Who Will Save the Global Economy?

Multilateral institutions can do much to help right the world economy, but we still need the U.S. to lead the way.

For those concerned about the international economy, the most pressing question is where do we go next. The global economy has not fallen into the abyss of a great depression, but these remain hard times, and things are not likely to improve much in the short-term.

Where does economic salvation lie? One group of experts heralds the emergence of the G20 as a broad, representative body, capable of acting together to stimulate the world’s economy. Another group still expects the U.S. to lead the way. Many forecasts point to an American recovery first, followed months later by Western Europe, with economic activity eventually diffusing to other parts of the globe.

Perhaps multilateral institutions can provide a substitute for the actions of a single country. The promise of the G20 is to develop informal mechanisms for achieving coordination among the world’s largest economies. By coordinating their efforts, the member governments can first ensure that they do not cancel out each other’s efforts.

Second, if they can get their actions to reinforce each other, the impact can be much greater than their individual policies would be in isolation – or even the solo efforts of the American government. The G7 summits proved their worth in previous decades on just these grounds. If stimulus packages are introduced in various countries at the same time, the combined effect is more likely to lift the world out of the current economic doldrums, compared to a series of efforts spread out over time and across different regions.

On the other hand, such coordinated efforts take time to pull off, and often fall short of expectations. They tend to require more time because not every country is in the same situation, nor are these large states equally prepared to act. Some don’t have the capabilities to do much to stimulate their own economies yet. Coordination may then require waiting for the slowest to be ready. And then there’s always the temptation for some to promise more than they can deliver – especially if they each expect the others to do their part. Some governments will allow their efforts to fall short in the hope that their contributions won’t be needed in the end, letting others pay to lift everyone out of this recession.

Conversely, a single state can often act much more quickly on its own. The downside of course is that in most cases, the actions of a single state will not be enough to increase economic activity elsewhere. Only the largest of all economies can be expected to drive global affairs, which is why so many look to the U.S. Moreover, the U.S. economy is open for business – it has open financial and commercial markets, so that increased demand there will surely spill over onto others. Here in Canada we can easily appreciate that, but it is equally true for many other states.

It is seductive to think multilateral institutions, formal or informal, will make up for any mistakes or hesitancy on the part of the U.S. Canadians have traditionally looked to multilateral institutions as a way to safeguard their interests, or at least provide a forum where Canadian interests can be heard. Relying on the U.S. runs certain risks, including accepting an American definition of how things should be. But it is too easy to think about leadership and the G20 as a dichotomy – choose one or the other.

What the world economy needs now is a bit of both. Multilateral action coordinated through the G20 is great, but so too can be American unilateral action. If anything, what we need is American leadership inside the G20. The U.S. can and should lead the way – lead by example and by guiding the actions of others. Without American leadership, the G20 can’t be expected to achieve much.