So far in this blog, posts have focused on how advanced technology makes it possible for knowledge professionals to understand better and faster the policy developments around them. Disruption has been addressed as a technology issue. Today, we expand the focus.
Today’s post focuses on how multiple macrotrends are coinciding to deliver disruptive impacts. All those trends share one common element: all trends point towards distributed (rather than centralized) shifts. This post thus expands on issues first raised in blogposts earlier this year for the Bretton Woods Committee, the Atlantic Council, and the Washington International Trade Association.
Welcome to the Distributed Age.
The so-called “fourth industrial revolution” mobilizes technology to empower a broad range of private actors to reimagine the relationship between the individual and the government. Technology makes it possible to consider new ways to think about how individuals can and should delegate their sovereignty to governments and how governments can and should cooperate across borders to pursue shared objectives.
This can create disruptive challenges since governance structures domestically and globally require centralization of authority in order to function. The more a government relies on strong central structures, the more threatening it will find the distributed era.
Background – The End of the Centralized Age
It is deeply ironic to see the distributed age arrive in a year marking multiple major milestone anniversaries. The main milestones include:
Euro (21 years)
NATO (70 years)
DDay (75 years)
Bretton Woods institutions (75 years)
San Francisco Convention (74 years)
Georgetown University’s School of Foreign Service (100 years)
These milestones laid the foundation for a set of centralized institutions designed to foster increased cross-border economic and political integration.
Yet the fabric of cross-border cooperation has never seemed so thin. Technological communications increase the connections among people and ideas across time zones and geographies. But this interconnectedness has also generated backlash against international institutions from the World Trade Organization to the European Union to the Basel Committee on Banking Supervision.
Let’s be clear -- the last 75 years have not been full of stability. Increased cross-border integration certainly expanded opportunities for economic growth. But it also generated vulnerabilities to cross-border spillovers which have occurred nearly once a decade since the late 1960s. Policymakers have periodically puzzled over the challenge of how to handle oversight of financial institutions that are national in corporate form but international in their reach.
The tension between cross-border economic activity and national sovereign laws has long contributed challenges to policymakers charged with safeguarding financial stability. The tension initially was resolved by creating informal cross-border institutions to generate international common minimum standards. A brief history of the main cross-border financial regulation institutions can be found HERE.
However, as the financial crisis made clear, cross-border consensus on minimum standards is meaningless without parallel political will to share or delegate enforcement authority.
Today’s macrotrends indicate that such centralization is politically impossible and potentially undesirable. Across a broad range of sectors and interests, the prevailing trend politically and technologically is all about decentralization. The conundrum, of course, is that the technology itself depends critically on substantial centralization (cloud computing, platforms, telecoms infrastructure) with private sector entities rather than governments at the center.
The next decade will determine whether the post-war cooperation structures can evolve to accommodate more distributed frameworks for cross-border coordination. History suggests strongly that a failure to evolve will generate tensions for more dramatic change.
Macro Trends Pointing Towards Decentralization
1. Geopolitical Rebalancing (aka, economic sovereignty): Much has been written about China’s global geopolitical ambitions in recent years. Political scientists and international relations theorists have been prolific in describing how China’s economic and technological growth inevitably lead to tensions as it creates a counter-balance to Western (particularly American) leadership.
When China articulates its priority is to exercise “economic sovereignty” or it creates its own international organization (the Asian Infrastructure Investment Bank), many bemoan the centrifugal forces on display that spin away from the accepted post-war institutional structure (particularly the IMF, the World Bank and the WTO).
The Chinese government’s recently released White Paper accentuates these concerns. It delineates an approach to economic sovereignty focused on bilateral rather than multilateral negotiations in which “mutual respect…(for) each other’s social institutions, economic system, development path and rights, core interests and major concerns…(and) a country’s sovereignty and dignity must be respected.”
China is not alone in seeking to define a new, distributed paradigm for economic sovereignty independent from centralized international entities. Nor is China the first to push back against the post-war institutional structure.
Populist political trends from both the left and the right have been pushing back against an expanding international policy perimeter since the late 1990s. Consider these developments placed in chronological order:
--Seattle Riots/WTO (1999, ongoing): Left-leaning activists protested, then rioted, against the World Trade Organization and increased cross-border trade integration. Their intellectual heirs continue to protest a range of trade agreements and individual issues within trade agreements, joined by far-right activists and protestors (e.g., phyto-sanitary standards, dispute resolution processes, environmental and labor standards). Whether on the left or the right of the ideological spectrum, these advocates share with the Chinese government (ironically) a priority for placing a primacy on policy choices made at home rather than defined through a consensus-based cross-border negotiation. They reject growth models premised on cross-border economic integration – which is the foundation of the post-war economy, compliments of the Bretton Woods agreements – when they perceive that such growth and integration comes at the expense of preferred local priorities.
--EuroArea Crisis (2010, ongoing): The financial crisis shone a spotlight on the foundational weaknesses underpinning the common currency in Europe. Lack of political will to share fiscal liabilities when the common currency was founded persisted throughout the financial crisis. To this day, policymakers continue to reject policies that would create a common deposit insurance system within the European Union system and the bank resolution system remains incomplete.
For example, as noted in this Breugel analysis, it is unclear how EU authorities would resolve a financial institution which could not produce sufficient collateral to support central bank liquidity assistance. In addition, as Spain’s central bank governor recently noted in this speech, many of the EuroArea banking sector vulnerabilities have receded precisely because the solutions have followed decentralization or fragmentation paths. Banks in Europe decreased substantially their cross-border claims, which means that the majority of their exposures are now to borrowers in their home countries.
The EuroArea's common currency was stabilized through a distributed structure that relied on capital markets for funding rather than central government solutions.