Rethinking Bretton Woods | Thu, Nov 6, 2008
WTO vies for role in shaping “Bretton Woods II”
Starting with the President of France, Mr. Sarkozy’s speech at the UN General Assembly in September, a number of leaders had been calling for a summit level meeting as the global spread of the financial crisis sheds new light on the depth of the problem. Such calls culminated with Pt. Bush’s decision to call a summit of the members of the Group of 20 , now scheduled for November 15, which will, it is announced, probably lead to a series of new meetings. Based on the speeches delivered by Mr. Sarkozy and others, “Bretton Woods II” has become shorthand for referring to these meetings. But the reality is there does not seem to be such a level of ambition, in particular by the convening government. It is more likely that the hasty gesture is rather due to an attempt to grab the initiative and, thereby, prevent either other countries –or a broader collective of countries, through the upcoming Doha FFD Review Conferenceto grab it.
Though the global financial crisis –not trade--is the primary topic of the meetings, WTO Director General Mr. Pascal Lamy, in a recent speech delivered at the Beijing School of Government, was quick to back the calls for the summit series and portray the institution he heads as “part of the solution.” It is rumored, indeed, that the talks convened by the US government may include yet another push for fast conclusion of the WTO Doha talks. This would hardly be surprising since as recently as mid-October the G8 called to “intensify efforts to bring about a successful conclusion of the WTO negotiations with an ambitious and balanced outcome.”
Lamy’s statement was in line with other measures he has recently taken. He has called a meeting of major providers of trade finance, on November 12, to address the immediate impact that the crisis is having on export credit for developing countries. On October 14, he set a Task Force within the WTO Secretariat to follow up the effects of the financial crisis on the WTO’s different areas of work. Then he anticipated he may call on the Chair of the Trade Negotiations Committee to convene a special meeting under the “Coherence” mandate if “ there are indications that the financial situation could be having serious implications more generally for trade or the trading system,” saying also the WTO should be “ready to act as necessary.”
The statement was a bit puzzling to some observers. While it is clear that the financial crisis will have –and is having already-- repercussions for the conduct of trade, it would be difficult, however, to discern what relevant role the WTO could take on this field, given its limited mandate to pursue the progressive liberalization of international trade transactions. UNCTAD, for instance, is the intergovernmental focal point for issues of trade, and interrelated issues of investment, finance, etc. so would strike as a much better endowed institution to deal with the issues of financial crisis. In fact, as attested by two recent policy briefs, UNCTAD has ramped up its level of activity on this area already.
The Doha FFD Review, under preparation, follows up on the Monterrey Consensus agenda which set out to holistically pursue trade, financial and investment issues. It includes an item on systemic issues that deals with the consistency of trade, finance and monetary policies. It is, thus, a more suitable forum than the WTO to deal with interrelations between the financial crisis and trade. A Task-Force headed by Nobel Prize economist Joseph Stiglitz is being set up by the President of the General Assembly also with the goal of providing inputs into the discussions on financial crisis going on at the UN. In a statement by more than 630 organizations and networks in over 104 countries, issued a statement this week calling for making full use of the UN FFD and the Task Force, as a more inclusive forum where this discussion should be carried out.
In trying to position the WTO as a relevant player in this discussion Mr. Lamy argues, for instance, that stronger trade rules make “recourse to protectionism more difficult in periods when markets need to remain open to offer a chance to crisis-stricken economies to turn around their balance of payments.”
But the binding commitments in the WTO operate, arguably, both ways. Many countries were, because of existing binding commitments, exposed to forces that reduced their capacity to export and especially to build capacity to export more dynamic products, to increased imports and, more recently, to higher import prices, with current account deficits building up as a result.
He recognizes that “the expansion of world trade needs an efficient allocation of capital” in the assumption that globalization of finance will help better allocate such capital to productive purposes. This assumption is puzzling in the light of the evidence of behavior of financial market actors that led to the current crisis.
Even more astounding in the light of the evidence was Mr. Lamy’s stated belief that trade opening can also be useful, by “bringing fresh capital inflows”, as in the case of financial services. On the one hand, the experiences with foreign banks operating in developing countries has oftentimes not meant they bring “fresh capital.” Quite to the contrary, their business model implies that, in many cases, they do not bring any new capital but use existing capital that, given a larger pool of resources and access to intra-company credit or international capital markets, can be better leveraged. As a number of studies have shown, capital may, in fact, flow out as repatriation of the profits generated by such companies, increased transfer pricing or the costs represented by the access to the expensive patents on their financial management practices. The IMF reported in the latest World Economic Outlook that it is the developing countries that more opened themselves to foreign banks –economies in Eastern Europethat are faring worst comparing to the ones that had a relatively more closed financial sector, such as those in Asia. On the other hand, in a situation of crisis, far from representing relief, the foreign banking sector is proving to bring added woes. This became clear this month as parent companies of banks operating in developing countries –and home governments to them -- are reluctant to provide capital support for the subsidiaries, aggravating the financial crises in host countries. Further to the point, implicitly recognized in Lamy’s convening of the November 12 meeting, access to trade credit from the private sector has become an immediate casualty of the financial crisis in developing countries.
For the Civil Society Statement on the November 15 Global Summit, in English, Spanish, French and Portuguese, click here.
For press release associated to that statement, click here.
For an article by Aldo Caliari appeared on Foreign Policy in Focus “The world only needs one “Bretton Woods II” click here.
For a news release on the recent General Assembly President’s High Level Task force on the financial Crisis click here. http://www.un.org/ga/news/news.asp?NewsID=28643