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The Race to a New Bretton Woods

Article no: EN20081111-Article-6.5-2008

The Race to a New Bretton Woods

For years, only a small and enlightened elite and some NGOs looking beyond their tiny projects have been calling for a New Bretton Woods ? a global conference to restructure the global economic and financial system. Yet suddenly such demands have become almost mainstream, and developments have accelerated tremendously. However, the World Financial Summit to be held in Washington DC on 15 November will be at best be a starting point of a process, at worst we will observe another public relations exercise. By Rainer Falk

It is particularly the Europeans who seem to be rushing into action. They have agreed on five measures to re-regulate financial markets: new rules for rating agencies, an overhaul of existing accounting standards, the expansion of control and oversight mechanisms to all financial market segments including hedge funds, a code of conduct for managers of the financial industry and ? last not least ? strengthening the International Monetary Fund (IMF). The latter is planned to host an early warning system for the markets and to rescue defaulting countries (which would also include more financial resources for the Fund). At an EU emergency summit held last Friday in Brussels, the Member States agreed concrete decisions with regard to a new international financial architecture should be made no later than 100 days after the Washington Financial Summit.

* A key role for the IMF?

The hyperactivity of the French EU Presidency has already prompted warnings of an ?overregulation? of markets. Yet it should be noted that the European agenda is very narrow and that the Europeans themselves are main stumbling blocks on the road to a New Bretton Woods. Case in point: the naïve push for a strengthened IMF. This will not be possible without stronger participation of the new economic heavyweights from the South, such as China, India and Brazil in the decision-making processes of the Fund. Currently the Europeans are overrepresented in IMF governance structures. But there is no indication that they are prepared to make room for the underprivileged of today (today, Belgium has the same number of votes as Brazil).

Let?s take another example: Just recently the IWF has created a new function called ?multilateral surveillance? ? which is nothing but an US attempt to rein in China. The Europeans have joined the call upon China for a one-sided reduction of the current account imbalances. Consequently, the idea to strengthen the IMF is not met with enthusiasm by many Third World countries, which does not come as a surprise considering their experiences with the Fund?s direct conditionality. Anybody who suggests using reserves of Asian countries to strengthen the global financial system should not outright reject the idea of creating a new international financial organization (as proposed by Joseph Stiglitz).

* L20 format

No doubt: the fact that a L20 format (L=leaders) has been selected for the World Financial Summit is a real step forward. With its broader membership (see table) the Group of 20 represents at least 90 percent of the global output, 80 percent of world trade and two thirds of the world?s population. Nevertheless, L20 has a representation problem too, not only because it is restricted to state membership (thus widely excluding civil society) but also because the majority of the world?s states is not represented at all. The invitation to the United Nations Secretary-General to attend ? although a welcome step ? will in no way solve the problem of underrepresentation of the international community. Thus it is neither useful to demonize G20 (as the successor of evil G8) nor to herald it as the ?steering committee? of a revived multilateralism (even in a reformed concept including representatives of poorer countries).

In view of these developments the vivid debate which has evolved in the recent UN General Assembly is particularly important ? a debate which most notably led to the appointment of the new UN High-level Task Force to review the global financial system with Nobel Laureate Joseph Stiglitz as president. The Task Force could not only contribute to a new consensus but also ensure that the range of issues to be discussed on the road to a Bretton Woods II is expanded to cover other global problems such as climate, poverty and development which are closely intertwined with the current world economic crisis.

* Next stop: Financing for Development conference in Doha

It took two years to conclude the negotiations of the first Bretton Woods conference in 1944. There is no reason to expect that Bretton Woods II will be the result of a single meeting. It might turn out to be a lucky coincidence that soon after the World Finance Summit ? from 29 November to 2 December ? the Second United Nations Summit on Financing for Development is scheduled to take place in Doha/Qatar. Its agenda goes beyond development and includes all systemic questions of a New Financial Architecture ? questions which most likely will not be adequately solved at the Washington meeting. The preparation process for Doha is presently stalling as everybody has the eyes fixed on Washington. Both meetings are suffering from a severe handicap: without the input of the new US administration it will be difficult to arrive at meaningful and sustainable decisions.

* Reform debate under pressure

In the wake of the global financial crisis the pressure for reform is stronger than ever before. Yet fundamental reforms need well designed concepts, not quick fixes. Some axes of the necessary debate can be identified:

* Should we focus on the immediate problems of stabilizing the financial system because every thematic extension would make deliberations less productive and may make concessions (especially from the US) harder to achieve? Or does a new regulatory framework for world finance in order to be successful have to encompass other global problems, such as climate, hunger, development or trade?

* What does ?regulation and control of international capital flows? exactly mean: the overhaul of the existing institutional structures of the old Bretton Woods system or also the creation of new institutions? So far, it is only evident that a seriously strengthened IMF without a comprehensive reform of its mandate and its governance and decision-making structures will be problematic, even outright inacceptable from a Southern perspective.

* How we can improve multilateral coordination and cooperation of economic policies, and in which framework? Today even at a regional level, e.g. within the EU, the principle ?joint talks, separate actions? prevails. At the same time we observe new integration tendencies in the South raising the question of how to link new global arrangements with regional initiatives such as an Asian Monetary Fund?

* And finally: How can we meet the growing financing need, be it ?just? for stabilizing the financial systems or for solving other global problems? Which role can innovative financial mechanisms, including new forms of international taxation, play?

None of these questions is new. But they have to be posed anew in a new environment in which almost daily we can watch old certainties disappear.

Posted: 11 Nov 2008

Recommended citation: Falk, Rainer (2008) 'The Race to a New Bretton Woods', World Economy & Development In Brief, Issue 6/Nov-Dec, Luxembourg (