transnational corporations (TNCs).

The TNC-led globalisation and neoliberalism since the 1980s gathered pace in the 1990s with the support of international financial institutions, such as the International Monetary Fund (IMF) and the World Bank. The new patterns of international economic specialisation saw significant industrialisation and growth where governments had pro-actively utilised the new opportunities available to them, especially in East Asia. But in most regions, especially in the North, much of the new prosperity was neither inclusive nor shared, resulting in new economic polarisation unseen since the 1920s and the fuelling of globalisation's discontents.

The World Inequality Report 2018 found that the richest 1% of humanity captured 27% of world income between 1980 and 2016. By contrast, the bottom half got only 12%. Even in Europe, the top 1-per cent got 18% during this period, while the bottom half got 14%.

OXFAM's Reward Work, Not Wealth reported that 82% of the wealth created in 2016 went to the richest 1% of the world population, while the 3.7 billion people who make up the poorer half of humanity got nothing. 2016 also saw the biggest increase in billionaires in history, with one new one every two days. The wealth of billionaires increased by $762 billion between March 2016 and March 2017.

The World Inequality Report warns, "… if rising inequality is not properly monitored and addressed, it can lead to various sorts of political, economic, and social catastrophes".

The Global State of Democracy 2017: Exploring Democracy's Resilience had anticipated this concern: "Inequality undermines democratic resilience. Inequality increases political polarization, disrupts social cohesion and undermines trust in and support for democracy".

This, in turn, threatens global solidarity.

Globalisation's discontents undermined international solidarity

Much of globalisation's discontents in the global North was easily blamed on the 'other', i.e., immigrants, refugees and Muslims, and also cheap foreign imports accused for stealing good jobs.

Meanwhile, a new generation of social democrats in the West embraced much of the neoliberal agenda, even rejecting Keynesian counter-cyclical fiscal policies after failing to stem the tax-libertarian revolt. Successful in achieving their political ambitions, the 'new social democrats' offered a culturally alien, new 'identity politics' as ideological surrogate. This, in turn, later served to fuel the reactionary ascendance of 'ethno-populism' by the 'new right'.

Thus, neoliberalism's triumph -- with enhanced corporate prerogatives, privatisation, economic liberalisation and globalisation -- in the face of widespread Western social democratic abandonment of its own purported class base, has led to corporatist populist reactions.

Narrow reactionary ethno-nationalisms do not lend themselves to international cooperation, often depicted as a variant of their ostensible enemy, globalism! This has not only weakened international solidarity, but also undermined the very basis for multilateral engagement, let alone cooperation.

The ongoing undermining of multilateralism with the rise of US sovereigntism after the end of the Cold War has been given a new momentum as the backlash to globalisation and its pitfalls have spread from developing countries to many transition economies and declining industrial powers.

In the wake of the worst financial crisis since the Great Depression, the club of rich countries, G7 co-opted some emerging economies to form G20. In 'divide and rule', this not only weakened G77 solidarity, but also undermined the global economic co-ordination role of the UN's Economic and Social Commission (ECOSOC).