WhyGlobalizationis Failing

loss of order — to Frank-Walter Steinmeier, the Foreign Minister of Germany, the geopolitical tensions troubling the world boil down to this simple yet powerful trend. Our world is neither uni-polar nor multi-polar, it is non-polar. It is “a world in search of a new order.”

Two hundred years ago, in 1815, Europe’s leaders may have shared a similar concern. Exhausted from decades of war, they gathered in Vienna in search of a new order. The “Congress of Vienna” resulted in a century of relative peace in Europe and laid the ground for the acceleration of scientific and technological progress, the rise of industrial capitalism and the birth of powerful nation states. The peace settlement of Vienna accelerated the transition into the modern age.

Progress, market, nation state — the three factors that enabled the rise of the West are now enabling the rise of “the Rest”. Global tensions are framed as side effects of this dynamic, as a strategic competition between rising challengers and struggling incumbents. Yet they go deeper: the pillars of modernity themselves are facing an existential crisis. Herein lies a great paradox of our times: we are simultaneously experiencing the globalization of modernity and a crisis of confidence in its foundations.

First, we are losing trust in progress. Productivity growth in rich economies has significantly decreased in recent decades. Economists argue that the digital revolution has not transformed productivity as much as electricity or the internal combustion engine. Robert Gordon, Tyler Cowen, Thomas Piketty and others thus expect a future of slow growth based on the addition of resources rather than productivity gains. In those areas which have seen rapid progress, the impact on growth and employment is unclear. In the past, greater productivity led to the creation of new and better jobs; today, economists worry about the polarization of labour markets into a few winners and many losers. This is bad news for a planet with soon 9 billion people, limited resources and fragile ecosystems.

A key difference between today and the pre-industrial age is the belief in human progress. This belief lets us create and maintain conditions that favour innovation over predation: political stability, property rights, technology and science. If technological change fails to produce broadly shared benefits or if its overall rate slows, political, social and economic stability are at risk.

Second, we are losing trust in markets. Along with technological progress, free markets are seen as the second driver behind the triumph of modernity. The astounding development of countries in Asia, Latin America and Africa is mostly the result of market reforms: for three decades, China has continually grown by more than 9%, freeing millions from poverty. India reduced poverty rates from 50% to 20% in just two decades. Many of the fastest-growing economies are now in Africa.

However, despite this enormous progress, the gap between poor and rich has grown significantly in many countries. Inequality in China is 50% higher than before its reforms, higher than in liberal market economies like Great Britain and the US, and up to double that of social market economies. Experts point to the Kuznets curve, which suggests that inequality increases at the beginning of reforms but decreases in the long term. The problem with this is that inequality skyrocketed in rich countries, too. The IMF calculates that, worldwide, seven out of 10 people live in countries where inequality has grown over the past three decades.

Rising inequality contests not only the political, but also the economic legitimacy of capitalism. Recent OECD and IMF studies show that lower net inequality drives faster and more durable growth. They also suggest that redistribution is generally benign in its impact on growth, with negative effects only in the extremes. The World Economic Forum’s Global Risks report lists severe income inequality as a top global risk for the past three years. “A severely skewed income distribution harms the pace and sustainability of growth over the longer term,” warns Christine Lagarde, Managing Director of the International Monetary Fund. “It leads to an economy of exclusion and a wasteland of discarded potential.”

Rising inequality and slow growth will also intensify the debate about varieties of capitalism. If expected returns from investing in factories, research, or education decline, those expected from investing in political influence may increase. To Moisés Naím at the Carnegie Endowment for International Peace, corruption — not capitalism — is the main cause of deepening inequality in countries such as Russia, Nigeria, Brazil and China. While authoritarian regimes are particularly susceptible to corruption and rent-seeking, liberal economies have no reason to be complacent. Daron Acemoğlu,Simon Johnson, Joseph Stieglitz and others warn that special interests hold undue sway over politics in Europe and the US, with dangerous repercussions for economic growth, stability and equality.

Third, we are losing trust in government. The Reformation, the Enlightenment, the Industrial Revolution — disruptive change in modern European history has been driven by informal networks that undermined traditional power structures. Steamships and trains transported not only goods, but also powerful ideas including liberalism, socialism and nationalism. Yet, at the same time, new hierarchies emerged in the form of powerful nation states and corporations. “The mid-20th century was the zenith of hierarchy,” wrote Harvard historian Niall Ferguson. The First World War wiped out Europe’s old dynastic hierarchies just to replace them — with astonishing swiftness — with new and stronger nation states.

Today, all states, democratic and non-democratic alike, face pressure from new informational, commercial and social networks. Networks can empower people, unleash creativity and spur change, but they can also sow discord, instil factionalism and spread confusion. They can not only bring tangible benefits to millions through higher growth and living standards, but also amplify crises and increase volatility and instability. Mitigating the risks of a networked world without compromising the benign self-organizing capacities of networks is the holy grail of a sustainable political order in the 21st century.

The transnational nature, complexity and velocity of today’s networks make it hard for states to strike this balance. Liberal democracies often seem self-occupied and polarized, while autocracies resort to iron-fisted leadership or caricatures of democracy without independent judiciaries or free speech. Iraq, Syria and parts of North and Central Africa — entire regions are experiencing collapse. As recent surveys suggest, the past couple of years have seen trust in public leadership decline and protests increase.

To be sure, some devolution of state control can be a good thing. Yet, if states are widely seen as unable to establish an effective and legitimate order, the silent presumption that makes them function in the first place is at stake. Extremist, nationalist and separatist movements will benefit. If states are weak, the state systemsuffers, too; governments with shaky or non-existent mandates struggle to make the commitments, compromises and concessions that international cooperation requires.

The New Global Context — the theme of this year’s Davos meeting — is marked by both the diffusion and decay of modernity; it describes a world that is both moving closer together and drifting further apart. “The world is getting smaller” sounds for many more like a threat than a promise today. Is this justified concern or hysteria? The lines are blurred, but an ambient sense of fear offers fertile ground for the spread of radical ideology, exacerbates the risk of geopolitical conflict and complicates solutions to global challenges.

In 1815, shaping a new world order was the business of a handful of statesmen. Since then, the number of actors, connections and challenges has grown exponentially. In 2015, diplomacy operates in shifting and complex multistakeholder constellations, not bilateral transactions. In this regard, the World Economic Forum Annual Meeting provides an unparalleled platform to develop the insights, ideas and partnerships that are needed to rebalance and rebuild the pillars of modernity.

For an overview of programme and participants, click here. For an overview of webcast sessions click here. You can also follow the Annual Meeting on Twitter, Facebook and other social media.