The global recovery is firming up. In some countries
like the US, this process has been visible for some years, in
others like Europe and Japan, the consolidation of the recovery
is at an earlier stage. So it is fitting that our discussions
are now focusing not only on how to stabilise the economy, but
also on how to make it more dynamic – while at the
same time improving people's welfare. At the centre of this
debate is the question of how to raise potential output growth,
which has slowed from around 2% in OECD countries in 2000 to
around 1% today.1
Without stronger potential growth, the cyclical recovery we
are now seeing globally will ultimately converge downwards to
those slower growth rates. Slower growth will in turn make it
harder to work through the debt and demographic challenges
facing many advanced economies.
With the population growth rate in those economies projected
to slow, the burden of raising potential growth must fall on
productivity. There are a number of areas in which domestic
policies can encourage an upward shift in productivity growth,
such as competition, research and development, and insolvency
But when thinking about the global economy, one of the key
ingredients for raising productivity is openness. Open trade,
investment and financial flows play a key role in the diffusion
of new technologies across borders that drive forward
The social consensus on open markets has, however, been
weakening in recent years. This is driven not so much by a
belief that open markets no longer create wealth, but by the
perception that the collateral effects of openness outweigh its
benefits. People are concerned about whether openness is fair,
whether it is safe and whether it is equitable.
As Karl Polanyi observed many years ago, if the dislocation
created by an open market goes beyond a certain point,
protectionism is society's natural response.2
So a central element of efforts to raise productivity growth
– and build a dynamic global economy – must
involve responding to these concerns about openness. And this
is a feat countries cannot accomplish by themselves. Although
domestic welfare policies are, of course, essential to the
task, a commitment to working together through multilateral
institutions is just as important.
This is because fears about fairness, safety and equity
ultimately reflect a lack of trust in other countries'
regulation and enforcement. One of the main reasons why
multilateral institutions exist is to create regulatory
convergence, and therefore to increase trust between
countries.3 And perhaps the most important area
where this applies today is global financial sector
Openness as the key to a dynamic global economy
One of the key questions facing the global economy is
whether the trend towards ever greater economic openness, which
has defined the last three decades, is coming to an end.
Temporary trade barriers have indeed risen from covering around
1% of products in 2000 to more than 2.5% today, with the crisis
accelerating this pattern. The same is true of anti-dumping
That said, at the global level openness is still viewed
favourably; three-quarters of people consider growing trade and
business ties with other countries to be a positive trend. But
those polled in rich countries are more negative than in the
Given the established gains of trade, this is plainly a
concerning trend for the global economy. International trade
results in a more efficient use of production factors and in
specialisation where comparative advantage exists, thereby
raising productivity growth.6 And welfare gains from
trade for firms and consumers follow from the wider
availability of cheaper and better-quality
Moreover, for advanced economies the importance of trade may
actually be growing. As economies converge towards the global
technological frontier, innovation becomes more important for
sustained productivity growth. And as OECD research has shown,
openness to trade is a crucial factor in enabling an economy to
benefit from frontier innovation.8
According to OECD estimates, in the case of a 2%
acceleration in multi-factor productivity (MFP) growth in a
frontier economy, the productivity spillover will be 0.3
percentage points higher for a country that trades intensively
with the frontier economy than for one which trades less
intensively. To put this in context, MFP growth has averaged
only around 0.5% in OECD countries since 2000.9
Thus a turn towards protectionism would pose a serious risk
for continued productivity growth and potential growth in the
global economy. And this risk is particularly acute in the
light of the structural challenges facing advanced
Old-age dependency ratios are rising, putting more pressure
on public finances. By 2025 there will be 35 people aged 65 and
over for every 100 persons of working age in OECD countries,
compared with 14 in 1950.10 At the same time, public
debt levels have surged in those countries from 56% of GDP in
2007 to around 87% today.11 Only higher potential
growth can provide a lasting solution.
So, clearly, to foster a dynamic global economy we need to
resist protectionist urges. But to do so, we also need to
identify how best to respond to protectionism.
The role of multilateral cooperation in making openness
Much has been written over the past few years about the
negative effects of free trade and the need to pay more
attention to those who benefit less from it. The debate has
typically focused on the extent to which welfare policies can
be used to share the gains of trade more evenly.
Though this is a complex issue,12 I have no doubt
that making better use of public policies to support the more
vulnerable members of society, not just financially but also
through education and retraining, is a vital part of the
equation. More work needs to be done in this area and it is
important to learn from best policy practices.
But the other key question is: how can we work together to
make openness sustainable? What role can multilateral
cooperation play towards this goal? This is the angle I would
like to address today. Its importance becomes clear when one
thinks about the three main areas of concern that people have
about open markets that I mentioned earlier.
First, there is the concern about whether openness is fair
– i.e. whether all are playing by the same rules and
applying the same standards. This manifests itself in fears
about currency manipulation by trading partners, dumping
practices and lack of reciprocal market access.
Second, there is the concern about whether openness is safe
– i.e. whether it exposes people to harmful spillovers
from abroad. This is perhaps most visible, at least for
economists, in the case of cross-border capital
flows13, but it also applies in areas such as
agriculture and biotechnology.
Third, there is the concern about whether openness is
equitable – that is, whether it disproportionately
benefits some groups in society over others. Though it is not
straightforward to disentangle the effects of trade and
technology on inequality – and they may in fact be
linked14 – the perception that openness
contributes to inequality has become more widespread.
In each case, multilateral cooperation, leading to
regulatory convergence, is a precondition for addressing the
underlying causes of these concerns. To demonstrate this, let
me draw on our experience of managing openness within the
As regards fairness, the point is obvious: regulatory
convergence provides the strongest assurance that the playing
field is level right across the European market. This is why,
as borders have opened within Europe, common supranational
powers of legislation and enforcement have strengthened in
For example, the Single European Act in 1986 not only
launched the single market, it also substantially extended the
powers of the EU to make laws, the role of the European courts
to rule on them, and the powers of the Commission to execute
them. The logic was that a single market could only be
sustainable over time if all participants could be certain that
they faced the same rules, and had recourse to the same courts
in the case of infractions.
Despite the political events of last year, this symmetry
between regulatory convergence and market deepening has, by and
large, been a success. In fact, the free movement of people,
goods and services within Europe is regularly mentioned in
polls as one of the two most positive aspects of the EU, the
other being peace among its member states.16
Similarly, what has permitted the Single Market to survive
various financial and consumer protection crises is its ability
to restore safety by adapting market-wide regulation and
To give an illustration, the internal market for frozen
foods overcame the mis-selling scandal of 2013, when horsemeat
was sold as beef, in large part because it was met with an
improved food labelling and EU-wide inspection regime that
restored trust. By contrast, a perceived lack of regulatory
convergence between the EU and other countries, especially
regarding food safety, is one reason for opposition to
preferential trade agreements, such as the Transatlantic Trade
and Investment Partnership (TTIP).
More fundamentally, following the sovereign debt crisis, the
euro area experienced first-hand the risks of a diverging
supervisory and regulatory framework for cross-border finance
– and faced a serious threat of financial market
fragmentation when those flows reversed. Safety was restored by
elevating supervision and resolution to the European level with
the banking union. This was key to re-establishing trust in the
banking system and reviving cross-border capital flows within
Europe. These are only the first steps, but the direction of
travel has been drawn.
When it comes to the effects of openness on equity, it is
admittedly less obvious how multilateral cooperation represents
a solution to the fears being expressed. As I said, such fears
typically have to be addressed by national distributional
policies. But there is also an important international
dimension, in particular related to tax avoidance.
Indeed, the problem many have with openness is not just that
it redistributes income between different social groups. Almost
everything that happens in a market economy –
skill-biased innovation, churning of firms –
redistributes income in some way, and we have in place
mechanisms to deal with those outcomes, such as tax
Where trade may differ from these other market forces,
however, is in the perception that, in Dani Rodrik's words, it
"undercuts the social bargains struck within a nation and
embedded in its laws and regulations".17 For
example, increasing openness to trade and finance is perceived
by some to shift the burden of taxation from footloose capital
to labour, or to create pressures to reduce labour protections
to boost the competitiveness of domestic producers –
the 'race to the bottom'.
Such perceptions, and the sense of injustice they fuel, are
deeply damaging to public faith in open markets – and
this is where multilateral solutions can play a role.
Addressing tax arbitrage between jurisdictions, for
instance, can clearly best be achieved by countries cooperating
via international institutions. Likewise, taking a stand
against race-to-the-bottom dynamics that threaten labour
protections, calls for a common regulatory approach. Again, our
experience in Europe offers some insights into how this can
work, as well as into some of the difficulties involved.
Thanks to its common legal framework, the EU has
successfully upheld labour standards even as its market has
expanded to lower-income countries. The Single Market has no
doubt prompted some relocation of jobs across countries, and
this has at times triggered fears of 'social
dumping'.18 But in fact openness has not
fundamentally challenged labour protections.
One main reason for this is that safeguards central to the
European social model have been progressively embedded in
European law, ensuring gradual convergence in labour standards
among EU countries. Thus, while there is still heterogeneity,
the gap between them is narrowing.
Preferences about the degree and type of social and labour
protection differ across the world, and I am not claiming that
those in the EU should be a model for everybody. The point here
is that through multilateral decision-making, the EU has
successfully built and defended the single market, addressing
the perception that openness is always a source of
At the same time, in areas where unanimous decision-making
is more prevalent, Europe has not always used the potential of
its multilateral structure to the same extent. This is the
case, for instance, in combatting profit-shifting and tax
avoidance, although progress is now being made,19
which clearly chimes with the mood of EU
In short, there are certain concerns about equity that can
most effectively – and perhaps only – be
addressed through multilateral actions. As such, in tandem with
well-targeted welfare policies, they are a key part of the
policy toolbox for making openness sustainable.
Implications for the global economy
Clearly, the European model involves several unique
features. In particular, it depends on a relatively advanced
political structure that helps reconcile multilateral
cooperation with democratic control, which is difficult to
replicate elsewhere. Still, EU countries are generally more
open than other advanced economies and perhaps have fewer
problems of skewed income distribution.21 So what
lessons can we draw for the global economy from our
The most salient is that, at a time when disaffection with
openness is growing, multilateral institutions become more, not
less important. They provide the best platform to address
concerns about openness without sacrificing open markets.
So organisations like the WTO, which make sure that trade is
governed by rules and is subject to fair arbitration, remain
vital to ensuring that global trade is perceived as fair and
safe – while at the same time avoiding protectionism
in disguise. And bodies that foster global cooperation, such as
the G20, remain just as necessary to reconcile openness with
equity. The OECD/G20 initiative to combat tax base erosion and
profit-shifting is just one example of such cooperation.
That said – and going by our experience in Europe
– the area where we need a special focus today is
cross-border finance. Organisations that facilitate convergence
in financial regulation and supervision, such as the Financial
Stability Board and the Basel committees, are key in this
Within these committees, a substantial amount of work has
been done since the crisis to strengthen microprudential
regulation, as well as to design and calibrate macroprudential
tools. This work has been essential for at least three
The first reason is that finance is the most mobile
production factor, and therefore the most likely to cause
dangerous spillovers. This makes convergence in financial
regulation one of the most important components of a
sustainable open economy.
And we should remember that diverging financial regulation
would endanger not only financial openness, but also global
trade, since they are often two sides of the same coin: finance
and trade are complementary in spreading knowledge and
underpinning global value chains. A striking feature of the
global financial crisis was indeed the collapse in world trade:
between the third quarter of 2008 and the second quarter of
2009 global trade volumes declined by approximately 15%.
The second reason is that we have only recently witnessed
the dangers of financial openness combined with insufficient
regulation. International financial flows both contributed to
and propagated the global financial crisis and the ensuing
collapse of trade, output and employment.
Financial integration only survived relatively unscathed
because the global regulatory response was swift and decisive,
creating a financial system that posed fewer risks to the world
economy. Any reversal would call into question whether the
lessons of the crisis have indeed been learnt – and
thus whether financial integration can still be considered
Third, financial regulation interacts critically with
monetary policy. Lax regulation implies an underestimation by
regulators of incentives which lead to behaviour that is
individually profitable, but socially costly. Given the large
collective costs that we have observed, there is never a good
time for lax regulation. But there are times when it is
Specifically, when monetary policy is accommodative, lax
regulation runs the risk of stoking financial imbalances. By
contrast, the stronger regulatory regime that we have now has
enabled economies to endure a long period of low interest rates
without any significant side-effects on financial
stability22, which has been crucial for stabilising
demand and inflation worldwide.
With monetary policy globally very expansionary, regulators
should be wary of rekindling the incentives that led to the
To design and agree, in reciprocal trust, a regulation that
preserves financial stability without unnecessarily restricting
the flow of credit to the economy, while revisiting the
post-crisis regulatory framework where necessary, the FSB and
the Basel committees remain essential. This is also because,
for large economies, changes in domestic regulation have
international consequences. Global financial conditions account
for 20-40% of the variation in countries' domestic financial
conditions, as shown by recent research from the
Let me conclude. To inject more dynamism into the global
economy we need to raise potential output growth, and to do so
with ageing societies we need to lift productivity growth. For
advanced economies that are close to the technological
frontier, this depends crucially on openness to trade.
Yet openness to trade is under threat, and this means that
policies aimed at answering this backlash are a vital part of
the policy mix for dynamic growth. Some of those policies can
be implemented domestically, but some can only be effectively
enacted through multilateral cooperation.
Multilateral cooperation is crucial in responding to
concerns about fairness, safety and also equity. By encouraging
regulatory convergence, it helps protect people from the
unwelcome consequences of openness. And protection ensures that
we do not lapse into protectionism over time.
The European experience provides some insights into the
opportunities and challenges involved. It also shows the
importance of ensuring that, at all times, openness remains
under democratic control. Multilateral institutions are
necessarily staffed by experts. But it is essential that they
always remain accountable to elected representatives who set
the parameters and have the final say.
This article is a reproduction of the speech given by
Mario Draghi at the Economic Policy Symposium of the Federal
Reserve Bank of Kansas City, Jackson Hole, August 25 2017. The
full speech is available free of charge at www.ecb.europa.eu.
- Per capita potential output growth, OECD data.
- Polanyi, K. (1944), The Great Transformation.
- See, for example, Williamson, O. (1996), The Mechanisms
- Bown, C.P. (2016), Global Antidumping Database, The World
Bank; World Bank Temporary Trade Barriers Database.
- Pew Research Center (2014), "Faith and Skepticism about
Trade, Foreign Investment", September. However, a Pew
Research Center poll released in August 2017 found that, in
the context of immigration, 68% of Americans believe that
"America's openness to people from all over the world is
essential to who we are as a nation".
- The most recent review in the literature has been
published by the IMF and confirms that international trade
improves welfare and strengthens economic growth. See IMF
(2016), "Global Trade: What's behind the slowdown?", World
Economic Outlook, Chapter 2, October.
- For more information on this topic, see Helpman and
Krugman (1985), Grossman and Helpman (1991), Melitz(2003),
Broda and Weinstein (2006), Melitz and Ottaviano, (2007),
- Saia, A., Andrews, D. and Albrizio, S. (2015),
"Productivity Spillovers from the Global Frontier and Public
Policy: Industry-Level Evidence", OECD Economics Department
Working Papers, No 128.
- OECD data, unweighted average.
- OECD (2015), Pensions at a Glance 2015: OECD and G20
indicators, OECD Publishing, Paris.
- OECD data, unweighted average.
- See, for example, Antràs, P., de Gortari, A. and
Itskhoki, O. (forthcoming), "Globalization, Inequality and
Welfare", Journal of International Economics.
- Broner, F. and Ventura, J. (2016), "Rethinking the
Effects of Financial Globalisation", Quarterly Journal of
Economics, Vol. 131, Issue 3.
- For a review see Pavcnik, N. (2011), "Globalization and
within-country income inequality", in Bacchetta, M. and M.
Jansen (eds), Making Globalization Sustainable, International
Labour Organization and World Trade Organisation.
- See Cœuré, B. (2017), "Sustainable
Globalisation: Lessons from Europe", speech at the special
public event "25 Years after Maastricht: The Future of Money
and Finance in Europe", Maastricht, February 16 2017.
- See, for example, Eurobarometer Spring 2017.
- For a more extensive discussion of this point see Rodrik,
D. (2017), "It's Time to Think for Yourself on Free Trade",
Foreign Policy, 27 January.
- See, for example, the ongoing debate on the Posted
- European Commission (2016), "Communication from the
Commission to the European Parliament and the Council
– Anti Tax Avoidance Package: Next Steps towards
delivering effective taxation and greater tax transparency in
the EU", Commission Staff Working Document, COM(2016) 23
- 74% of EU citizens believe the EU should take more action
in the field of fighting tax fraud. See Eurobarometer Spring
- See Wang, C., K. Caminada and K. Goudswaard (2014),
"Income redistribution in 20 countries over time",
International Journal of Social Welfare, Vol. 23, Issue
- See Draghi, M. (2017), "The interaction between monetary
policy and financial stability in the euro area", speech at
the First Conference on Financial Stability organised by the
Banco de España and Centro de Estudios Monetarios y
Financieros, Madrid, 24 May.
- IMF (2017), "Are Countries Losing Control of Domestic
Financial Conditions?", Global Financial Stability Report,
Chapter 3, April.