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Rebuilding trust in the global economic system

Authors: Christopher H Lim and Tan Ming Hui, RSIS

The global financial system is in a frail state. Global debt reached a record high of US$233 trillion in the third quarter of 2017. The global debt-to-GDP ratio has grown beyond expectations since the 2007–08 global financial crisis, and governments will struggle to pay off the interest. While a full-blown debt crisis has not materialised, the vulnerabilities are apparent.

To make matters worse, the stock market suddenly began to turn southwards in February 2018, signalling continued market volatility globally. Investors are now bracing themselves for rising inflation and interest rates.

For the average worker who is at risk of losing their job or their pension, the frailty, uncertainty and unsustainability of the current economic system is deeply concerning. The post-crisis years have been marked by rising levels of global wealth inequality and youth unemployment.

Living in the age of the Fourth Industrial Revolution, workers face unprecedented job insecurity. Employment has become uncertain across various sectors as technological developments threaten to take over the workforce. This is the case even for the well-educated or the highly qualified. As long as someone’s work can be codified, whether it is manual-based or knowledge-based, their job is at risk of being taken over by computers and robots in the future.

The end of World War II heralded in a new age of globalisation. Under the leadership of the United States and the United Kingdom, the Bretton Woods agreement and the development of global institutions such as the General Agreement on Tariffs and Trade (later the World Trade Organization), the International Monetary Fund (IMF) and the World Bank set the stage for a new economic order.

Despite occasional hiccups, this economic system has generated wealth and led to peace and poverty eradication for most parts of the OECD and for many emergent economies in Asia.

But since the global financial crisis, prolonged and unsettling socio-economic woes have eroded confidence in the post-war system and its international institutions. Developing economies are moving away from a reliance on IMF funding towards the creation and use of alternative, regional funding sources.

Even the developed West, including the United States and the United Kingdom, has increasingly lost trust and hope in the world order they were responsible for creating. Western democratic governments have started to lose their bearings and become more inward looking. Fears of job competition, terrorism and erosion of local identity bases have led to a surge in right-wing nationalist, populist and xenophobic sentiments.

How can this global trust deficit be overcome and confidence in the global economic order restored?

The decline of the West has been accompanied by China’s re-emergence as a world economic power. According to the IMF, China overtook the United States as the world’s largest economy in 2014, producing 17 per cent of the world’s GDP when adjusting for purchasing power parity compared to the United States’ 16 per cent.

Could China rise up to lead the global economic order into a new economic paradigm? This possibility has been echoed within China itself, especially during the recent 19th Communist Party Congress. During his opening speech, Chinese President Xi Jinping voiced China’s commitment to international cooperation and global economic integration, and announced that it was time for China to take on a global leadership role as part of China’s plan to make the ‘Chinese Dream’ a reality.

But there seems to be a feeling of unease about the idea of a China-led world order, particularly from Western intellectuals and media outlets. Many are wary of the incompatibility of the current Chinese political system and ‘Western’ liberal democratic ideals.

Given the current atmosphere of distrust in globalisation and the international world order, China will need to begin offering some assurances to the world that the Chinese model of economic growth and development could potentially provide a new ‘safe harbour’.

The United States’ recent imposition of tariffs on steel and aluminium imports heightens the risk of the world descending into protectionism and trade wars. This is an opportune moment for China to try to provide some economic stability and decrease global tensions. One way it could do so is by accelerating its ‘21st century Maritime Silk Road’ component of the Belt and Road Initiative.

In Southeast Asia, China could expedite port and shipping development to promote trade and connectivity. This enhanced connectivity could also act as an incentive for ASEAN+6 countries to conclude the Regional Comprehensive Economic Partnership as early as possible.

On the investment front, China could increase and diversify its investments in the region, particularly in growth sectors that could provide more high-skilled jobs to an increasingly well-educated labour force in Southeast Asia.

Even more importantly, rather than relying on a single system as a safe harbour, the world should think about further developing networks of strong, modernised and deeply integrated economies across Asia and the globe.

Christopher H Lim is a Senior Fellow and Tan Ming Hui is an Associate Research Fellow in the Office of the Executive Deputy Chairman at the S Rajaratnam School of International Studies (RSIS), Nanyang Technological University, Singapore.

A version of this article originally appeared here on RSIS.

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