Page last updated at 06:07 GMT, Thursday, 13 November 2008

Insight: 'Bretton Woods Two'?

By Bridget Kendall
BBC diplomatic correspondent

A deep-seated global crisis is often a chance to redraw the map, reflecting shifts in the balance of power in different ways.

First, the crisis can confirm or nudge ahead trends which seem to be happening anyway - like the shift of power from Western to emerging Eastern players.

Second, it can put flesh on reforms already in the air - like plans to overhaul the international financial architecture to be discussed at this weekend's summit being hosted by President Bush in Washington.

Shanghai construction
China is the latest large economy to announce an economic stimulus plan

And third, there are the instinctive emergency reactions, supposedly temporary, but which can end up reshaping the global chessboard for years to come - the hurried nationalisation of some Western banks, for instance, or possibly Iceland's desperate bailout appeal to Russia - a Nato member putting financial survival ahead of any security provisos.

Of course to draw firm conclusions at this point, with the economic crisis far from over, is a risky venture. But some patterns merit closer examination.

First, is the balance of power in the world really shifting eastwards? It is a question that has been the subject of much debate recently on the discussion programme The Forum which I host for the BBC World Service.

My guests' general conclusion seems to be that, yes, Asia is on the rise, and the economic woes of the US and Europe have exposed the fragility of Western banking and the vulnerability of Western economies.

China and India have been less affected. And, even if demand for Chinese goods slows, its mammoth economy can still be a powerful engine of growth and a much needed source of liquidity.

Russian nerves

And yet, in a world so interdependent economically, can any part be immune? Especially given the symbiotic relationship between China and the United States - "Chimerica" as the Harvard historian Niall Ferguson calls it: not two financial systems, but one.

J Maynard Keynes at meeting in 1944
Economists including JM Keynes negotiate the Bretton Woods Agreements

In these terms, surely if the American and other Western economies have succumbed to a chronic bout of sneezing, flu for China and rest of world is inescapable?

Moreover, perhaps we should not overstate the resilience of emerging economies.

Look no further than Moscow, where the stock market panic and flight of capital abroad have been dramatic, and the fall in world oil prices has added to the economy's battering.

Despite Russia's legendary energy wealth, there is a new nervous uncertainty among local businessmen who - one suspects - know more than most about the way the domestic economy remains weakened by corruption and a labyrinthine smoke-and-mirrors way of doing business.

A second question worth pondering - just how likely is it that this weekend's top-level meeting really will generate reform of the world's leading financial institutions?

Bridget Kendall
Bridget Kendall
1998 to present: BBC diplomatic correspondent
1994-98: Washington correspondent
1989-94: Moscow correspondent

There is grand talk of a 'Bretton Woods Two', a vision for a new financial system pushed for some time by, among others, Britain's Gordon Brown. True, there is broad agreement on an agenda to seek ways to forestall a global recession, devise an early warning system and consider more international regulation.

But the leaders from 20 of the world's largest economies bring to the table a variety of conflicting interests, some motivated by practical need, others by ideological considerations, some looking for short term fixes - the move from private to state control of banks for instance - which others view as a desirable long term objective.

Top table reform

So is major reform feasible? Is the current economic crisis cataclysmic enough yet to be truly transformational?

The Europeans say they are united in a call for global financial governance and greater transparency.

The United States has been famously reluctant to accept any authority but its own. Why should this be any different?

But a rift has opened up between those like the French President, Nicolas Sarkozy, who seek permanent global oversight of financial transactions, and wary Anglo-Saxon governments - including above all the US administration - which fear that too much control could hamper the workings of the free market.

And even if that hurdle is surmounted, could any US president, even one enjoying such goodwill as President-elect Barack Obama, win Congressional backing for a toothy regulatory body that would have real oversight of US institutions?

Whether the issue is international crimes against humanity or attempts to regulate carbon emissions, the United States has been famously reluctant to accept any authority but its own. Why should this be any different?

Russian President Medvedev
Russian President Medvedev blames American policies for the current crisis

Meanwhile, the powerhouse nations of the so-called BRIC group - Brazil, Russia, India and China - and the petro-states of the Gulf (armed with the bargaining chip of sovereign wealth funds) have made it clear that what they want is recognition that the old elite clubs dominated by Western nations no longer reflect reality.

Logic would suggest this means reform of the top tables not just at the IMF and the World Bank, but an enlargement of the G8 (Group of Eight most industrialised countries), and the United Nations Security Council.

Fine in theory. But in practice…

Reforming the G8 is probably easiest. Already the annual summit opens its doors to other players. And the 2009 host, Italy's Silvio Berlusconi, has made it known he intends to invite the G20 countries to his G8 Sardinia party.

But the weary process of reform at the UN has left many jaundiced. It is hard to imagine the mechanism which would require current global powers to agree to anything but a symbolic change.

The Bretton Woods Agreements
Agreed in July 1944, but not all of them operative until 1959
Creation of the IMF and IBRD (now part of World Bank)
Encouraged open markets
Obligation to maintain currency exchange rates within fixed values (to +/- 1%)

Likewise at the World Bank and the IMF, the hard bargaining will revolve not just around which new countries get seats on the board, but whether they will be allowed to upset the current balance of power when it comes to decision-making. Note that already there are voices warning that too many players will make any new arrangement dysfunctional.

There are other complications. Russia continues to agitate for any adjustment that will lessen US influence, whether in financial or European security matters.

No doubt President Medvedev will want to repeat his and Mr Putin's belief that the root cause of the current financial crisis lies in American unilateralism following the end of the Cold War and the 9/11 terrorist attacks - an ideological argument that may irritate rather than persuade and make consensus even harder to achieve.

Safety in numbers

And a third area of examination - what do the emergency reactions to the financial crisis so far tell us about the way the world may be heading?

Reactions seem to boil down to a choice of two - whether to conclude that in times of trouble safety lies in numbers and it is better to be part of a bigger bloc, or whether when the going gets hard, it is better to look after your own - the protectionist, nationalist instinct.

Certainly some people seem to be concluding that size is the best security against future risk.

In beleaguered Iceland, where six months ago opinion suggested a majority were against EU membership, those in favour of throwing their lot in with the EU has crept above 50%.

A similar trend in Scandinavia is leading the governments in Denmark and possibly Sweden to wonder if they should think again about offering a referendum on joining the Euro.

In global terms, perhaps the biggest worry of all must be what will a financial downturn mean for the world's have-nots?

And in Scotland, too, recent polls have suggested support for the Scottish Nationalist Party's vision of independence has lost ground. Going it alone, it seems, no longer looks so attractive in the wake of a financial crisis.

But at the same time, EU cohesiveness has taken a knocking. Despite early declarations of EU economic solidarity, it didn't take long for Ireland to break ranks and offer a unilateral guarantee to depositors to forestall a run on its banks, or for Germany to hint it would take similar action.

And disorderly EU bickering ahead of the Washington summit has rather belied claims of European unity.

And in global terms, perhaps the biggest worry of all must be what will a financial downturn mean for the world's have-nots?

Fears for poor

For all the high hopes of turning this crisis to advantage, to push through reforms that otherwise would never have been contemplated, there is a danger it could pivot in the opposite direction. And if this crisis ushers in greater protectionism, it could mean an end to an era of generosity and less concern for the welfare of others.

For the last decade it has been the very poor who have dominated the agenda of the World Bank and the IMF. Not any more. In the last two months, it has been Iceland, Hungary, Ukraine and Pakistan knocking at the IMF door.

Already the UN Secretary General, Ban Ki-Moon, has sounded the alarm that his ambitious UN Millennium goals to slash poverty, illiteracy and disease run the risk of being neglected. This could 'threaten to undermine all our achievements' he said recently.

Just this week the World Food Programme warned it was having to cut food aid to impoverished Zimbabweans due to a lack of international donations. A harbinger of things to come, perhaps.

And there is a broader implication - that it may become increasingly difficult to persuade nations to sign up for large-scale interventions to help the desperate and the victimised. If a global recession cannot be avoided, the United Nations' much vaunted "responsibility to protect", only recently enacted, may end up already becoming an outdated aspiration.

You can listen to the BBC World Service's The Forum with Bridget Kendall here .

Your comments:

The crisis will have low or any impact on international relations. The governments have to stop pushing money into the banking system immediately and use it to support companies (not financial) and create new workplaces
Ervin , Brno, Czech republic

Subsidies will end for the developed world. Developing countries produce will be marketable in those developed countries. The farmers in developed countries will be discouraged and will shunt farming due to poor returns. Developing countries, especially African economies will prosper. Developed countries' exports will diminish in sales volumes to developing countries. Availability of cheap raw materials for the bug economies will decrease.
Elphas Moni, Kampala, Uganda

I have been having a feeling lately that the current financial crisis is just another one off event and the situation will normalise soon. The countries bickering about the US influence seem to be taking advantage of its current financial failings-which is a rather ill fated short term proposition. More emphasis should be concentrated on what led to the current situation, .i.e. lavish credit from banks, 'cooked books' from financial institutions etc... The Chinese, though not there yet, have shown that we can regulate capitalism to the good of everyone. But all in all the financial crisis is over hyped and it will therefore have negligible effect on the balance of power.
Charles Lukwago, Kampala, Uganda

This is regarding a new Multipolar World Order
Chetan Singh, Dehradun, India

Let's hope this trend signals the end of the dominance of the Illuminati in Europe and the US!
Maurice, Paris, France

The financial crisis will affect international relations positively. As the famous saying goes, adversity is a blessing in disguise. The great financial crisis is serving as an eye opener to those who assumed that without investing in sustainable growth pre-requisites, profits can be harnessed forever. They are being proved wrong.

Madan Gopal Sharma, Olten, Switzerland

Your article is very interesting, focusing on the materialistic aspects of life (money, power, control etc) but it leaves out the more important aspect of humanity, its spiritual reality (compassion, justice, ethic, respect, truthfulness and many more .... ). There definitely needs to be a balance between the material and spiritual, otherwise civilisation as we are experiencing it in these days, will be doomed ... as happened to great civilisations of past ages.
Paula van den Boogaart, Nuernberg, Germany

I would like to see more G-20 Than G-7, or 8's. Also, more countries involved in the decisions of the planet, after all we are in this together. The less government involvement in a free market, the better off the free market is, take the pain.
David Eaton, Las Vegas, USA

I think that balance of powers will tend to eastern nations but it is a matter of time (we do not know how many time) that that balance tends back to western nations again.

I think all nations should work together without thinking about particular interests like the USA and China, that consume lots of fossil fuel. Rising nations like Brazil and India must be considered in all these international discussions about the economy etc.
Gustavo Pontello, Araraquara, Brazil

The financial crisis has shaken many countries in the last few weeks, it has opened the eyes of the world on how the financial system was structured over the last 50 years. The fall of the US economy and its domino effect on the rest of the world has proven one thing: the system was created to basically support them. Now, the leaders of the world's biggest economy should learn to define the meaning of "balance" in this world. They must set clear parameters to define how we can all affect each other.
Mark Carbungco, Jakarta, Indonesia

Clearly there cannot be economic cooperation while Politically there is so much sparring going on. The most basic and essential step is for the US to stop entertaining this ridiculous idea that it is some kind of Global Superpower which has to control the world. Accordingly, Obama's first task is to unwind all the lunatic strategies Bush embarked on - starting with abandoning plans to install missile shields in Poland (clearly a breach of the non-proliferation pact and sure to restart cold war activities). Russia should and would respond by toning down their own military enhancements. This will help improve economic cooperation and free up some funds for more constructive purposes.
Peter, Townsville, Australia

I think the world blames the financial collapse on the U.S., and for good reason. We sold out our industrial base and the only thing we have left to export is debt. Now we are broke with no hope of recovery because we no longer produce or save. An economy based on debt and consumption is UNSUSTAINABLE. The "free trade" and globalist movement has been the biggest rip-off in world history, and the U.S. will default on the behemoth debt owed to China, Russia, and the Arabs. The only ones benefitting from this whole mess are the criminal banker-elites who are looting our treasury for "bailouts". The American people are not blameless, however. We lived beyond our means and allowed our governing officials to run wild with their corporate partners in crime. After all, we were too busy with soccer games and trips to the mall to mind the "For the people, by the people" store. America will be reduced to 3rd-world ashes by 2012 without a single shot ever needing to be fired.
Ann Minch, Red Bluff, CA (USA)

Great article except for the absence of any reference to Japan. This is strange on 3 counts. First, it is the second biggest economy in the world-how can you possibly discuss the global economy without reference to it? Second, to support your argument I would have thought Japan`s own rise post WW2 already suggested the movement away from west towards east long before China. Third, given Japan`s own financial sector woes in 1990 I thought this would be a good moot point for global discussion as to solving current crisis.
Nicholas Cunningham, Australia

What should Governments of developed countries do?

1. Acknowledge that macroeconomic frameworks can be sustained only on strong foundations of microeconomic efficiencies. The genesis of the present crisis is that financial superstructure has moved too far away from the real sectors of the economy.

2. Set good examples of fiscal prudence; current expenditures must be contained within current revenues; only capital expenditures should be used to inflate or deflate the economy.

3. Realise that "trickle down" strategies have failed miserably; must work out stimulus packages that will work bottom up. For a start, each of the citizens should be given a 'basic grant' fixed at half the poverty level.
Sastry Kambhampati, Hyderabad, India

Re: World Food Programme and Zimbabwe - Does this seem feasible: instead of shipping food (and money) from the West to feed impoverished Zimbabweans, to actually have the UN set up large scale farming on land garnered from the white farmers? The land remains Zimbabwean and in time the management of these farms can revert to the locals.
Martin Peros, Toronto, Canada

We like it or not capitalism and free-enterprise is the only successful economic system we have and free world trade is the only vehicle to achieve universal wealth.

The system is obviously not perfect but the best we've got and the result of centuries of trial and error socio-economic evolution not the creation of any human mind. Our economy is far too complex and changing for any human mind or minds to embrace it, much less to predict and control it. One more proof of this is watching the spectacle of world bureaucrats trying desperately to stop the crisis with little or no results. Nobody knows the solutions because nobody can understand the complexities of the rapidly evolving economic reality.

Lucas Antuna, San Pedro, Paraguay

I think we need to head towards 'Total Socialism' for all countries - What we extract from the grounds of poor nations should go mainly to their wealth, health and happiness and not to shareholders - Hospitals and infrastructure should be all 'State Owned' and non profiting - All land should be state owned and state controlled and leased and never used as an asset or passed on to relatives.
James Shreenan, Melbourne Australia


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