The world requires a trust-based model of governance

Live Mint, July 21, 2021

By Pradeep S. Mehta,

Decisions that are thrust upon everyone from above do not make for a fair and equitable world order

Copper mines in Zambia have mostly earned bumper profits, and when the government wanted to impose a windfall-profits tax, the proposal faced huge resistance from all the foreign investors that were running those mines. These included Chinese companies. If one looks at China, it is no surprise that former US president Donald Trump howled against Beijing’s opacity and support to state-owned enterprises, which could not be challenged under World Trade Organization (WTO) rules.

China enjoyed the benefits of Globalization 1.0. It helped open up borders to enable the easy movement of goods, services, capital, technology and people. Many other countries benefitted from it, but advanced economies the most, as their companies gained access to large uncontested consumer markets. While Globalization 1.0 was touted as the outcome of a consensus-based global decision-making model under the WTO, developed countries were the rule-setters of this game and developing countries were rule-takers.

Compliance with the WTO’s rules meant that some arbitrary yet sovereign decision-making powers of these countries were taken away. While the resultant policy and regulatory certainty aided the rapid rise of few industries, the consequential growth was neither inclusive nor equitable in all developing countries.

The world has come a long way from Globalisation 1.0. While issues like covid vaccine coverage or industrial development may appear far more important for poor countries, what has not changed is the top-down decision-making process. Now the world’s seven richest countries have decided that it is time for taxation reform. They have set a global minimum corporate-tax rate of 15% without consulting other countries. In the process, they have kindly allowed them to tax multinationals, after much pleading for years. Such taxation authority was not obvious, despite such global corporations collecting substantial data and generating enormous revenues from their activities in emerging markets like ours.

Also, never mind that the taxation criterion is quite complicated and applicable only to a part of their profits, and comes on the condition of developing countries surrendering their right to impose a digital services tax. It also doesn’t matter that Big Tech firms like Amazon are likely to claim exemptions, given their declared profits typically fall below the threshold level. Nobody is really bothered that the proposed tax regime would disproportionately benefit the same set of developed countries that proposed it and are hailing it as a landmark achievement.

Mind you, while agreeing to global tax reform, that set of G7 countries committed almost nothing to combat climate change, other than repeating old promises and shifting greater responsibility onto developing countries. No agreement was reached, for example, on new funding to help poorer parts of the world invest in green technology and adapt to extreme weather, despite the G7’s own record of vast carbon emissions. These countries were also the first to sensibly order vaccines, but then amassed far more doses than their actual requirement, despite a large number of poor countries not having enough to vaccinate even small proportions of their population.

Unilateral decisions made by groups of seven or 20 in the garb of collective decisions do little to nudge all nations to come together and collectively act against common problems. Developing countries are typically left with two options: either to join negotiations within the four walls set unilaterally by developed countries, or to protest till no choice is left but to submit to a so-called global consensus.

A third option would be to forge a consensus among developing countries and suggest a counter proposal to what rich nations want. However, this approach also runs the risk of decision-making processes being captured by a relatively well-off group of developing countries, or of poor countries falling into traps laid by powers like China.

The global order needs to be based on trust and not power. Unlike power, trust flows bottom-up and not top-down. Developing countries need to design and test trustworthy decision-making processes domestically and then introduce them at regional and global levels. However, they must not complain of exclusion at global forums on one hand, and then exclude relevant stakeholders when it is their turn to take decisions, on the other.

In recent years, India has experimented with several decision-making processes. Its famed Goods and Services Tax Council, built on the idea of moving beyond political differences, has been getting degraded into another show of majority politics, wherein states ruled by the country’s ruling party at the Centre vote in favour of central proposals even when they are adversely impacted. Similarly, the Union government has been mindlessly imposing levies on petroleum products, and hasn’t shared the resultant revenue increase with states, despite the latter being in distress. India will not be able to assume natural leadership at regional and global levels with such a report card at home.

The decision-making models of Asean and the African Union are in infancy, limited by scope, and are yet to be tested by divergent interests pulling their member nations in different directions. It is thus a need of the hour to work towards a trust-based global world order, starting with reforms of our domestic decision-making processes.

Amol Kulkarni contributed to this article.

Pradeep S. Mehta is secretary general of CUTS International .

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