As 2023 meanders to a close, an noted economist took stock of the global economic order and found the Western alliance doing very poorly this year.
What Happened: “The Western-led global economic order had a bad 2023,” said noted economist Mohamed El-Erian in a “Project Syndicate” opinion piece. The economist suggested that the Western nations have themselves to blame for the predicament.
“Surprisingly, the primary cause was not the emergence of an alternative order led by China … Instead, it was internal stress that led to more doubts around the world about its effectiveness and legitimacy,” he said.
The economist does not see a new international order emerging any time soon but warned of risks to America’s leadership role.
“As more and more countries decide to self-insure by building alternatives to the Western-led order, the global economy risks increasing fragmentation, eroding America's leadership role and accelerating a system-wide shift toward disorder,” he said.
Policy Missteps To Blame: The setback to the Western-led global economic order did not start in 2023 but has been the result of policy missteps seen over the years, El-Erian said. “Over just the past 15 years, its credibility and smooth functioning have been undermined by policy missteps that resulted in a series of disruptions,” he said.
To make his case, he highlighted the 2008 global financial crisis, the “growing weaponization of trade and investment sanctions, the unequal distribution of COVID-19 vaccines, central banks' mischaracterization of inflation as ‘transitory’ and the consequences of the banks' aggressive interest-rate hikes."
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The inability to take on global challenges such as climate change and overwhelming debt in the Global South has intensified the pressure and Western-dominated institutions are increasingly viewed as “ineffective and insufficiently inclusive,” he added.
Two things that led to widespread frustration over the Western-led global economic orders this year were Russia continuing to maintain active trading relationships despite the sanctions, and America’s role in the Israel-Hamas war, El-Erian said. The latter has served to expose the “hollowness of the West's stated commitment to upholding basic human rights and their inconsistent compliance with international law,” he added.
What’s Next: “As middle powers increasingly assert themselves on the world stage, they will encourage smaller Western-aligned countries to contemplate the prospect of becoming ‘swing states,'”El-Erian said.
He called upon the Western Powers to confront the threat head-on. “Political leaders should focus on mitigating the risk of further fragmentation and forestall a rapid descent into international disorder by strengthening the existing multilateral architecture,” he said.
The economist called for reinvigorating previous reform initiatives within key institutions, starting with the International Monetary Fund and the World Bank.
He also cautioned of disorder if remedial actions aren’t implemented. “Should the current international framework be allowed to fail, it will not be replaced by a new system anchored by China but by more global disorder,” he said.
Such an outcome, the economist said, would not only hurt everyone in the short term but also inhibit the collective ability to tackle the complex and growing long-term challenges.
The market has largely ignored the changing dynamics in the global economic order. The SPDR S&P 500 ETF Trust SPY, which is an exchange-traded fund that tracks the S&P 500 Index, has gained about 25% this year.
The SPY settled Thursday’s session down 0.32% at $472.01, according to Benzinga Pro data.
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