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|Spotlight on Bretton Woods II|
In 1944, the world's most powerful nations met at Bretton Woods, United States, to create the financial architecture for a post-war era. Against a backdrop of 'financial anarchy,' world leaders will meet on November 15th to shape a new economic order again - but what can we expect from 'Bretton Woods II'?
While the current system of finance and trade has led to deepening inequality and increased poverty in the developing world, the current crisis could provide the opportunity for a fairer and more inclusive financial system.
Rather than transient changes to protect the status quo of these multilaterial organizations, analysts are urging global leaders to ‘reassess global economic arrangements and prevalent economic doctrines.’
The reports below provide in-depth analyses of the international economic architecture led by the World Bank and IMF – and examine what "a new, more inclusive global financial architecture" could entail.
31st October 08 - Wolfgang Kerler, IPS News
U.N. member states and economists challenged the neo-liberal policies of market deregulation that have long been promoted by powerful global financial institutions like the World Bank and International Monetary Fund (IMF), and called Thursday for a new, more inclusive global financial architecture.
Nobel Prize-winning U.S. economist Joseph Stiglitz stressed that "the current economic crisis should provide an opportunity to reassess global economic arrangements and prevalent economic doctrines", as he spoke at a panel on the ongoing global financial crisis, held by the U.N. General Assembly on Thursday.
Stiglitz is supposed to head a new U.N. task force of experts to undertake a review of the international financial system -- including its major institutions -- and to make proposals for how a more stable global economic order could be achieved. Other members of the task force are to be announced in the near future.
In his statement, Stiglitz heavily criticised the current international system for working "to the disadvantage of developing countries" as capital and financial market liberalisation -- which has been pushed on developing countries by the IMF and the World Bank in exchange for financial support -- "has often not brought the promised benefits of enhanced growth, but has increased instability."
Blaming the IMF, with its under-representation of developing countries, for being a source of current problems rather than part of the solution, Stiglitz proposed the creation of a new international financial facility funded by countries with large reserves -- for instance, China, Japan, India and oil-exporting states.
Stiglitz told IPS that "the IMF makes it very difficult for those whose voices are not adequately heard to turn over the money", in a situation where an international forum is needed to mobilise liquidity for developing countries.
Also because it lacks representation by middle- and low-income countries, neither the IMF nor World Bank is the right place to develop a new global consensus on key economic issues. "The only institution that currently has that broad legitimacy is the U.N.," Stiglitz said.
Sakiko Fukuda-Parr, a professor of international affairs at the New School in New York, highlighted that although the roots of the current economic turmoil can be found in rich countries -- as was the case in some previous crises -- the impacts on poor countries might be even more devastating.
"When crisis strikes, it is the poor and disempowered whose lives are most thrown off balance and are the slowest to recover, sometimes never to be regain the position they were in before the crisis," Fukuda-Parr said.
Like other panelists, Fukuda-Parr promoted a shift from neo-liberal economic policies of deregulation and liberalisation to Keynesian policies. Named after economist John Maynard Keynes, those policies advocate state interventions with fiscal and monetary measures in order to fend off economic recessions -- based on Keynes's observation of the 1930s Great Depression in the U.S.
"Policies that were pushed through under the ideologically driven neo-liberalism led to countries not having the possibility of introducing these policies," Fukuda-Parr told IPS.
Sharing the opposition of neo-liberalism, U.N. General Assembly President Miguel d'Escoto criticised the associations of rich countries -- like the Group of Eight (G8) -- by stressing that "it is time to stop viewing the global economy as the private dominion of some exclusive clubs."
Together with diplomats from developing countries, d'Escoto called for a new global financial architecture with an adequate representation of all countries -- and stressed the crucial role of the U.N. General Assembly, an institution where all member states enjoy the same voting power.
"Only full participation within a truly representative framework will restore the confidence of citizens in our governments and financial institutions," d'Escoto said.
While a French diplomat spoke on behalf of the European Union, the representative of the U.S. did not explicitly mention the need to reform the Bretton Woods institutions -- the IMF and World Bank.
Instead, he expressed the opinion that "these institutions are particularly well-equipped to provide assistance to countries in need." The U.S. is the only country with veto power over many issues at both the IMF and World Bank, as voting power is apportioned according to the size of each country's monetary contribution.
Joseph Stiglitz held the U.S. accountable for the financial crisis by stressing that "American financial markets have polluted the world with toxic mortgages and now have caused a global slowdown -- America should pay for the cleanup."
He dismissed the U.S. approach to tackle the crisis -- the bailout of troubled banks at an overall cost of one and a half trillion dollars. "Too little was done to affect the underlying sources of the problem, the foreclosures, to help the homeowners who were losing their home, to help the workers who were losing their jobs and to help the economy that is inevitable suffering as a result."
The participants of the U.N. panel expressed the hope that the upcoming G20 summit in Washington on Nov. 15 and the Conference on Financing for Development in Doha starting Nov. 29 will be used to further advance reforms of the international financial system.
28th October 08 - Aldo Caliari, Foreign Policy in Focus
Following several weeks of widespread global financial turmoil, leaders of several of the world's most powerful countries are planning a summit and a series of meetings to address this burgeoning crisis. The November 15 summit and an accompanying series of smaller meetings will weigh the potential for reforms of the international financial system. Some are calling these meetings "Bretton Woods II," in reference to the New Hampshire conference held in 1944 that created today's main global financial institutions, the World Bank and the International Monetary Fund.
The assumption, thus, is that these meetings could be subject to scrutiny, and fundamentally challenge conventionally adopted notions of the rationale and mission of such institutions in the light of today's world dynamics. The power imbalance whereby these institutions are able to dictate intrusive conditions and set the prevailing paradigms for knowledge-and policy-formation processes in developing countries, in spite of the limited representation those countries have on their boards, could be up for review. The lack of international regulation for capital movement — also a feature of the existing "architecture" — would be scrutinized.
For all the grandiloquent language, however, there's no reason to expect anything more than limited reforms to the existing system to emerge from this summit. The countries convening the summit seem likely to support a model that closely resembles the approach pursued to respond to the series of crises that shook Latin America, Asia, Russia, and Turkey in the 1990s and the start of this decade.
Essentially, this model entails a small group of rich countries coming together to channel their preferred policies through global institutions. Only the Group of 8 nations — plus larger emerging markets nations such as India and Brazil — will participate on November 15.
While some countries outside the G8 are being included, they aren't going to call the shots. The United States, as the host country, will have significant influence and discretion in shaping the agenda and outcomes. This much is clear: whatever method is used for arbitrating differences of position among participants, there won't be much transparency about it.
This isn't the first time we've heard widespread calls for "new global financial architecture." Such calls abounded in the 1990s, yet nothing came of them. Now we're paying the price for that. Today's global financial crisis, as Financial Times columnist Martin Wolf recently said, is the worst anyone alive has seen — unless you have lived for longer than 100 years. The distributional results of the approach are also clear as developing countries start to feel the pain of reduced remittances, lower demand for their exports, increased costs of debt payments, and threats to future aid. Sadly, this is happening despite the fact that these countries sustained painful reforms of their national financial systems in the name of that earlier call for new "architecture."
Furthermore, the exclusionary approach pursued in decisions on the global financial system may have had some credibility — even if it was admittedly undemocratic — in the late 1990s. Back then, many thought the only threat to the international financial system was posed by developing countries' outdated financial institutions, such as supervisory and regulatory bodies, that couldn't cope with the growing mobility of capital flows.
So much for that theory. Any semblance of its credibility has vanished now that many developing countries are suffering from a crisis they clearly had no part in creating.
But more extraordinary than news about the November summit is what's not in the news so far and, yet, seems to be the reason for such rapid action. There's another process where the words "Bretton Woods II" have resonated since the summer. From November 29 until December 2, world leaders will meet in Doha, Qatar, to review progress in implementing the "consensus" that emerged from the International Conference on Financing for Development held in Monterrey, Mexico six-and-a-half years ago.
The reform of the international financial and monetary systems was a key theme on that conference's agenda. The upcoming review in Doha was poised to deal with this issue, because it was clear that little progress had been made toward that goal — even before the global credit markets debacle provided a "smoking gun." The document currently serving as the basis for negotiations, released in late July, contains breakthrough language calling for a major review of the "international financial and monetary architecture, and global governance structures." This is a proposal that enjoys broad support by the developing-country governments. Some diplomats have been informally calling it "Bretton Woods II."
Indeed, the Monterrey Conference established the first multilateral, North-South consensual framework for reform of the international financial system. It offers the framework that best meets the needs of the time. Who can't agree with French President Nicolas Sarkozy when he says "the 21st-century world cannot be governed with the institutions of the 20th century"?
The Monterrey framework is the one process that can garner the broadly based knowledge, ownership, and political support that needs to be behind reforms of such magnitude. In a visionary speech delivered during the annual meetings of the World Bank and International Monetary Fund Robert Zoellick, the Bank's president, called for a "new multilateralism" that "must put global development on a par with international finance." What could be better suited to this purpose than a process whose central objective is financing development? Perhaps one like the Monterrey Consensus, which explicitly stated in 2002 that poverty reduction should be at the center of efforts to reform international financial architecture.
The Doha review, therefore, offers a perfect opportunity to launch these discussions. Unless, of course, you represent a government that has controlled global financial reforms for the last half century, in which case you would probably not be so keen on a process where you'd have to negotiate with other actors who may have the chance to put their needs on the table, too.
At the risk of sounding cynical, it's possible that the most compelling reason for holding the November 15 summit was the simple fact that the Doha review, scheduled last December, was about to happen. This would also explain the otherwise incomprehensible fact that not a single one of the leaders who convened the meeting has even mentioned the upcoming Doha meeting proposal at all, or pledged to support it. It's hard to believe this was an inadvertent omission. Unfortunately, the most plausible explanation is also the worst: that hasty calls for a summit of G8 and large developing economies aims at undercutting the Monterrey/Doha financing for development process, and sapping the energy building toward an inclusive political discussion that could be had in Qatar.
Zoellick called for a "new multilateralism." Essential to a truly "new" multilateralism, however, is the courage to allow scrutiny of reform ideas by more than a few like-minded partners. Let's hope the 20 leaders meeting on November 15 in Washington, especially those representing the rich G8 countries, will have the vision and courage to put this principle into practice two weeks later in Doha, including by calling on all heads of state to attend that conference and commit to shaping a substantive outcome there. The world only needs one "Bretton Woods II."
Aldo Caliari, a Foreign Policy In Focus contributor, is director of the Rethinking Bretton Woods Project at the Center of Concern in Washington, DC.
27th October 08 -Mukul Munis, FinanceAsia.com
Global leaders, led by Gordon Brown and Nicolas Sarkozy, are pushing for a reform of the international financial system.
In 1944 in a small town called Bretton Woods, just a little beyond Mount Washington in the US state of New Hampshire, 44 leading Western nations met to map out the post-war financial system. The result of the agreement was the formation of three big global financial institutions – the International Monetary Fund (IMF), the World Bank and the International Trade Organisation (ITO).
At the closing plenary session of the conference, John Maynard Keynes, one of the principal architects of the agreement, commented: “We have shown that a concourse of 44 nations are actually able to work together at a constructive task in amity and unbroken concord. Few believed it possible. If we can continue in a larger task as we have begun in this limited task, there is hope for the world.”
Now, almost 64 years later, leaders of developed and developing nations are once again pushing forward to save the global economy and its financial system from slipping into anarchy. And leaders from Western and Eastern nations agree that the need of the hour is to draw new guidelines for the world’s financial systems.
The magnitude of the global financial problem and the efforts needed to save the financial system were best put by the president of the European Union Commission, Jose Barroso, in Beijing over the weekend at the Asia Europe Economic Meeting (Asem). Barroso told reporters that there was a strong need for developed and developing countries to come together from a common platform. “We stick together or sink together,” Barroso warned.
There is a general consensus among world leaders that there is a need for a Bretton Woods II; a need to chart out how to regulate the financial system and global money markets; and definitely a need to involve emerging economies like China, India, Brazil and Russia in the decision-making process.
The European leaders in unison have thrown their weight in for the creation of a Bretton Woods II. They underscored the immediacy of a summit-level meeting between the US, Europe and emerging economies to "redesign" the world's financial architecture. Last week, the US agreed to such a meeting, which will take place in Washington on November 15. This could also be a good occasion to allow the new US president-elect to meet the world leaders and chart out the future course of action to be taken to reform the financial system.
British Prime Minister Gordon Brown, who has considerably bolstered his sagging image by playing a vigorous role in restoring stability to the financial markets, calls for making best use of the present crisis to reform the multilateral lending institutions such as the IMF.Brown says the current crisis should be seen as an opportunity to push through delayed reforms. “Sometimes it takes a crisis for people to agree that what is obvious and should have been done years ago can no longer be postponed,” he said in a major speech on the fast-moving global financial crisis last week in London.
“We must create a new international financial architecture for the global age,” he said, adding: “We must have a new Bretton Woods – building a new international financial architecture for the years ahead.” Brown says that while the founders of Bretton Woods devised rules for a world of limited capital flows, we must now devise rules for a world of global capital flows. What is needed is a financial system for the 21st century that recognises "the new realities”, Brown said, reflecting the views of numerous commentators and economists.
Brown compares the task facing world leaders now with the actions of British Prime Minister Winston Churchill and US President Franklin D Roosevelt during World War II. Even in the "heat of the battle" they were already thinking about the framework that would be needed for the future, he points out. International cooperation is the only way the global economy can achieve the restructuring it needs to avoid a repetition of the problems seen over the past 12 months.
The current global system is too clouded with opacity, conflicts of interest and irresponsible risk-taking, and when problems occur countries have tended to look inwards and deal with them in isolation when it is clear they should look outwards and join in international cooperation.
Brown says he proposed a reform of Bretton Woods in a speech at Harvard University a year ago, but other factors such as the rising oil price "got in the way" of anyone acting on his call. He assures everyone that he will now re-double his efforts to secure a meeting of world leaders as soon as possible to discuss drawing up a new Bretton Woods system.
Europe, led by France's Nicholas Sarkozy, is looking to put its own stamp on such ideas – and to get the endorsement from major nations like the US, China and India. Sarkozy too wants to reform the Bretton Woods system that created the World Bank and the IMF. And he pushed his ideas strongly in Beijing this weekend.
At the end of the two-day Asem meeting in the Chinese capital there was a consensus among the 40 leaders of a need to reform the IMF and the financial markets. "Leaders believed that authorities of all countries should demonstrate vision and resolution and take firm, decisive and effective measures in a responsible and timely manner to rise to the challenge of the financial crisis," the Asem statement says.
The international community should continue to strengthen coordination and cooperation and take effective and available economic and financial measures in a comprehensive way to restore market confidence, stabilise global financial markets and promote global economic growth, it says.
But no effective solutions can be found without the explicit support of the biggest economy in the world, the US. So far, President George W Bush, Treasury secretary Henry Paulson and Federal Reserve chairman Ben Bernanke have been lukewarm to the idea of a reform of the financial system architecture. The US government, it seems, is still reluctant to take head-on the bankers at bulge bracket firms, even as it becomes their biggest shareholder.
Bernanke has been pushing his own ideas about the turmoil and has been quoted by the New York Times as saying that stabilisation of the financial markets is a critical first step, “but even if they stabilise as we think they will, broader economic recovery will not happen right away”. He tried valiantly to reassure the American people that the Fed would utilise all its tools to combat the financial crisis, but this was too little too late and the Dow Jones and Nasdaq indices continued their slide throughout last week. And warnings from analysts that the US and Europe are headed for a recession may continue to savage stocks in the coming week.
Asia's response to the crisis so far has involved shared strategies such as interest rate cuts, stimulus packages and emergency measures to halt stockmarket slides, but has stopped well short of coordinated actions.
Philippine President Gloria Macapagal Arroyo has unveiled an idea of creating a $10 billion emergency fund with the supposed blessings of the World Bank. Arroyo claimed the Association of South East Asian Nations (Asean) together with China, Japan and Korea support the plan. The idea of an Asian Monetary Fund, which was floated during the Asian financial crisis in 1997, has been revived again.
But the need of the hour is a concerted effort by governments in the US, Europe and Asia and not individual regional rescue efforts. The contagion that started on Wall Street has effectively spread across the global markets and the world is staring at the prospects of a drawn-out recession. Leaders of the West and the East need to draft a new action plan for the reform of the global financial system – a reform plan that will keep up with the realities of the 21st century.
29th October 08 - Scott Neuman, National Public Radio
It was the summer of 1944, still a year before the end of World War II. The Allies had gained a foothold against the Nazis in France and were advancing against the Japanese in the Pacific. But far from the battlefields of Europe and Asia, representatives of 44 nations gathered in an idyllic northern New Hampshire resort to reshape the global economy.
Three weeks of meetings at the Mount Washington Hotel produced the Bretton Woods Agreement, creating the now familiar World Bank and International Monetary Fund and establishing a currency exchange regime that would shape monetary policy for decades.
Bretton Woods (officially known as the United Nations Monetary and Financial Conference) is little remembered outside university economics classes, overshadowed in history by the cataclysmic events of the time.
Now world leaders — dismayed by the current chaos in financial markets — are calling for a sequel of sorts.
But economists and historians are quick to point out that a Bretton Woods-style solution is unlikely in the current environment. In 1944, the economic road ahead seemed clear. The resolution of the current global crisis, by contrast, seems to elicit little consensus.
And while European leaders are calling for a massive rethinking of how the global economy functions, it's less clear that U.S. authorities are interested in comprehensive change.
What Happened At Bretton Woods?
By early 1942, renowned British economist John Maynard Keynes and Assistant U.S. Secretary of State Harry Dexter White had independently drafted plans that would lay the foundation for the conference. Although the two were largely in concert, they disagreed on many of the details.
They shared the belief that an international organization should act as a lender of last resort to assist nations that were having short-term problems with "balance of payment" deficits. These deficits, caused largely because some nations had more imports than exports, were blamed for slowing economic growth and spurring inflation among many of the world's economies.
No More 'Go It Alone'
Keynes and White brought to Bretton Woods an understanding that global finance was too big and too complex for each nation to "go it alone" on economic decision making.
"They believed we cannot have a stable international financial architecture without a will for cooperation," says Benjamin Cohen, a political science professor at the University of California, Santa Barbara.
"Keynes wanted a world central bank that would be capable of creating money out of thin air in the same way that national central banks can do," says Cohen, who is author of the book International Political Economy: An Intellectual History.
Keynes and White shared a desire to head off the protectionist policies that worked to isolate the United States from other nations before the war. They believe that high tariffs on imported goods — meant to protect American jobs — had deepened the severity of the depression. They also hoped to use the promise of a new post-war economic order to strengthen the anti-Axis alliance.
"We needed to assure [the Allies] that we wouldn't return to the 'beggar thy neighbor' financial and monetary chaos of the 1930s," says David Andrews, a professor at Scripps College, whose latest book is Orderly Change: International Monetary Relations since Bretton Woods.
An 'Audacious' Plan
White and Keynes envisioned a post-war restarting of international financial markets that had virtually ceased to function during the Great Depression and World War II. Their plan was "audacious," says Andrews.
At Bretton Woods, nations agreed to adopt a monetary policy that tied currency exchange to gold reserves, a return to the gold standard that had prevailed before the depression.`
The British, facing massive deficit spending to rebuild their shattered homeland, objected to a fixed rate, anticipating a need to devalue the pound.
But the conference participants ultimately agreed that currencies would be permitted to fluctuate within a few percentage points of a fixed rate, pegged to the U.S. dollar, which was backed by America's gold reserves.
Keynes' vision of a world central bank became the International Monetary Fund, to be funded by member nations. The forerunner of the World Bank, an institution that today provides loans to developing nations for reconstruction and infrastructure projects, was also created.
While the IMF and World Bank are lasting legacies of Bretton Woods, the fixed exchange rate is not. By the early 1970s, U.S. inflation had made the fixed exchange rate regime untenable.
"The U.S. was supposed to keep inflation down. Until about 1965, it did just that," says Michael Bordo, an economics professor at Rutgers University. "But around 1965, inflation took off."
By 1971, the rising cost of the Vietnam War, coupled with President Johnson's Great Society programs, had increased inflation and forced President Nixon to effectively rescind the U.S. gold standard and allow the dollar to float freely.
Why A Bretton Woods II?
In that sense, a key tenet of Bretton Woods — the effort at a fixed exchange rate — was a failure. So why have French President Nicolas Sarkozy, European Central Bank President Jean-Claude Trichet and others called for a "new" Bretton Woods?
"There's a broad sense on the part of the Europeans that the international monetary, financial and trade institutions are stuck — that they haven't worked properly for some time and in a sense they see this crisis then as an opportunity to address a long-standing set of concerns about how the international economy ought to function," says Andrews.
But today, there is no international consensus on which direction to move and considering the timing of a mid-November summit — scheduled days after the U.S. presidential election — there is unlikely to be enough political will to move ahead quickly.
Without the serious groundwork laid by a Keynes and White, "I can't imagine there would be any real result in terms of reform of the system," says Cohen.
A Changing Economic Climate
Since Bretton Woods, the world has been transformed again.
The United States remains a major force in the world economy, but it also has major competition. China and Europe have become economically much more important since Bretton Woods, while the "rise of the rest" makes the emerging economies of Southeast Asia and Eastern Europe bigger players.
Then there's Russia. In 1944, White managed to get a reluctant communist Soviet Union to attend the conference, only to see Moscow subsequently refuse to join the IMF or ratify the agreement. Today, Russia has emerged as a major exporter of oil and other commodities and would undoubtedly take a much more prominent seat at the table.
Cohen says the fact that the U.S. is less powerful than it was at Bretton Woods "makes consensus far more difficult."
"The likelihood is that the United States will seek only minimal changes to the status quo, in part because it doesn't know what kind of changes it wants," Andrews says.
In short, Andrews expects "nothing on the order of Bretton Woods" to emerge from November's summit.
"You don't draft a document like [the Bretton Woods Agreement] over the course of a weekend," Andrews says. "You draft it over the course of several years and then you finalize it at a summit."
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