Addressing Critical Risks

While the first impetus for creating institutions of global governance was to prevent inter-state war as the principal risk to global security, many other issues have emerged requiring global collaboration, and the UN system has expanded with a variety of specialized agencies and other entities to address the different issues. Issues in need of focused and coordinated international attention can be expected to evolve in the future, and global governance mechanisms will likewise need to be flexible and adaptable.

Currently some of the most significant and threatening possible global risks are poorly understood and seriously underestimated by both political leaders and the general public. They tend to be complex and diffuse, and somehow are not considered short-term priorities. Global environmental challenges such as climate change and loss of biodiversity fall into this category. Risk assessment is always difficult – relying both on technical data and abstract probabilities – and even more so for problems that seem distant or infrequent, but with catastrophic consequences that we prefer not to think about. Improved scientific research on such risks and their interrelationships will be an important starting point, to assess more clearly their probability, magnitude and consequences. This should feed through assessment processes (see Chapter 6) into the deliberations of the the General Assembly (and associated bodies), or the other relevant UN organ, specialized agency or affiliated international organization. Contingency planning for relevant countermeasures can then follow to reduce the risks. Similar scientific advisory processes are needed at national and local government levels coherent with the global level.

The many risks on the horizon are also increasingly interrelated, as any one crisis is likely to precipitate others in our globalized society.Footnote ² For too long we have hoped that the specter of nuclear war had receded, but recent political changes have perhaps brought us closer than ever. The present generation of leaders has apparently forgotten about the studies of nuclear winter and other horrors for the entire planet that would result from a nuclear exchange, in which there would be only losers, and no winners. Moreover, the increasingly integrated global economic system of production is much more vulnerable than in the past, and the reduced capacity for self-sufficiency with the larger urban populations in most countries would mean that any large-scale war or other politically motivated violence that interrupted world trade would precipitate human catastrophes on a massive scale. The repeated small-scale wars of recent decades have inured the public in many places to the suffering of violence as something that happens only to others far away. The ease with which the world slipped into World War I should serve as a reminder of how easily it could happen again without the safeguards that only global governance can provide (see Chapters 8 and 9). A few countries have started a public debate on civil protection, including Sweden, and a recent referendum on increased self-sufficiency in Switzerland.

For population growth (see Chapter 17), world overpopulation has been debated since Malthus, but improvements in agriculture, often unsustainable in the long term, have so far extended the limits of planetary carrying capacity, so people have stopped worrying about numbers. The focus is more on poverty, which is in fact partly a consequence of absolute numbers of people, as well as of an economic system that does not address the equitable distribution of wealth. Sooner or later, it is very likely that the global population crisis will emerge, perhaps when the world food supply, impacted by climate change or some other disaster, is no longer sufficient to feed everyone. By then, it will be too late. One immediate consequence of excessive numbers of people in some regions is migration, and this may be the issue through which to hold a broader debate on population growth. One partial solution to the population crisis is redistribution – moving people to where there are adequate resources and economic opportunities – but this needs to be presented as a positive solution to an inadequate workforce and replacements for an aging local population, not as an “invasion” of foreigners.

The globalized economy has brought with it a new scale of global risks, recalling the Great Depression of the 1930s, and more recently the financial system crisis of 2008. No effective mechanism to anticipate, prevent or prepare for an economic collapse has been developed at the global level, and existing institutions such as the IMF lack the resources necessary to face a major crisis (see Chapter 15).

Additionally, there are the new and emerging risks that are not yet on the global agenda. There are already worries about the next global influenza pandemic, comparable to the Spanish Flu of 1918–1919, with experts waiting for a virus to mutate to become easily transmittable between people, and which could in the worst-case scenario kill a third of the world population, particularly young people, through an excessive immune reaction. Beyond that, it would not be difficult to genetically engineer a dangerous virus or microbe in a laboratory, which might then be released accidentally or intentionally. Terrorist groups might be motivated to do this, or a criminal organization holding the world hostage to such a threat. Others worry about artificial intelligence becoming so powerful that it escapes from human control. Geoengineering, already debated as a solution to climate change but with the potential to destabilize the planetary system, has already been mentioned as posing significant risks. Many new chemical compounds are being invented, and are often manufactured in quantity and used without adequate study of their possible damaging effects on the environment or various forms of life, including humans. Chemicals that have been shown to be endocrine disruptors are one recent example. The reformed UN should have a strong Office of Technology Assessment with the capacity to follow all these developments and others that cannot now be anticipated, to research and evaluate the risks involved, and to advise the General Assembly and relevant specialized agencies as appropriate, so that measures can be taken rapidly to establish guidelines and precautions for research, and regulations and prohibitions as necessary, where the risks are identified as significant (see Chapter 6).

Similarly worrying is the increasing vulnerability of our globalized economy and society, because it has become a highly integrated system and is increasingly dependent on vulnerable information technologies.Footnote ³ Any one major disruption affecting global trade and communications would precipitate a series of other crises in a complex catastrophe. We have become so dependent on the digital society and the Internet that a major failure would leave many helpless. Such a disruption could be caused by cyber warfare, or even a giant solar flare.Footnote ⁴ Transportation systems could break down. Cities might be cut off from the flows of energy, food and water, and the removal of wastes, essential for the survival of their dense populations. If security breaks down and social cohesion is inadequate, societies could descend into anarchy. A reformed United Nations able to react rapidly to any emerging catastrophe with global reach or implications might be the last bulwark to maintain civilization on this planet.

UN Specialized Agencies

Just as a national government has central legislative, judicial and executive functions, with the executive function implemented through a variety of ministries or departments, so the United Nations has specialized agencies, convention secretariats, programs and other entities to address different areas of global concern. Unlike national governments, these often have both legislative and implementation functions in their areas of responsibility. The agencies and conventions have their own legislative charters and governing bodies or conferences of the parties that give them considerable autonomy. They may be financed both from the regular UN budget and/or from their own funding sources. All this is the result of states insisting on retaining complete national sovereignty, down to deciding what international legislation they are willing to accept, and what to ignore. The inefficiency of basing international governance on voluntary legislation is made evident if we imagine the result if each individual could choose what national laws to obey and opt out of others.

The United Nations, alongside its central functions in the Charter to maintain peace and security and control politically motivated violence, has incorporated mechanisms over the years to deal with a wide range of issues requiring a global approach across the economic, social and environmental fields and for collaboration in health, science and education, among others. Today, the United Nations system includes about two dozen specialized agencies that formulate programs and channel resources to a number of important areas that address the Charter’s provisions for the promotion of economic and social development (see Figure 13.1, UN System Chart).

Figure 13.1 UN System Chart

Source: www.un.org/en/pdfs/18-00159e_un_system_chart_17x11_4c_en_web.pdf, ©2019 United Nations. Reprinted with the permission of the United Nations

Once the General Assembly is reformed to become a legislative body empowered to adopt binding legislation on issues of global concern including initially peace and security, and the planetary environment, the UN will have the capacity to reform and consolidate as necessary the many parts of the UN system (see Chapter 4). The General Assembly could legislate, allocate budgets and assign responsibilities for implementation, regulation and enforcement. Specialization is a necessary approach for any complex institution, but collaboration and integration are also increasingly necessary to address complex global problems. In addition, the independent funding mechanism for the renewed UN (see Chapter 12) would help to overcome the chronic funding shortages that have handicapped most UN agencies and programs.

Making a comprehensive assessment of the sorts of reforms that are needed in the UN’s system of specialized agencies and other bodies is beyond the scope of this book. But because we feel strongly that these agencies can play a critically important role in promoting and bringing into practice the best ideals of the UN Charter, we do wish to provide the reader, by way of illustration, with a sense of the kinds of issues that emerge in undertaking this work. We provide a brief review of the governance challenges represented by the wide range of issues covered, the multiplicity of mechanisms created to deal with them and the need for better collaboration to address the integrated challenges of sustainable development. As examples, we then expand on a few particularly challenging issues for the risks they represent for the future of humanity: the challenge that increasing inequality represents for social stability and the risks that could be created by unregulated multinational corporations (see Chapter 14); financial issues in the global financial system and the risks of another financial crisis (see Chapter 15); the need for environmental governance to address the dangers of overshooting planetary boundaries, in particular through climate change and biodiversity loss (see Chapter 16); and the social challenges presented by population growth and migration (see Chapter 17).

UN Agencies, Programs and Conventions

Many specialized intergovernmental agencies and bodies have been created over the last century, starting with the International Labour Organization (ILO) dating from 1919. Many of the global bodies, with a notable exception in the World Trade Organization (WTO), which was intentionally kept separate, are today part of the United Nations system. They can be grouped into three main categories:

1. a) Conventions and other multilateral agreements under the UN umbrella were negotiated independently by governments and are responsible to their Conferences of the Parties (COP) with their own secretariats, funds and subsidiary mechanisms. Among the international conventions born from UN processes, some, such as the ILO conventions, have a single organization as secretariat, but many, including the UN Framework Convention on Climate Change (UNFCCC) and the Convention to Combat Desertification (CCD), have independent secretariats. The Convention on Biological Diversity (CBD), the Convention on International Trade in Endangered Species (CITES) and the Convention on Migratory Species (CMS) have their own secretariats directed by their COP, but are administratively under UN Environment (formerly UNEP).

2. b) Specialized agencies of the United Nations system have their own legal charters and intergovernmental bodies. In terms of the resources they receive from the UN budget through assessed annual contributions, the most important are the Food and Agriculture Organization (FAO), the World Health Organization (WHO), the ILO, the United Nations Educational, Scientific and Cultural Organization (UNESCO) and the International Atomic Energy Agency (IAEA).

3. c) United Nations programs such as the UN Development Program (UNDP), UN Women and UN Environment (UNEP) are under the UN Charter and considered part of the UN Secretariat under the ultimate responsibility of the UN General Assembly and the UN Secretary-General. They may have their own intergovernmental bodies and funds in addition to the regular UN budget.

The IMF and the World Bank were set up in 1944 at the United Nations Monetary and Financial Conference (also referred to as the Bretton Woods Conference), nearly a year before the San Francisco conference that adopted the UN Charter. These two agencies generate their own funding, have their own by-laws and founding charters and have traditionally had a considerable degree of independence from the UN Secretariat. They also have systems of weighted voting, unlike the one country–one vote approach within the UN General Assembly. In many ways, however, because the resources they deploy dwarf those of the entire UN system, they deserve particular attention.

Many other intergovernmental organizations, often regional in coverage or with a narrower focus, are outside the UN system. Since these were all independently negotiated, and may not have exactly the same governmental parties, they are quite independent, potentially making coordination or reform difficult.

Most of these agencies and programs receive direction from their own intergovernmental bodies, such as the World Health Assembly of the WHO representing health ministries, or the UN Environment Assembly of ministers of the environment. This can mean that the same national governments can take different and not always coherent positions in these specialized agencies. The UN itself has a range of subsidiary structures to coordinate across issue-areas and provide framing guidance where governments meet and make decisions, including the Economic and Social Council, the Human Rights Council, the Statistical Commission, the Commission on the Status of Women and the High Level Political Forum charged with overseeing the 2030 Agenda and the Sustainable Development Goals, among many others.

The full range of UN bodies, commissions, programs, specialized agencies and other associated entities perform vital roles in promoting human welfare and prosperity. They represent institutional capital, a source of expertise and depth of experience that are essential for any effective system of international governance. They provide leadership on global issues, set global norms and give operational guidance and assistance to developing countries in particular. Whatever the direction of UN reform, it should preserve these important capacities and plan for their evolution into the new system.

At the same time, due to their diverse origins and heterogeneous arrangements, they are far from a coherent and efficient system at present. Coordination is difficult. There are significant gaps and overlaps, and the inevitable inefficiencies that come from such a multiplication of structures. In addition, their governing bodies have government representatives from different sectors, who may seldom coordinate at the national level, creating the potential for the same governments to give incoherent instructions to different parts of the UN system. Further their main problem is implementation, often because the means made available to them are inadequate to their mission, and sometimes because of government resistance and the general lack of a mandate and means for binding enforcement.

The challenge, then, is how to maintain and strengthen as necessary the existing UN agencies and bodies while making the transition to a more coherent and effective system of global governance. Indeed, in an increasingly interdependent community of nations facing a wide range of unresolved global problems, the need for an effective cluster of specialized agencies is more urgent than ever and is likely to intensify. A strengthened UN with a revised Charter, greater responsibilities in the areas of security, peace and management of the global commons, and a larger and steadier source of funding, will create new opportunities for international cooperation in a number of areas of global concern, including climate change and the environment, the global financial system, human rights, migration, poverty alleviation, income inequality, job creation, nuclear proliferation, corruption, terrorism and drug trafficking, among many others.

Creating the Basis for Reform

The first step to reform this complex but useful assemblage will be to create the necessary structures for binding international legislation in the reformed General Assembly (see Chapter 4), and for executive action in the Executive Council (see Chapter 7), through revisions to the UN Charter. The General Assembly would be mandated to adopt legislation in the different areas of specialized concern requiring international coordination and action as demonstrated by the existing institutional arrangements and as defined in the Charter. It would not start from scratch, but over time could consider all the existing charters and conventions in a particular field, build on their strengths and acquired experience, correct weaknesses, address new challenges and approve legislative texts that would substitute for and replace the existing international legal instruments. Such legislation would be binding on all countries, just as legislation is binding at the national level, without the need for complex processes of signature, ratification and accession as at present. This would also provide a mechanism for review and improvement in international legislation when required without the cumbersome process of ad hoc convention revision. The secretariats would transition into institutions within the new governance framework.

The legislative mandate of the General Assembly should ultimately include the ability to define and raise limited types of international taxes in its specific areas of responsibility (see Chapter 12). An effective system of governance must have some financial independence, and not be subject to the goodwill (and sometimes political pressure and leverage) associated with contributions from national governments. Taxation can be one of the tools of good management, requiring activities that damage the common interest or threaten its stability to cover the costs of their regulation. For example, this could initially simply involve a harmonization of specific taxes at the national level to reduce the harmful effects of tax competition, without the need to create a global system to collect taxes. Access to a reliable source of finance would also be a strong incentive for the specialized agencies, conventions and other entities to integrate into the new system.Footnote ⁵

In the meantime, and as part of the evolving system of global governance, the Executive Council, with its management and system coherence mandate, could consider how to enhance the effectiveness of specialized UN agencies and conventions without waiting for legislative revision. The goals should be subsidiarity, coherence and efficacy.

There would still be a need for subject-specific intergovernmental consultations beyond the capacity of the General Assembly, presently carried out by the existing commissions, governing bodies and conferences of the parties. There are also scientific and technical advisory bodies, and mechanisms for the participation of civil society and other stakeholders. These could be attached to the relevant specialized agencies, or, if their function was legislative revision, become subsidiary commissions under the General Assembly (see Chapter 6).

The Sustainable Development Goals: An Integrated Approach

The United Nations has always had a vital normative role, setting the global agenda and agreed standards, ranging from the 1948 Universal Declaration of Human Rights and other Declarations and Resolutions,Footnote ⁶ to Agenda 21 adopted at the 1992 Earth Summit.Footnote ⁷

One of the remarkable recent steps forward in international consensus among states has been the adoption in 2015 at a UN General Assembly Summit of the 2030 Agenda and its Sustainable Development Goals (SDGs) (see Box).Footnote ⁸ The fact that unanimity could be achieved around such a broad and ambitious agenda covering and integrating so many issues of world concern and developed with such wide participation was already an achievement.Footnote ⁹ Its implications for global governance are also significant, as it maps out the wide range of areas where progress needs to be made globally, insisting that they are all integrated, indivisible, and must be addressed together.

The SDGs can be seen as a global framework for action toward sustainability. There are 17 goals that are action oriented, global in nature and universally applicable to all countries, rich and poor, unlike the previous Millennium Development Goals to 2015. There are goals that place humans at the center of a global development agenda to eliminate poverty, where environmental challenges represent threats to human health and well-being, and where environmental solutions can reinforce human progress. Another cluster of goals for environmental resources, processes and boundaries define the dimensions of planetary health on which human well-being and development depend. There are goals about transitioning to a green and circular economy that builds rather than undermines planetary sustainability. The final two goals are on institutional and governance issues including peace and security, and on the means of implementation. Along with the goals, 169 quantified targets were identified as a focus for action, and initially 241 global indicators have been adopted by the UN Statistical Commission to measure progress toward the targets.

As with any government-negotiated action plan, there are some contradictions and inconsistencies within the SDGs. A goal of sustained economic growth as currently measured, for example, is incompatible with environmental sustainability within planetary boundaries. Some targets need to be balanced or prioritized differently in each country; others are interdependent, with one, perhaps, a prerequisite for progress on another. One challenge in the UN is to coordinate and deal with the interactions in their implementation.Footnote ¹⁰

The SDGs can be considered the most recent globally accepted definition of sustainable development, building on the Brundtland Commission definition of 1987, “development that meets the needs of the present without compromising the ability of future generations to meet their own needs,”Footnote ¹¹ and then Agenda 21 adopted at the United Nations Conference on Environment and Development in 1992.Footnote ¹² As such, they also can be considered an outline of what the responsibilities of governance should cover and the benefits governments should deliver to their populations. While much of the effort must be made at the national level and below, it is at the UN, acting today through the High Level Political Forum (HLPF) set up after the UN Conference on Sustainable Development in Rio de Janeiro in 2012,Footnote ¹³ that progress toward the global goals is assessed.

It is useful in the present context to consider, broadly speaking, the purpose of governance in light of the Secretary-General’s summary in his synthesis report to the 2015 Summit which adopted the goals.Footnote ¹⁴ He called for a fundamental transformation of society and the economy, with the SDGs defining a paradigm shift for people and planet, inclusive and people-centered, leaving no one behind, integrating the economic, social, and environmental dimensions in a spirit of solidarity, cooperation, and mutual accountability, with the participation of governments and all stakeholders. How many governments today really see this remarkable and urgent vision as their core purpose and primary motivation?

At the 2015 Summit, heads of state and government committed:

• to end poverty and hunger, in all their forms and dimensions, and to ensure that all human beings can fulfil their potential in dignity and equality and in a healthy environment.

• to protect the planet from degradation, including through sustainable consumption and production, sustainably managing its natural resources and taking urgent action on climate change, so that it can support the needs of the present and future generations.

• to ensure that all human beings can enjoy prosperous and fulfilling lives and that economic, social and technological progress occurs in harmony with nature.

• to foster peaceful, just and inclusive societies which are free from fear and violence. There can be no sustainable development without peace and no peace without sustainable development.

• to mobilize the means required to implement this Agenda through a revitalised Global Partnership for Sustainable Development, based on a spirit of strengthened global solidarity, focussed in particular on the needs of the poorest and most vulnerable and with the participation of all countries, all stakeholders and all people.Footnote ¹⁵

It is encouraging that governments can sign up to such high ambitions, but they too often fall down in their implementation. The gap between principles and practice is still wide, as it is too often in intergovernmental processes. It is the responsibility of the UN system to take this agenda to heart and restructure itself as the best instrument to turn these ideals into actions. It should aim to catalyze “an organic change in the structure of society itself so as to reflect fully the interdependence of the entire social body—as well as the interconnectedness with the natural world that sustains it.”Footnote ¹⁶ The 2030 Agenda calls for just such a fundamental transformation.

Indeed, among the transformational aspects of this agenda are its profound implications for approaches to governance. While the SDGs are intended to be met by 2030, they really define the scope of governance generally. Many proposals for sustainable development governance have been made, which are well summarized by Cruickshank, Schneeberger and Smith,Footnote ¹⁷ as well as in a recent study specifically on governance for the Sustainable Development Goals.Footnote ¹⁸ Governments traditionally consist of ministries and departments responsible for different functions provided to citizens, such as health, education, welfare, finance, commerce, transport, energy, science, justice, security and defense. The United Nations similarly has specialized agencies and subsidiary bodies with a wide range of functions. The 2030 Agenda takes an integrated approach, in which all the goals must be addressed as an interrelated whole. Science is demonstrating how interrelated the physical, chemical and biological systems are at the global level, with biogeochemical cycles operating at a planetary scale, and human economic, technological and social systems now having global impacts. The world is a single integrated system in which every component and process influences, and is affected by, every other. This requires breaking down the traditional silos in which different functions have operated more or less independently, implying a radical restructuring, even for governments at the national level, and even more so for international governance.

It is not clear that anyone knows very well how to do this. Innovative new ways are needed to balance the values of specialization and of integration through new institutional structures and forms of coordination, as well as new skills and systems thinking. Such integrated, holistic governance will have to evolve organically through adaptive learning processes of action/experimentation, consultation and reflection. As a starting point, it will be necessary to agree on a framework of principles and values that would define the purpose of governance (see Chapter 20). Examples include ensuring justice and equity for every human being, defending the greater good and the common interests of all humanity, maintaining the sustainability of the biosphere, building resilience in human society, and encouraging learning, innovation and diversity. The people involved in governance, whether elected or appointed officials, should be conscious of the essential interdependence of humankind and operate with the common good in mind, rather than defending any unduly limited national perspective, ideology, selfish viewpoint or vested interest, as is too often the case in governments today. While much of the experimentation will need to be done at the national and even local levels, there will clearly be a role for the UN at the global level to coordinate these efforts, share best practices and encourage adoption and adaptation to the many different national circumstances.

The 2030 Agenda also specifies that no one should be left behind, so that governance should respond to the needs of all human beings, starting with the most deprived and marginalized. This will also be a challenge requiring new approaches. It is the economically deprived, the marginalized, minorities, those with disabilities, not infrequently migrants, women and girls, etc., that are most often left behind, frequently not captured or disaggregated in statistics, often not even legally recognized if unregistered at birth or without proper documentation, and thus invisible. The concept of statehood includes a state responsibility for its citizens, but not for non-citizens or the rest of humanity. There are also an increasing number of “failed states” and incompetent governments incapable of providing even the most rudimentary facilities and protections to which any citizen should have a right. Today an increasing number of migrants and displaced persons are escaping from any one state’s responsibility and are not even covered in many cases by human rights protections. They are in an international limbo that only global governance can address; the system of a national citizenship for life is breaking down alongside the erosion of the nation-state. A renewed UN will have to consider adopting stronger measures to ensure that every human being has a recognized legal status regardless of where they are in the world. Leaving no one behind includes the poor whose births were never registered and the many undocumented refugees and migrants. Ultimately, the rights and opportunities of a human being should not be conditioned by something as arbitrary as where one is born.

Using the SDGs as a framework would also call for a number of other characteristics in governance, both in the UN and its specialized agencies and in governments at the national and local levels. This includes an important role for science and knowledge to support policy-making, both in describing the reality of the natural and human situation, and in generating indicators of the status and trends in actions to reach the goals. Furthermore, average statistics often give a misleading impression by covering over extreme differences, for example between a rich minority and a vast majority of the poor. The SDGs call for disaggregation of data, for example by gender, age, class, urban and rural, and including often-discriminated minorities, to ensure that all those that are being left behind are measured and monitored, and their needs identified and responded to. The lessons learned from the work coordinated by the United Nations after the 1992 Earth Summit to develop indicators of sustainable development can be a useful guide to the even greater effort needed to implement indicators for the SDGs.Footnote ¹⁹

Cooperation and knowledge-sharing would be necessary to integrate all the goals and targets in a systems perspective, since some are dependent on others or are mutually reinforcing, while a few are contradictory and will require trade-offs.Footnote ²⁰ Research is still needed on the best way to integrate indicators across all the domains of the SDGs, and to develop indicators of integration itself.Footnote ²¹

Multilevel governance will be essential, since the global goals have to be translated to the national level for implementation, and many will require action at the subnational level and by other actors including business and civil society.Footnote ²² There will need to be continuing debate about the future of society and the visions and paradigms that will lead in the desired direction. In the modern world we have created, the past is no longer a good guide to the future, and we therefore need to learn from the emerging future. Innovation and experimentation should be encouraged, with both successful results and the lessons learned from failures shared so that society can keep advancing. All levels of governance from the global to the local will need to be involved in this process.

This book cannot review all the global risks requiring UN action. The important principle is to create the mechanisms through which reform can be pursued as and when needed. A few examples are developed in the following chapters, from the economic, environmental and social domains, as illustrations of how the reform process could work and the results that would be possible. These include governance of the global economy and business (Chapter 14), the global financial architecture represented by a reformed IMF (Chapter 15), global environmental governance including responding to the challenges of climate change and biodiversity loss (Chapter 16), and managing migrations and population displacements in an increasingly crowded world (Chapter 17).

Inequality

One function of governance is to address issues of inequality, as extreme differences create tensions and destroy the social cohesion necessary for stability and security. Income gaps are widening in many countries, while aspirations are growing. Social inequalities lead to apathy, alienation, social unrest, violence and the erosion of trust between individuals and the institutions of governance.Footnote ² Inequality can occur at multiple levels: between individuals, between communities or cultural groups, between urban and rural areas, and between states. There can be inequality in wealth, in opportunities, in gender, in power, in status, in health and education, etc. There are also distributional issues between the highest and lowest levels, such as between a privileged minority and a deprived majority, or a well-off majority with excluded minorities on the margins. For this reason, average, mean or median statistics can be deceptive and hide significant inequalities.

The role of wealth distribution, including both in-country and global inequality, has emerged as a significant issue for development, with a number of influential books published on the subject since 2009.Footnote ³ Measures of public attitudes toward inequality suggest that people both prefer lower inequality than they imagine exists in their society, and underestimate the actual level of inequality. High levels of inequality tend to limit development. The 2030 Agenda, with its aim to achieve greater justice in the world and to leave no one behind, is an expression of the imperative need to reduce inequalities; goal 10 of the Sustainable Development Goals (SDGs) is specifically to reduce inequality within and among countries. The mandate for a vital role for global governance in addressing the issue is clear, but different approaches are required when addressing inequality between states, and inequality at the level of individuals within a given community.

This issue is so important that we recommend that a new multilateral specialized agency be created within the reformed UN system specifically to address growing economic inequality and to organize a more equitable distribution of the world’s resources. Existing international economic institutions for poverty alleviation, financial system surveillance and trade regulation have failed to address this gap adequately. This will require novel approaches for funding, beyond those already used by institutions such as the International Monetary Fund (IMF) and the World Bank with mixed impact at best, and some options for this are considered in Chapter 12. The following sections address the rationale for and possible scope of such an agency.

If we start with the assumption inherent in the UN Charter and explicit in the Universal Declaration of Human Rights that “all human beings are born free and equal in dignity and rights” and are “endowed with reason and conscience,” then equality is a fundamental aspect of what it means to be human. Dignity, reason and conscience are qualities common to every member of the human race. Therefore, equality is not something to be created, but is to be reflected in social structures and processes of governance as a matter of justice.Footnote ⁴

While extreme inequality is clearly seen as unjust (except by some of those at the wealthiest extreme of the spectrum),Footnote ⁵ that does not of course mean that complete equality is the solution. It is often unfairness that is the issue. There are natural differences, whether between people or countries, that should be acknowledged. The concept of justice includes just rewards for talent, effort and accomplishments, and implies equality of opportunity. Differences are accepted if they are justified and earned or are the result of a random process such as a draw or lottery where everyone has an equal opportunity.Footnote ⁶ It is the extremes of inequality that need to be eliminated at both ends of the spectrum.

Narrowing Income Inequality

Lindert and Williamson raise an interesting and pertinent question with considerable relevance to the ongoing debate on the impact of globalization on inequality.Footnote ²⁹ How unequal would a fully integrated world economy be? Imagine a world economy with a single currency, few if any barriers to trade, free mobility of labor and capital, and let’s ask ourselves: “would such an economy be more unequal than the world of today?” The answer to this question has two dimensions. First, one must note that today we have large integrated economies – the United States, Japan, the EU – that are larger in size than was the global economy in 1950. These economies have Gini coefficients (47 for the United States, a lower 32 for Japan) that are much lower than the corresponding Gini coefficient for world inequality reported by Bourguignon and Morrisson (64)Footnote ³⁰ or the higher (68) Gini calculated by Milanovic for 2010 on the basis of the latest purchasing power parity (PPP) exchange rates.

Globalization and other factors have not only contributed to a process of rapid convergence among high-income globalizing nations but have also delivered much lower levels of inequality within these countries than currently prevails in our barrier-filled world. A skeptic might argue that a barrierless global economy would still likely be characterized by large income disparities, reflecting the sharply different stages of development in places such as China, Africa and Latin America – witness the income disparities within the 50 states of the United States or the 28 members of the European Union. However, an important lesson from the past two centuries is that what matters most for economic and social transformation is what happens at the margin where proximity facilitates comparisons. As more countries adopted policies that facilitated their integration to the global economy, one would likely see set in motion the same class of convergence forces that have been in operation during the past century in the developed world. And this observation may contain within it an important piece of the puzzle as to how to reduce global income disparities in the future.

The second dimension concerns the speed with which growing inequality can be halted and reversed in a world where the injustice of inequality is apparent to everyone, creating social instability. When the top 10 percent of the world’s population receive 58 percent of the world’s income or, alternatively, when the bottom 60 percent do not even receive 10 percent of the world’s income, we know that we have a serious problem of income distribution. It does not matter very much, in fact, if income inequalities might have “turned a corner” in the past decade because of feverish growth rates in India and China and other parts of the developing world. The current levels of inequality are unacceptably high and we cannot simply say to ourselves: within another 100 years or so, we will have returned to more socially acceptable and politically sustainable levels of inequality, closer to those seen in the nineteenth century. (It took Japan, starting in the 1870s, 100 years to catch up with the United Kingdom and other rich industrial democracies). The question is: what can we do to accelerate the process whereby income disparities are attenuated and we move to a more egalitarian world?

The answer to this question has many parts. First, it is necessary to say that the problem we face is one that admits solution; countries subject to some of the same forces shaping the global economic environment during the past century have radically different levels of within-country inequality. The Nordic countries, for instance, are among the most competitive in the world, have managed to exploit effectively the opportunities provided by globalization, and yet have made considerable progress in creating more egalitarian societies – they have the lowest Gini coefficients in the developed world.Footnote ³¹ The relationship between economic growth and inequality may be a complex one, and there may be forces affecting the direction of inequality that have an exogenous character, but there is little doubt that inequality is also affected by policy, and policies are shaped by governments, sometimes increasingly within frameworks of international cooperation.

One way to frame this discussion is in terms of the future of globalization. Because globalization is mainly being driven by technological and scientific innovation, the profit motive and the uncoordinated actions of myriad players in the global economy, as well as what Thomas Friedman calls the democratization of technology, finance and information, it is very probably an irreversible process.Footnote ³² Policy-makers are not likely to be any more successful at stopping it than they have been at controlling the flow of capital across national boundaries. Thus, we would agree with those who suggest that all that can be hoped for is more effective management of the globalization process. In practice this would mean, for instance, reorienting government spending priorities – particularly in the developing world – so as to put greater emphasis on the protection of the economically vulnerable and other disadvantaged groups in society; and making sure that there are programs in place for temporarily displaced workers in declining industries – one of the inevitable consequences of a rapidly changing global economy – including those aimed at training and providing new skills. More generally, greater efforts need to be made in the developing world to build the social safety net institutions that were put in place in virtually all the developed countries during the twentieth century and that have been a key element behind the creation of more egalitarian societies.

Boosting the share of education budgets to broaden the range of opportunities available to women is likely to be a central component of this process, given the overwhelming scientific evidence linking female education and literacy to reductions in mortality rates for children, fertility rates and levels of poverty.Footnote ³³ Benjamin Friedman observes:

Intensified efforts are needed by donor governments and nongovernmental organizations (NGOs) engaged in assisting the developing world to encourage greater democracy and participation, to make people feel they are empowered, willing and knowledgeable participants in the development process. Pushing for more responsible behavior on the part of large global corporations vis-à-vis the environment, working conditions for their employees and as regards their relations with host governments would all be desirable components of a strategy aimed at better management of the globalization process.

While these points all sound ideal, the skeptic might ask: who will pay for all of these initiatives? The answer is twofold. First, the developing countries themselves, hosts to billions of people who feel left behind by the locomotive of globalization, can do a great deal more to improve economic management and to better use available resources. According to the World Bank’s World Development Indicators, the emerging markets and developing countries, home to virtually all of the extremely poor, illiterate and malnourished people in the world, spend US$545 billion on their militaries every year. For many of these countries, more money is spent on the maintenance of military establishments every year than on health and education combined.Footnote ³⁵

That developing country governments bear a heavy burden of responsibility for the plight of the poor and the widening of income disparities does not exempt the donor governments – mainly in the industrial world – from their own share of culpability. First, wealthy countries’ commitment to assisting the developing world is much weaker today than at any time in the postwar period. To cite a well-known example: the United States provided close to 3 percent of gross national income (GNI) in development assistance in 1946; by 2017 this figure had declined to approximately 0.05 percent of GNI or, proportionally, about 60 times less. According to the OECD, the rich industrial countries annually spent on average over the period 2015–2017 about US$317 billion subsidizing their agriculture and about US$141 billion in foreign aid.Footnote ³⁶ Subsidies to relatively well-off farmers in the industrial world distort the markets for agricultural commodities and impose a heavy financial burden on farmers in the developing world. Second, what little aid is provided is often misspent, with little to show for it in terms of improved policies, living conditions and so on.Footnote ³⁷ For this reason (and others) we also put a heavy emphasis on the significant enhancement of international anti-corruption efforts and institutions (see Chapter 18). Thus, the scope for improvements would appear to be enormous in both the volume and the efficiency of wealthy country aid flows and to support policies and institutional innovations that will help reduce income disparities.

But, beyond this, there are other instruments that we are not making use of – policies that, if implemented, could go a long way toward reducing the extremes of wealth and poverty within the existing economic system.

Policies Aimed at Helping Redress Income Inequality

Countries that have managed to attain lower levels of income inequality within their national boundaries, such as the Nordic nations, Japan, France, Austria, the Netherlands, Slovenia, Slovakia, the Czech Republic and other members of the European Union, to name a few, have actively used progressive taxation policies as an instrument of redistribution. There is no doubt that this is one of the more powerful tools at the disposal of policy-makers. The nation’s budget is perhaps the largest pool of resources available in an economy, and governments typically have a chance, once a year, as the new budget is being prepared, to embed within it a range of national priorities, one of which can be to narrow the income gap – to boost the safety net that protects more vulnerable groups in society, to tax the income of high earners, to spend more on education and training, public health and so on. Different countries will have different priorities, depending on their current circumstances, where they are located along the income distribution spectrum and what the preferences of voters are as manifested through the democratic process. Not all countries may be able to afford the high levels of social protection provided in the Nordic countries, with the associated high tax rates.

There are legitimate concerns about the kinds of incentives that can sometimes be unleashed when policies are extreme in some way. Ten years ago African countries had the highest tax rates on companies in the world, by a significant margin. Indeed, tax rates were so high that businesses found it more profitable to go underground, to become informal or to simply evade paying taxes, operating beyond the margins of legality. Tax collection levels in these countries were among the lowest in the world, severely undermining the ability of the state to generate enough revenue to fulfil essential social functions. Taxes on labor in some countries are so high that they discourage firms from hiring and the country ends up with higher rates of unemployment than would be the case under a more reasonable tax regime. Therefore, care must be taken not to implement policies that have exactly the opposite of their intended effects – this happens frequently across the world. Good intentions sometimes get kidnapped by attachment to incoherent policies, misguided ideologies or corruption and inevitably the people suffer, sometimes dramatically, as has happened in Venezuela in recent years. Over the past decade tax rates in African countries have come down and this, on the whole, has had a salutary effect on incentives and tax revenue.

The Nordic countries, with among the highest tax burdens in the world, are a special case. They have the lowest levels of corruption in the world. The taxes collected by the state are not leaked to offshore bank accounts of public officials or spirited away in some other fashion. The revenue collected is channeled back into the economy through high spending on education, on research and development, on boosting innovation capacity and investing in the modernization of the countries’ infrastructure. This has contributed to the development of a virtuous cycle of development, where businesses and civil society largely trust their governments to use the taxes collected for the public good and, therefore, are willing to pay them – rather than, as happens in countless other countries, spending time and effort devising creative mechanisms to avoid paying the taxes due.

We live in a world in which one’s prospects in life are very much a function of the nationality of our parents and, therefore, where we were born, which is, of course, a completely accidental event. If my parents are Norwegian, I will have a life of good health and opportunity, I will receive an excellent education and my future will be generously provided for because, among other things, the government has wisely invested more than US$1 trillion of petroleum revenues in a Wealth Fund, the primary purpose of which is to ensure that the state is able to fulfil its obligations to future generations. And there are only 5 million Norwegians in the world! If I am born in Chad, Burundi, Sierra Leone or one of dozens of other sub-Saharan African countries, or I am one of several hundred million Indians living below the poverty line, I will have a life of onerous limitations. I may not make it to age one because of sky-high infant mortality rates, or I may become part of the close to 815 million people suffering from malnutrition across the world. Because of the incidence of early childhood diseases my IQ, on average, will be lower than that of children in Sweden, Singapore, Japan or South Korea and thus I will be limited in a number of other ways. Most people would not disagree with the statement that there is something profoundly unjust in this state of affairs.

One way to address this problem would be to provide what is called a “universal basic income” to every human being, as a right of citizenship, independently of a person’s particular circumstances.Footnote ³⁸ One could argue, on purely ethical grounds, that every human being should have access to an adequate caloric intake that will ensure the avoidance of hunger, to essential public health services independently of one’s level of income, to free education at least through secondary school, to shelter to avoid homelessness and so on. Indeed, many countries, particularly wealthy ones, already provide key elements of this bundle of goods, but this is done in a haphazard way and largely as a matter of public policy, not because these basic forms of support are seen as a right of citizenship, as something that one is entitled to because one is a member of the human race.

There is a fascinating recent case study of a Native American tribe in North Carolina on whose reservation a casino was built. The casino generated some tax revenue and the authorities decided to split the after-tax profits among the reservation’s population – every man, woman and child was entitled to a share. As the casino prospered and the size of the payoff grew, social scientists began to gather interesting data and discovered that the incidence of crime had come down, graduation rates for youngsters had gone up, and the incidence of domestic violence within families had decreased as well, as had rates of alcohol and substance abuse. Youngsters decided to get a college education, others decided to open small businesses and become entrepreneurs. This is not to say that gambling and casinos should be at the center of social policy; this was an accidental feature of this particular reservation. The point is that the existence of something like a universal basic income had all kinds of economic, social and psychological repercussions, all of them positive, suggesting that at least some of the crime, substance abuse, domestic violence and other social dysfunctions are linked to the psychological burdens of economic insecurity. Provide individuals with a reliable safety net, and we will see tangible improvements in social conditions.Footnote ³⁹

In 2016 Switzerland held a referendum on the introduction of a universal basic income. The measure was defeated, partly because of concerns about affordability and the impact on the budget, but also because there is concern in some circles about the implications for people’s incentive to work. Would the introduction of such a benefit lead to an increase in idleness and undermine people’s desire to work and to be economically productive?

The issue goes far beyond a simple question of income. Everyone has skills and wealth-creating capacities that should be developed, and all should be provided with opportunities to work and to contribute some service to society. Dignity requires that everyone have a place in society, and not be forced to be idle and dependent. Unemployment is a social curse. In a world that can produce all the goods and services we need without creating employment for everyone in traditional occupations, equity requires that the benefits be shared in other ways. However, the poor do not need aid so much as more capacity to generate their own wealth. A fundamental transformation in the economic system is needed so that one priority is ensuring meaningful employment for everyone. This is a major challenge for economic thinkers, and should be enabled as one responsibility of governance, nationally and internationally.

Our own view is that, as a matter of priority, as part of our global efforts to reduce the incidence of poverty and encourage what the World Bank calls “shared prosperity,” which means narrowing the extremes of wealth and poverty in the world, we should endeavor to introduce a universal basic income in those countries with the largest numbers of poor in the world. This could be done in stages. We might focus our attention first on those countries that account for the lion’s share of the extremely poor, those close to 800 million people currently living on less than US$1.90 per day. This could subsequently be expanded to take care of those falling under a less onerous poverty line; there are, for instance, close to 2 billion people living on less than US$3.20 a day. The issue of affordability is obviously key. There are serious questions linked to implementation as well, but the details are beyond the scope of this discussion (see Chapter 12). It is worthwhile saying, however, that we live in a world in which there is massive waste of budgetary resources. We subsidize energy (gasoline/petrol, electricity, coal, natural gas) to the tune of US$5.3 trillion per year on a global scale (6.5 percent of world GDP according to a 2015 IMF study), resources that worsen income distribution because the primary beneficiaries of the subsidies are the car-driving middle classes, not poor illiterate women villagers. Indeed, according to the IMF, 60 percent of the subsidies end up with the top 20 percent of the income distribution. Furthermore, these particular subsidies make climate change worse. Also we spend trillions of dollars maintaining military establishments and a military-industrial complex because we have not organized our affairs so as to devise mechanisms of collective security, so there is massive overspending on defense, as noted in Chapter 8.

Profit sharing is another idea that should be explored more fully as a means to address income inequality, and could be encouraged by incentivizing legislation or other programs at the national and international levels. It is a way to supplement the income of workers that would align their interests with those of owners. By becoming stakeholders in the enterprise, workers would have powerful incentives to be more productive, to see their jobs not merely as a means to earn a daily living, but also as an investment in the future and as a way to accumulate wealth. This would likely be a policy to be implemented or spearheaded from within the private sector. As can be seen with the plethora of business community-led initiatives on ethical, sustainable, “triple bottom line” and similar values-based principles (see, e.g., the B Corp movement, which includes such companies as Patagonia and Ben and Jerry’s Ice Cream), there should be an intensifying global appetite to explore such solutions to address economic inequality issues.

Beyond progressive taxation, universal basic income and profit sharing, there are other public policies that can contribute to empowering the poor and narrowing the income gap. Encouraging a culture of integrity and honesty in the public sector is of prime importance. As we will see in Chapter 18, corruption can have deleterious effects on the development process and severely undermine the ability of the government to deploy resources for socially productive ends. It reduces government revenue and thus adversely affects the interests of the disadvantaged, who seldom have the power to ensure that public policies promote their interests, as is the case with ruling elites. Education and training remain central to poverty alleviation; that we should have close to 800 million illiterate people in the world – amid the highest-ever levels of productive capacity in the global economy – is an eloquent indictment of the extent to which we have failed in helping to narrow the extremes of wealth and poverty.

One final area where there is huge scope to implement policies that could contribute to reducing income disparities concerns the hundreds of discriminations against women that are embedded in the laws (the constitution, the civic code, family law, the labor and tax codes, among others) of countries all over the world.Footnote ⁴⁰ There is ample empirical evidence that a reduction in gender inequality can directly translate into a decrease in income inequality. Women make up more of the vulnerable segments of the population relative to men; since they are overwhelmingly in the lower end of the income distribution, an increase in the gender wage gap would further exacerbate the degree of inequality in the economy. Studies using microeconomic data have generally indicated that female labor force participation has had an equalizing effect on earnings. This has been found to be the case for the United States.Footnote ⁴¹ At the macroeconomic level, an empirical study from the IMF has provided some basis for the link between gender inequality and income inequality. Gonzales et al. uncover three main ways gender inequality leads to worsening income inequality.Footnote ⁴² Gender wage gaps contribute directly to inequality, with gender differences in labor force participation likely to lead to lower wages for women, further increasing income inequality. Finally, there are some enabling conditions that create unequal opportunities for women, for instance unequal access to education, health and finance, leading to greater income inequality.Footnote ⁴³

Transforming the Economy

Given the tendency of the present economic system to foster inequality, what might an alternative look like? It is not possible to design a new economic system from scratch, or to create one within a rigid ideological framework. It will have to evolve, with some global characteristics defined in global legislation to create a level playing field for economic actors, and diverse applications at the national and local levels adapted to the conditions of each country and community.

However, if the overall goal is social cohesion and an economic system which is inclusive of all, it is possible to lay out some design criteria. Our economic systems should encourage strong entrepreneurial cultures and capacities for innovation, with robust and vibrant business sectors. A transformed economic system should also be socially just, more altruistic and cooperative in nature, create meaningful employment for all and eliminate poverty.Footnote ⁴⁴ Its aim should be human health and well-being, and moderation, a value that aligns with the SDGs. Additionally, recent social science research has shown that, on the individual level, a more moderate income and lifestyle marked by good social relationships and meaningful work may be more conducive to happiness and satisfaction, with diminishing marginal returns in relation to well-being for lifestyles devoted to excessive wealth accumulation.Footnote ⁴⁵ While growth is still needed in areas affected by poverty, consumption of material goods needs to be reduced in the most advanced economies, which should emphasize growth in intangible areas such as knowledge, culture, science, well-being and spirituality.

Considerable research has gone into the policy innovations necessary for transformative change, as called for in the 2030 Agenda. Such change requires a reversal of the hierarchies of norms and values that subordinate social and environmental goals to economic objectives. In the immediate aftermath of the 2008 global financial crisis, Nobel laureate Amartya Sen wrote that “the question that arises most forcefully now is not so much about the end of capitalism as about the nature of capitalism and the need for change.”Footnote ⁴⁶ Sen reminded his readers that in The Wealth of Nations, Adam Smith “talked about the important role of broader values for the choice of behavior, as well as the importance of institutions.” “But it was in his first book,” Sen added, “The Theory of Moral Sentiments, published exactly 250 years ago, that he extensively investigated the powerful role of non-profit values. While stating that ‘prudence’ was ‘of all virtues that which is most helpful to the individual’, Smith went on to argue that ‘humanity, justice, generosity, and public spirit, are the qualities most useful to others.’”

To break the vicious circle that produces poverty, inequality and environmental destruction, change should directly attack the root causes of these problems instead of the symptoms. It should combine social policies directed to marginalized populations; strengthened social care across health, education, infrastructure and social protection; more emphasis on the social and solidarity economy; framing climate change as a social and political issue; increased domestic resource mobilization; and improved national and international governance and inclusive political processes. This will require innovative policies that overcome palliative and compartmentalized approaches and are grounded in normative values such as social justice and sustainability, forged through inclusive political processes, new forms of partnership, multilevel governance reforms and increased state capacity.Footnote ⁴⁷

While redesigning the economy is likely beyond what global governance should attempt at present, growing income inequality – between countries and within countries – is one major global governance challenge, as exemplified in UN SDG 10. Income gaps are widening in many countries while aspirations are growing and the effects of climate change threaten the poor disproportionately. A large number of countries are fragile and conflict-ridden, becoming dysfunctional as sovereign states while serving as fertile sources of regional instability and out-migration. Climate-induced migration will accelerate, and recipient countries are already experiencing a political backlash from an unmanaged international migration crisis. Hundreds of millions of people are expected to be displaced in coming decades by environmental, social and economic pressures including climate change and sea level rise. This migration challenge is addressed in Chapter 17.

A variety of transformations are needed in governance to address the root causes of inequality. International governance has largely been dominated by an economic rationale that now – of necessity – should be subordinated to the social and ecological objectives of the 2030 Agenda, for example through sustainable economic policies that are conducive to employment creation and decent work, investment incentives that reward environmentally and socially sustainable activities, social policies that combine social and environmental goals, and environmental norms that rectify social and climate injustices. It is necessary to establish an international regulatory regime that establishes a level playing field and, as necessary, holds transnational corporations and financial institutions accountable so that they respect human rights, obey national tax laws and avoid environmental harm. Beyond public–private partnerships, partnerships are needed with communities and civil society, facilitating the political empowerment and activism of civil society, and providing real options for participation beyond “having a seat at the table.”Footnote ⁴⁸

A UN Mandate for Inequality

Filling this gap in global economic governance requires a multilateral organization with a primary mandate to help redress global inequalities in income and wealth in a way that present international economic institutions for poverty alleviation, financial system surveillance and trade regulation have not been able to do. This will require novel approaches for funding beyond those already being used by institutions such as the IMF and the World Bank with mixed impact at best. Civil society will play an increasing role. Creative approaches to taxation, including certain kinds of global taxes, will also have their place. It should no longer be possible for the very wealthy, whether corporations or individuals, to profit from globalization while at the same time avoiding their social and fiscal responsibilities. To address individual inequality, global standards should be set for social security, minimum wages and employment creation, which will also reduce the motives for crime and corruption.

The heart of the present global system is too weighted toward political and economic power, which reflects historical factors and an unjust distribution of resources that should be corrected rather than enshrined in the structures of governance. In national governments, one solution to balancing different voices has been a bicameral legislature, with one house representative of the different states, cantons or provinces, and the other with representation weighted by population. It is clear that one country–one vote, as in the present UN General Assembly, would be unjust to the most populous states, while even the smallest states have something to contribute to the rich human and natural diversity of our planet. The governance structure is one part of addressing different kinds of inequalities. A bicameral legislative process is one approach that could be adapted to the limited range of responsibilities appropriate to a global government, balancing a voice for each state, some weighted by population, and an opportunity for non-state actors from civil society to contribute to the consultative process. This is discussed in detail in Chapter 4 on the General Assembly, Chapter 5 on the establishment of a World Parliamentary Assembly and Chapter 6 on advisory mechanisms, including a Civil Society Chamber.

More fundamentally, while the system should ensure that the widest range of perspectives is represented and contributing to the legislative debate, there needs to be an important step forward from the current excesses of partisan and representative democracy as it is usually practiced, where legislators consider themselves in quid pro quo relationship with their electorate, fighting for their particular interests, and also in unhealthy fights for power against other political factions. If global governance is to evolve from diplomats (too often) from competing nation-states defending their own interests, to elected representatives searching for the common good while considering the human interests and environmental boundaries of the entire planet, then the legislators should be selected for their competence, their mature experience and their adherence to basic principles and values. They should be united in their search for the common global interest in a consultative process guided by the core values of the Charter, the best scientific advice, careful attention to all the diverse perspectives shared in the debate and the long-term interests of a planetary society. In this way, they should see themselves as the trustees of all humanity rather than representatives of special interests. This will be the most effective way to overcome the inevitable inequalities in any legislative process.

Global Management of the Private Sector

One of the major challenges in designing a system of global governance is in extending its reach beyond the intergovernmental sphere to other areas of the emerging global system of institutions apart from governments themselves. Multinational corporations, for example, and the economic systems within which they operate are often now richer and more powerful than many governments. The economy and its associated world trade and financial flows are perhaps the first dimension of social organization to have globalized so completely, yet it is a domain in which global governance is particularly lacking.Footnote ⁴⁹ This has allowed the private sector to expand beyond any national control or regulation in its goal to maximize profits and its return on investment, and to reduce its tax liabilities. It has increased its power to lobby national governments to protect its own interests and to play governments off each other to obtain the most favorable treatment with the least constraints and regulations. One consequence has been to increase returns on capital and reduce the dependence on labor, with the wealth created going largely to wealthy owners, shareholders and investors, and not to governments for redistribution as public services, or to the general public as wages. While development has reduced poverty in some parts of the world, the recent economic trend has been to increase inequality within and between countries as discussed above, and to see wealth concentrated among a few super-rich heads of enterprises at the top. This private wealth is largely beyond the reach of any governance mechanism or any goal of more equitable distribution.

National governments generally have a ministry or department of commerce and industry that sets the framework for, and encourages the development of, the private sector and state enterprises as well. It often intervenes to prevent the formation of monopolies or cartels that distort markets, and to ensure good business practices in the common interest. This is an important gap in the present system of international governance, with only the UN Industrial Development Organization (UNIDO) focused on developing countries, informal arrangements with business through the Global Compact, and the World Trade Organization (WTO) outside the UN system dealing with trade issues. Many core aspects of the global economy and business have been left unaddressed because of governments wanting to give the advantage to their own business sector,Footnote ⁵⁰ and powerful lobbying by industries wanting a free hand to maximize their profits by exploiting opportunities around the world, with the ends justifying any means, as with the petroleum industry’s denial of climate change.Footnote ⁵¹ Businesses have too often replaced governments as “colonial” powers looking around the world for resources and cheap labor to exploit.

An ideological approach to minimize government interference in the economy has led both to a reduction in some countries of government regulation of business at the national level, and to powerful lobbies effectively blocking any attempts at governance of the economy internationally. There is no United Nations economic organization. After the Great Depression of the 1930s, the anarchy of national currencies competing in a race to the bottom led to the creation of the IMF to stabilize relationships between central banks in the management of their currencies (see Chapter 15), in the absence of any willingness to consider a single global currency that would no longer be subject to national manipulations. Similarly, the General Agreement on Tariffs and Trade (GATT) and the WTO emerged out of the need to resolve trade disputes amicably rather than by trade wars. Beyond that, the wealthier countries set up the Organization for Economic Cooperation and Development (OECD), and ad hoc discussions of economic policy take place in the G7 or G20 groups of countries, but these are more for voluntary cooperation rather than actual governance. The economy is still an area where the raw exercise of power is dominant, rather than considerations of fundamental justice, equity or the rule of law in service to shared and sustainable prosperity.

Furthermore, the heritage of the old colonial systems, where the resources of the world were raped and pillaged for the benefit of colonial powers, has often continued in other forms through multinational corporations and governmental and intergovernmental loan programs, with enormous net wealth transfers still taking place out of Africa and other poor developing areas of the world.Footnote ⁵²

National economic systems are already very diverse, ranging from unfettered free enterprise to majority state control and ownership. Good management is probably more important than the nature of the system itself, so this diversity is probably healthy and should continue, leaving room for continuing innovation. When economies were still national in scale, businesses operated within that framework, and were subject to national legislation. A brief summary of the forms of economic governance that have emerged at the national level may help to identify those functions that may now need to be extended or transposed to the international level.

National legislation has defined the legal forms that economic enterprises can take, such as partnerships, cooperatives, limited liability companies and corporations, defining principles of ownership, shareholding and legal standing. Systems of intellectual property have been created for patents, trademarks and copyrights to stimulate innovation and protect trade secrets. Frameworks for business accountability, management oversight and taxation have evolved, along with those for responsibility and liability. Abuses have led to labor laws, and regulations to protect health and the environment and to reduce social impacts, as well as product standards and labeling requirements for consumer protection. The scope of national governance of the economy is indeed very broad. These systems are still far from perfect, as evidenced by the frequent use by businesses of legal loopholes, lobbying, “creative” accounting, tax evasion, fraud and corruption.

With globalization, multinational corporations have been able to escape in large part from those controls, with many forms of behavior that would be considered illegal nationally perfectly “legal” internationally because of the lack of international legislation. Companies can choose the best legal regime for each activity, hide true ownership and control, locate their profit centers in tax-free havens and practice transfer pricing to minimize tax liabilities wherever they operate. They may also bribe public officials in developing countries when they would never do so at home. The natural tendency in a liberal economy for the biggest companies to out-compete or buy out their competitors leads to monopoly positions, which even the most liberal governments have legislated against at the national level to ensure some level of competition, but for which there is no equivalent capacity to manage this risk internationally. Corporations and financial institutions have become “too big to fail,” larger in economic weight than many countries. Not only are global monopolies growing in different economic sectors, but vertical integration is allowing them to control everything between the primary producers to the final consumers with the aim to maximize their profits. The agriculture and food sector,Footnote ⁵³ and information and communications technologies, are some examples.

It is also a waste of resources to duplicate in many countries the same process of determining standards for protecting health and the environment, when issues of human health are universal and a chemical’s toxicity does not vary from one national jurisdiction to another. Wealthy countries can afford to research and determine high standards of protection, while poorer countries lack the resources to give their populations the same levels of protection. This is an obvious area for harmonization at the global level to the benefit of everyone everywhere. The best technical competences in the world could be harnessed to determine the levels of protection and regulation required. At the same time, global standards can create a level playing field for business that would greatly simplify commerce and reduce the bureaucratic burdens of dealing with a wide variety of national legislative requirements and regulations.

While it is relatively easy to define the scope of the problem of governance in this area, finding solutions is not so evident, since existing mechanisms of economic governance are often rudimentary or ineffective, as evidenced by the repeated economic crises that the world has experienced. Some elements of global governance will be necessary to provide a level playing field for economic actors and to prevent the present competition between countries for the lowest social and environmental standards and most advantageous fiscal arrangements (for the companies, not the countries). This need has long been recognized as a fundamental gap in the UN system.Footnote ⁵⁴ Creating a UN Organization for the Economy would be one option.

Some of the options for areas of global economic governance would be common legal frameworks for the different types of enterprises, harmonized levels of taxation and common standards for fiscal systems and accounting to ensure transparency and comparability. Minimum social and environmental standards could ensure that the planetary environment is properly protected, human rights are respected and social cohesion within and across countries is maintained, while allowing some flexibility to adapt to local particularities and priorities. Intellectual property regimes that disproportionately favor private profits over the common good need to be considered and adjusted so that innovations do not benefit only the rich but are widely distributed to all who need them. More fundamentally, legal and institutional frameworks that make profits the sole objective of corporations should be replaced with statutes that adjust the primary purpose and driving force of the enterprise as some service to society, providing sustainable value for all stakeholders and the common good, with profitability one measure of efficiency among others (see, e.g., the Benefit Corporation model, which currently exists in more than 30 US states).Footnote ⁵⁵

The World Economy

Since the Bretton Woods Conference, there has not been a significant step forward in designing a framework for the world economy. In 1944, Keynes wanted a global currency as the stable foundation for global markets, but the United States and United Kingdom were too intent on defending the dollar and the pound, so the IMF was the second-best option.Footnote ⁵⁶ Since then, too many vested interests, both governmental and in the banking system, have sought to limit the extent of regulatory interference, with their aim to maximize financial power and profits. More recently, inadequacies in our global financial architecture – including, for instance, poorly regulated financial markets in the private sector – were central to the 2008–2009 world financial crisis and the associated costly disruptions. There seems to be little confidence that the vulnerabilities exposed by that crisis have been adequately addressed and that the global economy is thus protected from an even bigger future financial shock (see Chapter 15).

A greater concern is that the whole framework of the world economic system is fundamentally faulty, starting with the indicators for success that it uses. GDP measures financial flows, but not what they are used for in relation to the common good. Disasters and the subsequent reconstruction, and wars (at least for the victors), contribute positively to GDP. Profit as the ultimate objective and measure of success in the current prevailing economic paradigm is pursued as an end that can justify any means, such as the sale of tobacco and other harmful and addictive products.Footnote ⁵⁷ The maximization of shareholder value has produced a shift of profits away from investment and toward dividends. The resulting underinvestment hurts employment and contributes to economic stagnation, while the top 1 percent of wealthy investors and corporate leaders with stock options become ever richer. They manipulate the system for their own advantage. Government and central bank efforts to stimulate the economy with quantitative easing and borrowing are ineffective when the money mainly inflates capital and market valuation rather than going into real investment, leaving ever-growing government debt and the resulting need for austerity in their wake. These economic inefficiencies are unsustainable.

In our interconnected world, the banking system does not exist in isolation. The Governor of the Bank of England warned before the 2015 Paris Climate Change Conference that climate change could bring down the whole world financial system, since banks were overextended in their lending to fossil fuel development, and if investors suddenly panicked over potential stranded assets, the system could collapse.Footnote ⁵⁸ Today, the greatest risk may be excessive government borrowing for quantitative easing and reducing taxes. Austerity measures are imposed on the poor and middle classes to prevent governments from defaulting, and interest rates must be kept low, below the growth rate in the economy, to prevent debt servicing from becoming unmanageable. The realization that governments cannot go on expanding borrowing forever and are unlikely to ever pay back their debts, perhaps triggering a wave of government defaults, would be far more serious in its repercussions than the last global financial crisis, and would itself prevent governments from responding as they did in 2008–2009. No existing institution is currently capable of addressing this global risk, which is not negligible, as discussed in Chapter 15.

This is another challenge for global governance, which will need to create a new economic and financial architecture that will ensure productive investment and innovation, while also providing for better wealth redistribution so that everyone benefits from economic activity and no one is left behind. The IMF is only partly responsible for this (Chapter 15). The 1995 Commission on Global Governance proposed the creation of an Economic Security Council to assess the state of the world economy, provide a long-term strategic policy framework, ensure consistency between the parts of the system, and give political leadership and promote consensus on international economic issues.Footnote ⁵⁹ It would be highly desirable to convene a new “Bretton Woods” conference to adopt preventive measures, build more resilience into the global financial system and ensure more social cohesion, before a serious crisis occurs that could see major currencies collapse, potentially shut down global trade and badly cripple the world economy.

The IMF at the Center

A number of questions have been raised over the past few decades (perhaps beginning with the 1997–1998 Asian financial crisis) about the IMF’s approach to crisis management in emerging markets and other economies (e.g., Greece in 2010), the chief characteristic of which seems to be large-scale improvisation and ad hoc arrangements with at times costly social and political repercussions. The IMF has found itself in the middle of many of these episodes, and questions about its effectiveness have been raised each time; indeed, some have argued that the organization is no longer needed in an environment of largely floating exchange rates. It is clear, however, that because today’s world is one of closely integrated markets, in which linkages are becoming increasingly complex, an institution that will have sufficient resources to deal with more frequent and recurrent episodes of financial instability, and that will help to cushion or prevent the effects of future crises, is indispensable. Some ideas follow on the sort of reforms that could make the world’s only “financial peacekeeper” a more effective crisis manager.

As presently structured, the IMF falls far short of the role played by central banks in national economies. Like a national central bank, it can create international liquidity through its lending operations and the occasional allocations to its members of Special Drawing Rights (SDRs), its composite currency. Thus, as Richard Cooper has pointed out,Footnote ² the IMF already is, in a limited sense, a small international bank of issue. As has often been seen, beginning with the Mexican crisis in 1994–1995, the Fund can also play the role of “lender of last resort” for an economy experiencing debt-servicing difficulties. But the amount of support it can provide has traditionally been limited by the size of the country’s membership quota, and there is obviously an upper limit on total available resources; as of March 2019, the IMF’s “lending capacity” was equivalent to SDR 715 billion (or around US$1 trillion) consisting primarily of IMF quotas and multilateral and bilateral arrangements that the IMF has negotiated with member countries and institutions to provide so-called second and third lines of defense, to supplement quota resources.Footnote ³ While this sum may seem large, in early 2019 it was equivalent to about 3 percent of cross-border claims of Bank of International Settlements (BIS) reporting banks, 0.4 percent of total global debt and 1.2 percent of world GDP. It is, hence, a relatively modest sum, adequate to deal with a handful of crises in a few middle-income countries but, as we will argue, possibly a puny amount in the middle of a global financial crisis.Footnote ⁴ Furthermore, in the absence of additional progress in currently frozen negotiations on a quota increase, it is expected that more than half of the total IMF firepower will be gone by 2021.

Beyond the issue of the adequacy of resources, there are other serious structural flaws in its lender-of-last-resort functions. To begin with, its regulatory functions are extremely rudimentary. Its members are sovereign nations that are bound, in theory, by the Fund’s Articles of Agreement, but the institution has no real enforcement authority, other than some limited functions through the “conditionality” it applies to those countries using its resources. In particular, the Fund has no authority to enforce changes in policies when countries are engaged in misguided or unsustainable policy paths but are otherwise not borrowing from the Fund – this was the case with the Asian countries in 1997. What little enforcement authority the IMF does have is sometimes eroded when the country in question has a powerful sponsor, who may try to persuade the Fund and its managers to exercise leniency or “turn a blind eye” if policies appear to be going awry. Contrast this situation with that of a typical national central bank, which has enormous leverage vis-à-vis the commercial banks under its jurisdiction when making resources available to them, particularly in the midst of a crisis. The IMF simply does not have an analogous authority at the international level in relation to the countries that are eligible to use its resources.

There are a number of possible ways to deal with these shortcomings. One proposal put forward in the early 2000s was to create an International Financial Stability Fund, to supplement IMF resources. This would be a facility that could be financed by an annual fee on the stock of cross-border investment; a 0.1 percent tax could generate, according to Edwin Truman, a former Assistant Secretary at the US Treasury, some US$25–30 billion per year, which could then be used over time to create a US$300 billion facility.Footnote ⁵ Using more updated figures and shifting the focus from cross-border investments to foreign exchange transactions, we saw in Chapter 12 on the development of new funding mechanisms for the UN that a relatively small Tobin-like tax could generate some US$600 billion annually, some of which could be used to strengthen the IMF’s lending capacity. This would partly address the issue of the adequacy of IMF resources and would partially delink its lender-of-last-resort functions from the cumbersome, sometimes heavily politicized periodic allocations of national currencies, in the context of its quota reviews, that currently form the basis of IMF liquidity growth. An alternative and possibly more promising approach would give the Fund the authority to create SDRs as needed, as most national central banks can, to meet the calls of would-be borrowers. The IMF Articles envisaged the SDR to ultimately emerge as the “principal reserve asset” in the global economy. There is at the moment about US$280 billion outstanding in SDRs, or less than 0.4 percent of world GDP; thus the SDR has not fulfilled the promise that it held at the time of its creation. A national central bank does not seek the approval of parliament to make liquidity available to the financial system in the middle of a financial crisis; in most countries such attributes are already embedded in the existing legal framework. Hence the compelling need to overhaul and simplify the system under which the Fund may issue SDRs under exceptional circumstances, such as during times of crisis.Footnote ⁶

When this idea was first put forward, in the early 1980s, concerns were raised about the possibly inflationary implications of such liquidity injections; however, international inflation was a serious problem at that time in ways that it clearly is not today, and measures could be introduced to safeguard against this. Furthermore, the size, integration and complexity of financial markets today dwarfs what we had in the 1980s, and the costs of an unresolved systemic crisis today are too high to even contemplate. This, of course, would involve giving the Fund considerably more leverage vis-à-vis the policies of those countries willing to have much larger potential access to its resources. Nobody questions the right of central banks to have a major say over the prudential and regulatory environment underlying the activities of the commercial banks under their jurisdiction; it is seen as a legitimate counterpart of its lender-of-last-resort functions. A much richer Fund would, likewise, have to have much stronger leverage and independence.

This says nothing, however, about the kinds of policies that the IMF advocates and whether these are generally welfare enhancing or not. A number of emerging market crises in recent years (e.g., Asia in 1997, Russia in 1998, Turkey and Argentina in 2001, Greece in 2010 and thereafter, to name a few) have generated heated debates as to whether the IMF is part of the problem, part of the solution or a bit of both. Whatever the justice of these respective positions, it is clear that giving the Fund potential access to a much larger volume of resources would have to be accompanied by significant internal reforms, both in terms of the content of the policies it advocates, as well as its internal management. Both areas have received scant attention since 2009, with the focus having largely been on the types of facilities through which resources are made available and the bureaucratic underpinnings of each.

It is becoming increasingly clear, however, that at least some of the instances of unsuccessful intervention by the IMF since the late 1990s may reflect less a lack of resources and more old fashioned policy mistakes, arising from the Fund’s own intellectual biases, its particular views as to what makes for good economic policy and the vagaries of its internal decision-making processes, which suffer from a number of flaws.Footnote ⁷ Thus, if the Fund is to be given more of the functions of a lender of last resort, then it needs an expanded philosophy, bringing into the center of its programs (and its conditionality) the kinds of concerns and policies that, so far, it has only tended to espouse in theory. In public speeches the Fund’s top managers speak of transparency, social protection, good governance and “high quality growth,” but, by and large, they have not yet managed to incorporate these laudable aims into IMF program design.Footnote ⁸ Indeed, it is becoming increasingly evident that only programs perceived as meeting actual needs and as being just and equitable in their objectives can hope to engage the commitment of citizens of countries around the world upon whom successful implementation ultimately depends. By this yardstick, most IMF programs yield distressingly disappointing results. Not surprisingly, the Fund has often found itself at the center of ineffective programs, blamed for the failure of its policy prescriptions.

A recent example will be useful to illustrate this point. Its financial power and the widely acknowledged professionalism of its staff notwithstanding, the IMF’s Global Financial Stability Report of April 2006 set out an enthusiastic vision of the wonders of efficient financial markets:

While, after the 2008–2009 global financial crisis several years later, the IMF was in the forefront of critical assessments of what had gone wrong, one could argue that it was too late. The damage had been done. This led many critics to argue that we don’t need an IMF that will act as a cheerleader for conventional wisdom, or that will see its role mainly in terms of buttressing the interests of its largest members. Ideally, we need an IMF that will admonish, alert, caution, illumine and, in general, protect its membership – and thereby the global economy – from flawed thinking, from unwarranted faith – in this particular case – in the self-correcting nature of financial markets or in the ability of credit derivatives to “provide valuable information about credit conditions and increasingly set the marginal price of credit.”Footnote ¹⁰

In response to a question raised by Queen Elizabeth during a visit to the London School of Economics about how economists had failed to anticipate the crisis, a group of them sent her a letter saying: “In summary, your majesty, the failure to foresee the timing, extent and severity of the crisis and to head it off, while it had many causes, was principally a failure of the collective imagination of many bright people, both in this country and internationally, to understand the risks to the system as a whole.”Footnote ¹¹

Easing the task of evolving new paradigms of intervention, a wealth of illuminating material already exists in the field. A perusal of Sen’s Development as Freedom,Footnote ¹² for instance, provides a compelling list of the ingredients for a successful approach to economic development, making clear to the reader that fiscal austerity is not the sole remedy available. Indeed, as former UK Chancellor of the Exchequer Gordon Brown noted in the middle of a wave of emerging market crises in 2001, the assumption that “just by liberalizing, deregulating, privatizing and simply getting prices right, growth and employment would inevitably follow” has “proved inadequate to meet the emerging challenges of globalization.”Footnote ¹³ Eighteen years later this assessment remains broadly on target.Footnote ¹⁴

A broadening of the policy content of Fund programs, to meet the challenges of Sen’s much wider vision of successful development, to be credible, would need to be accompanied by a structural reorganization, whereby the Fund’s shareholders assigned it a greater measure of intellectual independence, making it at the same time more accountable for the consequences of its decisions. It would seem desirable to separate the Fund’s surveillance activities from its decisions in respect of lending, so that glaring conflicts of interest might be avoided. Gordon Brown’s call for a “more transparent, more independent and, therefore, more authoritative” Fund is certainly a step in the right direction, and his call for new approaches to sovereign debt restructuring and the implementation of code standards for fiscal, monetary and other policies, to diminish the likelihood of future crises, remains relevant, notwithstanding the progress made in these areas in recent year. In these discussions the focus should overwhelmingly shift to crisis prevention rather than crisis resolution.

But even an updated set of policy prescriptions is unlikely to suffice without corresponding reforms in the internal workings of the organization aimed at improving its effectiveness, representativeness, legitimacy and accountability. As a preliminary measure, the international community might finally break with the convention adhered to since the IMF’s creation, which establishes that its managing director must be European. (A similar recommendation applies to the World Bank, whose president has traditionally been a US citizen). The organization is too important and its mistakes too socially costly for the nationality of the candidate for managing director to be the determining factor in assessing suitability for the job.

The unseemly negotiating process that is entered into every few years as efforts are once more set in motion to locate the most suitable candidate from a specific country is inherently offensive to the peoples of those countries who have had to endure the rigors of IMF austerity, not to mention that it exemplifies the very inefficiency that IMF officials are quick to condemn in dealings with the Fund’s member countries. (The practice reflects the position of the economic powers emerging from World War II and could not be justified under the ethical principles and best-practice management codes of the world of today.) Another desirable reform along these lines would be to accord the Managing Director a non-renewable fixed term of service, thereby freeing him or her from the conflict that may otherwise result between the interests of those who hold the appointment in their hands, and the countries which it is his/her mission to serve: in this way, the MD may never feel pressured to place personal interest above the function of the office.Footnote ¹⁵

On this question of the controlling interest in the organization, it may be noted that the salaries of the Fund’s MD and of its entire staff (as well as other administrative expenditures) are financed precisely by the interest paid by taxpayers in countries (mainly in the developing world) that are users of Fund resources. Whereas IMF lending operations have no budgetary implications for members such as the United States and the European Union – indeed, they earn a return on their SDR reserve assets – borrowing countries can end up paying billions of dollars in interest charges on previous Fund loans. Such a circumstance alone, one would think, might go some way to counter the existing notion that, because the large shareholders “contribute” more to the organization, they are in some manner entitled to oversee its operations as well, particularly since they, in any event, already have the largest voting shares at the IMF Board.

This leads to a second observation: namely, that increasingly there is a tendency for the markets, borrowers and other economic agents to view the Fund as subservient to its main shareholders, a proxy of G7 foreign policy or, worse, as has been noted by some scholars, “a branch of the US treasury” or, more recently, in the context of the euro crisis, the European Central Bank.Footnote ¹⁶ Such a perception is deeply damaging to the organization’s ability to act effectively. It encourages countries to gauge their relationship with the IMF in terms of short-term political advantage rather than lasting economic gain.

The present organizational structure has implications too for the Fund staff, who cannot under the present regime be held accountable for policy miscalculations. Deprived of full freedom to make intellectually independent assessments, inasmuch as the controlling influence rests with the large shareholders, who, as indicated, may be answerable to various “strategic” (meaning political) interests of their own, they are constrained to represent themselves merely as executors – not a role calculated to enhance their standing with their counterparts in the Fund’s member countries. And to the extent that they are viewed by the countries concerned as mere functionaries, their ability to act more generally as advocates for change will be impaired.

Emerging from the 1944 Bretton Woods Conference at which both the IMF and the World Bank were created, John Maynard Keynes expressed the view that: “As an experiment in international cooperation, the conference has been an outstanding success.”Footnote ¹⁷ The world has changed beyond recognition in the meantime, and, with the emergence of one global economy, the case for an institution that will help further the cause of international cooperation and be identified with the promotion of economic policies supportive of improved efficiency and equity has only become stronger. Conditions now seem propitious for the convocation of a global conference of heads of state to consult upon the policy and institutional requirements for a more stable world financial system in the era of globalization. How to promote better ownership of programs, and how to engage more effectively in the decision-making process with the countries most affected by such crises, are clearly two central questions that would need to be addressed. Indeed, the time may be fast approaching for a new “Bretton Woods” conference aimed at turning the two premier development organizations into more flexible and effective instruments for the promotion of global welfare.

The 2008–2009 Financial Crisis and What It Said about the World’s Financial System

The world’s financial system unraveled very quickly after the collapse of Lehman Brothers in September 2008, the rescue of AIG and other interventions in the United States and Europe. A large increase in uncertainty linked to sharp swings in risk, as banks witnessed a collapse in the value of their assets, raised questions about the solvency of major participants in the global financial markets. As market volatility surged there was a shift to high-quality assets, with yields on liquid government securities falling quickly. The virtual disappearance of credit led to rapid and chaotic attempts to reduce debt levels and the sale of liquid assets at rapidly declining prices precipitated a downward spiral in equity markets worldwide. At the outset of the crisis there was short-lived optimism that emerging markets would be spared the worst effects of the crisis. But emerging markets were hit as well, highlighting, convincingly, the highly integrated nature of global financial markets.Footnote ¹⁸

Initially many felt that a combination of a strong reserve position and low exposure to toxic assets would shelter them from the crisis, but as financing dried up they came under heavy pressure as well. Particularly hard hit were countries that had relied heavily on foreign investments or debt to finance large current account deficits; there was a sharp reversal of capital inflows. In the first year of the crisis gross capital flows plunged by about 90 percent. In parallel to these financial market developments, there was a vast synchronized collapse of international trade, which exceeded that seen following the crisis of 1929, reflecting the close integration of global supply networks. In the United States unemployment rose by some 8 million people and, by 2015, more than 9 million homes had been lost to foreclosures. There seems to be fairly broad agreement as well, as recently noted by The Economist, that the crisis “turbocharged today’s populist surge, raising questions about income inequality, job security and globalization.”Footnote ^19, Footnote ²⁰

The authorities took extraordinary measures intended to stabilize markets, including: massive provision of liquidity, the takeover of several institutions perceived to be weak, the extension of deposit insurance, the introduction of legislation in the United States to use public funds to buy troubled assets from banks, the infusion of capital to the banking system which, de facto, turned the US and other governments into major shareholders of large portions of the banking system, and the announcement by the United States of an US$800 billion package to directly stimulate borrowing by homebuyers and small businesses, among others. Between December 2007 and October 2010 the Federal Reserve provided temporary swap lines to a group of 14 central banks amounting to some US$4.5 trillion. This was part, according to IMF estimates, of the US$12 trillion in interventions in the immediate aftermath of the crisis.Footnote ²¹ In addition, prodded by the IMF, the authorities also announced large programs of fiscal stimulus that were expected to lead to a huge jump in public indebtedness over the next several years.Footnote ²²

There are several reasons why we should worry about the remarkable increases in public debt that followed the crisis. One has to do with the constraints on government policy that high levels of debt normally imply. With debt levels in many developed and advanced countries in excess of 100 percent of GDP, governments are less able to invest in education, infrastructure and other productivity-enhancing areas, to say nothing of moving to a lower-tax environment. This leads to reduced “fiscal space” – also entailing a crowding out of private investment – and undermines economic growth. High debt service becomes an important constraint on the ability of governments to respond to pressing social and other needs, including possibly responding to other unforeseen crises in the future. For example, in the case of the US, a recent Congressional Budget Office (CBO) study (2018) shows that the federal government may soon pay more annually to service debt interest payments than on the military or Medicaid. The federal deficit is rising more quickly due to recent tax cuts, and rising interest rates make borrowing to finance such a deficit more expensive. The government may see an erosion in its capacity to complete mundane tasks such as infrastructure repair or its ability to respond to emergencies such as a recession. According to the CBO, interest payments will hit US$390 billion in 2019 – 50 percent higher than in 2017 – and are on track to hit US$900 billion within a decade, a figure that highlights the geopolitical implications of high public debt. Faced with onerous budget constraints, the United States may no longer be able to underwrite the global security arrangements that have underpinned half a century of buoyant economic growth. In such scenarios, instead of worrying about reforms aimed at boosting productivity, governments increasingly have to worry about debt dynamics, market sentiment, credit ratings and where the money will come from to deal with the next crisis.Footnote ²³

Nor are emerging markets exempt from the risks associated with high debt. The level of debt that is regarded as prudent in emerging markets – about 40 percent of GDP – is generally considerably lower than in the advanced economies, with their much deeper financial markets and better track records of debt management. Emerging markets tend to have lower revenue ratios; they sometimes are more dependent on financing by nonresidents and have a much more uneven history of debt defaults. According to the IMF, countries such as Brazil, India, Pakistan, Poland, Turkey and Thailand, among others, already have debt levels above 40 percent of GDP, sometimes substantially so.

Second, in a large number of the bigger economies there are unfavorable demographic trends that are resulting in the aging of populations. Increases in life expectancy combined with declining fertility will have systemic implications for the sustainability of pension systems and the ability of governments to remain faithful to the key elements of the social contract. In some countries (e.g., Italy) unfunded pension liabilities exceed 100 percent of GDP, raising questions about the sustainably of pension systems and the likely need to significantly increase the retirement age as a way of propping up their financial position. The cost of pensions, health care and other social benefits is projected to rise rapidly over the next several decades. In the United States, for instance, 78 million people were born between 1946 and 1964 (the “baby boomers”) and this cohort started retiring in 2011. In France and Germany pension and health spending by 2050 is expected to be well above the 17 percent of GDP registered in 2000.

But there is more. Climate change will be a feature of the global environment in the years ahead (see Chapter 16). Increases in sea levels could well require heavy investments in infrastructure, such as sea barriers. As many regions become drier, outlays for irrigation networks and other investments to deal with water scarcity will be needed. In some cases it may be necessary to resettle populations no longer able to live in low-lying areas; roughly 1.2 billion people live within 100 km of the shore. The increasing incidence of extreme weather events (such as we saw in the summers of 2017–2018 in the Caribbean and the southern United States) will also require budgetary outlays that will, by definition, be difficult to plan for. To the extent that weather-related catastrophes put a dent in economic growth, there will be adverse repercussions for government revenue as well, putting additional pressures on budget deficits.

The risk, obviously, is that markets will not wait until a government is insolvent before significantly increasing the costs of borrowing. In 2010 we saw how systematically destabilizing the prospect of default by a small country such as Greece could be; how losses of confidence in the debt-carrying capacity of the country can, through an increase in risk premia, dramatically reduce the government’s room for fiscal maneuver. The point here is that the fiscal consequences of climate change and population aging could at some point interact with financial markets in highly destabilizing ways, which could significantly worsen an already difficult fiscal situation. To make matters worse, there has also been a huge increase in private sector indebtedness since 2009. According to the Institute of International Finance’s July 2018 Global Debt Monitor:

There are credible economists (Nobel laureates even) who argue that the global financial system is inherently unstable, that there is no guarantee that it will not crash in the future as a result of abuse, misbehavior or other factors unrelated to those that caused the last crisis. Robert Shiller, a leading observer of financial markets and one who issued repeated warnings about the real estate bubble in the United States, thinks that “capitalist economies, left to their own devices, without the balancing of governments, are essentially unstable.”Footnote ²⁴ There is no certainty, thus, that we will not again face what we saw in 2008: the sharp contraction of equity markets as a result of sales of liquid assets at rapidly collapsing prices and the drying up of credit lines to financial and non-financial institutions, all of it followed by growing unemployment, falling incomes and a widening of budget deficits. What makes this a nightmare scenario is that the ability of governments to prevent an economic depression through a variety of interventions, such as those deployed in 2008–2009, will be very much a function of the health of their own finances and their being on a sustainable path. Absent this, what is left is the Latin American scenario of the 1980s: debt default and potentially very high inflation and a lost decade of growth, except that this time around the impact would be global and highly destabilizing. The point here is that there is no guarantee that the financial system might not itself become a wholly independent source of pressure on government resources, increasing the vulnerability of already strained long-term budgets.

The sooner we return to cautious management of the world’s public finances, the sooner will we be in a position to respond effectively to the crises that, surely, will remain a feature of our economic landscape for years to come. More importantly, sound public finances empower governments to move away from day-to-day cash management in the middle of a crisis, to more proactive policies aimed at boosting the quality of education, improving infrastructure and spending more in competitiveness-enhancing areas.

The question that all of these recent developments raise is: can we immunize the global economy against a future crisis? And what is the role of regulation, and the kinds of monitoring mechanisms that are developed by organizations such as the IMF? This is a vast subject, and here we will be brief. We begin by outlining some problems and possible solutions.

Our model of financial regulation before the crisis was misconceived. Loan brokers had few incentives to assess risk that they sold on to others more realistically. Investors relied too heavily, in assessing asset quality, on sometimes optimistic analyses by credit rating agencies, who were themselves sometimes plagued by conflicts of interest. Regulation and supervision were too focused on firms and not sufficiently mindful of systemic risk. The shadow banking system – investment banks, mortgage brokers, hedge funds – were (and remain) lightly regulated by numerous agencies sometimes working at cross purposes. The assumption was that only deposit-taking institutions needed to be regulated and supervised, thereby encouraging “financial innovation” in the rest of the system (what investor Warren Buffet referred to as “financial weapons of mass destruction”), which, the thinking went, would act under a regime of self-imposed market discipline. Obviously, the system had (and still has) a huge amount of moral hazard built in.

On the consumers’ side, it is known that financial markets intrinsically suffer from informational asymmetries and overall imbalances of power between individuals and financial institutions. Market failures allow the transfer of risk to consumers during the rent-seeking transactions performed by financial service providers. The financial crisis showed that the lack of regulatory frameworks that required transparency in the delivery of financial products and the sound assessments of consumers’ affordability and suitability, among others, contributed to inflating wildly those intrinsic risks. As a result, irresponsible lending practices characterized by the mis-selling of subprime mortgages, complex financial products and promotion of over-indebtedness were pointed to as the main causes of the financial collapse.Footnote ²⁵

We need to move to a system where, as noted by the IMF, “all activities that pose economy-wide risks are covered and known to a systemic stability regulator with wide powers.”Footnote ²⁶ This would include investment banks, special investment vehicles selling collateralized debt obligations (CDOs) and insurance companies selling credit default swaps. Disclosure obligations within this broader circle should then allow the authorities to determine relative contributions to systemic risk and to differentiate the scope of necessary prudential oversight. For instance, one could discourage the emergence of mega-institutions, via capital ratios that increase with the contribution to systemic risk. Unfortunately, the crisis brought about a sharp increase in the concentration of the financial system.Footnote ²⁷ It would also be desirable to mitigate pro-cyclical behavior, for instance by raising minimum capital requirements during periods of economic expansion and reducing them during periods of contraction or slowdown. A similar approach could be taken for leverage – introduce a supplementary leverage ratio for banks, to discourage excessive borrowing, which at times can border on recklessness, as we saw in the period leading to the 2008–2009 crisis. There is also a need to reform the system of incentives for employee compensation, making it more risk based and consistent with the long-term objective of sustainably maintaining the firm. Or we could delink compensation from annual results and link it more to medium-term return on assets.Footnote ²⁸

The IMF’s call for greater transparency about techniques, characteristics and other dimensions of valuation of complex financial instruments, more information about the over-the-counter derivatives markets and clearing arrangements in ways that make it possible for regulators to aggregate risks for the system as a whole is a sensible recommendation. Central banks need to broaden their definition of “financial stability” from an often exclusive concern with stabilizing inflation to looking at asset price increases, credit booms and debt. This is to avoid the buildup of huge risks that escape the notice of the supervisory authorities, particularly in the shadow banking system. It matters a great deal whether a boom is associated with high borrowing. For instance, the dotcom bubble of the late 1990s was associated with limited indebtedness and thus its bursting had limited impact on economic growth. In the latest crisis, asset price declines greatly affected the balance sheets of financial institutions.

In addition, consumer protection needs to be a focus of the strategic plan of every central bank. The assessment of risk should go beyond financial stability to also pay prominent attention to societal risks related to inadequate practices from regulated entities. A step beyond would be setting the agenda to include financial inclusion efforts to enable access to the financial services to the 1.7 billion unbanked individuals around the globe.Footnote ²⁹

What about the International Monetary System?

Beyond building a better regulatory framework that addresses many of the vulnerabilities revealed by the 2008–2009 financial crisis, there are other reforms that are very important and that pertain to other aspects of the operation of the international monetary system. We will address three aspects of this vast subject: (1) the need for reforms in the area of multilateral peer review of national policies – also known as “surveillance”; (2) aspects of the management of global liquidity and risks stemming from the absence of a lender of last resort for the international monetary system; and (3) the governance of the international monetary system and the extent to which flaws in the system are undermining the credibility of the system itself by providing perverse incentives for some countries to create competing structures.

Governance

Unlike the United Nations, both the World Bank and the IMF were established with a system of weighted voting within their governance structures. There is no evidence that the one country–one vote system adopted for the General Assembly at the San Francisco Conference in 1945 was ever contemplated at the Bretton Woods Conference that launched these organizations in 1944. Weighted voting has served them well, has contributed to boosting their credibility, and has been reflected in the importance and attention that their large shareholders have given to their operations. Voting shares have been updated from time to time, but with the rapid pace of economic growth in emerging and developing countries such as India and China in recent years, a sizable gap has emerged between the relative weight of particular countries in the global economy and their voting share within the IMF governance structure. The gap has been particularly glaring in the case of China, whose voting power is less than 7 percent (compared with 17.5 percent for the United States), even though by 2018 the GPD gap had virtually disappeared and China was well on its way to overtaking the United States as the world’s largest economy.Footnote ³³

Quota shares at the IMF are allocated by a formula that captures aspects of each member country’s position in the world economy at a particular moment in time.Footnote ³⁴ This quota, in turn, establishes the country’s subscription (its maximum financial obligation to the IMF), voting power within the Fund and access to Fund financing.Footnote ³⁵ GDP is given the largest weight in the determination of a country’s quota as it captures its ability to contribute to the Fund, linking it to a measure of its size and influence in the global economy. In this respect, the Calculated Quota Share (CQS) formula reflects some of the spirit of the current formulas used to determine countries’ contributions to the UN budget and our own proposals for newer and better UN funding mechanisms. The openness metric reflects a member’s integration with the global economy, an important metric that attempts to measure its stake in global economic and financial stability. The variability measure is intended to be a proxy for a member’s vulnerability to balance of payments shocks and subsequent need for the Fund’s assistance. Finally, reserves are also an indicator of a country’s ability to contribute to the Fund. Quotas are supposed to be reviewed every five years by the IMF’s Board of Governors. Changes to members’ quotas must be approved by an 85 percent majority vote.

The figure below shows, on the left-hand side, for a group of ten selected countries the voting shares in 2019 following the update that was done in 2010, based on 2008 data. While, at the time of writing, quotas had not been updated since 2010, this has not prevented the IMF staff from preparing a variety of illustrative simulations using more recent data and under different assumptions. There seems to be broad-based support within the IMF membership to drop the variability measure on the occasion of the next quota review and to allocate its weight to the other variables. The figure on the right-hand side shows quota shares under one such simulation, in which all of the 15 percent weight currently allocated to the variability metric is allocated to the GDP blend, with GDP at market exchange rates assigned a weight of 39 percent and purchasing power parity (PPP) GDP a weight of 26 percent. In this simulation China’s quota rises from 6.4 percent to 11.4 percent, and India’s rises from 2.7 percent to 3.4 percent. While the US quota falls from 17.4 percent to 15.7 percent, there are drops in the shares of other advanced economies as well.Footnote ³⁶

Serious consideration should also be given to lowering voting thresholds for important decisions from 85 percent (which effectively gives the United States veto power since it is the only country among the IMF’s 189 members with a voting share in excess of 15 percent) to something like 60 percent, as being more consistent with sound democratic principles.

Figure 15.1

(a) Current voting shares in IMF: selected countries (%).

(b) Alternative voting shares in IMF: selected countries (%).

In respect of other internal governance reforms we find the recommendations made by former IMF Managing Director Michel Camdessus to be a sensible set of proposals, moving the IMF in the right direction.

In a lecture delivered a few years after leaving the Fund, the former IMF Managing Director outlined an ambitious reform agenda for IMF governance. He identified three values that, in his view, the IMF and other international financial institutions must embrace if they are to tackle successfully global economic challenges: (1) good governance, including transparency, openness, and accountability; (2) public ownership of policies, and (3) partnership between developing and developed countries. Camdessus recommended replacing the International Monetary and Financial Policy Committee (IMFC) with the Council, a formal decision-making body. Major strategic decisions would be transferred from the Executive Board to the Council. Working on the basis of staff analysis and Board deliberation, the Council, argued Camdessus, would be the ideal place for a global membership to discuss policies to address systemic issues. Camdessus … also called for strengthening surveillance by submitting preliminary conclusions of staff missions to broader public debate before transmission to the Executive Board. On Management, the main recommendation was to change the rules and practices that govern the selection of the Managing Director. Europe and the US should renounce the nomination ‘privilege’, and the process should be open to all candidates.Footnote ³⁷

In this chapter we have focused on some of the reforms that may be needed in coming years to better prepare the IMF to confront the challenges and risks associated with the emergence of a fully integrated global financial system in which, as of this writing, its two largest shareholders are engaged in an escalating trade war. The global financial crisis in 2008–2009 and its after effects, not only raised fundamental questions about the sustainability of an economic system based on various combinations of liberal democracy and the market but it also was a powerful catalyst for the emergence of various forms of populism and a questioning of the benefits of multilateralism and international cooperation which have been at the basis of economic growth during the past half a century.

The global financial system today is more fragile than it was in 2007, on the eve of the last crisis. Dealing with the next global financial crisis in the context of sharply reduced fiscal space, when the traditional responses to managing downturns (such as reducing interest rates, unleashing fiscal stimulus) will largely no longer be there as weapons in the arsenal of policymakers will clearly be a crucial challenge for the world’s largest economies. There is no doubt in our minds that the IMF will be forced to play a central role in crisis management during the next global financial implosion. Whether the organization is ready and empowered, with the appropriate instruments at its disposal is a highly consequential question. If our proposals for reform appear somewhat ambitions, it is because the stakes are remarkably high, both in terms of the social and economic costs associated with a preventable global financial crisis, but also in terms of the IMF’s future reputation and public perceptions of its role in contributing to establish a solid foundation for a sustainable economy.

An Environmental Organization

It is too early to say whether other multilateral environmental agreements should lead to specialized agencies or be grouped within a strengthened UN Environment Organization. UN Environment is just a program within the United Nations, with limited resources and only administrative responsibilities for some biodiversity and chemicals conventions, while climate change has a separate convention, and the wetlands convention is not even within the UN system. It has even been suggested that the multiplicity of environmental agreements with secretariats scattered around the world was intended to prevent them from being effective and thus interfering with profits and the growth of the economy. In many cultures, humanity is an integral part of nature, or Mother Earth. The Western concept of the environment as something outside of us has made it easier to consider environmental issues as externalities and not really central to the economy. For economists, natural resources have traditionally had no value until they were exploited and marketed, with a range of pernicious consequences. Faced with the pressure of commercial interests, efforts to adopt a convention on forests have failed. Plastic pollution has become a global crisis, and many environmentally damaging chemicals remain unregulated. Now that we understand our fundamental dependence on natural capital and planetary life support systems, and the need for sustainable use of resources as we overshoot planetary boundaries,Footnote ¹³ a coherent approach has become a priority for global governance.

This challenge is particularly acute because there is no easy way to achieve the current concept of a high quality of life for the entire world population without destabilizing critical planetary processes. A recent study using indicators designed to measure a “safe and just” development space between social thresholds and biophysical boundaries for over 150 countries quantified the resource use associated with meeting basic human needs and compared this with downscaled planetary boundaries. No country met basic needs for its citizens at a globally sustainable level of resource use. Physical needs such as nutrition, sanitation, access to electricity and the elimination of extreme poverty could likely be met for all people without transgressing planetary boundaries, but the level of necessary resource use must be dramatically reduced.Footnote ¹⁴ However, the universal achievement of more qualitative goals such as high life satisfaction, as presently defined in our consumer society, would require a level of resource use that is two to six times the sustainable level. For these goals, non-material means should be used such as social support, generosity, freedom to make life choices and absence of corruption. Meeting this challenge will require strategies that improve physical and social provisioning systems, with a focus on sufficiency and equity, in order to move nations toward sustainability.Footnote ¹⁵ Global mechanisms need to be strong enough to give priority to the common good of all with justice and equity, and to use various policy tools, including more responsible tax and expenditure policies, to shift incentives in a way that puts consumption levels, particularly of the wealthy and powerful, on a more sustainable path.

One necessary innovation will be to create a global legal framework for those areas, resources, planetary processes and biogeochemical cycles that are essential to maintaining a global environment conducive to human life and well-being. They should be considered the common property of humankind and could be managed as a condominium, just as individual owners in an apartment building share responsibility for the common public areas and utilities that service the whole building.Footnote ¹⁶ All states and peoples would be expected to contribute to the upkeep and protection of these common property resources, including the atmosphere, the oceans, the climate and cycles of nitrogen, phosphorus and other elements that support all life, among others.

The above reference to natural cycles illustrates that the environmental dimension of international governance has some specific characteristics, as it concerns not just human society and the built environment created by humanity for its own needs, but the natural environment and planetary life support systems that are essential for human well-being and survival. One requirement of environmental governance is ensuring that the scientific input to policy-making is adequate and objective, that the risks and uncertainties are presented correctly, and that sufficient attention is devoted to long-term as well as short-term priorities. This requires coordinated and sustained research, monitoring and scientific advisory procedures appropriate to each environmental process, with structures for multilevel governance at the scales most relevant to each characteristic or problem. Decision-makers also need to be scientifically literate to be able to understand scientific advice.

Climate Change

A priority area for coherent international action is climate change, and the UN Framework Convention on Climate Change (UNFCCC) signed in 1992 bears this responsibility. The scientific evidence is frightening, with global warming accelerating, impacts such as extreme storms, wildfires, droughts and sea level rise increasingly costly in human and financial terms, and fears of tipping points that could cause runaway acceleration of damaging processes.Footnote ¹⁸ Parts of the planet will become less able to support a human population, or even uninhabitable, due to excessively high temperatures, whereas other regions presently too cold could become more habitable, requiring significant displacement of human populations across national borders. Failure to act in time could lead to a reduced capacity of the planet to support human life, with mass fatalities.Footnote ¹⁹ Yet the response from governments is too little, too late, with some even denying the reality of climate change and encouraging economic activities that increase the release of greenhouse gases.

The reason for this is that climate change is a complex and diffuse risk that has long seemed somehow to lie outside short-term priorities.Footnote ²⁰ Because of its political sensitivity and economic implications, scientists have tended to make conservative evaluations of the scientific data, while there have been unanticipated accelerations in various scientific processes.Footnote ²¹ It is not easy to assess the probability of tipping points beyond which runaway processes become uncontrollable but with timing that is uncertain. In addition, there have been massive attempts to deny and discredit the science for ideological and political ends and to protect vested interests. It is already difficult enough to educate the public on such issues without the headwind of such negative forces that stoop to anything to win their argument, even to the extent of denying the validity of expert scientific opinion. Much of the world is in denial.

The human-induced causes of climate change are well known, with the release of greenhouse gases from fossil fuels, intensive agriculture and deforestation primarily responsible.Footnote ²² Unfortunately these activities are fundamental to the present model of development and high consumption, meaning that everyone is responsible, with increasing responsibility with greater wealth and power. The only solution is a fundamental transformation in the system, but there is great inertia and resistance from vested interests. A global approach is the only option, since the failure of some countries to cooperate can doom the efforts of all the rest. However, a system of global governance still dominated by great powers defending national interests has proved itself incapable of responding to the problems of such interdependence.Footnote ²³

While there are many positive signs of change, and technological solutions are largely available, the transition is not occurring quickly enough. After the failure at the UN Climate Change summit in Copenhagen in 2009, the 2015 Paris Climate Change Agreement succeeded in mapping out a way forward, agreeing to hold global warming to 2°C and aiming for 1.5°C, which is the level that might ensure the survival of some small island developing states that would otherwise drown with rising sea levels. In Paris, almost all governments promised voluntary nationally determined contributions to greenhouse gas emission reduction, but even if all of these are effectively implemented, which is far from certain, they would only limit warming to about 3°C. The Agreement therefore includes provisions for the regular review of progress and a ratcheting up of commitments to try to reach the target.Footnote ²⁴

There are already some other elements of international governance for climate change in place. These include an effective scientific advisory process in the Intergovernmental Panel on Climate Change (IPCC) under the World Meteorological Organization (WMO) and UN Environment. With the rapid acceleration in the signs of climate change, it may need to increase the frequency of its reports (the next one is due in 2022), or to supplement them with near-real-time reporting where appropriate, to stimulate policy action. The Secretariat of the UNFCCC, supported by the host country France and many others, demonstrated its effectiveness in achieving the Paris Climate Change Agreement. However, as with most international agreements today, there is no enforcement mechanism. While the reporting mechanism is legally binding, the national commitments to reductions in emissions are explicitly voluntary both in the levels set by governments and in their implementation. The Conference of the Parties functions by consensus, so any one country can block decisions not in its national interest, and some frequently do so. The mechanisms of accountability are very weak,Footnote ²⁵ relying largely on moral peer pressure to have any impact. A simple change in a national administration can easily lead to abandoning such commitments, and even to withdrawing entirely from the agreement, as we have already seen. Given the evident risks and even actual costs from climate change, and the threats to universal human well-being, this is not sufficient. Similarly, discussions of a mechanism for liability and compensation are blocked because some governments are well aware that they have contributed most to the problem and eschew accepting responsibility. Principles of good governance and responsibility that are widely accepted at the national level are rejected internationally as interference with national sovereignty and against national interests.Footnote ²⁶

Given the recent evidence that the climate is already changing rapidly with negative consequences for humans and the environment, and the calls from the scientific community for urgent and immediate action,Footnote ²⁷ what is really needed is a massive global campaign to transform energy, transportation and agricultural systems and the economy on what might be comparable to a war footing. There is no time to wait for fundamental improvements in global governance, but climate change could be the impetus for some first steps toward the collective global management of a significant dimension of the biosphere.

Ultimately, possibly not even waiting for the General Assembly to be reformed to give it a legislative responsibility, the UNFCCC Secretariat should be expanded into a UN Climate Change Organization with the authority to set global limits on greenhouse gas emissions necessary to keep global warming below 1.5°C or another boundary as determined by its scientific advisory process, and then to negotiate the assessment of risks and how the necessary actions will be shared among countries, with binding application and fines or other penalties for failure to respect the agreed limits. This will leave scope for different states to experiment with and evolve various approaches to returning to and staying within this planetary boundary, such as a global price for carbon or carbon tax, incentives for carbon capture and storage with both natural and technological methods, and accelerated implementation of renewable energy sources. The organization should have the financial means and technological capacity to assist poorer countries and small states to meet their mitigation obligations.

Another part of the solution is educational. Formal educational systems should teach a proper understanding of science, complex systems and integrated approaches, and ethical values that favor solidarity, cooperation and service to the common good, as discussed in Chapter 19 on education and Chapter 20 on values. Media campaigns can also relate peoples’ lived experience of the signs and symptoms of climate change to the larger scale of the problem and the causal factors in everyone’s lifestyles and consumption patterns, including the more restrained use of natural resources, to build a sense of responsibility for action. This should be on the policy agenda of countries everywhere.

Environment and the Biosphere

Population Growth

Population growth is often depicted as a major global problem and a threat to planetary stability, and extreme measures are sometimes suggested to prevent “others” from multiplying excessively. Certainly, the still rapidly growing world population, projected by the UN to reach perhaps 11 billion people by the end of this century, is creating political, social and environmental stresses of major proportions.Footnote ³

When combined with the excessive consumption of a consumer society, there is no way with present resources and technologies to both maintain the standard of living of the rich and meet the essential needs of the poor in the decades immediately ahead as the world population peaks and then starts to decline.Footnote ⁴ It is not that this would be technically impossible, but it would require fundamental changes in our lifestyles, consumption patterns, social relationships, institutional structures and value systems.Footnote ⁵

The present rapid population growth is a symptom of the extreme inequality in the world. Attempts to limit birth rates through legislation or constraint raise serious issues of human rights. The reasonable solution lies in addressing the root causes of rapid population growth. It is extremes of wealth and poverty, coupled with the lack of empowerment of women, that have maintained the world for so long in an unstable intermediate state between high and low birth and death rates. Modern health advances have been widely shared to prevent or control epidemics, and to reduce infant mortality, bringing down death rates around the world. At the same time, we have not shared enough wealth with the poor to reduce poverty, educate girls and women and provide meaningful employment, which would reduce the incentive to have many children. It is well-known that countries go through a demographic transition as the standard of living rises. A better distribution of wealth, coupled with universal education and social security, would be the best route to stabilizing the world population. The population could then grow in balance with our efforts to restore and then raise the human carrying capacity of the planet.Footnote ⁶

From this perspective, the sustainable solution to the world’s population problem lies in the transformation of the world economy so that it is more firmly based on principles of social justice and equity, reducing the present extreme inequality within and between states (see Chapter 14). The world today generates sufficient food and wealth to meet everyone’s basic needs. The challenge is one of distribution, which improved global governance could address. Economic systems need to be redesigned to enhance their altruistic and cooperative attributes, to create meaningful employment for all and to eliminate poverty in the world, as this is now a realistic possibility, given global wealth.Footnote ⁷ There are already many small-scale experiments in alternative economics that global governance mechanisms could help bring into the mainstream.Footnote ⁸ It is the same excessive differences between wealthy and poorer countries, maintained by barriers of excessive national sovereignty and an exploitative international economic system, that are behind the global pressures for economic migration.

Population Age Structure

Many of the most industrialized countries, including China, are faced with aging populations as birth rates have declined below replacement levels. The costs of caring for old people are rising, while there are proportionally fewer young people of working age to support the necessary social services. In addition, China, because of the one child per family policy that it maintained until recently, and a strong cultural preference for male offspring, has a large excess of men who cannot find spouses, adding to social tensions.Footnote ⁹ Other countries see half or more of their population under age 21, although many have now passed “peak children” and are now at or beyond “peak youth.” These are population trends with large economic and social repercussions that take decades to work through.

The logical solution would be for those countries with large younger populations of working age to more substantially “share” them with countries which lack enough younger people in the work force to maintain a demographic balance. Yet today, what country would open its doors to migration on such a scale, when facing seemingly insurmountable political, social and cultural barriers at home?

Carrying Capacity

Carrying capacity refers to the ability of a geographic area and its resources to support the population living there on a sustainable basis. In nature, some animal species will multiply to the extent that their food supply will allow, until they finally consume all the food available and the population crashes. Only when the food supply regenerates will the cycle begin again. However, in most mature ecosystems, there are multiple control mechanisms and predator–prey relationships that keep the system more or less in balance. Human populations were also regulated traditionally by war, famine, and pestilence. Modern technology has pushed back those threats but not eliminated them as ultimate forms of control, if we do not consciously prevent them.

One difficulty in determining carrying capacity and planning to identify and respect environmental limits is the frequent time lag between an action and its observable consequences. This often happens when excessive consumption of a resource does not yet exhaust the resource but reduces the capacity to produce the resource, so that we are living off the capital rather than the interest on that capital, leaving a debt or future impact for later generations to pay back or experience. With intensive agriculture, for example, every ton of grain produced in the American Midwest means a ton of topsoil is lost to erosion. At a planetary level, we have degraded 37 percent of all the world’s arable land since World War II.Footnote ¹⁰ By some calculations, our present civilization already consumes the current annual production of planetary resources in the first seven months of the year, so for the last five months we are living off of the planet’s capital and reducing its long-term productive capacity.Footnote ¹¹

The integration of the global system through trade and transport has added some resilience to the human capacity to resist or recover from disasters, most of which are local or regional in scope, so aid can be provided from elsewhere. This does not mean that a large-scale disaster could not push us over planetary limits and result in massive loss of life. Already in 2008 and 2012, widespread crop failures meant that the world produced less food than it consumed, drawing down food reserves. The possibility of a global catastrophe is in fact not remote, and one aim of global governance should be to anticipate and prevent such a catastrophic situation from materializing. The 2018 New Shape Prize of the Global Challenges Foundation was specifically aimed to award innovative ideas for global governance able to avoid risks that might annihilate 10 percent or more of the world population.Footnote ¹²

Population Displacement and Migration

Migration and growing mass movements of refugees have become a defining issue of the first years of this century, and the subject of great political controversies. Recipient countries are already experiencing a political backlash from this unmanaged international crisis. No proposals for global governance can ignore this issue threatening the stability of many countries and regions. As in the Middle Ages in Europe, when the rich barricaded themselves behind castle ramparts, wealthier countries are today closing their frontiers, even behind walls and high fences, to keep migrants out, often exacerbating the human suffering of already distressed people.

Yet it is important to place migration in its proper context. The human race has always migrated, from the first migrations out of Africa to the gradual colonization of all the inhabited places on Earth, even to the most remote Pacific islands. Empire building and migration went together. The great religions, too, spread by migration. Moses led the migration of the Hebrew people out of Egypt. Islam migrated out of Arabia as far as Spain and Indonesia. National borders changed often in the past, and, as mentioned, passports for travel are a recent phenomenon. The great economies of America, Canada, and Australia were largely built through the hard work of immigrants, and even today, with many countries experiencing aging populations and birthrates below replacement levels, their future will depend on migration. Migration therefore can be a positive phenomenon for receiving countries, even if the migrants have been forced to leave because of various traumas or lack of opportunity at home. As the distribution of the world carrying capacity and resources changes in future years due to changing environmental conditions, it will be necessary to reduce the number of people living in some regions under stress and to populate other areas that become newly inhabitable.

It can be helpful to distinguish different categories of migrants, including those that choose to leave their country for better opportunities elsewhere, sometimes called economic migrants, and those refugees that are forced to leave their homes because of war, violence or persecution. Religious intolerance is another leading cause of forced displacement by denying equal citizenship rights on religious grounds. A new category of environmentally displaced persons includes those who migrate because rising sea levels, drought, storms, flooding and other disasters, often associated with climate change, have permanently rendered their former homes uninhabitable. Their numbers are expected to increase substantially in the years ahead.

The UN responded to the refugees created by World War II and subsequent events by creating the UN High Commissioner for Refugees and adopting the 1951 Convention Relating to the Status of Refugees, including rights of asylum and an assumption that refugees would return home once the cause of their displacement was removed. The International Organization for Migration was created at the same time to resettle the millions of people uprooted by the war. There is no equivalent normative framework for economic migrants or the environmentally displaced, a major gap in international legislation that needs to be filled, and that is acknowledged in the Sustainable Development Goals target 10.7.

In 2018, the UN negotiated and endorsed two new texts to consolidate and clarify the international approach to migrants and refugees, the Global Compact for Safe, Orderly and Regular Migration, and the Global Compact on Refugees.Footnote ¹³

As described above, economic migration is driven largely by the income gap between the origin and destination countries, with average incomes 70 times larger in the latter, and the lack of educational and employment opportunities at home.Footnote ¹⁴ Migrants have always left homes and families in search of a better life and have generally been successful. As mentioned above, a second driver today is the demographic divergence between regions with a high proportion of young people and the aging populations of the advanced economies that need workers and a larger working population to support the rising costs of supporting the elderly.Footnote ¹⁵

Contrary to much contemporary popular opinion and political discourse, migration is usually beneficial for all concerned. Migration is integral to development; people need to move to where the jobs are. For economically deprived populations, migration can provide the best opportunity to escape quickly from poverty and unemployment. Increasing migration can produce greater economic gains than trade liberalization. Migrants see increases in income and child education and reduced infant mortality, with additional benefits for women and minorities. For countries of origin, migration lowers unemployment and creates more productive, higher paying jobs, and is thus a powerful force for development. Remittances from migrants can be an important source of foreign exchange, investment capital and direct support to the poor. According to the World Bank, remittances to developing countries in 2018 were US$528 billion, nearly four times larger than Official Development Assistance.Footnote ¹⁶ Migrants can also transfer knowledge and technology, with a diaspora supporting development at home. For receiving countries, migration has a positive fiscal effect, increasing goods and services and lowering prices for consumers. It addresses labor shortages at both the high and low ends of the job market. Prices for health care and university education are also lower because of the high number of immigrants employed in these sectors. There are labor market complementarities, and a high number of inventors, innovators and entrepreneurs among migrants. The more the host community facilitates integration and assimilation, the greater the benefit.Footnote ¹⁷

Despite these overwhelming advantages, popular opinion is easily turned against migrants, with people’s perceptions of the percentage of migrants in their countries greatly exaggerated. Crime rates among migrants are actually lower than among the native population. Moreover, most efforts to control migration, especially irregular migration, are ineffective. However, large-scale immigration can challenge governments to provide social and physical infrastructure and confronts civil society with issues of adaptation and assimilation.

Two things have changed in recent years to give migration a bad name. First, a reaction against economic globalization, with the rise of nationalisms for political ends built on nativism and xenophobia, coupled with the revival of ancient tendencies toward racism and religious intolerance, have led in many countries to increasing divisions and social fragmentation, if not violent rejection of those who are different, even in places where peaceful coexistence had long been the rule. The resulting negative view of migration is quite recent.

Second, the rapid growth of the human population pressing against planetary limits and its globalization with the support of new technologies is stressing if not seriously eroding the carrying capacity of the planet. When people feel forced to emigrate, there is no place on the planet left to migrate to that is not already well occupied. Furthermore, our environmental impacts, first among them accelerating climate change, are going to displace hundreds of millions of people in the decades ahead, forcing them permanently from their homes due to rising sea levels, increasing drought, agricultural failures, violent storms and other catastrophes. In these situations, it is always the poor who have the fewest options. These displacements do not fall under the current criteria for refugees, since they have no hope of returning once the cause of the displacement is removed. The most extreme case is that of the Small Island Developing States on low atolls that risk losing their entire national territory, and thus not only their homes and occupations but their culture and national identity, becoming citizens without a state.

All of this is in addition to the migrations and displacements caused by social and political factors, from war and violence to terrorism, failed states and persecution of minorities, generally covered by the present Refugee Convention. We must anticipate greatly increased flows of migrants.

The fear of migrants cultivated by certain politicians and the media has important consequences for human rights. Many human rights violations today are against migrants, and illegal migrants are often denied even the most fundamental human rights protections. The label “illegal” from the simple fact of crossing a border may be seen by some to withdraw their right to exist as human beings, and can be thrown up as a barrier to defend a “national interest.” Even those who are legally in another country face discrimination. One of the issues raised at the 2010 UN Human Rights Council Social Forum on Climate Change and Human Rights was the need to extend concern beyond those migrants who are victims of climate-induced violations of their human rights, to focus on the education of receiving communities.Footnote ¹⁸ Forced migrants need to be seen as human beings, as victims of events beyond their control. Since we are all generally, through our lifestyles, part of the cause of climate change and environmental degradation, we have a duty of solidarity to those who are its victims. By educating those in the communities receiving migrants to have sympathy for their circumstances and a sense of responsibility toward them, welcoming them and assisting in their settlement, many human rights violations could be avoided.

The Response Needed

From the perspective of global governance, greatly increased environmentally induced migrations can be anticipated. They should thus be planned for and well organized; we should not wait until a natural disaster or catastrophe forces such displacement, no doubt with great misery and suffering. This also means determining where such displaced persons could best be settled: where adequate resources are available, and perhaps with a situation and climate not too different from what they have known. Where whole communities are displaced, it should be possible for them to migrate as a unit, keeping families together and retaining as much as possible of their social capital. The UN International Organization for Migration could have expanded responsibilities in this area. The UN is presently adopting Global Compacts on Migration and on Refugees, and pressure is building for strengthened UN mechanisms to manage migration from a global perspective.Footnote ¹⁹

Special educational programs need to be developed both for migrants and for their receiving communities. Among the issues to be addressed is that of assimilation or cultural preservation. Should migrants be encouraged to abandon their culture, traditions and faith and assimilate completely into the receiving community? Should they be allowed to cluster in their own in-group, maintaining their differences in a kind of cultural ghetto? Neither extreme is desirable. If the receiving community is welcoming and offers all the necessary opportunities for education, employment and participation, each person can choose the balance he or she feels comfortable with. Ideally, those migrating should see the culture and faith that they bring with them as enriching the diversity in their new community, something to offer on equal terms as they also receive new perspectives from the community they have joined. Children can share the richness of multiple heritages, and young people, as they intermarry, will pass this human richness on to their offspring. Learning diverse languages as an infant has been shown to increase intelligence. With a proper understanding of shared values on both sides, migration can be an enriching experience for everyone, as demonstrated by the experience of millions of people during the past century.

Finally, given what we now know about the changes to come in the world, not to mention other potential crises and catastrophes that past experience suggests could well be on the horizon, we could all find ourselves as migrants, refugees or displaced persons; no country or group within a given country is immune. The golden rule of doing unto others as we would have them do unto us certainly applies.