Later on, the influence tended to move the other way. The 1986 Goldwater-Nicols Act, which put the “joint” into the Pentagon, had as profound an effect on UK military organisation as the general staff system originally employed in Napoleon’s Grande Armée.

But whereas previously the ideas were studied and adapted to the UK’s constitutional set-up, today it seems anything invented in the US should be imported wholesale to the UK, regardless of whether it fits the political, legal and constitutional set-up or not.

So Richard Holbroke’s appointment as President Obama’s Special Representative for Afghanistan and Pakistan has now been matched by the choice of Sherard Cowper-Coles as the Foreign Secretary’s Envoy to Afghanistan and Pakistan. This adds to Jack McConnell’s role as Special Envoy for Conflict Resolution and what is rumoured to be Des Browne’s imminent appointment as the Prime Minster’s envoy to Sri Lanka.

But whereas the Obama administration’s appointment of enjoys and representatives is a product of serious thought not only about the specific policy problems, but about how best to mange the sprawling US national security bureaucracy, the same cannot be said of the UK government’s approach. Unlike in the US, the envoys are simply bolted on to existing governmental structures. Rather than solve inter-department problems, they tend to highlight these.  And more often than not they serve to demonstrate governmental action, garner a bit of publicity, but little else. 

In Sir Sherard’s case, the former ambassador in Kabul is the Foreign Secretary’s man, but does not represent DfiD or the MoD. (That is before even addressing the question of whether a UK envoy as opposed to a British EU envoy makes any sense). Jack McConnell’s role, meanwhile, is a mystery to even senior FCO mandarins.  And who now remembers Michael Williams’ role as Gordon Brown’s Middle East representative? Or Britain’s peace emissary to Sudan, Allan Goulti?

Though the Civil Service will make the most of these appointments, it is clear that greater thought needs to be given to how the UK manages cross-cutting issues, high-level diplomacy and the need to engage US counterparts like Richard Holbrooke or George Mitchell.

Personally, I favour the idea of having Prime Ministerial Regional Envoys or in the cases where Britain has a large-scale, multi-departmental commitment, like Afghanistan, Resident Ministers, such as Harold Macmillan’s role in Austria, Duff Coooper’s in Singapore and Oliver Lyttelton’s in Cairo during World War II. These individuals would have the clout to manage all departmental interests, have a direct link to Parliament (and so could keep the arguments for interventions alive) and ensure the necessary delegation of authority.

But the whole system probably needs a good look. Now there’s a subject IPPR’s National Security Commission could deal with.

Image Author: mike_is_scrumptious

Assume a robust global deal on climate and the world’s cities will have to transform their infrastructure, economies and societies in little more than a generation.

Assume uncontrolled emissions growth and they face growing impact from a less hospitable and more volatile climate.

Either way – big changes are on the way. Few cities’ leaders grasp the scale of the challenge, especially in developing countries, where towns and cities will have an additional 1.5bn residents to cope with by 2030.

This new think piece has been prepared as part of the British Council’s Climate and Cities programme. Download the pdf (which has full references) or read the full text below the jump.

A Tale of Two Cities
29 January 2009

A think piece for the British Council’s Climate and Cities programme

“It was the spring of hope, it was the winter of despair,
we had everything before us, we had nothing before us”

Charles Dickens

The Best of Times

The World in 2030 – Take 1

Imagine a world where governments agree a robust global deal on climate change. 

The 2009 Copenhagen agreement is the first step, setting out a broad framework for emissions control. A green ‘new deal’ helps the world tackle the global economic downturn and pushes investment in clean tech into top gear. By 2012, detailed negotiations have triggered a wave of institutional innovation, at global, regional, national and local levels.

From that date onward, a price for carbon is set and emissions are traded globally. Growing numbers of countries take on binding targets, with carbon markets providing finance to help poorer countries develop along a low carbon pathway. Forests and other sinks receive investment in return for the ecosystem services they provide. Adaptation funding is used to make countries more resilient to all the climatic threats they face.

As a result, global emissions are already ten years past their peak in 2030, and have fallen to more than 10% below today’s levels. The world is gradually converging on equal per capita emissions. By mid-century, the average American is projected to emit a tenth of the carbon they do today, and Chinese per capita emissions will have fallen by half. Meanwhile, Brazilian emissions will have risen for a time, but then fallen back to 2009 levels, and the average Haitian will still be below the global average, but receiving some cash in recompense.

There’s been some friction along the way. In 2030, the carbon market is big business, trading over $5 trillion annually, as part of a global financial system extensively remodelled after the depression. But the price has been volatile, creating systemic instability that the International Carbon Fund struggles to contain. In spite of this, the US, European Union and Japan have managed to maintain some unity within an increasingly assertive G20, while the new powers (China, India, Brazil) have assumed enhanced rights and responsibilities on the global stage.

Non-state global networks, meanwhile, have continued to grow in influence, while a new commitment to subsidiarity has strengthened the hand of provincial and local actors. The nation state has not disappeared, but it has a growing number of rivals on the international stage.

The climate, of course, is still warming. The IPCC has just published its eighth assessment report, with a headline finding that emissions will stabilize around 465ppm CO2e, leading to eventual warming of 2.6ºC above pre-industrial levels. By 2030, the world has already warmed by about 1ºC (a rise locked in by 20^th century emissions). The impact of this is obvious for all to see. The climate has become less dependable; floods, famine and drought have all increased in frequency and severity.

In general, however, communities have proved surprisingly resourceful and innovative – both in reducing emissions, and in coping with a changing climate. Top down political action has been met and matched by an effective bottom-up response. The 20^th century’s climate legacy may have presented the world with its greatest market failure, but the 21^st century seems to up to the task of designing and implementing a collective response.

Low Carbon City

In this world, what will the future city look like?

Here’s what we know:

• It will be bigger… Today, 3.3 billion people live in the world’s towns and cities. By 2030, this figure will have leapt to 5 billion. There will be eight ‘hypercities’ with more than 20 million inhabitants; another nineteen ‘megacities’ with at least 10 million citizens, and 48 or so large cities where more than 5 million people live.
•  …or smaller... Half the world’s urban dwellers live in a ‘long tail’ of towns of less than 500,000 inhabitants. These towns are too numerous to be counted, but by 2030 there will be at least 700 million more people living in them (that’s twice the population of the USA).
• …but considerably poorer. Even if economies grow strongly, 2030′s average urbanite will have a lower standard of living than he or she does today. Cities in rich countries will barely grow over the next twenty years and some will shrink. But developing countries will have 1.4 billion more urban dwellers, with the very poorest cities growing fastest of all.

But while tomorrow’s towns and cities face massive challenges, they still act as dynamos in the global economy. Even poor cities have huge economic importance, with a country’s largest city commonly accounting for 20% of its GDP. As the World Bank points out, “No country has developed without the growth of its cities. As countries become richer, economic activity becomes more densely packed into towns, cities and metropolises.” Not only do cities offer residents the chance of a better life, over time the benefit tends to spread to the surrounding countryside as well.

But tomorrow’s city must perform a tricky balancing act. It will have to grow at breakneck speed, while providing both services and economic opportunity to its people. And it must do this in a world with severely constrained access to the carbon-rich energy sources that underpinned the twentieth century’s complex urban environments.

This will require a revolution in energy use:

• At present, towns and cities account for 67% of the world’s energy consumption and 71% of energy-related CO2 emissions.
• Assume business as usual, and urban emissions will grow by 55% over the next twenty years – equivalent to double the US’s current emissions. Almost 90% of this growth will be in the developing world.
• Under this scenario, cities and towns in 2030 will be using 70% more coal, 60% more gas, and 35% more oil than they are today. Fossil fuels would make up 85% of all urban energy use, virtually unchanged from current levels.

But the world we have described is one where such rapid emissions growth has been made impossible, where fossil fuel use is below current levels, and where carbon constraints on trade will have changed the relationship between a city and its hinterland.

By 2030, then, the future city will have substantially reconfigured its energy and transportation systems. It will have found a way to house, feed and clothe a growing population using materials that have drastically reduced levels of ‘embedded carbon’. And it will have set new standards for energy efficiency (low hanging fruit that have accounted for over a third of its decarbonisation).

The Worst of Times

The World in 2030 – Take 2

Now imagine a world where things don’t work out so well, where 2009 is remembered as the high water mark of global interdependence – the year that globalization began a slow and painful retreat.

Copenhagen produces a deal, but it’s simply Kyoto II – delivering short term targets, with patchy coverage. The treaty is hard to ratify, poorly implemented, and has negligible impact on global emissions. Developed countries continue to relocate their energy intensive industries to countries without targets. They produce a little less carbon, but – once imports are taken into account – consume even more than before. Subsequent talks tighten the regime a little, but by 2030 it’s clear that there’s little chance of stabilization below 650ppm.

At the same time, there is a broader loss of confidence in international cooperation. A deep and persistent global depression triggers increasingly nationalist and protectionist responses the world over. The result is a demographic disaster. Rich countries struggle to cope with their retiring baby boomers, while poor countries produce growing numbers of workers, but have decreasing numbers of jobs to offer them. The news is not universally bad, but most countries in most years see their economies perform at levels well below their theoretical potential.

To make matters worse, a nasty scarcity dynamic creeps up on policymakers while their attention is focused elsewhere. Energy, food, water, land and, to a lesser extent, emissions, become increasingly constrained, as the world’s population rises towards 8 billion. Oil production peaks (partly as a result of chronic underinvestment), and alternative energy sources continue to underperform. Food prices are driven up by increased demand, competition for land, water scarcity and the rising cost of energy. Conflict over water becomes increasingly common – both between and within states.

The consequences of this are toxic. On the one hand, economic growth tends to trigger, and then be limited by, a series of resource price shocks. On the other, successive waves of resource nationalism do little to enhance prospects for global co-operation. Tit-for-tat is now the dominant force at the heart of the international system, as nations and regions jostle and compete for the resources the world has left.

By 2030, climate change is beginning to accelerate all of these problems. Rich countries have been hit, but poor countries have suffered worst. In the coming decades climate change may push the number of displaced people in the world up to one billion. With conflict on the rise, a remodelled UN Security Council is spending a growing proportion of its time on climate security.

But the worst of the impacts are yet to come. Within another fifty years, 600 million more people are likely to be acutely malnourished; 1.8 billion people will suffer from water shortages; 200 million will experience coastal flooding; each year and up to 400 million more people will be at risk from malaria.

In 2030, then, this future is an increasingly bleak one for hundreds of millions and perhaps billions of people. And for their children and grandchildren, things are by now certain to get much worse.

The Feral City

So what are the prospects of the future city in this darker world?

The underlying demographic drivers, of course, will not have changed. Urban areas will see the same surge in population (or perhaps an even greater one, given that poverty tends to keep birth rates high). But with the global economy stagnating, people will no longer be pulled into cities by economic opportunity. Instead, they’ll be pushed out of the countryside by disaster, war and famine.

Worse still, new arrivals will often be moving to the wrong places. 13% of the world’s urban population lives in coastal areas that are less than 10 metres above sea level. Today, there are over 3,000 cities and many more smaller towns close to the waterfront – a figure that will have risen substantially by 2030. As sea levels rise by a metre or so, Buenos Aires, Rio de Janeiro, Los Angeles, New York, Lagos, Cairo, Karachi, Mumbai, Kolkata, Dhaka, Shanghai, Osaka-Kobe, Tokyo and thousands of smaller towns and cities will all come under threat.

By 2030, many, if not all, urban areas will have experienced a gradual intensification of their current vulnerabilities. Natural disasters reveal how fragile modern cities can be. Katrina shut down New Orleans, causing $80 billion damage, and costing 1,836 lives. But by 2030, there’s a good chance that the US will have experienced its first $500 billion hurricane. The winds won’t need to be any stronger – poor planning and pressure to build in vulnerable areas will have inexorably driven up the level of risk.

Nor does the breakdown of a city have to be so dramatic. In Europe, the heat wave of 2003 killed 35,000 people, most of them old and living in urban apartments. Families had abandoned the city centres for the beach, while hospitals were short staffed. No-one realised that the region’s worst peacetime disaster was underway. By 2030, the world can expect to see a doubling of heat related deaths.

But the threat from climate will be at its most acute in the chaotic, sprawling, endless cities of the developing world. Today, 800 million urban dwellers live in slums, and most of them lack proper water, sanitation and housing. By 2030, without rapid economic growth, that number will have grown by 50% or more.

These cities will be beset by a growing ‘dirty’ environmental burden. At present, 800,000 people die each year from urban air pollution and many more suffer from ill health. Indoor air pollution is prevalent in slums and shanty towns, where many women cook using wood fuel and dung, often in poorly ventilated rooms. Uncollected waste and sewage is another pressing problem, and causes at least as many additional deaths. Slums also tend to be built in the most hazardous places, with little or no drainage, where the risk from flooding is high.

Without economic growth and better planning, these problems will steadily worsen, making the future city a dangerous and unpleasant place to live. The result will be an inevitable wave of crime, social unrest and, at worst, conflict. Some cities will be simply unable to cope, and will fail in the face of an insupportable social, environmental and economic burden.

These will be tomorrow’s feral cities. No longer a driver of growth and increasing prosperity, but “a vast collection of blighted buildings, an immense petri dish of both ancient and new diseases, a territory where the rule of law has long been replaced by near anarchy in which the only security available is that which is attained through brute power.”

The City of the Imagination

Signals from the Future

Climate change presents cities with an immense challenge.

Assume the best of times (a rapid, co-ordinated effort to stabilize the climate) and they must undergo revolutionary transformation in little more than a generation. Very few city leaders grasp the scale, depth and speed of the changes that will be required.

Assume the worst of times (uncontrolled emissions growth, with three, four or five degrees of warming on the way) and cities will lose their place on the cutting edge of an advancing civilization. All will struggle to adapt. Some are certain to fail.

Which path we take depends on signals from the future. The tipping point is a psychological one, with actions taken today being influenced by what people believe the future holds:

• If politicians, investors and citizens expect a rapid transition to a low carbon world, then their incentive is to act now – locking in leadership in emergent industries, while avoiding decisions that make meeting future targets more painful and expensive than they need to be.
• If however, they think the change is going to come slowly, or not at all, then their incentive is to delay action and free ride where possible. Countries then have a strong incentive to block global agreements. The logic is circular: why should a state take on targets now that it is so poorly positioned to meet them?

A strong signal from the future, then, promotes a self-fulfilling cycle of action, co-operation, and binding international enforcement. With weak signals, the logic turns vicious, leading to intense and equally self-fulfilling zero sum competition.

That’s why today’s policy disconnect is so corrosive. Citizens are highly sceptical that their leaders will ever make, implement and enforce a robust global deal. That belief, while understandable, further erodes the political conditions needed to make a deal possible.

So what role can cities play in breaking this double bind? As the world’s creative hubs, they bear much of the burden of developing fresh approaches and innovative solutions. The example they set (or fail to set), the way their citizens think about and tackle the climate problem, and the advocacy of their leaders will have a huge influence on the future direction of their countries. Without leadership from cities, climate stabilization will not happen quickly, or at all.

A New Cosmopolitanism

In the coming years, the need for greater innovation will be great. Cities must:

• Revolutionise their economies, squeezing four or five times as much value out of every tonne of greenhouse gas they emit, and pioneering new ways to meet global consumer demand.
• Rebuild their infrastructure, investing in new energy and transportation systems, and buildings that are massively more frugal in their use of resources.
• Develop the political, regulatory, and financial institutions needed to track, control and price national emissions with sufficient transparency and accuracy to satisfy international standards.

The scale of what’s required goes far beyond developing a few new technologies. Innovation will need to reach deep into both formal and informal economies, with the latter certain to remain critical in developing country cities throughout much, if not all, of the twentieth first century.

But the challenge is more than just an economic one. For the climate to be stabilized, cities must be at the head of a profound cultural, social and psychological transformation, one that touches all aspects of their citizens’ lives, changes the way people think and behave, and creates a world that is different in many unanticipated ways from the one we live in today.

And this shift must happen across most (and probably all) major cities. Climate change, as Scott Barrett has argued, depends on the aggregate efforts of all rowers in the boat. Pioneers will find their effort is wasted, unless they share their experience widely, and in particular with the sprawling megacities of the developing world.

Climate, meanwhile, will be only one of many challenges that cities face. As we have seen, urban centres of all sizes will continue to grow at a staggering rate, with population, power and influence shifting steadily from the developed to the developing world. Resources will be tight, while global systems are likely to struggle under the demands that are placed on them. Even optimists expect the road to 2030 to be a rocky and uneven one.

Cities must therefore also invest in resilience – the capacity of a system to “absorb disturbance and reorganise while undergoing change.” Many of today’s urban centres are brittle and over-centralized, and have worryingly few reserves. It’s as if citizens believe their city is immune to the impact of climate change, and that the brunt of the impact will be felt somewhere else (by the poor, in the countryside, in other countries etc.).

Cities are perceived by their population as immune to the impact of a changing climate, with the worst consequences thought to lie somewhere poorer and more rural.

Increasing resilience is thus not simply about being ready for the occasional natural disaster, but about a broader effort to build a coherent, long-term and inclusive response to a range of risks. That means mobilising urban networks and communities, and building a new understanding of risk all the way from a city’s government to its grassroots.

Resilience may have to substitute for innovation, if global co-operation on climate breaks down. But the two will be stronger if they go hand in hand, with resilient cities better able to respond in creative and dynamic ways to the climate challenge. Taken together then, they provide a recipe for a new cosmopolitanism – one that brings the energy of cities to bear on the most complex problem the world has ever faced.

For references, see the PDF

As regular readers will know, that observation comes straight out of the writings of ‘fourth generation warfare’ theorists like William Lind, Martin van Creveld and John Robb.  But what may come as more of a surprise is the interesting revelation that Kaiser Wilhelm II made a similar point yesterday in his birthday conversation with Lind*:

“My generation of kings and emperors were fixated on the age-old contest between dynasties. Would the houses of Hapsburg and Hohenzollern defeat those of Romanoff and Savoy or the other way around? We could not see the paradigm shift welling up all around us, the onward rush of democracy and equality and socialism and all the rest of that garbage. What we needed was an alliance of all monarchies against democracy. Instead we wiped each other out, putting the levellers in charge everywhere, to the world’s ruin.”

“Does that hold any lessons for our time?”, I asked.

“From Olympus, the picture could not be more clear,” His Majesty replied. “As we were mesmerized by dynastic quarrels, so your politicians cannot see beyond the state. They think only of states in conflict. Will America be threatened by China? Should India go to war with Pakistan? Is Iran a danger to Israel? They cannot see that states are now all in the same, sinking boat, just as all the dynasties were in 1914.”

“What should states then do?”, I enquired.

“Form an alliance of all states against non-state forces, what you call the Fourth Generation,” the Kaiser answered. “The hour is late, and the state system itself has grown fragile. That is the lesson of America’s quixotic war in Iraq. You destroyed the state there, and now no one can recreate it. That is what will happen almost everywhere when states fight other states. But none of your leaders can see it, because they, too, are time-blinded. It is the human condition.”

* Since you ask: in addition to being one of the top experts around on counter-insurgency and fourth generation warfare, William Lind is also an ardent Prussian monarchist.  Consequently, he marks the birthday of Kaiser Wilhelm II (“my reporting senior and lawful sovereign”) with a column each year in which he records a conversation with that leader’s ghost.  Previous editions are highly recommended – e.g. here and here.

You can download my talk here (with pictures, references etc) – or the text only is available below the jump. There’s a webcast too.

Headlines:

• It’s going to be a tough year. The financial meltdown has a long way to go, and the downturn is risking turning into a global depression.
• Trade is a bell wether. Protectionist pressures are already on the rise. If they gain traction, take that as a warning of a wider loss of confidence in global institutions.
• The unravelling of global economic imbalances could prove corrosive to the international order. If countries start to devalue to protect exports, expect a tit-for-tat dynamic to kick in.
• Scarcity issues (energy, water, land, food, atmospheric space for emissions) remain the key medium term driver of global change. Commodity prices will spike again as soon as there’s recovery.
• The downturn has stemmed the uncontrolled growth of emissions, but also lessened the chance of a robust global deal on climate.
• Economic bad times could well drive increased conflict. A major new security threat might be the fabled black swan – hitting just when the global immune system is already overloaded.
• If we experience a long crisis (or a chain of interlinked crises), we are likely to see either a significant loss of trust in the system (globalization retreats), or a significant increase in trust (interdependence increases). 
• You need to stretch time horizons to get the latter – shared awareness (joint analysis of risks and challenges), as a basis for shared platforms (loose coalitions of leaders), which can lobby for a shared operating system (a new international institutional architecture).
• 2009 sets a challenging agenda for the G20 (financial reform and economic recovery – but framed by a broader vision on climate, resources, security etc.)…
• …the G8 (caucus of rich countries able to tee up Copenhagen and kick start development assistance if developing countries begin to teeter)…
• …the UN (especially Ban Ki-Moon’s proposed high level ‘friend’s group’ on climate, but also as a fora for getting to grips with scarcity issues)…
• and the Bretton Woods institutions and the WTO (first of all ensuring they keep their heads above water, then looking to ‘save globalization from itself’).
• Oh and be ready for the backlash – people are angry and rightfully so, but that may well lead us down some populist blind alleys.

2009 – A Year for International Reform
Talk to the Reforming International Institutions – Meeting the Challenges of the 21st Century conference
David Steven, 21 January 2009 

Introduction

In the run up to November’s G20, I published A Bretton Woods II worthy of the name, a paper co-authored with my colleague, New York University’s Alex Evans.

In a nutshell, our argument was that leaders needed to respond to extreme global stress by:

• Becoming more ambitious in their attempts to reform the international system, despite temptations to focus narrowly on fire fighting a growing number of immediate problems.
• Focusing on the long-term in order to increase the basis for co-operation, thinking in decades where national interests tend to converge, rather than in years where often they will not.
• Working towards integrated solutions, and not imagining that a ‘global deal’ on finance could be divorced from the other big deals that must be struck on trade, security, climate and other resource issues.

This paper, prepared for presentation to the United Nation’s University and UK Foreign Office conference on International Institutions Reform in Tokyo, expands these points.

It has been written at the beginning of a critical year for the international system – a year of great peril, but also of some promise. Threats are building up globally, many of which are poorly understood and will strain our capacity for collective action. International institutions, as currently constituted, risk being overwhelmed. We could end the year confronted by a ‘new isolationism’.

But there are also opportunities to carve out an effective response. After all, a crisis always provides the conditions in which desperately needed reforms can best be achieved.

But policy-makers will find it much easier to work together if they focus on the big picture, or what Wittgenstein called ‘the single great problem’. Without ambition, long-term goals, and integration across issues, 2009 will go down in history as a year of lost opportunities – and possibly mark the point that a short-term international crisis turned into a much more deep-seated decline.

The financial crisis

So how can we expect 2009 to unfold?

First, it is a given that the financial crisis will continue to unravel, revealing some devastating economic consequences.

Japan knows better than most how pernicious a banking shock can be – and how long lasting. Her experience, however, is far from unique. On average, banking crises take around four to five years to unravel in a developed country, and cost around 12% of GDP to resolve – emerging economies tend to feel more pain, but get through the crisis slightly faster.

Their economic impact is also considerable. In a review of the fallout from past crises, Carmen Rheinhart and Kenneth Rogoff find that on average:

• 35% is lost from house prices and 55% from equities.
• Unemployment rises by 7% and output falls by 9%.
• Government debt increases by 86%.

The past does not predict the future, of course, but it should make us wary. The pattern, as Japan found, is for policy-makers to underestimate the seriousness of the problem and for financial institutions to spend years refusing to confront their predicament head on. The required psychological shift is a profound one.

Throwing money at the problem is, in many ways, the easy bit. Much more demanding is the process of unpicking and revaluing the poorly-understood risks that are at the heart of the financial sector’s difficulties. This is a process that has barely begun.

Back in April last year, I presented on multilateral reform to heads of state at the Progressive Governance summit. Then, bold action was promised to sort out the ‘bad’ from the ‘good’ banks, but nine months’ later that is only beginning to happen.

Instead, many countries have pumped money into their financial institutions, without having the tools to force these institutions to identify, value and dispose of toxic liabilities.

This mistake is likely to prove costly. As Ben Bernanke admitted last week, large quantities of “troubled, hard-to-value assets” have now become the primary obstacle to the financial system’s recovery. The UK and US are both now working on new mechanisms to tackle these toxic assets.

Meanwhile, the US Treasury’s Troubled Asset Relief Program (TARP) has been subjected to some fierce criticism. The Congressional Oversight Panel, for example, identified:

• ‘Significant gaps in Treasury’s monitoring of the use of taxpayer’s money’
•  A lack of clarity in asset evaluation, making it unclear whether the Treasury is able to distinguish between ‘healthy’ and ‘unhealthy’ banks, and
• ‘Shifting explanations’ of the fund’s purposes, leading the Panel to the conclusion that the Treasury does not have a clear strategy for spending the funds.

The situation in the US is not atypical; its system is simply unusually willing to wash dirty linen in public. Stimulus packages also pose risks, as they must be assembled and dispersed at high speed. Finding productive investment opportunities is a significant challenge.

We have already seen a massive market failure. The danger is that a similarly sized policy failure will now be layered on top.

The trade challenge

The trade system is also well worth keeping a close focus on.

It offers the best early warning system we have for any widespread loss of confidence in global integration. Protectionist pressures are already on the rise, as happens in every serious downturn. In 2009, will they overwhelm the will of governments to contain them?

If they do so, we may rue the opportunities that were missed on trade in 2008. In April, at the Progressive Governance Summit, there was genuine enthusiasm for returning to, and completing, the Doha Development Agenda. But the talks still collapsed in July, in a row between India, China and the US.

China thought the rich countries had been ‘selfish and short-sighted’, while Japan attacked the emerging economies for failing to recognise their new responsibilities. They had failed to think about the world economy as a whole, while pursuing narrow national self-interest.

At the G20 in November, Doha was back on the agenda, with heads of state promising a framework agreement by the end of the year. By mid December, however, Pascal Lamy had decided it would be dangerous even for ministers to meet, believing that an acrimonious failure could threaten not just the round, but the WTO system itself.

And the bad news spread beyond Doha. Russia, India, Indonesia, Brazil and Argentina – all G20 members, and key swing voters in the multilateral system – had announced restrictive trade measures within weeks of the G20, despite a promise to “refrain from raising new barriers to investment or to trade in goods and services.”

Doha, then, has become the ‘zombie’ trade round, staggering on, but never quite dying. Few expect that it can now be revived. But who knows? Given its resemblance to a B-movie, perhaps it will lurch back into life at the very moment when all hope appears to have been lost.

An alternative view is that the content of Doha doesn’t matter that much. As Paul Krugman has argued, “World trade is already so free, we’re really talking about stuff at the margins.”

But Doha has, at the very least, great symbolic importance. It is a yardstick for our ability to strike complex global deals; shows the extent of the world’s commitment (or otherwise) to developing countries; and – above all – acts as a bellwether for global confidence in free trade itself.

Global imbalances

If the global trade system is to come under a sustained attack in 2009, this will happen as global imbalances – built up over the past decade – unravel, revealing divergent interests between producer and consumer countries, and particularly between China and the United States.

Currency may well be the main battleground, with countries tempted by competitive devaluations as export markets shrink and domestic producers beg for protection.

Since the mid-1990s, we have seen:

• A ‘savings glut’ in Japan and old Europe, and more recently in China and the oil producing countries.
• A ‘money glut’ in the United States and a few other countries.

Effectively, US consumption was fuelled by a potent combination of cheap imports and cheap money, leading to a surge in consumption and debt. The causes for this were to be found both in the US and globally.

Within the US, monetary policy was lax (in part, as a response to previous economic shocks). From overseas came an avalanche of dollars, as China and other countries recycled their surpluses back into the US economy in order to stop their currencies from appreciating.

The debate as to who should be blamed for the imbalances – savers or borrowers – is a fruitless one. The arrangement was symbiotic, or to borrow language from those who treat addiction, an example of co-dependence.

More pertinent were two questions. Were the imbalances sustainable? And if not, could they be unwound in an orderly fashion? The answer to the first was ‘clearly not’. Much now depends on whether a gradual and controlled rebalancing is possible.

China is entering a critical period. The country has massive surplus capacity now the American consumer has stopped spending. Its exports have fallen fast and have much further to go. It is vulnerable to falls in the dollar, which will worsen its terms of trade while devaluing its massive dollar holdings ($1.94 trillion at the end of 2008).

Finally, there are signs that so-called ‘hot money’ may be beginning to flow out of the country, with analysts estimating that $120-140bn of capital left the country in the last quarter of 2008. China’s own banking system has significant weaknesses, despite recent efforts to address non-performing loans.

Some of the tensions can be seen in a fascinating interview in last month’s Atlantic magazine with Gao Xiqing, Chief Investment Officer at the China Investment Corporation, the sovereign wealth fund that manages the riskier part of China’s foreign exchange reserves.

Gao had harsh words for the Americans (“the simple truth today is that your economy is built on…the gratuitous support of a lot of countries”). He also provided an insight into how unpopular Chinese investment in the US can be at home. China’s citizens ‘hate’ its support of rich Americans (“people eating shark fins” at the expense of “poor [Chinese] people eating porridge,” he claims).

It seems unlikely that the Chinese can boost domestic consumption rapidly enough to soak up declining exports – though they must do what they can. A worrying prospect is that the Chinese government will devalue to prop these exports up. That would mean that Western stimulus dollars, euros and pounds were flowing to Chinese producers. It is hard to imagine anything more politically explosive in the current climate.

The US would almost certainly react to protect its producers, with Europe tempted to follow suit. The worst case would be the emergence of a nasty zero sum dynamic in the international arena – a series of tit-for-tat measures that are politically compelling in the short term, but lead to a marked, and even disastrous, loss of collective welfare over longer time scales.

The politics of scarcity

2009 will also see the world continue to grapple with the impact of a set of scarcity issues that are perhaps the most important long-term drivers of global change.

These issues have enormous geopolitical relevance (oil), are growing causes of poverty and conflict (food, water, land), and/or demand unprecedented levels of international collective action (climate change).

Neither can they be seen in isolation, as was shown by last year’s short, but pronounced, commodity boom. In the spring of 2008, oil prices spiked, reaching $147 dollars per barrel in July. Food prices also increased alarmingly, sparked to a large degree by the price of oil. Inputs such as fertilisers had risen in price, while biofuels were an increasingly strong competitor for productive land.

In rich countries, recent analysis suggests that higher energy prices were a significant factor in turning an incipient slowdown into a deep and painful recession. In poorer countries, rising commodity prices had seriously destabilising effects, with food riots across Africa and Asia.

The response: a wave of resource nationalism, with over thirty countries introducing export restrictions. Even with lower prices, countries have continued to try and protect their security of supply. Middle income food importers have signed long-term land deal with other – usually poorer – countries, while producers are re-examining the merits of self-sufficiency.

In the medium term, the drivers for commodities remain upwards. Population growth, economic development, underinvestment in supply, a lack of water, competition for land, and climate change are all likely to increase prices and volatility.

We therefore find ourselves in a damaging triple-bind:

• On the one hand, resource price shocks are likely when times are good, acting as a repeated challenge to economic recovery.
• On the other, political progress may prove hard in both good and bad times. When prices are high, national responses will be favoured. When prices are low, economies will probably be suffering too. Other priorities will thus seem more important.

Recent experience with climate change illustrates the problem. In the boom years, global emissions shot up, rising 2.9% a year between 2000 and 2006, compared to a figure of less than 1% that was assumed in the models that formed the basis of the Stern Review. Surveying this trend, analysts from the Tyndall Centre argued that “it is difficult to envisage anything other than a planned economic recession being compatible with stabilization at or below 650ppm.”

Now, of course, we have that recession – though it wasn’t planned. The IEA expects demand for oil to fall by around 0.6% next year, though the drop could be much more dramatic than that. Emissions will decline roughly in line with energy demand (though probably not as rapidly given substitution by dirtier forms of fuel). In theory, this should make emissions restrictions easier to swallow.

But yet, as we saw in Poznan, the reverse is true, with many governments arguing that a tough climate deal should be delayed until the economy recovers. At the same, investment in low carbon technologies (at least from the private sector) is also suffering.

The logic is insidious and, if unchecked, will have catastrophic long-term consequences, as countries persuade each other that it’s never a good time for a robust climate deal.

The security threat

Finally, with the economy on all our front pages, it is easy to disregard the potential impact of security threats on the world in 2009, and on prospects for international co-operation.

That would be a mistake. The situation in the Middle East again seems unsustainable, at a time when oil producer countries are coping with what was, for them, a very unwelcome decline in the oil price. Iran’s nuclear ambitions are a threat not just to Israel, but to many of its competitors in the Arab world, and indicate the ongoing threat from proliferation.

Key middle income countries, meanwhile, are experiencing extreme distress. Pakistan, for example, has been battered by fall-out from its highly ambiguous role in the Bush administrations ‘war on terror’; by the commodity price crunch which pushed large numbers of Pakistanis back into poverty; and by the credit crunch, which left it needing an IMF bailout.

Many other countries are feeling similar impacts. Higher food prices in 2008 are estimated to have pushed an additional 130-155 million people into poverty. That shock had barely worked its way through the system, before the financial crisis hit. The World Bank estimates that developing country growth will slow to 4.5% in 2009, well below recent levels. Many analysts are significantly more bearish.

2009 could see a wave of countries get into serious trouble. If so, the IMF may well struggle to cope, given that its reserves are only around $200bn. It can probably respond to a handful more crises in smaller, poorer countries. If a larger emerging market were to get in trouble, it would need new money and fast. Trouble for a major developed country would quickly take us into unknown territory.

Weak growth in the developing world is likely to fuel conflict and state failure, with poor countries facing a ‘demographic disaster’ if they fail to provide economic opportunities for growing numbers of young adults. There is a compelling link between income and civil war, while sudden income losses weaken the legitimacy of the state and exacerbate competition between groups for scarce resources.

The results are countries that are a threat to themselves, to their neighbours, and – as havens for terrorists – to the rest of the world.

Now is a good time to remember that Nassim Nicholas Taleb has said that the financial crisis is not a black swan, because it was too predictable that it would happen.

An unexpected security deterioration in one or more regions is precisely the kind of additional stress that could derail international efforts to tackle other problems. Terrorism is another potential threat that can be corrosive to international alliances, of course, while avian flu would see countries rush to close their borders, in a futile attempt to isolate themselves from the threat.

This, then, is not a time to lose focus on these risks. Instead, the question to ask is: how will global systems cope at a time when they are already compromised by a number of other serious stresses?

Lessons from Bretton Woods

Given the dramatic prospects we face in 2009, it’s tempting to look at past crises to see what historical precedents tell us about what is happening today.

In the run up to the G20 last year, a number of European governments became excited by the prospect of a grand redesign of the multilateral system. Gordon Brown and Nicolas Sarkozy were particularly enthusiastic about the prospects for Bretton Woods II – and have taken this energy into the G20 process.

The first Bretton Woods conference aimed, in the words of John Maynard Keynes, to find “a common measure, a common standard, a common rule” that would govern all parts of the economic system.

The impetus for agreement sprang from the exhaustion of the second world war; a decade of thinking and preparatory work by Keynes and others; and the ability of the United States – in its pre-Cold War period of undisputed hegemony – to impose agreement where necessary.

Today’s conditions are very different. Many policymakers are still in denial about the depth of the problems we face. There are few, if any, well-developed packages of solutions. And the United States is in no position to insist on a programme of global reform.

Perhaps then, a better example is the crisis that ended the Bretton Woods system – the so-called ‘Nixon Shock’ of 1971 when the US President broke the link between dollar and gold.

Although Nixon blamed speculators for his decision, in fact the problems were structural – global imbalances that are strikingly similar to today’s. Post-war European recovery had led to large US deficits and, with fixed exchange rates, the Europeans had little choice but to recycle dollars into US government debt, of which there was plenty, given America’s need to fund an expensive war in Vietnam.

The result was a series of runs on US gold reserves and growing pressure to devalue the dollar. Policy was made up on the hoof. Nixon’s shock decision to break the link with gold was taken with little preparation or forethought. The President spent less time on the policy itself, than he did on worrying whether he should interrupt a popular television programme to announce it to the American people, and the world.

So what happened? Predictably, the dollar went into a steep decline, losing around a quarter of its value against a basket of European currencies. And inflation was let loose, despite US attempts to control prices and wages. The resulting inflationary spiral was not tamed until the 1980s and only then through the ‘Volcker recession’.

Natural resources were also involved. The oil shock of 1973 can be seen, in part, as a response to the depreciation of the dollar, as Arab countries protected an oil price that, when denominated in gold, had seen a three-fold decline.

The Nixon shock illustrates the dangers of unilateral and reactive policy-making; and also the power of unintended consequences. In our response to a crisis, we often sew the seeds for the next breakdown, and can easily exacerbate not dampen volatility.

Stagnation in the thirties

For pessimists, however, comparison with the 1970s is not sufficiently dramatic. They prefer to reach for the stock market crash of 1929 and the subsequent ‘great depression.’

A few months’ ago, these were comparisons were regarded as distasteful, maybe even a little hysterical. In April last year, the IMF was predicting only a minor slowdown for Europe and a recovery in the US starting in 2009.

No longer. Now, rich countries are clearly all in a deep recession. The question is whether it will be U-shaped (deep but with a gradual recovery) or L-shaped (ongoing stagnation). As one economist quipped recently, it’s now too late to avoid 1929. Instead, we must focus on avoiding the mistakes of 1930, 1931 and 1932.

What were those mistakes? Deflation exacerbated by policy, of course. But also a tit-for-tit recourse to protectionism, as global trade came to a halt, and a series of sovereign debt defaults, leading to the collapse of the international financial system.

It is tempting to imagine that the period was a time of international policy paralysis, with policymakers simply unaware of the risks they were running. Far from it. There were plenty of attempts to tackle problems on an international level, culminating in a World Economic Conference in 1933 that brought 66 nations together.

The summit was supposed to launch a global ‘new deal’ – or, at least, that was what the Europeans were hoping for. But there was no shared platform to bind Europe, the UK and the US together. Franklin Roosevelt – just elected in a landslide – was focused on problems at home.

To European fury (and the discomfit of his own delegation), the new President derailed the summit with the so-called ‘bombshell message’, sent from a yacht where he was enjoying a vacation. It was to be the last attempt to forge a global approach to reform before Bretton Woods.

Surveying the conference’s wreckage, Keynes’s conclusion was a sobering one. 66 countries could never be expected to agree, he thought. Only a ‘single power or a like-minded group of powers’ could prevail – and only then if they were equipped with a new understanding of the world’s systemic problems, and a new toolbox with which to tackle them.

The first globalization

The 1930s offers salutary lessons to policy makers. However, it does encourage them to believe that our current troubles are purely economic in their nature – and can be solved through some deft re-regulation and a generous dose of stimulus.

This creates a real danger that other pressing issues will be kicked into the long grass for how ever long a recovery takes. This would be a mistake, especially given the strong links between economic and other global challenges.

To underline this point, it is worth looking back beyond the thirties, to the period before the First World War, when the world had its first experience with globalization and enjoyed unprecedented mobility of capital, goods and people.

It was then that Norman Angell argued in The Great Illusion that major wars were now almost inconceivably because of “the delicate interdependence of our credit-built finance.”

For Keynes, looking back, globalization then appeared “normal, certain, and permanent, except in the direction of further improvement.” But yet the forces that were to lead to war were already building:

The projects and politics of militarism and imperialism, of racial and cultural rivalries, of monopolies, restrictions, and exclusion, which were to play the serpent to this paradise, were little more than the amusements of his daily newspaper, and appeared to exercise almost no influence at all on the ordinary course of social and economic life, the internationalization of which was nearly complete in practice.

Rapid social, technological and economic development had brought about a new paradigm of ‘industrial war’. Countries were enmeshed in a system of diplomacy that was intricate in its operation, but in which levels of mistrust had steadily grown.

The result, in 1914, was the destruction of the European world order and a period of chaos that took two world wars and the intervening depression to resolve.

Today, the second period of globalization faces similar challenges and contradictions.

Modern economies are dynamic but unstable, as we have found out. Technological diffusion is putting unconventional weaponry in the hands of a growing number of states. Inevitably, non-state actors will also find some way of getting in on the act.

Power, meanwhile, is shifting to countries where most people are still poor, at a time when resource constraints are beginning to bite. Economies must decarbonise at a speed that will make the industrial revolution look pedestrian. Even so, the chances of disruptive climate change are now worryingly high.

The challenge then is to use the current systemic shock as an impetus for fundamental reform. The danger is that, as in 1914, the basis for international co-operation will disappear, just when globalization most needs to be ‘saved from itself’.

Signals from the future

Last year, in a paper for the United Nations University, I argued that international co-operation on climate depends on ‘signals from the future’.

Alex Evans and I have developed this work further, in a project for the UK’s Department for International Development that explores the radically different institutional architecture that will be needed to deliver a low carbon future.

One of our central arguments is that action taken on climate today is fundamentally influenced by expectations of what will happen in the future:

• If countries, companies and citizens expect a slow transition to a low carbon economy, then they have a strong incentive to block any climate deal, and to free-ride on carbon reduction measures implemented by others.
• On the other hand, if they expect the transition to happen rapidly, their incentive is to lead the change (in order to avoid misallocated investment, and to lead emergent industries), while supporting strong action against free-riders.

An effective climate deal, then, is something of a self-fulfilling prophecy. With strong signals from the future, policy-makers are likely to behave in a way that makes a deal easier to achieve. In contrast, weak signals will lead to a vicious cycle and intense zero sum competition.

This argument can, I believe, be applied more generally to today’s international challenges. Let us characterise current international co-operation as medium trust, with considerable commitment to globalization, but relatively weak institutional arrangements for controlling the global system.

If we experience a long crisis (or a chain of interlinked crises), we are likely to see either a significant loss of trust in the system (globalization retreats), or a significant increase in trust (interdependence increases). The status quo is not likely to be stable over the medium-term.

Which way we move depends, above all, on our time horizons. Do they shorten, as countries focus on immediate domestic political concerns? Or do they lengthen, as institutions are built that can last a generation or longer?

The three ‘shareds’

Lengthening time horizons requires countries to work from a comprehensive view of the risks and challenges the world faces, and its opportunities for solving them.

This is why we need a new diplomacy – one that focuses its resources not on bilateral relationships, but on multipolar responses to global threats and challenges.

This is a diplomacy of ideas, not one of narrow self-interest, and it should take us a long way from the old geopolitics. In the new paradigm, countries need to co-operate to build a vision for the international institutions that we need, not just today, but over the next generation. They need to identify and further shared interests.

The goals of this diplomacy, then, are to build:

• Shared awareness – a joint analysis of future challenges, one that is sufficiently broad to bring together economic, security and scarcity issues, and that has buy-in not just from governments, but from non-state actors too.
•  Shared platforms – coalitions of countries that begin to harmonise their domestic policies and commitments (whether on banking reform, or climate change, or investment in agriculture), and use this as the basis for lobbying for more fundamental international reforms.
•  A shared operating system – new global frameworks and institutions, with a mandate to deliver security and sustainable growth over the long-term.

As Alex and I argued in our paper for the Progressive Governance summit, we need to drive through a programme a multilateral reform that focuses on delivering results, not restructuring organisations.

 This means building an international system that:

• Aims, over the long term, to manage risk and increase resilience.
• Embeds national sovereignty in a deeper context, in which the need for cooperative action between states is recognised and acted upon.
• Overcomes fragmentation between silos and distributes, as widely as possible, the responsibility for creating global public goods.
• Rebuilds international organizations, making them much more flexible, responsive, and able to interface with non-state global networks.

Building the platform

So what might this look like in practice?

The first priority is for the US, Japan and Europe to start acting as if they have a shared interest in a more stable, equitable and sustainable future. We have been through a period of US overreach and unilateralism, coupled with muddle and passivity from its key allies. That has to end.

The Obama administration will clearly be a breath of fresh air. It can be expected to:

• Develop the US’s piecemeal and reactive bailout into something that has greater coherence and strategy.
• Signal a more co-operative and less confrontational security stance.
• Begin the process of legislating on climate change, with the US potentially matching European commitment on the issue.

This will create considerable diplomatic space – across the UN system; at the G20, of course; but also at the G8, which will have a reduced, but important, role as a caucus for richer countries.

For the rich countries, the priority is to use domestic delivery to build a basis for international agreement. This is true for financial reform, trade, and action on climate and other resource issues.

But, assuming positive moves from the US, will Europe and Japan respond in kind? Or will they take a ‘wait and see’ approach to Obama’s overtures? The question is critical to the ongoing relevance of the post-1945 alliance.

Even united, the world’s traditional powerbrokers cannot act alone. They will need China, India and the other emerging powers not as reluctant negotiating partners, but as substantive contributors to a new global order.

Broader involvement becomes more, not less, important should the BRICs find themselves in serious economic trouble as the financial meltdown proceeds.

This will require more established powers to show considerable (and uncharacteristic) humility. In East Asia, memories of the financial crisis of the late 1990s are fresh. Bailout packages then came with stringent conditions and much lecturing from the international community. Countries were told there was no gain without much pain.

Things are very different today, now that rich countries are in trouble. Stimulus is all the rage, not austerity. The doctrine of deregulation has also been shattered, but it is as yet unclear what will take its place.

2009 will be a year that heads of state spend more time together than ever before. This time will be wasted unless the intellectual spadework is done to prepare for their discussions.

That means creating a vision for where globalization goes from here. Built into this vision, we need a renewed emphasis on the resilience and coherence of global systems. We cannot simply ‘redraw the organogram’ – the need for reform is much more fundamental than that.

Good signs

I want to end by sketching out some sense of what would constitute progress in 2009. This is not a comprehensive agenda for the year, just some positive signals that countries are choosing a long term, high trust and co-operative approach, not slipping into tit-for-tat, reactive and protectionist responses.

We should expect the G20 to:

• Embed its work on finance and economy within a broader vision of global reform and not simply focus on technical issues.
• Make clear its expectations for a deal on climate at Copenhagen and set out some parameters for the ambition of that deal.
• Make a shared commitment to a green stimulus, with arrangements to quantify the impact of stimulus packages on carbon productivity.
• Mandate the IMF to monitor the re-pricing and allocation of toxic assets, improving cross-border visibility of the pace of financial restructuring.
• Agree that members should report, on a quarterly basis, steps they have taken to control the financial crisis.
• Begin to develop a ‘super sherpa’ system to improve the capacity of Heads of State to cope with their growing responsibility for global issues.

From the G8, meanwhile, we should expect:

• A clear signal from each member state as to what it is prepared to offer to ensure an effective climate deal.
• Equally clear signals from the ‘+5′ countries (Brazil, China, India, Mexico and South Africa) on how they plan to reduce emissions over the long term.
• A renewed pledge to meet development commitments, especially as poor countries suffer growing impacts from the financial crisis.
• Reporting on national delivery of key G8 commitments in area such as climate and trade.

From the United Nations, we require:

• Renewed leadership from the Secretary General on climate, especially through the SG’s high-level ‘Friends Group’.
• A concerted effort to explore the shape and content of a climate deal, using previous High Level Panels as a precedent.
• A process that explores the global institutions needed to deliver a post-2012 climate deal (this could build on the model provided by the Task Force on the Global Food Security Crisis).
• An exploration of how global stocks of food and other commodities can be increased, using the International Energy Agency’s co-ordination of strategic oil reserves as a model.
• An initiative by the Security Council to explore the security implications of financial instability and growing resource scarcity, as part of a renewed commitment to forging a new global security consensus.

This year could be an exceptionally tough one for the Bretton Woods’ institutions and the WTO. As a minimum, we should therefore look to:

• Strengthen the IMF and World Bank to ensure they can cope with the risk of a cascading series of national liquidity crises.
• Defend the current free trade system and maintain confidence in the WTO.

Looking forward, the Bretton Woods’ institutions must address their lack of legitimacy in large parts of the world, while developing:

• An enhanced global surveillance function (though this must incorporate a new openness about the limits of economic forecasting).
• Tough international norms for the regulation of financial institutions.
• A framework that allows debtor countries to restructure their debts in a controlled fashion.
• Enhanced arrangements for working with the rest of international system to improve resilience in the face of short and medium term challenges.

Finally from the WTO, we should look for:

• A renewed attempt to breathe life into Doha, perhaps as part of a broader ‘grand bargain’ on finance and climate.
• An analysis of the relationship between trade and scarcity issues, exploring action to discourage export barriers and related restraints to trade.
• An analysis of how the world trade system can best be integrated with a comprehensive framework for emissions control.

Human drivers

Finally, I want to close with a warning.

We will make a grave mistake in 2009 if we persist in treating the world’s challenges as primarily technical ones, and we neglect the underlying human drivers.

The world’s economic and financial problems have deep-seated psychological and behavioural dimensions. As Paul Krugman has argued, “the expectations, even the prejudices of investors, [have] become economic fundamentals – because believing makes it so.”

Our security challenges result from the fact that conflicts are now fought ‘among the people’ rather than just between nation states.

Scarcity issues, meanwhile, trigger powerful popular responses – and could easily lead to debilitating conflicts within and between countries over how limited resources can be fairly distributed.

But we live at a time when public trust in governments is being shattered.

In a recent international poll, only half of respondents believe their leaders are up to the task of designing a suitable response to the financial crisis. Confidence was lowest here in Japan, the country that has the longest experience of financial turmoil.

In this atmosphere, populist movements are certain to thrive. We ignore them at our peril, as they will rarely support international action and, even if they don’t attain power, they may exert a blocking vote.

That makes it vitally important that reforms are designed in the open, not cooked up behind closed doors. Whatever solutions we come up with, they must emerge from a new engagement with citizens and efforts to develop domestic political conditions that allow international commitments to be made.

That means a concerted attempt to:

• Reach out to influencers and opinion formers at a national level, to debate and make the case for a new multilateralism.
• Build a narrative and vision that will communicate to a wider public the need for international approaches to global problems.
• Develop social protection systems that will insulate citizens from international volatility and instability.

Ultimately, any international reform agenda must be about the needs of global citizens. Lose sight of this fact and, however attractive new policies appear in prospect, in practice, they will fail.

For references, see PDF version.

For a while now, there have been whispers that the Tories don’t really buy into the idea of an independent DFID – and that perhaps (gasp!) they might be considering merging it back into the Foreign Office, where it resided until 1997. Well, following last week’s Independent interview with Conservative aid spokesman Andrew Mitchell, we can put that notion to rest: “We are very committed to DFID continuing as an independent department of state”, says he.

So, a ringing endorsement of DFID, then?  Er, not quite.  Here’s the full context:

The shadow International Development Secretary, Andrew Mitchell, said DFID had begun to encroach on the work of other departments and to come “perilously close” to setting its own foreign policy, a role he said should be reserved for the Foreign Office. He said the Foreign Office will be given much greater influence over the use of overseas aid should the Tories win the next election …

“There are times when DFID comes perilously close to pursuing its own foreign policy and that is not right,” Mr Mitchell said. “Foreign policy is decided by the government and the Cabinet, led by the Foreign Office, and DFID should not be an alternative to this. We are very committed to DFID continuing as an independent department of state. But we would make it more of a specialised development department and a little less like an aid agency,” he said.

That left me wondering just which specific instances Mitchell was thinking of in arguing that DFID was coming close to having its own foreign policy.  Iraq? Afghanistan? Climate change? (Thinking that Paul Wolfowitz might not be such a great idea for President of the World Bank?) Sadly, we don’t know.  Earlier today I called his office to ask him to elaborate, but he declined to say more.

This is a shame, on two counts. First, because it’s a cop out.  For the Opposition front bench spokesman on international development to argue that the Department he shadows has come ‘close to pursuing its own foreign policy’ is a serious claim – and one which he ought to be prepared to substantiate.  To fail to do so leaves him open to accusations of offering soundbites rather than reasoned argument.

More fundamentally, though, it’s a shame that Andrew Mitchell wouldn’t elaborate because this debate needs to be had.  There are big questions about DFID’s relationship with the Foreign Office, and how coherent UK foreign policy as a whole is now, or could be in the future.  And to be fair, most people in the aid sector trust Andrew Mitchell and think he’s one of the good guys (indeed, one suggestion I heard today was that Mitchell’s interview was part of a settlement thrashed out between him and Shadow Foreign Secretary William Hague – whereby having DFID ‘brought to heel’ was the price Mitchell had to pay for the Conservatives committing to keep DFID independent, with its budget intact).

So what to make of the substance of Mitchell’s argument?  Well, NGOs – and many within DFID – will have alarm bells ringing in their ears at the notion that “the Foreign Office will be given much greater influence over the use of overseas aid ” under a Conservative government.

After all, last time that was the case it didn’t work out so well: just look at the Pergau Dam, a hydroelectric project in Malaysia that hoovered up £230 million of British aid, with negligible impact on poverty (“an abuse of the aid system” is how DFID’s former Perm Sec Tim Lankester described it), but a fat pay-off for the British firms involved in construction.  It was precisely to prevent such abuses from recurring in future that Labour enacted the International Development Act, which enshrines in law that DFID’s budget is only to be used for purposes of poverty reduction.

Today, though, various commentators – including, now, Andrew Mitchell – wonder whether the pendulum has swung too far.  Fine, aid should be about poverty reduction – but couldn’t DFID be a little more flexible in how this is interpreted?

And in fact, there’s often something to these arguments. It’s only recently, for example, that the UK development community has really accepted that conflict prevention is a core part of poverty reduction – pretty extraordinary, when you reflect on the impact that conflict has on prospects for achieving the MDGs in places like Congo, Sierra Leone or Sudan. On the other hand, there’s also a big risk of throwing the baby out with the bathwater.  Is the aid budget really there to repatriate failed asylum seekers to refugee camps in developing countries, for instance? Someone once thought so…

But in a larger sense, to zone out immediately on the implications of Mitchell’s comments for the aid budget is perhaps also to miss the point. In most developing countries, it’s not at all clear that the principal obstacle to development is the lack of aid cash, however much Bono and Jeff Sachs might want us to think so (though there are exceptions). More fundamentally, development prospects depend on:

1) the quality of the country’s institutions, its governance, its political process; and

2) all the ways in which actions taken elsewhere in the world affect prospects for development in the country – e.g. emitting carbon, selling arms, providing tax havens, imposing one-size-fits-all aid conditionality, diverting food to biofuels, subsidising EU and US agriculture, and so on.

And this is where I think Andrew Mitchell’s argument is a missed opportunity. Fine, if you think DFID is just a tube through which to funnel money into developing countries then by all means clip its wings, put it back in its box, and leave the politics to the big boys over at King Charles Street. But if, on the other hand, you think that delivering development involves being politically sophisticated – both in partner countries and on the global stage – then a strong, independent-minded DFID, with views of its own about foreign policy, is an absolute sine qua non.

To be sure, the fact remains that DFID’s relationship with the FCO is probably overdue for a review.  But to begin that process from the premise that DFID needs to be brought to heel is not the right starting point. If we’re honest, after all, FCO is just as capable of dysfunctionality as is DFID.  And if DFID is sometimes a bit too cocksure about its mission in the world, FCO is sometimes pretty unsure of what its role is in a world of transboundary issues in which every government department has its little bit of foreign policy.

The real problem is not, as Mitchell argues, that DFID has begun to ‘encroach’ on other areas of foreign policy; it’s that everyone is encroaching on everyone.  The old organisational silos simply don’t match the reality of a world in which the borders between areas of policy are as porous as those between countries.  Even if DFID were abolished tomorrow, the FCO still wouldn’t be in charge of foreign policy – because European integration and globalisation have between them scattered foreign policy from one end of Whitehall to the other.

By extension, where I do agree with Andrew Mitchell is where his interview ends up – with the need to ask what a coherent, integrated approach to all foreign policy issues would look like (something David and I have written about before – here’s the note on same that we did just before Gordon Brown became PM).  This is a much bigger issue than just DFID’s relationship with the FCO (and actually, I think that most people in DFID would welcome the chance to have this big picture discussion – if only the old guard at FCO could restrain themselves from rattling DFID’s cage and bringing all the old fears back to the surface).

Still, perhaps we’ll get there in the end.  As chance would have it, discussions of what a more integrated foreign policy strategy might look like are just getting underway as the Government embarks on the second iteration of its National Security Strategy, due for publication some time this summer.  As I write, I’m at a Wilton Park conference organised by several UK government departments, which will be feeding in indirectly to that review.  While naturally respecting Wilton Park’s firm rules about discussions being off the record, I don’t think I’m giving away any state secrets if I report that the DFID and FCO officials who are here, at least, seem to be able to work together rather well. Finding the right context for discussions of shared futures is half the battle, it seems.

In last month’s New Atlantic, James Fallows had a fascinating interview with Gao Xiqing, Chief Investment Officer at China’s sovereign investment fund, and the man responsible for a significant chunk of China’s huge holdings of American dollars.

Gao – who Fallows dubs one of the US’s new banking overlords – thinks Americans need to learn some humility and fast.

“The simple truth today is that your economy is built on the global economy,” he says, “and it’s built on the support, the gratuitous support, of a lot of countries. So why don’t you come over and … I won’t say kowtow [with a laugh], but at least, be nice to the countries that lend you money.”

The US should disentangle itself from expensive overseas conflicts, Gao believes, raise its diplomatic game, and – above all – tell its citizens to get saving as part of a “long-term, sustainable financial policy.”

It’s all well and good, but maybe Fallows should have pushed Gao a little harder on whether China’s own financial policy is sustainable. After all, despite recent appreciation, the yuan remains substantially under-valued against both the dollar and the euro – the main reason why the Chinese has ended up holding so much Western debt.

Gao’s comments on the dollar are somewhat contradictory (and reflect all the ambiguity of China’s own dollar position). On the one hand, it defends its status as a reserve currency. The US is still the most viable and predictable market, he says. But on the other, Chinese investment in the dollar is widely unpopular at home. According to Gao, China’s citizens ‘hate’ its support of rich Americans (“people eating shark fins”) at the expense of “poor [Chinese] people eating porridge.”

More significant than public pressure, perhaps, is Gao’s belief that the dollar is highly likely to lose value over the short to medium term (with a corresponding appreciation for the yuan). This will wipe billions of Chinese reserves (reserves that have only been built up through consumption foregone) – while challenging China’s export-led growth model:

We are not quite at the bottom yet. Because we don’t really know what’s going to happen next. Everyone is saying, “Oh, look, the dollar is getting stronger!” [As it was at the time of the interview.] I say, that’s really temporary. It’s simply because a lot of people need to cash in, they need U.S. dollars in order to pay back their creditors.

But after a short while, the dollar may be going down again. I’d like to bet on that! The overall financial situation in the U.S. is changing, and that’s what we don’t know about. It’s going to be changed fundamentally in many ways.

Unravelling these imbalances seems certain to be ugly. Reading George Cooper’s book, The Origin of Financial Crises, on a plane the other day, I was struck by strong parallels between today’s economic woes, and a crisis we have heard little about recently – the ‘Nixon Shock’ that led to the end of the Bretton Woods system.

Nixon blamed his decision to sever the link between the dollar and gold on ‘international speculators’. Sounding like an early-Naomi Klein, he accused them of engineering an economic shock for financial gain. But in fact the problems were structural. Europe’s economies had recovered from the war and were booming. The US economy had become relatively less competitive and was running a growing trade deficit. As Cooper explains:

This unbalanced trade and currency flow tended to depress the value of the US dollar. However, under the Bretton Woods agreement non-US countries were obliged to keep the value of their currencies fixed with respect to the US dollar. To maintain these fixed exchange rates foreign governments were obliged to recycle the trade surplus back into America. Put differently, if the European currencies were to remain fixed with respect to the US dollar, then for every dollar America spent on European goods Europe would have to spend that same dollar amount on something in the US – that something was US government debt.

You can see how close the fit is. The main difference, of course, is that in the 1970s the US controlled the devaluation lever not the Europeans. Today, the yuan’s peg (first to the dollar and now to a basket of currencies) is controlled (jealously) by the Chinese. The US can bluster a little if it likes, but the last thing it wants is China to start dumping dollars in an uncontrolled fashions.

Both then and now, of course, the US government badly needed credit. Then Vietnam – and ongoing aid to Europe – was swallowing up resources. Now its Iraq, Afghanistan and swelling social security commitments. In the 1970s, the result was a series of runs on the US’s gold reserve. In August 1972, the British ambassador is said to have made a particularly spectacular foray – turning up at the Treasury Department to request that $3bn be turned into gold.

Soon after, Nixon set out to Camp David with his advisers, where the decision to abandon the gold standard was taken, and price and wage controls instituted to damp down inflation. Although Nixon promised the world a new international monetary system (sound familiar?), the step was tactical not strategic. Apparently, the President spent more time worrying whether to interrupt a popular Sunday evening television show to announce the policy than he did in thinking through its consequences.

At first, Nixon’s new policy was very popular at home – but it had far-reaching (and unpredictable) economic and geopolitical impact. By 1973, the dollar had plunged 25% against a basket of European currencies. The resulting inflationary spiral was not cured until Reagan and Paul Volcker, tamed the beast in the 1980s. (Volcker, by the way, is a Democrat and will head Obama’s Economic Recovery Advisory Board).

Internationally, as David Hammes and Douglas Wills have argued, Nixon’s decision to abandon gold was, in part, responsible for the oil crisis that followed a few years’ later (though the proximate cause was US support for Israel in the Yom Kippur war).

Although the dollar price of oil increased by a factor of ten in the 1970s and rose 135% on the first day of 1974, this does not take into account depreciation of the dollar (and other Western currencies) or the rampaging inflation consumer countries experiencing. Oil’s price in gold shows a very different pattern:

• In 1970, 10 barrels of oil would buy an ounce of gold.
• This rose to 12 barrels in the aftermath of the end of Bretton Woods, and had reached 34 by mid-1973.
• After the big price shock of 1 January 1974, the price was back down to 12 barrels per ounce. It was 14 barrels by the end of the decade – making it 25% cheaper in gold terms than it had been ten years’ earlier.

The US response to the embargo, in turn, created a raft of what the State Department politely terms ‘foreign policy challenges’ – most of them in the Middle East, though there was a pronounced transatlantic rift as well. In addition, Nixon promised energy independence by 1980. The US also attempted to forge a consumers’ cartel to control prices – an idea that didn’t fly then, but appears to be back on the cards today.

Today, I’d bet good money (if there was any left) that the banking crisis is far from over – a point that I’ve argued on Global Dashboard before. Despite all the money being pumped into the banking system, most institutions seem to have a long way to go before they own up to all their toxic liabilities. (Henry Blodget has a brutal take on what needs to be done to avoid a lost decade with Japanese style ‘zombie banks’.)

Meanwhile, I expect the big story of this year (or perhaps it can be put off until 2010) will be how to unravel global imbalances. As the 1970s, that will undoubtedly be a messy (and one would presume inflationary) process – but the pain can presumably be controlled if we don’t blunder into it like Nixon did in 1971.

Success will require not just good US (and European and Japanese) leadership, but oodles of strategic thinking from the Chinese as well. As Gao Xiqing has made clear, the Chinese certainly hold plenty of the cards.

As in the 70s, scarcity drivers (not just oil this time – but food, water, land and the right to emit carbon) seem highly likely to play a complicating role. That’s why, as Alex and I argued in a paper for last years’ G20, a global deal for economics cannot be separated from one on climate (which, in turn, will tell us a lot about how scarce resources are to be allocated).

Next stop, of course, is April’s G20 summit in London – which needs to take a broad and long-term view of the challenges ahead. If the agenda is limited to tinkering with financial regulation, we could be in for a long and increasingly bumpy ride.

Let’s hope the ‘Obama moment’ forces leaders to think a little bigger than that… and as they work on BWII, they remember the demise of the last Bretton Woods…

Further reading: A Bretton Woods II Worthy of the Name

Update: The New York Times has a good piece from the end of last year on China’s role in the US meltdown

As soon as the government was gone, mysterious European ships started appearing off the coast of Somalia, dumping vast barrels into the ocean. The coastal population began to sicken. At first they suffered strange rashes, nausea and malformed babies. Then, after the 2005 tsunami, hundreds of the dumped and leaking barrels washed up on shore. People began to suffer from radiation sickness, and more than 300 died.

The UN envoy to Somalia told Hari, “Somebody is dumping nuclear material here. There is also lead, and heavy metals such as cadmium and mercury – you name it.” According to Hari, “Much of the waste can be traced back to European hospitals and factories, who seem to be passing it on to the Italian mafia to “dispose” of cheaply…This is the context in which the “pirates” have emerged. Somalian fishermen took speedboats to try to dissuade the dumpers and trawlers, or at least levy a “tax” on them.”

The buccaneers are popular with local people. 70 per cent of Somalis interviewed by a local news site “strongly supported the piracy as a form of national defence.” The case against pirates has never been as black and white as the world’s great powers like to paint it. Hari tells the story of one of their number who was captured by an earlier superpower in the 4th century BC:

He was brought to Alexander the Great, who demanded to know “what he meant by keeping possession of the sea.” The pirate smiled, and responded: “What you mean by seizing the whole earth; but because I do it with a petty ship, I am called a robber, while you, who do it with a great fleet, are called emperor.”

Blair, a 6th generation, Oxford-educated naval officer, occupies a number of teaching posts and once served as the first associate director of CIA for military support. He also ran the federally-funded Institute for Defense Analysis before being forced out after a conflict of interest dispute.

But it is his role as the Deputy Director of the Project on National Security Reform, a bi-partisan, Congressionally-funded reform initiative, that may say most about how, if confirmed, Blair intends to manage the U.S intelligence community. For despite the misgiving of some like Bob Baer, the former CIA analyst, Blair is both a manager and a reformer.

During my time in Washington, DC, I spent a little time with Blair, who struck me as a reformer with deep insights into how both soldiers and spies work and think. See this clip where he argues that the U.S government needs to work on the basis of “integrated, agile, collaborative, inter-agency teams” rather than the departmental stove-pipes currently in existence. Not the sound of a status-quo thinker.

Being reform-minded, however, will only go so far. Blair will need to will reform, demand reform, and pursue reform. For most intelligence-watchers believe that the Bush administration’s post 9/11 intelligence reforms were hurried and have created as many problems as they have solved. The current spy chief, Admiral Mike McConnell has done what he could to improve the situation, launching a 100-day initiative when he took over from John Negroponte, to improve “integration and collaboration” across the many intelligence agencies. Meanwhile Robert Gates has scaled down the Pentagon’s footprint on intelligence.

Yet most people believe the situation needs to improve further if the U.S is to get more for the $43 billion it spends annually on intelligence. The Office of the Director of National Intelligence has become a large bureaucratic contraption with hundreds of personnel camped out in a Washington airbase. Many staff are unclear about their roles vis-à-vis their CIA colleagues.

The DNI himself, though he briefs the president daily, has only limited authority over the 16 agencies in the intelligence community as the reform legislation did not give the spy chief the kind of budgetary muscle needed to lead the intelligence community. In spite of the efforts of Gates and McConnell the National Security Agency, the National Geospatial-Intelligence Agency and the National Reconnaissance Office remain under Pentagon’s command. 

Then there is the question of domestic intelligence. Many believe the U.S should create a domestic intelligence agency like Britain’s Security Service. But how to do so and avoid adding complexity to the intelligence system, slowing down rather than promoting information flows among the existing agencies, while respecting civil liberties? And who would run such an agency – the DNI, the Homeland Security Secretary, the FBI, the CIA?

Finally, there is a need to look again at Congress’ role. Oversight has deteriorated amid battles between different committees. The President’s Foreign Intelligence Advisory Board and the Intelligence Oversight Board have also atrophied in the last eight years while the Bush administration failed to create a Civil Liberties Board, despite being mandated to do so by Congress.

Blair seems well-placed to lead a reform process without allowing it to descend into something like the Church Committee hearings, which investigated intelligence-gathering by the CIA and FBI after the Watergate affair, but ended up encouraging many of the intelligence community’s bad traits. No doubt his confirmation process will drag up the conflict-of-interest case that forced him out of his last government-funded job, as well as his controversial role in opening diplomatic ties with Suharto’s Indonesia.

But the real question is: how ambitious will Obama be in leading changes in Congress; and reforms in the Executive Branch to ensure a well-functioning intelligence apparatus that can deal with foreign and domestic threats, produce politically-neutral assessments, work with other government departments and guarantee civil liberties. Obama’s choice of Blair shows the President Elect wants to reform, but also wants to keep the intelligence community on board.