Trust and the Future of Multilateralism

IMF News, April 30, 2018

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Speech title: Trust and the Future of Multilateralism
Occasion: Introductory Remarks for the Eurofi High Level Seminar
Speaker: IMF First Deputy Managing Director David Lipton
Date: April 30, 2018
Core message: Rising doubts about the global order have produced an erosion of trust in institutions at national, regional, and global levels; the speech focuses on trust and its implications for the multilateral system and how the IMF will evolve.

Academic framing: 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”.
When trust is present and reciprocated, it produces “confidence” in policies, institutions and systems that enables higher economic achievement.
When trust is depleted, people believe the system “does not reflect their values, is not under their control, and no longer works to their benefit,” leading to economic underperformance.

Dislocations from globalization:
- Perception that globalization “has not delivered fair outcomes” and a perceived “lack of accountability for leaders and those who have gained the most.”
The global financial crisis and its aftermath:
- The “global financial crisis, and the slow, decade-long recovery that followed” exacerbated distrust.
- Governments were blamed for failing to prevent the crisis and for failing to engineer a swift recovery.
- Recent surveys show that trust in banks is now returning, which is presented as evidence that “trust can be rebuilt.”
Technology:
- The rise of “automation, AI, big data, e-commerce, and fintech” has vast potential but increases worries about the future of work, business sustainability, cyber-criminality, and the weaponization of data.
- Loss of trust in large internet companies exemplified by pressure on Facebook over privacy issues.

Observable consequences:
- Rise of populist political parties.
- Growth of protectionist sentiments.
- Anger about income inequality.
Social and political shifts:
- Movement toward fragmentation and decentralization: people identify with localized entities (civil society organizations, single-issue movements, online groups) where they feel more control and belonging.
- Downside of fragmentation: decentralized trust reduces the authority of those trusted to address problems requiring centralized or global cooperation.

Trust in some European institutions has suffered from concerns about overreach, contributing to political backlashes (e.g., recent votes cited as from the UK to Italy).
Europe’s vulnerabilities:
- Incomplete elements of the regional construct, including unfinished work on banking union and harmonization of national regulations and practices in the financial sector.
- Risk that new problems will erode trust if Europe is not prepared.
Policy trade-off:
- Difficulty in balancing risk reduction (legacies of crisis and national policy indiscipline) with building elements of risk sharing.
- If the balance is not struck, “citizens in some countries see themselves as payers and others as receivers,” making trust hard to maintain.
Upside: progress on further integration could renew trust.

Distrust is most evident in trade and foreign direct investment:
- Turn toward bilateral negotiations and treaties and talk of unilateral actions and retaliation.
Policy prescription:
- Cooperation rather than unilateral action is necessary to avoid damaging escalation in trade tensions.
- Globalization needs to be based on free and fair trade and investment practices to secure sustained, broad support.
- Countries should update rules and institutions to match growing sophistication and complexity of the global economy and technological change.
- All countries should improve domestic policies and work together to address dislocations from globalization and technology.

The IMF has faced distrust through crises and controversies and recurring pressure to reform.
Recent steps:
- Over the past decade, the IMF has taken important steps to make decision making “more reflective of changes in the global economy, with emerging market countries gaining a larger voice.”
Ongoing agenda:
- Reforms are “only a first step” and “will continue.”
- The IMF must be “better attuned to ideas and grievances coming from all corners of the globe.”
- The IMF must demonstrate it is a “learning, evolving, and competent institution.”
Restoring confidence:
- Demonstrate that cooperation yields “concrete gains that benefit all people, and that these gains are widely shared.”
- Rebuild trust in institutions by regaining the sense that “something concrete can be achieved by working together.”
- Prepare multilateralism for a world where “trust and authority are more decentralized.”

Introductory Remarks for the Eurofi High Level Seminar — IMF First Deputy Managing Director David Lipton, April 30, 2018