Allow me to express my appreciation to Eurofi for organizing this conference. I am pleased to be here to address the important issue of multilateralism. The high level of attendance and representation in Bulgaria at this conference is testament to how seriously these issues are taken in Europe, and that is encouraging to all of us at this juncture.
Until recently, the theme of multilateralism probably would have prompted me to focus on governance reforms at the IMF.
But times have changed.
We live in an era of doubts and questions about the global order. We have seen an erosion of trust in bedrock institutions—at the national, regional, and global levels. This trend is especially evident in the advanced economies of Europe and the United States.
So tonight, I want to talk about trust. And its bearing on the future of the global economy—particularly the multilateral system, and how the IMF will evolve.
A week ago, our member countries came to Washington for the IMF and World Bank Spring Meetings. Some of you were there. The subject of trust, and the erosion of trust, came up over and over again, whether in discussions of national policymaking, the need to fight corruption, the challenge of strengthening Europe, or maintaining confidence in the trade and payments system.
Let me speak about what we heard, and what we take from it all.
Many say that we are witnessing a loss of trust in political parties, national governments, regional authorities, and among international trade and investment partners. We often throw around the word trust rather loosely. But serious and careful work by Luigi Zingales and several others has defined trust as “civic capital”, meaning “those persistent and shared beliefs and values that help a group overcome the free rider problem in the pursuit of socially valuable activity”, and has begun to measure it.
Confidence and Economic Achievement
They find that where trust exists and is reciprocated—where there is “confidence” in policies, institutions and systems—economies will achieve more.
But when it is depleted, when people come to believe that the “system” does not reflect their values, is not under their control, and no longer works to their benefit, economies will underperform.
Why is trust eroding? We can identify three important factors.
First, is the reaction to globalization—or, more specifically the dislocations that have occurred in our interconnected global economy. Many people believe that it has not delivered fair outcomes and that there is a lack of accountability for leaders and those who have gained the most.
Second, the global financial crisis, and the slow, decade-long recovery that followed exacerbated this trend. Governments have been blamed for failing to prevent the crisis in the first place, and then compounding the difficulties by failing to engineer a swift recovery. For many, the past decade only provided proof that special interests had hijacked institutions, with working people left holding the bag.
Deep anger was directed at the bankers—although, ironically, recent surveys show that trust in banks is now returning. That no doubt reflects the reforms and regulation that followed the crisis, which underlines one key lesson: trust can be rebuilt.
The third factor is technology. The rise of automation, AI, big data, e-commerce, and fintech each have huge potential. But they also deepen worries about the future of work, the sustainability of established businesses, the spread of cyber-criminality, and the weaponization of data. It should come as no surprise that we are witnessing a loss of trust in the big internet giants; witness the pressure being brought to bear on Facebook over privacy issues.
We are in a trust recession. Certain consequences of that recession are clear. The rise of populist political parties and protectionist sentiments may be the most obvious, along with the anger in many countries about income inequality. But we see a deeper tendency at work—a shift as people identify with and trust in fragmented, localized entities; where citizens feel they can regain a sense of control. This includes civil society organizations, single-issue movements, on-line groups and communities that form on social media.
Decentralization and Fragmentation
But while decentralization gives people a sense of belonging and local impact, this fragmentation comes with a fundamental downside consequence. The more trust resides at local and decentralized levels, the less those who are trusted will have the power and authority to address and solve problems that inherently require centralized authority, and in an increasing number of cases: global cooperation.
And that brings me back our topic. Let’s take a broad view of multilateral institutions to include the regional, because I think it’s important to include what Europe is facing in this discussion. So, I will speak about some of the issues facing Europe and then about the global level.
Trust in some European institutions has suffered from concerns about overreach. Discontent and suspicion of supranational bodies and regulation has generated the backlash in recent votes—from the UK to Italy.
Looking forward, Europe faces additional vulnerabilities as long as elements of the regional construct remain incomplete. With work remaining on banking union and the harmonization of national regulations and practices in the financial sector, the risk is a further erosion of trust if new problems arise and Europe is not ready. On the upside, progress on further integration could renew trust. What is proving difficult is contending with risk reduction —the legacies of crisis and national policy indiscipline—while building elements of risk sharing. Unless that balance is properly struck, trust may be hard to maintain, if citizens in some countries see themselves as payers and others as receivers.
Moving to the global level, distrust of global agreements and institutions is most evident in the realm of trade and foreign direct investment—witness the turn toward bilateral negotiations and treaties and the talk of unilateral actions and risk of retaliation. I hope we can all agree that cooperation rather than unilateral action is the only sure way to avoid the risk of damaging escalation in trade tensions. But by the same token, globalization will not receive sustained, broad support unless it is based on free and fair trade and investment practices. That means being willing to update rules and institutions commensurate with the growing sophistication and complexity of the global economy—and as technology changes the economic landscape. As we have been urging, all countries need to work to improve their own policies, and work together to take account of the dislocations from globalization and technology.
Trust and IMF Governance
The IMF is no stranger to distrust. We have been at the center of crisis and controversy. We have faced pressure again and again to reform to meet the changing needs and expectations of the international community. We feel it again now in discussions about the global financial safety net, which we all need as a bulwark against future crises.
I began by mentioning IMF governance. Over the past decade, we have taken important steps to make our decision making more reflective of changes in the global economy, with emerging market countries gaining a larger voice.
That is only a first step. These reforms will continue. In addition, we must be better attuned to ideas and grievances coming from all corners of the globe. We must demonstrate that we are a learning, evolving, and competent institution. But more importantly, we must demonstrate that there is still reason to work together for global goods that benefit all people and transcend national and parochial boundaries.
We all need to work together to prepare multilateralism for a world where trust and authority are more decentralized. Our multilateral institutions are more critical than ever. We cannot take them for granted. The way we rebuild confidence is to make sure that cooperation leads to concrete gains that benefit all people, and that these gains are widely shared. We can restore trust in institutions and larger purposes if we set out to regain the sense that something concrete can be achieved by working together.