The New Isolationism: Why the World's Richest Countries Can't Work Together

The West has lost its ability to coordinate solutions to global crises, from Syria to the long recovery following the Great Recession


In rejecting the use of force in Syria, the British parliament did more than deal a blow to U.S. efforts to organize an international coalition against the deployment of deadly chemical weapons in Syria. Last week’s unexpected development also confirmed a phenomenon that has been clear in economics and finance for a while: countries are turning more insular, even when there are good reasons to believe that collective international action would dominate individual domestic responses. In turn, this has contributed to a global economy that continues to operate below potential and faces renewed risks of financial instability.

The post World War II period was one in which the West recognized the power of coordinated responses, and acted on it. They wisely used structure to do some of the heavy lifting, forming a network of multilateral institutions and processes. This was supplemented by periodic summits that, unlike today, were driven more by substance and less by public relations – most notably among the G-7 (led by the U.S. and consisting of Canada, France, Germany, Italy, Japan and the United Kingdom). And bilateral relationships were anchored not just by common values and aspirations, but also by a unified assessment of external threats.

This Western-dominated architecture contributed in consequential ways to economic, political and social achievements. It also proved mostly effective in countering unexpected shocks.

Recall how the West catalyzed most of the world to counter Iraq’s invasion of Kuwait; and, on the economic front, the coordinated response to the financial crises of 1994/95 and 1998/99, as well as earlier collective action to deal with major currency mis-alignments within the G-7.

More recently, the architecture proved useful in encouraging the multi-country policy response that proved instrumental in preventing a disastrous global depression in the aftermath of the 2008 financial crisis. Indeed, the overall effectiveness of the April 2009 G-20 meeting in London now constitutes the peak of recent global economic coordination.

Over time, however, the West has found it hard to evolve this architecture to keep up with major global realignments, let alone get ahead of them. Steadfast adherence to outmoded historic entitlements and stubborn mindsets were major hindrances, as was the erosion in western countries’ global economic power and influence (particularly relative to the economic breakout performance of emerging economies).

Unusually high unemployment, increasing income inequality and persistently sluggish growth imparted a heavy domestic bias to the policy narrative in the West. Meanwhile – and especially with multilateral institutions consistently handicapped by obvious representation, voice, governance and legitimacy deficits – there were few effective ways to channel and incorporate the growing influence of emerging economies.

It is therefore not surprising that Western policy formulation has paid little, if any attention to global spillover effects. It is also not surprising that global economic outcomes have fallen short of both historic achievements and, more tragically, what is needed, feasible and desirable.

Whether it is the overwhelming domestic bias of unconventional monetary policy in Japan and the U.S. or the loss of momentum in trade negotiations, the ex-post rationalization in the West has relied on some combination of three distinct arguments: It is legitimate to use domestic measures to pursue domestic objectives; the rest of the world would end up better off by adopting measures that are focused on improving Western economic performance; and it is the responsibility of emerging economies to adjust to what the West is doing.

The rationalization in emerging economies has been more diverse. Having said that, there is a common perception – that of an unequal global standards, with the West failing to internalize the importance of more equal voice and representation, starting with multilateral institutions such as the International Monetary Fund. Also, having acquired systemic importance quite suddenly, some countries find it hard to reconcile their new global responsibility with their domestic situations.

Presented by

Mohamed A. El-Erian is CEO and co-chief investment officer of Pimco, the world's largest bond investor, and author of When Markets Collide.

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