November 3, 2008
If Bretton Woods is Dead, Now what?
Here's Kevin Gallagher's answer:
Bretton Woods is dead
World leaders must commit to forming new international organisations better suited to solving the economic crisis
Monday November 03 2008 12.00 GMT
President Bush has taken a welcome
step by inviting the G-20 to Washington
on November 15 to discuss the global financial crisis. This meeting should put in place a stability package that includes the developing countries and lays the groundwork for the creation of a new multilateral financial architecture.
Over the past five years, GDP per capita in the world's developing economies has been rising faster than in rich countries for the first time in history. According to statistics released by the World Bank last week, the developing world has pulled 232 million people over the global poverty line of $2.50 per day since 1999.
These gains in economic growth and
poverty alleviation are the result of an economic model that
significantly deviates from the Washington Consensus. Nations like China, India, South Africa and Brazil all have
recognised that markets and trade are important for development, but they have
also shown the world that markets must be guided by appropriate governmental
policy. In the World Trade Organisation, where each nation has an equal
vote, the developing world has worked hard to preserve the ability to deploy
the mix of state and market policies that have been working for them.
Until a week ago it was thought that poorer nations were "de-coupled" from the current economic crisis because they had piled up reserves and their banks weren't heavily involved in mortgage markets. Now it is clear that the crisis, which was not of their making, is at their doorstep.
Much of the economic boom in the developing world was fueled by commodities exports. Demand for exports has declined as prospects of a recession increase, causing a sharp decline in the prices of those exports. Global credit, which is crucial to exporters, has all but frozen. Banks in developing countries weren't heavily involved in the mortgage business, but they did swap with and borrow money from banks in developed countries, creating a credit squeeze for the local economy as well. If that wasn't enough, rising interest rates and credit tightening has strengthened the dollar, and currencies across the developing world are losing value.
World leaders should swiftly
coordinate interest rate cuts and provide massive liquidity to markets in
developing countries. New capital should also come from the larger developing
Developing countries can't do this on their own. Many of these nations simply don't have the capital. Some have reserves from the commodity boom but are draining them to save their currencies. What's more, when developing nations unilaterally mimic a rich country's methods of dealing with this crisis by nationalising private assets, such actions can instill even less confidence in a developing country's markets and provoke more capital flight.
New capital can be used in the short term to fend off runs on their currencies. Just as important, new credit and capital can be coupled with coordinating governmental policies to build the productive capacities of promising and strategic domestic enterprises and toward domestic consumers to stimulate demand. With jobs becoming scarce and food prices still high, small farmers are also among the strategic sectors worthy of government attention.
Non-OECD countries are now half the global economy and more than half the destination of OECD exports. Maintaining the growth in developing countries not only saves them from meltdown but can also help rich countries dig themselves out of a downturn with new demand.
Under no circumstances should a developing country's capital infusion have IMF-like conditionalities. Historically, the IMF often gave loans only if recipients deregulated markets, privatised industries, slashed government budgets and devalued currencies. A new book, “Development Redefined: How the Market Met Its Match” by Robin Broad and John Cavanagh, documents how IMF conditionality often caused irreversible social and environmental costs on recipient countries and created a global backlash against the IMF and other international institutions. There is simply no legitimate reason for these conditionalities today. Indeed, it was the deregulation in rich countries that helped get us into this economic mess in the first place.
Finally, the global summit should be the first step toward a "Bretton Woods II" that supports multilateralism and policy diversity as core principles. This summit must be dedicated to setting counter-cyclical capital standards, regulating all parts of financial markets (including the rating agencies) and creating a credible lender of last resort. Under the current system, Luxembourg, the Netherlands and Belgium have more votes in the IMF than China, India and Brazil. A truly multilateral organisation must have a one country-one vote system. Without a new infusion of capital and a multilateral approach to reform, the November meetings will be one step forward, two steps backward.
TrackBack URL for this entry:
Listed below are links to weblogs that reference If Bretton Woods is Dead, Now what?: