In Institutions We Trust? The Economics of Institutional Change
Led by Georgetown University, the Global Economic Challenges (GEC) Network brings together prominent research and policy institutions to address the most critical economic challenges of the twenty-first century. The July 2 workshop sponsored by the GEC network, Université Libre de Bruxelles (Solvay), the Joint Research Center (European Commission), and the Center for Economic Policy Research (CEPR) discussed the evolving nature of institutions and how they will need to change in response to the global COVID-19 pandemic.
Shéhérazade Semsar-de Boisséson, CEO of Politico Europe and advisory board member for Georgetown’s Master of Science in Foreign Service program, facilitated the workshop, which brought together economists, academics, and policymakers.
She launched the discussion by asking, “Why was the West so unprepared for the challenges of COVID-19? What lessons should be learned, and what should not be learned?”
Lessons from the Pandemic
Daron Acemoglu, an institute professor of economics at the Massachusetts Institute of Technology, outlined how COVID-19 hit the West at a particularly low point for its institutions.
We live at a point in our history where trust in institutions has completely eroded.
Acemoglu lamented that “the way the West handled the global economic crisis and other long-ranging trends has led people’s beliefs in democracy and impartiality to be at an all-time low.” He emphasized that two key trends—the collapse of both expertise autonomy and independent decision-making in civil societies and bureaucracies—are negatively self-reinforcing, sharing as an example the growing inequality in Western health care systems revealed by the pandemic.
Laurence Boone, chief economist of the Organisation for Economic Co-operation and Development (OECD), cited data that suggested people have greater trust in institutions with more defined objectives and asserted that the success of any institution comes from its ability to evolve while maintaining that focus.
She pointed to the OECD, founded in 1961 with membership from European nations in addition to the United States and Canada, as an example. Created to establish best practices for governments, the OECD’s civil servants have been able to successfully use models and conceptual frameworks to recommend economic policies that bolster national economies and stimulate world trade.
“Economic cooperation has been a success,” Boone said, citing the organization’s now 37 member countries working toward economic progress.
Developing Lasting Institutions
International economic crises of the past have prompted the creation of new institutions. However, the COVID-19 crisis has led to a new approach in institution-building in comparison to previous efforts. Marco Buti, former director-general for economic and financial affairs at the European Commission and current chief of staff to Commissioner for the Economy Paolo Gentiloni, outlined the unique framework that distinguishes institution-building during the COVID-19 pandemic.
“There is a consensual view and narrative shared by nations during this pandemic. A community-based, supranational approach to institution-building will be the best solution in this case,” Buti asserted. In other words, because the economic and health crisis extends beyond national borders, multinational institutions are best placed to respond.
Solidarity is key in developing successful supranational institutions, agreed Mathias Dewatripont, a professor of economics at the Université Libre de Bruxelles’ Solvay Brussels School. He suggested a supranational institution geared toward banking relief would help to stimulate international economic progress.
“Helping banks that are temporarily struggling but are sustainably healthy can be a very good deal for the taxpayers,” Dewatripont explained. “In Belgium, the bank KBC was aided with a loan of $7 billion, and the government received $12 billion back when the loan was repaid with interest.”
He believes that the COVID-19 crisis actually presents a unique opportunity to create institutions that will put Europe’s banking system on an even firmer footing.
“If handled correctly we can overcome the current mistrust between [potential] member states, particularly the states that will be acquiring banks of other member states and the states which will have banks being acquired.”
Boone also reiterated the importance of working across borders:
Equity and fairness are a very powerful engine to boost international cooperation.
The panelists concluded that this is perhaps the greatest lesson for institution-building amid the COVID-19 crisis: it requires a focus on maintaining solidarity among nations and a commitment to upholding the public good.
A recording of this event is available online.