Changing the Global Architecture

While the global economy has changed dramatically since World War II, the postwar institutions that the U.S. and Europe created to manage it have not. The rapid integration of global markets has outpaced the ability of those bodies -- principally the International Monetary Fund, World Bank, World Trade Organization, G-8 and International Energy Agency -- to adapt.

Economic power has shifted toward Asia and Latin America. Today China, India, Brazil, Russia and other emerging countries represent 45% of global GDP, up from 39% in 1995. They also represent 40% of world exports and 65% of foreign-exchange holdings. This group's economic position is now comparable to the combined position of the U.S. and the European Union. Yet these emerging players have a much less central role in global economic governance than their importance dictates. The U.S. and the EU must strike a new bargain with emerging powers and restructure the global institutions for the 21st century, or risk losing international economic leadership.

The need for change is most evident in the architecture of the IMF and World Bank. The U.S. and Europe should end their duopoly on selecting the heads of these agencies, beginning with the next elections scheduled for 2010. Their leadership should be chosen on merit world-wide. Emerging economies should have greater voting power and board representation, while EU representation should be consolidated into two seats: one for members of the euro currency and one for EU members outside the euro zone. At the IMF, EU members currently hold seven directorships out of 24.

To remain relevant in a changed world, the IMF should focus on surveillance to prevent crises and on acting as a lender of last resort, whereas the Bank should focus exclusively on development. One way to end the current confusion about their roles and ensure coordination would be to "double hat" the executive directors so that they serve both institutions. This will help the Bank and Fund sort out their responsibilities and prepare to merge by 2030.

The WTO, created more recently as a successor to the General Agreement on Tariffs and Trade, represents a great leap forward institutionally, as countries have been willing to use it to resolve their trade disputes. But more needs to be done to bring the WTO into the 21st century. The organization could start by opening up its crown jewel, the binding dispute-resolution process, to public hearings and by allowing legal briefs in these cases from third parties, including NGOs. It should also work with developing countries to improve their capacity to enforce trade agreements.

That's not all for the WTO. Regardless of whether the Doha Round succeeds or fails, the era of traditional global trade rounds that require a consensus of some 150 nations is over. The world economy is changing too rapidly to wait five to seven years only to agree on the lowest common denominator.

After Doha, it will be time for a new approach, one that brings together like-minded countries to develop a range of different agreements, in the form of a "variable geometry" within the WTO. This will allow those governments willing to move forward, and with the most at stake, to take responsibility for reducing barriers rather than forcing them to wait until consensus is achieved among all.

As a start, the EU and U.S. should give developing countries greater access to the trans-Atlantic marketplace. The current arbitrary and often conflicting rules the U.S. and EU impose on their preference programs should be replaced by a single set of rules that assures consistency and the greatest degree of market access.

The EU and the U.S. should also rally like-minded countries to eliminate barriers to trade in products and services over the next 10 years. As reductions are agreed, the benefits would be extended to all WTO members using the existing "most favored nation" principle. If countries stay on the sidelines as free riders, products crucial to their economies should be excluded from the benefits of liberalization. Moreover, the EU and the U.S. should recruit other WTO members to liberalize market access in specific sectors, especially those dominated by new technologies such as nanotechnology. These sectoral accords should be premised on strict adherence to WTO rules.

To be effective in this effort, the U.S. and the EU must strengthen their bilateral relations. The most significant step they could take would involve the establishment of a barrier-free Trans-Atlantic Investment Agreement. Specifically, the U.S. and the EU should eliminate all investment restrictions, such as those the U.S. imposes on airlines and telecommunications, leaving only narrowly tailored national-security exceptions. By removing barriers to investment and financial flows, which far exceed U.S.-EU trade flows, the U.S. would send an extraordinarily positive signal to markets and to other governments about our openness to trade and investment.

Less dramatic changes are needed for the G-8, the International Energy Agency and the OECD. Each of these organizations too can be made more inclusive by adding key developing countries as members in recognition of changing political and economic realities.

Only by sharing leadership with emerging nations can the U.S. and EU set the course for the new global economy -- and avoid a world that becomes increasingly protectionist and fragmented. We must choose to lead or accept being left behind.

Mr. Eizenstat held several senior positions in the Carter and Clinton administrations, including ambassador to the EU. Mr. Aldonas was undersecretary of commerce for international trade in the current Bush administration. They co-chaired the Atlantic Council's commission on Trans-Atlantic Leadership in the Global Economy.

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