Global trust deficit and its repercussions

Developed and developing countries alike would benefit from greater economic-policy coordination. While regional groups may obtain some short-run benefits by pursuing narrower interests outside of multilateral channels, neither emerging nor advanced economies can fulfill their long-run potential in an environment characterized by isolationism and a zero-sum mentality in areas like trade and exchange rate policy.

Policy coordination, however, depends on trust, and building trust requires advanced countries' leaders to keep their promises and offer their counterparts in developing countries opportunities for leadership. Instead, developed countries have been taking actions that compromise their legitimacy.

For example, after spending decades encouraging developing countries to integrate their economies into the global market, advanced countries now balk at trade openness. Indeed, despite pledges not to erect trade barriers after the global economic crisis, more than 800 new protectionist measures were introduced from late 2008 through 2010. G8 countries, the supposed champions of the global free-trade agenda that dominates the World Trade Organization, accounted for the lion's share of these measures.

Some question the leadership ability of the BRICS. But many emerging markets are already leading by example on important issues like the need to shift global financial flows from debt toward equity. Mexico, for example, recently adopted - ahead of schedule - the changes in capital requirements for banks recommended by the Third Basel Accord in order to reduce leverage and increase stability.

For too long, developed countries have clung to their disproportionately high influence in international financial institutions, even as their fiscal fitness has dwindled. By ignoring the advice that they so vehemently dispensed to the developing world, they brought the world economy to its knees. And now, they refuse to fulfill their promises of global cooperation.

Leaders of developed and developing countries alike must deepen their commitment to economic reform and integration. But only by giving emerging economies a real voice in global governance - thereby reducing the trust deficit and restoring legitimacy to multilateral institutions - can the global economy reach its potential.

The author is dean of New York University's Stern School of Business and the author of Turnaround: Third World lessons for First World Growth.

Project Syndicate

(China Daily 07/08/2013 page9)