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Bretton Woods II Is a Small Step toward International Financial Institution Reform
Category: Development, Global Regulation
Friday, November 14, 2008
Financial turmoil on Wall Street and around the world has galvanized calls for international financial architecture reform. This weekend, G20 members will gather in Washington, D.C., to discuss overhauling the Bretton Woods institutions, with proposed plans for regulatory reform, poverty reduction, and a new global environmental policy. The diversity of reform agendas will not only make reaching any kind of consensus a difficult task, but also risk leaving the summit in a stalemate reminiscent of the Doha talks.
Calls for international financial institution (IFI) reform peaked in October, when Iceland warned that it would accept a loan from Russia if the IFIs and European financial institutions refused to lend it capital to bail out its failing banks. “We have not received the kind of support that we were requesting from our friends,” said Geir Haarde, prime minister of Iceland. “So in a situation like that, one has to look for new friends.”
Ultimately, a last-minute deal from the International Monetary Fund (IMF) prevented Iceland - a founding member of NATO - from borrowing funds from Russia. Since then, the IMF has lent successfully to Hungary, and is now exploring the possibility of extending similar financial lifelines to Pakistan, Ukraine, and Belarus.
But these three countries may find better deals elsewhere as they scramble to bail out their failing financial sectors. For example, Pakistan has expressed interest in securing loans from China, a lender willing to extend credit without conditionality. According to David Rothkopf of the Carnegie Endowment for International Peace, “A new mix of lenders is being sought, suggesting that the successor to the Bretton Woods order is being created on an ad hoc basis by the markets.” If the Bretton Woods institutions are to remain relevant, they must become competitive with China and other emerging sources of finance.
The availability of capital from new lenders will almost certainly be a topic of discussion at this weekend’s summit. Summiteers are also expected to discuss new ideas for capitalizing the IFIs, such as Jeffrey Sachs’ proposed “Tobin Tax,” which would place a small tax on all financial transactions. Revenue from the tax would be used to create a more robust IMF capable of serving as a “last-resort” lender. Sachs’ proposal will not go far at this weekend’s summit when it comes to tax-averse participants, including the U.S. delegation.
Perhaps the greatest challenge for summit participants will be distilling between reform proposals that are capable of achieving broad-based support and those that are not. Unlike Bretton Woods I - which occurred after World War II, when the United States and its allies were in a position to craft the world financial system without opposition - Bretton Woods II will include emerging powers like Brazil, China, India, and South Africa. These countries will bring to the negotiating table a new set of priorities that are unlikely to align perfectly with the G8 countries’ interests. Additionally, the original Bretton Woods conference focused exclusively on establishing a new international financial system rather than tackling diverse issues such as climate change, global poverty, and human rights. The addition of these issues to the summit’s discussion makes the G20’s task all the more complicated, meaning that the group is less likely to reach consensus.
According to AEI’s Philip Levy, this weekend’s summit should aim to be more descriptive than prescriptive. The first Bretton Woods summit took place following two years of meticulous preparation and was more of a signing ceremony than an actual workshop. This weekend’s summit will be the result of far less preparation and is occurring while the causes of the financial crisis remain undiagnosed. “Before these countries are able to act, we need to have a better understanding of what's driving the current financial crisis,” said Levy. “We're still in the middle of it. Every week we get new information about the scope of what has happened."
In that regard, this weekend’s summit marks the first step down what will probably be a long road to IFI reform. The summit is likely to produce a few documents stating mutual concern about the current crisis and planning for future meetings. Nonetheless, the summit signifies a growing consensus that IFI reform is vitally important. The ball of reform has started rolling, albeit at a cautious pace.
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