Resilience through cooperation: With or without multilateral consensus

Resilience through cooperation: With or without multilateral consensus

by
Danny Quah
Mar 2025

How can the global economy and its institutions build international resilience through global cooperation? This article considers how multilateralism holds both promise and challenge. Given the parlous state of the international system, however, modalities other than just multilateralism will be needed. The article describes three such possible ways ahead.

(The key ideas here were presented at IMF’s High-Level Forum “Asia and the IMF: Resilience through Cooperation” in Tokyo, Wed 05 Mar 2025. I thank Chatib Basri, Kenneth Kang, Jun Ma, Takehiko Nakao, Mari Pangestu, Ceyla Pazarbasioglu, Krishnan Srinivasan, and other participants at the event for their comments and suggestions.)

Resilience through cooperation is the right goal. Multilateralism is a good platform to try and achieve that goal, but need not itself be the final objective

At IMF and elsewhere the world is on a hunt for resilience. Nearly all observers agree that yet more global disorder is imminent—pandemics, global climate crisis, AI and other disruptive technology, trade wars, geopolitical conflict. How do we build resilience into the global economy so that our world seeks not only to be razor-sharp efficient (and then fragile) but instead to show both high productivity and the ability to recover from global shocks?

Cooperation is, of course, a good, sensible way to achieve the goal of resilience. By definition, cooperation accords everyone appropriate space, voice, and responsibility in just the right degree, in order to achieve what objectives they set out for themselves in the best way possible. But cooperation, while a fine aspiration, is not something that humanity always considers natural. For instance, in some parts of the world and at certain times, global cooperation comes with a charge of surrendering national sovereignty, and so is politically unacceptable. Or, cooperation might not align with a nation’s individual objectives—that nation would have to give up some well-being in order for the group to achieve a higher goal—and so is politically infeasible, or at least awkward. Put differently, cooperation need not be always incentive-compatible.

Instead, therefore, multilateralism is a leading platform by which the world has sought to achieve the outcome of cooperation. At first, this might not seem obvious, not least as multilateralism in different disciplines bears different meanings. In economics, for instance, there is a fundamental theorem of welfare economics, where individual agents behaving according to simple rules—not collectively but just by themselves—nonetheless achieve social outcomes that are both optimal and individually incentive-compatible (i.e., are Pareto-preferred). That, however, is a proposition about markets and price-taking behaviour. Unfortunately, there is no counterpart theorem in economics, politics, or elsewhere for multilateralism achieving global cooperation.

But even without a general theorem, the possibility for multilateralism achieving optimal outcomes becomes more compelling if by multilateralism we mean at least the following three features: (1) a level playing field where all nations, large and small, participate with equal rights and obligations, including rules for free markets and open trade; (2) effective international organizations that maintain rules for that level playing field; and (3) outcomes determined through the system’s rules-based order, not by the doctrine of “might makes right”. Items (1)-(3) would, I suspect, feature in most conceptions of the international rules-based order of the last seven decades.

(In this description, I diverge from economic writings where multilateralism is taken as represented by the international monetary system and a global financial safety net. See, e.g., Aiyar et al 2023. In the reasoning here, the monetary system and financial safety nets are potential outcomes of multilateralism, but they do not define it.)

Even if multilateralism as imagined above need not achieve cooperation exactly, most observers likely think it has some shot at coming close. The challenge today, however, is not a question of how close multilateralism gets to delivering full cooperation. Instead, the challenge is the opposite. Multilateralism is fraying, and so the pathway from disorder to multilateralism to global cooperation grows ever less feasible. Multilateralism is a global public good, its maintenance is expensive, and the cost of that support is unevenly distributed. As the global economy continues to change, so too the balance between costs and benefits evolves differently for different nations.

Seven decades ago the US found great advantage to supporting a multilateral international economic system. The Cold War against the Soviet Union had America’s adversary opposing free markets and open trade. On this margin the US gained geoplitically from taking the contrary position, thus adding to the direct economic benefit that the US already drew from the multilateral international economic system. The US had no close competitor in that system thus a great fraction of the system’s gains accrued significantly to the US itself. For the US, both geopolitics and economics aligned in multilateralism.

But that margin of costs and benefits shifted. First, the Cold War ended. Today, not only do America’s greatest geopolitical adversaries no longer oppose free markets and open trade, they have instead benefited from multilateralism. Second, and related, the global economy grew multipolar. When, in the past, the world was obviously unipolar, America gained visibly every time the global economy grew due to multilateralism. In this calculation, when the cost-benefit ratio rises, it becomes rational for the US and other similarly-positioned powers to pull back from providing multilateralism the support they had previously done.

Multilateralism is, therefore, significantly frayed.

But if the ultimate objective is resilience through cooperation, multilateralism is just one possible pathway to that goal. It is not essential. Yet other pathways might be possible. To surface what those others might be, it is important to clarify possible misconceptions of risks in the international system.

Risks and Misconceptions

A first misconception: “Geopolitical rivalry is the cause of fraying in the multilateral system.” While geopolitical competition doesn’t help, it is also not the principal cause of multilateralism weakening. Instead, multilateralism is fraying because it is an expensive global public good, whose aggregate benefits are considerable but whose costs are unevenly distributed.

Additionally, free-riding in public goods provision of course leads to cooperation breaking down even when all participants agree on objectives. Thus, preferences being aligned does not guarantee cooperation. With free-riding there is, in fact, failure to cooperate even with consensus: Geopolitical rivalry in that case is irrelevant to the breakdown of the multilateral system.

A second misconception follows from the first: “The breakdown of multilateralism comes with a global decoupling into separate camps or spheres of influence, each led by one of the Great Power adversaries locked in geopolitical rivalry.” In this view, partitioning of the global economy then leads to economic inefficiencies. IMF estimates that perhaps 7-12% of world GDP might be lost due to such global fragmentation. This is a Cold War kind of scenario, analogizing from the decades-long confrontation between the US and the Soviet Union after the Second World War. The Cold War also featured Kennedy-esque narratives of the “long twilight struggle” between democracy and freedom, on the one hand, against totalitarianism and tyranny on the other. That was a time when the Great Powers carried deep, irreconcilable conflicts with each other, when everyday Americans thought the other side was out to destroy the American way of life and their entire system of government.

Today, the motivation for decoupling is not primarily ideological difference but instead economic competition. Today, that motivation is the China Shock. That disturbance—that China is “stealing American jobs, hollowing out American industry, turning into ghost towns where were once thriving American middle-class communities”—would engender the same response from Americans whether it arose from Chinese businesses’ cheating, from Chinese state intervention, or from simply China’s particularly devastating economic efficiency. The China Shock narrative is one that resonates for many observers, independent of its actual empirical validity or the fundamental cause of the Shock.

Moreover, the China Shock is not inconsistent with theories of Ricardian comparative advantage. Its narrative is a statement about the distributional lived experience of different factors of production. Comparative advantage, on the other hand, is a statement about aggregate effects on well-being. The two are logically distinct but mutually compatible.

How Americans respond to the China Shock narrative makes for a crucial difference between circumstances today and in the 1950s-1970s. At no time in the Cold War, were Soviets ever accused of taking American jobs or dismantling American industry. The Soviet economy was an isolationist (and ultimately failing) machine; in no way could it have been viewed as sustainably engaged in competition with the US. Great Power competition today is profoundly different from that during the Cold War. Geopolitics is no longer just bad economics (e.g., Quah, 2024).

This does not make the matter less serious. The economics of the China Shock happens to align with international relations arguments in scholarly writings such as John Mearsheimer’s. These latter suggest that the US will not tolerate the rise of a hostile hegemonic power—of whatever political complexion—in the Asia-Pacific region. This is because such an ascent will end up restricting America’s prospects and freedom of actions. In this reasoning, it is not central whether the rising power is a democracy. Indeed, that the US seeks to contain China, in this view, does not draw on any wish to uphold an ideological position against an opposing model, as is suggested of the Cold War. The adversary could just as easily be Japan or India, or any other sufficiently great power that is rising. Middle Powers are not excluded.

Recognising economic reasons—not just geopolitics—to be among the ultimate causes for global fragmentation means that any enduring solution also needs to contain elements of economic resolution. But, further, that acknowledgement also means that the right analysis cannot rely on a model of global fragmentation based on interpolated political alignment. Global fragmentation will not be emerging on the basis of ideology; fractures will not be aligning with UN voting patterns.

Finally, a third misconception: “Whatever happens to multilateralism, global fragmentation will be too costly, and hence policymakers will back away from decoupling.” This is a fallacy of composition. However high the aggregate cost of global fragmentation, that cost is not what is perceived at the individual level. For many, the lived experience of global integration is more in sympathy with the narrative of the China Shock than with win-win welfare gains from comparative advantage.

To understand this, remember that if trade does anything, it changes relative prices. When relative prices change, there will always be someone in the domestic economy who sees that change as prices falling on what they sell. Regardless of the eloquence with which economists and policymakers laud open trade producing an efficient allocation of resources, such reasoning gains no traction with those workers and firms who see relative price move against them. For such agents—who have every incentive to be vocal and pivotal in the political system, democratic or otherwise—global fragmentation is a gain, not a cost. This is the case even if in the aggregate, net loss is by far the dominant feature of fragmentation. That those agents’ losses could, in principle, be more than compensated is irrelevant, as no one ever actually steps forward to make good on that compensation to them. Global fragmentation, therefore, will not be held in check by the argument that its aggregate cost is high: politically pivotal workers and businesses see gains and losses that don’t align with what happens in the aggregate.

Along similar lines, the COVID pandemic raised the question of how far the world economy might need to retreat from its efficient allocation of global production and supply chains in order to achieve resilience. If global production networks and supply chains were strained to razor-thin efficiency, then a retreat to some global fragmentation might be appropriate as a tradeoff, at the margin, for improved global resilience.

The global pandemic thus produced a shift in global preferences. But so too do other changes: concern over national security could rise, perhaps even endogenously through the so-called security dilemma, where one nation increases its aggressiveness in response to other nations’ doing so, and in a vicious cycle these actions accumulate, each building on the other.

With such shifts in global preferences, the world should indeed, rationally, slide along the tradeoff frontier between erstwhile economic efficiency and other considerations such as resilience and security. How much quantitatively it should do so, however, is not addressed by simply saying that the cost of global fragmentation is lowered world economic output.

But if multilateralism is failing, then what?

It is natural to hypothesize that if the Great Powers—for whatever combined reasons of China Shock, cost-benefit calculation, and geopolitical rivalry—are now unwilling to support multilateralism in the international system, then Middle Powers can step up and lead on doing so.

This belief draws from the fact that providing global public goods is costly. In this view, only large and powerful nations can undertake that provision. So, if not the Great Powers, then look to a combination of lesser powers.

But global public goods provision has two relevant dimensions to it: One, affordability; the other, incentive. Sure, Middle Powers find provision more affordable than would small states, and thus Middle Powers are more willing to bear the cost. However, if it is diminishing incentive (the increasingly unfavorable cost-benefit ratio) that is degrading Great Power support for the multilateral system, that diminishing incentive operates at least as powerfully on Middle Powers as it does on Great Powers. Middle Powers will be just as bad as Great Powers in upholding multilateralism, when push comes to shove.

Any enduring solution to the challenge of resilience in the international system needs to have more than just Great or Middle-Power leadership. Small states need to be an integral part of the solution. Or, more precisely, any enduring solution will need to focus on incentive compatibility. It will need to discard the idea that size matters, but instead focus on all nations participating co-equally and everyone gaining.

Three distinct pathways suggest themselves. First, seek inadvertent cooperation. Cooperation is, of course, a natural corollary when states are in agreement and can set down explicit articles of collaboration. Inadvertent cooperation, conversely, is when cooperation emerges even when states disagree. Inadvertent cooperation, therefore, is about doing the right thing even if for the wrong reason. While this might at first sound impossible, it is not that different from Adam Smith’s description of how “it is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest.” If your nation feels another is unfairly and illegally subsidizing the production of new energy vehicles, then subsidize your own as well, instead of sanctioning or placing tariffs on your adversary. Subsidizing your own national industry gets back at the other nation, but in the process both nations end up providing the Global South and yourselves a greater supply of clean energy devices that will help address the global climate crisis. This achieves a good outcome even if everyone is acting for the wrong reason.

Second, look to nudge the system out of gridlock. When every nation seeks to advance their self-interest, Prisoners Dilemma situations arise where every nation undertakes actions that are self-optimal but collectively destructive. When it is Great or Middle Powers caught in that gridlock, it takes only a small nudge to convince them to undertake a different action, and move to an otherwise unstable, not individually rational, but collectively preferred outcome. Small states can provide that nudge. Nudging can help Great and Middle Powers do what they would prefer to do, but cannot, for fear of retaliation by their adversaries.

Third, build subsystems of pathfinder multilateralism. When the international community of nations sees defection from multilateralism, smaller subgroups within whom multilateralism remains incentive-compatible can still form and work together. The WTO’s Multi-Party Interim Appeal Arbitration Agreement is one such example, providing an independent appeals process to resolve WTO disputes while the WTO Appellate Body remains inquorate. Such subgroups should remain open to new members who, over time, might join because they again see gain in participating. Through example, rather than nudging, gridlock might still be evaded. Call this pathfinder multilateralism, characterized by voluntary membership and choice of problem domains. While the focus of action is different, such a system bears some resemblance to what IMF calls “pragmatic multilateralism”, e.g., Aiyar et al 2023 and Pazarbasioglu 2024.

Conclusion

International cooperation is a natural way to try and achieve global resilience. If the multilateral system of the last seven decades is fraying for geopolitical reasons, then through economic institutions, working against geopolitics, we might work to restore that system for the purpose of again inducing international cooperation.

In this article, I have provided three lines of argument on this challenge. First, what were the hopes for multilateralism? It is unclear why multilateralism is the right vehicle to achieve global cooperation. But, second, multilateralism itself is fraying, not just for exogenous geopolitical reasons but from an endogenous alignment of economics and geopolitics. Third, I have provided three suggestions for what the international community might do in the midst of this global fracturing: seeking inadvertent cooperation; small state nudging Great and Middle Powers away from gridlock; building pathfinder multilateralism.