The frag­men­ta­tion of Bret­ton Woods

Financial Mirror (Cyprus) - - FRONT PAGE -

The world has changed con­sid­er­ably since po­lit­i­cal lead­ers from the 44 Al­lied coun­tries met in 1944 in Bret­ton Woods, New Hamp­shire, to cre­ate the in­sti­tu­tional frame­work for the post-World War II economic and mon­e­tary or­der. What has not changed in the last 70 years is the need for strong mul­ti­lat­eral in­sti­tu­tions. Yet na­tional po­lit­i­cal sup­port for the Bret­ton Woods in­sti­tu­tions – the In­ter­na­tional Mon­e­tary Fund and the World Bank – seems to have reached an all-time low, un­der­min­ing the global econ­omy’s abil­ity to meet its po­ten­tial and con­tribut­ing to geopo­lit­i­cal in­se­cu­rity.

When the Bret­ton Woods con­fer­ence was con­vened, its par­tic­i­pants un­der­stood that the IMF and the World Bank were in­te­gral to global sta­bil­ity. In­deed, both in­sti­tu­tions were de­signed to dis­cour­age in­di­vid­ual coun­tries from adopt­ing short-sighted poli­cies that would harm other economies’ per­for­mance, in­cite re­tal­ia­tory ac­tion, and ul­ti­mately dam­age the en­tire world econ­omy. In other words, they were in­tended to pre­vent the kind of beg­gar-thy-neigh­bour poli­cies that many ma­jor economies adopted dur­ing the Great De­pres­sion of the 1930s.

More­over, by en­cour­ag­ing bet­ter pol­icy co­or­di­na­tion and the pool­ing of fi­nan­cial re­sources, the Bret­ton Woods in­sti­tu­tions boosted the ef­fec­tive­ness of in­ter­na­tional co­op­er­a­tion. And they en­hanced sta­bil­ity by of­fer­ing col­lec­tive in­sur­ance to coun­tries fac­ing tem­po­rary hard­ship or strug­gling to meet their devel­op­ment-fi­nanc­ing needs.

It is dif­fi­cult to iden­tify more than a small hand­ful of coun­tries that have not ben­e­fited in some way from the IMF or the World Bank. Yet coun­tries seem hes­i­tant to con­trib­ute to the re­form and strength­en­ing of th­ese in­sti­tu­tions. In fact, a grow­ing num­ber of sys­tem­i­cally im­por­tant coun­tries have taken mea­sures that are un­der­min­ing the Fund and the Bank, al­beit largely in­ad­ver­tently.

In re­cent years, mount­ing do­mes­tic po­lit­i­cal pres­sure has driven Western gov­ern­ments to adopt in­creas­ingly in­su­lar poli­cies. And, just a few weeks ago, the BRICS coun­tries (Brazil, Rus­sia, In­dia, China, and South Africa) acted to bol­ster a cur­rency-re­serve pool to help ease short-term liq­uid­ity pres­sures and to es­tab­lish their own devel­op­ment bank – a di­rect chal­lenge to the IMF and the World Bank.

In­deed, un­like ex­ist­ing par­al­lel ar­range­ments, which have always been re­gional in na­ture and in­tended to com­ple­ment the work of the IMF and the World Bank, the BRICS’ New Devel­op­ment Bank and con­tin­gent re­serve agree­ment are not based on cul­tural, ge­o­graph­i­cal, or his­tor­i­cal links. In­stead, they are founded on a shared frus­tra­tion with the out­moded en­ti­tle­ments to which the US and Europe are cling­ing – en­ti­tle­ments that are di­min­ish­ing the Bret­ton Woods in­sti­tu­tions’ cred­i­bil­ity and ef­fec­tive­ness.

Most im­por­tant, Europe and the US con­tinue to re­sist the full dis­man­tling of a na­tion­al­ity-based ap­point­ment sys­tem that fa­vors their cit­i­zens for the high­est lead­er­ship po­si­tions at the IMF and the World Bank, de­spite of­fer­ing the oc­ca­sional prom­ise of change. More­over, they have sti­fled ef­forts to re­cal­i­brate the bal­ance of rep­re­sen­ta­tion even marginally. As a re­sult, Western Europe en­joys a mas­sively dis­pro­por­tion­ate level of rep­re­sen­ta­tion, and emerg­ing economies, de­spite their in­creas­ing sys­temic im­por­tance, barely have a voice. And, dur­ing the eu­ro­zone’s debt cri­sis, Euro­pean lead­ers showed lit­tle hes­i­ta­tion in bul­ly­ing the IMF into flout­ing its own lend­ing rules.

In this sense, it is the coun­tries that spear­headed the cre­ation of the Bret­ton Woods in­sti­tu­tions that pose the great­est threat to their le­git­i­macy, im­pact, and, ul­ti­mately, rel­e­vance. Af­ter all, emerg­ing economies can­not rea­son­ably be ex­pected to sup­port in­sti­tu­tions that of­fer un­fair ad­van­tages to coun­tries that so of­ten preach the im­por­tance of mer­i­toc­racy, com­pe­ti­tion, and trans­parency. That is why they are now de­ter­mined to use their col­lec­tive economic weight to cir­cum­vent th­ese in­sti­tu­tions.

An­other chal­lenge to the in­ter­na­tional mon­e­tary sys­tem lies in the pro­lif­er­a­tion of bi­lat­eral pay­ment agree­ments. By by­pass­ing more ef­fi­cient and in­clu­sive struc­tures, th­ese ar­range­ments un­der­mine mul­ti­lat­er­al­ism. In some cases, they even con­flict with coun­tries’ obli­ga­tions un­der the Bret­ton Woods Ar­ti­cles of Agree­ment.

The con­se­quences of this grad­ual process of frag­men­ta­tion ex­tend well be­yond lost economic and fi­nan­cial op­por­tu­ni­ties, to in­clude weaker po­lit­i­cal co­op­er­a­tion, re­duced in­ter­de­pen­den­cies, and, in turn, grow­ing geopo­lit­i­cal risks. One need look no fur­ther than the cur­rent tur­moil in Ukraine or Iraq to un­der­stand what can hap­pen in the ab­sence of cred­i­ble mul­ti­lat­eral struc­tures ca­pa­ble of shap­ing de­vel­op­ments in cri­sis sit­u­a­tions.

So much for the prob­lems. What about the solutions? Sim­ply put, the IMF and the World Bank ur­gently need self-re­in­forc­ing re­forms.

With a few key mea­sures – none of which is tech­ni­cally com­pli­cated – the Bret­ton Woods in­sti­tu­tions can move be­yond the mindset of 1944 to re­flect to­day’s re­al­i­ties and en­hance to­mor­row’s op­por­tu­ni­ties. Such re­forms in­clude the elim­i­na­tion of na­tion­al­ity-based hir­ing; ad­just­ments to rep­re­sen­ta­tion, with emerg­ing economies gain­ing more in­flu­ence at the ex­pense of Europe; and more equal­ity and even­hand­ed­ness in lend­ing and economic-sur­veil­lance de­ci­sions.

The chal­lenge will be to over­come po­lit­i­cal re­sis­tance – no small feat at a time when do­mes­tic po­lar­iza­tion has made politi­cians wary of pub­licly sup­port­ing economic mul­ti­lat­er­al­ism. The re­peated re­jec­tion by the US Congress of a much more limited set of re­forms – which was ap­proved by most other coun­tries in 2010-12, im­poses no in­cre­men­tal fi­nan­cial obli­ga­tions on the US, and im­plies no re­duc­tion in Amer­ica’s vot­ing power or in­flu­ence – is a case in point.

En­light­ened self-in­ter­est must over­come such po­lit­i­cal ob­sta­cles. The longer that world lead­ers re­sist the over­whelm­ing need for re­form, the worse the world’s future economic and fi­nan­cial prospects – not to men­tion its se­cu­rity sit­u­a­tion – will be.

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