Friday, October 31, 2008

DEVELOPMENT: Bretton Woods II: New Lifeline for Ailing Giants

DEVELOPMENT: Bretton Woods II: New Lifeline for Ailing Giants
Analysis by John Vandaele*

BRUSSELS, Oct 28 (IPS) - Europe, by way of the hyperactive French President Nicolas Sarkozy, demands a Bretton Woods II, that is, a major shake-up of the International Monetary Fund (IMF) and the World Bank. This is as much a rescue operation for two organisations that have lost muscle as a call for a new financial architecture.

Up until mid-October 2008 the IMF, the world's most important financial institution, did not play a role in the unfolding credit crisis. The G7 (the seven industrialised nations, the United States, Canada, France, Britain, Germany, Italy and Japan) had given the task to make recommendations to the Financial Stability Forum dominated by the G7 countries, effectively bypassing the Fund.

Also, the IMF proved powerless in prevention of the crisis. For years the Fund deplored the rising macro-economic imbalance between China and the U.S., which lies at the heart of the current crisis. The IMF had to do this because article 1 of its charter says one of the purposes of the IMF is "to shorten the duration and lessen the degree of disequilibrium in the international balances of payments of members." But the Fund simply has no real power over countries such as the U.S. or China.

With the crisis now deepening, Iceland, Ukraine and Pakistan asked the IMF for financial assistance, the first countries in several years to do so. Others will follow. It seems the Fund is -- a little bit -- back in business. Still, there's an awful long way to go if the Bretton Woods Institutions (BWIs, the IMF and the World Bank) are to prevent a repeat of the crisis. That's why Sarkozy pleads for a Bretton Woods II.

It certainly wouldn't be the first change for these two institutions. After all, from the seventies on, the main task of the International Monetary Fund (IMF) and the World Bank clearly shifted from assuring reconstruction and financial stability in the rich countries to developing countries.

That shift was born of a double necessity. On the one hand the World Bank and IMF were looking for a new job. Rich countries didn't really need the IMF and the World Bank any more. Reconstruction was more or less finished, rich country governments could borrow money from their populations or from international financial markets which were 'reborn' from the seventies on. The IMF too lost its task as guardian of the Bretton Woods system of more or less stable exchange rates after the United States cancelled the link between the dollar and gold, and floated the dollar.

On the other hand those reborn financial markets, in a matter of years sparked a major debt crisis of developing countries. Western banks, flush with petrodollars from the Arab world, pushed their loans on developing countries. Many of them at the time were governed by unelected leaders who didn't always use the loans in a sensible way.

During the seventies loans were very cheap, but that wouldn't last. In an effort to combat the world inflation the U.S. had created by printing too many dollars -- to finance the Vietnam war and its own war on poverty -- Paul Volcker, president of the U.S. central bank, abruptly changed course by raising interest rates dramatically.

Since most of the loans of developing countries had a variable interest rate -- depending on the rates in London or New York -- their debt service doubled or tripled. In a matter of years the financial net closed upon many developing countries. Country after country couldn't pay its debts, and it was decided that the IMF and the World Bank would manage the debt crisis.

From then on the Bretton Woods Institutions (BWIs) were very asymmetrical organisations. The rich countries didn't need the BWIs any more, but with more than 60 percent of the vote they called the shots in both institutions. Developing countries really depended upon the BWIs, but didn't have a lot to say there.

And so the BWIs developed into an instrument of western power. In return for loans the BWIs pushed the same ideological recipes on all those different countries: privatisation, deregulation, liberalisation...

First, the rigidity didn't make sense. There are many differences among countries, and timing is crucial for those kinds of measures. Second, it became obvious that rich countries were judge and party. When they forced developing countries to open their markets, it was no coincidence that western multinationals tended to be among the first beneficiaries.

Thirdly, the reforms tended to worsen poverty in many countries since government expenditure had to be reduced. Finally, the BWIs underestimated the all-important role of government and governance. It is ironic that the BWIs nowadays very much stress the role of governance, and of ownership: they have realised that it's not very useful to push policies upon countries. The enormous protests also forced them to think more about the social consequences of their policies.

Lack of transparency and accountability was another problem of the BWIs. Since the minutes of the executive boards are secret for at least ten years, it is very difficult to know for countries what their director is saying on their behalf. Europeans have reason to question their representatives on this: the EU countries until recently had 32 percent of the votes against 17 percent for the U.S. Still, both institutions had a very hard-line neo-liberal approach for many years, questioning the good sense of minimum wages and collective labour agreements and public pension systems, all of which are mainstream in Europe.

Developing countries and civil society for many years criticised the power distribution at the BWIs. How is it possible that small European countries like Switzerland or Belgium had more votes then India, Brazil or Mexico? The reason was that power was based upon the money countries put into the BWIs, and that again was based on the economic weight of a country.

That weight was determined through rather vague formulae. The unequal power distribution is under pressure now: last April it was decided that rich countries at the IMF would give in 3 percent of the votes; 2 percent went to emerging countries and 1 percent to other developing countries. For developing countries this is just a start.

This lack of voice in both institutions and the adverse conditionality, especially during the Asian financial crisis, stimulated developing countries to turn away from the BWIs. China, and to a lesser degree, other emerging countries, partly overtook the role of the World Bank in financing big infrastructural works in developing countries. Developing countries also tried to avoid the IMF if one day they would have currency problems. That's why many of them have built large foreign currency reserves.

With the credit crunch deepening, Iceland and Pakistan approached the IMF but not after first negotiating deals with Russia, China or Arab countries. The IMF-Iceland package was less conditional than the usual IMF stuff.

Sarkozy's call for a second Bretton Woods is timely. Crises are opportunities. Some of his ideas -- tighter supervision of the international banking system, a crackdown on international tax havens to attack unfair tax competition between states...have been demanded for many years by large swaths of the global civil society. Why not add a currency transaction tax?

But if Sarkozy is serious about a Bretton Woods II, he'd better keep in mind that developing countries want more voice. The first victim of this will be the European countries which are overrepresented at the Fund. Why, for that matter, should the managing director of the Fund always be a European? And what is the credibility of the Fund if big countries can ignore the Fund's recommendations and in so doing, create a global financial crisis? So, there's a lot of ground to be covered. That discussions will start with a Group of 20 with a majority of developing countries is a good sign.

*This is one of a set of four articles on the global institutions by John Vandaele, journalist with the Belgian magazine Mo*, and author of several books on globalisation, most recently 'The Silent Death of Neoliberalism, 2007. (END/2008)

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