Rethinking Bretton Woods | Thu, Jul 2, 2009
Under the auspices of the UN, governments from all the world meeting in New York last week adopted what is the first, and so far only, global consensus on a response to the global financial crisis.
North and South positions were so far apart during the preceding negotiations that many thought the feat would be impossible to achieve. But two days before the conference, a document containing a carefully drafted compromise developed by the two co-facilitators, failed to ignite any response and was, as such, moved to the conference. The unexpected enfolding of the document took many by surprise. In the words of a diplomat, “It’s as if you have been training all week for this big match. Then, just as you are entering the field to play, the referee blows the whistle and says “The game is over, you win ! “ The problem is, we are not sure to whom he said ‘you win’!’” Ultimately, the compromise text’s ability not to leave anybody with a certain impression about “who won,” proved to be its greatest virtue. When the conference started two days later, though any government could have asked for the document to be reopened, no one did. This obviated the need for establishing a negotiating committee, and the exact same text was formally adopted as the outcome of the conference.
It is clear that many demands that developing countries formulated throughout the process failed to obtain explicit—or in some cases any type of-- recognition in the final outcome. But it is also clear that the outcome has validated the demands for a more inclusive and participatory response than what institutions or groupings dominated by rich countries could provide. From the description of the crisis to the assessment of its impacts and proposal of responses, the differences between a consensus of a few and consensus that includes poor countries, are noticeable.
More importantly, the outcome does address both short term mitigation of impacts, but also long term, deep reforms to build a more resilient international economic system.
Some aspects are rather symbolic—though not unimportant. The outcome document makes the important recognition that “Developing countries, which did not cause the global economic and financial crisis, are nonetheless severely affected by it.” It also refers to the impact of stimulus packages by advanced economies on developing countries (e.g. subsidies to the financial sector that cause capital flight in developing countries), and encourages countries implementing national stimulus measures to avoid “possible adverse impacts on third countries, particularly developing countries.” The agreement establishes that the main regulation and surveillance obligations are with regards to major financial centers, recognizing their impact and thus moving away from the customary language that generally refers to evenhandedness.
It also manages to bring closure to a heated debate that underpinned negotiations since the very birth of this conference, namely, whether the UN was the right forum to address international financial and monetary reform. The final agreement states, with no room for confusion, that the United Nations, on the basis of its universal membership and legitimacy, “is well positioned to participate in various reform processes aimed at improving and strengthening the effective functioning of the international financial system and architecture.” Furthermore, governments stated their resolve to strengthen the role of the United Nations in economic and financial affairs, “including its coordinating role.”
The agreement made little progress beyond existing commitments in some of the areas where civil society organizations had demanded it, such as financial regulation and monitoring, international cooperation on tax matters, and reform of the governance of the Bretton Woods Institutions. But it was groundbreaking on the progress it managed to bring to other areas.
Governments agreed to act on the looming debt crisis. With fiscal and trade deficits growing, developing countries will have a hard time rolling over more than US$ 3 trillion that mature this year, especially amidst a contraction of world trade not seen since the Great Depression that will block foreign exchange earnings. To imagine that it will be possible to address such debt crisis by tinkering with mechanisms used in the last two or three decades, such as HIPC/ MDRI or the Debt Sustainability Framework, borders on the delusional. Governments agreed to go beyond the existing mechanisms. In this regard, possible resort to temporary debt standstills is endorsed, as well as the need to establish a more structured framework for cooperation on debt matters.
Recognizing that many countries have been forced to implement procyclical policies, even in times of crisis, due to IMF loan conditions, the final document calls on the International Monetary Fund to stop the practice of unwarranted procyclical conditionalities.
Governments also recognized the importance that trade-related impacts of the crisis carry on developing countries, citing the role of “fall in exports and loss in export revenue, diminishing access to trade finance, reduction in export-oriented and infrastructure investment, lower fiscal revenues and balance of payments problems.”
It is unfortunate that the implications of this reference to the impact the structure of trade in developing countries had in increasing their financial vulnerability failed to make it into the document in a more explicit way. There is a mere repetition of the customary call for a conclusion of the Doha Round and a rejection of protectionism, with a call for stronger monitoring of it. But in another section there is language that contemplates developing countries’ right to use “legitimate trade defense measures” and “temporary capital restrictions” in order to cope with the acute shortage of foreign reserves that the crisis may have caused.
Furthermore, in an addition to the language on policy space coming out of Sao Paulo in 2004, the text includes recognition that developing countries may need to depart from trade and investment disciplines in order to implement crisis recovery plans, address social and human impacts, safeguard progress achieved towards the MDGs or regulate local financial markets, institutions, instruments and capital flows.
Governments called upon the leadership and management of the Bretton Woods Institutions to be chosen on the basis of gender equality, geographical and regional representation. This is a welcome addition to the London Summit agreement to make those selections on the basis of open, transparent and merit-based processes. These latter requirements had already been adopted for the last selection of leadership in both institutions and, yet, were not enough to change the longstanding convention by which the head of the World Bank is an American citizen and the head of the IMF a European one.
There was also agreement to maintain under review “the use of Special Drawing Rights for development finance purposes.” This accommodates a two-prong demand by developing countries regarding SDRs. First, that SDRs be allocated not according to quota, but according to need, and second that the interest charge on their use be waived for the poorest countries.
The conference also tackled an issue that G20 members had skirted, the unsustainable trends on the international monetary system where excess consumption in the US is fed with excess demand for the US dollar worldwide. While agreement on solutions clearly exceeds what could be done in the short term, this will be a critical item for the follow up process. The final agreement calls for providing a fix to the insufficiencies and inefficiencies in this system.
Part of the answer lies on the role, to be explored, of SDRs as an alternative supranational currency. This would have to be complemented, in the assessment of the UN Commission of Experts, by a mechanism for coordination between surplus and deficit countries and allowing capital controls. Another insufficiency that will have to be addressed is the lack of mechanism to ensure that developing countries’ economic and trade prospects are not held hostage to wild fluctuations in the value of currencies that act as reserve assets.
But some responses do not need to wait for SDR reform and other mechanisms at the global level. In this regard, the document does encourage regional and sub-regional “commercial and reserve currency arrangements,” as a crucial contribution to the multilateral response to the current crisis and to improved resilience to potential future crises. The pursuit of regional systems for payments that allow countries to settle international trade transactions with their domestic currencies, backed by clearing unions or settlement accounts, and with the support of regional or South-South units of account, would be a crucial element of a system that allows countries to save reserves, while fostering intra-regional trade and therefore a diversification of markets. Eventually, in fact, regional reserve currency arrangements could become the cornerstone of a process towards building a more resilient and diversified global economy.
The follow up mechanism was probably the most contentious aspect of the document and, in a final assessment, the result is rather weak. In spite of the support by all developing countries and some developed ones, the conference failed to agree on a proposal for the democratization of economic policy-making by establishing a Global Economic Council within the UN. The proposal authored by the UN Commission of Experts was for a body that would gather annually at Heads of Government level to “assess developments and provide leadership in economic, social and ecological issues” and would have restricted membership but representation by constituencies.
But in spite of significant pressure by major countries to turn the conference into a one-off event, agreement was reached on setting up an ad hoc open-ended working group of the General Assembly that will follow up on the issues contained in the outcome document.
Of course, the most successful of the conferences does not guarantee a successful implementation and that is why, though the conference just concluded, the real job only begins. This year alone more than 53 million people are joining the rank of the poor and 50 million are expected to lose their jobs worldwide. Knowing that even the swiftest implementation of these measures will not happen fast enough for them, should be the context for the actions to follow.
Click here to download Outcome Document of the conference.
Click here to download CSO Background document including key recommendations.
Click here to see media reporting on COC and CIDSE activities around Financial Crisis Conference.