Global governance mainly focuses on global issues, namely issues that both have global impact and cannot be solved without the cooperation of all countries in the world, including world peace and security, climate change, trade and investment systems, and so forth. Global economic governance primarily refers to global issues in the economic field, of which the most critical or fundamental issue is maintaining strong, sustainable, inclusive, and balanced growth in the world.

Hence, global economic governance here relates to how countries in the world negotiate a series of rules or institutions that help maintain and promote global growth. There is only one source of economic growth, that is, the improvement of labor productivity, namely the increase of labor output per unit time. Generally speaking, there are two driving forces for productivity improvement: technological progress which includes innovation and diffusion, and gains from trade based on division of labor and factor mobility.

Sustainable global growth

The main focus is on how to maximize the gains from trade deriving from the division of labor and trade between countries on a global scale, thereby contributing to realization of strong, sustainable, inclusive, and balanced growth in the world. As the basic premise of exchange is that the ownership of the exchanged object is effectively guaranteed and the contracts reached by the exchange parties are protected, the issue of maximizing gains from trade could be roughly transformed into the issue of global economic governance.

Specifically, global economic governance deals with issues related to human economic activity. The main actors are countries, or groups of countries, whose goal is to maximize their own interests. The background of global economic governance is the absence of a world government, and its manifestation is a set of self-binding rules, or institutions, formed by various actors through negotiation. In today’s world, global economic governance involves many areas including international trade and investment systems, and monetary and financial systems that control the cross-border exchange of goods and services and affect cross-border factor mobility and capital flow. Specific topics closely related to global economic governance also include supply and value chains, supply and demand of large commodities, climate change and the low-carbon economy, as well as policy coordination among key actors. Obviously, it is in the interest of all countries in the world that the above-mentioned global economic problems are effectively resolved. On the whole, however, the world has witnessed a relatively obvious governance deficit in the process of addressing global economic problems.

In this light, the question of how to reduce, and eventually eliminate, the global economic governance deficit has become a higher-dimensional global problem facing humankind. One of the fundamental reasons why it is difficult to support the enhancement of the well-being of all mankind, is that common interests are not a sufficient condition for collective action.

Furthermore, good things never come easy—they all have a cost—but the benefits are often shared by everyone. When it comes to global governance, the problem is the allocation of costs and sharing the benefits. In economics, this is what is known as the collective action dilemma: as the benefits of collective action are not exclusive, members of the collective will try to take a “free ride.” As a result, the provision of public goods is obviously insufficient, and global economic governance, represented by international institutions, usually has obvious non-neutral characteristics, as the same governance action could be beneficial to some actors while it is damaging to others. If we take geopolitical and economic competition among major countries into account, free trade with mutual benefits, or at least Pareto’s modification, is still unacceptable.

Mechanism design

Putting the geopolitical games among major countries aside for the time being, one of the solutions to the collective action dilemma in global economic governance is to consider mechanism design for effective governance. Global economic governance concerns the common interest of all countries, so it needs to be implemented through consultation. Through equal consultation, various national actors will gradually form multilateral rules accepted by each member, after fully considering the balance of costs borne and benefits shared by each member. In the process of mechanism design, the key is to reduce or eliminate moral hazards and adverse selections by providing compatible incentives, and to reduce or eliminate free-riding behaviors by creating selective incentives. With limited governance resources, countries could rank global economic issues according to their urgency, severity, and feasibility, and implement policies step-by-step in accordance with their priorities. If it is difficult to reach a consensus at the moment, we could consider breaking up the whole into parts and dividing a set of issues into several modules to deal with. The mutual benefits and win-win results brought about by free trade do not satisfy all beneficiary countries.

The Victorian manufacturing hegemony has been gradually replaced by American inroads since 1850. Therefore, in an environment of intensified competition among major countries, the dominant strategy has become curbing the opponent’s momentum to catch up—even at the expense of one’s own interests. The result is the fragmentation of the global system, or the emergence of two or more parallel systems with limited access, ultimately leading to the shrinking global single market and reduction in the benefits of global trade.

Preventing this decline in global welfare can be achieved through a multi-pronged approach. The first step is to restore or build trust among major countries. Next step is tapping into and making the best of joint interests in non-economic, or trade fields, to increase the cost of decoupling. The third approach is to maximize trade gains from unrestricted exchanges between parallel systems. The fourth step is strengthening economic and trade cooperation with middle powers, emerging economies, and developing countries.

Zhang Yuyan is a research fellow and director of the Institute of World Economics and Politics at CASS. This article was edited from his video speech at The International Academic Forum in China 2022.