Trust and the Future of Multilateralism
IMF Blog, May 10, 2018
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- Authors: David Lipton
- Published: May 10, 2018
Definition and importance of trust
- Trust defined 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.”
- Where trust exists and is reciprocated—where there is “confidence” in policies, institutions and systems—economies will achieve more.
- When trust is depleted and people believe the “system” does not reflect their values, is not under their control, and no longer works to their benefit, economies will underperform.
- Trust can be rebuilt: reforms after crises (for example, in banking) can restore trust.
Main causes of the erosion of trust
- First: Reaction to globalization and the dislocations in an interconnected global economy; perception that globalization has not delivered fair outcomes and 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—governments blamed for failing to prevent the crisis and for failing to engineer a swift recovery; perception that special interests hijacked institutions and that corruption is endemic.
- Third: Technology—automation, AI, big data, e-commerce, and fintech deepen worries about the future of work, sustainability of established businesses, cyber-criminality, and the weaponization of data; concomitant loss of trust in big internet giants.
Consequences and dynamics of declining trust
- Political and social consequences:
- Rise of populist political movements and parties.
- Protectionist sentiments and anger about income inequality.
- Shift toward trusting local entities or single-issue entities (civil society organizations, social and political movements, online communities) where citizens feel they can regain a sense of control.
- Fragmentation trade-off:
- Decentralization gives a sense of belonging and local impact.
- The more trust resides locally, the less authority those trusted actors have to address problems requiring centralized, regional, or global cooperation.
- Europe-specific vulnerabilities and dynamics:
- Trust in some European institutions has suffered from concerns about overreach, generating backlash in recent elections.
- Incomplete elements of the regional construct (for example, work remaining on banking union and harmonization of national regulations and practices in the financial sector) increase vulnerability to further erosion of trust.
- Challenge: contending with risk reduction—the legacies of crisis and national policy indiscipline—while building elements of risk sharing; failure to strike the balance risks citizens in some countries seeing themselves as payers and others as receivers.
- Global cooperation and trade:
- Distrust of global agreements and institutions is most evident in the realm of trade and foreign direct investment—turn toward bilateral negotiations and treaties and talk of unilateral actions.
- Cooperation for mutual gain is the only sure way to avoid the risk of damaging escalation in trade tensions.
- Globalization will not receive sustained, broad support unless based on free and fair trade and investment practices, with rules and institutions updated commensurate with the growing sophistication and complexity of the global economy and technological change.
- All countries need to improve their own policies and work together to take account of dislocations from globalization and technology.
IMF role, actions, and recommendations
- The IMF has been at the center of crisis and controversy and has faced repeated pressure to reform to meet changing needs and expectations.
- Over the past decade, the Fund has taken important steps to make decision making more reflective of changes in the global economy, with emerging market countries gaining a larger voice.
- The Fund must continue to:
- Become better attuned to ideas and grievances coming from all corners of the globe, including addressing corruption concerns.
- Demonstrate that it is a learning, evolving, and competent institution.
- Prove there is still reason to work together for global goods that benefit all people and transcend national and parochial boundaries.
- Preparing multilateralism for a world where trust and authority are more decentralized:
- Multilateral institutions are more critical than ever.
- Rebuild confidence by ensuring cooperation leads to concrete gains that benefit all people and that these gains are widely shared.
- Restore trust in institutions and larger purposes by regaining the sense that something concrete can be achieved by working together.
David Lipton — May 10, 2018