Rethinking Bretton Woods | Mon, Apr 6, 2009
London G-20 Summit: No ‘Bretton Woods II’ here, either
A second Summit of the Group of 20 took place in London on April 2. After November’s meeting failed to deliver the groundbreaking reforms that some high level officials had billed as “Bretton Woods II,” a lot of expectation had built up in the lead up to this summit. For one thing, the “Bretton Woods II” nature of the initial summit was now transferred to the “process” that it started. For another, the summit counted with the input of a number of Working Groups—each led by trio of member countries—set up by the Washington meeting last year and that were expected to provide more flesh to the hasty and vague language agreed in November.
But by the time G20 Ministers of Finance held a preparatory meeting in mid-March, it was already clear that this Summit would stay far from the defining “Bretton Woods II” moment that had been expected. From a headline perspective, the Summit did well: a strategically-situated introductory paragraph allows readers to quickly pick up the total of $ 1,1 trillion in promised funding increases that newspapers quoted all over. But, past the quick effect of the headlines, a reading across the declaration issued in the occasion (Leaders’ statement) and its annexes (the Statement on Delivering Resources through the International Financial Institutions and the Statement on Strengthening the International Financial System) leaves readers with more questions than answers in areas that are begging some major agreement for international cooperation.
For a start, the greatest and most divisive issue, how to deal with the non-performing loans that remain in banks’ balance sheets so as to restart credit, was sidelined. The outcomes also omitted the question of how to achieve some credible coordination of macroeconomic policies in order to avoid global macroeconomic imbalances. Critical would have been, in this regard, to start progress towards an alternative world monetary system, one that is no so over-reliant on the US dollar. In spite of some government representatives—e.g. the Governor of the Chinese Central Bank – raising the right questions in advance of the meeting, this matter remains off the agenda.
Financial regulation: Common language… but not common interpretations
The need to strengthen international financial regulation was generally dealt with nice and broad language whose interpretation is left to the discretion of individual governments or, worse, that of the financial actors that triggered the crisis.
The language on hedge funds is an example. It was well known that the Anglosaxon countries tended to favor a lighter regulation of hedge funds than, for instance, France and Germany whose officials had talked several times about the need to “extend the regulatory net.” The G20 declarations talks of extending regulation to “all systemically important financial institutions,” including “systemically important” hedge funds. This raises fresh issues such as, what is a “systemically important” institution or hedge fund? It also puts governments in a conundrum. Defining an institution as systemically important amounts to officially declaring it “too big to fail.” But leaving one out of the definition could amount to an authorization to engage in reckless risk-taking. Furthermore, if overlooked ties between this institution and more sensitive ones emerge or are created in such process, it is almost sure that it will benefit from a government rescue when things go wrong, definitions notwithstanding.
With regards to banking supervision the Basle Accord receives a standing ovation—all G20 members “should progressively adopt it.” The statements express support to the ongoing work of the Basel Committee in tinkering with the capital buffers, liquidity management principles, off-balance sheet vehicles and so on. These are all good and important mitigation measures but the basics of a regime based on banks’ self-monitoring of risk that, for many analysts, was at the heart of the crisis, remains untouched.
The G20 attempts to tackle the difficulties in monitoring financial entities with cross-border operations by repeating its proposal of “colleges of supervisors,” mentioning that there already 28 of them in place. It is too early to tell whether colleges will become more than interesting venues for exchange of information. What is clear is that anything that they achieve will be achieved because of the use of such information by national supervisors in a national context, and if necessary departing from the Basel framework. Whether colleges will become tools for support—or obstacles to-- this task by national supervisors, especially those situated in smaller economies with less capacity, remains to be seen.
On credit rating agencies, there is no noticeable progress, with the declaration announcing a regime for oversight and registration that had already been announced in Washington. But a subtle tweak in language from the Washington to London, means that a small opening for the Organization of Securities Commission to play some mild compliance-monitoring role has now been withdrawn, to leave the matter up to national authorities, “coordinated” by IOSCO.
The Summit refers to the expansions of the membership of the Financial Stability Forum announced by such body in March. It will now be called Financial Stability Board and include all G20 members plus Spain and the European Union. A communication on expanded membership had also been issued by the Basel Committee on Banking Supervision, which is now to include seven more members out of the G20 membership.
These are welcome steps towards inclusion of developing countries in financial standard-setting bodies and respond to longstanding demands agreed by the all governments already in 2002. It is regrettable that it took a crisis of this proportion to shame the members of such bodies into fulfilling such commitment. However, the troublesome nature of these and other standard-setting bodies as formed by a small group of self-appointed countries that issue rules of alleged global scope certainly remains unaddressed. The membership is still composed of a fairly small group of countries that can claim no representation of the vast majority of non-members who, repeated experiences show, have to bear the brunt of the impacts of decisions that go wrong.
International financial institutions: mindboggling numbers but no reform
The most headline-grabbing agreement was the G20 leaders’ commitment of $ 1,100 billion, with $ 750 billion of it for the International Monetary Fund and $ 100 billion for all multilateral development banks. But the spin failed to make it beyond such headlines. Analysts trained in demystifying Summitry language quickly dissected the funding promises to find out that most of them were old, while a good portion of the new could not be traced to specific pledges by any government.
In the declaration leaders agreed to provide an “additional” $750 billion for the IMF. Only one third of this amount, however, represents funding bilaterally pledged by members to the IMF. This includes $ 100 billion that had been pledged by Japan and $ 75 billion pledged by European countries earlier this year, while the sources for the rest, which would seem new, are hard to account for—rumors that China and Saudi Arabia will provide the balance are yet to be confirmed.
Another $250 billion is yet to come, from sources that may include the issuance of bonds by the IMF, but that remain fairly unspecified in the statement. And another $ 250 billion of the funding for the IMF would come from Special Drawing Rights –a basket currency that the IMF can issue and members can use as foreign exchange reserves.
Still, an extra $250 billion duplicates the lending capacity of the institution and could represent a dramatic shift of its original concept. The New and General Arrangements to borrow amounted, together, to some $50 billion that could be activated by the IMF in addition to its capital. With the G20 decision both arrangements together would have now gone from being a fifth of the available IMF resources to being three fifths-- that is, the largest portion—of available funding to the IMF, with capital taking a secondary place to it.
But, as critics point out, the increase in resources may not be very wise given dubious track-record of the IMF in its ability to provide timely and appropriate help to user countries. In fact, not even two years have passed since the time when the IMF was bankrupt due to the lack of trust such user countries placed on it. It was clear that going to the IMF was a measure of last resort for developing countries. The reason why some more countries are entering into agreements with the IMF is not that there has been a change on that, but that a rapidly-worsening juncture is pushing them to appeal to measures of last resort. Moreover, the conditions attached to loans given to the countries that resorted to IMF help show that there is no change of heart in the IMF’s approach to crisis lending, which critics credit with compounding the social and development prospects of countless countries in the South.
Granted, the declaration does mention the need to reform both the IMF and World Bank so as to improve their “responsiveness and adaptability.” But for institutions that have successfully eluded the call for reform during decades, there is little these soft terms amount to.
One example is the discredited governance structure of the organizations. The result of seven years of internal discussion on reform of the anachronistic governance system that dragged along since the 1940s was, last year, a meager 2.7-point increase in the percentage of voting allocated to developing countries. A similar discussion within the World Bank still has no closure.
The same decision on voting reform at the IMF called for periodic realignment of quota shares at the general quota reviews that take place every five years. So one achievement of the G20 in London was to bring forward the next review, expected for 2013, to 2011. But the formula used to determine the quota still suffers of significant flaws that the decision of last year left standing. Thus, reviews that are based on such formula are more or less expected to systematically maintain the underrepresentation of developing countries in the institution.
The Summit also agreed that “heads and senior leadership” of the international financial institutions will be appointed through open, transparent and merit-based selection processes. But this agreement was already in place in the last appointments at both the Bank and the IMF. In fact, such processes gave the occasion to see that putting an end to the traditional practice whereby the IMF and World Bank have been respectively headed by a European and a US citizens will take more than formal approval of such rule. The realities of European and US overwhelming voting power and their early support to a specific candidate, conspired to ensure the perpetuation of tradition, in spite of any formal claims to the contrary.
International trade: Still missing the point
As forecast by Mr. Gordon Brown, the UK Prime Minister, trade was a big component of the declaration.
The Summit was closely preceded by release of reports that showed that 17 of the 20 members had engaged in protectionist measures since the Washington Summit when they agreed not to do so. Proof of its futility, however, did not discourage members from making the commitment again.
The declaration also contains the now ritual call for “a successful and balanced outcome of the Doha WTO Round” adding this time that it would boost the global economy in $ 150 billion per year. The figure lacks any substantiation whatsoever, being in discord with the latest assessments by the World Bank, not to mention those by academic and civil society experts.
But the strong focus on market access issues misses the point amidst the growing evidence that the major fall in trade flows in the last several months is not due to the lack of market access or even to some countries’ incipient flirting with protectionism. The financial regulations and structures that would need to be in place to ensure developing countries can benefit from trade, both as a source of finance for development and as a pillar of financial stability, are either missing or inadequate. This was true both for the build up as for the unfolding of the crisis, though developing countries are posed to suffer even more from it now.
One of these issues that did make it into the declaration is the scarcity of trade finance. Leaders say they “will ensure availability” of $ 250 billion for trade finance. The ambiguous reference, however, is rather an estimate of all that would be spent –by countries and private sector -- in trade finance in the next two years, than a new and additional pledge attributable to this meeting. This includes a new trade finance facility launched by the World Bank the day before the Summit and presented with much fanfare as a “$ 50 billion trade finance facility.” But the fine print of that announcement revealed that pledges amount to scarcely $5 billion, with $ 50 billion being the amount of total trade that is expected to be financed by it. In a similar spirit, one of the G20 annexes puts actual voluntary bilateral contributions made at the Summit at $ 3-4 billion, to be contributed to that same World Bank pool.
The adjacent commitment to ensure regulators “make use of available flexibility in capital requirements for trade finance” would be, if implemented, worth a lot more than this promise. It may address one of the asymmetries that the Basle agreement creates for developing country exporters seeking access to trade credit.
So the “Bretton Woods II” moment seems to have been putt off once again. The G20 leaders meet again—most likely in New York in September--, but there is little hope to place in the process when its basic agenda has narrowed out the key issues.
In the meantime, all eyes will be placed on a gathering of leaders of all countries that will meet in New York earlier than that, in June, to discuss on the basis of an agenda put forward by the Stiglitz Commission. The agenda will be open to all relevant questions about the international financial and monetary system and, as a process driven by the United Nations, it involves all countries. Indeed, if there has to be a foundational moment like ‘Bretton Woods’, this looks much closer to one…